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Empathy: The Key to M&A Success in the Middle Market
813 Plays7 months ago
In this episode, we sit down with Sharon Heaton, the founder and CEO of sbLiftOff, a national M&A advisory firm located in Northern Virginia. Sharon shares her journey from seasoned attorney to founder of her own advisory firm specializing in the middle market. Tune in to gain valuable insights into the world of M&A and learn how empathy can be a game-changer in negotiations, ensuring successful outcomes for both buyers and sellers alike.
sbLiftOff is a trusted advisor to founder-led businesses and government contracting companies throughout the U.S. They provide merger and acquisition advisory and related services focusing on private companies with $10 million to $100 million in revenues and at least $2 million in EBITDA.
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Transcript
Introduction to the Middle Market Economy
00:00:04
Speaker
Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market. The center is the leading source of knowledge, leadership and innovative research on the middle market economy. Throughout our podcast, we will feature middle market leaders and stakeholders to hear their real world perspectives on trends and emerging issues.
00:00:24
Speaker
Business transitions in the middle market are a highly common occurrence in general, but for a business owner who has spent years growing and nurturing their company, it may only happen once in their entire career.
Meet Sharon Heaton: Background and Motivations
00:00:36
Speaker
On this episode of The Market That Moves America, we welcome Sharon Heaton, founder of SB Lift-Off and author of the book, Lift-Off, 12 Things to Know Before Selling Your Business.
00:00:49
Speaker
Welcome to The Market That Moves America. My name is Doug Farron, Managing Director of the National Center for the Middle Market, located at The Ohio State University Fisher College of Business and the host of this podcast. Today's conversation is with an M&A advisory company located in the nation's capital, Northern Virginia. So joining me today is the founder and CEO of SB Lift Off, Sharon Heaton. Sharon, welcome to our podcast.
00:01:18
Speaker
Thanks, Doug. It's great to be here. So first, can you just tell us a little bit about your background and how you founded your firm, SB Liftoff? Absolutely. Well, I'm going to start off with a confession. I am a recovering attorney. So I started off my career as a lawyer working in some of the biggest law firms in the country, including Skadden Arps and working at the very top of the market.
00:01:46
Speaker
Over time, my career took me to the US Senate and then large companies. As I went further in my career, I found the middle market and I fell in love with the middle market. Those are the people who sit at their kitchen table and come up with an idea and turn that idea into money. That is the backbone of the US economy and I've created a company that's really designed to serve those people.
00:02:13
Speaker
That's that's great. That's a very diverse background set of experiences. Sounds like you're very well versed in the middle market and you have recently written a book. That's how you and I met through your book launch event recently called lift off 12 steps to selling your business.
00:02:34
Speaker
Why did you decide to do that, given that there's probably a number of books out there about M&A in general, but what was your motivator for your book? There are so many books out there on M&A, and most of them are written for people who are experts in M&A.
00:02:52
Speaker
What I wanted to do was to write a book for people who were smart, created a company, kept it going over a series of years, but may not have a lot of experience at M&A. So I wanted to be able to write a book where I answered the questions that people ask me on a daily basis.
00:03:09
Speaker
Is my company sellable? What will the process be? How is it going to be valued? What is this due diligence I keep hearing about? I wanted to answer these questions in a very straightforward way without jargon aimed at the people who have created these companies. Yeah, and here at the center, I think you're hitting on one of the key points that we've seen. These are businesses that are critical to our nation's economy, yet they've been
00:03:38
Speaker
for many years ignored and often misunderstood. And there's not a lot of resources out there for them. So I think that's another important part of your book. What is your perspective on that? Do you agree with that? I completely agree with that. There are entire newspapers, such as Wall Street Journal, focused on the upper ends of the market.
Why the Middle Market Matters
00:03:59
Speaker
And then there are entire people who are focused on truly the main street businesses in America that might have 2 million, 3 million, 1 million of revenue. The corner store are even smaller than that. But there's this entire market of companies with 10 million, we focus on up to 100 million, but I know the center for the mid market goes to a billion. And that mid market is so incredibly important to our economy.
00:04:29
Speaker
I often analogize that this part of the market is like the middle child. The first child gets a huge amount of attention, and the youngest child is cute and adorable and gets a lot of attention as well. That middle child is pretty darn important to that structure of the family, and in this case, in the economy. So that mid-market is critically important. It moves our economy. Yeah, absolutely. We use that same analogy, by the way. I love that middle child. And speaking as a middle child, I can certainly relate to that.
00:04:58
Speaker
So let's talk a little bit about the book.
Understanding M&A: A Simple Analogy
00:05:01
Speaker
First of all, I loved reading the book. When I was sent a copy, you know, I set aside some time and it took me about half the time that I expected because I just wanted to keep going from chapter to chapter. So certainly my compliments on how it was organized and structured, just very logical and easy read. And one of the analogies that you use in there, selling a business kind of like selling a house,
00:05:27
Speaker
I thought that was a really good way that resonated with me personally, relating those two sales processes. Can you expand upon that a little bit and just talk to our audience about what you meant by that?
00:05:39
Speaker
Absolutely. As I said, the book is really written for people who have not had a lot of experience in M&A, but most people have had some experience in buying and selling a house. So I thought if we could start with something that people have familiarity with and jump off from there, it might make the concepts a little bit easier.
00:05:58
Speaker
So, for instance, when a buyer is buying a company, they need to have both equity and debt. And people's eyes roll over in their head. But if you say, hey, the equity is like the down payment you put on the house, and the debt is the mortgage, people say, oh, yes, I completely understand that. That makes perfect sense. There are major differences, however, between selling a house and selling your company.
00:06:26
Speaker
Telling a house, the first thing you do is you put a sign outside your yard saying, I'm selling my house. You tell everybody that you know and you put it in the newspaper because you want as many people to know as possible to get a buyer. Well, selling a company is very different.
00:06:42
Speaker
Because on one hand, you have to market your company. On the other hand, confidentiality is incredibly important when you're selling your company. You don't want your competitors to know that you're selling. You don't want your customers to know. And you don't want your employees to know until it's the right time.
00:07:01
Speaker
So figuring out how to market something without being open about it is a challenge. But starting with the house analogy, I think, gives people a grounding, and we can work from there. Yeah, agreed. Yeah, it was very, very helpful. And having never gone through this process myself, not having owned a business, it really put a lot of the key messages in perspective.
Emotional Journey of Selling a Business
00:07:24
Speaker
Let's talk a little bit about emotions. I know one of the very early messages in your book is that
00:07:31
Speaker
owners looking to sell their business should be prepared for the fact that this is going to become quite an emotional process. And understandably, like, these folks have spent a lot of blood, sweat and tears to build this from an idea, like he said, maybe from their kitchen table into something that is very meaningful and employs a lot of people. So talk to us a little bit about that emotional aspect.
00:07:55
Speaker
Absolutely. As you said, people have been raising their company as long as they've been raising their children. You have a child, they're a baby, they're cute, they become teenagers at some point, God forbid. They leave the house and they go off to college. Well, your company kind of stays there. It starts off as a very small idea and grows and grows over time.
00:08:18
Speaker
I find that business owners are emotionally attached to their company and they want to make sure that they're selling it into a good home. It's not just a question of a financial transaction, but it's making sure that their employees will be well taken care of, that their customers will continue to get the same quality of work.
00:08:37
Speaker
In addition, there's truly emotional things going on for the seller themselves. In the book, we talk about the fear and uncertainty that sellers have when they're selling their company. I had a deal a couple of years ago, husband and wife formed this company, again at their kitchen table, and grew it to be over $100 million in revenue. It was a phenomenally successful company. They were very emotionally committed to this company.
00:09:05
Speaker
and had not had a boss in many decades, actually. When I started to explain the due diligence process to them and the kinds of questions that would be asked, the husband turned to me at one point and said, we're not going to do this. We'll simply close down the company. I'm not going to go through that process. And I stopped and I thought about it for a second. And I said, wait a minute, you're going to put hundreds of people out of work. You're going to give up.
00:09:33
Speaker
the option to have a liquidity event that was really quite substantial for you and your family because you don't want to be asked questions.
00:09:41
Speaker
And I realized it was a question of fear and uncertainty, feeling like he was going to be judged and found inadequate. So I needed to confront that with him so that he could understand that that was simply part of the process. There's a battle of the brains going on, a battle of the emotions versus the head. And both sides have an important role in this process. We need to understand the emotions that are going to go on and not simply wish them away.
00:10:11
Speaker
So what was the outcome of that client that you referenced, the husband and wife, what happened there? They had a fantastic transaction, took a little time to get it done. I get phone calls from them from all around the globe. My most recent phone call from them was from Antarctica. When I speak to them, the first question is what continent are you on? They're having the time of their life and it's working extremely well for them. Oh, that's great. So on a related note, one of the other
00:10:41
Speaker
Things that you mentioned quite a bit in the book is empathy. And the way you frame it up is that empathy is kind of an M&A superpower.
Empathy in M&A Negotiations
00:10:50
Speaker
Explain that to us a little bit. Empathy is a superpower that can save deals. You know, we watch these superhero movies and somebody has x-ray vision and this one can fly. Empathy in negotiations and M&A is a negotiation, is being able to see the world from the other person's side.
00:11:10
Speaker
If you had perfect clarity as to what was going on in the head and in the world of the party that you're talking to, your ability to come to a deal is going to be so much more stable and get it over the line. So, for instance, buyers need to understand that sellers are emotionally tied to their company. We had one deal where it was, again, a husband and wife who were selling the company.
00:11:39
Speaker
And we brought in some private equity buyers from around the country. And one firm came in. I think they were from LA. And a young man came in, threw his backpack on the table, put his feet up on the desk, and turned to the couple and said, let me tell you what you're doing wrong with your company. I could have ended the meeting at that moment. That buyer had no empathy for that seller. In contrast, sellers really need to have empathy for buyers.
00:12:09
Speaker
Because buyers, no matter how much due diligence they do, will always know less about the company on the day of close than the seller does. And the seller needs to understand that the buyer is dealing with their own fears and uncertainties. And sellers need to be empathetic as to what the buyer is going through. Empathy is a superpower, and it really makes a difference for getting the deal done.
00:12:35
Speaker
That's a great segue into my next question, because the book talks about many of the key different types of buyers and two that I'd like to focus particularly on are two that we see pretty frequently here at the NCMM.
Family Business Transition Complexities
00:12:51
Speaker
That is private equity, as well as generational transfers. And each of those have their own, you know, reputations, both good and bad. Can you kind of maybe compare or contrast those two and
00:13:04
Speaker
share some of the common themes or misconceptions across both PE as well as generational transfers? Absolutely. So let's start with the generational transfer. The generational transfer is essentially an M&A transaction with a heavy overlay of family dynamics on top of it.
00:13:23
Speaker
In fact, it's so dramatic that there was an entire TV show called Succession based on the transfer of a company from one generation to the next. There's so much more than simply the company that's being dealt with at that point. It's the dynamics of the family, the relationship among siblings, and people's goals.
00:13:46
Speaker
Very often, we find that the seller, the parent or the grandparent, very much wants a child to take over that company. The child may not be interested, may be feeling a little pushed into it. You really want to have a buyer and a seller who really want to be there. You want to make sure that the dynamics are incredibly important.
00:14:08
Speaker
We did a deal a couple of years ago where, again, it was a husband and wife who were selling the company, but their son worked in that company. And the son was deeply involved. So early on in the process, I turned to the son and I said, why don't you buy this company? You understand its very substantial strengths. Why don't you do this? And he said, well, Sharon, I have a brother and a sister. If I succeed in growing this company and making it very profitable,
00:14:36
Speaker
I will get one third of that benefit. However, if I mess this up, I will never live it down with my siblings. There's no win in this for me. So that was a generational transfer that the child said, I don't want to be a part of this. I want to help them sell it and I might buy a different company, but I'm not going to buy this one.
00:14:57
Speaker
You really need to be thinking about it, not only from the seller and the buyer side, but who are the other family members that might be impacted by it. So generational transfers have all the complexity of a normal M&A transaction with a large overlay of family dynamics on top of it.
Private Equity vs Government Contracting
00:15:18
Speaker
Private equity can be a very different structure.
00:15:22
Speaker
While the private equity tends not to be emotional in the same way that a generational transfer would be, the private equity is a very large category. There's lots of different types of private equity. And some private equity would be terrible at buying founder-owned companies. They have as much compassion as the private equity person who threw their backpack on the table.
00:15:48
Speaker
And others are completely aware that founder-owner companies that have grown to a certain level are wonderful platforms to then be able to grow from there. So in the last 10 or 15 years, there's many more private equity firms interested in being the first institutional capital at the table and bringing those companies standing on the platform built by the founder-owner and then growing it into its next generation.
00:16:17
Speaker
There are lots of dynamics in a private equity deal, but you've got to make sure that you're dealing with the private equity firm. There are also some special considerations around companies that deal in government contracting.
00:16:36
Speaker
to the extent that you even devoted an entire chapter of your book to it. And when we met earlier this year to talk about that, we were just outside of DC, kind of talked about some of those different set of rules for GovCon type companies. Can you tell us more about that?
00:16:56
Speaker
Absolutely. Government contracting is in fact its own sector of the industry. SB Liftoff, my firm, really focuses on federal government contractors, but many of the same issues hold true for state and local contractors as well. There were upsides, such as the federal government, contrary to notions, pays its bills. Our clients almost have no bad AR.
00:17:22
Speaker
On the other hand, the cycle of getting work is completely different than it is in the commercial sector. Another major difference is that in government contracting, there are what's known as set-aside companies, companies that are women-owned, owned by veterans, small businesses, etc., and they're given certain types of contracting advantages over larger companies.
00:17:47
Speaker
That's kind of a dual-edged sword, however, because on one side, it's easier to start a company and start selling to the government, and easy is a qualified word in that context, and you can get to $3 or $5 or $10 or $15 million in revenue.
00:18:04
Speaker
However, one of the major differences is that in the normal commercial market, as your company gets bigger, it generally becomes more stable and even a multiple, the mechanism for valuation goes up.
00:18:20
Speaker
In GovCon, if you're a company that has designations, your multiple may in fact go down because you might be sizing out at some point and have to compete in the full and open market. It's a really very different structure.
00:18:35
Speaker
One of the reasons I put the chapter in there about government contracting is A, that's a lot of my clients, but B, each company, each sector is different. It's important that you work with M&A advisors who understand your business. Don't assume that somebody who has done one kind of transaction could absolutely and easily do something in a very different industry.
Role of a Good M&A Advisor
00:19:01
Speaker
And that's really where I'd like to spend the last part of our conversation today is if you take a step back, Sharon, what do you think are some of the key responsibilities of a good M&A advisor as they work with companies along this journey?
00:19:18
Speaker
Good M&A advisor should be a sherpa. They should be somebody who is walking a path with you, but also has the ability to kind of see what's ahead and prepare you for it. When we're talking to our sellers, one of the first things that we do is put them through what we refer to as our masterclass slides. Again, similar to the book, the same issues come up over and over again.
00:19:44
Speaker
So what we'd like to do is to educate our sellers so that they understand things like working capital or tail insurance, things that normal people haven't thought about before, but will come with a transaction.
00:19:57
Speaker
Your M&A advisor should be somebody who's truly working with you to get this deal to a good place, but also is educating you along the way so that everything is not coming as a surprise to you. A good M&A advisor should pay for themselves by being able to negotiate a better deal or terms or things that are important to you.
00:20:19
Speaker
You also need to decide the philosophy that you want to do. There are definitely people who want to sell, and the only thing that matters to them is the money. I've actually met very few people like that in the mid-market. In the mid-market, I find that sellers care a lot, not only about the purchase price, but about what happens to their employees and their customers and the quality of work that's going to be done after a transaction.
00:20:46
Speaker
So a good mna advisor should start off by listening understanding what that seller is trying to achieve and then try to help the seller achieve those goals because that's really what matters.
Future Plans and Advice for Business Owners
00:20:58
Speaker
Right. Well what's what comes next for you now the book has been out it's doing very well so what can we expect from both you share as well as sb liftoff in terms of. Content guidance knowledge to help middle market business owners.
00:21:16
Speaker
Well, Doug, I think the work that's being done by the Center for the Mid Market is incredibly important and we're honored to be associated with you.
00:21:23
Speaker
We think that there's a lot of education and information that needs to get out there. And we think that the more that we can be talking to people and giving presentations and podcasts, the more informed sellers will be. We're looking to take a little bit of that fear factor out of the process so that people can, in fact, excuse the terminology, lift off to their next goal in life.
00:21:47
Speaker
we really want to have the people who are the founder owner be empowered so that they can make the decisions that are important to them as they move on with their companies. So I have one final question for you, Sharon. If we have a business owner who's listening and they're maybe started to contemplate selling their business, what would be the first thing he would recommend that they do?
00:22:15
Speaker
Well, I think that the first thing they should do is actually read the book. That's the worst. Because I think that it's a pretty darn good overview. And it's called Liftoff, 12 Things to Know Before You Sell Your Company. But truth is, start talking to business owners who have sold. Start talking to different M&A advisors.
00:22:36
Speaker
I believe that the time to start thinking about selling your company is not when you're ready to leave your company, but several years in advance. At SB Liftoff, we talk to business owners three, five years before they're going to sell their company, because there are changes that you can make to your company that can have a significant impact on the value of your company.
00:22:57
Speaker
And it's hard to do that if you're basically on your last nerve ending and you absolutely need to sell immediately. If you still have some gas in the tank, then you really want to be working on it when you have that energy to make the changes that will really create value for you and your family. Yeah, wonderful advice. Well, thanks again for this discussion. It's been wonderful having you on the market that moves America and appreciate all your insights. Thanks, Sharon. Thank you, Doug.
Conclusion and Contact Information
00:23:27
Speaker
For more about SB Lift Off or Sharon's book, The 12 Steps to Selling Your Business, visit their website, which is sbliftoff.com. Thanks and look forward to speaking with everyone on our next episode. Thanks. Thank you for listening to The Market That Moves America. Never miss a new episode by subscribing anywhere podcasts can be found. You can also subscribe to our email newsletter at middlemarketcenter.org.