Elizabeth Shea (00:44)

Hello everybody and welcome to Branching Out. We are very excited today to have in our studio Karl Sigerist, who is a little bit of a twist on our typical guest in this program. He's an author, a recent author. He published a book on Amazon just this past month. Is that right, Karl?

Karl Sigerist (00:59)

That's right, Elizabeth.

Elizabeth Shea (01:01)

Yeah, so we're really excited to hear some of the insights. For a lot of our listeners, we've really looked to try to find ways to bring stories to life and what people should be thinking about as they go through the process of a sale or an exit. And so this is a perfect opportunity. The book is called Selling your Canadian Business. Karl joins us from Toronto. So, he's coming at it from a little different perspective from a Canadian marketplace, but a lot of the principles still apply. So, we're really anxious to have you. Thank you, Karl.

Karl Sigerist (01:28)

Thank you, Elizabeth, for having me on.

Elizabeth Shea (01:31)

Yeah, so let's just start from the beginning. What inspired you to write a book? What's the topic of the book? What do you hope that readers can get out of the stories that you tell?

Karl Sigerist (01:43)

So maybe a little bit about my background because that all kind of aligns.

Elizabeth Shea (01:46)

Yes, of course.

Karl Sigerist (01:48)

I'm often referred to as an operator and today turned advisor. And for the past 30 years, I've been in sort of a unique situation where I've been an operator, a leader of various specialty finance companies, both in Canada and Europe. And those businesses were all around providing financing for entrepreneurs to grow their business and to be successful in the Canadian market and other European markets, you need to focus on things that the traditional banks didn't do. So, for many entrepreneurs, we were often the first form of financing we were getting to grow their business, which gave us a deep insight into the unique challenges of entrepreneurship and growing and financing your business.

So, my colleagues and I exited our last business in 2017. This is now after having founded something like eight companies and led turnarounds and had various accolades for growth of our businesses. We exited our last business in 2017. I had that conversation with my wife, which we've had a few times now, about retirement and she's finally now come to the conclusion that I am a failed retiree.

I tried at 37 and I've tried it a couple other times and it just doesn't fit with me. Now I'm no longer in that vintage. So, she knows I'm going to go do something else. So, what I said was, what are my assets and what I'm going to go do? I said, we've been helping all these entrepreneurs finance their growth. They've also gotten older like we have, and most likely they will have similar challenges to exit their business.

Throughout my career, we've done M&A to grow our businesses, I've worked for businesses that grew through M&A, both as a buyer and ultimately at some points we were sellers. And I imagine that the same challenges that Canadian business owners had in growing their businesses would come arise when it was time to sell or exit or talk to prepare about that.

So as an owner operator, I have sat in every chair at the table, being the entrepreneur selling, being the entrepreneur buying, being in the role of financier for these acquisitions. In the past eight years, founding the Shaughnessy Group, we've been providing sell-side M&A to Canadian families and Canadian businesses, looking for a way to exit this business.

All of that context is necessary to say, there really wasn't a resource that a business owner could read and their family could read and prepare themselves for this eventual exit. So, Selling Your Canadian Business is really the sum total of all of that work that puts a very good simple roadmap together for any family or business owner who wants to contemplate and explore what all of this might look like before they actually engage. So, this is a resource that you can start looking at in the case of Canada, three years before you ultimately exit your business.

Elizabeth Shea (04:56)

You make it very clear, I noticed in the beginning of the book, you talk about who this book is for and who the book is not intended for. And it was very clear. It brought some real clarity. And I think a lot of those principles apply no matter where you're located as a business owner. And you do service the low to middle market. Can you tell us a little bit about the profile of who the book is really intended for?

Karl Sigerist (05:11)

So, Canadian definition of lower middle market is sort of more than $5 million and less than $50 million in revenue. And part of the boutique that we founded when we started this in Vancouver in 2017, I went to my large network of contacts of other investment bankers, lawyers, and accountants. And what I saw is that if in Canada you have a business that's worth more than $50 million, the investment bankers are already at your doorstep wanting to win that engagement. If you're a business under $5 million, business brokers, which in Canada are effectively commercial real estate brokers as well, are there to help you with your business.

But if you're in that, what I call that space where your business is too small for the investment banker's attention and you don't want to pay their fees, yet it's too sophisticated for a broker. And that's really the niche that our boutique firm plays in, that $5 to $50 million revenue, Canadian privately owned business that's looking for a white glove — what you refer to as Wall Street, we refer to as Bay Street — type global process to sell their business. That’s the niche that we play in. And it's that insight and that experience that all came into last year when we started writing the book.

Elizabeth Shea (06:52)

So, the book is not intended to be a do-it-yourself book, you made very clear, which I think was a really astute point to make. You are advising that people seek out the proper counsel that they might deserve, and that they really make it a really strong proposition. Any comment on that?

Karl Sigerist (07:04)

So, I mean, I was at an M&A ACG session this morning with a lot of other private equity folks, and one of the first risks that we try to address in the book is reasons why transactions don't close. We try to mitigate them. And one of the first reasons that transactions don't close is the seller has cold feet. So, we spend a lot of time initially talking about why do you want to sell? What is your motivation? What is your family's motivation for selling? And ultimately, what is your vision of your situation post transaction? If you don't have clarity around that ahead of time, you don't have an anchor as you go through this process, which is quite intense. As Stephen Covey says, you start with the end in mind.

So, we start with “what is your why?” And once we get past your “why” and you are prepared as an individual or as a family to sell, we can get into the business preparedness, how prepared is the business which is separate from you, and then thirdly we get into advisor selection, and we make the case why you need advisors. I can go to WebMD and punch in a bunch of ailments, and it will eventually tell me all kinds of things that are wrong with me. But you wouldn't go with that, you'd go see a doctor.

When it comes to selling your business, in almost every case, an entrepreneur gets to do this once in their life. The people that you're going to sell your business to do this for a living. So, you are showing up wholly unprepared. In Canada, there are nuances around regulation and tax — particularly tax — so it's really important that the family structure this share sale many years in advance for tax purposes —at least two years in advance.

You need a tax specialist to help you do that. You need a state and trustee and wealth managers to guide you through that. You need legal support to guide you through. You don't do this yourself. And ultimately, when you are ready to take your business to market, you should have it vetted. And the best way to vet that is using sell-side quality of earnings advisors, third-party experts, M&A advisors.

The math and the data support all of what I'm proposing here. Yes, these transactions will cost you money. All these advisors are expensive, but they're very much worth it. By hiring the right team of advisors — and the book talks about how to select that team — the data shows that you will receive between 1.25 to 1.5 times EBITDA more than if you go at it alone.

So, on a $2 million EBITDA business, nobody wants to leave one and a half turns of EBITDA alone, right? So, all this team effort of advisors more than pays for itself.

Elizabeth Shea (09:59)

Well, and that's our value proposition — to just put a little plug in for Treefork — is to spend the time upfront to package your business for sale is an investment that's worthwhile. You talked about in the beginning the $3 million mistake that you came across with a couple of your clients and how someone had left $3 million on the table because he had not taken necessarily the steps and went for the first offer. Can you talk about from that standpoint and advice you might give out of that story?

Karl Sigerist (10:38)

Absolutely. There are two buyers, financial buyers and strategic buyers, and they love transactions what they call a proprietary deal. Those are transactions where a strategic buyer or a private equity group is dealing exclusively with the seller and they are the only party bidding on the purchase of your business. And the reason they do that is it saves them one and a half to one and a quarter of EBITDA turn when they can acquire directly.

So, if you're ever referred to when you're selling your company as a proprietary deal, that's not a compliment. That's a warning sign. It's not unusual. The strategics are flush with capital, private equity is trillions of dry powder, and they have large armies of people making phone calls that go something like, “hi Elizabeth, we've been watching your business, we're really interested in what you've been doing and would love to have a conversation about your next transition.” And it's flattering as an entrepreneur to take that call. It's validation, because often to become successful in business, you had to persevere decades of no and rejection and setbacks. And to get those kinds of calls is flattering.

I've written articles on when that happens — bring in advisors to aid you through that process. Again, these people buy businesses for a living, and you're at best going to do it part-time from the side of your desk.

Elizabeth Shea (12:15)

Right, right. So, talk about some of the gotchas that you've seen or that you tried to guard against. What are some classic mistakes? I hate to use the word mistakes, but some classic things that are like . . . just think about this, think about that.

Karl Sigerist (12:30)

Firstly, I would say that first piece of advice is start early. Earlier in my business career, I became an angel investor, and I worked with a lot of startups and founders. And one of the first things I found useful working with founders and CEOs of startups that have gotten seed capital and are looking for Series A as their next step is having a conversation around what is the business worth? I think any business owner needs to have the discipline of strategic planning. And one of the points that if you've got a board or an advisory group is, have a conversation around what is the business worth today?

Then, as the CEO / founder of that business, understanding the metrics that will increase the value of your business and then executing on only the investments that your business requires to increase its value. Particularly with emerging founders and first-time CEOs, they refer to activity versus productivity or busy work versus value creating. As a CEO of that business, you're responsible for allocating all the resources of the business. And it's easy to go and allocate resources to the next shiny object versus really value enhancing activity that will grow your business.

So that's number one is start early. And particularly in Canada, just from a tax perspective, you need to do 24 months in advance. So really you need to be starting this process 36 months ahead of time. Also, I think it's how people think about exit. Because there is this, “I've decided to sell . . .” and people think about it maybe like selling a car, because that's a big ticket item. They think about it like selling a house, meaning “we've decided to sell, we interviewed some realtors, we've put the house on the market, we received an offer, we've got the financing, the deal closes, we move out.” That's not at all a business sale.

So, you need to start early to plan for all of this, because not planning from a tax perspective, not planning from systems, processes, management, succession . . . all of those elements ultimately impact the exit multiple and the overall value that the business will fetch for you. For all middle market deals, a third of the enterprise value is coming through as an earn out or a vendor note.

Which effectively means that yes, you've sold the business on day — let's say today, January 29th —but you're still vested for the next two, three years. So, if your vision of an exit was that Karl thought he would close the deal on January 29th, receive his proceeds and be on the golf course — no, he's still in for another three years.

But proper planning in advance can minimize that three years to two years to more cash proceeds upfront. Ultimately that gets back to starting early and then knowing your number. So, part of the “why sell?” exercise is to say what will be the after, the net after tax proceeds that we receive and what do I and my family need when we no longer have the business to fund our next chapter of our life. And then the third piece of advice is: get proper advice. Start by reading a $45 book on Amazon called Selling Your Canadian Business, and then knowledgeably pick a group of advisors that specialize in various elements of increasing the value of your business. If nothing else, just by surrounding yourself with that team, the business — while you continue to operate it before you sell it — will already start to behave better, if I can say the business can behave better from that regard.

Elizabeth Shea (16:36)

Yes, I can't say that strongly enough. I totally agree from the standpoint of building a business that you're preparing to sell even if you're not preparing to sell is not a bad mantra to take. Let's shift gears for a second because I know you do talk a little bit about the emotional toll that it might have on a business and potentially founders not being able to anticipate the impact that it's going to have on their life personally. I think most of the guests on the show have been founders who have sold and didn't understand and were completely surprised by that impact. Can you talk a little bit about what that looks like in your experience when you've worked with founders. How do you prepare them?

Karl Sigerist (17:19)

This is probably sort of more emotional intelligence than deal doing M&A. This is really about coaching and mentoring these founders and asking them questions that they haven't asked themselves, engaging their spouse or partner in these conversations. What is this going to look like tomorrow?

An executive that I worked with who had gone through this process . . . he called me six months after “retirement” and he said, “I need to find something to do . . . my dog's looking at me strangely because he's getting too skinny with too many walks.” And he goes “my wife has finally told me that every day can't be Saturday. I have a life I have things to do so go find stuff to do.”

At that point, I brought him on as chairman of our business. But it was sort of a reminder that the “why are you selling?” is so critical. In the book, we go through that and we give you worksheets and an exercise to go through that you share with your partners and share with your family.

Ultimately, when we get deep into the process, when you're 12 or 18 months or 9 months into this process and deal fatigue starts to hit, and the terms and conditions start to become overwhelming, you need to be able to pull that document back out and go, “this is why we are doing this.” We need to anchor this in this reason why we're doing it. If you don't have that reason, you end up often . . . and we've heard this, where sellers last minute at the eleventh hour, get cold feet and say, “I'm sorry, I just can't do this.”

Now the buyer, whether it's a strategic or a private equity financial buyer, all the advisors to both the buy and the sell side . . . a tremendous amount of time, effort, and money has been spent, and nobody gets anything. There is no celebration of an unclosed transaction. And sadly, 80% of deals don't close. One of those elements is simply sellers have cold feet. So, without a strong “why,” documented “why,” all the rest is often for naught.

Elizabeth Shea (19:28)

Right. Well, I'm certain that buyers get cold feet too at times. So, are there things that you can point to that might make a buyer more wary about moving forward in the process?

Karl Sigerist (19:39)

Yes, so I guess the first thing — whether you're a strategic or financial buyer — is predictability, right? They're looking for predictable revenues. They're going to be looking at customer concentration. They're going to be looking at if there is a management team in place that's running the business. How much of the intellectual property and the relationships are in the mind of the founder? Is the founder the top sales rep, the number one engineer, the creator, or are there second-tier management teams in place. Is this business transferable?

Obviously clean books, kind of goes without saying, but you'd be surprised how many founders . . . and that's part of the privilege of being an entrepreneur, you may have a fleet of trucks, but you may have the nicer truck. You know, you may go on business trips, but maybe you're flying at a higher grade of travel. All those kinds of personal expenses and the benefits of being the entrepreneur founder. But all of that undermines ultimately the EBITDA of the business. So, the cleaner you can run your books, the longer. Yes, we can normalize all of that. But if private equity comes along and they see that you've been disciplined and rigorous in that three years before you sell the business, that's a predictability that people like.

Now, one of the other points is brand matters. There's an expression that Warren Buffett talks about. He likes businesses with pricing power. So, what does that mean? Exactly that — that power comes from brand; it comes from strategic positioning. Right? I mean, how much are you prepared to pay for a Coca-Cola? They're so sophisticated, I've heard that they even have vending machines that judge the temperature and the price goes up as the temperature goes up. And irrespective of that, you're willing to pay more, right? That's variable pricing, right? So maybe I'll go to Costco, and I'll buy a case at a good price, but I'll go at the convenience store and buy one bottle for the price of the case. Like that's brand power and that's pricing power. So, that's it. All of that adds to the predictability of your business.

They’re looking for retention rates, looking for repeat business, and ultimately the brand contributes to defensible revenue. You can have a great logo, but that doesn't matter if customers leave when the owner leaves.

Elizabeth Shea (21:56)

Right, right. We can't emphasize that enough. We talk about that a lot at TreeFork, about what is the perception of the founder? What's the perception of the management team? And how is that going to look on a going forward basis after they decide to sell?

Karl Sigerist (22:18)

Yeah, and in the second chapter of the book, we really just talk about, okay, so you're ready. You've got your “'why.” Now we do an assessment of your business, right? Are all of the qualitative elements that buyers are going to be looking for presentable, coherent, clear, and obvious ultimately before we move forward.

Elizabeth Shea (22:40)

Right, right. Well, this has been fascinating. Thank you so much, Karl. So based on our conversation today, anything you'd like to add? I mean, you talk a little bit about some of the unique differences within the Canadian marketplace. Maybe just touch on those real quick for your Canadian listeners.

Karl Sigerist (22:56)

Certainly. So, I mean, I'm not completely familiar with U.S. tax code, but I do know that, for example, in Canada, there is a tremendous amount of opportunity as far as capital gains protection or what's called lifetime capital gains. As a selling shareholder, you can . . . based on current, it's indexed every year, it's 1.25 million of capital gains . . . you can be shielding. So, if the business is owned by you and your spouse, now you're up to two and half. If you've got three children, you've got a family trust, you start to see the difference in the hundreds of thousands of after-tax proceeds that you can have in your family trust or pass on. There's a difference between a nice retirement and generational wealth.

So, on the tax side, provincial legislation and federal legislation is obviously different than it is in the US. And all other material that I have read is typically written either too academically, which is great when you're in university, or it's written by lawyers for lawyers, which again doesn't speak to entrepreneurs. And for obvious reasons, the people who produce books like myself are writing them for the biggest market, which is the US market. So, it's very generic.

In this case, we're targeting privately owned Canadian businesses and the nuances and the regulatory uniqueness that is part of Canada. And lastly, I've left out we are a bilingual country and we have the French element or the Francophone element to our business. And we also have different . . . we have the Napoleonic system of regulation in Quebec and the British parliamentary system in the other Canadian provinces, which are just things that as a former colony. . . It's just nuances that US as both a former colony of England and of France has created its own system. So, we still have a lot of that legacy in our law system.

Elizabeth Shea (24:56)

Yeah, it makes sense. And it's important no matter where you reside to really be able to understand those things. And that's where advisors can come in and help in the process. So, all right, tell us how do we buy your book? You're on Amazon, I assume.

Karl Sigerist (25:04)

Yeah. Yes, so I mean people want to connect with me. I've got a pretty unique last name. I'm on LinkedIn. That's the best way to find me. The book Selling Your Canadian Business is available on Amazon, eBook, softcover, and hardcover. And again, if you're a Canadian business owner and you're thinking about your exit, not necessarily planning to do it right away, but if you are or not, I wrote this book for you.

Elizabeth Shea (25:34)

Beautiful. Well said. Thank you so much, Karl. Have a nice day.

Karl Sigerist (25:39)

Thank you. You too. Take care.