The value of your firm is influenced by the comparables for recently sold firms like yours. On this episode, we invited Frank Williamson, Founder & CEO at Oaklyn Consulting, to share details about comps, valuation, and the benefits of an investment banker.
TRANSCRIPT
Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those that are not familiar with Collective 54, we’re the first mastermind community to help you grow, scale and exit your firm bigger and faster. Specifically for pro serve firms. My name is Greg Alexander and I’m the founder and I’ll be your host. And our topic today is comparables. Otherwise known as comps. And this is for firms that would like to sell themselves at some point. And it discusses how being in the right category or being compared correctly to others like you can have a big impact on the purchase price and the terms of the deal. And to help me with this conversation, we’ve got an exceptional role model this morning. His name is Frank Williamson, and Frank runs Oakland Consulting, which is somebody who helps clients with this particular item. Their services include acquisitions, transaction management, private equity, capital service and so on. And and he and his firm probably know more about this than any any of us ever will. So we’re really lucky to have him with us. So. So, Frank, it’s good to see you. And would you please properly introduce yourself to the audience?
Frank Williamson [00:01:37] Oh, Greg, it’s great to be here, and I really appreciate what you’re doing for the audience and for the founders of professional services firms. So, yes, we do just what you described, which was well done. We are we’re an investment banking boutique. We work with small and mid-sized companies, nonprofits, professional services firms and others. When there’s a major transaction to navigate, maybe it’s an incoming offer or maybe it’s a very planful strategic sale. You know, maybe it’s the need to raise capital to grow. But we try to be good guides to people through that process.
Greg Alexander [00:02:17] Okay, fantastic. So, Frank, many of our members are first time founders and entrepreneurs. They haven’t been through an exit before. They probably have listened to guys and gals like me and read all the books and tried to educate themselves. But when I have this conversation regarding comparables and positioning yourself in the proper category, sometimes it’s deer in the headlights. It’s for some reason it’s an abstract idea that’s tough to understand. So I’m wondering if you might offer the audience your perspective on this topic. Maybe share an example or two just to bring some greater clarity to it.
Frank Williamson [00:02:55] Well, the chapter of your book on comps does the really nice analogy of a real estate broker, and I think a lot of us have more opportunities in life to think about, well, how do I cut the cost per square foot of something? Then how do I comp the whole business? And and we might even wonder why that comping things idea make sense since businesses are so different from one another. But you know, you brought up the in the chapter, I thought, you know, some really good ways to look at it. One of them amounts to saying, well, who are you relative to other similar firms that someone you’re talking to might seem. And and I think importantly. Who are you relative to the kind of firm that in the bigger acquisitive. Company might buy you. Are you like them or unlike them? And I think that having a beat on that really gives people a chance to start talking with their exit. Or it’s a succession partner about how do we fit and what could we do together. And it you know, it’s easy for all of us to go into those kinds of conversations with some kind of analogy. Yeah. And that’s what I think comps are most useful, as is the analogy that gets the conversation going.
Greg Alexander [00:04:24] Yeah. So for, for listeners that haven’t had a chance to read the book, let’s just stay on the real estate example because it’s easy. You know, let’s say you want to list your house and you hire real estate agents to represent you and you say, well, what’s the house worth? Well, they consider your neighborhood, your street homes that like yours, that have sold. And they boil it down to a metric sometimes, like in Texas where I live, it’s it’s cost per square foot. Then there’s other metrics that we use. Well, in the business world is very similar. If you have a firm that you want to sell, you would hire somebody like Frank’s company to help you do that, and you’d say, What’s it worth? And they would go out and and do some homework and come back with some comps and say, you know, this is this is a range of what your firm might be worth. And here’s what it will trade on. Sometimes it’s a multiple of revenue, sometimes it’s a multiple of immediate. There’s a bunch of different ways that you can value a firm, and getting that incorrect can cost you a lot of money. And I share my story in the book where at one point when I sold my firm, people thought we were a sales training firm and that carried a much lower comp. And we weren’t. We were a management consulting firm which carried a higher comp. And just moving into that category and being able to prove that that’s a category we belonged in, you know, got me a higher price in better terms. And that’s what’s so important. Now, Frank, it’s hard for founders to identify who their comps are, and that’s probably why they hire your firm and partners to figure that out. So how do you how do you find this difficult to locate information? Because these transactions are private companies. The data is not readily available. How do you learn what the going rate is, so to speak?
Frank Williamson [00:05:56] Yeah, well, there are two parts that good question. One is who to be comped against. Yeah. And then the second one is we’ll get given that I did that, then what’s the going rate. If you don’t mind I’ll just do the, the first 1/1 because I think it’s a little bit easier. Bite of the apple, too, you know, to get in your mouth and you go in and we see many people who haven’t just figured out who are who is comparable to me, who are other people like me. And that I think people can do often on their own by just sort of scanning the business landscape. Who do I compete with? Who else is sold? Who I compete for staff with? You know who who is like me? And who do I want to be like? Like in the case of your story, do I want to be like a management consulting firm? I want to be like a sales training firm. And how will I prove that? Then comes the hard part, which is how do I get to a real number that makes any sense. And and as many people know, you know, price is. At least half the equation. Terms of the rest. You know, if I went out and heard a friend of mine. Tell me he sold his business for 20 times last year’s epitaph. But upon further. Probing with him or with the buyer. You know, I realized that it was eight times at closing and a big profit share that came along. And it was equally 12 times after that. And in any event, the buyer thought they were going to make twice as much off the business as the seller did. And so really the prior year’s earnings weren’t the right number two for the multiple against anyway. It wasn’t how the deal came together, but it makes a great headline. I sold my business for 20 times while going and using that 20 as the basis for account isn’t really going to. Help anyone beyond a great story over dinner about what a great negotiator you are. So it really is hard to get an honest bead on. What are firms like mine selling for in reality? And, you know, our experience is there are few good sources of data around the marketplace, number one. Number two, people who are active in the market have an anecdotal sense that add something important to the data. And number three. Even with that, there’s a big element of small operating companies trading in a market that just, you know, is a you don’t know until you ask kind of market. And finding the way to ask the right questions. It is a lot is a lot of what we do on behalf of clients is a lot of what people get out of investment bankers is can you find a way to ask what the terms really were such that you feel like you’ve got an honest answer? Yeah.
Greg Alexander [00:09:22] You know, a little bit more about my story and how I stumbled into this because I was a first time father myself and this was a foreign world to me. So as we were gaining some some traction, one of the big consulting firms approached us and said, Hey, we would like to buy you or consider by you. Your firm is worth 1.25 trailing 12 month revenue. I didn’t know any better and I said, okay, well, that’s really not that interesting because we’re growing at 30% a year. So I just hold on to it and then we bid on a company. So we were on the other side of the desk and we participate in an auction run by an investment banker. And we lost. And I was surprised we lost. And when the banker called me and told me we lost and he said we were one third the price we offered, like I think it was like $20 million. And he sold for like 60 and I couldn’t believe the number. And I said to the banker, I said, My goodness, if you could get that for that business, what could you get for mine? And the banker did a great job and they said, Well, they’re adjacent to you. Not exactly like you, but you know, if you probably can get a little bit more because you’re bigger than them, but the only way to really find out is give it a try. So we hired them because they were the experts and they went out. And as luck would have it, thank goodness they got a number that I never thought possible. But what I learned from that experience is. Your business is worth what someone’s willing to pay for it. Right.
Frank Williamson [00:10:47] And I think that’s such an important lesson and one that one that is hard to have come across when any business owner does probably their first encounter with getting their business valued, which is for some wealth planning purpose or tax planning purpose. They don’t get a valuation report and that uses a wide or very broad set of comps and describes a theoretical transaction to the satisfaction of the paperwork that the IRS needs. That’s you know, that’s a whole different way of thinking about it than what’s the actual transaction, the actual buyer, and what does that actual person need. What really jumped out to me about your story was that you went to develop a bid as a buyer. I assume you did it at what you thought would be a fair price. It would make sense after the deal and you came back with feedback that when you weren’t off by 20%, but it was X to three X. Yeah. In that range. And I think that so perfectly illustrates the question of, well, there was somebody in the market who really wanted that company that you were looking at to the tune of three times more than you wanted it. Yeah. And getting in the zone of what do people really want? What would they pay for is such an important part of really having good dialog.
Greg Alexander [00:12:18] Yeah. You know, you talked earlier about terms and this is something also I think is underappreciated by our membership. You know, when they think about selling the firm, obviously the first question is, what’s it worth? Excuse me. But they they they don’t put enough emphasis on terms, in my opinion. The example that you gave earlier, you know, when you peel the when someone said, I sold over 20 times last year’s profit, but then you peel the onion back and not really. And I think comps also inform what the terms are. And there was an old phrase, I forget who said it, but you name the price, I’ll name the terms, something along those lines. Great.
Frank Williamson [00:12:54] Great, great, great.
Greg Alexander [00:12:55] Yeah. What what does comps and running a process with someone like yourself reveal about terms that typically surprise first time founders?
Frank Williamson [00:13:09] I would say. I would say that people get surprised by two things. One is because we all talk about multiples and comps as if it were a clean price. Yeah, that’s one. One surprising thing is that buyers and for that matter, sellers don’t make the decision about the price on the basis of last year’s earnings. People are getting together to make a decision based on what’s going to happen after the deal. And it’s a convenient way to express it to say, well, it was some multiple of last year’s earnings that wasn’t really anybody’s decision. So that, I think comes as a surprise to people is, oh, the multiple. Wasn’t the reason that the multiple appear. The other related part that I think is surprising to people is, is for all you know, all of us do sales in the normal part of building our firms. Selling your business. In the end, it’s sales, you know, and it’s it’s it’s best done in my experience as a consultative selling process. When you’re sitting down with someone else, the topic is, What can I do that’s going to impact your business? And then how can we share the results of that? Yeah, and that conversation, in my experience, does as much influence terms as it does to influence price. Interesting cause that’s the point at which you accommodate. Well, was the day after the sale all about the buying company taking over operations and letting the founder leave? Or was it all about providing a new platform for the selling company’s founder so that. She could go run three times as fast as she was able to do alone. Hmm. It’s that kind of business plan that really drives terms and and it may also drive price but a little bit jokingly it can those things can get conflated right in my mind story which by the way, is a true one about the you know, about a client who sold for a price that he they in this case could honestly go say to their friends was 20 times and the buyer could honestly go say to their board, it was seven times because their respective views of what was going to happen afterwards were just different. Hmm.
Greg Alexander [00:15:49] That is a great story. Well, listen, we’re at our time window here, but Frank, on behalf of the membership, this is an area that our members lack. Experience with so happy because their first time fathers, they haven’t been through a transaction before for the most part. So having an expert like yourself in the community is really helpful in the way the collective works is we all make deposits to the collective body of knowledge and we all learn from it. So on behalf of the members, thank you for doing that today.
Frank Williamson [00:16:18] Well, thank you so much for having me. I’ve really valued being part of collective group.
Greg Alexander [00:16:23] And if anybody is thinking about selling their business, I tell you, I say it in the book, I say it on the podcast, don’t go it alone. Hire somebody like Frank to represent you. It’s a mistake when you’re doing this to try to do it on your on your own. And usually a representation like Frank will make your life a lot easier and make you some more money, get you better terms, and just hold your hand through the process. So if you want to get a hold him, do so through the member portal. Okay. So for those that are interested in this topic and others like it, if you haven’t read the book yet, the boutique artist art scale and seller professional services firm, I’ll direct you to that. And then for those that are listening that are not members but would enjoy being part of a community of peers and meet exceptional people like Frank, consider joining our mastermind community. You can find it at collective54.com. Thanks again, Frank. Have a good rest of your day.
Frank Williamson [00:17:19] Thank you, Greg. Goodbye.