Chris Vanderzyden of Legacy Partners: Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit

An Interview With Jason Hartman

Choose your team wisely. — From building to scaling to preparing to exit, the quality of your team will determine the level of your success. Building a business requires that you have a bulletproof strategic plan with the right human capital to execute it.

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 Chris Vanderzyden.

Chris Vanderzyden is an exit planning advisor who specializes in mergers and acquisitions. She’s enjoyed helping privately held business owners grow and exit their businesses for decades. Her career started as a CPA with PricewaterhouseCoopers and then as a real estate asset manager in Los Angeles, California. She is currently a principal with Legacy Partners, LLLP, an exit planning and mergers and acquisitions advisory firm.

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?

I sold my first business in 1996 in Los Angeles. Although I was a CPA and had a strong financial background, my business partner and I made every mistake in the book. We had no idea what the market value of the business was. We didn’t understand the process of selling a business; it’s nothing like selling real estate!

There were things we could have done to reposition the company prior to the sale that would have made it much more marketable, resulting in a higher price, but we were completely unaware. We ended up going with a business broker, not knowing that an exit planning and M&A advisor could reach far more buyers.

This personal experience drove me to want to help entrepreneurs as they build and exit their businesses. Business owners are specialists in their industries, but they aren’t exit strategists. They don’t know how to exit a business, when to exit, or who can help them, so I started consulting to help business owners through this process.

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?

Going after the big whale of a client. I had just started my first company and landed Enterprise Rent-A-Car as a client. I was solely focused on this client. One day, the client asked me if they were my only client. “Yes, indeed you are,” I said, and I died laughing — and so did my client. But that was my wake-up call to understand that along with the whales, you need minnows, too. Customer diversification is very important to the value of a business, and this is often a struggle for entrepreneurs as they build and grow their companies.

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

I’m going to give you two!

“The pinnacle of success is achieved atop a mountain of failure.”

Growing a business is fraught with trials and tribulations, and failure is ultimately our greatest teacher. The trick is to recognize failure quickly and recover even quicker. Learn from it. Let it go. Then go higher.

“Fake it until you make it.”

This quote is really about confidence. To succeed as an entrepreneur, you have to have confidence long before you truly have the experience that drives it. We’re all rookies in the beginning, yet the businesses that endure start with swagger. Maybe that swagger forms prematurely, but entrepreneurs’ confidence in their products or services will get them through the inevitable failures that arise as a business grows.

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?

My second business was built on the back of the internet. It launched in 2003, at the very infancy of doing business online. I moved from Los Angeles to a tiny town in Vermont to start a family, and I desperately missed the corporate world. My life was truly mimicking the movie Baby Boom with Diane Keaton.

So, I launched a business, and with the help of the internet, I acquired clients nationwide. The internet literally removed all geographic barriers. It’s the same today, with trends and opportunities that can be leveraged

Having scaled the company as much as possible with my resources, I sold to an individual investor who could bring expertise and capital to the table. I’m now positioning my third company for a planned exit.

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.

1. The earlier you plan for your exit, the higher the chance of successfully scaling and positioning the company for a lucrative sale.

I’m often asked when an exit strategy should be created. In an ideal world, it would be written in conjunction with the business plan. Entrepreneurs, however, tend to myopically focus on cash, acquiring customers, and really just getting to the point where the company is sustainable. “Why plan today for what can be easily put off until tomorrow?” they think. This is a mistake. An exit strategy is simply a good business strategy.

An exit plan aligns an owner’s business, financial, and personal goals. It’s a living document, so it’s continuously revised as the business grows. It helps an owner identify who they want the company to transition to and how the business will need to be positioned to fulfill that strategy. It also determines what the potential financial impact to the owner’s personal wealth will be upon exit, and it guides the owner in establishing post-ownership goals that will ensure he or she continues to live a purposeful life. It’s a comprehensive plan that addresses all aspects of an entrepreneur’s life.

An exit plan helps the owner set priorities as critical decisions are made to scale the company. For example, suppose an owner’s exit strategy is a transition in ownership to family. In that case, the owner needs to focus on the development of the next generation’s skills. This, most likely, will take many years to accomplish. Extensive financial planning will also be required to ensure the next generation is financially capable of buying the business and is emotionally prepared to do so. The vast majority of family successions fail for a variety of reasons, so planning for this exit well in advance is the key to its success.

To continue with this example, at Legacy Partners, we guide owners through an analysis to determine if leaving a business to the next generation can be successful and, if not, how the exit plan can pivot to accommodate a viable transition. For instance, we might modify the strategy to sell the business via a recapitalization: the owner sells 100% of the business to a financial buyer and then, at close, buys back an equity position.

This equity roll is typically a minority position, which the next generation can retain while providing liquidity for the exiting generation. An added benefit to this structure is that the investor will bring expertise that can help develop the next generation’s skills.

If the strategy is to sell the business to an outside third party as an outright sale, an exit plan will help guide the company’s growth to ensure that when the owner does go to market, the business will attract buyers. The plan will identify changes that need to be made well in advance, such as developing management, reducing customer concentration, or removing dependency upon the owner.

Another common reason for failure or stymied growth is a lack of capital. An exit plan will direct an owner to address any future financial shortfall that could prohibit scalability.

For a successful, lucrative exit, the strategy must be planned well in advance and meticulously executed.

2. You must understand the value of your business at all stages of growth.

An exit plan begins with a proper business valuation, which requires quantitative and qualitative analyses. You can’t simply apply a capitalization rate to net operating income, like real estate, to quickly determine value. A business is different in that it consists of tangible and intangible assets; these assets create a future cash flow that provides the buyer with a return on their investment, therefore requiring a valuation that addresses both asset classes.

A proper valuation will not only provide the owner with a current market value range but also uncover weaknesses in the business that are restricting growth. It serves as a basis for identifying optimization opportunities and strategies that can be deployed to further scale the company.

The most lucrative exits come from businesses that focus on value as the business grows, giving owners confidence that their decisions consistently and efficiently increase value. Increasing value also requires de-risking the business, which ultimately drives the selling price upon exit.

Here’s a real-world example of this: One of our technology clients had a significant hole in their management team and a high level of customer concentration. These weaknesses created a substantial drag on the business’s value and limited its marketability. The owners had to wait to go to market until they identified new management talent and hired, trained, and retained them. Your management team and employees are among the most significant intangible assets you have, now more than ever, in our tight labor market.

This client also had a significant customer concentration, which can render a business completely unsellable. Investors often cite the 15% rule: they don’t want to invest in a business with more than 15% of revenue coming from the top three customers. It’s just too risky and often doesn’t meet investors’ investment criteria. Diversifying a customer base takes time, so you don’t want to make this mistake.

With a process in place to value your business as you grow, you’ll be cognizant of weaknesses like these that need to be shored up far before you’re ready for your liquidity event.

Business owners often have financial goals in mind that will dictate when they want to sell their companies. For instance, a client once told us that a successful exit meant having investable proceeds of $10MM net of tax and fees. Without having a valuation for transaction purposes, you’ll have no idea if you’ve built an asset that can meet your financial goals.

Continuously valuing your business is crucial: it allows you to properly scale your business in a meaningful way that will drive value and ultimately position the business to attract multiple buyers upon exit.

3. The timing of your exit matters.

Don’t underestimate the importance of timing your exit correctly. Economic cycles are as old as time: our economy will always expand, peak, retract, trough, and do it all over again. Timing your exit to these cycles is important because when the economy retracts, capital dries up and mergers and acquisitions activity pulls back, which results in lower prices for businesses.

This means business owners must consider all the external and internal factors that drive sales prices and terms. External factors, such as interest rates, capital availability, and confidence, influence mergers and acquisitions activity. A strong economic cycle that heightens confidence — with monetary policy that delivers low interest rates — increases deal activity if the cost of capital is considered to be inexpensive. And when fiscal policy results in lower tax rates, more capital is on investor balance sheets, which stimulates competition among investors and drives deal values upward.

So, if an owner is timing the sale of a business to when he or she “retires” at a specific age, it may not work out as planned. It may be a good time to sell if prices and terms are robust, or it could be a period of retraction where capital isn’t plentiful, and values recede.

For instance, if a business owner turned 65 in 2008 and intended to sell the business to fund his or her retirement, that would have been bad timing. The trough of a cycle often results in businesses selling at a discount. Now, there are always exceptions, in which a large business sell in a down market, but the middle market always gets hit in a recession. So it’s vitally important that an owner understand market cycles. Keep in mind: the mergers and acquisition cycle always lags the economic cycle. Interest rates go up to stave off inflation, and if we eventually end up in a recession, capital will dry up.

Internal factors that drive the marketability of a business must be analyzed, too, when assessing if the timing is right to sell. Highly developed intangible assets, such as having exceptional employees who drive growth, a diversified customer base, a strong supply chain, brand recognition, and intellectual property will dictate if the company is well-positioned to go to market.

A common mistake business owners make is to wait to go to market until the business has achieved its highest potential. Remember: an investor is purchasing the business for its growth potential, so be sure there’s still a runway for growth that an investor can capitalize on. Also, if you see that your industry is being rolled up by financial investors, you certainly don’t want to be the last one to go to market. Take advantage of the interest in your industry and know it’s happening. It’s no fun to be the last man out the door.

The bottom line? When a business’s internal factors are positioned to attract investors and the external economic indicators are positive, it’s the right time to go to market. It’s imperative that business owners look at the economic indicators and internal positioning together.

Here’s how this might look: We had a client in the technology sector that we were advising on when to go to market. The mergers and acquisition cycle was hot, but this business was on the precipice of major growth that would have pushed the company’s EBITDA over a level that would spike the number of interested investors and the price of his company. We advised the owner to wait to go to market until his business was better positioned to capture a higher price.

Could it have sold anyway? Yes, we were in a strong M&A market that we didn’t think would wane in the short term, so why not wait a short period of time and drive value? This understanding of timing and business value drove our strategy — and it ultimately meant millions more in the owner’s pocket.

4. Understand the M&A process.

Selling a business isn’t like selling real estate. You don’t call a broker, understand cap rates, compare sales in your area and industry, and list the price you want. It doesn’t work that way.

The mergers and acquisitions process is centered on creating competition — an auction — that will drive deal value with higher prices and optimal terms. There’s an old saying in M&A: One buyer is no buyer. If you don’t have competing buyers, you’ll never know if you landed the best deal.

We’ve had many clients come to us after receiving an offer from a buyer. Usually, they’ve been approached directly by a buyer or a buyer’s rep. They end up with an offer and the question of whether it’s a good offer or a bad one. This doubt nags at them. It keeps them up at night. When they find their way to us, they’re shocked to learn that there’s a process to follow that will drive deal value.

The process begins with creating the documentation that will attract investors. From the business valuation, we’re able to create a Confidential Information Memorandum (CIM), which is a document that relays high-level information about your business to a buyer. From the CIM, a Confidential Business Profile (CBP) is created. The CBP is the cliff note version of the CIM; it acts as a marketing teaser that’s initially sent to an identified, vetted buyer pool. The goal of this document is to generate interest from multiple buyers who will engage in the mergers and acquisitions auction.

The auction is the point in the process in which your deal team will negotiate with multiple buyers, driving them to draft an Indication of Interest (IOI), which is a letter outlining an investor’s interest in buying the business. The IOI outlines basic items, such as the price range, terms, the timing for deal closing, and how the investor will capitalize the transaction.

Once a seller receives multiple IOIs, management meetings are held, giving the buyer the opportunity to gather more information about the business. These meetings also provide the seller with an opportunity to understand the buyer’s motivation in greater depth and if the buyer will meet the seller’s goals.

This is a pivotal point in the process, allowing both buyer and seller to assess if the potential transaction is a good fit. More information is gathered, and the process ultimately culminates in the investors issuing an offer in the form of a Letter of Intent (LOI), which is a nonbinding offer. After the potential offers have been analyzed — including understanding the tax impact and net investable proceeds available to fulfill the seller’s goals — a decision is made as to which buyer and offer best fit the seller’s objectives

The seller signs the LOI, indicating a commitment to the buyer, and the deal moves into the due diligence period. Due diligence is performed by specialists who will verify the accuracy of all the data presented in the deal. The seller must be prepared for due diligence and provide all information efficiently so the deal closes as quickly as possible. After the due diligence period, an M&A attorney will negotiate all closing documents, including the warranty, representations, and indemnifications.

After closing, a predetermined wealth management strategy is implemented, and the owner goes on to his or her post-ownership plan, which typically includes a transition period to assist with the integration of the business into a new entity or new ownership.

Any mistakes made during this process will reduce the seller’s return on investment, despite all of the efforts and risk the seller took on in building the business, so it’s imperative that an owner understand the professional process the owner’s teams will be using to sell the business.

5. Choose your team wisely.

From building to scaling to preparing to exit, the quality of your team will determine the level of your success. Building a business requires that you have a bulletproof strategic plan with the right human capital to execute it.

As we discussed earlier, your business plan and exit strategy are living documents that should be reviewed and revised as you assess your business’s value as it matures. Every decision you make is either building the value of the asset — or it’s not. It’s as simple as that.

When it is time to execute the liquidity event, it’s critical that you have a team of advisors who will manage your exit strategy. Don’t go it alone. It’s enough that you’re an expert in your industry; you don’t need to be an expert in selling a business — and the odds aren’t in your favor if you try.

We’ve had many clients who were approached directly by a buyer or buyer’s representative and then tried to sell the business without professional advisors. One particular client spent over a year engaging directly with a buyer who was gradually getting more and more information about the business, which the buyer then leveraged in a competing business. At the end of the day, this client received an offer that was a fraction of the true market value. After being referred to us and developing his Master Exit Plan, we advised him through the M&A process. He received multiple letters of intent and accepted an offer from a private equity group which was much more than his original offer.

The exit process is complex and requires expertise in mergers and acquisitions, taxes, law, estate planning, and financial planning. A lack of knowledge in any of these disciplines will only diminish an owner’s wealth.

Proper exit planning will ensure that your business is well-positioned to go to market in the future. You’ll ultimately enjoy a great liquidity event and go on to life’s next chapter with ease, knowing that the exit fulfilled all of your business, financial, and personal goals.

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?

Yes, product-based models are focused on the sale of tangible assets, whereas a service business is dependent upon intangible expertise, so investors will analyze each very differently.

When investors are evaluating a service-based business, they’re analyzing both the back of the house that produces the service and the front of the house that delivers the service to the customer.

Investors know a service model is much harder to scale than a product-based business. You can sell 1,000 widgets much easier than providing service to 1,000 customers. The primary resource that most inhibits the scalability of a service business is time, which requires human capital and a repeatable process.

A dominant concern in selling a service-based business is ensuring the business can continue without the owner. A key driver of value is creating a recurring revenue model, such as subscriptions, renewable contracts, etc. An investor will focus on pricing, predictability of cash flow, and staffing in a service industry. While in a product business, an investor will focus on profit margins, lean operations, supply chain depth, and customer concentration.

When all is said and done, though scaling a product-based business requires more capital than growing a service-based business, a product business — if positioned well — will most often result in a higher value.

If an owner has a service business, I always ask: “Is there a way to productize it?”

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

Every business owner will benefit by working with an independent exit planning advisor who will align the owner with the right mergers and acquisitions advisor who has access to vetted buyers.

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?

It’s always better to build a business to exit. Why go through the pain of building a business if you aren’t going for a pot of gold at the end of a rainbow? Sticking around and letting the company spin residual income as it winds down is not an option.

Now at some point, an owner has to decide: Do I go to market today, or do I hold and grow? The only way to answer that question is to have an M&A valuation and integrate the potential investable proceeds into a financial plan to understand what a liquidity event would mean financially. An owner would then consider what he or she wants to happen with the business and in the next chapter of life. Again, it really is about establishing the business, financial, and personal goals of an owner and going through the process of creating a Master Exit Plan. Therein lies the answer.

Going public is a big, sexy exit. But it’s expensive, and you need to prove that your business has a strong market position and tremendous growth potential. Understand all of the exit options, identify your goals, and you’ll find what’s right for you.

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

Selling a business is not like selling real estate. If done correctly by utilizing a professional M&A process, the selling price is never set. The process will drive multiple buyers who are willing to compete, and the price will be revealed when the seller accepts an offer.

Price is negotiated. Value is computed.

With a proper M&A valuation, a business owner will understand a range of acceptable prices so they can better evaluate offers.

One note: Often, an owner will hear that businesses in their industry are selling for a certain multiple. Do not depend on multiples you hear about; they’re merely set by the private capital markets and are an average of all transactions. It’s not specific to your business, so it’s completely unreliable. After your business sells, we’ll tell you what the multiple is. We can then make it a multiple of EBITDA, revenue, or pizza, if you like.

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. :-)

Education is the key to success, and I think innovation that supports virtual education will be a game changer in our world.

How can our readers follow you on social media?

They can connect with me at www.linkedin.com/in/chrisvanderzyden.

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

Jason Hartman is the Founder and CEO of JasonHartman.com, The Hartman Media Company and The Jason Hartman Foundation. Jason has been involved in several thousand real estate transactions and has owned income properties in 11 states and 17 cities. His company helps people achieve The American Dream of financial freedom by purchasing income property in prudent markets nationwide. Jason’s Complete Solution for Real Estate Investors™ is a comprehensive system providing real estate investors with education, research, resources and technology to deal with all areas of their income property investment needs. Through Jason’s podcasts, educational events, referrals, mentoring and software to track your investments, investors can easily locate, finance and purchase properties in these exceptional markets with confidence and peace of mind. Jason educates and assists investors in acquiring prudent investments nationwide for their portfolio. Jason’s highly sought after educational events, speaking engagements, and his ultra-hot “Creating Wealth Podcast” inspire and empower hundreds of thousands of people in 189 countries worldwide.