E285: How to Sell a Business in Puerto Rico (Without Losing Your Mind or Millions)

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:06):
Hello and welcome to the How to ACCEP Podcasts, where
we introduce you to a world of small to medium
business acquisitions and mergers. We interview business owners, industry leaders, authors,
mentors and other influencers with the sole intent to share
with you what it looks like to buy or sell
a business.

Speaker 2 (00:24):
Let's get rolling.

Speaker 1 (00:31):
And now a moment for our sponsors, I want to
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(00:55):
multi platform mobile magazine speaks to acquisition entrepreneurs wherever they
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acquisition Afficionado dot com today. Hello and welcome to the
Hot Exit podcast Today. I'm here with Francisco Yuriate and
he is the managing partner over at Conley Capitals. I

(01:15):
think I got your name right. If not, you can
announce your name for everybody so that they hear what
you're supposed to what the name is supposed to sound like,
and we can go from there perfect.

Speaker 2 (01:24):
All right, So we always start off with the origin story.

Speaker 1 (01:27):
We always trying to get to know our guests, kind
of how did you end up in this space of
buying and selling companies?

Speaker 2 (01:34):
And where are you located?

Speaker 1 (01:35):
Because you're you're in a unique space that most of
my most of my guests, So tell us where you're
at and kind of how you got in this.

Speaker 3 (01:42):
So I'm I'm may start of Puerto Rico and most
of the work we released Puerto Rico, though we we
have sat fitting the continental US, mostly the Northeast region,
some southeastern sections and some may not being americ John,
but I'll pertually the eighty percent of our work Puerto
Rico and a big chunk of that is self side.

(02:03):
So we ended up setting too continental US based companies. Then, interestingly,
I got I got into this world by happenstance. I
would say I bought my initial business with my wives
in ninety ninety eight, if memory serves me right, there
was a cheese factory. We grew that business mainly by

(02:25):
following my wife's advice. We grew it and then I
saw that in two thousand and two, when I saw
that the money didn't stay long in the account, that
I invested into a the abbuisition of supermarket stores that
were a spin off of a long art transaction here
Puerto Rigo and I started a new supermarket here. I

(02:47):
ran down for about four five years and then I
sold my participation when I got the idea was to
look for another business to buy and run. But all
of a sudden, friends started calling me and say, I
mean you bottle. One sold it, but the other one
sold your share. You know how to do this? I
you know, somebody's brought me they want to buy my business.

(03:10):
I don't do it. Would you help? And that was
in two thousand and six, and that has turned into
you know, a firm or about ten of us in
the firm. We've made over eight hundred million dollars in
San Sacho's about sixty transactions in total in the county.

(03:32):
So it's it's been been an interesting ride. We like
to tell our customers because we operate most eye than
my partner. We've operated businesses before. We have a better
understanding of what sellers and buyers are actually.

Speaker 1 (03:48):
You also have a better understanding of the emotional things
you go through through a cell. Right, sales are not
simple process as they can be, but usually there's emotional
ties of the business. There's the buyers asking for all
kinds of stuff you don't normally have to produce for
anybody else on the planet. Right, Uh, you're not you know,
financial reports and that stats and numbers and things that

(04:11):
you may or may not have been tracking at all,
and now they want all this stuff from you. So
it's actually a little bit stressful to sell. And then
you also have to be willing to say what you're
going to do next. A lot of times people they
don't know what they're going to do next, and it
clouds the whole thought process of while they're while they're
trying to do the sell. So I, having been through

(04:31):
two of them, you have a very unique insight into
what your customers are going through and what they're going
to face. And when they've come up to it, you go, oh, yeah,
I was there too, and it's a lot easier for
you to walk them through what that, what that is?

Speaker 3 (04:44):
So so I listen, we we idea deal with whatever
market eats you. What idea if you want to get
global dential seller with enough time to help them prevent.
And there's a bunch of issues that need to have
when the first one, as you said, is what will
I do next? Because if if the business is your

(05:06):
life and your persona and you don't you don't have
a plan be clear, you're gonna end up sabotaging the
transaction and it's not gonna close. It's it just it
works that way. So they have to they have to
have a plan, be clear. But then then you get
into you know, things like you're gonna sell the assets

(05:26):
or saw and depending on on those tools tax core sequences,
but there's diligence consequences to and then you know, so
sometimes private businesses either either have a touch basis counting
maybe maybe the only do their tacks fighting. They don't
necessarily go through a crew base that based financial statements.

(05:51):
So dependingum, besides of the business, the buyer most likely
in our case is a sophisticated buyer. They want to
see clear numbers and they're going to put you solve
the quality of earnings process. And if you'reenough repaired and
you you know, present that correct information and it all
ties up, it's going to become a nightmare and we

(06:14):
just don't want to do that. We want to make
sure we get repair and we help them manage the
process so that the day the business owner in most
cases is the number one person in the organization, so
I don't want them losing focus on their business and
not running the business. Because this will surprise you. Some

(06:36):
deals don't close right, and you don't want to be
sitting six nine months after a process without the build
one and your business is tanking down twenty You just
don't want to do that. So we we end up
being the trust trusted advisor and kind of project manager
for our clients and run the process from A to

(06:59):
Z to closing complete.

Speaker 1 (07:01):
Yeah, it opens up for all this retrading stuff too.
So if you if you hear like an loi and
the loi comes in at you know, a certain price
and you've taken your foot off the gas and it
took six months to get the deal done. At the end,
the buyer's going to look one more time at your
current financials and go, you've declined by twenty percent. We
need to retrade this you know deal, meaning they're going
to renegotiate a lower price based off your current revenue.

Speaker 3 (07:23):
Numbers.

Speaker 1 (07:23):
So I always tell sellers like a look, whatever you do,
never take your foot off the gas. You want to
show strong, consistent growth throughout this entire process, and that's
how you're going to get the best you know, bang
for the dollar. That's how you can get the best
value at a company is even through you know. So
if that means you need to bring in an outside
help and advisors and other people to do these tasks

(07:44):
instead of doing them all yourself, you're better off on
the other end because for every dollar you decline, you
lose them multiple of that dollar, right, so you know
you're a dollar or less this you know in revenue
this quarter. You know, if you're trading at a five
x multiple, you just lost five dollars in this value
of your property. So people don't get that. What other
things you look for at a pre sale stage? What

(08:06):
other I'm going to walk through this process from start
to finish of a sell right and work with you
and pre sale strong financial strong books. We're talking about
making sure maybe even creating books if they've only just
done their taxes right, so that there's something that can
pass a quality of vernings report. I'd hate to see

(08:26):
somebody have to start and go, I need a que
quality of your return, a vernings report, and you don't
have any financials recorded anywhere because.

Speaker 2 (08:33):
It's just never going to work, right, So what are
the things you do for.

Speaker 3 (08:38):
One of the first things we try to ascertain goes to,
you know, do I have a Willie center or not?
And that has a lot to do with soft issues
and not hard ones, right, So it's it's what's the mentality?
Was the expectation? Is there a plan B. So will
often go through an internal valuation process, not to get

(08:58):
a specific number, because that's just waste of time my opinion,
but rather to get a range or where we think
the business country and then compare that to what the
seller is expecting and around the edges. It's hard to define,
but you quickly identify an individual that has an expectation

(09:20):
that is so far out basically means I don't want
to sell and that so that's so the first thing
we do. We we then try to understand again, depending
on the market, the size of the company, and the
peculiar characteristics of the company, we'll try to figure out
if this is saying DOS or an acid deal. Because

(09:42):
most of the work we do is in work on ego.
We find that we need to spend time understanding that
because the typical bayer from the continent to US would
want to buy assets. That makes sense because there are
certainly rules in the IRS and most of the states

(10:05):
just make it easier for them to make an asset transaction.
But there's again peculiar loss in Puerto Rico, for example,
labor laws where whether you make an answer or a
stock seal, you're going to inherit all of the employees
with their length of service and a bunch of other requirements.
So there's no Usually with an acid transaction, you're gonna

(10:26):
cut cause doesn't work unfortunately in Puerto Rico. So sometimes
we need to just make sure that the buyer identifies
a local council that can get them up to speak
quickly on the rules so that we can understand each other.
So defining the structure that we're going to pursue and
the tax consequences above. I find that to be very

(10:48):
helpful because when we have the valuation conversation, sometimes I
get folks that get stalk in the headline, I want
to sell a ten million bucks, because so that's going
to make me look better than if they don't necessarily
pay attention to the structure what actually gets to their

(11:09):
bank account after taxes. So I want to make sure
they understand after taxes, what are we talking about, because
that might allow us to be flexible in the structure
we pursue. While we get the amount of money in
the bank and not necessarily the head you know, we'll
go through that. We'll look at numbers, make sure they're

(11:32):
properly accounted for that you don't have funny things like
want learn revenues being booked a particular period and add
you know, earned as time goes back. We will make
sure that any expenses that are not necessarily key for
the business operation are normalized and identified so we can

(11:54):
present the numbers in a normalized way. So sometimes there's
value to be caps sure there.

Speaker 2 (12:00):
Right.

Speaker 3 (12:01):
The working capital profile is another area we've found in
time that people tend to not necessarily bail a lot
of attention to it, and there's value there, at least
in our experience. When when we sell a business, what
we're selling is the fixed assets. We're selling a business
without deb right, we're selling a fixed assets and the

(12:22):
equity of the business and the ability of those fixed
assets to generate free cass flow. What happens in current
assets and current liabilities could depend on how a particular
business owner chooses to run his or our business. So
if we do have the time, we go through any
way where they might be behaving in an indeficial way.

(12:45):
Now they might be they might not like debt, they
might not have a credit line, they might feel comfortable
having a lot of money in the bank, and then
the receive levels are typically I don't know, let's say
seventy five days old coverage when they're inust is closer
to forty five. But then they don't want to owe
people money, so their payables are paid at thirty is

(13:07):
on average, and that creates a work working capital profile
that works against you in many instances inventory are you
rotating inventory in an efficient matter? Or are you just
buying because you have the cast, You buy whatever you
think you need and it doesn't really matter and you
rotate the inventory or notes. So we pay a lot
of attention to working capital because there's you know, there's

(13:29):
value to be taken out of a transaction when we
understand that, and we can make it efficient and improve
it right. We put all that information together in what
probably is again typical for you, but we put together
a teaser and the teaser is going to have very
top line general financial information and a brief description of
the company and the industry and the geography it operates on.

(13:53):
That's what we use to get the interest of pre
identified strategic or financial buyers. We search pherto ECO, we
search the continental US, we search Latin America, and we
send that out and the folks that are interested in
signed an MBA then will be confidential Information memory and

(14:14):
which is a more expanded piece of document with confidential
information that in a way it tells a story, and
it tells a story that has to be true, but
it has to highlight what is valuable of the business. Right,
do we have customer diversification? Are we growing consistently through dying?

(14:39):
Do we have a long tenure on our customers? What's
a gurnreate? Are we managing our ross martin so so
that we every time we get an increase in cost,
we can pass on the price increased to our customers.
So those kinds of things are the ones allow a

(14:59):
potential by to put their best foot forward, to put
you know, their best value to the business forward. And
I you know, I say, we create a story because
you have to tell a story, and you have to
make sure that people get what you're trying to tell.
But it has it has to be the right story
because that you that's that negotiation is going to get

(15:23):
us a good NI with a good purchase price. But
from from the time we select an l I to closing,
it's going to be trust what gets us to close.
So if we if we put out a rosy story
that is nothing like the truth, we're wasting time and
we are fooling ourselves. We're going to lose trust. The

(15:45):
buyer is going to say, these folks are I mean,
these are not serious folks. We're not going to spend time.
So that's sort of the things we prepare before we
even start the process.

Speaker 1 (15:56):
Yeah, trust and rapport with the seller, and the is
so critical to this entire process that there's anything that
nicks away from it. In my mind, you're always either
building or taken away from trust. Anything that takes away
from it could kill these deals. So not having your
numbers right or overinflating numbers, all that type of stuff
is really just a fast way to put an into

(16:21):
something that could be a good thing.

Speaker 3 (16:24):
Right three, Listen. One of the things we do, and
I forgot to mention this is we put together the
data room for delions. We nowadays I like to hold
on VIDs to management and premisisms until we firm I
about to be accepted or accepted. But having the delience complete,

(16:48):
to me, it's one of the best ways to build
trust because when we start, and because we've done this
so many times, well you know, we can anticipate ninety
percent of what people are going to ask in delions,
so we have a ready the potential buyer starts to
ask for information and we can comply and reply in
a speedy manner. That increases trust. That increases trust. And

(17:12):
if we said our margins are thirty percent, and when
they go and look at our detailed financials and diligence,
that number low and behold it is thirty percent. You
keep on building trust and that helps again get to
closing and obviously deal with any issue that could come up.
And the delien is there's always going to be issues,

(17:33):
but if you have enough trust developed, you can certainly
correct whatever issue you find in a more productive manner.

Speaker 2 (17:42):
Yeah, I don't know.

Speaker 1 (17:42):
How many times when you're starting down the process and
I asked for something, they okay, let me see what
we can do to get that for you.

Speaker 2 (17:48):
And it goes.

Speaker 1 (17:48):
Days go by, and you're thinking they're out there making
this stuff up because this is something.

Speaker 2 (17:52):
Easier you have or don't have.

Speaker 1 (17:54):
Right, you have your you know what your expenses are,
and you have them, you have your expense reports, and
you know you know what company you know supplies costs
and stuff, or you don't have it, and you're going
back and scraping through all the receipts and making stuff up,
you know, the fill in the gaps because you won't
have it all. Right, So that's the fastest way I
think to degrade trust. And then due diligence processes go yeah,

(18:15):
let me get that for you. And then it takes
three or four days to do it because in this
day and time, if it's there, it's in you know,
some form but you know, some form of accounting software,
quick books otherwise, and it's just going in, clicking a
few buttons and generating report. Right, it's minutes, not days
or hours or weeks. So we had one company that
like it took them three weeks for everything we asked
them to do.

Speaker 3 (18:36):
So yeah, but I mean there's Lisa unfortunately, and can
I still I still run across business, especially in the
lower end of the of the market, and let's say
two three million dollars in revenues and below, they do
not keep accounting books. They just send a large box

(18:57):
to their account tan and at the end of the year.
So the do axes they have knowing, I mean, these
guys their expertise. With their expertise, they know that they're
making money, but they cannot prove it. They just think
they do. And at the end of the day that
to lead, that becomes an unsellable business. So I've always

(19:18):
argued that if you, I mean, you have a choice,
right you can start a business and run it since
they want us if you were gonna sell it the
day that you decide to sell it. If you do,
then you're ready. There's there's not a whole lot you
have to lose. But if you don't necessarily think of
what you need to sell a business, it'll get to
a point where you probably need one, two, three years

(19:41):
to get ready.

Speaker 1 (19:43):
Right. I laughed when you said, you know you take
the financials to the you know tax guy in a
box that was my father to the tea. It was
a brown paper kitchen bag, like a ground paper shopping bag,
and you put all the receipts and there. Now you
put them in order like date order right, and sometimes
you put paper clips wrong jobs like, so all this
went to this job site.

Speaker 2 (20:03):
So he that was about as organized as he got.

Speaker 1 (20:05):
So the receipts and all the slips and stuff where
they'd have a pay per click. But everything in that
paper clip was for a particular you know, they all
match the same address and usually around the same daytime.
And he would take that and he's like either you know,
as I go though, he's like, oh, take this to
our tax guy over on eighty first Street.

Speaker 2 (20:20):
So I take it. There's these two old this.

Speaker 1 (20:22):
Old man and his friend that helped him do the paperwork,
and they worked out at this one guy's house and
I would drop it off when I was about sixteen.
I probably told this earlier on the podcast more than once.
But when I was about sixteen, my father had handed
that business over to me, and it was towards taxis
and then one told him say I'll i'll be dropping
this off, but I'm running the business now, and he goes,
could you breeze weave me in the brown bag? Paper
bag at least quarterly then, so it's not so much

(20:45):
to go. You guys are getting big, you know, like
we were doing quite a few jobs, like we could
you just drop it off once a quarter it's that way.
I'm pretty much prepared by the end of the year.
And I was like, what should I be doing? And
he's like, no, this is good for now. He didn't
tell me anything because I didn't know anything about QuickBooks
or accounting or anything until you know, I got out
when the military ended up in college and I was like,
wait a second, there's a different way to do this.
So yeah, that was us for for sure and our

(21:09):
I'm sorry.

Speaker 3 (21:10):
I was going to say to me, is unthinkable that
a doctor, if I'm at the er or at the hospital,
right a doctor comes to see me, first thing they
do is pick up the chart and see, you know,
what are these guy's bible? What what has happened in
the past, what's why is he here? I just I
find it unthink about that somebody can run a business

(21:31):
without financial statements. I mean, I know people do. I can't.
I need financials to run a business. Listen, I learned
accounting the old way, just starting to read and and
uh and I'm an engineer by training, but I ended up,
you know, in business and finance, and I had to
learn accounting. So I think I'm vegerous enough to face

(21:54):
any CPA and have a business conversation. But I never
I mean, I'm not a CBA, nor have had a
lot of me GO training on my I do like
what you said, I do understand a business by looking
at the numbers.

Speaker 1 (22:07):
Is there anything else that needs to be in line
before a company takes themselves to the market and puts
it up for sale.

Speaker 3 (22:13):
I mean, I would say if you're if you're targeting
a stock sale, then then you need to understand that
because because the person that's gonna buy it's going to
actually buy the legal entity since it was initially created
way back. Whenever you need to, you need to pay
attention to corporate records. You need to pay attention to
your tax fighting behaviors of the past, your labor practices,

(22:36):
and your environmental practices. And I'm probably forgetting one or
two because those those are going to end up in
the rep and warr and section of your stock purchase agreement,
and there's gonna be an indemnity attached to it, which
at the end of the day, the way I explain
it to my clients is that is a hand inside
your pocket that is waiting for you to screw to

(23:01):
take money out of it. So those are and for
some reason I think we do more stock sales and
asset sales again. I mean it might have to do
with the ESO permits, you know, just just changing permits
instead of getting new permits, and and some of the
there's exclusive distribution rights laws in Puerto Rico, so if

(23:23):
you're buying a distribution company, you don't want to give
the principle a chance to you know, just cut your
loose from that. So even though those contracts have changing
control language and all that, we usually go that that
paths of having a stock sales so that we can
better allotiate and transfer those or the changing control approvals

(23:44):
for those those types of the grievance.

Speaker 1 (23:47):
I mean, your buyers don't want a lot more legal
due diligent stuff to make sure he's not buying any
extra liabilities.

Speaker 2 (23:53):
Right and here in.

Speaker 1 (23:55):
The United States, we need things like are you doing
your corporate minutes on a quarterly basis?

Speaker 2 (23:59):
Like just those two are you.

Speaker 1 (24:01):
Documenting you know that you have a corporate resolution to
change banks when you change your bank statements and all
the little things you got to go back and dot
your eyes and cross your t's, because thats all that
has to be there, right, And the reason we do
a lot of assets series, it's just a clean cut.
I don't have to worry about you a lot. I
have less worry now that you don't. Anybody's listening to this.
You still need to worry a little bit about their

(24:22):
background background. There are some things that will bleed across
no matter what, right, but you worry less about lawsuits
from previous employees, lawsuits from previous job sites and stuff
like that, you know, or previous contracts in a asset
cell that you do inside of a stock cell.

Speaker 3 (24:41):
So but listen, we don't have I mean, for the
Continental US, at least at the federal level, you have
Section three thirty eight that, as you know, allows the
buyer to fire us an asset sale and the seller
to tax you know, pay taxes as it were a
stomp sell. So it's both the best of both worlds, right, I,

(25:01):
as a seller get the lesser tax you as a buyer,
gets a step up in bases and and so that
that doesn't that doesn't exist in Puerto Rico. So if
if your corporate low here models Delaware, so it's pretty
much like Delaware. But if and and for the most part,
businesses nowadays are operating under LLC BUS through structures, but

(25:22):
there's still some legacy closed corporations, and a close corporation
selling assets you get double taxed and it's really painful
the amount of leakage from that purchased the headline price
to what you get. I mean, it's it's big. So
again those other kinds of things that we want to

(25:43):
know first, and you know, find out on closing day,
I need to pay forty five percent taxes.

Speaker 1 (25:51):
I don't like this, right, So as a seller you're
buying a coming in in Puerto Rico, you also need
as a as a buyer, you're going to want more
doo delays inside of the legal aspects and stuff. As
a seller, it's best to have an answer to every
one of the questions that sellers that the buyer's gonna
come up with. So if I'm doing my legal due
diligence and I see a potential or a past lawsuit,

(26:12):
you should already have a pre can define answer in
your deal, in your in your media kit, in your
you know, your deal, your deal room. So you know, yes,
this happened on this day, at this time.

Speaker 2 (26:23):
Here's the resolution of it. And here here, here's here's
why it's.

Speaker 1 (26:26):
Already complete and there shouldn't be no feedback or you know,
no other issues of it.

Speaker 3 (26:31):
And I have you know, let's just say I have
three pending lawsuits and here's my lawyers opinion on the
you know, the prospects of each claim, and what do
they think might be the range of a potential claim
if if they think that there is a potential to
lose it, and then make sure that my insurance is
you know, has been properly notified and they're either defending

(26:52):
me or they will cover me. So yeah, it's it's
basically understanding what the other side will expect a need
and prepare for it.

Speaker 2 (27:01):
You mentioned repord warranties. You guys do repor warranties insurance
down there?

Speaker 3 (27:07):
You know, that's an interesting question. I was going to say,
I done it only once, and it was a large transaction.
This was about it was about a forty five million
dollar sale price transaction. I'm not sure how down can
you go on price so it becomes feasible to cost.

(27:28):
But it's a great tool. It's a great tool in.

Speaker 1 (27:31):
The United States, about two or three years ago, there's
a couple of companies that came out and now that
you offer because used to it, it's like ten million
dollars twenty million dollar deals and above. It's the only
thing they offered. The repord warranty insurance companies wouldn't even
look anything less.

Speaker 2 (27:44):
Now there's two out there.

Speaker 1 (27:46):
I believe I've interviewed one of the guys and they'll
do them down into the one and two million dollar
transaction deals.

Speaker 3 (27:53):
I mean, that's that's great. Again, it's it just it
It is certain people over uncertainty and right and if
you you know, if you're an owner that have been
on top of all of the details in your company
and you feel very certain that nothing will come out
to buy, then you can take the risk. If you're
not sure, just because businesses are imperfect, you know, and

(28:16):
there's just no way to guarantee that nothing will come on.
You buy insurance, you negotiate splitting that price in half.
You know, there's just no hassle, no lawsuits, no identifications,
no s cross I mean, yeah, I'll need to find out.
I mean, as you know, insurance is regulated by state.

(28:39):
I'll look them up and see if for some reason
there are already accepted or locally here. But I mean
it's crazy. If it's awing level, I would recommend it
with my eyes closed.

Speaker 1 (28:50):
Now let's go, let's go into the next phase. So
we've done all our work. We think we're ready to sell.
Do you think you can ever be so prepared you
don't need, you know, advisors or a team helping you,
or do you think that everybody should have somebody helping
them through the transaction.

Speaker 3 (29:04):
We are advisors. So my first reaction will be you'll
never be ready. But quite honestly, I mean, you could
be an individual that has traded businesses more than once,
and you could have a business that hands a structure
and organizational structure that allows you to not be involved
day to day, and then you might be able to
pull it off. I mean, this is at the end

(29:27):
of the day. I tell my clients first, this is
not rocket science. And some folks come to my office and.

Speaker 4 (29:34):
They think that we have likeing buyers that are exclusive
to us, and we have them inside a hat, and
whenever they sign the engagement, we're going to pull it
out and say this is the magic buyer and I
you know, I tell them misten whoever tells you that
they're lying, and just be aware. We probably you, mister client,

(29:57):
are going to al bet who's your potential buyer. We
will research the market, We will on earth strategics and
financials and maybe augmant that least, but you're gonna know
better who's gonna say it. What we provide is the
ability for you not.

Speaker 3 (30:14):
To lose focus on running your business. Two classy will
deny ability right and on emotional interaction. I can I
can sit down with a buyer and I can hear
out of this world's small number for the company, it's
not going. It's me off. I don't know if I
should say this or not. I won't get mad. I'll say,

(30:37):
mister Meyer, it just so happens that the rest of
the suitors are fifty percent above your price. And even
though I respect your appreciation of value, if you if
you want a real chance at getting to the next stage.
You need to consider opening your number. I'm not gonna
get mad. Sometimes if the principle is involved in the

(30:57):
conversation and they feel that their business is like a
so own or a daughter, they'll blow up. And so BottomLine,
we I mean, we've done this, and we do this
day in and day out. Usually business owners will sell
once or twice in their life. There are people out
there that aren't probably and that they like to bring

(31:20):
growing selling, starting, growing selling, buying growing selling. So what
I would say is always it depends on the amount
of time you can spend on the process, your understanding
of the process, and the deal team you put together.
For example, we as mergers and acquisition advisors. We don't
work alone. We need a team. And you know we

(31:42):
always explain this to our clients. We need corporate lawyers,
tax lawyers, environmental lawyers, labor lawyers. We might need accountants
to do a quality elearnings pre going to market, so
understand where are the issues and fix them before we
go out. So what I try to explain to my

(32:03):
clients is this is not if this is not like
selling a small apartment where you put a picture and
list the apartment and somebody just connects one and the
other and they just sign a piece of paper that
is standard and if we go this is a relatively

(32:23):
complicated process. There might be businesses that are small in nature,
that single location maybe I don't know, doing one hundred
to five hundred thousand dollars a year, You might be
able to sell those pretty easy. But as you start
getting into more complicated growth businesses, multilocation, multi geography type businesses,

(32:45):
it is a complex process. So it helps to have
folks at your side that have done it before because
guess who why again, depending on the business you're running,
the barrier is going to be a very sophisticated buyer
going to be conarmed with very expensive law firms. At
least that's our experience because they are again either strategics

(33:09):
or privately pretty firms. And you know those guys, they
know their craft. They don't at least if not more
times than we have. And if you're not well advised
from Urine, you're bound to leave either value on the
table or assume more risks than you should have in

(33:32):
a transaction. And you know one that I mean, if
you decide to sell again, depending on the structure. It's
it's hard to say that you sell and you disconnect
from the business. More often than not. I am finding
that when we sell businesses, we need to use creative
structures that look like arnouts or similar things to bridge

(33:55):
value value expectations between vionment and seller. More like you
and the owner needs to remain in place for at
least six months or a year as a consultant. Even
if the business owner is not involved in the day
to the activities of the business, more likely than not
he or she will have to stay on call. So

(34:16):
this notion that us you know, like an apartment, that
you have an apartment to you and tomorrow you have
the cash and nobody's going to call you. You saw the
unceas whereas it's not the same. So long answer to
your question, I think if you go round the day
to day and if you have done it before, you

(34:36):
are somewhat equipped to go at it. Otherwise, my recommendation
would be to get get an advisor and you.

Speaker 1 (34:44):
Mention like multiple locations and you know, different different ends
and that type of stuff. First thing that came to
my mind, at least your United States is if you're
in multiple locations you cross the state boundaries. Every state
has its own permits, every state has its own licenses,
and every day state has its own rules. So now
you're buying a company that's operating in you know, five states,

(35:06):
and you have to go out and change the names
on all the you.

Speaker 2 (35:10):
Know those chamber on everyone, on all those permit holders.

Speaker 1 (35:15):
So you know, having a team of people that know okay,
and sometimes there's a sequence to them, like you can't
have this permit until you have that permit, especially if
you're any type of uh like liquor licenses or anything
like pest control and stuff like that. You can't go
get the termite permit and a pest control company unless
you have an underlying permit to do pesticides. And there's

(35:36):
certain things you can't have certain ones. So it might
look like although that one's expired, as to them as
they expire, I'll move them over as they expire.

Speaker 2 (35:43):
Like, no, you have to.

Speaker 1 (35:44):
There's a sequence to do things, and some things are
really hard to get. Like you said, certain permits don't
just transfer easily. A lot of states don't sell don't
allow liquor license to transfer. So if you did an asset,
sell and you think I'm just gona get my own
whether you're going to be in a lot of fifteen
thousand people waiting for the five licensers are going to
give out in that county for that year.

Speaker 3 (36:04):
So so how do you buy that business? And you
need to pre plan, understand diligence. Yeah, I mean I
I we've personally helped a local client buy companies in Philadelphia,
virgin New Jersey, and Maryland and went through that process,
which was a big headache. When you go into a

(36:26):
company and you see, you know, usually have like a
bulletin board with a bunch of piece of papers and
all of that needs to be transferred. Not all of
them are transfer them role. So I mean it's a
big headach. But again if you it's a big headed
if you don't understand it and you buy and then
you're faced with, wow, I cannot operate. I thought I

(36:48):
could operate the day after I bought, I can't. So
now what do I do? And this is I switched
from cell to why, But it's exactly the same. You
when you plan right and deligence, then you understand what
what are the steps that you need to know and
do and then you can structure your acquisition agreement to
reflect those peculiar things per per location, and make sure

(37:15):
that you never interrupt the business, because the worst thing
you can do, either as a buyer or a seller
is to not be able to continue as if nothing
had happened the day after the transaction. That that's not
good for buyer or center.

Speaker 1 (37:29):
It even impacts sometimes the valuation of the company because
in some states some of those license is so hard
to get. The license has inherent value, right, So you
hold a special license like in certain states I want
to say, like Virginia and some other places where it's
really hard to get liquor licenses and stuff. And you
own a restaurant that you know, sixty percent of your
you know, revenue comes from you know, liquor sales and wine.

(37:51):
All said that if it's real hard to get that license,
knowing that the business that license itself might be worth
you know, you know, some some value you wantitary value.
You know that that increases the value of the overall
company as opposed to one that doesn't have it or
one that's going to lose it on the transfer. So
I see them all the time, pop it up on
the biz by sales like on some of these other things.

Speaker 2 (38:13):
We have this license and we'll help.

Speaker 1 (38:15):
We have a company that'll help transfer it to you
so you won't lose your license and you do their
little research and oh yeah, that one's really hard to
get an estate.

Speaker 2 (38:22):
So let's look at the next step here.

Speaker 1 (38:24):
So you're talking about like we talked about taxes earlier
a little bit, like with the tax applications and stuff
like that.

Speaker 2 (38:30):
There's a that's a very complex space.

Speaker 1 (38:33):
Like we were doing a roll up at one point,
and every time we would take an idea to our attorneys,
it took us like four or five months to get
our contracts ready for this roll up we were going
to do. As we take it to the attorneys and go,
here's what we want to do. Like you yeah, you're
gonna have to pay it, you know if they do
this type of roll up where we're like we're doing
where we were doing basically where we're trying to do
as a waterfall effect, where we come in, we give

(38:53):
them a certain evaluation, they agree on it, and then
we only participate in the uplift and get our you know,
but we only have some of that. We own the
company and we control everything, but no money changes hands
until we sell it again four or five years later.
At the end of the roll up and everything. We
said like, oh, you're gonna have a tax hit on
year one because they gifted you the shares or so
we had to sit there and tweak that these these

(39:14):
tax laws and they go state by state too. California
is insane with some of their rules, right, and that
Puerto Rica has its own permits and tax and stuff.
So I love that you said you're guilty because in
almost all cases, you could change the value that ends
up in your bank account by as little as a
few thousand dollars or as much as a few hundred

(39:36):
thousand dollars on a multimillion dollar transaction, just because of
how you deal with the taxes.

Speaker 3 (39:42):
I enjoy having conversations with tax lawyers. We tend to
be creative. We want to push, push the line, but
not cross it. And it's it's it's unnecessary part of
our crosses having trusted and usually we like to talk
to conservative tax attorneys because I you know, they'll draw
the line pretty quickly. But yeah, I mean, you can

(40:05):
viva Romali on the table and at the end of
the d I call it leakage because it doesn't accrue
to you, are to me, not the buyer, not in
the center, but just it's value that they've operate. So
why not, you know, why not spend dying.

Speaker 2 (40:19):
I've seen it killed deals.

Speaker 1 (40:21):
I've seen people wait till the very last second to
talk to their tax person and they you know, like
they you know, it's one of those cases.

Speaker 2 (40:27):
Most of the time. He's small businesses.

Speaker 1 (40:29):
They went to their CPA or their financial advisor and go, hey,
I'm ready to retire. I need that I'm going to
sell my business. What do I need to add to
my you know, what do I need in order to retire?
A place on our plan? And they're you know, the
wealth advisor or whatever will go, well, you need another
two million dollars to stick to the plan. Right, So
they go, my business is worth two million dollars and
when it may or may not be.

Speaker 2 (40:50):
But at the end of the day, they say they
listed it.

Speaker 1 (40:53):
For two million, not realizing that they're going to have
state and federal taxes and all these expenses and legal
fees and closing costs and everything else comes out of
that transaction. And now they're at one point four right,
there's six hundred thousand dollars short, and they go, I
can't sell this. I needed two million dollars for retirement.

Speaker 3 (41:08):
We call that run. There's you know gen mas. It
used to be you know, bonds that were frequently sold
and gen mas back in I don't know, maybe twenty
thirty years ago, were yielding five percent and it was
sort of the safest place that you could get a
good return that that is not treasuries, right, and we

(41:31):
would call it the GENM evaluation approach. Business owners in
Puerto Rico would say, I need a million box to live,
so my business is worth twenty because I need twenty
to put into genim as that would yield taps three
a million bucks. And it was like, it doesn't it
doesn't work like that. You don't want to sell. Tell

(41:54):
me you don't want to sell because it doesn't work
like that. And obviously, you know sub some of those
businesses were a bit aggressive on the way booked expenses
to get taxes down and anyway, I mean all sorts
of story. It's it's amazing, amazing to me at least again,
I don't deals in the States in Latin America and
in Puerto Rico, and early on I thought Puerto Rico

(42:16):
was a bit peculiar how they did things. But at
the end of the day, we're all exactly the same,
certain size down businesses, privately own businesses we have, we
do exactly the same, behave pretty much the same. What
I would say is that in my experience, Continental US
business owners more at ease with the idea of selling

(42:37):
their business. And I don't know why. Latin American cultures
tend to ascribe value to the business. Is kind of
like family. So it's like selling your daughter or your
son or emotional and so I get, you know, in
Puerto Rico, I get a lot of you know, we
need to sign an NDA and we need to make
sure nobody knows that we're selling, which is I mean,

(42:59):
it's fine, we do that, but it's there's I even
I would even say, there's like a stigma and negotic
stigma to deciding to sell the business. Oh, it must
be that the business is not doing great. That's why
they're sinning. Whereas the contrary, I mean, you should sell
when the business is on its way.

Speaker 2 (43:19):
Up, right, when it's coing and doing well.

Speaker 1 (43:21):
Yeah, as a matter of fact, if you want to
sell a business that's declining and having a rough time,
you're asking as a fire is sell and mostly you're
gonna have hard time finding a buyer. The buyer's is
gonna want a heck of a deal because now he's
got a mess on his hands and clean up.

Speaker 2 (43:32):
And I see all these buyers all the time.

Speaker 1 (43:34):
I meet with them regularly, people listening to my show,
and they come in and say, yeah, I'm gonna do X,
Y and Z in the first six sixty days, and
I'm going to double the revenue. Like, man, that guy
you're buying that company from is run that company for
the last forty years, thirty five years. You think you're
going to go in and change everything on day one
and do so much better than him.

Speaker 2 (43:51):
That's your ego.

Speaker 1 (43:52):
That's not your intelligence speaking, that's your ego at one
hundred percent ego mode.

Speaker 2 (43:56):
I look at.

Speaker 3 (43:57):
Companies and i'd be I agree. And I learned that
the hard way again, just because sometimes you get sort
of on the byside. And this was in a byside
roll up where I was a shareholder as well, so
we you know, you need to be careful not to
get an amored by the deal, right, and then you
see a deal that's been flat for six years and
you start thinking, I'm going to take this and make

(44:19):
it grow. But listen, culture in a company, which is
a very subjective thing. It is so important when you're
acquiring a business. Whoever's listening to us, all of your
bodcast listeners, right, you make sure that there's a culture
of growth in the gump. If that company has been

(44:39):
operated with an expectation of growth, I don't care what
the percentage is, obviously the higher, but a culture that
drives grow that's a great acquisition. If you find a
flat business, you better make sure you negotiate a great
deal and assume it'll remain flat. The only thing you

(45:00):
can actually probably think of and not the first sixty
days is rationalizing cootes right, you know, by a company
and I don't I have one HR person, I don't
need the other one that goes. I have my finance team.
I don't need more finance TeVeS and finance individuals, So
that goes. So there's you know, a little bit of
efficiency that you can squeeze out of the business. But

(45:23):
growing a business requires my experience culture, and if you
don't have it. You're not gonna get it. You're not
gonna get it. Its sixty days. Actually, in this particular case,
what we ended up doing was basically firing everybody and
just putting new people.

Speaker 1 (45:38):
So what is the what is the process? We've we've
got the data room. Now everything's ironed out. Were walking
through the process. You start taking them to market. You
produce some marketing materials and teasers. You talked about your
teasers and your and your folders you send out. At
what point do the business the sellers end up talking

(45:58):
to the buyers? Do you get you do a lot
of the pre screen and making sure they're serious, you know,
or do what's the.

Speaker 3 (46:05):
Theiveday what we'll do when you know this is obviously
subject to clients approval, But what we wouldn't normally do
most of the time is not not to have my
customers my clients talk to the first batch of people
that is interested, but rather, depending if we're running a
two step process or a straight process, they'll get to

(46:28):
talk to only the selected lo I or the selected
three yel o eyes that are going to go to
a second phase. Which is interesting to me, for example,
is that you know some people ask me, well, you know,
other than the highest price, what else should we look
for in an LOI? And it's it's interesting, it's usually
not necessarily the highest price. So you know, you need

(46:50):
to you need to understand it's what kind of structure
are they offering, what are the payment terms, what are
the contingencies to that deal, what's what's a level of approval?
Who are you talking to? Right? So sometimes you know
I and you know we learned through experience, but early
on you would get all excited when you have an

(47:12):
l o I with a very high price, but you
were talking to a level within the organization that had
two steps on a board to approve it. So it's
like I'm getting a non binding NI from a guy
or doesn't have authority. That's not worth my time and
my client's doing so we help them, help them understand.
Once we get those yes, which one or which ones

(47:35):
are the ones we think are better? And then those
usually a particular one are the ones that then get
to sit down with with management and and then have
a you know, visit facilities and the like, and it's
it's it's a push caol. I mean, usually what seller
wants is not what buyer wants and what buyer wants

(47:56):
is not a seller one. So it's so I can
it's any but it's understanding those differences and then being
able to explain and develop the trust between the parties
that you can carry it on if you if you
let a buyer, they'll they'll ask for you know, the
entire data room and visits, and they'll talk to your
clients without even telling you what is the non binding

(48:20):
offer they're going to put in tail. So we do
it the other way around, you know, we build the
onion from the outside to the inside. We go slow,
what is the information that you need to give me
a non binding l I and the end, the and
the and then we actually give them guidance as to
what we expect on our llys so that we could

(48:41):
properly evaluate as much as we can apples to apples.
That necessarily what we get what we try right, and
then that that's that's when we'll we'll get them to
sit down. And in the particular case of Puerto Rico run,
which is most of my practice, the it's important it's

(49:02):
important that buyers engage local council. When I when I
see early young, when I get an l I and
I see that we're gonna you know, the l o
I has jurisdiction Delaware or New York. I pick up
the phone, call the other guy and say, listen, you're
interested in buying a company in Puerto Rico that has
assents in Puerto Rico, employees in Puerto Rico, clients in

(49:25):
Puerto Rico. So I mean you need to understand the
low the law of Latin right, it's a complicated As
I said, corporate law follows della or lay as soon
as you get exposed to it, it makes all the
sense in the world. But it's different. So you need
to understand that. And if you're not, if you're not
willing to consider local jurisdiction and getting local lawyers. To me,

(49:47):
that's a high risk of closing. So I can see
an l o I that is very high in value,
and I see those features, and I have a conversation
and I can't persuade them to move from their position.
My my advice to my client will be, what this
is going to be a waste to die. We're gonna
go through the process and it's it's not gonna work

(50:10):
because we we we're gonna have people that are thinking, oh,
another framework for issues that are in this particular framework.
And again it's not I mean, I'm hoping that the
listeners actually become interested in looking at businesses in Puerto
Rico and not scary it is. It's the same corporate

(50:30):
and law framework or the rest of the contiguous states taxes.
It's a bit different. We are foreign for Dutch purposes,
which is interesting. But again, nothing that a good could
set up counsel in Puerto Rico might be able to explain.

(50:51):
And most of the US law firms have counterparts and
relationships with friendship Puerto Rico, like you know, get get
whatever buyer hope to speak very quickly. But there's a
lot of opportunities. There's a lot of businesses that are
owned by baby boolers, you know, getting sold or looking
to be sold of all ranges, you know, forty fifty

(51:14):
million dollars revenues a year to two hundreds three hundred
region dollars in revenues a year, So that there are
portunities for private equity and strategies that are willing to
spend a little bit of time in understanding the framework.

Speaker 1 (51:28):
What's your primary industry that you have most of your clients, right,
I know there's probably a full spectrum. You probably have
sas companies down, the pest controls on, you name it,
you probably have it. But what's the general common industry
that's there.

Speaker 3 (51:43):
So, I mean we, for example, we don't specialize in
any particular industry because we say, and we think that
Puerto Rico is a limited market in a way, and
it doesn't pay off to specialize in a particular industry.
So I think I've done only twice deals in a
party in the same industry. So I mean it's all

(52:04):
over the place. There's a there's still concentration of pharma
and medical devices manufacturing as coll oponents of the economy.
These are not places where you would seek to do
deals necessarily because there are mainly production sites and none
of the decision makers we cite in those production sites.

(52:25):
So I don't know that'll be when Butcher this maybe
twenty twenty percent of the economy. The food industry is
a very interesting one. The food industry is one of
the industries where there's still a lot of locally owned
businesses all the way from manufacturing, distribution to retailing. So

(52:46):
supermarket chains QSRs, bannered flag franchise QSRs, the wholesaling businesses
are that's where usually the most established families and operate
in Puerto Rico. And then you have tourism maybe six
eight percent of the economy, and you have all the

(53:09):
things that we're used to. I mean, the best control
company is the h VC company, is the plumbing companies,
the electrician companies, the solar gen energy store companies are
doing a great now. They have a bit of a
challenge with so now and some rooms and financial issues.
But and then construction is a good component of the

(53:31):
of the ecosystems. You know, all the you know, there's
interesting marine so the marine industry, you know arenas the
boat selling boats. We just had Blackstone Board, the company
that owns the largest marina here. I forget the name,
but Blackstone Real Estate board about the company, and they

(53:56):
happen to have MHM facility here. So, I mean, it's
a fairly new diversified economy. The doornment is a relatively
still a large player. Maybe thirty five forty percent of
the economy is public services.

Speaker 1 (54:09):
Okay, that's normal, right, that's gonna be like you have
people there to serve, so you're gonna have you know
that that's there to be done, right, and then you're
only gonna have your home services right to painting, remodeling,
past control, plumbing, you know, roofing, all landscape being escaping
the whole nine.

Speaker 2 (54:25):
Yards or because you have houses there, right.

Speaker 1 (54:27):
I was just curious that there's like a lot of
manufacturs like we here in the United States. We used
to be a big manufacturing country, and then that all
shift overseas and now we're more into the software, so
well that's starting to go overseas, and now we're more
into legal services and services and accounting and all this
other stuff. So and technical different types of technology.

Speaker 3 (54:44):
Right, I mean so, so for example, software software is is.
It's an interesting player and a growing group and very
interesting transactions in the last four or five years of
friends that have sold their companies, and there's there's an
interesting and bodies startups scene. I'm personally involved in a
nonprofit that develops entrepreneurial capacity and we go through We've

(55:08):
got programs for idea ideational businesses, helping people understand the
difference between a good business proposition, then business plan competitions,
and then venture accelerators and so there's It's interesting. I've
seen a shift in younger folks from wanting to work

(55:29):
for large, established multinational companies and more of them so
trying to strike it on their own specialty agriculture. Believe
it or not, it's also a place where I'm seeing
a bunch of young folks spending time.

Speaker 1 (55:42):
On all Right, So we need to wrap this up,
and I know we can talk on forever because we're
both passionate about the subject. What are some ways people
reach out to you if they're interested in seeing what
you're available in your market, and you know, how do
they reach out? And if they, you know, were ready
to buy something there, or you know they or they're
sitting there listening to us, they're already they live in
Puerto Rico, because you haven't going to have locals listening

(56:04):
to us also and they're ready to do a deal.
What's the best way for somebody to reach out to you?

Speaker 3 (56:09):
And it's either website, email, or on phone. Our website
is connellycap dot com. Connelly has two n's and two l's,
so it's C O N N E, L L Y
C A P dot com. My email is Francisco, like
the city San Francisco, Right Francisco at connellycap dot com.

(56:33):
So yeah, those two ways are great. You know you
can reach out through LinkedIn Francisco, Uriarte connect, happy to
Happy to hell.

Speaker 1 (56:44):
We actually I don't. I butchered your name the first time.
I'll do my It did great, by the way, you
degree as I. As we get to know each other
more over time, I'm sure we'll have other conversations.

Speaker 2 (56:55):
I'll do better and better. I appreciate your.

Speaker 3 (56:57):
Fever in here.

Speaker 1 (56:58):
Hang up for a few seconds. It has the together
the files, so we'll call that a show.

Speaker 3 (57:03):
Thank you, thank you, all right bye,

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