Summary

In this conversation, Chris Younger, founder of Class 6 Partners, shares his journey from a legal career to investment banking, discussing his extensive experience in mergers and acquisitions. He emphasizes the importance of team structure in successful acquisitions, the core values that guide his firm, and the significance of ethical practices in business. Chris also reflects on his partnership with David Tolson and the meaning behind the name Class 6 Partners, which symbolizes the challenges entrepreneurs face in navigating their business journeys. He concludes by discussing the factors that determine when a business owner is ready to sell their company. In this conversation, Chris Younger discusses the complexities of business exits, emphasizing the importance of preparation, understanding financial statements, and the role of family offices in managing wealth post-sale. He highlights the challenges entrepreneurs face during the sale process, including emotional stress and the need for clear communication with their teams. Younger also addresses strategies for mitigating risks, such as customer concentration, and the significance of targeted buyer identification to maximize valuation.

Takeaways

Chris Younger has completed over $2 billion in transactions.
The consolidation strategy in the communication space was intentional.
Strong second-tier management is crucial for successful acquisitions.
Ethical practices and integrity are vital in business relationships.
Class 6 Partners symbolizes navigating difficult business challenges.
Entrepreneurs should be running to something, not from something.
Investing in talented management can depress profitability initially but is necessary for growth.
Building strong relationships is key to business success.
The importance of having a strong team to support the business owner.
Chris values lifelong learning and mentorship in his career. One option may be not doing a deal, and that's okay.
Business performance can deteriorate, affecting buyer interest.
Counseling business owners is crucial throughout the deal process.
Educating clients about the emotional challenges of selling is essential.
Pathfinder helps owners prepare for exit years in advance.
Entrepreneurs often need to take risks to achieve their valuation goals.
Customer concentration can be mitigated through strategic negotiations.
Financial statements tell the story of the business and its growth.
Utilizing debt wisely can enhance returns on investment.
Effective communication is key to managing employee anxiety during sales.

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Transcript:

JON STODDARD (00:00.522)
Welcome to the top M&A entrepreneurs today. My guest is Chris Younger. Chris runs a company called Class 6 Partners. It's an investment banking firm. He also has this book called Harvest. It's on Amazon. It's a smart read and I've got some questions for that. Chris has done over $2 billion in transactions from 70 different deals. So welcome to the show, Chris.

Chris Younger (00:25.909)
Thanks so much, John. Happy to be here.

JON STODDARD (00:27.958)
Yeah, let's talk about a little bit how you started. I was looking on your LinkedIn, and you're a Harvard-educated attorney. You used to work for Jesse. What's his last name again? Eshbaugh. Yeah, then Wilson Sosini out of California, that big Silicon Valley attorney. Yeah, and then you worked for Northwest Growth Corporation. What was that?

Chris Younger (00:43.749)
Yes.

Chris Younger (00:57.685)
So when I left the legal profession, I went to work for a, there's basically an investment group that was funded by a utility. And that's where I and a couple of other folks started a consolidation strategy in the communication space.

JON STODDARD (01:15.99)
Yeah, then you Exponence, largest value added reseller of telecommunications equipment in the US, acquired and integrated 27 companies. When you brought that on, was that your goal, to start acquiring companies?

Chris Younger (01:19.518)
Yeah.

Chris Younger (01:35.217)
Yeah, when we started, it was an intentional consolidation strategy. We had looked at the VAR market value added reseller market in the communication sector and felt like with the change in technology, moving from kind of traditional TDM technologies to IP technologies, that having a large national platform and the ability to invest in a big network operation center would give us an advantage.

And so that started in 97 and we got, well, we completed those 27 acquisitions through early 2000. And then as I mentioned, I went from being the deal guy, throwing the deals over the fence to the operations team, to being the guy on the operations team. I became the COO and the president of that business. So I had to deal with all the messes that I created on the acquisition side. It's quite fun.

JON STODDARD (02:33.366)
It's like stop sending this stuff. We have to clean up. Yeah Yes, and then you sold that via very large multi-billion dollar company and then you went off to Silver Cloud companies private equity firm in Inglewood, Colorado and you did that for seven years

Chris Younger (02:35.245)
I used to be a lot taller, yeah.

Chris Younger (02:52.233)
Yep, did that. And then in parallel, we started our investment bank class six partners with my partner. And it's been a great ride ever since.

JON STODDARD (03:04.662)
Yeah, you've been doing that for 17 years now. That's fantastic.

Chris Younger (03:09.381)
Yeah, that's been a lot of fun.

JON STODDARD (03:11.286)
and you're also a Vistage Worldwide Speaker since 2008.

Chris Younger (03:15.613)
Yep, really big believer in Vistage. I'm a member, I have been for the last 15 years and do a lot of speaking to Vistage groups around the country and always happy to help those companies because they tend to be lifelong learners and interested in growing their businesses. So they're fun to work with.

JON STODDARD (03:36.064)
Where do you go for advice?

Chris Younger (03:39.837)
Well, I'm fortunate that I've got a business partner that, you know, for the last 17 years, I've been able to bounce ideas off of. We're also very fortunate. We've built a team of about 40 people. You know, the old advice about hire smarter and more talented than you, I think we've done that. So they're very savvy folks. And then I've got mentors as well.

Jim Walker has been a mentor of mine. He ran a very big division of AT&T back in the day. And then he was the CEO at Exponence and learned a great amount from him. Just a terrific mentor.

JON STODDARD (04:22.746)
Yeah. Hey, I want to go back to that exponent and your 27 acquisitions.

Chris Younger (04:30.066)
Ahem.

JON STODDARD (04:31.27)
Why did you do that? Did you just see the end goal of like, okay, we need to get to this, the valuation a lot higher so that we all, you know, the operations bigger because we can all make a lot more money or what was it? Was it just, it was there, we need to decline.

Chris Younger (04:48.101)
Yeah, there were really two pieces to that strategy. One was that market was highly fragmented. There were lots and lots of ours all around the country. And so we felt like if we could consolidate those, get it to achieve some efficiencies, I think that proved to be pretty challenging. But we'd have a much larger business and a more scaled business. The second piece, as I mentioned, was in that particular market,

maintenance services for, we did a lot of phone systems and data networks. At that time, if a customer's data network or phone system was down, you had to do a truck roll to fix the system, which is pretty expensive. And we had about 200,000 maintenance contracts once we were at full capacity. And what we concluded was as technology was changing,

to IP technology, which is most systems today are all IP based. A lot of that maintenance could be done remotely, but that takes a pretty sophisticated network operations center, a NOC, that was, you know, we were investing about 10 to 15 million dollars in that NOC. And we ended up selling the business before we got that fully deployed, but that was the game plan is, hey, we think we can.

get an edge over our competition by being able to remotely diagnose and solve maintenance problems for our customers versus having to roll a truck, which is all those smaller bars, that's what they had to do. And so that would give us a pricing advantage.

JON STODDARD (06:24.77)
Yeah.

JON STODDARD (06:28.106)
Yeah. And how did you buy those? Wouldn't, you know, everybody go, OK, everybody wants cash, ideally, upfront. But what did it come down to? Like, we put 33% down in cash, 33% seller financing, or earn out, and some debt.

Chris Younger (06:43.953)
Yeah, we used a combination of cash that we raised from our utility company. We had a credit line that we used for some of those acquisitions. And then we required each of those entrepreneurs to take equity in exponents as part of the deal. We wanted them to continue to be invested in and motivated to help us, you know, build exponents into the business we thought it could be.

JON STODDARD (07:10.866)
Yeah, so out of the 27, the failures teach us longer than the other successes. Can you describe one of those where I go, yeah, that was horrible, but we learned a lot. We only have 15 minutes.

Chris Younger (07:16.39)
Hahaha

Chris Younger (07:23.121)
Oh, how long do we have? Yeah, the well, I joke and people have heard me say this before, but out of those 27 deals, I think nine, I looked a lot smarter than I am. Nine of those kind of went as we had planned and modeled. And nine of those, you know, were complete train wrecks and I should have been fired. So in

JON STODDARD (07:50.279)
Well, you're humble. That's good.

Chris Younger (07:51.665)
Yeah, no, it's that'll doing that many deals that quickly, you know, you're bound to make mistakes. But you know, the learnings, if I were to start to identify common elements of failures, I would say the number one lesson that we learned was, if you're buying a business that where the entrepreneur is the dominant, either salesperson or operations person, or product development person.

JON STODDARD (07:58.134)
Yeah.

Chris Younger (08:22.197)
and they don't have a strong number two in place, that's gonna be a challenging deal. For the entrepreneurs in the audience, don't take this the wrong way, but most of us make poor employees. And after we would acquire those companies, obviously we had more stringent reporting requirements. We had policies and procedures that we needed to follow. And for a lot of entrepreneurs, hey, that was...

you know, a reason for them to disconnect and get a little bit less interested. If you had a strong number two that was managing the business for that owner ahead of time, that was much easier to deal with, because they were already used to taking direction, managing according to, you know, with a, with a manager in place. And, you know, the businesses where that wasn't the case, those were our toughest deals. And, like I said,

JON STODDARD (09:14.602)
What does that look like? I mean, can you see that when you say, okay, he's got a general manager or COO, and you ask the CEO about that? You go, well, who's your number two? And tell me about it.

Chris Younger (09:27.273)
Oh, yeah. Yeah, before we would, as we learned those lessons, obviously, we would insist on meeting those people to really understand what was the bench strength, both at the, hey, is there somebody that is either running or is capable of running that business, a president or a COO? But we also wanted to talk to the CFO, we wanted to talk to the head of sales, we wanted to talk to the head of operations, head of engineering, because that gave us a much better sense for the strength of the team.

which that has a big impact on valuation. And the stronger the team, the less risky it is. And like I said, we learned that lesson the hard way on some of our deals. But it was, yeah, you said you learn a lot doing that many deals that quickly.

JON STODDARD (10:14.082)
Yeah, when you say it adds to the valuation or subtracts to the valuation, you're saying the same thing. Was there a number attached to that? Or can you quantify that?

Chris Younger (10:26.025)
Sure, yeah. Yep, and even on the banking side, we see this all the time. If we've got a business where it's too heavily dependent on the owner or the entrepreneur versus a business that's got a really strong, deep, qualified team, the difference could be two to three turns of EBITDA in terms of valuation. So yeah, so as businesses scale.

JON STODDARD (10:48.395)
Really?

Chris Younger (10:52.333)
This is one of the challenges that all entrepreneurs have as businesses scale. As they get to a certain level, maybe that's 10 million in revenue, maybe that's 12 million in revenue, they're going to have to make that decision to really invest in more talented second tier management. It'll depress profitability for a little bit, but that's what's required to make the business less risky and scalable.

JON STODDARD (11:19.242)
Yeah. So let's talk about Class 6 partners. You clearly had the skills to say, I can go acquire a company and then do repeat this, or I can go down this other road and help other people do it. I mean, what was the choice and why did you make that, take that fork in the road?

Chris Younger (11:38.365)
Well, we had sold exponents back in 2003. I had at that time three young kids, a newborn and a four-year-old and a six-year-old. And I was on the road pretty much nonstop. And I sat down with Mary Beth, my wife, and said, hey, we could try to go do this again, right? Go raise some money and come up with a strategy, or we live in Denver and we loved it.

JON STODDARD (11:54.978)
Yeah.

Chris Younger (12:08.605)
we could stay here in Colorado and do something different. So I actually, I probably, it was kind of in quasi retirement for about a year and a half. And I joke, I was reorganizing her spice store when she told me, I won't use the, yeah, I won't use the exact language that she used. Yeah, but she said, you need to find a hobby. So that's why we started the bank. And we did it. One of the things that I learned and doing all those acquisitions is just how fun

JON STODDARD (12:22.843)
For the sixth time, you need to find something.

JON STODDARD (12:29.378)
Hahaha

Chris Younger (12:38.137)
entrepreneurs are to work with. They were high integrity, high quality driven, fun people to hang out with. And so I wanted in the next life to make sure that I got to continue to work with them. And this is a perfect job for that. I mean, all of our clients save a few are entrepreneurs and you know, they're good people and it's really easy to get our team motivated to help them because they

JON STODDARD (12:40.024)
Yeah, yeah.

Chris Younger (13:06.621)
Like I said, we're pretty selective on clients. We really work with those folks that are a good values match with us. And, you know, they're generally quite charitable. They treat their team well, high integrity people, hard workers. And as you know, with all entrepreneurs, I mean, they've got their quirks. Most of them are entertaining. Some of them not, but.

JON STODDARD (13:27.918)
I got a question. When you ask, say, about high integrity, what is your, hey, they crossed the line. And it could be the tiniest little thing. I mean, I'll give you an example. I can remember, at U of A basketball, when Lou Olson first came, he brought a recruit to a restaurant. And the recruit was rude to the waiter. And that guy did not get a scholarship. And he told that story because he was trying to get people to come to the seats at that time. This is what we're talking about.

right when he first came.

Chris Younger (13:58.825)
Oh, yeah, our the three core values at our firm are hustle, humility and relationships. And the humility pieces are really, really important one that I don't know if people pay enough attention to. So we're looking for clients that are lifelong learners, that are coachable, that care a lot for their team. We can tell a lot about an entrepreneur when we're first meeting with them and asking them about goals of the transaction.

if their individual financial goals show up first, that tells you something, right, in terms of, Hey, what are they trying to get done? Versus, you know, it's music to our ears when an entrepreneur talks about wanting to reward the team that helped him or her get there. So that's, you know, there's lots of tells, as we like to say, that give us a sense for, Hey, where's this entrepreneur positioned? And is that going to be a good fit for us? You know, the

the entrepreneurs who know everything and really can't take advice. I mean, we're just not gonna be that helpful to. And so those are ones we pass on. We've certainly done deals that were a lot more challenging because, hey, maybe the business was smaller or maybe it was just a more difficult market, but we just loved the entrepreneur and we knew it'd be fun to work with them. And so that's been, you know, we've been fortunate to be able to make those choices.

JON STODDARD (15:26.614)
Let me dig deeper into that. When you say when they want to reward the employees, do you insert your opinion going, oh, he wants to give 10% of his business or the sale to the employees? And do you say, no, I think it should be 15%? Or are you just OK with whatever?

Chris Younger (15:51.429)
Yeah, I don't. I mean, we'll get the question a lot. How much should I reward my team? But I would say most entrepreneurs, these business owners have a pretty good sense for what they want to allocate to their team. And, you know, we've seen just some amazing stories where we had one client a few years back, you know, the deal wasn't a large deal was probably, you know,

JON STODDARD (15:57.023)
Yeah.

Chris Younger (16:17.853)
I don't know, $15 million. And so you think after tax, maybe there's 10 million left. I think he ended up writing $2 million in checks to folks that had been with him for longer than six months. And they literally brought everybody into the room and presented them their check. And he said it was one of the best days of his life, which is, I mean, that's fun.

JON STODDARD (16:37.002)
Yeah. Yeah, that is cool. So let me ask you about this. I want to talk to you, your partner, David Tolson. So how did you decide to partner up with him and write the book? The reason I ask this is you know, finding somebody to be a lifelong partner with your spouse is challenging. And then

Chris Younger (16:54.487)
Well.

JON STODDARD (17:05.558)
when you're bringing business and a lot of money to the table, to finding somebody that's ethical and has humility is also a very challenging.

Chris Younger (17:14.797)
It's a great story and the good news is he's not here to defend himself so I can say pretty much whatever whatever I want But I mean I've been so so lucky with David we When I was running exponents, I was the chair of an industry association and the woman who was the executive director She actually did all the work Mary say hey, you need to meet my nephew He lives in your neighborhood here in Colorado. And at that time, I mean we were

so busy, I didn't have time to do anything. But after we'd sold the company, I was still on the board for a while, and she kept telling me, hey, you really need to meet my nephew, David. And so we met, hit it off. We immediately played golf. You can learn a lot about somebody on the golf course. And there's lots of stories that I'm sure he would tell and that I can correct about the first golf match that we played. And then...

We just got to know each other over the course of about a year and a half, and he was running his valuation practice at the time. And we talked and said, Hey, why don't we start, you know, an M&A advisory shop? And I'll tell you, you know, obviously, it's, it's hard to predict, Hey, how do these partnerships evolve over time? We've just been, it's been terrific for us. I think we complement each other really well on, Hey, where do we have areas of exposure?

I think our thought processes, negotiation tactics are different enough that it's always helpful to talk to one another. I will tell you the moment that I knew that I had picked the right partner and that we were aligned early in the days of our business, we had a guy come to us who was trying to raise a real estate fund. Obviously, that's a lot different than doing M&A advisory, but given that we didn't have any money.

and we were anxious to do any deals, we told him, hey, this is a little bit outside of our bailiwick, but we'll give it a shot for you. So we got our retainer. I was in charge of it, went out, did the solicitations and ended up with almost nothing. And I went into David's office and we weren't obligated to do this, but I went into his office and said, David, we've just totally booted it for this guy. We need to refund his retainer.

Chris Younger (19:42.537)
Well, I think the retainer was 30,000 and we had like 15,000 in the bank. And David said, all right, where do I write my check? And so, you know, both of us had to put money into the, into the business to write that. And I knew right then, Hey, we're, we're aligned, right? We always, you always want to do the right thing by the client. And sometimes that hurts. And sometimes it costs you money. But I do think in the long run, number one, it's an easier way to live. And, and two, it's good business. And so.

But I've just, like I said, he's a terrific person. I can't say enough good things about him, and he's been just a ton of fun to build this business with.

JON STODDARD (20:23.102)
Yeah, I've heard that the more you tell the truth, the stronger you get. Where does that come from? Where do you think that comes from? Your parents instilled these ideas or you found your God, whatever it was.

Chris Younger (20:39.037)
No, for me, I'm sure it was my parents. My dad has been a role model for me. He grew up in the cable television business, but he was beloved by the folks that worked with him, and he and my mom, just a very strong moral compass. And I think Charlie Munger, Warren Buffett's partner, he's got a bunch of quotes, one of them, and I'll paraphrase, but basically, hey, don't do business with turkeys.

Um, you know, pick the people. Yeah, exactly. Yeah. Yeah. I have that book. Um, and, and I think that's true, right? I mean, life is short and you want all the studies that they've done about happiness, it's all about having great relationships. Well, uh, and I think it was Warren Buffett who said, you're not going to do a, you're not going to, how much time you spend is not going to make a good contract with a bad person. Um, and, uh, so I think.

JON STODDARD (21:09.802)
Yeah, that's in Charlie's almanac. You gotta get that part.

JON STODDARD (21:35.819)
Yeah.

Chris Younger (21:38.769)
And obviously as you get older, you're better able to pick up on that. Um, and you know, the more deals you do. No, it's, it's, uh, um, one of the nice things about our business is we get to, we just get a lot of referrals and we know right when a referral is coming from one of those clients, Hey, the person that's on the other end of that line is likely to be a good person. And, um, it's been, uh, that's been a lot of fun. Very, very gratifying.

JON STODDARD (21:44.654)
There's no shortcuts to that.

JON STODDARD (22:06.21)
So why, I got a class six partners. Where did that name come from? I mean, you didn't go to the, hey, just find a lookout over the edge and looks, oh, there's a black rock. I just call it black rock. Or a street. You don't have street in there or something. Yeah.

Chris Younger (22:10.513)
Yeah. Well.

Chris Younger (22:20.368)
the

Chris Younger (22:24.089)
Yeah, we used to be, our name used to be Capital Value Advisors, CVA. And we had that name, we're a registered broker dealer. And we also, we have a family office, which is a registered investment advisor. But then the SEC implemented this reg BI. I don't know if you've heard about it. But basically, they after 15 years with no issues with our name, we know they told us, hey, you can't use the word advisors in your name as a broker dealer. So we said, fine.

JON STODDARD (22:30.561)
Yeah.

Chris Younger (22:53.597)
So that was during COVID. I think David and I probably had too much to drink one day and said, hey, we're gonna change the name. And we started thinking about, hey, what's that journey of the entrepreneur? And what's a great metaphor for, hey, the work that we can do to help them. And Class 6 is the classification for rapids is the most difficult rapids to traverse. Yep. And I do think that for a lot of entrepreneurs that haven't been down the river yet,

JON STODDARD (23:14.131)
Oh yeah, yeah, yeah.

Chris Younger (23:22.181)
You know, maybe calm and it may look really nice today. You know, as you get into that transaction phase, that's when the class six rapids are. And so, you really need a guide. And, you know, that's our role is to make sure that they don't die.

JON STODDARD (23:35.266)
Yeah, I gotta I gotta pick on this. So Finra was a finner or SEC said you can't use what why? Yeah, well why? I mean what was the reason?

Chris Younger (23:39.946)
SAC Reg BI, yeah.

Chris Younger (23:44.721)
Who knows what the reason is for all these different regulations? I mean, they had a, Reg BI was expansive in terms of all the different changes that they made and that was just one of them. But I think the underlying reasoning was it would make us sound like a wealth advisor. And so, hey, we're not a broker dealer. We don't take custody of funds in that business.

JON STODDARD (24:08.164)
Oh, gotcha, gotcha.

Chris Younger (24:12.453)
At the RIA, our family office, we absolutely do, but that wasn't the name for the broker dealer.

JON STODDARD (24:18.93)
Yeah, I'm going to ask you about that little family office a little bit. So after that real estate, you refunded his money. So what was the first client after that? I mean, this is always curious. When you do a good thing, the door opens faster for the right business. I don't know why that the universe works that way, but it does.

Chris Younger (24:22.677)
Sure.

Chris Younger (24:26.991)
Yeah.

Chris Younger (24:35.569)
Oh, for sure. Yep. Yep.

Chris Younger (24:42.661)
Yep, I would agree with you. We did our very, very first deal was a company here in Denver called Sunnyside Staffing. It was a staffing business. Bob Grabowski and Ann Padilla. Ann has since, unfortunately, passed away. But she was kind of a pillar in the Denver community. And David had done some valuation work with them. And for whatever reason, they decided to put their trust in us to get their deal done.

They became just lifelong friends. And just what a great, great couple. They did a ton for the community. They did the right thing in their business. Just a prototype, perfect client for us. And we got it done. It was not easy, but we got it done. And they were very appreciative. And today are still references for us.

JON STODDARD (25:41.826)
Yeah, you call that chapter in your book, deciding when to harvest. How do you know that they're ready? I mean, you ask them a bunch of questions and sometimes you just find somebody that backs out last minute or something. How do you really know?

Chris Younger (25:56.817)
Yeah, it's a great question and one that we've spent a lot of time thinking through. We do use some assessments just to help us understand a little bit more. And what we like to say is you really want an owner who's running to something and not running from something. One of the things you'll see in the book Harvest, a lot of times an owner will show up and they're just exhausted. And that's maybe the business is struggling or maybe the business is having some challenges. And that's the reason that they want to go to market.

And we always tell them, look, this is the exact wrong time to go to market because you're going to end up leaving a bunch of money on the table. You know, let's help you fix some of the underlying operating issues so that the business gets back into a shape where you actually enjoy it. And then, hey, you can make that decision of whether you want to sell it or not, because now the business will be in a shape where we can actually make a reasonable return for you. But we like to say, look, there's three sets of timing for a deal. There's

Market timing, which is very, very difficult to predict. There's the business timing, which is easier to understand. And then there's personal timing, which is the owner has all the cards in that decision. And we ask a lot of questions about what's next. What are you gonna do next? How do you, is it, hey, sometimes it's a health issue. Sometimes it's, hey, I wanna spend more time with my grandkids. Sometimes it's, I wanna go start another business.

And sometimes it's just, hey, I've been doing this for 30 years and I think it's time. And it's obviously, as you know, it's stressful running a company and particularly when you're the first one in the last one to get paid. And so, and I, you know, you can see that in entrepreneurs.

JON STODDARD (27:43.521)
Sometimes as the answers actually, their actions don't match the answers.

Chris Younger (27:51.194)
For sure, for sure. I think where we...

JON STODDARD (27:52.416)
Yeah.

And how do you deal with that? You just say, hey, it's OK. Come back to us when you're ready. Yeah.

Chris Younger (28:00.569)
Oh, for sure. Right? If it's one of the things we've learned, if an entrepreneur decides that a deal is not the right fit or it's not gonna work for them, that's great. Right? And that's just, we've gotten a lot of information. We've obviously learned a lot from the marketing process. We've talked to a lot of bidders. And we've also, we also know, cause we've seen this movie a bunch of times, when they go back out, we're gonna do much better.

And because we've learned, hey, here are some of the things we've got to go work on to make this business more saleable and hit a higher valuation for you. And so we're, I always tell owners, look, you know, we're here to advise and we're never going to push a deal on you. You as the owner hold all the cards and the decision of what deal you want and who you want to sell to and for what amount. Our job is just to provide you a lot of options and allow you to pick from those.

JON STODDARD (28:56.934)
What's the kind of like, yeah, well, what are the top two options? What they choose, like if you go to market and they're not getting the price that they want or something, do they, was that one of the top ones or what?

Chris Younger (28:57.15)
And one of those options may be not doing a deal, right? So that's okay.

Chris Younger (29:13.393)
Yeah, that's usually one or something happens to the business where business performance starts to deteriorate and hey, we're no longer in the driver's seat with buyers. That happens, not a lot, but maybe 10 or 15% of the time you'll have that issue. Sometimes look, as the owner gets closer to the decision to actually close a deal, it's pretty stressful.

JON STODDARD (29:41.475)
Your job is to insulate them from most of that straight. Hey, by the way, there's a curve coming up or there's a dip coming up. Yeah.

Chris Younger (29:44.201)
Yeah, as best as, yeah. Now we do a lot of, we have a chart in our office about the amount of counseling that we do. And it's a, through the course of a deal, it's an asymptotic up to the right in terms of counseling that we do with business owners over time. But that's, it is, it's, we try to, we're big on education with our clients. We want them to understand exactly what's coming. Here's the emotions that you're likely to experience.

Here are the challenges that we're gonna have. Deals die, so just be prepared for that. We'll work through it. But as much as we try to educate and inform, it's still a daunting process for an owner, and it's stressful. And compound that with, for a lot of entrepreneurs, the challenges with just identifying their own identity coming from that business, that starts to create some challenges for them.

JON STODDARD (30:42.122)
Yeah, let me ask you about if they come to you and say, hey, I would like X amount of money in my bank or X to do this and this, but there there's no way that business is going to provide that for them. And you clearly have a tool in your pocket. Well, you need to do five acquisitions to get your EBITDA to be able to get that kind of price. Do you do that for them and say, well, this is going to be a two year roadmap?

Chris Younger (31:02.813)
Yep. Yes. Yeah, so we have a piece of our business, we call it Pathfinder, which is basically, that's for business owners who might be a year to five or six years away from getting ready to exit. And that work is really, I mean, we know what the end of the movie needs to look like, and so it's really helping translate that for a business owner and giving them the test ahead of time to say, look,

A buyer, we're going to be the eyes of the buyer throughout this process, and we're going to let you know as you're making different decisions, a buyer is going to like that, they're not going to like this. And hopefully that helps give them more confidence as they're making these different decisions, but also some guidance around where should I take the business. And sometimes I would say, look, 60% of the time their intuition is absolutely correct on what to do with the business.

But I would say maybe 30% or 40% of the time, their intuition might be just slightly off kilter. And so, hey, let's try to adjust that with what we know the market is going to like or not like. And in general, I think that advice is pretty good. I think it gives them the eyes of the buyer or the voice of the buyer in the room. It's not as if you're always building your business to sell it, but I do think sophisticated

uh... hey what makes a business valuable what makes a business more scalable and that's good advice for business owner regardless if you're gonna sell or not

JON STODDARD (32:37.702)
Yeah. What's the conversation you have with somebody when like, okay, if you're wanting to get to this price and this valuation, you got to do this. And that requires you're like on the last lap of and the coach is on the side. You got one more lap. Now kick it up a gear.

Chris Younger (32:57.949)
Yeah, a lot of that goes back to what the goals are of the entrepreneur. And if the goals are way out of reach, that just means, and if they've got a short time horizon, unfortunately, that means they're going to have to take a lot more risk. They're going to have to put more chips on the table in order to be able to get to that level of valuation. And sometimes that's...

Feasible for them their risk appetite is appropriate and sometimes it's not but we try to be you know When we run a process there's kind of a bell curve of valuations on that business, right? And the fat part of the bell curve is going to be what we would consider market value You're gonna have folks that are gonna try to buy it a lot cheaper than that And if you've done your process the right way and you've identified enough of the right types of buyers You're hopefully gonna get bids that are you know on the far right of that bell curve

We never want to take a business to market unless we believe, hey, the fat part of that Belk or valuations in that range are going to meet their needs, financial needs, whatever other needs that they have. You definitely don't want to take a business out counting on getting one of those outlier bids because you're likely to disappoint them. There's nothing worse than having a disappointed owner after working nine months. That's a horrible, horrible position to be in for everyone.

And so we try very, very hard to prevent that. But it is a, you know, back to your question of how do you motivate somebody, part of that's just showing them what's possible. And most of these folks are pretty driven. And sometimes all it takes is just painting that picture for them of what's possible. And then they, you know, they'll go execute. We've watched that time and time again.

JON STODDARD (34:45.79)
Like you just tell them hey, here's the roadmap you should take and they just do it themselves and they're just constantly You know, they'll pick up the phone and go. Hey, what do you think Chris you make 27 acquisitions? What do you think?

Chris Younger (34:56.977)
Yeah, exactly. And we monitor them. We've got a series of, we obviously monitor their financials. We update the financial model. We're going to update all the data room documents as those are happening so that we're ready. We continue to think through the story that they're going to tell to the market. We check in with them periodically, at least once a quarter, if not more. And, you know, as I always tell clients, I'll be disappointed if, you know, you've got a big decision and you don't call us to...

you know, to get some input. That's our, that's our role. For sure, for sure. Back, back to the client selection, right? You're trying to find somebody who is a lifelong learner and, you know, knows what they know, but also knows what they don't know.

JON STODDARD (35:26.274)
Yeah, that eagle will kill you.

I'm going to go ahead and turn it off.

JON STODDARD (35:39.198)
Yeah, let me give you a couple examples. Have you ever taken a company to market with a really high concentration of customers, let's say 80% of their business and two customers, do you take that to market because you know that somebody might buy that, a bigger company that's a strategic, or you just say, hey, this is not our bailiwick, we'll pass.

Chris Younger (36:01.641)
So we have, we've taken some of those to market. And I'll give you an example of one of them. They had one customer that was about 80% of their business. They were serving utilities, which makes sense, right? Typically...

JON STODDARD (36:17.662)
Yeah, those are a lot. Yeah, I understand those. Those are long term contracts and switching costs are extremely high. You just can't move from one, you know, one supplier to the next.

Chris Younger (36:22.258)
WAH

Yeah, in

Chris Younger (36:28.989)
Well, yeah, this was a company that was providing services to the utilities and they had evergreen year long contracts. So they, the utility company, basically every year that contract was up for renewal. And we ended up taking, we took the business out to market and I had talked to the owner and said, look, I think this is a long shot, but let's go see. So we talked to the different strategics, we talked to a lot of private equity firms and as you might expect with that much customer concentration, that deal was not doable. It wasn't tenable.

JON STODDARD (36:40.951)
Oh.

Chris Younger (36:58.609)
And so what we did is we went back, I mean, you can solve customer concentration in a variety of ways. You could go acquire some other businesses, you could try to sell your way out of it, but both of those are time consuming and expensive. What we ended up doing was just renegotiating the contract with the utility, gave them a price break, committed to some additional capex, but we were able to get seven year contracts. And then we broke that contract up into four or five different service lines, such that if one of them busted, and we didn't lose.

everything with that utility. And we took the business out and we ended up getting, we got it sold about twice the valuation that we were seeing in the first process.

JON STODDARD (37:35.426)
So the valuation went up because you diversified or mitigate the risk of customer concentration, yeah.

Chris Younger (37:39.217)
Yep, exactly. But it's a, I mean, the two-ish.

JON STODDARD (37:44.982)
Did you go to the utility company with the CEO and work on this negotiation, or you just coach him to do that?

Chris Younger (37:51.869)
We just coached them. We had said, hey, let's see if we can break this contract up, get longer terms. Also, let's kind of zipper the relationship with them. Let's make sure it's not just the owner and the head of procurement at the utility. Let's really build the project management relationships down through the organization such that we always had advocates up and down the organization.

JON STODDARD (37:53.399)
Yeah.

JON STODDARD (38:16.354)
How long did that take? Because now we're talking about working with a bureaucracy, possibly government, regulated or is regulated. And like, okay, let me run that to the next person, run it to the next person, run it up to the next person.

Chris Younger (38:20.669)
Yeah.

Chris Younger (38:29.545)
Took about two years. Yeah, yeah, yeah. It was worth it. I mean, they ended up, the increase in value over those couple of years was a really, really good return on investment. I will say that totally, totally.

JON STODDARD (38:30.83)
Two years, ah, yeah.

JON STODDARD (38:39.522)
It was totally worth it. Yeah, yeah. Hey, so I want to go to chapter five, understanding financial statements inside and out. I'm a big fan of Warren Buffett because business, the language of business is account. So understanding that. What are you looking for? And I know David Tolson used to do evaluation, so he knows these financial stuff in and out. So what value do you place on income statements? The bottom line is kind of a theory.

versus the balance sheet, you can see what people owe and people who you owe. Yeah.

Chris Younger (39:14.333)
Yeah, obviously in our world, the financial statements are really the story of the business, right? That will help you understand exactly what's going on in the business. And these days, right, any deal of north of 20, 25 million, you're going to have to do, I mean, we won't take a business to market unless we've done a seller prepared quality of earnings report.

we don't want any surprises and we want those financials to be represented just as well as they can be. And, you know, obviously there's lots of things you're gonna look at, but you know, the most important is how's the business growing? Is it growing profitably? You know, what's that incremental contribution margin from additional products or services sold? How are we doing on the bottom line? And then you go into all the qualitative factors behind that, right? The team, the customers.

What kind of strategic advantage does this business have? I'm a big believer that gross margins, right? Accurately accounted for will give you a really good window into how differentiated that business is in the market. The prototypical examples, when you look at a SaaS business, it's got 80 or 90% gross margins compared to a general contracting business, it might have three or 4% gross margins. That tells you a lot about pricing power.

for each one of those businesses and it corresponds to how valuable those businesses would be at equivalent cash flows.

JON STODDARD (40:46.314)
Yeah, what about debt on the balance sheets? What's your, when you look at this, do you try to help get rid of the debt on the balance sheet, clean it up? What do you do?

Chris Younger (40:57.917)
Yeah, most buyers are going to exclude debt from the purchase. Yep.

JON STODDARD (41:01.654)
Yeah, it's an asset purchase agreement, but what if the debt was actually used to turn assets into cash flow?

Chris Younger (41:10.021)
Yeah, it's again, I think well-run businesses with an appropriate amount of debt is just fine. Hey, they've used that. Hopefully, they've gotten a good return on investment for the debt that they're utilizing. Again, we're going to have to pay that off at closing. But I would say too few entrepreneurs that are running really healthy businesses utilize debt to their advantage to really be able to...

you know, make investments because, you know, for these healthy businesses, the cash that they invest in those businesses is going to generate a really nice return. But a lot of business owners are pretty conservative, which I totally respect. I'm that way with our business.

JON STODDARD (41:53.558)
When, let's unpack that, when you say they're not, you're not utilizing, entrepreneurs are not utilizing debt as much as they should, what are you actually saying? I said, to use it to go buy businesses, to go buy better, more products at a better price. What are you talking? What are you talking about?

Chris Younger (42:09.525)
Typically, for most entrepreneurs who haven't had acquisition experience, their risk-adjusted return on investment for organic growth is going to be better. We always do that analysis for them. We'll show them, hey, here's the return on doing this acquisition, right, under these assumptions. Here's the return on an organic growth strategy for you. Maybe that's adding a geography or adding a …

adding more salespeople or increasing your marketing spend or new product development. Hey, here's what that return looks like. In most cases, they're going to see that not withstanding their experience of how difficult it is to grow organically, generally they're going to get a better return there than just going out and doing an acquisition, particularly and especially if they don't have any experience acquiring another company. If somebody's got experience and they're well situated, that can be a great strategy.

In our experience, a lot of organic growth strategies are going to deliver returns in the 20s, 30s, 40s percent range in terms of return on cash. If you can borrow money at 5%, well, okay, all of a sudden now I'm picking up that incremental 25, 30% of return on somebody else's money. That's again, I understand for a lot of business owners, they don't want to get over levered because that tends to reduce flexibility during times of challenge.

But I would say most entrepreneurs are much more reluctant to utilize debt than they probably could.

JON STODDARD (43:41.31)
Yeah, let me ask you about that because organic growth, you know, this individual has been growing their business for 15 years and they kind of maxed out what they think. How do you bring a new marketing strategy and say, well, this would be a good ROI because our marketing is a test, right? Does this work? No. Did that work? No. And then at some point you find it, but

Chris Younger (44:06.345)
Yeah, generally on the marketing side, we're typically looking at, hey, what have you deployed in the past? And have you been able to measure the returns? If they haven't, then you're right. You've got to go do this testing. So you're not going to put major dollars behind a particular marketing strategy until you get a much better sense that, hey, that strategy is going to work. But once you do find those things that work, generally the returns are pretty good. And so it's easier to put.

you know, cash flow into those investments because you know, hey, this is going to generate, you know, certain amount of sales. We see this.

JON STODDARD (44:38.826)
Yeah, that's a, it's got to be a case by case though, right? I mean, cause yeah.

Chris Younger (44:41.709)
Oh, for sure. For sure. Yeah, we see a lot. We have a number of clients that sell on Amazon, advertise on Amazon. And there's a pretty direct link between the advertising and promotions that they do on Amazon and sales levels. So it's you can

JON STODDARD (44:57.278)
Yeah, so I mean that's easy. Like if I put a dollar in Facebook, I got $5 back. You step on the gas, right? Until you start seeing, you know, a minute.

Chris Younger (45:02.629)
Yeah. Yep. Exactly. Till your return on advertising spend row as they call it to start to deteriorate.

JON STODDARD (45:14.23)
When, let me ask you about the capital structures transactions. What are you talking about here about when you're trying to sell a business? Are you recommending specific cap structures that they're looking for or is it based upon? I know it's a combination of what the seller wants to have like, hey, he's 75. I don't really need a lot of money, but it's nice to see $5 million on my bank account.

Chris Younger (45:39.018)
Yeah

It's really, it comes down to, I mean, on the capital structure, I mean, deals can get done as we were talking about earlier, they can be done with cash, they can be done with a seller note, they can be done with a seller taking equity, they could be done with an earn out. In general, our advice, at least to our clients is, you know, when we do that transaction and we get that closed, the only cash that you can count on is the, are the dollars that you receive at close.

And if that's not enough to meet your objectives, then we shouldn't do the deal. All that extra, whether that's rolled equity or a note that the buyer may owe you over time or an earn out, those are all gravy, you know, icing on the cake. But you don't, you don't want to count on those. Uh, sometimes those can be used to bridge valuation gaps. Um, but again, if I, you know, came to you and said, Hey, John, I want to buy your business, I'm going to.

I'll buy it for $10 million and it's going to be 10 million in cash. So that's one offer. Somebody else says, you know, John, I'm going to buy your business for $30 million. If they don't tell you how they're going to structure it, Hey, initially that could sound appealing, but John, I'm going to pay you $500,000 a year over the next 60 years that tells you, Hey, from a deal structure standpoint, you're probably better off taking the 10 million. Right. Um, and so that's when we talk about deal structures, that's the advice that we're giving to folks on. How do you.

JON STODDARD (47:02.925)
Yeah

Chris Younger (47:09.597)
How do you think about the different offers that come in and how do you rank them against each other?

JON STODDARD (47:15.81)
How do you make that decision, let's say you have a number of offers on the table, one's from private equity and it's a good offer, they're going to buy 60% of it, but they're going to roll over 30%, which means the person has to stay on for another couple of years to work on a business versus a guy who says, hey, I'm going to buy it for 10 million. That's what it was valued at. And it's 50% down, 50% seller financing or 50% earn out. It's the same kind of offer.

Chris Younger (47:30.47)
at least.

JON STODDARD (47:45.912)
It's just, you know, one has a bigger bank account.

Chris Younger (47:49.277)
Yeah, I generally mean if a seller is going to take risk on future payments, right, whether that's an earn out equity or a seller note, in general, that risk looks a lot like equity type risk, right? And so, you know, for our clients, we would recommend if you have a choice between those three take the equity, because that's going to generate the best returns for you. If the business runs into problems.

the earn out's not gonna get paid, the seller note's not gonna get paid, and the equity probably will be worth less. If the business does really, really well, well, the earn out may be a little bit higher, the note's not gonna change, but the equity could be a lot higher. And so, in terms of, if you're gonna take equity-like risk, it'd be great to get equity-like returns, and that's generally our advice to our clients. And we've had a lot of clients, right, especially with selling to private equity, where they are rolling equity, and they've done, they've ended up doing better

on the second round than they did on the first round.

JON STODDARD (48:51.134)
Yeah, even though sometimes the business does worse, they have 30% equity or fractional in the holding company that the private equity sells to a bigger private equity company. Yeah. Yeah.

Chris Younger (49:00.597)
Correct, correct. Yeah, it does better. And those can be great deals if they're managed well.

JON STODDARD (49:06.134)
Yeah, beautiful. When you go to market, I mean, how do you go? I mean, you talked about, hey, don't do the shotgun approach. We do targeted. How long does it take to create a targeted list that you know that the companies are for? If you're doing all kinds of industries, I mean, you went like Sunnyside recruiting, then you would did something else, right?

Chris Younger (49:31.753)
Yeah, we've done deals in a bunch of different industries, but it really, the process for identifying those candidates is fairly straightforward. Let's map the industry up and down the value chain. Where are the adjacent industries that we think, particularly for strategic buyers, could have an interest? On the private equity side, it's actually pretty easy. We invest in a lot of databases that help us identify private equity firms where this

and character of investment and type of company would be appealing to them. And so that's pretty easy to identify. And then on the strategic side, you know, those are much more hit or miss, but, you know, we tend to talk to a lot of folks just so we can identify, Hey, who could be that outlier, uh, that, you know, might be willing to pay a premium for this business. Um, one of the things that we see when we go to market, a lot of times clients will say, well, I know who the buyer.

is going to be for my business. It's going to be one of these five companies, right? Because they've been super active in our space. One of the things that we've learned is when you have a very active M&A market, the folks that are the most active participants in that market, their bids are going to be very close to one another. And the reason is, is because they've watched each other bid over the last 10 processes. And so I, you know, I'm going to know where my competitor's bidding. And so I'm not, I don't want to pay much more than that, right? I don't want to be the idiot who paid.

way too much for the business. But if you talk to people that might be outside those likely suspects, that allows you to potentially find somebody who is not necessarily familiar with where all the other bids are going to come in and who's willing to pay a premium because they really want that business for some unique reason. But it does. It's a lot of elbow grease, a lot of reaching out to folks and talking to them, but it works.

JON STODDARD (51:20.97)
Yeah, I've had that experience. A broker told us, hey, you're in within 10% of the bid from, you know, five other people at the table. So.

Chris Younger (51:28.677)
Yeah, yeah. Well, it's when you look at the distribution of bids, right? Again, a lot of them are right there at the fat part of the bell curve. And usually those are what I would call the usual suspects. None of those folks is going to pay a premium.

JON STODDARD (51:42.678)
And I gotta tell you, when you ask, like chapter 14, you got like the communication, don't make this mistake. What are you referring to?

Chris Younger (51:51.213)
Well, a lot of owners, right, I mentioned that we're working with folks that are very, very high integrity. They sometimes will feel a compulsion to tell their team about the process that they're going through. And our advice is, look, you can't tell them with certainty what's going to happen because we don't know with certainty what's going to happen. Obviously for your CFO and maybe some of your senior leadership, you're going to have to bring them into the fold as you're starting to.

put a book together or talk to potential bidders. But announcing broadly to your team, we think is a huge mistake because most employees, for whatever reason, I think get very, very anxious around the notion of their business getting acquired. They've heard some of the horror stories about.

JON STODDARD (52:36.691)
Yeah, if it happens in Silicon Valley, you're going to get laid off. Somebody's going to get laid off. Yeah.

Chris Younger (52:41.525)
Yeah, you're going to get laid off. I would say in the 100 plus deals that we've done, we've only seen layoffs in two of those deals. And that was because the industry just cratered it. They were both in oil and gas services. But in most cases, the buyer, they want the team that's delivering the results that they're buying. And so they don't have a big incentive to create a lot of risk for the business by firing a bunch of people that have been delivering those results.

But unfortunately, if you were to explain to your whole team, hey, six months before a deal happened, hey, we're going to go sell the company, and this is a process that we're going to run. You're going to have a lot of people putting their resumes out. They're going to be worried about their job. Oh, exactly. Exactly. And so there's no reason to do that until you've got good certainty over what is the story that you're going to tell them. And you don't know that until you actually have the buyer in hand.

JON STODDARD (53:25.191)
Very active on LinkedIn.

Chris Younger (53:40.025)
Hopefully, you've gotten the deal closed so that you can explain to them, hey, here's exactly what we did and why and why this is. Again, for almost all of our clients, it's usually a good thing for their team. They're going to have additional investment dollars available to grow the business. It's going to be good for those employees careers. As my old mentor, Jim Walker used to say, none of us is permanent. We're all temporary employees, so we're passing through.

JON STODDARD (54:06.174)
Yeah, talk about O and G having high concentration to customers, man. And you know, in their industry, they like, isn't there a concern evaluation, high concentration? No, this is not a concern in this industry.

Chris Younger (54:18.737)
Oh yeah. Yeah, no, it's just that's the nature of that business. You know, Schlumberger is 80% of a lot of these companies' customer bases.

JON STODDARD (54:30.146)
Yeah, hey, we make pipes are the covering for pipes. So we have one customer. Is that a concern for you? No, no, not at all. Yeah, yeah. So tell me about this family office. What is that? What are you guys doing? I know what a family office is and everybody else does on this, but how are you matching that with investment banking?

Chris Younger (54:37.662)
No, all good.

Chris Younger (54:48.991)
Yeah.

So we, about seven years ago, we had seen this going on for years before that, our clients who were, they were wealthy, it just wasn't liquid, but they wouldn't necessarily attract interest from sophisticated wealth managers to help them do the planning that would help them save income taxes, help them save at state taxes, think about how to educate their kids about money and what that's gonna mean at some point in their lives. And so,

JON STODDARD (55:18.946)
So let me, so you do all these transactions and now these people have big checks in their grant. Do you say, hey, before you were going, now you need to go talk to Schwab or you need to go talk to Merrill Lynch or something. Yeah.

Chris Younger (55:32.281)
Exactly. But a lot of those guys, I mean, they might spend a little bit of time with them, but they weren't doing the planning. And then after they sold, all the wealth management firms are all over them. And I have to be honest, I'm not a huge fan of the wealth management industry. It's rife with conflicts. I don't know. I mean, a lot of people have incentives to sell product to clients that are maybe not appropriate.

And so it's not something that we were terribly excited about on behalf of our clients. And so that's why we started our family office is to be able to give them advice while we were doing the planning with them well ahead of a deal. And then afterward, be able to give them a service at a more reasonable cost and without any conflicts. You know, we don't take any money from anybody other than our clients. So there's no incentive to sell an insurance product or a particular fund or anything like that. And selfishly.

You know, one of our core values is relationships. It allowed us to continue those relationships with those families, which has been awesome. We have about 85 families. We have about a billion dollars of active assets under management. We advise on another billion and a half that's yet to be liquidated. And it's been just a blast for us because we get to stay in touch with all those clients and continue to help them.

JON STODDARD (56:51.678)
And what do you do with the money? What's your thesis like?

Chris Younger (56:55.877)
Yeah, a big part of our thesis is, hey, as an entrepreneur, you've taken a lot of risk in your life. Our primary job is to make sure that you don't run out of money, and that your family is well cared for, and that you don't have to go back to work. And that will depend a lot on the risk tolerance and what the goals and objectives are of the family in terms of, hey, what asset classes are going to be most appropriate for them? You know, a lot of our clients will do private investments, so we'll help them think through those. And...

We're actually in the process now of trying to put a fund together that would allow those families to invest in private businesses where we could provide them some advice kind of on a holistic level.

JON STODDARD (57:38.934)
Beautiful. Chris, thank you for being on my show, Top M&A Entrepreneurs. I appreciate this. Yeah.

Chris Younger (57:45.858)
John, thanks so much. It's been great talking to you, and thanks for what you're doing for all those entrepreneurs out there.

JON STODDARD (57:51.562)
Yeah, and by the way, it's got a great book. It's on Amazon. It's called Harvest. There it is. Look for that cover from Chris Younger and David C. Tolson.

Chris Younger (58:01.409)
Yeah, get David in there.

JON STODDARD (58:04.255)
All right, let me stop this.