In episode 78 of the Get Hired Up! Podcast, I speak with Sankeetha Selvarajah. Managing Attorney of ZENSEI Law P.C., a civil transactional firm located in Boston and New York. Her clients are within the cannabis, technology, real estate, food service, e-commerce sectors as well as, retail manufacturers. 

As a 6x Nationally awarded startup attorney, Sankeetha Selvarajah does more than create profitable exits. With almost 15 years of legal and business consulting experience, she's passionate about creating better businesses by making law accessible to business owners.

She is also the CEO of STARTUP DOX (legal template company) and ZENSEI ADVISORY, LLC (an exit-strategy advisory). As outside general legal counsel to over 250 small businesses, she has also worked with startups as an advisor, strategist, and reluctant therapist.

No matter which role she's playing, her goal is simple -- to educate founders and business owners to enable themselves to drive measurable results.

Sankeetha Selvarajah

Thank you for having me. I appreciate it.

Maureen Farmer

Oh, it's my pleasure. And it was really fun meeting you at Hamptons Tech Week and the Hamptons back in June. And ever since then, um, given that I know what you do, I wanted to have you on the podcast. I'm so glad that you've been able to make the time to do that today.

Sankeetha Selvarajah

Oh, it's been a pleasure actually coming here and I'd love talking to you about this actually. I'm so sorry for the back and forth.

Maureen Farmer

That's okay. At least you're here and I completely understand how busy things get. And that's the hardest part of producing a podcast is actually the scheduling part. So now that we're together, I think it's going to be a really enjoyable conversation.

And what I would like to do is to give a little bit of background, just from a global perspective in terms of M& A transactions. And then I'm going to get into some questions and we can just see where the conversation goes.

Sankeetha Selvarajah

Okay. Sounds good.

Maureen Farmer

Wonderful. So according to BCG Global McKinsey and Company in 2023, the global value of mergers and acquisitions activity was approximately 3.

1 trillion. I'm going to repeat that 3. 1 trillion, which represented an 18 percent decline from the previous year and marked a significant decrease from high levels seen in 2021. But despite that, I know you're very, very busy Sankita. So I'm sure that these are somewhat. sectorally divided as well as geographically.

But anyway, I'll continue. The year was characterized by fewer deals overall with a notable drop in both deal value and volume across most regions and sectors. Factors contributing to this decline included rising interest rates, geopolitical instability, and economic uncertainties. The Americas remained the most active region, accounting for over half of the global M& A value, while Europe, the Middle East, and Africa, and Asia Pac, regions saw steeper declines.

Despite the challenging environment, some sectors, such as energy and materials, continued to see significant activity. So it says here, looking forward, there are signs of recovery as conditions stabilize. Stabilize with expectations for a more robust M& A market in 2024. And just for the sake, uh, for the benefit of the listener, we are, we're recording this conversation in August of 2024.

So it'll be interesting to see how the rest of the year plays out. So Sanketha, given that information and given the fact that you're so busy, I would love to get your perspective on that overview.

Sankeetha Selvarajah

Well the backend overview, you're absolutely correct. Thanks seems so robust given the fact of where we are as service providers, but understanding this on a macro level.

It has dipped in the last year or two. However, what's happened is the small cap market deals have gone up. So when you were talking about sectorial as well as geographical differentiation, there's still that, but it's just become the deal. Value size has still been robust as well, too. It's just smaller deals.

What has also happened is, you know, in the first half of this year, in 2024, this behemoth called AI, Artificial Intelligence, entered the mainstream. However, it's the mainstream, but it's been around since the early 2010, 2011 era. So anybody in the tech field has been, you know, flirting with AI in some fashion.

But what's happened is now your hairdresser's talking about AI. Okay, so now everybody's talking about AI, whether it's investing, whether it's talking about it, or whether including it as part of their business processes. So a lot of AI adjacent Deals have gone in where now it's part of the deal analysis where anybody considering a Acquisition is now considering whether that company or that acquisition that asset acquisition Has any sort of ai adjacent or ai capacity for the future as well.

Maureen Farmer

So Sankeetha, what would that look like in in a real sense? Like what does that mean? Is it, is it technology that they're looking for? Is it...

Sankeetha Selvarajah

It's technology. It's the usage of it, right? So technology is only really as useful as how it's being used in the sense of including it into a business landscape is how does that technology add to your profit, add to your revenue, add to your, uh, Productivity more than anything. Productivity and efficiency should be increased by the inclusion of it.

Maureen Farmer

So what you're looking for, what people are looking for, investors and purchasers are looking for an AI strategy that will help them with productivity, et cetera. Is that what you're saying?

Sankeetha Selvarajah

Something of that nature. It could be strategy, of course, or how is it being used, but how is it also assisting the business to make more efficient decisions, increase the efficiency of the botton line or labor costs as well. So how is this helping the company really? And if you're not using it, there is a sense of like, well you should be. It should be part of the landscape going forward. It's not a trend.

Maureen Farmer

It's becoming a fabric. It's becoming part of our digital fabric. And yeah, and I, and I understand that from my point of view as well, from Westgate, I've started using AI chat GPT to be specific, to do particular types of research, which otherwise would have taken us much longer.

So it's a fabulous tool and an interesting addition to the pitch, I suppose, really, really interesting. And I know that your background, you. According to what I read that you have back, well, many of your targeted businesses are in retail tech and manufacturing. Is that correct?

Sankeetha Selvarajah

It is. So I cut my teeth on the tech side. I've been an M& A attorney for the past 14, 15 years. But what I've been doing is as general counsel to tech companies for the past same amount of time as well. So really we've taken big steps. Companies that started what we now call AI adjacent back then it was tech adjacent. So retail tech, manufacturing tech and so forth. And now what we do is we start or incorporate these companies and. continue on as their general counsel up until their exit.

Maureen Farmer

So that's, that's a great segue into my next question. So tell me a little bit about when your firm is brought into the deal team or into that process.

Sankeetha Selvarajah

The best answer is they should have brought us in about a year before they expected to sell. But what happens is we usually get brought in about three to six months before, okay, in the sense, or sometimes even two months because, hey, we need you to do the due diligence and so forth, but really a really successful. Exit is a planned exit, right? So ideally we want the exiting company and the CEO or the deal team to be brought in earlier so that we can actually say, what is the best exit scenario for you? And who is the best buyer for you to get the greatest amount of return on your sale value? So ideally we don't want us to be a reactive decision. We want us to be part of the proactive decision to create the deal team ahead of time.

Maureen Farmer

And so typically. Are you working directly with the founder or the owner?

Sankeetha Selvarajah

Yes. Or we get referred by other business owners or business service providers that have access to the CEO, such as accounting firms, valuation experts, wealth advisors find out that their clients want to sell their company because who else are they talking to, right? And then they're like, Oh, you should really talk to an exit attorney or exit advisor to really discuss what is the best avenue forward. 

Maureen Farmer

And is your practice primarily focused around exit strategies these days?

Sankeetha Selvarajah

The law firm is a purely business transactional. So what we do is we advise business owners from the start to the exit of their company. I have a separate exit advisory that assists business owners to exit their company, as well as acquisition and portfolio owners, how to acquire. Profitable companies as well. We assist buyers and sellers.

Maureen Farmer

Oh, that's fantastic. So I am very interested in the deal team composition, um, because of the, the questions that we get asked and just very, very curious as to, you know, the formation of the deal team and how, how, and I don't know if I can ask this, but how, how do you all work together?

Do you, do you, do you come together all at once? Ever. Or are you kind of, you know, advising the founder and CEO separately? Do you collaborate with one another? And who internally, besides the CEO or the founder, do you work with?

Sankeetha Selvarajah

That's a great question. And it allows me to get on my soapbox about this. So for that the exit team is your dream team. So this is not as you don't have one solitary service provider. So the business attorney, M& A attorney, same person, um, and your accountant. Okay, or CFO. So you have an internal CFO and your CEO usually work together. And then the external deal team is your accountant, your attorney, perhaps your valuation expert. Okay, because you have to value the company in such a way that the buyer will accept it. And then the other end, on the personal end, the CEO or the business owner will also want their own personal wealth advisor. Advising them as well. The reason why is when you do sell your company, that CEO or whoever owns the company, the founder usually has a majority of the stock, which means that the return to them is And their capital gains tax will be really, really monumental. So to do that, we want to prevent the high taxation or at least to understand it in such a way so that you can also build the appropriate vehicles, tax vehicles to assist you after the date of sale.

Maureen Farmer

And the wealth manager helps with that.

Sankeetha Selvarajah

Yes. That's a personal side. They are the deal. The one other person that I don't want to forget here is sometimes you might have a business broker that will be assisting you with the sale or basically selling your company to, um, a buyer. And so at that point, they're also part of the deal team. So the deal team consists of your attorney, your accountant, um, your broker optional. Um, and your evaluation appraiser optional. And then on the personal side, your wealth advisor.

Maureen Farmer

I would like to add one other service in there. And that's, this is a plug for Westgate and a lot of times business owners will bring in an advisor, a branding advisor to help them with the next leg of their journey from a career point of view. So sometimes the business owner will hire Westgate privately and the deal team doesn't even know. Like it can be completely private. So what happens is, is that, uh, we know from research that many transactions don't finalize because the business owner founder is not happy potentially with the valuation, which often sir, is a proxy for. I don't know if I want to make this decision. I don't know if I'm ready for it. So someone like us, we help the founder with the next. Iteration of their career in terms of, okay, maybe they want to serve on a board. They want to be a board advisor, a fiduciary or advisory capacity. They may want to purchase another business. They may want to do all of those things, but when they have a branded career strategy, this helps them, you know, with the language and the messaging to. To people in their world. It's more of an identity thing. What do I do next? What? Because after 13 years of pretty much 24 seven, you know, investment in this entity, they are now no longer part of it unless they're kept on for, you know, a continuation as a consultant or something like that. But ultimately there was an end and just helping that business owner CEO. With that next decision

Sankeetha Selvarajah

This is why we always say we want to have start having these conversations a year or so before your exit. Actually, one of the things we say is a profitable company already has their exit planned out because of the 100 percent we work backwards on this end. On the legal side, obviously we get brought in on this end, but on the advisory side, I will say that we generally would love for people to define their exit plan early. Like, what is the exit date? December 31st, 2029. And for the sale value, maybe 10 million, 15 million. Again, I'm being conservative with numbers. So don't, don't judge me on this. It's what is that date? So what happens is from the date of your exit plan, December 31st, 2029, and we're in August, 2024, you have 64 months. So five years plus four months, um, September to December to actually make your company valued book value at 15 million. It also gives you an idea of how to make the decisions you need to make to be surgical with it. So every act, creation, partnership, client, contract, everything of that nature goes towards this exit point. So at that point, you're not easily distracted. or waylaid by trends. What you do is you keep an eye on it, but you utilize the trends, so to speak, for your benefit. And it goes towards your exit. We found that people that plan their exits actually gain a higher sale value by at least 20 to 30 percent because they have been strategic in a negotiating the sale as well as coveting and clearing out potential buyers early on.

Maureen Farmer

Can you repeat that, please, Sankeetha, the 20 to 30 percent? Can you repeat that? I think it's worth repeating.

Sankeetha Selvarajah

People that plan out their exit or companies that plan out their potential exit, what we call a living exit plan, generally make 20 to 30 percent higher return on their exit than rather if they negotiated a reactive fire sale. So somebody just comes up to you and says, Hey, I'll give you 10 million for a company. And you'll take it because you're operating from a place of, wow, I've never seen that type of money. Okay. But if you have, planned an exit, you already know the value of each of the assets in your company so that you can say, no, 10 million is too small for me. The whole plan of being exit ready is to also be able to defend your company's asset value or every single asset value within your company. Your company is actually a summary of all of your different assets. So contracts, Vendor relationships, uh, assets such as land, um, AI or any sort of IP intellectual property holdings that you have. So those things can be considered assets or quantifiable assets that you should know the value of. A company can also have more than one exit, which means you can sell off each asset separately. You don't have to sell the whole kit and caboodle, which is company and assets. You can sell asset number one, asset number two, different exit dates. And sometimes the sum of all assets is usually greater than the entire company.

Maureen Farmer

Right. That is so fascinating to me. That is so fascinating. So So tell me what, from your point of view, are the critical periods in the deal process where, you know, there could be some friction, or typically there is some friction, or are they all so unique you can't really identify a particular trend?

Sankeetha Selvarajah

So number one, and it's usually a big point of friction, and if you can overcome this hurdle, I think everything else kind of becomes a little bit more smoother. Okay, it's perception of value. It's not actual value. It's perception of value. Okay. And what happens is a truly successful sale is really the buyer's perception of value aligning With your seller perception of value of the company, that's when a sale happens. Really, it is your job as a seller to accurately defend it and convey the value of each asset. Okay? As we talked about before, what happens is the valuation method, the buyer, all of these valuation methods, the top five EBITDA book value, uh, earnings multiplier, owner replacement costs, um. They are all quantifiable methods that a buyer will use to defend their sale price and say, Hey, I will give you this for 10 million because according to this valuation method, that is how it's coming up. It is your job as the seller to say no. We think that it's worth X amount because of Y, Z, A. Okay, so that's also understanding your true asset value as well, too. So at different points where this can be come up as friction is when your valuation methods or your perception of value differs. One way to overcome this is to be prepared. Like I always say this, and it's, it's, it's a common adagio is really just saying, you know, the best defense is to be in the offense, being prepared for potential, uh, pushback or obstacles or why for different valuation methods. So knowing what your company's valued and each of the valuation methods is a, is a great way to start. And then also allowing this. Um, buyer to tell you as a seller what they consider to be valuable in your company, okay, so it's still in any relationship. It's an active, open and honest conversation, right? Right? So, and the fact is, if you and the seller or you and the buyer can get on the same page about it, you can actually start thinking like the buyer and be able to craft an audience, which is your buyer, their perception to shift towards your value.

Maureen Farmer

So is it in your experience does a seller as part of their exit strategy create an ideal purchaser profile, an IPP? Do they do that?

Sankeetha Selvarajah

They could. What we do when we work with our buyers is we actually list, um, by asset potential buyers for each asset. And then we talk about different obstacles that can come up. One of the things we talk about and you'll see is we talk about what is the buyer motivation for this asset. Okay. What does it do for it? Why would this buyer buy this asset? Because a buyer is different than an investor. A buyer wants that asset to be cash positive on date date of sale. An investor will invest and wait for the value. Okay. It has to be valuable on day one for a buyer. So what we have to understand is what is the buyer's motivations, right? And what is the value to the buyer's portfolio as a whole? Okay, so you really, when you really get into the mind of a buyer, you really understand whether you need to streamline your company. At that point, whether you've got fluff or are we going to kind of hate to say it this way, rebrand this asset for a different buyer.

Maureen Farmer

Right. Sure.

And then we start talking about the obstacles, why a buyer potential buyer would not want this asset. And at that point, but then we're also identifying potential buyers. We're saying company X should buy this for this reason. Okay, company X should buy this for this reason, because this could expand their portfolio. This could also add and diversify their portfolio, and they could bring it in house so that they could reduce their costs long term. Do you see the difference there? Like we really get into the buyer's mind. And then we talk about what is the potential sale value of the asset. And we break it down asset by asset by asset. And so one buyer could buy all of the assets. Of course, they want the whole kit and caboodle and get a bulk deal here, or we could sell it to different assets and get a greater return at all points. Your job is to bring the greatest return for the greatest. Value and price to you now Also understanding what your perception is about value is important, too So does it matter if the legacy of your company continues if the buyer buys it? Does the buyer have to have the same ideological political, you know affiliations and tinges that you do? That matters to you. Will the buyer treat your staff? Well, if that matters to you. Okay. And again, there's no judgment, right? Some people are like, I really care of my people are taken care of. Other people are like, um, you know, they're all grown adults. They can go with God. It really doesn't matter. It's really about what you perceive that value. And again, how does that perception align with this, with the buyers perception?

Maureen Farmer

Going back to the planning process, tell me a little bit about how business owners can plan, prepare, what components of an exit strategy bring the most value? ROI to the seller. And I'm sure there's more than one thing. I'm thinking of one at the moment, which is a standard operating procedures, having a complete inventory of all of the procedures that are critical to your operations.

Sankeetha Selvarajah

That's a great example. Actually, it's the pivotal side of this is actually making the seller replicable or replaceable really. Okay. So the CEO should make themselves obsolete within a year of exit before exit, so that the buyer should have no problems imagining how this is going to or this asset would fit seamlessly into their portfolio.

So part of that is having SOPs in place that if something happens, a 10 year old can come in and just basically run the company based off of this, these SOPs and understanding how transferable are these labor contracts. Such as employees, such as independent contractor, even your vendor and supplier contracts. You want to make sure those contracts don't have any clauses in them that would prevent the seamless transition into someone buying those contracts. Because sometimes some contracts and I invite you to look through all of your business contracts right now is the fact that it does not allow assignment. Okay, so you want to allow assignment in those contracts and some of them require written consent, that's fine, but just the fact that it should allow some level to that. So that's what makes it more exit ready. 

Maureen Farmer

So what do you, from the due diligence point of view, where, I mean, obviously I'm guessing it starts from the financials doing an overview of the financials, um, and if I'm wrong, correct me, but what would be, you know, the, a business owner who is selling, what do you see as the, I don't know, the weakest part of their presentation to a buyer? If there is such a thing?

Yeah, it is, it's, it's not having clear, concise, transparent financials. Okay, so the financials should include you should know your last three years your P& L should be up to date Taxes should be filed and here's the kicker. You should know where the next three years are going to happen for your company, too Right.

What are your projections? It's like six years, three back, three forward. So when you can clearly say projection wise, this is what we consider our company to be making. You can do a multiple 1. X, whatever conservative method you want to use and be able to effectively convey that to your buyer, because remember the buyer wants this to be cash positive. So you have to show the buyer how your company can do that. 

Okay. So that's what happens is you don't know your numbers and/or you can't effectively convey your numbers in order to show your value to the buyer.

Maureen Farmer

Unless their objective is to purchase distressed assets, in which case that would be I guess they would still need clear financials, whether it's distressed or not.

Sankeetha Selvarajah

They would have to show why it's distressed. Number one. And two, also, that doesn't preclude you as the seller from understanding why it would be valuable to a seller though, to a buyer though, when the fact that how would this fit, even though it's distressed and basically getting a fire sale. They're basically getting a low price.

Yeah. So, but you still should understand that don't think that you're not without any negotiating power at any point in this. you have all the negotiating power. You just have to be able to align with the buyer. And so part of that is as the saying, while it's a distressed asset, you have to understand how is this distressed asset still going to add value to the buyer's portfolio, right?

Is this going to be an asset that's going to be held basically, let's just hold it and see what happens to the market perhaps. Or can you find another buyer to be fair, that would use it to in that moment, right? I think people, when they think that they have distress assets, or they just want to unload, they're not thinking expansively enough.

Maureen Farmer

Or that they're desperate.

Sankeetha Selvarajah

Yeah. And so part of the things that we do in the exit advisory, we do what we call exit plan, ABC and fire sale one, two, three, in the sense that exit plan a is the best case scenario. We sell your company. 20 million in five years, right? All things considered, this is the things you should be probably doing at this time.

Exit plan B is what happens if the CEO or the founder, the person that's running the show here, passes away before they sell the company. Who else takes up the mantle to sell this company now? Exit plan C is what happens if the owner is disabled in some fashion. Okay. Who else takes it over? Exit plan D is also what happens if you want to dissolve or sell the company. You basically want to file rent currency. What happens then? Because you just want to be done with it. Fire, sale one, two, and three goes through different scenarios where instead of 20 million, you get it, you get an offer for 15 million or 10 million or 5 million though that at that point, there are different scenarios as to who to sell it for and why you should be selling it to them.

Maureen Farmer

Well, this is just so fascinating to me. I guess the next question I have is around services business, businesses versus products businesses. Do you approach the sale slash purchase of a product based business differently than a service based business? Let's say a professional services firm.

Sankeetha Selvarajah

Yes. So because the services...definitely less overhead than a product space business for sure.

But products based spaces...I would say in my experience, are easier to transfer because it's more dependent on the product rather than the service. That is being offered by the CEO or whatnot. So whereas with the service side business or a lifestyle business, it is purely dependent on the output of the CEO or founder.

Maureen Farmer

So the valuation, would that be based on a book of business or?

Sankeetha Selvarajah

Yeah. So the different nominations for that book of business, uh, recurring client contracts, sometimes government contracts as well for service oriented businesses. Um, also the IP intellectual property that's housed or owned by the company. That's important. There's also portions of what about the other labor employees, contracts, and so forth. Another asset that people should also consider when they negotiate an exit is your non compete. Okay, you can add a value to your non compete. You can say, okay, for two or three years after we sell this company, I myself, the CEO will not compete in this route. It's called the tissue time, industry space. And the last three words are sued. It's a little legal humor here. But the fact is it has to comply within that acronym in some level to give you some basis for that. So how long time industry in what space, whether medical device consulting or whatnot, and then space, five miles, 20 miles within the geographical distance of where that company does business. And you can, that's a quantifiable asset.