Steve Conwell of Final Ascent On 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
Honesty and integrity in the valuation process, open communication, and educating the business owners are vital steps to get everyone on the same page on what the company is worth.
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 Steve Conwell.
Steve is the CEO and Partner of Final Ascent LLC with 30 years of business advisory and financial consulting experience. He brings his passion and energy as an accomplished business owner to entrepreneurs who want to sell their mid-market businesses. He helps owners prepare their businesses for sale, transforming their businesses into built-to-sell companies and maximizing their value at exit.
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?
After years of working for both large and small organizations, I built and launched my first company a couple of decades back and then sold it, afterwards starting another company. At the time, I was a Chief Financial Officer for a residential real estate firm where we would buy, rehab and resell hundreds of homes around DFW and Houston. During my tenure, we worked with an exit planner there, and at the time, I’d never heard of exit planning services. I started learning more and then reflected on the sale of our first company. How I wish that I had known the value an exit planner can bring, as we probably left millions on the table. Here we were thinking that we did great selling our first business while it could have been so much better. This prompted us to launch Final Ascent several years ago to offer exit planning and growth advisory services, assisting business owners in getting their companies ready for sale so they can maximize their enterprise value. Later, my partner, Jude David, and I started talking about the merger and acquisitions side because it seemed like a natural fit. And that’s how we morphed into what we are now.
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?
From a business owner standpoint, our first company grew rapidly from the outset, but as you can imagine, we were still in the early stages of building our business. We initially delivered recruiting services to tier-1 professional service firms and grew into a national IT risk consulting business, but that was later. We’d bid on a Fortune 500 company’s national recruiting business, and out of 600 bids, we were one of three that received the company’s winning bid. We were in our home office negotiating the remaining terms of the agreement with the VP of Human Resources, and while on speaker, our cat walked into our office during the talks. We didn’t close the door! She meows constantly, literally all the time and loud, and we quickly put the phone on mute and carried her out of there and far away from our office. Working from home is much more accepted now, but at the time, our cat announcing her presence could have been a deal killer because we would have looked like a small Mom and Pop. Anyway, we laughed after the call and breathed a sigh of relief as we closed the deal. The life of an entrepreneur!
Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?
Absolutely! Richard Marcinko is the founder of Seal Team Six. He has a leadership book, and I always remember life lesson number two. ‘You don’t have to like it; you just have to do it.’ For me personally, it’s very impactful. You hear people talk about how you should find what you’re passionate about and make a living at that. However, regardless of what you choose, 20% or so of any job is likely going to require that you do something you don’t like. For example, let’s say you decide to be a consultant using skills you thoroughly love to use. You’re still required to do the administrative piece, which certainly isn’t the favorite part of many consultant’s job and takes time each and every week. So, I believe ‘you don’t have to like it, you just have to do it’ is a tremendous life lesson for almost anything you have to tackle in life. For things that are your Achilles heel in business or in your personal life, you just have to roll up your sleeves and get it done. And not only finish it, but do it with high quality every time.
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?
In the early 2000s, I received a call from a former colleague who was a partner at a ‘Big 4’ firm. He wanted to hire me as a contractor, so I set up my own LLC. After a few months, one of the team members left, and that role needed to be backfilled. I was speaking with a senior manager on the job and mentioned that I know exactly what we need, and my wife knows how to recruit. He said, “Why don’t you see if you can go find somebody and maybe we can fill the role as a contractor.” We found the person the next day, a highly qualified professional who could hit the ground running and make a significant contribution. That’s how it began. We shifted from sole ownership with one contractor and grew to a national consulting company for seven of the top 10 accounting firms. We offered finance, accounting and technology recruiting and staffing services. We also had an IT risk and controls consulting practice. We built it to almost 100 professionals and ultimately sold it to one of the ‘Big 10’ firms looking to start their presence in the South. The timing worked out well since it was during the mortgage meltdown craziness. However, if we had gone to market with an M&A advisor, we would have undergone a competitive bid process and seen an even bigger upside of that process. We lived and learned.
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.
Owner Dependency
Owner dependency can be a huge obstacle when selling your company. Business owners have to learn to take what they do, barring just a few things, and delegate to their teammates. For most, because they started their business as the experts, the company is dependent on them, whether it is supplier relationships, research and development, customer support, or the financial side of the business. It’s incredibly important to give your management and employees the freedom to make decisions and execute without you, effectively creating a turnkey business. After the new buyer comes to the table, owners should be free to turn the keys over to the new buyer free and clear and then go off to their next adventure. That’s often not the case. For so many, after achieving what they believe to be their American dream, there’s a huge dependency issue that drags down the value of their business and even the sellability of their company. That can be very surprising and sadly, heart wrenching for business owners to hear, especially if they have to sell due to unforeseen circumstances like a death in their family, a partner dispute, divorce proceedings, their incapacitation or more. There’s a statement in the exit-planning world that heavily owner-dependent businesses are essentially worthless. In situations where the business owner knows all their big customers by name, that’s terrific, but you then have to introduce the customers to one of the salespeople and start to push that relationship down. Customers shouldn’t need to call the owner as their main point of contact, but rather the account manager or business development executive should be the first line of defense. It’s a huge consideration buyers look at. If they start to sense heavy owner dependency, they’ll often walk away.
Financial Performance
The timing of taking your company to market for sale, in combination with the accuracy and completeness of your financial records, is very important. Buyers like to buy businesses which are very successful, growing and scaling — not ones that are just surviving, struggling or declining in performance.
We’ve had clients where we’ve had to completely rebuild their financials. We’ve converted cash basis companies to the accrual basis to accurately reflect their financial position and give buyers a more accurate reflection of the financial position and health of a business.
I’d suggest picturing your financial records as your resume. You submit your resume for a job opportunity, but unfortunately the resume is filled with typos and grammatical errors. Even though you may be the ideal candidate, your resume gets thrown in the wastebasket. It’s the same thing here. Your financial records are like the resume of your business. You need to present them in a way that gives sophisticated, senior, accomplished buyers the opportunity to evaluate your business apples-to-apples with others in your industry, or any company for that matter. It gives buyers confidence in the professionalism of your financial records and the validity of your financial performance. You do not want your financials statements to be filled with errors and inconsistencies, because competent buyers will walk away without making an offer for your business.
Additionally, on the financial performance side, buyers like to see businesses which are over three years old (at a minimum) and have top-line growth year over year. An upward trend is extremely important, and why is that? Buyers are usually more sophisticated and experienced, and they could easily start a new company. However, they do not want to do that. They want to buy a successful, growing company and take it to the next level.
Strong Management Team and Employees
It goes without saying that building a strong management team creates significant enterprise value for business owners. I will explain it this way: buyers are buying your company first, that’s 1A, and then 1B, they’re buying your management team and loyal employees. Oftentimes, buyers start to see gaps. Now some of these buyers are ready to bring in a new team, but the reality is that having a strong management team so the business can continue to thrive without you is what gets buyers excited.
Other points to consider are reducing the risk your key employees can present to your business. You may have a crucial employee, maybe they’re your VP of Sales accountable for 75% of your sales. That’s a challenge when you take your company to market. What if the VP of Sales demands a portion of the sales proceeds or they’ll leave? What if they threaten to quit, or actually do quit post-sale, taking their client base with them? I have a client right now where that’s our number one focus. In their industry, I would put their key employee in the top five, if not number one, in the entire country for what they do. The owner does an amazing job running her business, but her top Account Manager is a unicorn and a risk to the business if she decides to leave. So, we’ve been working to reduce that risk, hiring the right talent, the right business model, the right territory management, and ensuring the correct commission model is in place to overcome this challenge. Even if it seems the main players will transition over when your business sale happens, you never know how someone’s going to react when they find out the company is being sold. All these factors are critical things, and incentive compensation models and golden handcuffs to keep key employees post-sale is vital to your business thriving and scaling.
Positive Cash Flow
Positive cash flow is paramount. Think of it as needing more cash coming in quicker than the cash going out. Let’s say you have a wholesale distribution company, and they’re buying products from overseas. It’s 50% upfront, 50% when it leaves the shore to come over to the United States, not to mention shipping over land to your distribution center or drop shipped to your customer. The entire supply chain, from initial sale to finally getting paid from the end client could eclipse 150 days or more. That’s a lot of cash tied up in inventory, perhaps supported by revolving lines of credit or expensive credit facilities to finance your working capital shortfall. You’ve got net60 terms to get paid. Even with the greatest product on the market, you can be upside down in cash, struggling constantly. The situation needs to be inverted.
We had a service client who would do a month’s worth of work and then their billing department would invoice a week to two weeks later on net 30 to net 45 terms. We reversed that. We created a model which, in that industry, is unheard of where they bill a month in advance every single month. Cash flow is no longer a problem. They have massive clients they can immediately service and never have to worry about running out of money because they’re always ahead. This model prevents a new buyer from coming in and demanding net 10 or due upon receipt to their existing customer base, prompting a possible mass exodus. This is something that buyers evaluate when determining which companies to pursue.
Growing and Scaling Profitably
I hear all the time, ‘We will make it up on volume. We’ll sell a ton,’ but the low gross profits using this sales model have an immediate and potentially severe impact to bottom-line net profits, and in turn, the underlying value of the company. Let’s say we’re working with a company that makes significant gross profits due to selling large amounts with substantial gross margins. Can their high volume/high profit customers be identified? Can the ones with minimal purchases and low profits be removed from the customer roster? Then consider the customers they sell a lot to, but the margins are less. Can those be converted to higher margins? The other side of the coin is those you don’t sell to often, but when you do, the margins are really high — can you sell more? We want to sell more to our customers with high gross profit dollars and high gross margin percentages. It makes sense, right? From a growth and scale perspective, you’ve got a tremendously profitable business and significant cash flow to expand your business, hire more talent, market your products and services more. All those profitable dollars flow right down to your net profits and the bottom line grows significantly.
You can also leverage technology, software and automation. For example, maybe your company processes and systems are unique and repeatable, so you can add more locations and you figured out a way to do that. That gets buyers excited. They see this company knows how to scale. This company is going to be my platform. I’m going to bolt on 10 more companies to this amazing business. We’re going to grow them from $50 million to half a billion and sell that for a 15x multiple. You’re going to get a bunch of buyers competing for that business.
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?
In a service-based business, there are two really critical things buyers look for. It’s your people and your knowledge capital. For example, let’s say you’re thinking about buying a consulting firm. How do they bring on top talent? With top talent, you’re competing with much larger firms, so your benefits have to be comparable, your performance management has to be really good, your onboarding has to be on point, your ability to train and educate them is very important, a lot of certifications come into play. The other thing is your back-office processes have to be highly optimized to grow because you don’t want an employee or a customer-facing issue surfacing that affects your brand. You’re also looking at a service-based business and saying, is there the potential to expand the business geographically, opening multiple offices to capture market share? Or can you do everything remotely and still maintain the level of service and quality your customers expect?
When you look at product businesses, there are different processes that have to be optimized. Management needs to evaluate their entire supply chain, optimize their cash flow for growth, manage inventory, bill and collect in a timely manner, and more. You have to ask yourself a lot of questions to compete effectively. Do we have suppliers we can depend on in terms of quality, on-time delivery, customer service, shipping orders complete with fair payment terms? How do I reduce the risk?
During the height of the COVID lockdowns, supply chain disruptions tied up products and working capital due to port congestion, making it difficult at best to service customers. The collective wisdom centered around supply chain diversification — perhaps we need to buy more goods from the United States and a host of other countries to reduce my supplier risk. Then, on the customer side, how do I make sure I can get these products to them quickly and get paid quickly so I don’t have this cash flow issue? How do I optimize my inventory?
This affects the company’s attractiveness in the marketplace. Buyers are wary when they see businesses dependent on one or a few key suppliers for all the reasons I described. It’s tough being a business owner!
How does one go about the process of finding a buyer?
Having the right advisor who can help you is one thing I highly recommend considering. The deal killer is when it’s not done right. You have to find the right buyer. It’s critical and easier said than done. Remember that old saying, “You’re barking up the wrong tree?” That’s never more true than going to market to find potential buyers, and ones that not only are a good fit but can actually do the deal.
A trusted advisor with the right team can take you through this process and identify those 400 to 600 buyers likely to be interested in your company. So, how do you determine which of the myriad of buyers makes sense to reach out to? It’s important to subset and evaluate the buyers pool based on their investment criteria (e.g., EBITDA ranges, specific industries and geographies, size of company, and more), and then go through a competitive bid process to get them competing for your business.
Our VP of Market Strategy, Chase Kenner, loves to say you also need buyer bouncers. Buyers may be more savvy than an owner, and it’s up to an advisor to represent the seller with their best interests in mind.
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?
Part of the coaching is to help the business owner co-develop what strategies make sense for them. Additionally, even larger mid-market companies may not fully understand how buyers look at their business and the timing of when it makes sense to go to market. They may have a great company, but they’re not sellable yet. M&A Advisors must have the integrity to tell them that and then help coach them and work with them based on their goals. You have to get them sellable and attractive to the marketplace, being mindful that it’s in the seller’s best interest to maximize their sales price and negotiate the best deal for them.
As far as going public, it’s a completely different dynamic because you have to get your business ready to be a public entity. Your existing financial staff may not have the experience for the regulatory demands of a public entity. It’s vital that you hire a professional CFO with public entity experience to generate the 10K and 10Q financial reports, manage a financial audit, build an audit committee and a Board of Directors, and more. You’ll also have to focus on your internal controls across the business and IT, ensuring they’re designed well and operate effectively. That’s a lot of work for even Fortune 500 companies to get right, let alone a middle-market business. Even your entity structure may need to change in preparation for going public. That’s a commitment, so you’d need to determine if this is truly the path you want to go down. Are you ready to manage and handle that? I’d argue most companies in the lower-middle market are not remotely ready.
It may be in their best interest to continue growing their business and working on the key drivers of value that will attract buyers for an eventual exit. It’s possible the business is already “built to sell” for maximum value, and it’s our job to work with them to determine the best decision for themselves and their family.
Can you share a few ways that are used to determine a good selling price for the business?
There’s classic art and science to the valuation process and a combination of a few different valuation methods. That’s the science. You follow valuation techniques in the simplest terms. You take their adjusted EBITDAs (Earnings before interest, taxes, depreciation, and amortization) times some multiple of earnings. For example, if they had an EBITDA of $5 million and their industry multiple was 6, then they’d be worth an estimated $30 million. It’s ultimately what the buyers will write a check for, right?
But then there’s the art, which is what are the qualitative aspects that could affect the business value? Let’s say there are two companies. Business A generated $30 million in annual revenue, and $3 million in bottom-line EBITDA. Business B also has $30 million in revenue and $3 million in EBITDA, and the two companies are in the same industry. You would think both would be valued the same, right? The reality is that Business A has a new financial accounting and operational software platform, and they’ve spent a lot of time developing their management team, they’ve documented their systems and processes and have a repeatable system that’s trainable across their employee base. At Business B, the landscape looks a little different. While the company’s been around for a long time, they have older systems, and they haven’t bothered to invest in the latest technology. They don’t have a professional management team either, and a lot of what they do is still done the old-fashioned way — manually.
So, they’re two different companies. On the surface, they may look the same, but you must consider what makes them unique in the marketplace and attractive to buyers. Business A will sell for more than Business B almost every time.
Honesty and integrity in the valuation process, open communication, and educating the business owners are vital steps to get everyone on the same page on what the company is worth.
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. :-)
I would create a movement where everyone helps others be successful. At our first company, we had the HOBS awards. It was a big annual award for helping others be successful. It’s really kind of turning outward, the whole ‘love others as you love yourself’ philosophy I believe. If you help enough other people, things tend to pan out. So, I would like that movement to be pushed out because the world would be a better place. Just help other people. It may sound kind of campy, but I believe in that. I love helping other people; it’s a good way of life.
How can our readers follow you on social media?
You can find me on LinkedIn at https://www.linkedin.com/in/steveconwell.
Thank you for the interview. We wish you continued success!
About The Interviewer: Jason Hartman is the Founder and CEO of Empowered Investor. Jason has been involved in several thousand real estate transactions and has owned income properties in 11 states and 17 cities. Empowered Investor 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.
Starting with very little, Jason, while still in college at the age of 19, embarked on a career in real estate. While brokering properties for clients, he was investing in his own portfolio along the way. Through creativity, persistence and hard work, he earned a number of prestigious industry awards and became a young multi-millionaire. Jason purchased a California real estate brokerage firm that was later acquired by Coldwell Banker. He combined his dedication and business talents to become a successful entrepreneur, public speaker, author, and media personality. Over the years he developed his Complete Solution for Real Estate Investors™ where his innovative firm educates and assists investors in acquiring prudent investments nationwide for their portfolio. Jason’s sought after educational events, speaking engagements, and his popular “Creating Wealth Podcast” inspire and empower hundreds of thousands of people in 189 countries worldwide.
While running his successful real estate and media businesses, Jason also believes that giving back to the community plays an important role in building strong personal relationships. He established The Jason Hartman Foundation in 2005 to provide financial literacy education to young adults providing the all-important real world skills not taught in school which are the key to the financial stability and success of future generations. We’re in a global monetary crisis caused by decades of misguided policies and the cycle of financial dependence has to be broken, literacy and self-reliance are a good start. Visit JasonHartman.com for free materials and resources.
