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Welcome to Startup Club. You’re listening to Serial Entrepreneur Secrets Revealed, and today we’re gonna talk about the art of the exits, when to merge versus when to sell. Should you stay with the company? Should you go? We’re gonna try to figure that out. And we have an expert with us today. Who, an m and a expert named Pierre Heurtebize

biz Pierre

hello. Hello. You’re coming in a little light, uh, on sound. I’m jumping, jumping, uh, jumping you right into it. There’s Michele Van Tilborg our moderator as well, and Mimi Ostrander, who actually writes the blogs on the website. If we haven’t already checked this out, go to startup.club and, and and, and have a, have a poke around.

There’s a lot of great articles. We’ve done some great [00:01:00] sessions on G P T over the last few weeks. , you know, different ideas. You can use AI to help your business. Um, and uh, today we’re talking about the art of the sale, whether to merge or to sell, whether to stay on or not stay on, uh, either. I’ve been involved with about probably 12 to 14 sales in my life, and I’ve also been involved with, um, equal or even probably a few more acquisitions in my life.

And I can tell you, they’re all different and very interesting, and every one of them has very different characteristics. So if you like this room, what I would ask you to do if you’re in the audience is, or even on stage, uh, as well, if there’s a button on the bottom. Of the room, right? The second from the left is a share on Clubhouse, and I’m gonna do that right now.

Share it on Clubhouse. The other thing is, if you’d like to come on stage, please raise your hand. You may have a [00:02:00] question for Pierre, or you may have a story about your sale and your experience with your selling your company and how you handled that. Well, welcome from, uh, France. I, I presume you’re in France today, Pierre?

Yes, I am actually. Oh, very cool. So why don’t we kick it off with, the first question I have really is, you know, timing. I wanna talk about timing, like when is the right time to sell? And it’d be interesting to hear from Michele as well after, after U Pierre. Yep. I was very happy to start with that one, like, great question.

That’s generally. Main question that people ask is, should I uh, sell now or should I sell later? So in a perf perfect world, you want to try to sell when your business is basically booming, where you can go see, see buyers, show them like a strong growth, uh, a pass to profitability or an existing profitability.

See that you still have a lot of potential on, [00:03:00] on your market because that’s when you are going to attract as many, uh, potential buyers as possible. You are going to be able to, um, uh, to negotiate harder and put them in com in competition. That being said, you also need to keep in mind that if your business is going well right now, you can be tempted of trying to sell to, to wait a year or two to have a higher, uh, level of revenue.

But you also need to think that that potentially the market can switch. So it’s all about, you know, adjusting to. Where you think the market is going and trying to optimize for when you think you’re going to be the most, uh, attractive, uh, and have the most potential. Cause you’re already saving potential.

Yeah, and we had that situation last year with one of our e-commerce companies. We had two prospective buyers come knocking and we’re like, oh, you know, we’re just gonna get, you know, add another whatever, 10 million in sales next year, and you know, the way we’re going, everything’s going [00:04:00] great, so let’s just wait and we’ll get more value next year.

Yeah. , you’ve seen e-commerce companies in the stock market. They’ve fallen by 80 to 90%. We probably could have walked away with a valuation last year and today if we were to go to market. Um, no, not, not so decent. It’d be more of an earnings multiple versus, uh, a growth play. And that’s interesting too, because we’re in a new time now with high interest rates, uh, potential recession looming, et cetera.

It seems like the market is looking at. Profitability as being more important as a metric clearly than growth? Is that correct, pierre? Hundred hundred percent correct. Now, no, most investors are, uh, are looking at companies that can generate cash flow now as opposed to trying to, to play the long term game of trying to find companies that can 100 times, uh, based on their potentials.

They really want to reduce their downside rather than looking at the, uh, potential upside.[00:05:00] 

So, Pierre, I see, you know, I’m looking, you know, we know you’re with Horizon Capital and your specialties are mergers and acquisition m and a and I, I happen to notice that on your profile as well, that you said something about like micro SaaS companies, but just ki could you kinda like tell us a little bit more about yourself?

And what kind of m and a opportunities or private equity opportunities you’re looking for. I think that would be interesting to our members here as well. Sure, happy to. So, uh, a little bit about my personal background. So, uh, right after my mba I started working in private equity, small cap private equity, and the small cap is important cause small cap private equity is today different from, from large cap.

Uh, and then after that, I quickly moved to pwc, [00:06:00] where I work there for five years. First in France, then in Australia. So working on over 30 or 40 transactions, uh, uh, m a transaction where I worked there. And after that I started working with Horizon Capital, uh, and my business partner Ike, uh, focusing solely on SaaS businesses for, so for, for the past three years, 90% of the work we’ve been doing has been, uh, on SaaS businesses, uh, that are doing less than 5 million ar.

Basically, and, uh, in terms of the spa specialty and, and the things I do is, uh, you are exactly correct. So I, I can either, and I’ve been helping entrepreneurs sell their companies as m an advisors or find companies to buy out to, uh, to fuel their growth, but also as a specialized in financial duty agents, which is basically the act of checking all the numbers and making sure you are able to [00:07:00] write the story of a company or the historical, uh, trajectory of company based on its financials, uh, statements, and, uh, based on their numbers.

Excellent. So that sounds like a really fun job actually, to me. But, you know, so he, here’s a question for you. What, what kind of, you know, things should a person accompany. Consider when they’re looking at merging or being acquired, like what kind of considerations? Like there’s a lot of variation in between there.

It could be a complete buyout, it could be a percentage, or as you said, maybe even a merger where you stay on. What would you advise people to consider when um, they’re, when they’re in this situation? Yeah. Uh, so first to link to the fir first [00:08:00] question about when it’s the right time to buy, I think a very important consideration as a founder is to look for, for, from a pure financial perspective, right?

Is to look at, uh, what you would consider as a successful exit for you, and what amount of money would be life changing for you, right? And, and everyone has a different number in mind. It could be 1 million, could be 5 million, could be 20 million. So, . If you ask yourself the question and you think that your business is at the right time to be able to attract that type of, uh, valuation, uh, and allow you to, to, to change your life, I think that one of the first step to, to take the leap and say, okay, I’m ready.

I’m put, I’m ready now or no, maybe a good time for me to look for buyers. The second step is, uh, what do you want with your company? So, so you have people who start companies just for financial [00:09:00] games, games, and they are very happy to sell it. Uh, after three years. Uh, a lot of founders that I meet are like super passionate about what they created.

They, they’re driven by their mission, by their product, by their company. They’re basically the second baby, and it’s very important for them. To either have a legacy, a legacy, or at minimum to make sure that the products they build, that the organization they build, that the people they work with, uh, uh, are well taken care of after a merger or after a buyout.

So basically, when you consider it, I think it’s very important that you figure out what are your goals and what are the most important things for you. Do I want as much money as I can? Do I want to be able to continue working on my project, but potentially with more financial, uh, help from a bigger organization that’s going to give me resources that’s going to be able to make me go to the next [00:10:00] step o of my growth?

Do I want something where I just want to be an advisor or like a senior advisor? Uh, but I want to make sure that my name is still associated to it, or that the brand I’ve, I’ve built is still there, you know? You start by answering all those questions and once you have a clear understanding of what you really want, that’s how you are going to look at the different opportunities, uh, that, that you can have and that you started mentioning.

You can be bought out 100% by your strategic buyer. You can be bought out by a financial buyer who will generally want you to continue working for them. Um, posi possibility are, are endless and are based on your own preferences. And if you have, uh, any more specific question, I’m very happy to answer them.

Oh, it’s interesting you talk about, um, different types of buyers. Um, you mentioned strategic buyer, a financial buyer or so I call it really a cash flow buyer. Similar. A lot of [00:11:00] the private equity firms tend to be very cash flow oriented. And then, uh, and then you also have a competitor who can buy you out as well.

And. . One of, one of the things I often do is with our businesses, we have a number of them in the incubator, is really try to build and develop relationships with our competitors. Cause one day they could buy us out. Yes. But can you talk about which is the best, uh, I mean, you’ve got this strategic buyer, cash flow buyer and a competitive buyer, like a, a competitor buying your, your company, which is the best type of buyer to sell to.

So I’m going to answer that question and there’s an assumption that you mean what’s the best buyer from a financial statement and to get the most money. Like, who would pay you the most money? . Exactly. Okay. So . So, so generally speaking is going to be the strategic buyers. And the reason is very simple is because compared to financial buyers, they’re going to benefit from, uh, from synergies.

So, which means that for, uh, when they buy you [00:12:00] sorry for, for every dollar of revenue that they buy from you. There things that be able to generate 1.5 or, or, or no or two additionals, um, dollars, which means that from their perspective, your value is bigger than from a pure and strictly finance, uh, financial buyers who will look at your cash flow, uh, um, kind of have a business plan of, of what type of growth you can get and be limited in how much they can offer by your potential performance as a stand.

However, if I, if I, if I can add, you also have a, uh, like a third solution that may be very lucrative for, uh, but maybe more for, for the top manager and not necessarily as much for, uh, for, for the owner is partnering with LBO Company, LBO Private Equity. So LBO private equity, we [00:13:00] basically look at, uh, the cash flow generating company and buy them out using a lot of debt and then pay back the debt, uh, through, uh, through the cash flow generated by the company.

And the advantage of that, especially for, for the top management of the company, is the private equity will give back, uh, a percentage of, uh, of their capital. If they, if they overperform, which is a very good way for, for top managers, uh, to, to generally, uh, make a lot of money without owning, owning most of the equity.

Well, I, I presume that that would be a pretty difficult transaction today to happen given the, the interest rates. Um, I probably be talking 12%, 13%. I mean, interest to, to, to be fair is I think we’ve just been too used to high interest, uh, to, to super low interest rate. Like, uh, when I talked to my father who, who bought his house like, uh, 25, uh, 30 years ago, he’s basically telling [00:14:00] me he, he, he, he had to pay 15% interest on his mortgage.

So, and, and they were still buying houses. Uh, so I, I don’t have exactly in mind how, how eyes or interest rate were, uh, 15 years ago, but 15 years ago, you already add a lot o of LBOs going on even 20, 25 years ago. And I, I do think for lbo, like a, if you pay 12 to 15% interest rate on, on, on your debt for, for lbo doesn’t seem that crazy to me.

When, when I was back in mba, that’s kind of the, uh, of the interest we were using back in, in like 2010, around that time. No, I understand. And, and I think the, uh, you know, we’ve definitely been spoiled. That’s po that’s possibility. Mm-hmm. . Um, I, I had the opportunity to acquire a company once I, I had sold my company to a Fortune 500 company and I worked at that company for three years and during that time we acquired a number [00:15:00] of other companies.

and I was in charge of the acquisitions. And um, the one company I’m thinking about it was a pretty, pretty, pretty decent size company. It was, you know, a 30 million deal, not when we acquired them. And they were a private equity firm that had a high leverage debt. Mm-hmm. And quite frankly, I nicknamed it as zombie company because all the people there would work, every, all the employees would work all month long just to pay the interest payment.

Yeah. And there didn’t seem like there was a lot of motivation, a lot of vision. It was just all about pay that interest payment. So sometimes I don’t know if, if maybe because of that experience, I’m partial against cash flow buyers. Obviously, if they’re the only buyers, I think, you know, you obviously have to look at them, but cash flow is, is, is tends to be on the lowest of my lists.

And then, you know, obviously competitors, they can get economies of scale mm-hmm. and they’ll generally pay, generally pay you something more than. Your standalone value [00:16:00] because they’re getting that economy as a scale and a strategic buyer is gonna leverage your business with their business in some way to give you a substantially higher value than your standalone value.

Um, they won’t give you the full value that they benefit from cause they want an arbitration. Of course, of course. But there’s some midpoint between the two where they can actually give that to you. So I, I’m, I’m in agreement with you on that, with strategic buyers, definitely being the, the, the top type of buyer, if you can find one.

Now, let’s flip it a little bit. Our business isn’t doing that well, uh, assume for, for a minute our business is not doing well and we’re just tired and we just want to get out. You know, what do we do at that point? What kind of deals do we structure? Um, I, one, I, I know just call your competitor and say, Hey, I, I’m done.

Are you interested in. , and, and, and that’s one technique. Uh, but I’m curious from your perspective that that’s a possibility. But you also need to keep in mind that generally when you are in that [00:17:00] position, you lost most of your leverage anyway. So you are not going to get crazy multiples. Uh, you are just going to, if you manage to get an offer, you’re going to get an offer from someone who was not necessarily looking to buy you out and understands you want to get out.

So ob obviously you need to ask yourself whether, uh, It’s going to be sufficient for you and whether, uh, whether you could just con, con continue or if it’s, uh, the best decision for you at that point. But if you, if you do that, you also, you can also list your, depending on the site of the com your company, you do have, uh, a couple of like broker website or, or website where you can list your companies to try to find a buyer.

Uh, I’m thinking about Micro Acquire, which rebranded to acquire.com for instance, who are mostly specialized in online businesses. But you also have a other platform like this that allows you to [00:18:00] connect to, to potential buyers, uh, and, and at least get like a couple of offers to, to see how much you can get from Itno.

Another path you could go, go down to, uh, is uh, try to find what’s called, um, uh, sorry. Um, I, I’m, I’m sorry I forgot the name. It’s ba basically people who partner with, uh, financial buyers, uh, that are going to get paid for two years to find a company and become the CEO of that company. And so that’s interesting.

I I, I, I haven’t really thought or heard of those types of companies. Yeah. I, I have a few friends that do that kind of thing. It’s very interesting, um, dynamic. But would that be called, would you do that through a broker pier? Um, for, to find the company you mean, or to get financed? Um, like what you just said, where they put [00:19:00] somebody in as a CEO for a few years.

So, so generally speaking, uh, I mean most of the time is either someone with a lot of, uh, industry expertise. Like who has been a CEO of the company before or, or someone who went through the path of, you know, getting his MBAs and working at McKinsey and BCG and, and then add a couple of years, uh, as a, um, high level senior team, team member in, in a, in a good company and get to a point where they want to be the CEO of their own company, but they don’t have the cash to buy it out.

So they partner with those exact type of investors who are looking for, uh, for, for potential CEOs. And the CEO E is going to be in charge of finding the company to buy out. Right. Search, search isn’t, I was actually at a company that was doing something like that similar. Um, basically it was [00:20:00] actually the investors that put the person in, you know, in the CEO position, right.

And then they actually were going to, you know, obviously financially benefit from, I, I don’t wanna say turning it around, but actually finding a good buyer. So that’s a, you know, it’s, it’s almost like a turnaround in many situations. But, you know, it’s interesting that you bring that up because that is a good, um, opportunity for people to get a CEO and their mission right, is to sell the business and they’ll get x amount of percentage or whatever, whatever the compensation is, uh, especially to the problem that Colin mentioned, right.

Where you’re burned out and you just kind of wanna move on. Exactly. Exactly. And I think in most of these cases, um, the main difficulty is people, Don’t want to trust someone with their, their equity. Cause [00:21:00] most of the time, you know, most of the equity and the wealth of the entrepreneur is tied with business and with equity.

So taking a step to hire someone external to be the CEO and trust them with your company is basically trusting them with most of your wealth. And that was a struggle to do it. However, I do agree that on paper is actually a very good, uh, good way for you to not sell your company at like, uh, at a point where you are losing leverage, uh, is to just step away from the business and let someone else, uh, run the day-to-day operations.

Yeah. Another case study here, um, well we had a company, it just was struggling and it was about five, six years. And, um, it was an outdoor media taxi company. We had the taxi cab tops for Canada, um, for Toronto and Montreal. And we had exclusive, like we had almost. Every, almost a monopoly in some weird, weird way.

And we had been running it [00:22:00] for years and years and you know, Uber was eating away at the cabs. And we just decided that we just didn’t want to do it anymore. So what we did is we went to our competitor or another outdoor media company we got to know this gentleman for, for over a couple of years. And that’s important too, is building the trust with the buyer, right?

Because it’s, he is just handing it over to anybody. I mean, if you’re gonna shut it down anyway, you might as well gamble and hand it over. But the reality is handing it over to anybody is not necessarily a good idea. But building and developing a trust with the potential buyer I, I think, was important in this particular case.

And what we did is we went to him and said, okay, we don’t wanna do this anymore. Uh, but what we’ll do is we’ll merge with. and we’ll get, you pay us, you pay us an earnout based on the actual revenue generated by our business. It’s like something like 20% of the revenue for five years. And we will, um, uh, and also we’ll get a, a 15% of the combined entity.

And so we did that [00:23:00] transaction. This was before the pandemic , and we did the transaction and we’re doing pretty well. We got about a third of our, our initial investment paid back and then the pandemic hit. Um, and, uh, and then, you know, it’s slowly coming back a little bit here. Uh, and you know, we’re, we’re, we’re likely to recoup our initial investment and potentially make a small profit on that particular deal.

So if you’re looking to buy companies, there are people out there who would be interested in selling them for their own cash flow. It is technically possible. to do that. And the key is to develop a trust and relationship. Can you talk about that element of the deal pire as this importance of developing trust with the buyer?

Or if you’re selling a company, a seller? Uh, I, I think if you have the trust, it makes everything easier. Cause uh, then you, you kind of need less, uh, due diligence. Uh, it’s going to make the negotiation easier. People know what they’re [00:24:00] buying, they know their their market, so, so even the conversation are going to be more fruitful cause they’re going to be on points that really matter.

Uh, not everyone can do that though. That, that the reality, a lot of people, when comes a time where they want to sell their business, uh, they have an idea of who could buy them out, but they have no previous relationship with these people and. And, and, and I think, uh, for anyone listening and with that situation where they’re starting the company or they’re currently running it and things they will sell in a couple of years, I think it’s great advice to start trying to build relationship with some key players.

We will never be able to know everyone that can buy you out, but if you can already have one or two guys in the loop that you personally, personally know, I think it’s, it is going to greatly improve, uh, your capacity to, to make a deal. Yeah, and I [00:25:00] think the other one, the other example there was the recent one that Michele and I, I did, and another gentleman, Jeffrey Sass.

Um, we sold a company to GoDaddy and we had built it up over 10 years. And we started, the first time we talked was about three years before we sold it, and then we talked again a year later and then again a year later. And our numbers kept coming in. They, they kept seeing how well. we were doing, and then they just one day decided to make the decision to do it and, and jump on it.

Look at it the other way. Let’s say you want to invest in the stock market. If you, if you, if you can pick any stock you want, you, you will still feel like your, your gambling on that stock, right? If you’ve never heard of it right now, sure, you’re going to do a bit of research, but you, you will still feel like you don’t really know that stock and, and you’re taking a chance.

Now, let’s say that you pick a stock today and you keep track of it for three years, and then in [00:26:00] three years you make the decision to invest in it. You will have the feeling that you actually know that stock, that you’ve been striking all these up and down, that you’ve been tracking, you know, the, the, the information that impacted it.

So you at least will personally have the feeling, you know it so, That’s exactly the same psychological process that will be happening in the ad, uh, of, uh, of, of your potential buyers. If you add several regular touchpoints, they will have a sense of familiarity with your product, with your company that will make them way more confident in, in the possibility to buy you out.

Yeah. I just wanna add something to that. , here’s something that I’ve learned over the years. You know, when you’re young or, or you’re feeling whatever, under pressure, you just wanna try to make those connections as quickly and as fast as you can. And it’s very difficult, right? To build a real [00:27:00] relationship quickly or fast.

Um, what I’ve found in, you know, especially in companies, like it takes time. So go to the conferences, you know, and even if your competitor is doing something particularly well, like there’s nothing like compliment them on it. It’s, it’s, it’s fine. But I think it’s, these are tend to be long games. And when I say long games, you know, absolutely over a year.

And it could take several. But if you just keep the conversation open, and I’ve seen works for companies where we were, you know, publicly traded big companies and we just kept the conversation ongoing with, um, you know, our competitors that we were interested in either merging, merging with, or acquiring.

And, you know, things do happen. And in our case, you know, specifically recently with GoDaddy, um, we were probably their, you know, best [00:28:00] partner and we just kept that conversation going and learned more and more about specifically what they were looking for. And over time, you know, it looks like it magically happened, but you know, these kind of things are often a long term in play and especially if it’s something that the company, the acquiring company needs to fill out their product mix or to give them a competitive edge or even just to simply buy market share.

It, it can happen as long as you, you know, kind of get in there and put in the time. And, and obviously you have to be, um, you have to be providing value. Exactly. That’s exactly, exactly. It’s, uh, and, and like the more, I mean the bigger you get. I, I think also as a owner and ceo, the more I feel like you be, you are becoming a salesperson.

Uh, like at the beginning. You do product development, you do [00:29:00] strategy, you do execution. And, and the more you grow, the more your role is going to be about building relationship with the right people and maintaining those relationship. And personally, I do think that the best relationship you can have are the one that you don’t create out of necessity or out of grid or, or because you have an interest in it.

I think, uh, the one that you can really count on are the one where you, you, you. Clearly have an interest in the person you like hanging out with them. You, you are interested in what they’re doing, in having their opinion. And, and that’s how naturally it will happen. And the reality is I think that in any industry, in any line of work, in anything you do in life, you will always find people that obviously have common interest, but also with whom you click.

You’re not going to go to click with everyone. So don’t spend too much time focusing on the one where it feels like it’s forced and just focus on the one [00:30:00] where you have a real connection, where, where you know, when you have meeting with them, you actually happy to talk to them cause they’re the one that, uh, will also reciprocate or, or, or have reciprocated feeling of knowing you and want to help you out.

And I would say they see the value right in the relationship. And as Colin has said, going back to that, there’s that mutual trust. , great advice, Pierre. So we have, um, two people that have joined us on the stage. So welcome to the stage, Chris, and welcome to the stage Chad. I, I know that too, Chad. Um, so Chris, do you have, Hey.

Hey. Good. I’m doing great. Thank you. Um, we’d love to hear any experiences or any questions you have for our two experts here, Pierre and Collin. Yeah, my name is Chris. I’m in the real estate space, also the wellness space. But, um, I’m always having, I have friends who’s always looking [00:31:00] for good businesses with cash flow.

I, I have, y’all have a ED in the internet businesses. Any, anybody on the stage have done anything with the internet? Um, business that’s got some good cash flow.

Um, We don’t, I don’t think we have any, uh, any, uh, companies here that are for sale right now in the incubator. But I can tell you that the internet companies, the ones we have had in the past have tended to do very well. You now, if you’re looking for cash flow, you will probably, probably wanna stay away from platform companies, subscription businesses.

Then I’ll, cause I’ll tell you why. They, those are the types of businesses we love the most. We just sold one in December of this year. It was a, a platform company. Um, and it was not profitable for, its an entire existence. In fact, it lost money made up to the day we sold it, but we sold it for 5.5 times revenue.

[00:32:00] And these companies are worth a lot because subscribers are worth a lot. They’re actually one of the mo the most, the, the best type of businesses you can get are platform or subscription-based digital platforms, um, similar to the way the one.club had. And of course they have good value. Now, if you’re looking just for cash flow, you know, there are e-commerce companies out there and they trade anywhere between four and seven to eight times earnings.

Um, and that would be based on, you know, the, whether or not the, where the traffic comes from and whether or not the, um, they actually, uh, have the customer base or they purchase the traffic or whatever. So there’s a lot of different parameters on that one. You have to be pretty careful with e-commerce as we talked about earlier today, that that whole area has just gone up and down and, and pretty much crashed right now.

So a lot of the e-commerce companies are struggling, but, uh, I think you [00:33:00] bring up a good point is, you know, if you do have a good cash flow, there’s always a, there’s always gonna find a buyer. But if, if you’re at a struggling, you know, your struggling business, it’s gonna be difficult to find that buyer.

Any thoughts Pier? Yeah, I guess one, one of the issue with internet companies that are cash flow generative is most of the time it’s not always the case, but a lot of, um, of the one I see that generate a lot of cash flow, they’re not necessarily necessarily growing. Cause you know, your profitability is going to be directly impacted by, by your growth.

Cause, cause in the SaaS business, at least what happens is you invest in your growth, uh, through your digital marketing mostly. So customer and customer acquisition, which brings down your profits. So the quickest, quicker you grow, the less profitable you are and you end up with SaaS companies that, and SaaS owners will have, uh, very profitable businesses [00:34:00] that are not growing, that are fairly flat, but they’re still expecting I, uh, EBIDA multiples because, just because they’re software companies.

So especially if you, I think if you come from the real estate investing, when you are more used to see the stream of cash flow and pay a certain multiple on that stream of cash flow, you may be a bit surprised by the expectation for, uh, from the SaaS owners, uh, that are, are, are looking for very high multiple, even though their, their numbers from my perspective, don’t, uh, uh, justify it.

Hey, I ask you another question. Have you all ever done, what’s your perspective on, on a apartment, uh, multi-unit or like a 5,000 units apartment complex? What’s your perspective on that?

So you want to go, Karen? Yeah, I’ll give it a try. So we, we, we actually have a real estate business here as well on the incubator [00:35:00] that we run. And, uh, it’s about 19 properties. Um, mostly single family homes, duplexes, and a triplex. , but we actually operate them as vacation rentals and as a vacation rental.

We found that a particular formula works very well for us. Uh, but one thing I will say about this, and this is, this is relevant for any type of acquisition. There are two ingredients to his first successful acquisition. One of them is buy at the right price. That’s when you make your money. When you buy, not necessarily when you sell.

Um, obviously selling. You feel like you made the money, but the reality is when you buy at the right price, that’s where the magic happens when you get a good deal. The second is leverage. And I’m coming back to this point, Pierre, because leverage today is very different than leverage was even a year ago.

We were working on a loan a year ago at 5% commercial loan of 5%. Today [00:36:00] there we can’t seem to find a bank that’s willing to give us loans. For real estate at less than 8% right now. It is, absolutely. In my opinion, it’s absolutely insane. Considering only two years ago or a year and a half, I got a loan at 3%, a 30 year fixed at 3% on one of the buildings.

That was a personal building that I owned, was in a commercial loan. But the fact of the matter is leverage is very difficult right now. If you have good cash flow, you’re, you’re, you’re definitely gonna be positioned better with the banks, um, if you’re, are you in the United States, Chris? Yes. Yes sir. Yeah.

So the one advantage if you’re an American citizen, you’re in the United States, is that if it’s more than, um, I believe, I mean, thinking about this, uh, I remember being, it’s more than a million or 2 million, I can’t remember the exact cutoff. Then there are Fannie, Freddie Mac or Fannie Mae back government loans that you can get, um, where basically you go to the bank, they l lend you the [00:37:00] money, but they’re backed by the government.

So, There is, uh, for larger lenders, you can actually take advantage of that program. Uh, I do like the idea of, you know, those large units. I just think right now we’re in a very unusual time when it comes to leverage, and I think that’s probably gonna change in two or three years from now. And those numbers are gonna come down.

But if you’re stuck with a long-term high interest rate, it’s just gonna be very hard to make the kind of returns you wanna make. If you’re paying out 8% and your, your cap rate, you’re only making 8%. I don’t know if, if you have had different experience than me on this one, Chris, I’d like to hear from you.

1. Every, everything you saying is right on the money. Um, you know, the rates, uh, have a little, um, thing to do with the, um, return on your investment. You just gotta be, a lot of wise, a little wise these days when you’re doing things, you know, with so much uncertainty in the market, nobody knows what the, um, the two or three year plans, what’s gonna happen.

I know, I know. So I have some friends that they’re putting down, they’re [00:38:00] putting, bringing more cash to the table on those, um, multi-units and I don’t even know if’s That’s smart

it seems like to be, you know, one of the only game plans right now, like one we were, we’re, we’re just doing a mortgage last night on one of the buildings and it’s co-ownership, Michele and I, with another partner. And, uh, we’re like, okay, we don’t, it’s about 8%. We’re gonna be paying about 8% on it. It’s vacation rental in North Captiva and it has a very good return on investment.

Don’t get me wrong, we probably run around 12 to 14%, but we’re like, we don’t even want the full mortgage. We’ll just take like half and just put more money up ourselves just to, just so we don’t have to be stuck with such a high, high interest mortgage. And so, you’re right, there’s definitely, if you have the cash available, it may make sense to put more money on the table than it is to leverage right now.

But the key to good real estate is buy well leverage well. And every business as well. Even if you were to buy a, buy an internet business, if you bought it well and you’re able to leverage it, that can actually, you know, [00:39:00] that can help you out as well. Yeah, and, and I think you’re making some very good point about that because there is one thing I’ve been fighting against is everyone on social media basically saying, oh, buy real estates and you can, can never be wrong.

Or if you manage to over-leverage your real estate, it’s going to pay for itself and you are going to become rich. Like, it sounds like they’ve forgotten, uh, the, the basic rule of finance, like they’re assuming the price of real estate, of your real estate, uh, whether it’s, uh, it’s a unique house or whatever.

They’re basing the assumption trend on the fact that it’s constantly, uh, uh, going. and they never really talk about the possibility of, of the i prices to go down, which may be dramatic if you or Overleverage, uh, your investment or if you, you, you didn’t pay the right price, uh, at the moment where, uh, where you borrow house,

hey, that there was [00:40:00] a article, um, I don’t know if you all back in 2008 in the Washington Post It, it was talking about Trump and I, I Trump have changed his game far as the way he purchased real estate. You know, cause you know, he’s, he’s been through a lot of the cycles. But it is in that article in 2008.

Even if you Google it and read it, he’s talking, talking about he was paying cash, says 2008 up till today for properties. He’s, he, he’s doing the same thing. He’s bringing more cash to the table. Cause I guess he’s learned from the passion, you know, by being over leveraged from those times, you know, that he went through.

I, I think, uh, uh, games changes a lot and you have to change too. With the, um, game too, if you want to, uh, stay afloat and be, and be thriving. Thank you. Yeah. And you have to think differently. And, uh, we’ve done a show here, oh, about a year ago on tokenizing real estate. So it’s an alternative method of funding your real estate where you actually sell coins.

Uh, and I know crypto’s got a bad reputation, [00:41:00] but we’re talking about fungible coins here, not non fungible, um, where you actually get a unit or, or, or you might get a unit in llc. But the idea would be that you would raise money using Reg CF crowdfunding regulation. You could raise up to $5 million, um, and you could sell these coins or these units, whether you use a coin or don’t use a coin.

This idea of actually selling them. And then you can actually, people can actually trade them on exchanges. and whatnot. So it’s not like a timeshare per se, where you can’t really sell them and you sort of own a particular two weeks of one particular unit. It’s more like a, an actual ownership where you receive dividends and distributions and ultimately capital gains on that ownership, almost like owning a, a stock.

And I think that’s becoming, that’s gonna become more and more popular, especially in a higher interest rate environment. And so we have a project in, we have building lots, and we have a project, um, where we wanna build three [00:42:00] vacation rental homes on North Captiva. And it’s cost to put a million dollars a piece.

And, um, we’ve got the property already secured right across the street from the club, readily nice location. Um, we’ll build these beautiful vacation homes. Um, but I, I don’t want to go and borrow a construction loan right now is around 11, 12%. So we’re thinking about the idea of doing a Reg CF and actually raising money.

From tourists on the island or through exchanges. And this is actually a good lead in to our friend Chad, right there, right? But this idea of tokenizing real estate, it is an alternative way of, of raising money in a higher interest rate environment. And I think we’re gonna see that rise in popularity.

Chad, welcome to, uh, startup Club and the Serial Entrepreneur Secrets Revealed Podcast. This is actually a, a podcast as well, uh, a live show on Clubhouse and that syndicates into a podcast. And you can listen to over 92 episodes on your favorite podcast channel. Chad, [00:43:00] what are your thoughts on this whole topic of exits and maybe, um, you can share some of, of the stuff I talked about on, on these tokenization.

Yeah, well, thanks for having hope, always having a good Friday. Um, you know, well, I think from the title, um, As you know, like John Ferber and I merged the companies back in 2011 to formed Domain Holdings Group, um, which is now still existence, does 50 million a year, uh, as a company, no longer involved. But I think part of the, and then the, another pattern was when to sell, right?

So we sold the brokers division to flip the 99 designs five or six years ago. And so my experience is once you kind of add VCs and you don’t own, you know, influence necessarily in the company, it’s not really your decision to sell. It’s, you’re part of a community or a, an organization you help build out, but it’s, you don’t make the final decisions.

And so, um, my experiences I think is, is time. [00:44:00] Um, if I can go back in time when I do that again, probably, maybe, maybe not, uh, now can I get that time back of the tools that I need, that I built back then that I need to grow, recoup now. So for my thing I think now is I analyze everything in terms of, um, of time.

So my value is my time now. Um, so that’s kind of from the header of your title. Now, in terms of tokenizing real estate, I do run a company called Realty Dow. Um, and we were tokenizing real estate about five years ago, but we saw, uh, the amount of work that goes into the analog in real estate still is very still early from a, um, from a risk reward situation.

And I think what you’re talking about is you’re tokenizing the cap table of an llc and then you’re, and you’re tokenizing that which owns the property, which companies like property are doing a bunch of other computers are doing now. So that is the future that is, um, the better mechanism to create liquidity for your property,[00:45:00] 

my opinion. Oh, that’s interesting. And so have you seen these. I mean, have these deals dried up these tokenized real estate deals or are we, are you seeing any action in that? I know it was, it’s pretty nascent, the whole concept. Yeah, it’s getting loaded up. I mean, do you have Die? Die is a pretty big stablecoin.

I think they’re like six or 7 billion, and they’ve diversified their treasury with like some commercial, you know, real estate bonds. Um, and so some of these, some of these stable coins are starting to, um, um, asset back. There’s one-to-one stablecoin with other assets, and you can’t do that technically with a, a stablecoin unless it’s a digitized, unless it’s, it’s digitized.

And so, but Dye is an example of one that’s, that, that has like a, a certain percentage of their treasury with commercial real estate paper. Um, so, so it’s, it’s gearing up. I mean, it’s just a [00:46:00] better, um, way. It’s, it’s just a, it’s, everything’s better. It’s just, uh, people start being cautious and they’re trying to do it, make sure they do it right, but, uh, the floodgates are already open it cuz it creates, you know, people need 10% liquidity, 20% liquidity on their portfolio.

That’s one of the best ways to do it. So it’s gonna, it’s, it is the future. I don’t know how fast it’s coming, but it’s coming here.

I mean, just in the last Excellent. Just in the last year, co a lot of the people are in Florida. Properties. In Florida, um, you know, lofty is in Florida. I mean, there’s at least 10 companies coming outta Florida that are tokenizing. Oh. Um, a company in Boca here, um, that are, they’re going after residential properties like yourself.

And there’s some, you know what Guy Invoca has, like, I think they’re up to a hundred properties, and then most of their customer base is foreign buyers, and they pay a dividend every, they used [00:47:00] to do a dividend every day, and then Ethereum gas prices got too expensive and stuff like that. But I mean, they’re paying residuals every day, uh, from a mechanism.

And you can’t do that with fiat, um, analog equity shares. Yeah. We don’t, we don’t wanna go off topic. Um, but the, um, I guess the one advantages we thought about for vacation rentals is that, uh, they become your customers as well and they get v i p access to your, um, booking and discounts on booking, and they’ve become actively engaged.

And it’s a way of sort of engaging your, a customer base as well. But I’m gonna ask, you know, Pierre u and every, every, everyone on stage, this question is, , do we all always need to sell all of our company? Is there a model where you can sell a part of your company to, so Pierre, you can meet the needs you talked about earlier.

You know, you, you have a need for X amount of cash. Maybe it’s to buy a home, to put your kids through [00:48:00] college, whatever it is. Um, you meet that need and you sell 20% of your company and then and hold the other 80% and maybe sell it off a bit at a time. Any, any thoughts on that one? Yeah. And, uh, I, I think everything is possible as long as one, you find a buyer, even though basically if you’re trying to get 20% off your, uh, of the value of your company, you can actually do LBO on your own company.

So, raising debt, replacing part of the capital that by debt, cashing it out, and, and, and then using your cash flow to, to pay back the debt. That’s also one possibility. It all comes down to, well, how much involvement you want in the company and how much involvement people that buy you out, uh, want you to have in the company.

Cause sometimes you are too tied to the company that investors make it contingent for, for you to, uh, continue [00:49:00] running the show to be able to, to cash you. Some of the times, if you manage to get to a point where you build a company that is self-running and you can step away from the business, then happy days.

There is also a scenario in which like a business model of instead of trying to sell your company, you can keep your company and you use the cash flow to start off your next company. And if you look at business model, like, um, uh, so in in the software world, they’re very famous. It’s Consti Constellation.

They started with I think like something like 15 or 20 million, uh, 30 years ago starting buying software company. And with the cash flow of the, their acquisition, they would finance their new acquisition and, and grow their, their, their portfolio company that they hold forever. And now they’re multimillion, even billion dollar, uh, group that have EAPs of companies that just generate cash and continue their strategy, uh, of acquisition.[00:50:00] 

Yeah. I think, um, that’s amazing, right? If you can find a company that fits that scenario where it can fund more your business and more acquisitions with their cash, uh, and I agree with you, the best acquisitions and or mergers that I’ve personally been involved with are ones that are very clear from the front what the, um, you know, structure in terms of the management is going to look like.

And I always found that it is good to, yeah, have that all very laid out very, very well before even the transaction closes. And it, and then you can just smoothly guide into if there’s such a thing. Um, Smooth operations, which is what you want. You, you don’t want like all this disruption, right? Because the last thing you want [00:51:00] to happen when somebody’s acquiring you or you’re merging is to have, um, you know, a disruption in your, your income stream.

Yeah. Uh, I do think that’s, that’s basically a talent. Uh, and maybe we don’t flag that often enough that some people are great leaders. Uh, they’re going to be great CEOs to, to lead a company to success. Uh, but a lot of the company rely on them and there is a few people who have the talent to be able to build great organization that don’t need them at the end.

They just put together all the pieces, is going to be self-sufficient, which allow them to just step away and, and, and just have, uh, a strategic role, uh, eye level role where they give the input once a month, uh, and the company is doing well, uh, without them. Yeah, absolutely. . And again, you know, like I said, in my experience, I, I love it like when you can, um, get together [00:52:00] with a competitor or someone who’s really just looking for a very specific skill set.

I think one of the keys we have to watch out for in these partial sales is control. Um, there’ve been a lot of horror stories of companies or that have sold and lost control

that we traded company to another company. But our shell,

yeah. Colin, we’re losing you. Sorry, I got some background noise here. Ah, hold on. Hold on.

What, what, what cooling was saying. Yeah, sorry about that. Oh, okay. He’s back. Sorry about that. Yeah, I’m just in, uh, I lost my [00:53:00] headphones and then a lot of I outside for, but we sold a, a company, um, it was a publicly traded, had a phenomenal astronomical valuation. It was just before the.com crash, and we sold it for, it was a merger, it was 180 million, and subsequent to that sale went over to a, went over a billion dollars, but yet we were locked up and we, we did not have control of the company.

And because of that, a lot of decisions were being made by the different people who were running it. And ultimately that those shares that were $18 a share went to 6 cents a share by the time we could actually trade them. And we spent 10 years building this company in one year, screwing it up. And I sometimes think that entrepreneurs, we do that we’ll spend a lot of time thinking about how to build it, A lot of energy put into that.

And when it [00:54:00] comes to selling, we spend so little amount of time when if you can plan it correctly, you can think it through, you could obtain liquidity or con, keep your control, and you’re in a much better job in selling the. . Any thoughts, Pierre, on, on that scenario? Yeah, it’s quite unfortunate that that happened to you, but that’s also fairly common and not only with partial sale, it also happens with earn out, you know, when you are tied to the performance of the company within the next few years, uh, then you need to make sure that you, you decide, and it’s very clear with your buyers, uh, who’s going to be responsible for what and what type of control you retain in, in the company.

Like I was working on a deal. Few weeks ago where the guy had created an app and uh, uh, because there was a lot of potential, but as of foreigner, the business was not generating that much, much cash and still needed a lot of work. We would have, [00:55:00] um, created a transaction and, and structure a transaction with a three year on out based on the performance basically.

But he was totally happy with that. He is actually the one who came up with the id. However, the one thing he didn’t want to nego even negotiate on was he wanted to retain control over the design, uh, of the product. Because he knew the market, uh, he, he was happy to trust us for, for, for, for growing the company from a digital marketing standpoint and for external acquisition standpoint.

But the, uh, the product, because he was the expert, he wanted to be, uh, to, to make sure that we would not be able to make the final, uh, decision on what the product should look like. And I, I, I think that’s, uh, uh, that’s totally understandable and that’s something you should definitely keep in mind if you are in the process of selling part or, or, or, or all of your company is if you stay involved or if your [00:56:00] payout is tied in any way, in any form to the performance of the company, how do you make sure that you have some sort of control, uh, uh, and some sort of impact on the performance of the company going forward.

And one way to do do that, that, uh, that I’ve seen, for instance, e e even if you want to give up control, then I think at minimum you should have, um, uh, some structuring and some wording in the legal agreement that says that if the company starts underperforming, then the clause kicks in and you, you can take back control of the company to bringing back to where it was before.

Yeah, we, we didn’t have that with our last contract and I’m not really able to speak to it, but I will say that we had clauses in there that if they performed a certain way, then, then we would still get paid our performance bonus. Um, [00:57:00] mostly transactions that I’ve worked on, generally the hold back about 10% for escrow in this particular transaction.

We also were, um, uh, Making an earn out as well on top of the sale price. And so what we did learn through that process was that we really had to spend the time with the lawyers to define every single element of the earn out. Because there’s a lot of ambiguity in language. And when you sign these contracts, when it comes to paying out thousands, tens of thousands, even millions of dollars on an earnout, the nuances of one tiny word can have huge repercussions.

So I, I definitely would recommend spending a lot of time with your lawyer to ensure that you’ve got the right language if you do have an earnout structured as part of your agreement. But what is typical Pierre for, for companies is for, for an escrow. I know it’s [00:58:00] escrow’s different than earn out, but what, what would be a typical escrow, um, to, to, to be fair escrow.

I don’t find it as, As, uh, popular or as usual as earnout, for instance? Uh, like of, of course it’s, uh, it’s not unusual either, but a lot of deals I’ve worked on didn’t even have any, any score comps. But I think that’s because, because you have other ways to reach the same type of, uh, uh, of structure of, um, of, of output without necessarily, uh, u using an escrow account.

Um, cuz the main issue like people have with escrow account is basically if you put part of that money on, uh, uh, on Nsq account, the, the main people who will benefit from it are, are the banks getting the interest on it. It’s just, it’s just money you don’t give to, uh, to, to the seller. Uh, so they can’t, can’t [00:59:00] really make anything out of it.

And it’s also out of your own pocket. So it’s kind of a situation where both parties are kind of, uh, uh, On are kind of losing and not earning any interest or any return on investment on their money. Of course, in certain situations, like Esco account can be super, uh, useful to build trust. And I think we come back to the, to, to, to the trust factors that we’re talking about at, at the beginning.

Uh, it’s mostly applicable when you are not sure whether the company or like the, the buyer is going to have the form to pay you out in the future. But if, uh, if you are in a scenario where the strategic, like is a huge company and they clearly have like a huge balance sheet or a financial buyer will clearly have, um, uh, a lot of dry powder, then the square count is not as, uh, as useful for my, for my opinion, however, to in, in terms of earn out.

[01:00:00] Uh, what we j what I would say is fairly common is to have anything from like 10 to 30% of, uh, of the price as in and out. But, uh, in some cases and, and, and companies like, uh, um, uh, constellation Software are known to, to, to have like a huge amount of, uh, the purchase price paid as in and out. I can go up to 60 to up to 70% of the purchase price paid over time based on performance.

Yeah, I think the, the, uh, buyer likes to pay overtime, but the seller likes to get it upfront. Well, Pierre, this has been really good. How, how do, how do people reach out to you and how do you pronounce your last name? . ? Yeah, Al always, uh, always a issue with, uh, non French speakers. So my last name is s which, which, uh, which I acknowledge is a bit, uh, hard to, to pronounce for, for non French speaker.

Uh, and actually the, [01:01:00] the best way to reach out is either on my LinkedIn, so Pierre Alexandro, uh, or they can reach me to, to my, uh, email, which is Pierre Horizon, h o r i z e n capital.com. Well, I can’t thank you enough. We, we always learn so much when you come on the show. This is the second time you’ve been on, and we really appreciate you coming on.

Thank you very much. And, uh, for everyone listening here, uh, I think we had a real treat. Uh, I think I might even have to go back and listen to it again to really. Pick up all the, all the details that we went through. But thank you very much again, and we will see everybody next week, two o’clock Eastern on the Serial.

Entrepreneur Secrets Revealed. It’s a podcast as well, a live show on club. So if you’re only listening to it in podcast, did you know you could actually come live onto the show like, uh, Kristen, Chad did here as well today. And come on stage and ask questions and interact. We, we love that. [01:02:00] Thank you very much and we’ll see you next week.

Thanks, Colleen. Always love the invitation. Thank you. Bye-bye. Thank you.