E26: M&A Deals and Transition Planning – Christopher Brodman, Metz Lewis

by | Dec 8, 2020

Succession
Stories
Podcast

Listen to the Succession Stories podcast:

Laurie Barkman talks deal making and transition planning with Chris Brodman, President of Metz Lewis, a law firm specializing in M&A and business transactions. The COVID-19 pandemic has impacted private equity and strategic deals. As more owners are thinking about selling, is the company ready to be bought? As Chris says, when the machine breaks and you’re in Florida, you don’t shut down because you’re the only person who knows how to kick it in the right place. Chris shares insights on what it takes to ready a business for sale and maximize value.

Learn more about:

  • Succession considerations with family and bringing in a professional CEO
  • Aligning vision, mission, values and incentives
  • Role of Boards in private companies
  • How strategic planning dovetails with transition and succession planning
  • Capacity in the private equity market for the right deals

Show Links:

Christopher Brodman on LinkedIn

MetzLewis.com website

Connect with the host, Laurie Barkman on LinkedIn or SmallDotBig.com/contact

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Transcript:

Laurie Barkman:

Welcome to Succession Stories, insights for next generation entrepreneurs. I’m Laurie Barkman. I’ve spent my career bringing an entrepreneurial approach to mature companies struggling with change as an outside executive of a third generation, 120 year old company, I was part of a long-term succession plan.

Now I work with entrepreneurs, privately held companies, and family businesses to develop innovations that create enterprise value and transition plans to achieve their long-term goals. On this podcast, listen in as I talk with entrepreneurs who are driving innovation and culture change. I speak with owners who successfully transitioned their company and others who experienced disappointment along the way.

Guests also include experts in multi-generational businesses and entrepreneurship. If you are a next generation entrepreneur looking for inspiration to grow and thrive, or an owner who can’t figure out the best way to transition their closely held company, this podcast is for you.

Subscribe to our newsletter for more resources to build value in your business. Visit SmallDotBig.com and sign up today.

Laurie Barkman:

This episode is about deal making during times of COVID-19. I spoke with Chris Brodman, the President of Metz Lewis, a law firm specializing in M&A and business transactions. We talked about the impact of the pandemic on private equity and strategic deals. More business owners are thinking about selling their company, but is the company ready to be bought? As Chris says, when the machine breaks and you’re in Florida, you don’t shut down because you’re the only person who knows how to kick it in the right place. For business owners thinking about selling their company, I hope you enjoy our conversation about what it takes to ready a business for sale to maximize value.

Laurie Barkman:

Chris welcome to Succession Stories. I am really glad to talk to you today. We’ve known each other now for a few years. We met, I would say, in the deal making space. You were supporting me as I was the client working at a private equity company, and we were working on deals related to early stage companies. But the focus of today’s conversation is on really mature, privately held companies in the family business space. But the overarching theme is deal making. So, I thought, what better guy to have on the show than you. And we can talk about your experience working with family businesses and deal making, and also deal making in times of COVID-19. So welcome. I’m really glad to have you today.

Christopher Brodman:

I am really glad to be here and I will say it’s good to see you virtually. But I also will let you know that I have followed Succession Stories and I’m a big fan. I’ve learned things. It’s really a great thing you’re doing.

Laurie Barkman:

I really appreciate that. It’s nice to have a fan out here on the show. Very, very cool. So, Chris, why don’t you tell us about yourself and about your firm.

Christopher Brodman:

I am the President of Metz Lewis. We are a 40 lawyer business law firm. We have one location it’s downtown Pittsburgh. We serve predominantly our practices, different service areas to privately held middle market companies. That is really our wheelhouse.

Christopher Brodman:

We do represent most of the banks in town on loan documentation and work out. We’ve got a high net worth individual practice, both income and estate tax planning. But our main driver is the corporate practice, the business practice. So within that, my specialty is I do general corporate, outside general counsel, so to speak for many lower middle market companies. And here at Metz Lewis, we do a significant amount of transactional work. We’ve got, I think, nine lawyers in our corporate group and we do 20 to 25 deals a year. So it’s a very active deal practice. I also, Laurie, I’ve been getting into apropos to some of the questions I think you’re going to ask me, I’ve really been focusing quite a bit on transition planning and helping middle market, lower middle market companies and the people that own and run them, plan for what’s next.

Laurie Barkman:

And that is a big topic that comes up so often in the context. What’s so interesting and I love covering on the show is talking to companies and leaders of companies about their business and sort of the meta macro sense of a transition. But also today there’s so many people that are thinking about transitions on the personal level. And the focus of this show today is obviously on the company level. But I just wanted to make that footnote. Transition is definitely a topic that’s on our minds. So let’s jump forward and talk about family business clients. I’m curious to start off about what you see when it comes to family members in the business. Other folks I’ve talked to on the show have said different things. Some say, oh, you need to go work elsewhere before you come in. Or some say, okay, you can come in, but you have to come in before age 30. There’s all kinds of stipulations out there. What’s what are some of the common themes that you see?

Christopher Brodman:

I see it all over the board. You know, one end of the spectrum, you’ve got a very structured approach that some families take and there are educational requirements and outside work requirements and achievements that have to occur in the outside work environment before you’re eligible to come work for the family business. And, you come into the family business and it’s a very structured existence. You come in at the level that you should come in based on your experience and your talent level, and you’re reviewed just like everyone else. And you might even have a cognitive test, a Predictive Index test or something like that to make sure that family members are put in a part of the business that is suitable to their makeup and really just go through a structured process.

Christopher Brodman:

If that person is, if the intent is to grow that person into a leadership role, it can be done in a very structured way. Often wanting that younger family member to be involved in all parts of business before they start to move up the ladder. On the other end of the spectrum, there is no structure at all. It’s this is my child and my child has a God given right to be the next person to run this business. And by the way, they’re going to come in and they’re gonna make more than everyone else besides me, and have authority that really is not justified based on their experience and talent level. So those are the two ends of the spectrum. And, you’ll see varying degrees of that across the range of the spectrum as well.

Christopher Brodman:

I will say what’s more typical, unfortunately I think the latter scenario is more typical. Which is why, there’s a reason when, I don’t know the exact numbers I used to, but there are studies and the statistics on the percentage of multi-generational family businesses that are successful and that fail going from first-generation the second generation. I don’t remember. You might know, but it’s a very low percentage of success. And going from second to third is a drastic reduction in that percentage of success. So I think there’s no mystery as to why those numbers are there.

Laurie Barkman:

Yeah. There’s a saying of shirtsleeves to shirtsleeves in three years. I think that’s the majority. If you make it past the second generation to the third, there’s probably some reason for that, but getting to the fourth is a lot harder. And I think that magic number is somewhere around 8% make it to the third generation. And yeah, there’s all kinds of reasons for that. It seems to me certainly there has to be a transition to someone. Sometimes there is a candidate internal who is a family member, and sometimes there isn’t. And that is one of the things I wanted to ask about today in terms of succession. And that was my experience. I was part of a long-term succession plan and went through the PI and the whole executive recruitment process. And so I saw it from that angle and it took about six months. It was a very in-depth type of decision that both of us, for me, and as well as the entity, was making. So I respected it. It was a great process. What have you seen for organizations when they want to bring in a professional CEO? You know, have you seen it work well, have you seen it not work well, any words of wisdom of things to avoid?

Christopher Brodman:

I’ve seen it work well, and I’ve certainly seen it not work well. The one word that comes to mind for me in so many aspects of the subject that we’re talking about – successful transition – is alignment. So, I think what works well tends to work well, if on the front end, everyone does the homework and ask the right questions and make sure that there’s alignment. And by alignment, I mean start with mission, vision, purpose. If you’re the patriarch or matriarch that’s running that family business and ready to move on to the next phase of your life. Whether it’s with an outside CEO or a family member or a sale or whatever it may be. Do you have a vision for where this company’s going? To increase your odds of a successful transition, you need to have a vision. If you’re bringing on an outsider to take over the top spot, they need to share that vision.

Christopher Brodman:

Because if they don’t, you’re not going to accomplish what you want to accomplish. So, I think it starts with vision. The other thing to help drive alignment or to help achieve the vision is I think it’s very important. The terms that this outside person has in their package when they come on. So there should be a performance aspect too, they should have an equity incentive. I firmly believe that because it drives alignment. But it only drives alignment if that equity package if the incentives are achieved based on goals and milestones that make sense to get us to where we’re trying to go.

Laurie Barkman:

Is that a difficult thing to do to achieve alignment? How many of these family businesses would you say have really well articulated the mission, vision, purpose, which some call values? How well is that, or does a new CEO come in and say, wow, this isn’t really articulated let’s spend some time on that.

Christopher Brodman:

Oh, that’s a great question. Great questions on the first part of that. I would say just in my experience, and I’m just one person in a 40 lawyer firm. We have the universe that we work in. But in our experience, it is not nearly often enough that these privately held family businesses have a mission, vision, purpose. It is less often that it’s the case that they do not. I think if you start bringing that CEO in and you haven’t even figured out for yourself where you want this to go and what you’re trying to achieve, your chances of success are greatly diminished. The really great part of your question was okay, so I’m a CEO and I’m coming in. What’s my ability to put my thumbprint on what that vision is?

Christopher Brodman:

And I do think that if you’re going to be successful sitting in that top seat, you have to have some control and ability to put your own stamp on that, for sure. You can’t, if you don’t believe it, and it’s not what you want to achieve, how are you going to lead others to it? Right. There has to be an authenticity in a belief there. I think there is a line there that I would say the vision has to be shared at maybe at a high level, like is this a growth oriented vision? Or is it let’s just maintain? And my vision as the founder who’s bringing in a CEO is I want to keep getting paid for a while. I don’t want to change anything. I don’t want to try to grow because that entails risk and it entails cost. And if you’re bringing in a CEO that, hey, listen, I’m with you. That’s what this business should be great. If you’re bringing in a CEO that wants to take it to the next level, and you don’t want it to take it to the next level, then you’re not bringing in the right person because you don’t share the same vision.

Laurie Barkman:

Yeah. I think alignment is a perfect way to describe it. And it’s also probably timing to it. When you bring in an outside CEO is really critical to thinking about the company and then that longer term, because there’s kind of this tug of war between the way we’ve always done it. And then maybe the way we could do it and the existing management team, which would, let’s just say family business management team there, they’ve seen what’s worked, but it could be that what’s worked in the past isn’t necessarily going to get them to that next level in the future. And that middle ground is the tough part because you can visualize this tug of war between let’s make changes versus this worked for us. Let’s just stay in a steady state where we’ve been. If you’re the new person coming in that’s kind of a tough spot, right? If the mission, vision, values is already well articulated, you can build from that. If it isn’t, then it feels like a little bit of a murky ground and perhaps some red flags for the outside CEO to come in. Or it could be a great opportunity, I guess you never know.

Christopher Brodman:

If you’re that outside CEO, I think it’s important for you when you’re going through the discussion process on whether this makes sense for everyone. If you’re a good CEO, you understand mission, vision, purpose, right? You should be understanding how important that is. If the ownership group, the family, doesn’t they’ve never focused on that. The CEO should be driving the discussion in that direction to make sure that everyone’s on the same page and aligned.

Laurie Barkman:

This leads me to my next question about other roles in the company that can have influence such as a Family Council or a Board of Advisors. What in your experience have you helped family businesses establish new entities like an independent board or a family council to help aggregate decisions and talk about succession planning?

Christopher Brodman:

Yeah. Those governance entities can be highly valuable if they’re done well. And the other big thing in my experience is if the leader of that family business has a growth mindset and not a fixed mindset, which some of the things you’ve mentioned in the last few minutes, I’m thinking, yeah, we’re talking about growth mindset versus fixed mindset. The people, the tug of war. This is the way we’ve always done it. We’re not going to change. And a lot of in my experience, often that’s the case because people are afraid to change. They’re hey, I’ve got a decent thing. I’ve made a nice living. Why would I risk that by trying to grow and bring in new people. So I think if the owner, the patriarch or matriarch, who’s driving that business, if they have a growth mindset willing to embrace change, willing to think differently about what. There’s a reason that businesses at the level it’s at, after the 25 years you’ve been running it, right.

Christopher Brodman:

It might be at a great level. I’m not saying it’s not. But it hasn’t gone past that for a reason now. So if you’re willing to take it to the next level, then an advisory board or some other governance entity, I think can really be valuable in that situation otherwise. I’ve been on boards on both ends of this, where the family leader is willing to embrace change and wants to grow the business and is open to what it takes to do that. And if you get the right board members and do it the right way, that can really drive results. But I’ve also been on the board where the family business leader sets up the advisory board or the governance council because that’s what their advisors tell them they should do.

Christopher Brodman:

And they read a book and said, this is the thing to do. But you get in there. And they are a fixed mindset. They are not willing to embrace change, and no matter what you bring up, it’s, if you’re not a yes person to where they want to go, if they’re not going to change. And then you’re really just spinning your wheels and wasting time, and sometimes going, you know, going to go backwards instead of forwards. I think, Laurie, I would say I’m a Vistage member. I’ve been a Vistage member for quite some time. And I’ve learned so many great things in Vistage. But there’s one thing above all. And our group leaders got named Chuck Gounaris. In every Vistage meeting, Chuck starts with reminding us about the belief wheel. Chuck’s belief wheel is your beliefs drive your judgements, your judgements determine your actions, and your actions determine your results.

Christopher Brodman:

And the reason why Chuck drives that every single meeting is because it relates to change. Chuck’s number two big thing is great business leaders all have one thing in common. They all understand the need for change, and they all can successfully manage change. And if you don’t start by changing what your beliefs are, your judgments and your actions are never going to change, and you’re going to get the same results. So when I talk about a fixed mindset and a growth mindset, and why that’s so important as to whether this governance entity is going to work, that’s really what I mean. That person has to be willing to change their beliefs if they really want to have a different result going forward.

Laurie Barkman:

Totally agree. It also makes me think to ask you then, if there’s a listener thinking about creating a Board of Advisors, what advice would you have for this CEO or business owner in thinking about maybe the skill sets or characteristics you mentioned to be on the same page about mindset? So that’s definitely one of them, but what might be some attributes of board members that they might want to consider surrounding themselves? Someone has jokingly said to me, yeah, the country club board member selection doesn’t work anymore. It’s really we’re beyond that. Well, so what else is there?

Christopher Brodman:

Honesty and independence. Someone who, whether it’s a difficult thing to say to you is willing to say it because they are there and they understand that their role is to benefit the entity. I actually have been removed from a board because of that.

Laurie Barkman:

You were too honest?

Christopher Brodman:

I was, yeah, well, when it came to voting the person that appointed me to the board, this was not an advisory board. It was a full voting board. And I had a great relationship with this person. But when it came to voting on some things that I didn’t vote in the way that he was voting, I was not long for that board. I think that’s what you need first and foremost is someone who has the right experience to express independent thoughts that are valuable. But someone who’s going to tell it like it is.

Laurie Barkman:

How did you feel about that being removed? Did you think that they were making a mistake removing you because they were removing all dissension and just trying to get group think and make it a happy place? Or were you agreeing that was the right thing that you needed to leave?

Christopher Brodman:

I did not think it was the right thing for the company at all. But actually I had mixed feelings and I was heartbroken, might be a bit dramatic. It has affected, I had a great personal relationship with this person, which I don’t have. We’re cordial, but I do not have the same bond with that person that I had before. And I think there was a feeling of betrayal. He felt that I betrayed him by not getting on board with supporting all of the direction he wanted to go on everything. So I think it was the right thing to do because he was in control. And if that’s the way he felt it wasn’t going to be better if I stayed on. But I wish it didn’t turn out like that because one of the things for me, we formed our firm in ‘98. Someone asked me once, what’s the most important thing to you in your years of doing what you’re doing. And when I think about it, it’s relationships. I have so many long-term relationships. To have a relationship that I thought was that strong go away for that reason, it bothers me to this day.

Laurie Barkman:

One of the characteristics you talked about was independence and that’s what you were trying to be. You were trying to be completely independent and make a recommendation for a business decision that you felt was the right thing. That’s really difficult because ultimately he didn’t want you to be independent. He wanted you to be on his side, whatever that meant. That’s a good point of view for people creating a board and also if you’re going to be an advisory board member, what to watch out for. It also leads me to the question about compensation. There’s – let’s a call him a friend, but he’s a long-time mentor of mine. He was my first, very first boss right out of college. And we’ve stayed in touch all these years. So don’t laugh. That was a long time ago. I know. But we’ve stayed in touch and he serves on boards, but he doesn’t take compensation. And that’s his choice. And I know there are typically compensation packages. So in your experience, what have you seen for private companies when they create a board of advisors do they participate in the equity of the company typically?

Christopher Brodman:

I would sometimes, but I wouldn’t say that’s typical, at least in my experience, I would say it’s typical that there’s some form of compensation, whether it’s a fixed annual fee or a per meeting fee. I would think that that cash compensation is more typical in the companies that I’m involved with. Although there are equity situations, and again, it’s very similar to the discussion we had about the outside CEO. I think that can be a really powerful thing if you have the right people. And if you have the equity issuance arranged in a way that incentivizes the right conduct, you know and, and aligns interests. So there should definitely be a performance-based aspect. And there should also be a time-based aspect because one of the difficulties with the equity sharing, especially in a closely held business, a family run business, is what happens when that person leaves?

Christopher Brodman:

So if my situation, I took no compensation on that board that I referenced. But if I had an equity position and we separated, we need to have had a pretty good arrangement up front on what happens when I’m gone. And for me, it would be, well, listen, you can’t just fire me when you want and get out of any of the equity and for the company. Well, if you’re not carrying your weight or the company is not benefiting from you, and someone else is driving value and you’re not really helping create that value, why should you continue to get equity? So that is one of the difficulties that you really need to think through on the equity side is what happens when that person leaves.

Laurie Barkman:

Yeah, definitely. Well, let’s switch gears now and come to more of a discussion around COVID-19. It’s been a kind of a crazy few months for a lot of people, a lot of companies, and I’m sure in your experience with clients you’ve seen a lot of different things. There may be companies that wanted to bring in outside before the pandemic hit. Curious what you’ve seen about that in terms of COVID-19 and deal making. It’s probably been harder for private companies to get access to capital. So many banks and lenders are so focused on PPP and The Cares Act and just getting everything there and rightly so. Everyone’s attention was there. So in terms of deal-making, has it really stopped, slow down? Do you see it coming back? There’s a lot of what I’m asking you here, I realize. Just observational now, if you look back at the last few months, what are some of the major themes?

Christopher Brodman:

On the deal-making side and when I think deal-making in this context, I think M&A, buying and selling. What we noticed was a definite pause in March, April, May, June. We still here at Mets Lewis, we closed two deals at the end of April, and we closed one or two in June. We also had a pipeline of deals when the pandemic started, let’s say we had 10 deals, and I say, pipeline, varying degrees of moving forward. Some had signed letters of intent. Others were close to sign letter of intent. Others had just started discussions with the market or investment bankers. So varying degrees, but we closed three or four of those and a couple of those have they just put on hold and continue to have dialogue, some are still having dialogue.

Christopher Brodman:

And then a handful of those just went away. They just, hey, we can’t move forward. Sometimes it was the buyer. Sometimes it was a seller. We can’t get our head around this right now. Let’s see what happens. So that was earlier in the pandemic. Recently here towards the end of summer, we’ve seen deal activity. Our deal activity really started to pick up. There have been one or two distress deals. I would call them that we are working on. But just normal deals, just same as pre pandemic type deals. We’ve seen several of those that we’re in the middle of right now. One thing, no surprise, some companies we all know have really been affected by COVID and others have not, or it’s been a positive impact on their business, right.

Christopher Brodman:

Depending on what industry you’re in. So no surprise that most of it, unless it’s a distressed deal, most the deals we’re seeing are in those industries where not only has there not been a big downturn for the target company through COVID, but they’re also industries where the smart money would be. This is probably not going to be that much affected by COVID. Some of the deals that fell apart and aren’t back together, no surprise, are in deals where the buyers looking and saying I need to see how this all plays out before I put my money into a home healthcare business that you’re trying to sell based on 2019 EBITDA and telling me, don’t worry, it’s going to come back to that. Those deals are tough to get done right now.

Laurie Barkman:

So a couple of questions about that. On the industry side, can you talk about what industries you’re seeing the activity in generally?

Christopher Brodman:

Sure. I’m happy to talk about that. We’ve got some FinTech companies we’ve been working on with an acquisition strategy for a number of years, and that strategy has continued to roll right through COVID. There are some medical device companies. I’m involved with a company that’s in the respiratory device arena and their door is being knocked on quite a bit by suitors. Their future looks pretty good right now. There’s no magic to it. It’s the things you would expect are still going strong.

Laurie Barkman:

I was in a webinar the other day and it was a deal focused webinar. So there were private equity firms on the calls and they were talking about activity as well. Kind of picking back up, as you said, in focus areas, are you seeing these are more private equity related deals or more strategic buyers or both?

Christopher Brodman:

Both. Yeah. So at Metz Lewis, our deal practice is even year to year. It’s pretty well evenly divided among sales side by side, private equity strategic. Any year it might lean a little bit more one way or the other, but I would say our mix right now is no different than it’s ever been. We’re on buy side for a few PE firms right now engaging in two deals. We just got hired in the last two weeks on deals to represent, they’re not family businesses, but they’re founder businesses. Where the person started the company, and grew the company to $20 or $25 million business in these cases. And now is a baby boomer getting towards the end of the cycle and their transition choice is a third-party exit. So, we’re seeing activity in all areas.

Laurie Barkman:

For the baby boomer transition where there’s a third-party exit. Do those clients typically have a hey, I’m going to go sit on a beach kind of idea. They know what they want to do with their money. They’ve already lined up maybe their values and philanthropic ideas. Or do you find that we’re just going to go through the motions and then we’ll figure it out.

Christopher Brodman:

Again. Great question. And I just paused because I’m thinking back to all my clients who’ve been in that position and how many of them have struggled with just what you’re talking about? Even the ones who think they planned it out invariably they struggle. When we’re talking about that baby boomer scenario, a person who grew the business and they’re the key person, and they have in many cases, they remain the key person all the way up through exit. People say it’s business, it’s not personal. But for those people, business and personal, there is no line between business and personal. They invariably they struggle with the idea of letting that go. And a lot of times it’s really such a part of who they are and their identity that it’s a struggle.

Christopher Brodman:

It’s much less of a struggle though, Laurie, for the ones who’ve worked either are smart enough to figure it out themselves or have gone through a transition advisory process well ahead of that transition. Transition advisory process, what I mean by that is not just how are we going to sell the company, but how are we going to prepare the company for sale so that you get the most value out of it. What has to happen? It’s not just a big EBITDA, it’s an infrastructure that’s in place, it’s personnel. It’s something that when the machine breaks down and you’re in Florida, we don’t shut down because you’re the only guy who knows how to kick it in the right place.

Christopher Brodman:

So it’s all those things that go into the planning and how much money do you need? What do you want your lifestyle to be afterwards? Have you really gone through a process with an advisor to figure out what that’s going to be? Do you know what your net proceeds are going to be from this transaction? Philanthropically, do you have a plan there? All those things, the sooner you get on those and focus on how important it is to have a handle on that, the better your chances are of having a having peace of mind through your trends.

Laurie Barkman:

I think that’s great advice. It also makes me wonder, do people then set up a separate transition advisory board for let’s say when the time horizon gets shorter and maybe it’s five years out, ten years out. I’m kind of sensing a pattern where if it’s 20 years away, they don’t want to talk about it. But if it’s maybe within a ten year time horizon, five year time horizon, certainly two years feels like, Oh my gosh, you’re probably way behind the eight ball. Do they set up a separate, is that what you would advise? Set up as a separate transition advisory board with experts? That’s what some people look to surround themselves with skills and expertise that they don’t have, which makes sense. You can’t know everything, and you don’t want to as the business owner. They’re not an attorney most likely, or they’re not a financial advisor. Or would they rely on their existing board of advisors for that?

Christopher Brodman:

I think most people in that situation do not seek out an advisor who is experienced in that particular strategy. I think most people, if they’re going to rely on anyone, it’s going to be their existing group of trusted advisors, whether they’re trusted lead, it might be their financial advisor. It might be their lawyer. It might be their CPA. It might be whoever. Those people are good at what they do, but this is a different skillset. This requires a different type of advising. If I had a nickel for every time that my partner, John Lewis, who is a big M&A guy, and we’ve been together for a long, long time. If I had a nickel for every time, we said to each other, we’re selling a client’s company.

Christopher Brodman:

And we said, if we just could have talked to this person five years ago, he or she would be in such a better position right now. because people, I think they just run the business and run the business and their ideas when it’s time to sell it’s time to sell. And often, unfortunately that time to sell isn’t even a planned exit. It’s often times I waited too long to think about this and get an advisor and plan for this. And now I have no choice. Either my health is bad, or the business is distressed or someone died, or I just don’t have the energy anymore. So I don’t want to go through a five-year planning process. I just want to, I’m ready to be done. So I don’t know if that exactly answers your question, but I think it’s a really critical need out there and not enough people go through the right process.

Laurie Barkman:

Yeah. There’s always the look back to see what you would have done differently. It’s probably the rare person to say we did it a hundred percent right. And it is good to have advisors around you that can give you that insight of where other mistakes they’ve seen along the way. I appreciate that you do that for clients.

Christopher Brodman:

On that Laurie. Just one more thought. So many of these people are great at what they do. They’re, great. But when you were talking about that baby boomer business. Very often when they it’s time for them to sell, it’s the only M&A deal they’ve ever been involved in their life. We talked about the country club. They may be at the country club for three years, listening to their friends, talk about multiples on EBITDA. I just sold for 11 times, and they’re sitting there thinking, well, my EBITDA is this. So I’m going to get 10 or 11 times not realizing that there are fundamental differences maybe between their company and that other company as to why it got 11 times. And those differences are most often fixable. You can often create that value if you start early enough by having the right management team in place and the right infrastructure and the right systems, having your intellectual property protected, your key people tied to the business through compensation or agreements or whatever the case may be.

Christopher Brodman:

All things that when a buyer comes in is going to have a dramatic effect, not only on the valuation, but sometimes even whether they want to buy your company. We talked about deal-making in COVID, we talked about that a few minutes ago. And one thing that I am seeing is there’s so much dry powder on the sidelines still for PE. And these folks make their living by trading companies, not by sitting on dry powder. So I expect there to be a lot of activity going forward. But I also expect with credit markets tightening that they’re not going to just buy, they’re going to be more careful about what they’re buying. Instead of a company that was a B company, and we can overlook these problems, or a C company, and we can fix these problems. I think you’re going to see more competition for the A companies.

Christopher Brodman:

Credit markets are loosening, but they’re still they’re tighter than they have been no doubt about that. So, you know, what I’m thinking, Laurie is that you really need to if you’re a seller, if you’re a potential seller, you really need to get on that program way in advance to make yourself an A target. Not a B or C target because while there’s a lot of dry powder credit is still tight. But we’re in really uncertain times even going forward who knows how this is going to play out. So what I’m thinking and we’re seeing already is, there’s more competition for the A target companies and the pricing, I think the pricing is still strong, but the valuations for those companies, but if you’re a B company or a C company, you’re going to either get your value pushed down, or you’re not even going to be saleable right now, because that money that’s buying, they need to be more careful. Now, they need to make sure that they’re getting an asset that’s going to deliver results going forward.

So all the more all the more reason why you really need to plan your transition way ahead of time. And, you know, not to get off the subject. But I think it’s a really relevant to everything we’re talking about. When we talk about transition, you know, it can take many forms. I mean, we talked earlier about succession. And now we’re talking about an exit to a third party. But you know, that succession could be to family, we focused on that quite a bit. But it could be to your management team, or it could be you mentioned an outside CEO, it could be a partial sale of your company to a PE group where you know, you do a recapitalization, and you take some of your chips off the table in the form of cash, but you maintain an equity position going forward. It can be an ESOP, it could be in a distressed situation, or a death or a disability, it could be a liquidation, which very often is not the most effective way to go.

The planning that I’m talking about, though, really looking at that transition event and getting out ahead of it, five years ahead of it. It’s the same planning. Whether an ESOP is your goal, or a third party sale is your goal, or a management succession or a family succession. It’s the same blocking and tackling that you need to do along the way. Because what you’re really doing, you’re not exit planning, you’re making your business stronger, which is going to create more options for a good transition. That’s, I think, very important for anyone who’s listening as a business owner. That’s the thing I really think is critical to focus on.

Laurie Barkman

I love how you just put that Chris. It fits really well with a client that I just started working with. He has a 10 year time horizon for his firm. And what we did was we worked on a strategic plan for the next three years with his team, which was great from a timing perspective, too, because they’re just coming back to the office, they haven’t seen each other in months. And it’s a way to start to articulate this kind of structural capital that you were just talking about. So right now, he’s kind of driving the business development, he’s driving so many pieces of the business, and he realizes it can all rest with him as a single person, there’s risk there. And it’s also not necessarily scalable. And then from a transition at some point in the future. There’s also issues with that. So the process now, is okay, let’s galvanize the team, let’s get everybody on the same page. And a part of what we’re working on then in their growth plan is, how do we make sure that we don’t have too much customer concentration of revenue? How do we make sure that our processes are documented? How do we make sure that we have the right skill sets in the right seats for what our services are? And by the way, our services are great, but we want to launch more services. So how do we introduce those and understand what the market needs are and try to look for some whitespace and go find it. And it’s a roadmap and as you said, there’s all these pieces that need to get put into place before for this gentleman, he’s another 10 years out, but he knows that this is going to take some time. So let’s say flash forward, in five to seven years, when he’s more ready to have these conversations about valuation and where they are in the market, what might suit them, then he’ll have had all these other structural pieces in place. So I like how you presented it. I think it’s great advice for business leaders to just make sure that they’re working on the right stuff. I like to say, you’ve got to work on your business and not just in your business.

Christopher Brodman:

Strategic planning dovetails with transition planning and succession planning.

Laurie Barkman:

It absolutely does. It has to and I think it is smart to engage your management team in the strategic planning side. And of course work with your board of directors, your board advisors, on what that bigger picture for transition, but at some point there’s an intersection. Where I’ve talked to some people about did they include their management team, some would say not till the end, not until I absolutely needed to. And some with family absolutely have to because they’re part of the Family Council, they know what’s happening. So really is very unique. I can’t say they’re all snowflakes, but kind of is.

Christopher Brodman:

You know, Laurie, I’m listening to you, it brings me back to what we discussed earlier about what to look for in an outside advisor, board member or a transition planning advisor. One of the other really critical things beyond being independent is you need someone on that team that can execute, can oversee the execution of the plan, because developing the plan is difficult, but it’s much easier than executing the plan.

Laurie Barkman:

That’s true.

Christopher Brodman:

I know that’s something that you are very good at, and that you have experience and a track record. So, be careful that you don’t just get an advisor who thinks that the job is done when you have the plan, because the job is done when you have the plan. And then as most of these companies do need help with a process that’s going to result in in execution. And, a process that is going to result in identifying how, when and how to change the plan as it goes, because it is a fluid situation.

Laurie Barkman:

That’s true. I like to say you can’t just create the binder and have it sit on the shelf and feel good about it. It’s getting dusty, but who cares. If you’re not bringing it to life? If you’re not executing it, you’re not holding people accountable to it, including yourself, then why bother what good is it. So that’s a really great point. So Chris, this has been a great conversation today. There’s two last things for you. I love to ask all my guests, which you know, because you listen as a fan, if they have a favorite saying or quote about entrepreneurship.

Christopher Brodman:

I do. And I’ll first say this, it wasn’t made to apply to entrepreneurship. But to me, it’s right on point. And it’s from Yogi Berra, the old baseball player who was famous for saying things that didn’t really make sense, but everyone still knew what he meant. And the saying, I don’t know if this is verbatim, but the idea was:

“If you don’t know where you are going you will end up somewhere else.”

It kind of ties back to the to the beginning of our conversation. You can tell how important I feel vision is as a starting point. And that’s why the Yogi Berra saying is so relevant to entrepreneurship to me.

Laurie Barkman:

That’s a great quote. I love Yogi Berra. That’s perfect. Thank you. And lastly, if people want to find you online, how should they find you?

Christopher Brodman:

Our firm website is a way to look me up at MetzLewis.com. I’m also on LinkedIn, and no other social media. That’s that’s the extent of it for me.

Laurie Barkman:

That’s great. Thank you. And I’ll be sure to include those links in the show notes. Chris, it was so great to catch up with you today. Thanks so much for being here. And I’m really so excited that you’re part of the show.

Christopher Brodman:

Yeah, well, I am too. And thanks for having me. It was great to spend some time with you talking about something that we both are passionate about.

Laurie Barkman:

Thank you.

Laurie Barkman:

Innovation, transition growth, easy to say but hard to do.

If you’re an entrepreneur facing these challenges, I get it.

I work with businesses from small to big for strategic planning with your team to achieve your vision.

Visit smalldotbig.com to schedule a call with me. I’d love to connect with you.

Be sure to catch the next Succession Stories episode with more insights for next generation entrepreneurs.

Thanks for listening.

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Ready To Take the Next Step?

We'll guide you through the process. Schedule an initial call today.