How to Sell your Language Business without Losing your Shirt

Igor Afanasayev 00:00
Our first presentation today will be how to sell your language business without losing your T shirt. And Presenting will be Michael clinger who is a CEO at language transactions. So we're still waiting for Michael to join us today. Just make sure. Okay, Michael has started his screen sharing. Will we see Michael today or will be just the screen? All right. Hey, Michael, how's it going?

Michael Klinger 00:37
I'm good. How are you?

Igor Afanasayev 00:39
Doing? Good. Where are you joining us from today?

Michael Klinger 00:42
I'm in Boston.

Igor Afanasayev 00:44
Oh, you're in Boston? That's okay. Yeah, I love how this sorting out and how we can actually work from every pretty much every place in the world from the comfort of our homes and speak about those professional topics. So well, or you don't know much about the topics that you'll be presenting today. Other than in order to sell the business, you have to have one, right. That's right. Okay, so yeah, if anybody who's listening us today knows how to create a like sellable business, please join us in the discussion in the community, or help us do a nice presentation for our next for our next conference. So without further ado, Michael, you can go ahead and present.

Michael Klinger 01:37
Thank you to my share screen here and do a slideshow Do you see that on the screen? Absolutely. Okay. That's good to hear. All right. Thanks, Igor. Appreciate it less than Brian was the last time that you do so. So I'll talk about how to sell your business, your language business. Without Losing Your Shirt, I think the original title was. So starting off with, let's see how to lose your shirt before selling your outfit. So basically, this was requested that we keep it simple. So language owners, many of you who are if you're an owner, or in the process of being an owner, many times had been been doing this for 2015 2030 years. And then you can lose a lot of the value of your business in a very short time if you don't do it correctly. So this is just a kind of a who, what, when, where and why, of what to do and next steps and what to watch out for. So this is another person who lost his shirt. I think Kate sent this to me. So if you're from New England, you probably would like the first picture. Right? If anyone knows who that is, Tom Brady was pretty famous until he left the Patriots. If you're from Russia, you probably like the first picture more also. Now, I'm only joking, I can't joke about leaders currently, given who we have in the current in the White House. But the point being here that we make choices based on a lot of our cultural biases or personal preferences, and just to become aware of that, when you start this process. So the first question is who? And who is the seller? In this case? Someone if you need to see me well, as long as you don't see more red flags, I guess. So you can divide up the seller in in many different ways. If you're a translation company, if you're single language vendor, multi language vendor or if you do interpreting, whether it's on site or OPI and being aware of how COVID is impacted your business, your tools company, some machine translation or artificial intelligence doing linguistic research or content management systems. Where if you see yourself as a full service being to have the tool, the translation and the interpreting so you can provide the whole soup to nuts requirements for client needs. Of note, if you're a company that does software or have tools or technology that has a higher value, it's a higher sales multiple than if you were just a services company. Who's the buyer? So you want to divide them up into two big categories and we'll go into this more detail strategic buyer is basically someone who's in that globalization industry, whether it's translation interpreting, etc. So it's a strategic buyer, professional buyer, someone from outside the industry. So they have private equity, venture capital, or investors who are looking to start a business, they often are looking at different, different qualifications and would be a strategic buyer. So the first question you want to ask yourself is why? Why am I selling? What's your motivation. And, as part of this, if you're going to sell you want to get agreement with your family, I had a case where a man was 77 years old, and he was trying to sell his business and he, we got to the 11th hour. And he came back and he said, Mike, I can't sell so why nice is my wife doesn't want me home. So if you're planning to sell, make sure this works with your, your social network. If you're burned out, maybe that's the reason to sell or if you want to become a millionaire, if you want to stay on board and work with accompanying stay there for three to five years. So once you understand your motivation, then you want to look at a timeframe. And it could be you're looking to leave right away, in which case, you want to start the process immediately. But maybe it's a you don't wanna leave the industry yet. And you'd rather structure some kind of an urn out with, with another business, in which case, you might get higher profits because you stay on board and make make money for them. Or you might want to create a partnership as opposed to a sale. Or you might want to sell your business to your employees, and make that a long term plan. So part of this is knowing the timeframe for when you want to get out. So here is where I think it's often the most important part, and often poorly calculated. So if you if you want to get out when I say how much it's what is the value of your business? And it's not? How much money do you need to retire? If you have to calculate the amount you want to retire, then go back and and you have to get an actual value assessment of your business. How do you do that? Well, one of them asked me, you know, I'd be glad to do that free of charge. Because I've been doing this kind of work for the past five or six years, work with hundreds of companies, I can give you a fairly clear assessment of what the value of your businesses are, you talk to peers, that you know, in the language industry hoops, either sold a business or bought a business, or you can talk to read read Slater, and Florian has a great publication, you can go to nem Z. Common Sense Advisory has reports you probably have to pay for. Or you can talk to a broker or a generalist and get their input. So here are some general numbers. And they obviously there's always exceptions, but if you're under 3 million in revenue, you're probably looking at two to three and a half times your EBITDA number. And for those of you who may be in Europe or Asia who don't use these terms, you can think of net revenue. If you're in three to 6 million annual revenue, you're probably four to five times your imageData number. Your six to 10 million your your maybe one times revenue, or six to seven times EBITDA, if you notice, the higher the revenue money, the higher business you are, the more revenue you'll get, the better multiple you get. So if you're 10 to 50 million, you're probably looking at one and a half or seven, eight times EBITDA. The challenge here is sometimes your EBIT up numbers are low, and your revenues high or vice versa. So pricing is a very unique situation for each business. If you're you're in life science as your vertical concentration, then that has a much higher value than say a generalist or if all your clients are multi language vendors, so you're a small vendor, say in France and you work with Lionbridge we localize or SDL which is now AWS shortly, your value may be lower because reselling that you may not be able to reap all the benefits, because you could lose some of your accounts if you resell to another vendor. And if your concentration is in one account, that might be a higher risk. So he might get a lower lower volume, lower price. Or say you have 50% of your business tied up in the contract that's going to get renewed next year. And the structure of the business, the offer will be predicated on this renewing this contract. So you've decided, you know how you're motivated to get out, you know, where you want to get out, and you know, the price that you're looking for based on intelligent information from people who know. So the next step is create a comprehensive financial summary. And to do that, you want to include your revenue, your expenses, your GM and your your net profit number one. And you want to give that for the past three to five years. You also want to include a summary of your top accounts. And you can do it anonymously, but basically want people to know what percentage your top five accounts are for your whole business. And then any changes dips and valleys peaks, you want to explain in an asterix, so you want to kind of have an annotated financial summary that you're going to present to potential buyers. The second step and probably less important, but still important is to create some kind of confidential marketing brochure which talks about your unique strengths, your financial history and specialization. But strange talking to screen here, and also summarize what you makes you special. So how do you find a buyer? Well, there's multiple ways to do it, it's a little tricky, when you are looking to sell your business and you're working with all these other companies, you may not want them to know. So one advantage is work with a language broker. That's what we do and and have it make sure it's confidential. You don't want everyone and their brother knowing that you're selling your business. Another way to do is simply contact people that you know, companies that you've worked with, and say, hey, you know, we've known each other a long time I'm thinking of leaving, is this something you'd be interested in? Or you go to events, Loke world, women in localization, I make meetings and you meet with people and you network can also list with the brokerage service. But most brokerage companies just to be aware, they have an upfront cost to engage them. And if you're ongoing working with them, there's some kind of retainer and they often want some level of exclusivity. For language transactions, we don't do any of that there's really no cost to engage us is there's a finder's fee that you would pay. But it's a different approach that we use then some of the other brokers. So you now reached out so what is the process of selling your business? What happens? What are the next steps that basically is fairly fairly straightforward, you identify the buyer, you set up a call you exchange an NDA makes sure that the everything is confidential. And then once you have a call and kind of exchange, who you are, what you do what you're looking for, they would request your financials maybe even before the call. If everything lines up, then they would send you in what's called an IOI indication of interest or letter of interest loi and once they do that, they would probably want to set meet with you. And you both want to evaluate what kind of fit this is personal fit, strategic fit, culture, cultural fit. And that's, that's both sides are doing that. pricings not an exact science when I gave you those numbers, 2 million revenues three headphones into that well, if you're ever does 40% of your revenue, and the actual price would be first example be like two and a half million which is For more than one times revenue, or on the flip side, if you have a large revenue number but a small imminent number, then again, the pricing is different. If your life science accounts pricing might be higher, if you only have one account, the pricing might be lower. So keeping in mind that this impacts, there are many pricing variables that will impact the ultimately the price that you're you're going to get. So once you get the offer that you are looking for, you have to think about what your exit strategy is. And here, again, when we're dealing with COVID, or we're dealing with a situation like that is that you want to be strategic in this decision. So if your business, for example, has a lot of long term accounts that you can't get to, and you need more of a sales effort, you may want to find a buyer that has a large sales team. So you structure payments, with an urn out. You agree in a lump sum payment. For earn out, you agree on a 30% payment upfront, and then you get payment based on the revenue generated each year. And so you do it over two or three years, it's quite likely that the value of your business went from 2 million to 3 million to three and a half million, and your payout will be a lot bigger and better than what's expected. But if you believe that your clients you're maxed out, and you think there's not a lot of future growth, and maybe you want to get more of the payment upfront, and the guarantee payment. Or if you you think, you know, if I had a partner that can help me, I want to join them stay on for two years. And they don't have to pay out as much, but I want to equity share so that when they grow, I'll grow with them. So originally, I was going to do this just about COVID because it brings up a lot of challenges for a lot of people. But I was advised that most of you are not business owners. So so I will jump in, in generally thinking of COVID The market has gone from a seller's market to a buyers market. So what does that mean? Meaning that the pricing as you know, if your house is on the market, if it's a seller's market, you get a higher price, but the buyers markets a little press, people are a little gun shy in terms of buying businesses because they can't rely on historical data. You might have done, you know, 5 million for the past three years as Interpreting Company. But this year with 80% of your business on site interpreting and all of a sudden the courts and the schools and the government are closing down, you've lost a lot of revenue. And they don't know how soon you'll catch that revenue up. So payouts are often a payments are often a lower upfront payment. And some kind of earn out structure pay when hitting targets. So it's important to choose the buyer wisely. So I mentioned there's two kinds of buyers strategic buyer is typically someone who's in the industry, whether they're, you know, your peer or an interpreting company buying translation company. So they're often looking for growth in vertical sectors, growth and targeted geographies. Looking for cheaper production costs, maybe they do a lot of Spanish and they're a US company, they maybe want to buy a company from Argentina or Peru. Maybe they're looking for technology advantages. Or they might buy a company because of your personnel. If skilled management is a shortage of skilled management, and they need that to grow their business, or they see the capacity to ramp up production, and professional buyers have a different orientation. So there's private equity, there's venture capital, and there's entrepreneurs, people who go out and get investors to invest in them. And then they go and run the business, they buy it and run it themselves. But oftentimes these people are looking very closely at the numbers, your ROI assessing risk and looking at the internal rate of return. And many times the strategy of the professional buyer is to sell after five years so they want to grow it bring some add ons and then sell in the five year period. So a buyer should expect a break even it's somewhere between two and a half to five years depending on the size, the volume and what's paid. So sale price if it's three times EBITDA There's no growth over the next three years and the breakeven is in three years. Five times EBIT, or no growth is five years. But you don't always look at it like that a colleague of mine who's who's bought several companies says, I don't look at ROI as a key strategic. The key is a is a strategic fit. It's common sense, you lower your costs with reducing overhead redundancies and adding clients. So you have an accounting cost, and the big company has accounting costs, you reduce your county costs, maybe you have people work remote, so reduce the rental cost. Maybe the HR function goes away, so all of a sudden, your profits go much higher. That's what he's talking about and common sense. This past year, we helped sell a $5 million globalization company that had a localization business, and they had a 30% of their business was AI research, linguistic AI research to simplify. Their price was above one times revenue. And here's an example even though it's a hybrid company of services and technology, the service, the technology component was very applicable to what's going on now in the in the industry, AI is very hot. And that drove up the price fairly significantly. So what we've noticed, and this happened recently, with the stock company is the 11th hour, you're about to decide and you get nervous and you ask your partner, you ask a friend, would ask your accountant to look at this offer and give advice, and vice versa on the pricing the process of the timeframe. And that's dangerous. We had this done recently, a company owner is about to sell, looked at the offer and went ask their accountant and the accountant and the lawyer that they've worked with for years, and the person said have them pay everything upfront. Well, that's that's not something that's done in the m&a field. A strategic buyer is not going to pay everything upfront, because there's a huge risk involved. They don't know what the future business is. So it's usually a minimum of two years could be four years. So you want to get advice from people who have done m&a work, who have closed deals, who've handled multiple transactions. Last minute, uninformed advice is a poor strategy. So if you're looking for meditation advice, you probably don't want to go to the Dalai Lama, you may want to go to the Dalai Lama. Lastly, when you're a seller, and you're wondering who to sell to some of the basic, important items are often overlooked. It's not just pricing, strategic fit, etc. It's Do you trust this person? Can you work with this person? Are you compatible? Do you have the same vision of work? Do you have the same values? What have you heard about this business? How do they treat their employees? Can you get references? Do you have the same vision for your future the future of your employees? Are they going to keep them or are they going to fire them so that the personal human factor is very important when you're going to be selling a business? So to summarize, make sure you understand why you're selling what the reasons are, what your motivation is, you have a plan for the next step and creating some kind of financial document and marketing brochure that you'll use to sell. Working with professional seller brokers or researching this and networking with colleagues. Make sure you have a realistic assessment of your value of your business before you go out and try to sell it. That's one of the biggest problems we've had to date. Talk to multiple buyers analyze the fit both culturally strategically and interpersonally. And get advice from knowledgeable resources Yeah, questions, reach out for sure. I'd be glad to find A lot of people. Yeah. And open for question.

Igor Afanasayev 25:09
Thank you so much, Michael. There's a lot of turn back from your presentations. And I think we have time for a couple of questions. And we do have some questions here. So let me read them. The first one goes from Omar. And he's asking, What makes an MOV or an SOV standout? sent out of the crowd to buyers?

Michael Klinger 25:32
Good question. And it really depends on MLP an SOP are very different, right. But I think there's going to be a talk about specialization. And I think that's a big one. So if you specialize in legal translation, or or life science, those are all that are very interesting and compelling. Another piece is, is your technology and process. If the technology and process is well developed and smooth in there, your website looks good and professional. All those things help. It's like if you think you're going to sell your house, silly thing like painting it before they walk up the driveway, it makes an impact. So if your website is good, if your customer service is good, that really helps the helps you stand out a bit. That answers it.

Igor Afanasayev 26:31
Thank you, Michael. And another question comes from Rodrigo, well, ergo asks multiple questions, I'll just pick the one that I like. And it sounds like that. So valuation can be typically based either on the company fundamentals or historic data related to similar transactions. What's the most common in our industry?

Michael Klinger 26:54
Can you say that again? I'm sorry? How? What's the common try to learn more?

Igor Afanasayev 26:59
Yeah, validation can be typically based either on the company fundamentals, or historic data related to similar transactions. So what is the most common in our industry?

Michael Klinger 27:09
Yeah, it's again, it's a little bit different than you know, you buying a house on the market, and the house next door sold for x, you can't go by that it is by your financials. It's not fundamentals, but it's five financials. It's taking a look at what your revenue was, what your profit was, when your cash flow is, and then it's a multiple of the net profit or EBITDA number. That's how it's done in almost any country in the world at this point. If it does, if it's not evident, its net profit. So you have to look at the historical financial data in the problem now that we're going into is which I mentioned in COVID. And is that historical data cannot be the only way because you don't know if that's going to be future is going to be the similar in the future. Good, right. Thank

Igor Afanasayev 28:00
you. Thank you so much again, Michael, for joining us today. It was really insightful. Thanks.