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Wise Up episode 6_2.txt
English (US)

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Hello, hello, hello. What's the flavor of the week? What's the flavor of the energy drink today? Peach vibe. How I'm speaking. How is peach vibe different from peaches? When you do not refrigerate them, there is no difference. Yeah, it is a thin film of Chucky Chucky sirup floating inside of your mouth and innards.

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Hello? Hello.

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Here we are. Everybody back at it again. Why is up on M&A? You had your first installment of five episodes with Bryan from Exit Wise, who talked about who should be on your M&A team. And today you're going to meet Todd Sullivan, also managing partner at Exit Wise. And we talk about what the heck is M&A, what is the M mergers?

What is the A acquisition? What does that mean? What's the difference? Help me understand. We hope you like this episode. We are doing this for you. We are trying to break it down. Tell us what you want to hear. Is something not clear? Do you know this already? Give us the feedback. Make sure to follow exit wise.

Wherever you are listening. Follow us on LinkedIn and check out our website exit wise.com to see how we can help you on your exit journey. See ya! Those following and listening in have already heard a five part little series from Mr. Brian Dukes talking about who's on your M&A team, and today we're really just going to talk about what the heck is M&A.

My whole life is built up to this moment M&A, right. Mergers and acquisitions. So in the most basic way one could understand or I could understand what is a merger. What's a merger. M&A stands for mergers and acquisitions. So together that's basically the umbrella term for when companies combine or change hands.

All right. So let's start with I like that. That's a merger. Yes. Mhm. So a merger is when two companies come together to become one company. So you can think of it. I like this analogy. I thought about it a little bit. It's simple two rivers. They're coming together to become one river. Both sets of shareholders or owners of those two businesses, they end up owning pieces of a new combined company.

That is a merger. Hmm. Okay. Pause. I like that also. We're always with the water analogies lately, I guess we had the boat and now we have a river. But that also, I don't know if you like the Spice Girls or you dead, but they have a very popular song called When Two Become One. We're not going to break that down too much now, but that's what a merger sounds like when two become one.

Okay, so I guess when we're talking about M&A and these mergers, I feel like I personally hear a lot about the a, okay, the acquisitions, the M when the two companies are coming together, is that a positive outcome. Is that a negative outcome? Are they coming together to grow? Why are they coming together?

Oh, I mean, there could be a host of reasons why companies merge. Now, I do think that term is used frequently when they don't want to really describe the higher right. You know what one company wasn't doing as well. But we really like their team. Or we're two companies coming together. So we have a little bit more strength in the market so we don't get crushed.

I think there are a lot of reasons to merge, but what I think a lot of entrepreneurs and people don't realize is that true mergers, where it's really a partnership of equals, that is really, really rare. It's usually one is the dominant one. You might see a 50/50 equity split where the financials are 50/50 split.

But somebody has to run that new company on a day to day basis. You can't have two CEOs. You can't have two boards. Right I want to. Okay. So I want to ask about that. But before that you mentioned the term aqua hire. And I want to make sure everyone at home listening knows what that means. So what is an aqua hire in a nutshell?

An aqua hire is the acquisition of a company really for its people. And so instead of just shutting down a company and giving employment agreements to the people that used to work there, they acquire the assets, which is really the talent of the business. And frequently there is a premium paid for the intellectual horsepower that lives within the people that are being acquired.

And the expectation in an aqua hire is that those people are truly committed and working on the other side with the buyer. I wouldn't necessarily call that a merger, right? Sometimes the word merger is used to guise what actually really happened, which is that aqua Aqua situation. So you said I don't know.

Is it aqua here? Like it probably makes sense. Its aqua like acquire quiet but it's acquisition acquire

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I don't know let us know whoever's listening. How do you pronounce it. Send me a voice note. But. So you're saying with the merger, the two companies are coming together, you can have two CEOs. All of a sudden you can't have two new boards all of a sudden. So who decides what happens? Who leads what? How do you kind of.

You're coming together. Who's in charge now? What happens? Yeah. Well, that's the biggest thing that founders really wrestle on when two companies are coming together is not just what percentage of the new company do you own, but who actually has the say. And that isn't a negotiated component of a merger.

Who's going to have the board votes? Which management team members actually run things? Who holds that tie breaking vote when a big decision in the business needs to be made and that is all negotiated. It is more difficult than it appears to put two companies together, because equity is easier to discuss than potentially than the governance answering those governance questions.

Right. And you said and it makes sense, right. It's so hard. Like I know this phrase, the merger of equals and what you kind of mentioned before is it's these companies can't really be equals, like someone is a bit, I don't know, has more is more powerful wealth impact reach revenue. Something like someone is a little bit bigger.

Whatever bigger means. Would you say it's common that when two companies merge, whatever company is quote unquote bigger, that leadership ultimately takes over and those decisions or values or whatever kind of held up that bigger company, that's kind of what gets implemented in the new one. I think I can really only talk to the transactions that I've seen that are really would be considered mergers.

And frankly, it has a lot to do with one company has a certain set of assets. Maybe it's something that the other company has the customer base that would buy those assets, and so they become very complementary. Why don't we come together? And from a people standpoint, it tends to be, well, this one company has knowledge of selling this type of product and the other company has knowledge of something else.

And so they're really just merging knowledge, customer bases, revenue streams. The reason I like, you know, two two rivers coming together is each river starts out with two banks to those rivers. And when they come together, what's left. Two banks, they've eliminated two banks. They've created efficiencies and they've created a bigger river, presumably more powerful one that isn't going to be drained as easily.

There are reasons the companies come together or there are efficiencies to be created when companies come together. So that's a bit more on the merger side. Now when we talk about the acquisition side, that's when a bigger company is buying a smaller company. What does it mean? What does an acquisition.

What does it mean when a bigger company acquires a smaller company? I think it's it's a simpler picture, right? It's one company. The buyer purchases another company, the seller and the seller stops existing as an independent company. The buyer may use the name of that company. There are a lot of like smoke and mirrors, but that selling company no longer exists as an independent company.

The buyer now owns the business, the assets, the customers, the team, everything. And depending on how that deal is structured, the buyer may pay for all of those things in a variety of ways cash, stock earned or earn outs, loans. There's lots of different ways to structure acquisition, but at its heart, it's one company buying another company.

You just said earn out. So what is what is an earn out? What does that mean? Well, I think it's what's interesting is one of the biggest misconceptions I see with business owners is thinking that an acquisition is black and white. You're either sold to your company or you didn't. The reality is, most acquisitions have structure, right?

And earn out as you asked, is part of that structure. So you might be compensated for the sale of your business with equity in a buyer's business. So you still own a piece of it going forward. That's often called rolled equity. You might have an earn out. And that is where the future payout, your future payout really depends on the business performance after the sale.

Sometimes sellers actually lend money to a buyer through a note to get paid back over time. All of this means you still care about the future of that business when you're acquired because you're full. Payout depends on the buyer's business doing well, and that's something we hear about a lot. And I feel like with all the conversations we've had with exited founders, it's that once you know, if your deal is structured with a lot of the money on an earn out.

Well guess what? Once you sell that company, you're no longer making the decisions that would ensure the success that you think it will have. Maybe it was successful under you, but now the company is under someone else. So I feel like that's a kind of a warning I hear from a lot of our exited founders when it comes to burnout and deal structure that like, guess what?

Hunh? You don't have control anymore. So be really smart about what that turnout looks like. Absolutely. I think the topic is really about risk and purchase price, right? So structure, meaning you're getting paid at a future date, whether it's debt or burn out variety of structures because you're not getting cash at the closing of the sale.

That introduces risk, right? Right. You're dependent on the buyer doing well. Like you said, it affects what you actually take home. All parts of the transaction are complete, and so most purchase agreements or sales have part of that. Compensation is deferred to the future, and that risk that a seller takes on should be or can be negotiated as into a higher purchase price.

Overall purchase price. And the other way is true too. If you want an all cash deal that is shifting the risk to the buyer and so likely the purchase price is going to come down, it's really risk versus price. Who wants to take that on. And there needs to be agreement between buyer and seller. I feel like M&A gets bundled together.

And when we're talking just about one, like if we're talking about exiting our business, you know, we're selling our business, we still use the term M&A, even though it's really just a very specific part of that. So I think it's interesting that it's bundled together. I'm not totally sure why. Do you know why do you think it even should be or does it just confuse everyone?

I think it's it's a these are business transactions. I think one thing that I didn't mention is that I think often in mergers there isn't a liquidity component,

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so cash isn't going out to either party in many cases, whereas acquisition really is more of a liquidity event where the seller of the business is expecting the shareholders of that business to receive remuneration. Right. They're receiving compensation for in exchange for the equity in that business.

Is it fair to say then, in that regard, when you think about doing a merger or an acquisition, a business owner who's trying to either acquire or be acquired is trying to get closer to the liquidity event and make some money up front or near term. And like a merger kind of has a longer road to go before exiting, does it seem?

Yeah. Does that make sense? I think that's a good way to think of it. Yeah, a merger, in my opinion, is about getting stronger. It's about growth. It's about creating value for both parties and acquisition. All of that is true for the buyer, whereas the seller, it really is about creating liquidity, right?

Some today, some tomorrow. But it is about exchanging the equity in your business for compensation over a period of time. I've done it acquire and we called it an acquisition. And we posted that publicly saying we purchased this company. The reality was that company really wasn't worth anything, but the people were extraordinary and we wanted them on our team.

And so instead of firing those people from one company and rehiring them, we essentially created new purchase agreements for all of these people to join us under the guise of an acquisition. So there are a lot of things that are happening in the background that maybe we're just throwing blanket terms on them.

So the the external to the company has a way to define what we did. Yeah. So I guess whoever's listening to this episode now, because we're going to rap shortly. Like, what do you hope they take from this? Someone who is a business owner or a younger entrepreneur, greener and learning about M&A and what does this mean?

I guess, what are the most important things you hope they take away from hearing us talk about it? I think it's, hey, there's a lot to learn about mergers and acquisitions. And as a starting point, if you understand that the merger is two companies coming together and acquisition is a liquidity event where one company buys another, that is more than enough to take away from this conversation.

Bam bam bam bam, boom boom boom boom boom boom. That's all for today's episode of Wise Up on M&A. Let us know what topics you want to hear about next. Let us know where you're at in your exit journey or your thought process. We are here to help you. We are exit wise. We are business owners. We have sold our own businesses helping you sell yours.

Have a good day.