You Can Sell Your Business Without Selling Your Soul
For Sunny Vanderbeck, cofounder and managing partner of Satori Capital, selling a business is about a lot more than dollar signs. And he’s found that the vast majority of CEOs agree with him. When you decide to sell a business or take on a capital partner, price matters—but so do lots of other factors. Does the deal create real value? How does it affect your customers, suppliers, employees, and even your family?
Vanderbeck’s latest book, Selling without Selling Out, is a comprehensive guide to making a sale or taking on an investor without compromising your core values. In this interview, Vanderbeck talks about some of his top advice for leaders considering a sale, as well as what running an investment firm has taught him about the CEO role.
Texas CEO Magazine: Let’s start by talking about Texas. You’re at the point where you could operate anywhere you want, but you’re still in the Dallas area. Why is that?
Vanderbeck: There’s a couple of things. I grew up in Fort Worth, but I lived in the Seattle area when I was in the military, and I realized it wasn’t for me. I’m solar powered. I knew I was definitely headed South again. Dallas is also one of the best gateways to everywhere in the world. I can daytrip almost everywhere in the continental United States. I’ve done the 17-hour direct flight to Australia.
The other big thing is our extraordinary business environment in Texas. I think we’re a bit spoiled, in that if you don’t realize what it’s like to do business elsewhere, you may not realize how good you have it, everything from the community to the legal infrastructure to the hiring pool. I had a friend with a business who left for another state—not to be named to protect the guilty—and he said that the workforce available to him there was somewhat uninterested in working. The market wage for working was so close to the market wage for not working that he wasn’t able to attract people. He later moved his business to a different state and had something like a fivefold revenue increase in the next 10 years because the workforce and regulatory infrastructure was so much better.
I can’t imagine a better place in the United States to do business than Texas, and it’s an extraordinary place to live too. Heads—I win in terms of business. Tails—I still win because I like to live here too.
Texas CEO Magazine: You’ve made the transition that a lot of CEOs hope to make or do make, from selling a business to looking for businesses to invest in. How has that been?
Vanderbeck: I love to learn, so it’s been a lot of fun. Many of the things I learned from being a CEO and building a business have been extraordinarily useful in my current role running an investment firm. Our industry has a lot of mystique about it, but it has the same opportunities and challenges that every other industry has. We have customers, products, and lots of stakeholders to satisfy. Skills like culture-building translate very well. We just won another Best Place to Work award, and we put a lot of energy into that. It changes who we have available to us in recruiting.
A lot of CEOs might think this job is sitting in an office on a big pile of capital, deciding who gets it and who doesn’t. That couldn’t be further from the truth. This is a hard job with lots of late nights and weekends, just like a normal operating business.
I talk about the intensity of a deal in the book, and those deals are our whole business. We go through that intensity two to five times a year, either on an entry or an exit. On top of that, we’ve got 12 portfolio companies that we’d like to actually help. We’re not good passive investors. We won’t make an investment where we don’t think we can make a difference; we’ve got the operating mentality. We enjoy thinking about A/B testing on marketing, or improving salesforce compensation, or how to reach new customers.
So, running an investment firm is a harder job than I thought it was going to be, but it’s more rewarding as well.
Texas CEO Magazine: When you’re CEO and you’re working a deal, it’s everything. Does it feel different to be on the other side, as a potential investor or acquirer?
Vanderbeck: I’ve learned two useful things. One, now that I’ve been on the other side of the table, I know what I sounded like when I was in board meetings. I would be a much better CEO than I was before. You have to be able to take the perspective of the investor; it’s a little easier to do that as a hired gun CEO than as founder CEO. Today, I have a little more empathy for investors and what the world looked like through their eyes.
The other thing I’ve learned is how to tolerate deals that may not work out. When you’re leading a company as CEO, you expect most of your objectives to pan out—there will be some problems and misses as you go, but that’s okay. In the investment business, a vast majority of the things we work on will never turn into a closed investment. We can look at a thousand opportunities a year and make three investments. That took some getting used to. It’s a different playbook to run—it’s a singles and doubles game versus lots and lots of at-bat and nobody throws a pitch. I didn’t expect to go to lots of meetings that at the end of the day don’t create value for anybody. You ask the question “Should we work on this or not? Is this one of the three out of a thousand?”
Texas CEO Magazine: In your book, you talk about how CEOs should deal with their investment bankers during a sale. What’s your best advice on that?
Vanderbeck: First and foremost, if the CEO isn’t clear about what they want out of a sale, they’ll get what the bankers and attorneys want. Before you decide to bring on banker to help you with an investment or sale, you have to figure out what you care about. Just like any other initiative in your company, you have to stop and write down what success looks like. You have to do that not just for shareholders but for your employees and customers and suppliers—and your family too.
In evaluating a potential sale, a lot of CEOs take their own needs and put them last on the list. It’s funny, because that’s not the typical CEO reputation, but it’s often the reality. This is the time to make sure that you understand who you care about and what you want for them, because the investment bankers’ compensation is based on how much the company is sold for. Their guidance is going to drift toward the things that pay them the most. It’s not their job to watch out for your employees and your customers and your family.
If you have two potential investors or acquirers and one of them is going to pay more but the other one’s a better fit, the vast majority of investment bankers will tell you to take the one that pays more. Otherwise, it’s literally money out of their pocket. That’s a tough spot to be in, where it costs them money to tell you about the best fit. It’s not that investment bankers are bad. The point is, they are salespeople and get paid on revenue and nothing else.
Texas CEO Magazine: They work for the deal, not for you, right?
Vanderbeck: That’s right. Their customer is a deal. A moment will come where you’re surrounded by a bunch of people, either in person or on the phone, people in neckties who do this day in and day out, with terms flying around, and they’re all trying to push you in one direction. If you voice an instinct about a buyer and that’s all you have to back you up, it’s going to be harder to stand your ground.
I started writing down the five constituencies I care about and what I wanted for each one of them, so I could point back to that and remind people. It’s much, much easier to get their head in the right place if you write it down. Otherwise, the bankers will say, “Yeah, all the entrepreneurs say that until I put money in front of them.” I found that to not be true, but that’s how they’re going to look at the world if you don’t write this stuff down and communicate in advance.
Texas CEO Magazine: Do you have that conversation with companies you’re considering investing in—what is success here?
Vanderbeck: We do. Clarity about what success looks like matters a lot for us, regardless of whether we bought 20 percent or 80 percent of the company. We want a real partnership.
We’re not a good fit if success for the owner looks like stepping back from the business. If you’re tired and hoping this sale is the end of the line, you’ve got to be honest with yourself about that. Once the wire clears, your new partner is going to have a bunch of energy about this brand-new thing; you have to ask if you’re really ready to dig in and build the company from, say, $100 million to $200 million. If not, a strategic acquirer is probably best, or maybe a private equity firm that has a CEO in waiting. So, we do spend a good bit of time understanding the “why” of a transaction with our potential investees.
Texas CEO Magazine: What is the best fit for Satori Capital? What do you look for in a deal?
Vanderbeck: There are a few different types of fit we look for. Misalignment of shareholders can be a good place for us to step in. On a recent investment we made, there were six owners of the company—the CEO and five external owners. Those five owners’ priority was their distribution and the reliability of cash flow, but the CEO wanted to grow the company. In that case, we were able to replace the owners who were not aligned with the CEO’s vision with people who were not only aligned but could help accelerate the vision. That CEO has gone from “Hey, you’re slowing me down” to “Wow, can help me go faster.”
Sometimes that misalignment plays out in a smaller form. Maybe Cousin Willy just wants his check but you’re trying to grow the business. Now Thanksgiving’s hard because Cousin Willie is mad he didn’t get his check because you made an acquisition. We can say, “Let us take Cousin Willie’s spot and we’ll show up and help instead.” I make no judgment on Cousin Willie’s situation. He just might not be the right shareholder.
Another common fit for us is when a business hits a size where the decisions feel too big for the CEO. If you’re making $10 million a year profit, the CEO is probably making $1 million to $5 million decisions regularly. When those were half-a-million-dollar decisions, they were easy, but now the right strategic choice might be to open a plant, but that’s two years of earnings—and you don’t want to mess up a good thing. Early in my career, someone gave me good advice, which was that the things that make you successful are the things you’re most likely to stop doing when you have success. In these situations, that plays out with the willingness to take risks and try new things. In those situations, we can say, “Let us buy 50 or 60 percent of the company so you can stop worrying about those decisions from a financial perspective.” They’re thinking more about risk than about reward, and we can help unlock that reward.
Being CEO is kind of a lonely job, so sometimes people are looking for a partner. One CEO said to me at a dinner, “Look, I just wish I had somebody to sit with me in the office to whiteboard and think out loud about where we’re going and how to get there. I don’t have anybody in my organization who can have that conversation.” It seems like a little thing until you’ve been on that island yourself. In those cases, we can be a really good fit.
Texas CEO Magazine: Those of us who’ve been around a long time have certainly seen an escalation in pricing of businesses. Assets are expensive, money’s cheap. Are you still happy to buy businesses at these inflated prices?
Vanderbeck: If we thought a price was inflated, we wouldn’t do it. We’ve got a responsibility to our investors to get great outcomes. There are a few things going on with pricing. We have a lot of capital coming in from overseas, because this is the best place in the world to do business. There’s also a big search for yield, and if it’s hard to make money anywhere else, private companies are an extraordinary way to get a return. And as you get later and later in the cycle, people are more likely to price everything to perfection.
On top of that, you have availability of debt that’s driving prices up. Capital is everywhere and cheap. If you pay nine times EBITDA for a company, a lot of times you’re going to see four and a half or five times EBITDA of debt on the business. That means you’ve effectively handcuffed the business because there’s no room for anything to go wrong. You have to make everything work every quarter because you can’t miss a payment—they’re priced to perfection. A lot of CEOs look at that situation and say, “No way.” If you put too much leverage on a business, you’re risking everything.
So, in a private equity transaction, the cost associated with a high price is usually a high amount of leverage. In a strategic transaction, the costs associated with a high price is often high disruption in the business. When I’m talking to an acquirer who wants to buy a business, I always ask my favorite M&A question: “What are you going to do with it?” It’s a silly little open-ended question, but they’ll usually tell you. Recently, I asked that question and the answer was, “Well, we’ll probably close the plant, since we think there’s too much capacity in the industry. We have our own management team, so we’ll probably get rid of that too.” The answer was essentially “We’re going to shut it down.” You have to be aware that that may be the acquirer’s plan.
The question I started ask people on the seller side is “If your acquirer says they’re going to fire everybody the day after close, how much more do they have to pay?” That question puts a bright light on what you value. Over and over again I’ve heard CEOs say they’d tell the acquirer to simply go away in that scenario. They don’t even want to engage in the conversation—they’d never make a sale with that condition. Or the number they come up with is one that’s basically three years of severance for the entire workforce. Collectively as CEOs, I’ve found that we do care greatly about things other than money in a transaction. If the reader is considering a sale or investment, I encourage them to ask themselves that question. Some investors will pay high prices, but their plan is to fire everybody. You’d better find out.
Texas CEO Magazine: You’re a proponent of “conscious capitalism,” and your definition is one of the best: “How you would run a company if you had no time horizon for an exit?” Is that a fair way to put it?
Vanderbeck: Right. If you’re the largest employer in a small town and your name is on the door and you can never sell the business—how do you make decisions? There’s an even simpler version: If your plan was to run the business forever, what decisions would you make? Thinking on longer time horizons tends to make you think differently about your tactics, from engaging with shareholders, employees, and other stakeholders. I would argue that that time horizon is a necessary condition for conscious capitalism.
Rather than thinking of profit as a dirty word, you think about running things in a way that creates value for everybody. I’m not shy about being a capitalist—capitalism is extraordinary. I don’t see conscious capitalism as a kinder, gentler, softer-around-the-edges capitalism. It’s simply asking the question “What’s the best way to run a company that creates the most value for everyone?”
Vanderbeck offers a free workbook to help CEOs determine what is important to them in a transaction, available at sunnyvanderbeck.com/workbooks.
Satori Capital manages more than $1 billion of committed capital with more than $400 million dedicated to private equity. They are actively seeking majority and minority investments in rapidly growing businesses with $5 million to $25 million of EBITDA.