On this episode, Josh speaks with Peter Lehrman, CEO of Axial. Axial is an online platform that business owners & their M&A advisors use to safely and intelligently explore and execute capital raises, acquisitions, and exits with strategic buyers or professional financial sponsors. Josh and Peter discuss, Axial, its advantages, and then talk about things business owners should keep in mind when selling their business.

Peter Lehrman is CEO of Axial, responsible for driving the company’s vision to be the trusted platform where private companies connect with capital.

Prior to Axial, Peter worked in private equity at SFW Capital Partners and was part of the founding team at Gerson Lehrman Group, where he helped build the company’s dominant global technology platform foron-demand business expertise.

His background in private equity investing and in building Axial has given him over 10 years of experience in the world of small business entrepreneurship, acquisitions, M&A, and a lot of perspective on how owners should think, act, plan and grow.

In today’s episode you will learn about:

  • What truly drives the ultimate valuation for a private illiquid business, and it’s not EBITDA
  • How owners can become transaction-ready in advance
  • How owners can explore M&A to grow their company


Narrator:             Welcome to Cracking the Cash Flow Code where you’ll learn what it takes to create enough cash to fill the four buckets of profit. You’ll learn what it takes to have enough cash for a great lifestyle, have enough cash for when emergency strikes, fully fund the growth program, and fund your retirement program. When you do this, you will have a sale‑ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want, in the way you want.

In Cracking the Cash Flow Code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.

Josh:                      Hey, how are you today? This is Josh Patrick. You’re at Cracking the Cash Flow Code. My guest is Peter Lehrman from axial.com. We are going to have a fascinating conversation today about a new platform that if you have a reasonably good sized business that you may want to use like it’s time to sell your business. Instead of me yammering on about something I know absolutely nothing about. I’m going to bring Peter on we’ll get started.

Hey, Peter, how are you today?

Peter:                    Hi, Josh. Thanks for having me on.

Josh:                      My pleasure. Tell me something, Peter, what is your platform? How is it different from all the other crummy platforms out there?

Peter:                    The name of the business is Axial platform. If you go to axial.com you can learn more about the business. A lot of people tend to paraphrase what we do as match.com for people buying and selling privately held companies. We’re a matchmaking platform built on the internet 100% software based that connects business owners looking to acquire businesses and grow or looking to sell their businesses with buyers of businesses.

Those buyers can be other business owners. They can be private equity buyers. They can be family offices that have an expertise in a particular family based industry. We operate this platform to get to the heart of the question, when the businesses become bigger and they have multiple millions of dollars of revenue, the public listing sites that had been around for 20 years now basically since the dawn of the internet, the public business for sale listing sites are really a really bad place for them to do business for a couple of reasons.

First is everything is public. Everybody who lists a business on the business for sale website essentially puts out a Craigslist Ad. Axial by contrast is designed private by nature. Only the seller decides who gets to see information on their business. The seller gets to do that when they want and how they want. They have total control over that.

That’s a big design difference between just the way that the historical business for sale sites works and operates. The second reason is axial is free for business owners who are selling businesses. We charge a transaction fee or subscription fee. It’s your choice if you’re a buyer. Our model is different from the business for sale sites which typically charge the sellers listing fees. We don’t charge upfront listing fees. The third thing that we do, it’s unlike a just like a listing site, we’ve actually built intelligence and really smart matching technology into the way that axial works so that if you are selling your business, or you’re raising capital to grow your business, Axial, while you’re confidentially sort of summarizing all of those things inside of the Axial platform, Axial is returning to you a ranked list of relevant potential investors or relevant potential buyers for your business.

So if you run a software business, there’s no reason for anybody who buys manufacturing companies to be aware that your business is for sale. There’s no reason for you to waste your time reaching out to them, emailing them, having phone calls with them. Different kinds of buyers focus on buying different kinds of businesses and different sellers should only be spending their time with buyers that are relevant for them.

We’ve built this recommendation engine that helps the seller figure out, “Okay of all the 1000s of different buyers that are all over the world, who are the most relevant?” Most likely ones that will be interested in my business because of the industry it’s in because of the financial footprint that the business has because of the end markets that we sell into.

There’s all these sort of cool filtering tools and stuff like that, that really help a business owner or a business broker or investment banker who’s helping a business owner not waste their time talking to thousands and thousands of potential buyers but just talking with those that represent the most likely subset. It’s those three things.

It’s the smart matching. It’s the fact that it’s free to the sell side, the fact that it’s 100% confidential. You as the seller decide who knows that your business is for sale and you can control that however you please. That represents a really big difference from the way it used to be.

Josh:                      It appears to me maybe I’m wrong about this. If I’m using your service, you would not be using an investment banker per se.

Peter:                    Yeah, that’s a common assumption that people make, but it is incorrect. It’s interesting, right? Just because a platform like Axial exists doesn’t mean that you as a business owner can just sort of come to axial.com and we have this magic wand that just sells your business for you without any hard work, without any preparation, without any conversations. It’s an involved process, right?

The way that I tend to talk about that, Josh is when you sell your house, very often your real estate broker—most people use a real estate broker to sell their house. Those real estate brokers will go on and use Zillow, or Trulia or realtor.com. They’ll use a set of tools in order to maximize the chances of successfully selling your house for you. They don’t do it without tools. They do it with tools.

Same thing happens when you are borrowing businesses. The brokers, the investment bankers, the financial intermediaries, they need tools in order to figure out, “Okay, I’ve been retained to sell this business, how do I optimize for the following three things?” Certainty of close, speed of close and price in terms—they need a lot of data. They need a lot of information. They need to be able to quickly figure out who’s going to be interested in this business.

Our platform is useful for CEOs and business owners who want to do it themselves, but over 80% of the transaction activity on axial has a broker involved in it because at the end of the day, most business owners decide to hire someone to help them with a transaction like this. It’s time intensive. They’ve usually never done it before. So very often, it might make sense to have somebody in your corner helping you out.

Josh:                      My favorite way of seeing businesses, the size you guys are working with [inaudible 00:07:16] through what’s called structured auction. If I hire an investment banker to run an auction for me, can they figure out who should participate through your site?

Peter:                    Yes, that’s one of the ways that banker uses it. A good investment banker brings a number of skills to the table. One of them is putting together credible, verifiable information on your business. One of them is having a set of relationships that he or she has that they can tap into in order to introduce you to potentially good buyers for your business, but that [Rolodex 00:07:49] is never comprehensive. It’s never exhaustive.

There’s just no way to know everybody who might buy a $10 or $20 million business. It’s very hard unless you’re exclusively focused on just some teeny tiny niche. All you do is sell dental businesses in San Antonio, Texas. Most investment bankers have a broader remit than that. They use tools. They use data and Axial is one of the tools that they use. Sometimes they decide that they only want to share the deal with five or 10 buyers, sometimes they decide they want to share the deal in a broader auction.

I’m not sure what you mean by structured auction, but we see investment bankers use Axial to reach out to only a handful of buyers and do sort of like a really quiet whisper auction. We also see investment bankers share a deal with 100, 200 potential private equity buyers or corporate buyers.

A lot of it depends on what is the business owner want? What’s the business owner comfortable with? What’s the style that’s worked for that particular banker? There’s a bunch of different ways to get a business sold. Usually, the more people that you can have at the table, the better off you are.

Josh:                      Typically, the best investment bankers I know in the world, they’ll start off with a universe of say 5000 and they’ll let 100 people show interest get some information and they bring that down to four or five and they run the auction with four or five buyers. It’s often it’s actually between three and five buyers and essentially want to get three or five good buyers to the table and then run an auction after that.

Peter:                    Agree with that. The typical process right is you put together one or two page summary of the business that’s enough to sort of whet the appetite of the buyer or for the buyer to be able to say this is a past for me. I’m not interested in this, but it’s kind of a relatively easy way. It’s like a listing for a house. You see pictures. You see a summary. You see the acreage.

Typically after that, there’s a much bigger package of materials on the business, but you can’t access those materials until you’ve signed a nondisclosure agreement which is designed to sort of secure and make a confidential.

Really all of the information, all of the interactions from that point onward and so what we’ve done on Axial is embed that NDA into Axial, embed the one pager or the two pager in the Axial so buyers can look at the one pager and the two pager very quickly. They can say yes. They can say no. They can sign the NDA digitally.

It just accelerates the process for the seller a lot. The investment banker is doing far less paperwork and is doing far more relationship management and human interaction. We sort of removed a lot of the admin from figuring out who are those three to five that you want at the end of the day.

Josh:                      So I’m going to bet that you could be the bankers best friend. They should be bringing you all sorts of sellers.

Peter:                    We are definitely considered by many to sort of be the one of the sort of banker’s secret weapons. We’re not a particularly well known business. We don’t have a consumer facing sort of brand. We’ve built the business to date, largely by partnering with investment bankers and it’s worked. A lot of them like to work with us. There are some that say, “I’m only going to work with you on certain deals and I’m not going to work with you on other deals.”

For a variety of reasons they say that. In general, we are making it easier for them to assemble a highly qualified list of potential buyers for a business which makes them do their job more easily, allows them to serve their clients more effectively and deliver a good outcome to the business owner. There are bankers in the world, plenty of bankers in the world who think that we’re kind of like outsourcing their job or we’re getting rid of the need for investment bankers.

I understand it, obviously, in theory, but it really doesn’t make sense to me. I’ve bought and sold businesses myself. It’s a very involved process. There’s a lot of information that needs to be reviewed. There are a lot of conversations that need to be had. There are a lot of moments of crisis. There’s just a lot of interpersonal work that needs to be done. There’s a lot of storytelling that needs to be done. There’s a lot of work that goes into it that not Axial nor any other piece of software can even remotely accomplish.

Josh:                      I’m totally in agreement with that. My experience, I had a few servers and vending company which would have been fit into your world of businesses to be sold and why I sold it. I hired a banker for one reason so I wouldn’t have to talk to the seller myself. I did the book. I did the analysis. I found the buyer. I did all the work and the investment banker would normally do, but I still paid the banker his fee because I knew that if I was talking to the buyer, I would say something that will cost me a couple $100,000.

Peter:                    Yeah, there are all kinds of value like that. They’ve done it before. You can do more good cop bad cop negotiation if there’s two of you at the table. It’s easier to preserve the anonymity of your business for sale, if you have a third party, like a banker who’s representing you in a private confidential way and using a tool like Axial or not.

If you are out in the market talking with buyers and you’re the business owner then presumably they know that your business is for sale. whereas if you use a third party, you can create a little bit of obfuscation and anonymity. I have to say, one of the things that people don’t seem to realize because I’ve had this conversation a million times, it turns out the CEOs actually have a day job above and beyond just getting their business sold. If you’re trying to sell your company as you run your business, the odds are you’re just going to do a really lousy job of both because they’re both full time jobs.

One is long term being a CEO. The other is, it’s a sprint. It’s like a six month sprint to get something sold maybe 12 months. It’s really hard to do them both well at the same time. One of the things that I’ve seen happen when people do that is the business performance deteriorates during that same period in time when they’re actually out trying to sell the business. You approach a series of buyers. You’re doing the process yourself as the CEO.

Your time is very heavily being sort of siphoned off towards managing the dialogue, pulling information, interacting, negotiating, drafting documents. You’ve got no help, no leverage in the process. No banker, but maybe have a CFO that can be super helpful. Meanwhile, businesses, it’s just not as well managed.

The business is not as well managed. It’s not as tightly managed. You’re probably not meeting with your direct reports as frequently. You’re mentally in a different place. You’re more preoccupied. You’re distracted. What can happen is, your business, they can deteriorate over a three month period or over a six month period.

Then, you told the buyer, I do $10 million in sales and I do a million and a half in pretax profit. Six months later, you’re missing your numbers. A lot of that is just because you kind of had your eye on two balls. There’s a whole host of reasons why a CEO needs to think very carefully about whom they hire and whether they hire someone or whether they try and do it themselves.

Josh:                      There’s the old saw about lawyers representing themselves—the lawyer that represented himself as a fool. Well, the business owner represents themselves in a sale process that even the bigger fool. The reason very simply is, I always assume that buyers know what they’re doing. I always assume that sellers have no idea what they’re doing which is usually pretty true especially if you’re selling to private equity or a large corporation that has an M&A department.

They’ve bought dozens, if not hundreds of companies. You’ve only sold your company once. You have no idea what you’re in for unless you have somebody sitting by your side who does and can coach you through it. So if you’re listening to this and you’re thinking about selling your business and you think you’re going to sell it by yourself because you want to save that 4% 5% 3%, whatever the fee is that you’re selling, paying for your investment banker, you’re an absolute fool to try to do it by yourself.

By the way, I don’t sell businesses. I do advise people through the process, but we don’t actually do the M&A work. I’m just saying this from my own experience of working with other businesses and myself.

So Peter, I have a little pivot here, I have another question for you. If you’re selling your business, what is the most important thing you can do? Well a couple most important things you can do to have your business be attractive and saleable?

Peter:                    Well, let’s see. It really depends on sort of how much lead time you have. If you’re going to try and sell it in the next six to 12 months, you have a more limited list of things that you can do to make your business more valuable. I’ll go through a few, but the more time that you have, the more you can do. It’s like, if you’re going to buy a house and flip it, well, the more time you have to renovate the kitchen and update the bathrooms and stuff like that the more you can maybe sell it for.

It’s sort of the same thing with your business. If trying to sell your business in the next three to six months, it’s going to be hard for you to get an audit. It can be hard for you to have a more diverse customer base. It’s going to be hard for you to have developed maybe a set of processes that remove you from being mission critical as the CEO from every aspect of the business’s operation.

The more time you have sort of the more things you can do to sort of get your business to an ever higher and drier ground and in a position of strength and leverage to approach a market of buyers. That’s an important concept for people to have. The earlier you get started, the more you can do. If you’re thinking [inaudible 00:17:25] term, I would say nearest term being like in the next 12 months. I would say, minimum, minimum thing that you just have to be ready to do is you have to be able to furnish reliable financial statements on your business.

You cannot get through a transaction process without having some credible set of reliable financials that demonstrate that what you say is the revenue of your business, what you say is the profit of your business, what you say are the costs of your materials or the costs of your labour supply, or whatever the case may be, but those are true.

Now, if you got a long period of time, you can get annual audits. You don’t have to work with KPMG or Price Waterhouse, just getting a good audit from a good regional firm is going to be helpful. It doesn’t mean that the buyer is going to just take the audit at face value and say everything here is whistle clean, but it helps.

It confers a certain amount of trust into the information. It shows that you as a business owner take financial reporting seriously because you’re spending money and time on it. Second thing that you can do, if you don’t have time for that is you can consider doing what’s called a sell side quality of earnings.

So quality of earnings report is something that’s done very specifically prior to a transaction closing. What happens is a third party firm comes in and scrubs the financials to determine whether or not your financials and the quality of your cash flows are as you say. They are and to render a point of view on the nature and the quality of your business’s profits and cash flows.

Very often what happens with small businesses is the buyers who get pretty far along in the process will say, “Looks good. I’m trusting you that the financials that you say have been producing are in fact true.” If we decide to do this deal, I’m going to ask for 60 or 90 days where I can hire a quality of earnings firm to come in and verify and confirm a lot of what you have been representing. Most of the time, the seller has not done a quality of earnings report themselves.

One of the things that really, really changes that piece of the process is that the seller has actually gone out and hired someone to do a quality of earnings report so when the buyer says, “I want to do a quality variance report.” The seller can say, “I just did that. I actually did that in the last six months. Here’s the report.

Feel free to take a look at it.” Now again, the buyer isn’t necessarily going to take that and say, “Okay, great, I’ll take it all at face value.” It’s just a huge— [inaudible 00:20:08] process so tremendously because the trust in your financial, the earnings potential of the business is so fundamental to what the buyer is thinking about when they buy the business.

Josh:                      So Peter, where would you get one of those done?

Peter:                    There’s a whole industry of regional, local and national quality of earnings organizations that they can be a business line inside of a CPA firm, , like inside certain CPA firms of certain scale. They will execute a quality of earnings study is one of the products that they offer to either a business owner or to a buyer.

There are pure play organizations that are in the business of only doing quality of earnings reports. It’s not something that only Apple and Google can afford to do. It doesn’t cost 100 bucks. It costs 1000s of dollars, but the number of transactions that fall apart and break down because the seller cannot quickly verify or create trust around the quality of their financials. It’s just a huge stopping point.

I think, within the world of financial accuracy, you have to be investing prior to selling your business. I could go on for the rest of the day, but I think the other thing that really, really matters, if you’re thinking sooner rather than later about doing this, you have to have a credible plan for how you’re going to get multiple qualified buyers to the table at the same time.

Josh:                      That’s where a banker comes in.

Peter:                   Absolutely, one way or another, you have to have a plan where when you work backwards from the end, at the end of the process, you have at least two buyers competing to try and win your business and win the opportunity. That doesn’t mean that they will overpay.

That doesn’t mean that they’re going to value your company the way Facebook valued Instagram. It keeps them honest. It just it keeps them honest. It puts you in a position where you have an appropriate amount of leverage. It’s common sense.

Again, you have to have a plan for how you’re going to do that. Investment bankers are in the business of helping create a competitive dynamic. They use data. They use tools. They use platforms like Axial. One way or another, you’ve got to have a plan for how to do that, that either means you’re going to do it and you know how to do it and you understand the risks. Or you’ve got a banker or broker lined up who you think can do good work on your behalf.

Josh:                      Cool.

Peter:                    You have to have that.

Josh:                      Peter, unfortunately, we are out of time. Before we go, your information has been just really, really good. I want to have you back some time. I want to talk about that three to five year period before you sell your business because there’s a whole bunch of stuff that have to be put in there also.

By the way, one of the ways that you can set up another buyer at the table if you don’t have one is to start going down the road of doing an [inaudible 00:22:59]. I’ve done that a couple of times where we’ve made the [inaudible 00:23:02] the alternative fire. You get to the real buyer, we want to sell to get as price when we add any need to have it.

Peter:                    Good, good stalking horse at a minimum.

Josh:                      Yes. Peter, how do people find you?

Peter:                    Well, it looks like on the screen, you’ve got the email address or the web address axial.com. You can go there. You can sign up for free on Axial. Subscribe to a bunch of newsletters and eBooks on a lot of the topics that we signed up for today. If you’re thinking about actually transacting, there are members of the team that are available to have a confidential conversation with you, but it all kind of starts at axial.com. If for some reason you prefer to just reach out to me personally that’s fine, too.

You can reach me at my email address. It’s just my first name, peter@axial.net not axial.com, hopefully next year it’ll be axial.com. peter@axial.net if you want to reach out to me directly.

Josh:                      Great. If you’re listening to this podcast someplace, I hope you go to wherever you’re listening to the podcast and please, please, please give us an honest rating and review. If you don’t have a place you listen to podcasts, go to our website at http://sustainablebusiness.co/ and not .com.

The second thing is, we’ve been talking about what it takes to get your business sold. I’ve been focusing a lot on my call creating a sale ready company. Now, a sale ready company doesn’t mean you’re going to sell your company.

It means that somebody else wants to buy it in a sale ready. I’ve written an eBook on what it takes to get a sale ready company. There are eight steps along the way. It’s really easy to get. You just go to http://sustainablebusiness.co/saleready. That’s http://sustainablebusiness.co/saleready. This is Josh Patrick. We’re with Peter Lehrman. You’re at Cracking the Cash Flow Code. Thanks a lot for stopping by. I hope to see you back here really soon.

Narrator:             You’ve been listening to Cracking the Cash Flow Code where we ask the question, “What would it take for your business to still be around 100 years from now?”

If you’ve liked what you’ve heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102, or visit us on our website at www.sustainablebusiness.co, or you can send Josh an email at jpatrick@stage2solution.com.

Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.

Topics: sustainable business podcast, Sustainable Business, selling your business, peter lehrman, M&A, strategic exits, exit, mergers and acquisitions, capital raises, axial

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