EP 71: How Divorce Impacts a Business Sale, with Melissa Gragg, Bridge Valuation Partners, LLC

Ed Mysogland  1:52  
I'm your host, Ed Mysogland. On this podcast, I interview buyers, sellers, deal makers and other professional advisors about what creates value in a business and how that business can effectively be sold at a premium value. On today's show, I am so stoked. I have Melissa Greg of bridge valuation partners, and the valuation podcast.

I got I came to know her years ago she was she was a

she's gonna give me grief about it. But she was a prolific author on and I read about her and in the trade magazines, and she was always she was always that person for divorce, and complex issues. And I just enjoyed reading about her and, and at some point, I was gonna get her on the podcast, and I finally have done it. And this is round two, because I screwed up the technology the first time. So Alyssa, welcome to round two.

Mellisa Gragg  2:51  
Thank you so good to be here.

Ed Mysogland  2:53  
Right. So I, before we got started, I kind of gave an overview about you know, just your background, but, you know, can you talk a little bit about how bridge valuation partners came to being as well as your own podcast?

Mellisa Gragg  3:13  
Yeah, sure. Um, I mean, bridge valuation partners, I kind of had to come up with a name at some point, because we all start with a company, you know, working for others, and then we create our own company. And I was like, Well, what do I really do, I kind of am the bridge between two people that are disagreeing whether they're a couple or business owners and things like that. And so most of my practice has been around litigated matters or when people are fighting. And I started to realize that if I could work for both of them, it was a little bit easier because, you know, being impartial in the middle is easier when you work for both sides. So I kind of have been doing a lot of joint work, or working as a joint expert, and, and then doing mediation, which is kind of like doing the same thing just outside of court. Well, well, let's Let's start. Let's start with divorce.

Ed Mysogland  4:13  
In my world, that is the kiss of death. I mean, it is if someone shows up and says I want to sell my business because I'm getting divorced, I know that it is guaranteed to be a mess. And it chances are it's never going to sell because somebody's not going to be happy. So I guess that's kind of where I wanted to start was I if that's the decision, whether it's, you know, one party or the other let's go ahead and and sell. I mean, how do you how do you manage that process when you know when both parties you know, it's an emotionally charged event and how how can you help somebody through that process? Because I can tell you, we we've been, I don't wanna say, we do a pretty good job of it, but it still breaks down and for No, for no apparent reason other than I'm pissed at the other party, you know what I mean?

Mellisa Gragg  5:14  
Right, right. Well, and I mean, I think you have a lot of factors, you know, one is traditionally in and every state is different. But traditionally, in a divorce setting, if one party wants to keep the business and maybe the other party doesn't, then we're going to value it right. And one party is going to keep it and the other is going to get equivalent, you know, assets. So then you have a situation where maybe they can't agree to the price. And now you have a well, you buy it, no, you buy it. And maybe it's a passive interest, right? Maybe we have we're just a 10% owner in something. And we don't want to split it or it can't be split. So then you have a situation, where is the judge forcing the sale? And the judge could say, well, if you guys can't agree to it, then we're going to have kind of a liquidation, if you will. And now we switch over into the m&a world. Well, in the m&a world, what do we want to do we want to prep for the sale, we want to get our client in the best light possible. And you're literally starting with, we're getting divorced, we're selling the company. And so you're in a fire sale, to a perception to the buyer, I think is part of the bigger issue. And then you have the distracted owner.

Ed Mysogland  6:30  
Well, we found one of the most Yeah, we took it on the chin on on this divorce, because, but at the same time, I'm, I was kind of impressed that they did it this way. So so the parties couldn't agree to value. So they put it on the market. And we I'll bet you we had it was a great business. And we and we had 10 Plus offers and in a real short period of time, and we got down to the person that they were going to, to sell to. And the wife bought him out. She used She used that offer as proxy for for fair market value, which to me, I mean, like I said, it forced me to change my my engagement agreement from that point forward. But at the same time, we're pretty impressed that, you know, what a great way to, you know, if you can't resolve who's going to pay what, all right, you put on the market, the market will tell you what, what what the value is. And, and that's my next question is the difference between fair market value in a in a divorce setting versus what I just described?

Mellisa Gragg  7:41  
Well, and what you just described is, you know, when somebody's getting divorced, if it's their first time, they don't know what to do, a lot of the attorneys are kind of like giving advice on what to do. So when we have a house, we're like, oh, call an appraiser get an idea, just get a rough estimate of what it's going to cost. And that might cost a couple 100 bucks to get an appraiser to tell you your value your house. Now they say, Oh, well, you know, there's these business brokers, these appraiser, you know, like, go out and get an idea for them. So, absolutely, it is has been used as a ploy to determine what the fair market value is. Now, realistically, in valuation, you know, any type of merger is going to have some inkling of a strategic value. Sure. And so when you have a strategic value, it's that I know something about the market that makes me smarter and or I think I'm getting a deal, because you're going through divorce, or whatever the reasons are, they might come up with it fair market value is willing buyer willing seller, and that's usually one of the edicts for a divorce is that it just has to be you can't pay a premium, or you can't get a premium for it.

Ed Mysogland  8:56  
Well, that's what that's what tripped me up. Why not in a million years? Did I think that we were that that at the end of the day, this is how it was going to work? Because I figured somebody would put their hand up and say, This isn't fair market value. This is this is something other than that. And, and it didn't add, I mean, the judge was tickled pink that? Yeah. I mean, you can argue about it.

Mellisa Gragg  9:20  
The problem is judges, attorneys, everybody in divorce court when when you even describe fair market value, and you're like willing buyer willing seller, the first thing they say is like we're not selling, we're not selling we're not going to market like this isn't how we should look at it. Like it's all me, I You can't sell me and all of these things with fair market value is the hypothetical like it is the assumption that you're going to put it on the market and what would somebody pay for the cash flow? And so I think in some capacity, when you have an unwilling business owner that wants to that that is willing to sell out, but maybe not internally. because again, you're never going to know the true value. If you're just a warring couple or warring partners, like, you're always going to assume that you're getting screwed over. So an outside buyer comes in and offers that price, the judge is going to love that, because they're gonna say, well, somebody on the outside was willing to pay that. And you now paid it. So that person got what they what it was worth. And they think that that is absolutely the proxy. And even if you have a conversation of Well, we had five buyers, and we worked up the price, and it's now a 20% premium, quite frankly, then they would probably turn around and say, Okay, where are you willing, sir, to buy your wife's shares up? Sure. Now, it to me, if the wife comes in and buys it at that point, then there was still an implicit understanding that it was worth more. And so now you're Are you now you're arguing against a kind of an assumption that's probably erroneous. But they, you know, like, we've talked about this before, they're locking in on that number, and nothing, even a willing buyer out in the open field, offering to buy this, if they still think that it's worth more, you know, like, right now, in divorce, the attachment to property is a big deal. You know, so the attachment to a business that's maybe been in the family, or you have children that are working in the business, you have more complexity, normally, these businesses provide the lifestyle for everyone involved. So you can't get rid of the business, because then we don't have an income. And if we don't have an income, we can't pay alimony. And we can't pay for the houses. So it's kind of a catch 22.

Ed Mysogland  11:44  
Play that out. So what do you do? I mean, that wasn't where I was going. But I'm interested in what in the world do you do when you have that level of complexity in a family business that that the income stream? is, you know, is the source of income for a bunch of family members?

Mellisa Gragg  12:04  
How do you know? I mean, one is, can it continue. And because once we start to take a look, from a business valuation standpoint, we start to see some of the nuances. You know, like, we have to dial back some of those expenses to understand what the true cash flow is. But in those situations, when it's providing for the family, a lot of times I mean, quite frankly, those are the situations when you have a privately held company, majority owned by one person, right? The Father, the grandfather, the the mother, the grandmother, whatever the the that hierarchy. And you have all these these kids, well, both spouses have an interest to have the kids still employed. But now you're looking at, you know, most of the time, the other spouse is concerned that a lot of personal expenses are being run through the business. And so you have this kind of this thing of like, well, we want to dig deeper, almost always, there's some issue, you know, of what has been done from an accounting standpoint. But it's never in the best interest for the parties to go down that path of like, threatening, well, I'm going to call somebody and you're gonna get in trouble for doing these things, you know, putting in personal expenses on your business. It's really starting to educate them on the fact of that, sometimes one income stream was great for one household, but it wasn't great for to. And so in looking at it, you don't want to blow it up. Right? Because it's still going to be finally in through one party to the other. Yeah, but then it becomes is it rehabilitative, you know, like maintenance, paying, somebody should get them to another spot. But that's not always what it's used for. So it becomes a very difficult situation, but you don't want to like throw the baby out with the bathwater. You know, like, you don't want to call the IRS or call the feds to come in because my husband's doing something or my wife's doing something, when it will crater the entire thing, it's better to kind of come in and say that there's a lot of discretionary items that should be done differently. And as valuators we're not coming in to say that the taxes were done incorrectly. Right? We're making the assumption that they were done properly with a CPA. So if you have a business owner that does their own taxes, it's a little bit different, you know, yet the to do your own professional due diligence, and say, does it make sense? I mean, we had one, just yesterday, we presented it. And they were very concerned, you know, and it was based in an industry that had is has so much fraud in it. So the odds are there's something going on, sure, but when we compared it to the bank statements, and the tax returns and the financials, guess what, they weren't too far off. Because the reality is most people aren't criminals. They're just trying to, like, get away with a little bit, you know, minimize, back it out in the valuation? Yeah. Can we look at what it looks like without it? Yep. And that's really how we approach it.

Ed Mysogland  15:14  
And then how do the parties? How do the parties feel about that? Because now you're a little bit different, like, because you're hired by both parties to mediate a value. So, so your findings are, look, they are what they are, I don't represent either one of you, or I represent both of you. And here's where here's where it lands. But I guess as as you start uncovering, you know, the discretionary expenses, or you start uncovering, you know, getting getting the business down to truly what you're valuing. I mean, how do how, how is your level of scrutiny? felt by the parties, it's a good or bad, I would imagine it's good. They, at least somebody knows that this is going on what at least one party does, you know?

Mellisa Gragg  16:08  
Yeah. And and I'm not always hired for both parties. But I think you have to operate in this space as if you are we always are hired by both parties, like really looking at it from a neutral standpoint. But then in kind of taking that one step further. If I'm working for both parties, and I'm in the middle, I literally, I'm telling them, like, everybody has their mediation Spiel at the beginning, I'm telling them crazy stuff, like everybody else wants to say talk nice and be nice. And I'm like, Now, I want, I'm there to protect you from yourself. And from everybody else in the room. And I'm there to provide education on the value and there's always going to be gray. So a lot of times I have to bring the gray up like Oh, parties, are you aware since this is a business owned by one spouse about the double dip? And they're like, No, I don't know about the double dip. And I'm like, well, the double dip is, you know, we can only have income be either salary or profit. And they're like, Okay, well, tell me more. And we talk about that. Well, of course, some of these things are on the side of one party or the other. But if I say it to everybody involved, and I say, here are the here are the positives and negatives, and I created as a situation that we just talked about it diffuses it and if there is an issue, you know, if you spent $1,000, let's say $10,000, okay, like a good $10,000 at a jeweler, and I ask what was bought, and it was not to your wife, it still is you control the vibe, and the energy of the room? And so if I'm like, Well, why is this $10,000? Did you buy a diamond? You know, or if I'm just like, it looks like there was $10,000, you know, to diamond company, you know, is everybody aware of what was purchased? And one person might say no, and I'll say, Okay, what was purchased? Was it for business purposes, and then it will typically, if there's infidelity, it's already known. And we're quantifying it to say, Okay, you spent $10,000 on the Paramore, but the thing is, most people use their bank account for multiple expenditures, but the tax accountant is allocating it out and saying this is to the business. And this is to you personally. But the the spouse doesn't know that process and doesn't see that process. And so I'm like, Yeah, I know, he's using the card. But it's still the accountant is not putting that as an expense. So some of its education. Some of its identifying the issues that are you know, when we have inheritances involved, or settlements from suits, that's going to have a little bit more houses have a little bit more energy. More than houses, vacation homes, because vacation homes are where we went when we were happy as a family. And we want to continue to be happy as a family even if it's without that one spouse. So I've seen vacation homes become more of like, both parties can use them, but you need to identify where the emotion is going to be because when you mix emotion in numbers, they don't match, you know that you have to deal with the numbers in a very different way than you have to deal with the emotion. So when the numbers are tied to the emotion, if you don't know that going in, you know, how do you back down off of that emotion.

Ed Mysogland  19:52  
So so in a in a sale environment. Yeah, I mean what what's the what's the the tip or what's the tell that things are going to? To go awry? So if I'm, if I'm the, you know, if I'm getting divorced, I want to know, you know, people that are listening, what what am I looking for? How do I know? This path? What's going to happen to me? Or what's going, you know, what is the scrutiny, you know, is this really the colonoscopy, I'm told it's going to be that kind of thing.

Mellisa Gragg  20:28  
If you're the broker, if you're the m&a advisor, and somebody's going through a divorce, you have to be very clear, I would almost get both parties in the room and have the discussion like, this is the process, we're gonna get offers that ended up because if you can, in the room zoom, however you do it at this point. But if you can lay eyes on that out spouse, the spouse, that's not part of it. And the everybody is saying, Yes, we are selling this company, if that person is sitting back and being like, well, like, how much like, what is it going to entail? Those are going to be your signs that that's going to you like, if you don't answer those questions, now, you're eventually that's, that's almost like your second seller, right? So you know, everything. So your first seller is the person that's totally making the decisions. And yet, they still have the second seller in the back that could trump everything. So unless you know the relationship, and you put eyes on it, because guess what, in a divorce, there's three stories, wife, husband, husband, wife, wife, however you want to look at, there's two sides, and then there's the truth. And the problem is, if you don't put eyes on that situation, and it's acrimonious, or it's okay, or they are not aligned, I would almost step back from the situation, because you're just punting that issue until you get closer to a close date. And then it's going to just ruin it at that point. So I think you've got to get both and who's making the decision? Like, if the court has determined that it's going to be sold? Then there is a written court order for the sale of that company. And so then you're working now, can somebody break it? Sure. Well, people,

Ed Mysogland  22:18  
the funny, the funny thing is, most of most of the blow ups in recent memory has been once we get an offer, and we start moving down that path of, you know, this is how much we're how much we're getting, what's the promissory note, if there's a bank involved, is there sub debt, you know, and, and the prospect of I'm going to have to differ part of my purchase price for this with, with this guy, I'm trying to totally divest myself of, you know, it has, it hasn't gone well. And, again, as well as due diligence, due diligence is another thing, especially if you've got husband and wife that have been working in the business. And now a buyer has to rely on them, collectively to provide, you know, whether it's a quality of earnings, or whether it's whether it's, you know, just your normal due diligence, it is a total, it is a total pain. And that's where that's where it falls apart. So I guess that's where my next question is. Yeah. Now, you know, where where it is? What do you do? I mean, have you seen anything effective that would help me not allow the ionic sensei not allow how to prevent the deal from blowing up? Once we agree on purchase price. You know, we're only about 30% of the way there, you know, now we got to now we got to verify,

Mellisa Gragg  23:51  
I think you have to front load it. So I think you have to front load all the work. But the thing that somebody says when they're in a divorce, and when they're selling the company is the same, it's my second job. And so when you're in a divorce, selling your company, and running the company, you now have three jobs. And the problem is three jobs is going to stress out anybody, but then you have a divorce with it, which is highly emotional. And then quite frankly, we we are discounting the fact that selling your baby, I mean, your company is highly emotional. So when you when you combine those three, you either have to lower your expectation for quickness. And and that's never a good thing in a deal. Right? Like we can't just like, oh, you you have due diligence requests, we'll get back to you next month. Sure. That's the clue. Yeah. Like, you don't have that space. So in my mind, if I see somebody that's in a divorce and every end, like, we're going to talk about all the issues at the beginning, all the negotiations, we're going to have everything ready for due diligence before it's even requested. And we're just be prepared for that capability, because I don't want to disclose it. The buyers have like, oh, be my, you know, like, will you be patient with my client? Because they're going through a divorce? Like, they don't care, they see blood, and they're just gonna go for you. And they're gonna be like, Oh, fine, yeah, we'll give you more time, we're gonna ding you on the price too, you know. So, in my mind, that's great. It's really having an X, you know, like, everything, I think, is setting the expectation. And so if you set the expectation with the couple, and you're like, I don't know if this is going to be a good time or not? Or who is the front person, like, what, what things do we have to agree with, and what things that we don't, because the moment you continue to leave out a spouse, especially gender related that that spouse is not your gender, right? So you keep on leaving out the wife, you're going to be the bad guy, he's going to be the bad guy. And it's going to be a perceived, not disclosing the information, it doesn't, you could be giving them everything, but the perception. And so I think when you get involved in these, like, people don't like divorce, because it's half of its own perception. There's no logic about it, there's no real thing happening. It's just the perception, like, Oh, you didn't have a conversation with I'm the owner, too. And as a woman, we are constantly put to the side in those situations, especially when it's male advisors. And so I think that in anything, you have to do your own due diligence, the way I do mediations, or when I work for a joint party, we have very clear communication. Yeah, you do not get to talk to me, without me responding with your originally email. So if you email me and say, I hate this person, and the value should be this and put it off, I'm going to say thank you for your email. And I'm going to respond to everyone, sure, your spouse, the advisor, everyone, and I'm gonna say, I'm going to clarify the situation. And so in my mind, that keeps me away from having any confidential discussions now, I can tell you how we use confidential discussions, but for those from the very beginning and tell I get the trust of everyone. Yep, everything has to be communicated to the whole.

Ed Mysogland  27:15  
Well, I'll tell you, one of the things that you just said was, I think, really impactful is, is front loading. But, you know, if you're, if you're gonna go through a divorce, you need to, to prepare much more, you know, the normal, you know, data room is, is not adequate, you, you need a full due diligence, you know, uploaded and ready to go, because I think the shorter the shorter the time from offer to close, even though that's best practice anyway, you know, in in that case, you have to do it, that that was, that was really great.

Mellisa Gragg  27:59  
But realistically, in a divorce, the discovery process is very extensive. So in some capacity, if you're selling, after you're getting divorced, in the divorce is a lot of the documents. Now, if you're selling and then getting divorced, it's the vice versa, like you have all the documents. And in those cases, if you are not hiding the ball, if you are not trying to keep documents away from your spouse, it doesn't even make sense, like you are a couple, your money comes from one pot, and yet you're gonna take your money and pay it to different people to value the same thing, and they're guaranteed going to come up with different numbers, for sure, you're gonna come up with different numbers, and then you're just gonna pay them to fight. And nobody else in the room even knows what they're talking about. So I think that the documents might be there. But they may not be I mean, they're not going to be you're not gonna be ready for a quality of earnings. No, you're gonna have an opinion on it. For the most part. I think business brokers and m&a advisors, we know what is going to be needed. And so from my standpoint, if you see kind of slow times in the process from the divorce standpoint, or whatever, because like divorces could take a year or two, you might sell a company and still be getting divorced. So I think you just have to know where you're at and the process and then the additional pieces is this business cyclical. Because if this business is cyclical, and we're heading into Christmas season, and that's their time, it is just you got to do doll just have to stop. Like at some point, you just have to be like this is not this is not going to work because if you start to crater, the business owner, like in with mental health at an all time high issue, you you know, it could be more impactful. So I just think that having them understand that each of these takes time and a process And that, you know, hey, you have the time now get the documents. Now let's answer the questions. I mean, even doing preliminary evaluations, I tell people, it's going to help, you know, the answers that you have no clue, like, what happened to that expense. I just asked a client, what is the $700,000? Other income?

Ed Mysogland  30:21  
What was it? Like? It's

Mellisa Gragg  30:22  
not like $7. It's like 700. And you know what he said to me? He's like, and I said was last year, last lap? Last year, right? Like, we're right there. Right? And he's like, really? How do I that could be? And I was like, Do you think your accountant does? Oh, yeah, I'm sure she knows. Wait, wait. It could have been literally he named for different things that it could be. So you have to understand the level of business of what you're, you know, like, does the owner is the owner have a handle on every single thing? Or is the owner I mean, because what the companies that are selling are 25 $50 million, right? These owners are not doing everything. And so they don't know the answer, but they're sitting in the room negotiating these price, you know, like you're negotiating these prices with them. And then they asked one question of like, what, where's it $700,000 of other income? And you're like, Hey, guy, what's that? Seven? And he's like, it could have been a lot of things. Is it recurring? Is it gonna happen again? I don't know. I don't know. So I think that a lot of it's your due diligence, so that you can conduct it without the owner there. And most of the time, we want to conduct all of this with the owner. Yeah. But there gonna be times where they're just going to disappear, because they're gonna be so overwhelmed. Yeah, no, you know, by all of this, yeah,

Ed Mysogland  31:40  
I follow? Well, I want to conclude the story of the woman, I've told you that that used us for fair market value, and her her and, and her husband was just, I mean, it's just that kind of guy, you know, good for her for getting divorced kind of guy, you know, and, and, and she turned it and flipped it. She bought it and flipped it. And she, I'll bet she made. It wasn't times two, but it was a good one and a half times. And it was within months. She knew exactly what she was doing. And I and I loved it. Because like I said, it was you don't wish divorce on anybody. But boy, you could. Yeah, this guy was just not. It was a good situation. So

Mellisa Gragg  32:30  
I think the hardest issue in divorce valuation in general, is that when we're doing strategic value, when we're looking at investors, when we're working for the company, right, and talking about how to grow it, sell it, buy it, whatever. We're looking at, really like what is the potential, right? And we're kind of ignoring the probability that that's going to happen, right? Because we're speculating. And quite frankly, even sometimes when I get into these businesses, I was like, Yeah, I see it, I see the future is, right, it's gonna be beautiful. But it hasn't happened. And like, as much as I believe that it could happen in a divorce, we're looking at what has happened, right? Because in some courts, they think that a future or projection or a DCF, or discounted cash flow model is future projections, and its future value, right? And sometimes we can't explain that away, because there's just like, No, you're not. And in divorce, you're sometimes not entitled to future value, you're entitled to what this value is today. And so I think in that capacity, it's hard because you get in these situations, and you feel and you hear the impassioned business owner. And they always think that their business is worth more way more money until they get divorced. And then it's worth nothing. You know, so you always have that issue. But for me, it's kind of getting out of the speculation, and the the belief that it is going to happen, because these people are usually brilliant, and they're coming up with great ideas, and they may have a lot of cash flow that's coming in or investors. But we can't speculate, like if you've haven't proved it, and that's the hard part. Like somebody could say, Okay, you're gonna go sell this business for a million dollars. I got somebody who's willing to pay 2 million. Why? Because I sold them on the dream, right? It's still the same business, but I was able to create a vision that they bought into better than you. Yeah. Okay. But either way, even if they walked away, and that spouse bought it from you, like she probably needed to still pay the dealer fees, right.

Ed Mysogland  34:47  
No, that's my point. No, no, we know that. That was the whole point. She would. She was excluded from our agreement. It was third party. That's why I said we changed our all of our agreements. if that if that changes hands from, from a family or a family member, we're getting paid. And in this case, you know, it was an inner intercompany. Sale. So, yeah, we took it on the chin on that one. But like I said, you know, we paid the tuition, and that's okay. We, it hasn't ever happened again. So the remaining time that we have, I wanted to talk to you about the work you're doing with selling companies, because, you know, regardless of who you use, or how you get your business sold, ultimately, the goal is to have a successful exit and the model that, you know, what you've taken as far as the mediation process, and applied it to selling a company. I, to me, I think that that is fascinating, and, and truly a great way to to exit a business. So can you talk a little bit about your process, and, you know, the evolution of it, I guess, to begin with, and then you know, how you how you do that, and what has been most effective on, you know, as far as the exit,

Mellisa Gragg  36:12  
I think lately, I've seen more partnerships, either buying in or buying out, and most of it's because we either got money sitting on the side, or we need the money, right. And so when they, you know, somebody will come to me, and they will say, Hey, um, I got a person, they're thinking, maybe they're employee, and maybe they're outside, they want to buy the company. And I need to know what it's worth, because we need to start these negotiations, then I say, Great, usually it's the business owner, right? And sometimes it's the person buying in, right, I'm gonna buy into this company, can you tell me if it's gonna be worth it? A lot of times, I'm telling them like, you don't need a valuation report, like you need numbers run. And depending upon your credential, you can either run those numbers and give a smaller piece of paper or not, right, but you have to understand your own standards. But it's really though, because what I tell them is, I can give you a number, right, I can look at the business and I can give you the number. And that's going to be the starting point of the negotiation. Right. And whatever number you tell them, depending on what side you are, is either where you start, and you're going to pay more, or you are going to get less, right. But either way, you have to determine where that starting point is. And I'd say you know, a way to do this, if we don't start right now. Right? Is you go back to that person, that partner, and you say, Hey, do you want to do it together, you split the fees, or in some cases, if it's, you're buying out a partner, it's the company. And I come in, and I do the same thing. It's the communication has to be clear communication with all parties. And we go in and we look and I get them to all sign off on the history, the adjustments, the you know, like, I still do the math, but I'm like, hey, does this adjusted EBIT? Da makes sense? Does this projection make sense? And they come back and they argue the inputs, right, the assumptions, basically, they're like, Oh, I think it's going to be grow faster. Well, now you think a 3% growth rate, he thinks a 15% growth rate? I think I have an industry report that says seven. Yep. But I show you what seven and 10 looks like right? And eventually, I will offer that. So we negotiate and then at some point, I say, Okay, are we good on the numbers, like you understand what I'm saying? Is the cash flow going forward? If you're doing capitalization of earnings? They say yes. And I say, Okay, here's the value, and they're like, and they should be, each of them should be moderately, okay. And moderately, and that, like, they're gonna like sit there and be like, are you okay with it, because the weight, you know, because they don't want to get screwed, you just don't want you just don't want to get screwed in the situation, right. But what happens is, I'm defending the number, not them. So they can still remain friends, because I am the enemy. And I'm the enemy to both of them, because one of the ones that higher and one of them wants to lower. So they're going to come at me from both sides. But what they're not having conversations with is each other. Because if you negotiate just two people, you made up your numbers. And if you made up your numbers, I just don't like yours, and you don't like mine, and there's no basis for them. So now we're in this tit for tat. And we're not probably going to be happy after it because I'm, you're both going to feel screwed. And so in doing this in the middle, we show the number. And then I say, Hey, you each get an hour with me by yourself. And they're like, what? And I'm like, Yeah, so we're going to take these models or templates. And we've done this with family members of four different parties, warring. Everybody gets an hour and we use the models and the templates to run your numbers. Okay, so you thought it was a 3% growth rate, you thought that they would have To get det, you thought that that was a bad ad back whatever it was that you just didn't like, I get to show you what the number means. Now sometimes I do it with both of them there and say, Oh, you like you wanted these things? The value is now it's not a million anymore. It's 990,000. And then I go over this guy, and I say, you know, you wanted this, and, and the value is 1.1 million. Okay? So maybe it's 1.2. Right? So it's a little bit down on this guy, but a little bit more up on this one. Now, I've established the range that you guys negotiate, and then I tell them, now the value is one issue. We have to negotiate employment contracts earnouts, you know, buyouts the timing for the buyout. So now you're arguing the facilitation of the buyout, as opposed to the number of the buyout, right? Yeah. And that's where it kind of changes. And, quite frankly, if you're buying in, this is a bigger deal, because now you're going to bought, you now have an unequal distribution of power. And unless I level the playing field, from a power standpoint, the person that doesn't have control over it is always going to think I am in the corner of the business person.

Ed Mysogland  41:16  
Should doesn't the business owner, you know, in their operating agreement or bylaws? Isn't there something that governs governs? people buying in? And and do you kick that to the curb and say, You know what, I get it, but this is how we're going to do it. Or better yet, Mr. Owner, this is what we're going to have to supersede this agreement in order to get that party into this business, if you truly want him as an him or her as an investor. So how does that work?

Mellisa Gragg  41:48  
I will say a Buy Sell agreement. Haven't seen one written properly, or Well, and, and I think a lot of people go and try to help people come up with better buy cells so that they can avoid this, I will tell you, for the most part. And I can't say all the way and I can't say every state for the most part, when I've been involved in litigation where there was a very specific buy sell almost specific enough to say, we determine the EBIT da based on this, this is the multiple blah, blah, blah, and there's some room to allow the valuation, the court throws it out. Really, why I have very rarely seen a buy sell with upheld. One is because most of the things that they say is going to happen in the buy sell that they've covered is not what is happening, you know, and then the divorce is kind of different. So if the divorce says, oh, it's going to be book value. That's, that's not an equitable situation. So the court could just say, that's not equitable. That's not fair. And then I come in anyway. And so for the most part, and I think that where we went wrong, as we'd we figured out a long time ago that we would negotiate from a position that we make up and I am finding that if we negotiate from some solid numbers, with some decent multiples and decent cash flow, because the reality is, what am I buying? am I buying 500,000 of cash flow? am I buying 100,000 of cashflow? And if I can't get to that point where we all agreed to it? Why am I buying into it? You know, so it's really going to uncover? How do they and I will tell both of them, I said how you deal with this is a very good indication of how you deal with this going forward, and all issues that you're going to talk to about being two owners. And so it just started, it started as a thing that I just did a couple times. And then it became like I value the company every year for whoever buys in and buys out, quite frankly, I believe that if you want to lock in a buy, sell, you need to value the company every single year. And that value becomes the value that anybody over the next year can buy in or buy out for. And then it's it's it's been determined. It's a consistent process. You have a pattern to me in any of this, especially if you're going to continue to buy in and buy out like an ESOP. Any sort of employee like employees buy in and out, because that's how the boomers and everybody is going to exit, right? That has to be like we don't, you can't just be bought out. Sometimes something like sometimes there's going to be family members and things like that. It's going to be a transition period, but you're going to be worth it. Even if somebody comes in and buys your company out totally. One to three years you're going to be working with them. So if you hate them on day one, this is not the endeavor that you want to go about and and you're hating them because they didn't like your number, but your number was pulled from the sky. Yeah. And it's what you felt it was worth. But I try to encourage people to have some solid foundation to negotiate. Because there's always ways to give, like if I come in and I do the valuation, right. And I've done it for so many families. And that's where it becomes key nice is buying out of business, right? I'm coming in, and and trying to save those relationships from the negotiation process. But if I don't, if I don't have some support for that position, you know, now, if I come in and say this is worth a million, and you really want to sell it to them for 800,000, there's nothing that prevents you from doing that. Yeah, I'm just giving you a rubric or a container of here's the reasonable value, if you decide to go outside of the reasonable value, what do we know and mergers and acquisitions? You can go outside? Any you? Maybe that nice is like no, no, Aunty, I want to make sure you get at 1.5 million. Okay, but I want you to continue to work. Again, we were we were solving situations with a number that we've just thought with everybody would would seal on. And they're not. There's no number. That's the, that's the hard part for people to understand. Even if I do this for a living, and I come up with numbers for for companies, there really is no number, there's a range of reasonable value. Hopefully, both experts or multiple experts would all be in that range. But there's a range of reasonable value. And then there's negotiating the intricacies of the deal. So yeah, I might take 800,000 Because I want a two year salary.

Ed Mysogland  46:44  
Show in your practice. One of the things I mean, you're you're able to, to facilitate exit and and not just with family members, and and in our original conversation, you know, you're you're you're you're dealing with people that have received indications of interest, and actually, you know, helping the those two, you know, I don't say merge, but there's an exit. But you're right in the middle of your I don't say. I mean, your your value brokers is I think the term I used before, I mean, you're right in the middle of brokering that value. So, you know,

Mellisa Gragg  47:25  
I think I think business brokers and m&a advisors because I was in that field, right? That's where I started. We were always trying to get these great companies to sell or buy, right? The good companies even have a million dollars or more 5 million, I don't know, the reality is I'm valuing companies every year just for strategic planning. And what I am seeing, and this is post pandemic, this was not pre pandemic, this is post pandemic, this is very much, you know, business owners that are 5565 75. I am seeing so much money in the hands of private, private equity and big companies that they are just coming to my clients door and knocking on the door. So they're like, Hey, guys, are you for sale? And my clients like now? And they're like, how about name your price? And then they're like, named my price. Okay, so then they come back to me, they're like, hey, somebody wants to name their price. I know, we were worth a million dollars at the year end, but I could do you think we can get three? And I'm like, oh, no, let's take a look at it. So it's negotiating that purchase price up. But what I say so I come in there and I say, Hey, can you go hire my guy, Ed, because he's gonna help you like, make sure you get the right. And you know, what the owners say? Why would I? Why would I bring in ED like, I can do this, right? And you know, what the buyer says, Why are you bringing in ED, we want to screw the seller over don't bring in ED, it's gonna protect them. And so we're going in this interesting space where business owners are doing their own deals, regardless of what you say, right? And so and I like I'm like, you know, I got people that won't charge one the deal fee, like, they'll just charge you by the hour. Now. They're like, I got you can we just use you? And I'm like, what, you know, but the reality is, they're getting it done. And some of the buyers and sellers just want to do this, you know, business owner to business owners, so they're not necessary. Like sometimes it's an unsophisticated buyer. And it's an I had a unsophisticated buyer and seller, where literally, they were both like, okay, Melissa, so should we both just hire the same attorney like Who should we hire to do that? And that, quite frankly, after being in a lot of deals that were really bad or went wrong, or had post litigation after the deal, like one of my deals literally within a month, they already had an issue, right? Sure, because of some, you know, stuff off. Yeah, played off. That's what's happening. And it's interesting to me, because these are the clients I always wanted when I would go to m&a. Right. And I could never get them because they were kind of untouchable because they had so many advisors around them. But the reality is, this valuation is kind of the carrot. And they want to know, because they want to negotiate themselves. Well, it's and then when they're not good at it, they need us to help them in the wings, though, half the time, I'm just, I'm helping them, but not a leader.

Ed Mysogland  50:36  
Yeah, I'll tell you, in our shop, I mean, it, I can tell you with certainty, if you do valuation work, I mean, you know, digging in, not necessarily a full blown report, but digging in and understanding the value and understanding how the buyer is going to look at, you got 87% of the time your business sells. I mean, that's a huge number. And, and but at the same time, I, I wish and I think I'm going to just because you said I'm going to start keeping track of, you know, our profit center of, of unscrewing up people's original work, not value work, but negotiation work, and just the, what you describe, hey, I've got a buyer, or I've got multiple buyers, and I get these letters every day. And now what well, you know, I got this far. And, you know, the when I

Mellisa Gragg  51:33  
told my guys, I was like if you get calls every week, write down the names, write down, the names, just write down. Like, that's our short list of If we did want to do because what I see is when when really profitable companies go to sell, there's usually an event, a health event, a situation that happens that makes it be like, Okay, we got to sell in six months. And the reality is when the person comes knocking, if you are ready, and if you know the the worse, you're worse, right? Then you're in a better situation, if you also, you know, it's not like, oh, doing evaluation makes you better prepared, know, doing evaluation, or having some consistent advisors in general, they're going to be like, Hey, why are you doing that? Oh, that's not good. Don't do that. Stop, get an accountant clean up the books. And so when they come, quite frankly, if somebody does a quality of earnings on one of my deals, it should go smooth, because we already knew, you know, or even like we talked about this, we'll negotiate the, the whole back. Like, I will negotiate the whole back at the LOI stage, and they were like, Why are you negotiating this? And I was like, because you're gonna come back and ding me on it at the end. Like, let's talk about everything right now.

Ed Mysogland  52:51  
It's funny you say it because I was just squabbling with with another deal person. And they were like, You gotta be kidding me. Well, I told you, I had Elliot Hollen from Guardian. Due diligence on the on the podcast a couple of weeks ago. And we, I was saying, Boy, if you could just show up to a to a buyer show a buyer, here's what the quality of earnings, wouldn't it make the whole process go? infinitely easier? That and, and the opposing viewpoint was? Why in the world? Would I air my laundry? And, and get dinged at the beginning? And I'm sitting here go? Well, I'm not really certain. I'm questioning how big of the ding, you would receive? I mean, they may they may look at and say, Yeah, you know, it may not be worth as much as we originally thought. But I have to believe downstream after everybody's put some time into it, they're gonna get dinged worse, you know what I mean, from a value penalty.

Mellisa Gragg  53:58  
If you have a skeleton in the closet, period, point blank, we have to pull them out. We have to dress them up. We have to put lipstick on them. We have to make it look good, but we need to tell them it. Selling your company is like a relationship. Okay? So if you have, I don't know, a really big issue. an STD, you probably should tell that person before you do that next step. And so in a in a selling your company, if you know that when they come to your facility, you know, something's going to be there that they're not aware of, then why wouldn't we prep? Why wouldn't we just here's the thing is, why aren't we just honest, right? Just be honest, you want to buy it or not buy it? And I think that that's where these business owners are because if they're being approached, then they're kind of like okay, and I do say let's, let's anchor the deal like Let's put that number out there, because I want them to negotiate off of our number, as opposed to, they come in and you want 5 million, and they tell you one, guess what's going to happen? Every single day, if you do that deal, you're gonna remember that day, right? And you're gonna think that they tried to screw you. And it's just gonna blow up, like so many. So much trust is built in the deal process with those two owners, that if you like, we had a situation where they're like, there was some adjustment. And they're like, Oh, we don't need to tell them about that. Oh, yes, we do. Or we bought out at one of our deals, we bought out an owner, like a year before, at a very different price. And they said, Do you have a valuation for that buyout, a report? And they said, Nope. Well, how'd you buy him out? Oh, we did the analysis with Melissa. But we never summarized it in report. Oh, really. So I presented the value to all the partners jointly, and they purchased each other out at that price or a similar price. And when they did it, they said, Okay, well, we need it in writing. So that everybody I said, No, I would not put it in writing. And they're like, why? I said, because due diligence comes and they say, Can you give us your past valuation reports for the past five years? You get to say the truth, which is you don't have one? That's great. No, that's, that's how I protect you from yourself. Yeah, and the deal?

Ed Mysogland  56:30  
What that is such great advice, you know, and the funny thing is that these are the sellers out to me, the level of scrutiny and the amount of professional advisors that are going to be in this deal. It's got to be found out whatever, whatever you think you're going to hide, it's your there's no way that anybody's going to, to not find it. And so this caveat emptor stuff, because, you know, as like I said, my this other deal guy? Yeah, he's I never put a quality of earnings up front. Yeah, well, I'm, I am totally on the opposite end of the spectrum. And it sounds to me like you are too well, and if

Mellisa Gragg  57:17  
you don't do you don't give them the report, I think you have to do the work. I think if you're gonna consider I mean, and you know, this is the stuff that we all we say, but if you're going to consider selling, cleaning up your books, getting an idea of the value, because the reality is you're gonna think it's worth more than it is figuring out what the after tax effect because guess what, there are taxes in these deals. That's why we do stock, you know, understanding a stock or, or asset sale, like why do I care? Understanding what happens if you sell a C Corp, or an S corp? You know, like, these are little things, but I think that that's how you can start to educate the client is how do you do some of these things? Now, I think that this is kind of different. But I think that we're going to start moving towards a private marketplace. And we're going to start moving towards like a matchmaking kind of situation. Because like, I have a certain type of company that my buyer once right, yep. And they want a certain type of company, I was like, Okay, we're gonna go look for it. And then the next week, I get a call from somebody who wants to sell that company. And I was like, what? I was like, you know, I already have a buyer, but I'll do that work, but I'm gonna value it. And I'm gonna say what it's worth, because we have to do it for certain other purposes. And I can't, it's my reputation. So I got to do it, right. But I think I could go back to my buyer, right? And say, I already did this valuation. She doesn't want that, because it's fair market value. She wants more. And now conceptually, so like, let's say right now, you and I are both businesses. And my price tag says 10 million and your says seven. Right? So you come to me and you're like, Hey, your price tag says 10 million, like a matchmaking site kind of right? Your prospect has 10 million. I said, Oh, no, no, yes. That's, that's what it's worth. But like for me to sell now. It's going to be 12. Now, what am I going negotiating? I'm negotiating the premium. everybody's aware of what the fair market value the base value. Now, do you want to buy it for premium? What is your premium compared to that person's premium? And now it's just a I'm gonna get what I'm worth, but I want more. Now. You're like, well, but your price tag to 10 million. I was like, Yeah, I know. But that's in five years. Thanks. Bye. 12 million today. Now, you might say, I would now I had I got cancer, and I'm like, they go, Okay, well, you take 9 million. And I'd be like, yeah, no, I'll take it right now. You know, but it creates this, this openness about what the issues are, and we're open dating Right, then ever because most for the most part, people don't want to sell their company. When you ask business owners, do you want to sell your company? They said, No, we want to grow it, we want to expand, but they're gonna get the knock at the door. And that's I think what you'd have to be prepared for is when the knock comes. Are you ready?

Ed Mysogland  1:00:17  
That's, that's a good point. All right. I appreciate you going over time. So my last question is the one I ask every guest is, what is the one piece of advice that you could give to the listeners that would have the greatest impact on their business? How's that?

Mellisa Gragg  1:00:40  
So what I normally always tell people is know your numbers, okay? So you can be a brilliant marketer, you can be a brilliant Rainmaker, you can have the personality, the size of Texas, everybody will love you. But there's veracity, and, and understanding behind numbers. And when you can at least talk the numbers. And if you can't talk numbers, if numbers is not your strong point, then have somebody that does that, that you can understand from or, you know, like, even attorneys, I'm like, You got to start understanding what the business mean, what are these business things mean? Because, quite frankly, you know, like, I've been talking to a lot of people about like, chat, GPT, and stuff like that, and AI. And I was like, Hey, I was gonna take away everything, all of this bullshit that comes out, Oh, can we take that any of that bull that comes out of our mouths, right can be created by AI? Sure. So you have to figure out why do they need you in the room, the virtual room, the actual room. So if you're just coming in, and you're spitting out, or just doing this rote stuff, because you heard somebody wants to buy a company, oh, you're gonna pay five times three times EBIT, da, if you don't really know why somebody would pay a premium for you. If there's not a differentiator, then there's a problem. You know, if you can't walk away from it, you know, like, I got a guy, he's running an amazing company. And I was like, your goal is to leave for two weeks and not take a call. And he's like, No. And I was like, Okay, well, maybe it's next year's goal. Right, this year's goal might be a little bit different. But I don't think business owners understand that letting go of their business takes time. And so you have time to get to know your numbers, you have time to know why things are moving, because quite frankly, start budgeting, start projecting work with somebody to see if you even line up with the projections, and start to take a more calculated, because my, for me personally, companies sell amazing on two to three years of great trajectory of growth, and they, they sell well on top, you take that one dip down, it's not so good anymore. So it's really like when's the right timing and opportunity. And if somebody's going to come knock at your door, be ready, because that's going to be the easiest deal you probably have ever done

Ed Mysogland  1:03:19  
under present. And, and the fact of the matter is, is that there's so much activity of buyer, you know, it used to be that, that we were the kind of the conduit to the marketplace anymore, oh my gosh, you know, the, the, the work that we do to find buyers, anybody can do it, you know, it, you know, we may know, different buyers and better buyers, but generally speaking, you know, the, the process of procuring, or, you know, a seller list and targeting and so on so forth. There's all kinds of books on it. But yeah, it is what it is.

Mellisa Gragg  1:03:58  
I think people will move and shift towards more partnerships, more line initiatives, you know, trying to get lower costs on supplies and, and things like that, but the old, you know, merging and somebody's just going to take away all the risk and give you all the money. I don't think that necessarily happens unless you have heavy equipment, companies, you know, but these service companies and things like that, I think you just have to be you have to know how you are making money, if it can continue, and what Reliance it has on you. And if you can answer those questions, those are going to be the bigger questions that a buyer is going to ask and if the buyer doesn't think they can ask you questions, how are they going to keep you around and how are they going to think that you've done something that's sustainable? Sure. You know, it's your credibility at that point.

Ed Mysogland  1:04:53  
It is. Well, thanks twice for your time. You have been you have been And you're awesome the first time you're even better the second time. So where can where can listeners find you?

Mellisa Gragg  1:05:08  
Well, currently, we have valuation mediation.com, which is really what we're doing a lot of our valuation in some sort of collaborative fashion, you know whether whether it's really called mediation or not. It's really just working with one person when you have multiple parties that just need a number. Yeah. But that's a good way to reach out to me, you can LinkedIn, I'm always connecting with LinkedIn, people, even strangers. I know that's for Bowden, but I'm fine with it. And reach out to me, most people have my cell phone. And it's pretty much everywhere on the websites. And if I have the capability to answer I do so I get a lot of calls from like, I saw a video, and I have a question. And I'm, like, great, and sometimes they result in like, Great cases or clients. So I think just put yourself out there and and be available.

Ed Mysogland  1:06:02  
I got it. And you also have a podcast, too.

Mellisa Gragg  1:06:06  
Oh, yeah, I forgot about that. Yeah, we do have valuation podcast.com. This is what happens when you get to podcasters. Together? No. I'm in the role of I don't have to worry about that. You know, but we do we also have a mediator podcast.com, which is for the mediation nice side of it. Because I think that's going to be really big in the future as well.

Ed Mysogland  1:06:28  
I agree. Well, Melissa, it's been great. I sure appreciate your time, and I can't wait to hear the feedback from people, you know, because this is a different way of looking at at at edit a common issue. So I'm so grateful for our time. Thanks again.

Mellisa Gragg  1:06:44  
All right, well, Thanks, Ed. I appreciate it. Not not a lot of people have me on the pot, other podcasts. So this is awesome.

Ed Mysogland  1:06:50  
Well, they're just gonna have to listen to this one and they'll figure out what a great guest thanks again.

Transcribed by https://otter.ai