Maybe you built it from scratch. Maybe you inherited it. In any case, there may come a time when you are ready to sell your business. But how? To whom? Is there an instruction manual? Turns out there is! Selling Without Selling Out is the book you’re looking for, and author Sunny Vanderbeck is here to talk you through it.
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This video was recorded on August 09, 2023
David Gardner: Selling, not a stock, though that is something we talk about on this podcast, selling stocks. Though we tend to talk more about buying stocks. Since that matters more selling, not as in sales. This week’s focused on selling is not probably going to generate you new leads or open up new markets for you. Selling. Selling as in your business. The one you started. The one perhaps instead that your grandparents started. The one for whatever reason in there are usually more than one that you now recognize it’s time to sell. Selling without selling out. That’s the book title of my guest this week for authors in August here to introduce you to my friend Sunny Vanderbeck and a wide-ranging conversation about business, about conscious capitalism, about mergers and acquisitions and bankers in deadlines and you and your family, your employees, all your stakeholders, selling without selling out. It’s about business. Yes, but it’s also really about life. Only on this week’s Rule Breaker Investing.
Welcome back to Rule Breaker Investing, it is authors in August, I hope you enjoyed Neil King and our American ramble together last week. If you missed it, definitely listen back, especially if you’re I don’t know, on a summer Mountain retreat, I guess it’s beach ready-to, although authors spends more times inland. But what a special conversation with a man who having survived cancer in his ’60s decides to walk, yep, just two years ago from Washington DC to New York City. What he found about himself in the world at large Neil King last week. We’re about to start this week, but let’s briefly talk about next week. Next week, it’s mathematician Jordan Elingburg. Bill Gates said this is one of the 10 books everybody should read, How Not to Be Wrong, The Power of Mathematical Thinking. Very much looking forward to having a mathematician in the house next week, and the week after our final author in August, we’re going back to the well with a best-selling novelist. You may remember Amor Towles, his book A Gentleman in Moscow who joined me for authors in August in 2018. Part of the interests for Rule Breaker Investors is Amor was a Wall Street employee for many years, working for a firm before deciding, what if I wrote a novel? While the rest is nearly history now and his third best-selling novel, The Lincoln Highway, which came out a couple of years ago. Amor Towles will rejoin me two weeks from today to talk about his newest novel, The Lincoln Highway. American ramble, selling without selling out. How not to be wrong, and The Lincoln Highway, this year’s authors in August and before I introduce Sunny Vanderbeck, I want to mention that I had foreshadowed Arthur Brooks and his book, Love Your Enemies coming into this podcast. Arthur has a new book coming out this fall. In fact, it’s coming out in September, co-written with Oprah.
I think I mentioned this book building a Better Life. For this reason, he needed to reschedule our authors in August Podcast. PR firms and publishers don’t want you to talking about your last book when your new ones coming out in a week. Arthur Brooks will be joining me in early September for that conversation, both about his new book and his old one. The authors will continue past August. Sunny Vanderbeck is an investor, entrepreneur, best-selling author, and former military leader focused on accelerating the growth of mid-market companies and creating best-in-class built-to-last businesses, as the Co-Founder and Managing Partner at Satori Capital. With the 2019 publication of his books, selling without selling out, Sunny is helping even more entrepreneurs and CEOs learn how to find the right buyer or capital partner without sacrificing what matters most. Full disclosure, Sunny sits on the board with me included of conscious capitalism. Sunny, it’s great to have you join me on Rule Breaker Investing.
Sunny Vanderbeck: Thanks for having me.
David Gardner: The first chapter of your book is entitled selling, buying, and reselling my company. Now, for those who haven’t read it yet, the chapter is not advocating that I, your reader, sell, buy, and resell my company rather Sunny, you’re sharing your own story about yeah, first selling then buying back then reselling your own company. Would you retell that story here in short?
Sunny Vanderbeck: Well, in the spirit of you can’t make this up, I was very close to a transaction to selling my first company, data return to Compaq, which was since acquired by HP. We were very close to Compaq, shared a lot of cultural aspects, did a lot of work together, even had a joint board member. It was in all respects to the perfect acquisition. Instead of closing on our acquisition, HP and compact merged, so that left us a bit high and dry. For those of you that were in and around tech, circa is year 2000, 2001, it was a pretty wild time. There was lots of change happening is the most gentle way I could put it. The right choice for us was actually to be part of a larger business. That left us to go restart an entire process, and for context, we were one day away from announcing to the markets that Compaq was acquiring data return.
David Gardner: Unbelievable.
Sunny Vanderbeck: One day.
David Gardner: You were public?
Sunny Vanderbeck: Yeah. We’re public company. There are two kinds of deals signed in and not signed and this one was in the not signed bucket. We had to go back out to market to go find a good fit. We found another company that we thought was a great fit, was able to close that transaction. I stayed on to lead the combined business units and by the way, again, in the wild world of M&A, because I think people think generally these things go relatively smoothly, and once you have a handshake on a deal, it’s done and that’s not how any of it usually works. [laughs]. In the middle of diligence, 911 happened. Like it just doesn’t get any wilder than that. We managed to still sign and close. Within about 90 days, it became apparent to me that we had not done sufficient reversed due diligence on our acquirer. This idea of reversed due diligence is like they’re asking a bunch of questions trying to figure out who you are and where you fit with cultures like all those things. When you’re selling, you should do the same thing. We didn’t do that. What I thought I was getting, and what I got were wildly different these room, some of the most successful software entrepreneurs in history, and yet their second business was not doing very well at all.
At first glance outside end, it seemed like it was doing great from the inside out. Not so great. So much so that about 12 months after the transaction closed, my part of the business was pretty profitable. Most of the rest of the business wasn’t, and it filed for Chapter 11. Subsequent to that, I got barred from participating in the auction to sell off the parts. Which was interesting. They said, hey, if you’re involved, chill the auction and no one wants to bid, and so you can’t even show up. There was a 28-hour-long auction to determine the fate of my company, and I had no ability to participate in it whatsoever. I just got to sit and wait. For those of you that have been founders and entrepreneurs, wow, that was, I will never forget that 28-hours. I was blessed. The story ended well. An investment firm who had done some diligence on our business and wanted to back me and my team to spin it out, prevailed at the auction. We bought it back, and I got another shot. Just what a wonderful thing to be able to get another shot. We spent the next four years rebuilding, unwinding some of the things that had happened before, trying to make a difference for customers, and ultimately sold it again in May of 2007 to acquire that we did, as you might imagine, a good bit more reversed due diligence on in that process. It was a wild ride.
David Gardner: Fantastic story Sunny. Can you remind me, you were a very young public company CEO. That itself is so impressive to me. But what was data returns business just in brief?
Sunny Vanderbeck: The business was mission-critical Internet infrastructure. Let me unpack what that really means. If you were H&R Block, and five days a year comprise most of your revenue, and the entire world is moving to filing their taxes on line, that system is large, complex, prone to failure, pushes everything to the edge and yet it has to work. We were brought the applications that absolutely had to work and if they didn’t work, there were significant consequences for the organization. It was when match.com came to us, they had 20 servers. The story of how much larger that business is now today, hundreds, if not thousands, and so forth, surgical scheduling applications. It’s important that it works. We were generally given the most important, most complex, and most prone to failure applications with the mandate of keep them running. Then in round two, we built the first enterprise, cloud computing. We launched that in late ’04, early ’05. A true enterprise ready cloud.
David Gardner: Yeah. If you are using the word cloud back then, you would have been one of the earliest dudes to be saying that word. Most other people who would be wondering, what does this guy talking about? [laughs]
Sunny Vanderbeck: Especially with my name there like a Sunny, cloud. I’m confused what’s happening here.
David Gardner: Well, thank you for that window back into the direct real-world experience you had sunny with selling, buying, and then reselling the first company that you’ve founded. Let’s go back a little bit further briefly, if you’d like any other elements of your earlier life from being a kid, I don’t know where you grew up to being an army ranger. I do know that about you to some years at Microsoft that for you has been integral to your mindset, which I think is a big theme of your book, ones mindset.
Sunny Vanderbeck: I think everything’s formative, but a few things stand out for me. One, I grew up as an outside kid. Our family had a garden. My dad’s degree is in ethnobotany, he’s a master gardener. It’s a lot of biology in the house.
David Gardner: Love it.
Sunny Vanderbeck: Learning about cycle of life and ecosystems. This idea of second and third order impacts that, hey, if you spray a pesticide to kill all the bad bugs, you’ll probably kill all the good bugs too etc. I think its early exposure to systems thinking but with my hands in a garden and being outside in the woods and so forth. I think that informs a lot of how I made sense of the world. Pass that, that everything we do has an affect. Some of it goods, some of it bad, often mixed. Be cognizant and aware of how those things play out. I think with that also came this idea of time and thinking long-term. Again to use the garden metaphor that was actually also specific to my environment is the things that we do today can have significant impacts later. Include that in your perspective. Then we go to the time in the rangers through a couple of things I learned there. One is that we are all capable of more than we believe we are capable of. That limiting belief is actually mostly what’s in the way. Nice platitude, but here’s how this plays out on the ground. I started college at 16. I went for a year, I was bored and it wasn’t what I thought it was going to be, so I decided to do something really different. Probably the most different thing I could imagine and go join the military and be army ranger.
David Gardner: What did mom and dad think, by the way?
Sunny Vanderbeck: I was 17. They weren’t super excited about it at all although I think dad understood. Dad volunteered for a military at one point, spent a few years there as well. I think he had a good understanding of what was going on inside my head to go do this. Supportive but concerned, I think is how I would describe it. When I joined the military, I don’t think I could run a mile without stopping. My experience in the early stuff, basic training and advanced inventory and all that is I was struggling to keep up, like just barely hanging in there. I remember having a conversation with one of the drill instructors. I still owe the guys stake if I could find him.
David Gardner: He’s probably listening right now.
Sunny Vanderbeck: I hope so. I said to him, I said, look, I’ve got this ranger contract. What that really means is you have the ability to go to the screening program. If you make to screening program, then you can ultimately go via ranger. But all the contract gave you was a shot at it. I said to them is something along the lines of, look, this is ridiculous, I can barely keep up with regular army stuff. This is rough, I should probably just drop this contract and just stop thinking about this. He looked over and said, well, it didn’t beat you yet. Why don’t you just keep going until it does. It turns out he was right. That’s what I did. The almost the opposite of this long-term extended horizon, one of the things I learned in the process of becoming a ranger and staying a ranger because in Ranger battalion you have to earn it every day, was that when it gets really hard, eye on the prize and long-term visualization and all that stuff, it doesn’t help, it’s too hard. When it’s really hard, you just have to figure out what’s the next thing I can do to move forward. Can I take 10 more steps, can I make it to the next bend, can I get across this Creek, can I get through in a business context, this one more meeting successfully, and then I’ll see where I am, can I go one more day? In the toolbox is the ability to pull horizon down to the immediate and just keep going until you can’t. What I learned about myself through that process was I could go much further than my brain thought I could, it turned out to end up as a Ranger and made it through the screening program and the rest is history. That learning has been helpful. Business is not easy, it’s not just complex. Almost every company has part of their origin story, whether they tell it or not, at least one brush with death. At least one event in the early days that how that turns out is going to determine whether or not the company continues to exist at all. Meeting those days, having had that experience was very helpful because I could just look at it and say, well, I’m not cold, I’m not tired, I’m not hungry. All I can do is see if we can move forward and take the next most important action and do that. That skill has become useful when it gets really hard.
David Gardner: What a wonderful life lesson. Thank you for sharing that because I know you opened up some eyes and ears when you reminded us that we’re capable of so much more than we might think. You can’t do it all at once, Sunny. It’s that next step. I guess caterpillar is do turn into butterflies all at once. But I feel like it’s a whole process that caused that metamorphosis. I think that’s such an important thing, especially for business and the power of persistence and your book Selling Without Selling Out. Let’s turn in that direction. Now, Sunny, I think a lot of people, when they think about selling their business, it might be somewhat keen, of course we have a lot of investors listening, somewhat a keen to selling a stock. They’re thinking about the valuation, it’s about the timing, it’s about the transaction, it’s numerical but Chapter 2 of your book is entitled preparing a sale starts with preparing yourself. In the book you ride and I quote, there are things nobody talks about, things that matter just as much as and sometimes more than money. In this book, I’m going to talk about them and quote, you’re speaking here most of all to mindset. Can you get us into that Sam?
Sunny Vanderbeck: Yeah, I’ll start with this. Most of the people that think that it’s selling a business or taking on an investor is a financial transaction haven’t done it before. They might have advised on it, heard about it or the recipient of it, lots of other things. But it wasn’t their thing. When it’s your thing and you go through it, you often learn the hard way that there’s a lot more to it. You learn the hard way that there’s a bunch of stuff that you actually do need to care about, that no one else cares about, it’s your job to care about. I’ll give you a couple of examples that I have found helpful. One, think about those people, you know that complain about their investor. The story is very often, wow, we got this great valuation, look at us and we’re a unicorn. With gosh, I showed you hate these investors. They just bother me with nonsense and they don’t understand my business. We know that complaint. I have not heard anyone complain about. Yeah, we got a fair price and I love my investor, but we only got a fair price. No one makes that complaint. What does that tell us? That tells us in investor context, there is in fact more to being in a decade long relationship with somebody than just money. I had the privilege of speaking to a group of a couple of hundred CEOs on this topic. As early on before I wrote the book. I asked the question of the audience. Assume you’ve got two buyers of your company, they are identical in all respects, except one.
One of them is going to fire 100% of your employees the day after close. How much more do they have to pay you to do that? That question, I think cuts all the way to the essence of the book. As you might imagine what I found in the audience was this popular narrative about CEOs, or just trying to get paid, and it’s all about money. That’s not actually my experience. I’m not saying those don’t exist. At least half of the room their answer to my numerical question, how much, was no. It was actually not a gentle no, it was an exploitatively no and included such comments as over my dead body, and that will never happen on my watch. Though most of the ones who did have a number, they said, well, five million dollars or 50 or whatever the number was. The next comment after that was so that I can give that much money to all of those employees. What I saw in that moment was my internal experience and beliefs that there was more to this than just an economic transaction was shared by most CEOs. What the unfortunate thing is, no one talks about that till after the deal. It’s done, it’s transacted. Now you’ve got a story, many of whom are in the book. There’s these stories about I sold my business and my acquirer did XYZ. Many of us have heard the stories about all the terrible things acquirers have done post-transaction. My question is, well, maybe we could figure that out before we actually do with you. To do that, we first have to agree like, do you care about anything other than money? If you do, read the book. If you don’t, then the books is not for you, it’s for the opposite of you.
For those of us that we do care about more than money, the first thing to do is to figure out who, who do you care about? Once you figure out who you care about, now you can start to think about what is it that you want for each of these groups? Now you’re aren’t. Now you can go into a conversation with a potential acquirer or investor and say this is what I want for each of these groups and figure out how do they match up with that. I’ll give you an example. Often when selling the smaller company to a large company, there is both the opportunity and the challenge. The opportunity is, you can have significant career growth for some of your team because now they get to play in this larger pool. In my case, when I sold my business, most of my team over the coming years were significantly promoted. The C-suite of the combined business was a lot of my team. How cool was that for all these career opportunities for these people? Now, on the other side, sometimes the culture is different. Sometimes it’s different in good ways, sometimes it’s different in bad ways. At least be clear about what it is and understand where your priorities are. You will have a day, this happened to a CEO friend of mine, where HR shows up and they say we’re from corporate and we’re here to help. It’s come to our attention that your office doesn’t follow our dress code. Can make it up, they really did. Everything was going great. This is in a coat and tie industry, and my CEO friend had a business in Austin. Austin is more casual culture and they prided themselves on a casual work environment in a stuffy industry, and that was part of how they attracted people. You can imagine how it went over when HR showed up, and it was basically like, y’all going to start worrying ties. The prior company had prided itself on being focused on high culture, more casual work environment, etc.
David Gardner: Disconnect.
Sunny Vanderbeck: Very much.
David Gardner: Some great examples and storytelling, Sunny. Preparing a sales starts with preparing yourself and the questions that you ask of yourself. I love that story. The question you asked those CEOs in the room, their reactions. Thinking again, here of many of my listeners who are investors in public companies only. When we sell it takes one second, you tap a phone, click a mouse, less than a second later, it’s typically bought by someone else. Now we don’t know who bought. We likely will never meet that person, even is a person or institution face to face. For those of us who are investors but not entrepreneurs, could it be any easier? But to your point, for entrepreneurs to whom you are selling counts a very great deal, it can help or haunt you years later to whom you are selling. Sunny, you start off drawing a distinction between strategic buyers and financial buyers. Talk us through some of the options entrepreneurs can sell to, including a new category of buyer you called the entrepreneurial buyer.
Sunny Vanderbeck: Sure. I’ll cover all three. First are the strategic buyers. Generally the strategic buyer is when you’re going to sell your business to another operating company. You make widgets, somebody else makes widgets and they want to own your widget making factory and Euro widget customers. That on the extreme end, those tend to have your accompany completely subsumed into the acquirer. Again, I don’t make a value judgment on any of these kinds of transactions.
David Gardner: This could be amazing. This could be horrific.
Sunny Vanderbeck: Yes. I’ll give you an example of when a strategic acquirer can be a great fit. I’ve actually talked to a CEO recently who had this challenge. He was exhausted. He had given everything he had he and couldn’t just do it any more at the pace he was going at. That’s a good time to sell to another company who just wants to absorb your business, maybe into a new business unit, maybe into existing business units, but that gives you the opportunity to start to wind down and be able to take a break. If you sell to the second or third category, the financial buyer or the entrepreneurial buyer, imagine for a minute that an investor wrote a $50 million or $100 million or $200 million check to buy a company, how are they feeling on the first day? They’re super excited. They’re like, we just did this thing, and now we’re going to do this and we’re going to move this over here and grow sales. They have all this new energy. They’re showing up with a bunch of energy and they’re ready to go and they’re ready to grow and you’re tired. Again, this is connecting back a little bit talking like getting really clear about where you’re at personally too. The financial buyers and entrepreneurial buyers can be a really good fit for somebody that’s still wants to go. You’ve still got things you’re trying to do in the world, things you’re trying to build. I’ll make a distinction between the financial and entrepreneurial buyers. Financial buyer is going to be mostly financially focused. Much of their language is going to be around leverage and accounts receivable and gross margin. It’s an excel lens on the world, more of an objective lens on the world.
Oftentimes, that can be a good place to go if you want to check and you want them to leave you alone. Now, they’re never going to leave you alone as much as you think they will, or they say they will, or you hope they will. Just don’t expect that. But the more passive, less involved. But you’re also probably not going to get much health either. You’re not going to find the, oh, well, here’s the team that can do commercialization and go-to-market in this sector. It’s just not what’s going to be there. The entrepreneurial class of investor that’s emerged over the last decade or so. There are funny mix because they have the financial motivations and incentives and capital. But by enlarge, you’ll find a bunch of X founders and CEOs in that crowd. These are our people, largely like myself who I’ve been in the chair. One has either made payroll, or not paying me payroll [laughs] If you’ve never been in a position where 100 or 1,000 or 10,000 people are relying on you personally to do your job or they don’t eat it, there’s not anything in the world like that. Once you’ve had that experience, is very eye-opening. This entrepreneurial crowd tends to come with a set of skills. In some cases, like in our case, there are probably five or eight things that we think we’re particularly good at. We’ve got life experience there both in our operating companies and in our experience as investors. As you look at Satori are private equity part of our business is covered up with people who have been CEOs and founders. We tend to want to be more involved because the fun part isn’t the money part. That’s incidental to what we’re doing. The fun part is maybe we can help figure out how to grow the sales force or to build one and many companies that don’t have a sales force at all. Maybe we can help figure out how to market better or faster and get the company to a new level of scale.
David Gardner: Problem-solving.
Sunny Vanderbeck: That’s right. Lots of problem-solving. We don’t tend to want or need any credit for it. We just love seeing it happen. Like businesses is an absolute blast. Doesn’t mean there’s not hard days and bad stuff, but the actual process is a ton of fun. If you’re looking for somebody that feels more like a partner who’s going to help you get where you’re going, that’s when I would advise somebody to look toward the entrepreneurial style. Capital versus financial capital or a sale to a strategic.
David Gardner: I really appreciate that breakdown. Strategic buyers, financial buyers, entrepreneurial buyers, I’m sure there’s some overlap between these things, but especially for entrepreneurs hearing for the first time, who are thinking about this for the first time, it’s really helpful to have a few buckets where you can start placing people and start understanding what’s happening out there. I want to read a quick section from page 65 of your book and how do you identify which one this speaks to him represents? I’m quite sure some people hearing me right now have had this experience. I think the storytelling is fun. Sunny, here we go meet Bob, you wrote. “He is an executive at your acquirer and he got to his lofty position because he’s highly skilled at climbing the corporate ladder. For years, Bob navigated the bureaucracy, hopping up the chain of command by doing whatever worked. If you needed to throw other people under the bus to get ahead, he rolled with it and never looked back. Bob is meticulous with expense reports. He ensures everyone who reports to him takes connecting flights whenever the difference in price is more than $400 or he won’t sign their expense claims. He’s a stickler for the rules and the dress code. The trouble is, he’s not all that adept at delivering value to the customer. He doesn’t have a vision, he isn’t inspiring. If you’re honest with yourself, he would never have landed a job at your old company. Bob can’t deliver what you can, which is why you’re acquirer, had to pay for your business. There are a lot of Bob’s in the world and you know that. But this one, this Bob is your new boss.”
Sunny Vanderbeck: That sounds like a lived experience [laughs] I think a little bit what I’m speaking to there is like being honest about who you are and what you’re good at and where you thrive. There are some founders. They can find themselves in large businesses, adapt very quickly. Maybe they’re reporting structure, it gives them the opportunity to bring a little spark to the business, but more often than not, the inertia of a large business is going to win out over your energy even if it’s unlimited. Like I’ve learned, like I would be a terrible employee. Especially for somebody like Bob. You should at least ask yourself the question, would I work for these people? Would I let my children work for these people? Sometimes the answer is yeah, it’ll be a good experience. I’ll learn new thing of we go. Sometimes the answer is, there’s no way. Just be realistic with yourself. I’m going to point out a really specific piece of advice. Ask for the org chart. Post acquisition. Show me in the diagram, where all the people that work for me now, where are they going to report?
David Gardner: Love it.
Sunny Vanderbeck: Because out of that question, a whole bunch of new conversations are going to come and you might find things like, oh, you mean sales and marketing isn’t going to report to me anymore. But I’m going to be responsible for the P&L and that’s how I’m going to be measured. But I actually have no control over sales and marketing. All of HR’s go into corporate and then Dan. In some cases it’s the opposite. You’re like no, it runs as a contained business unit, etc. That and you’re like, wait, where’s the accounting team? I don’t see it on the chart, and they’re like, oh yeah, we’re not keeping any of those people. Again, no value judgments in his book, good or bad. It’s just eyeswide-open. Know exactly what you’re walking into and what you’re bringing your team into, and what you’re bringing your customers into.
David Gardner: Play it forward. One of my favorite phrases, and it’s not easy to do, but with some prompting, with some good coaching that you’re giving us your guidance, asking that extra question often about what the future is going to look like and maybe creating a little bit of accountability for those who are answering it. Put the org chart on paper? Give me the E-copy of that. Let’s sign a gentleman’s agreement here in terms of what things are going to look like. That just seems like a superhero power that is available to all those who aren’t superheroes. Sunny conscious capitalism is a topic near and dear to your heart. I know we’re both presently on the CC board where you’ve served for many years. In the middle of your book, I might almost say in the heart of your book, you open things up with a chapter entitled “The Conscious Seller”. Now a lot of people hearing us right now, maybe encountering this phrase for the first time. What the heck do you mean by a conscious seller?
Sunny Vanderbeck: Well, I’ll start with this idea. Someday someone that’s not you is going to own and run your business. You might say, well over my dead body. Well, actually that may be how it turns out. But you’re not immortal, so it’s not forever. So just understand that you can just let it happen to you or to your heirs. Some of the most disappointing stories to hear are the ones of a family who’s been given the keys to the business, and the CEO that ran it has passed away and there’s no one to run it, and the family doesn’t know what to do with it, and they rely on it for their livelihood. It’s really unfortunate. Here’s the idea on the conscious seller. It’s almost back to Square-1, get clear about who you care about. My assumption going into this is most of us actually do care about someone besides ourselves or just ourselves in our family. CEOs we do care a lot about the people in our business, whether they be suppliers, the community, customers, anything that looks like a stakeholder. We actually do care. So part of being conscious is being thoughtful about what do I want for these people. How can I create value for them? How can I do it in a way that minimizes trade-offs that have as few trade-offs as possible and as many win-wins as possible. You have to recognize nothing’s perfect. There’s no perfect acquisition, there’s no perfect divestiture. But if you can be clear about it and be thoughtful about it and care about others, you can get to extraordinary outcomes.
David Gardner: You mentioned at one point in the book that Conscious Capitalism which, as a phrase, I’m going to say has existed for about 15 years. John Mackey, Raj Sisodia wrote a book 11 years ago called Conscious Capitalism. But the movement, it started before then. Some would say it dates back to the Greeks. I know at least in your own life Sunny, practicing many of the tenants of Conscious Capitalism without necessarily using that language, you were focusing on the word sustainability at the time. The way you’ve described sustainability or Conscious Capitalism these days is it essentially revolves around, and I quote, I’m quoting you here, ”In the long run, when you take care of the ecosystem, the ecosystem will take care of you.” I also hear some ethnobotany going on in there, and you know, as a gardener, I’m a huge fan of ethanol botanist and ecosystem thinking. Would you like to add anything to that? Or should we move on to the next question?
Sunny Vanderbeck: I think I will add one thing. When we draw our time horizon out and we have a little bit of long-term thinking, the things that we call Conscious Capitalism, they’re self-evident. If you think about it through the lens of I’m the largest employer in a small town. My cousin’s ranch is downstream of my manufacturing plant. My employees go to the same church I go to. When I have breakfast at dairy queen, my suppliers are there too. You see the actions of all of your behaviors. When your family name is on the door and you can never sell the business, how do you behave? You behave long-term. What’s long-term behavior? It’s this stuff we call Conscious Capitalism. It’s back to, if you care for others, they’ll care for you. That idea has a name now, is Conscious Capitalism. We use sustainability early on for the nod to the long-term thinking, but as soon as you draw your time horizon out, these behaviors all become self-evident.
David Gardner: Love that. Well, that sets up my next question for you. Let’s play a quick game together. This one’s called the connotation game. It’s going to be a very quick game, Sunny. Here I’m going to try a phrase out on you and you tell me whether for you it has a positive or a negative connotation and why, you ready?
Sunny Vanderbeck: Great.
David Gardner: Private equity.
Sunny Vanderbeck: Positive, because I’ve spent the last 15 years of my life trying to make a different flavor of private equity that’s conscious and cares about stakeholders.
David Gardner: I have to ask you more. Obviously, I’m talking to somebody who is in that field. I know many others. It’s a wide-ranging field, at different points in your book you were constructively critical of some of your peers. A lot of us might just read about private equity in the newspaper or not really part of it. I, myself having never sold the one company I’ve started, have never mixed with these types. I see them at business conferences. Share a little bit more about your viewpoint on private equity, both your own and that of others.
Sunny Vanderbeck: Sure. I’ll start with a little bit of context. Much like I believe that CEOs by and large get a bad rap in the media. Years ago, somebody tried to make a good news cable channel, where the entire thing was just going to be, look at all the wonderful, awesome things happening in the world. That channel failed. Just bluntly, stories about bad behavior or be it CEOs or private equity, get clicks. Salacious stories about how Party A ripped off Party B allegedly get clicks. So part of it, there’s a narrative and a backdrop, largely driven by people who don’t understand this stuff. They get lots of clicks and they’re in the business of selling clicks.
David Gardner: Very well said, by the way, I’m glad you said that. Thank you.
Sunny Vanderbeck: Thank you. With that in mind, there are a couple of challenges for private equity in the disorder default format. One is time horizon. Their structures are built by their customers who are the limited partners by and large mostly its pension funds. If you want to go upstream and you say, hey, where does this time horizon get created? It’s not actually created by the private equity firms, it’s created upstream by the pension funds.
David Gardner: Wow.
Sunny Vanderbeck: Which is an interesting, there’s a whole unpacking there about, how does private capital flow in our environment and where does most of the private capital reside, and who’s making those decisions and why are they making them that way. But that’s for another conversation. So by and large, they have a structure, a business structure required by their customers that says they can only hold for about five years. There’s a bunch of stories and ways around it but really the answer is they are expected to hold a given investment for five years. That means that on Day 1 you have a five-year horizon, which is not bad, hey, we live in a high changed world, a lot is going to happen in five years. You all think back to 2018. That seems like it was 15 years ago. What’s happened since then?
David Gardner: [laughs] True.
Sunny Vanderbeck: But in Year 3, now they have a two-year horizon. It’s not really two-year because they’re going to sell it in the year, so they only have a one-year horizon. So you’ve got this time horizon problem that prioritizes short-term decisions. It’s one of the concerns with public companies as well, at the next earnings call, am I willing to get on that earnings call and say we’re thinking for the long-term and we’re doing XYZ, and if people want to sell the stock, fine, they can sell the stock. Most boards and leadership teams and public companies cannot withstand the assault that comes when they do that. That time horizon problem shows up in private equity by and large as a structural artifact of what their customers want and need. They’re necessarily going to have a shorter time horizon. Just to eliminate how bad this problem is. Our business, we have built our structures in a way that they have unlimited duration. We can be an investor as long as appropriate. Sometimes it’s short and sometimes it’s long. But we just needed to take that off the table. When we talk to people who invest in traditional private equity funds, what we hear about our structure is they’re scared of it and they don’t like it. There’s a bunch of reasons why they can’t do it. That’s fine.
But it’s interesting to sort of understand that there is almost an allergic reaction to long-term thinking in that ecosystem upstream. So that’s one issue that you have to deal with. Overcome, figure out what it means, and practically, as an owner of accompany, what that means is there’s a date you can put on your calendar and outlook by which they are a forced seller of your business. They are required by their documents to sell. Good to know that. It could be 12 years from now, it could be five. You better know going into it. So that’s one issue that’s just in the room all the time and it’s a real thing. The second one is just the background. If you came up, if you grew your knowledge base as a leader of people and a decider of business matters, but only as an observer, you will make sense to the world in a different way than someone who’s done it. We just think there’s a lot of value in someone who’s actually done it.
It’s one thing to say, well, you should raise revenues and reduce costs. Well, thanks guys, I didn’t think of that. I’m not saying I’ve ever been in that meeting, but I’ve been in that meeting. I didn’t say those words out loud though. I’m an adult enough to know the difference between inside voice and [laughs] outside voice. Having been in the chair and having done the things and having them not always work, you get a different flavor of the experience. The indictment of negative comments about the only care about X, Y, and Z. Well, sometimes that’s just how they came up. They came up carrying their boss, and their boss’s boss said the way to success fees to care about these financial metrics and only these financial metrics and try to reduce business to an Excel spreadsheet. If that’s how you learn, I occasionally hear complaints about, well, so and so is not a very good manager, not in the private equity context, but just in general. My next question is always, where’s their life experience, where they worked for a great manager? Most people work for crappy managers. We’ve got to teach them what being extraordinary manager is like unless they’ve had one in their life. You’ve got this pattern where it’s financial first, financial focus, short-term focused, and you see success around you in that path, so would you do? You emulate it. Now, this is not true of all private equity firms. There are many that have people with business backgrounds in that care about other things. I do think it’s a little different here than in venture capital than it is in private equity for sure. But that’s part of the issue is that the things that they are investors care about are going to show up in your board meeting. A financial first lens on the world is going to show up in your board meeting.
David Gardner: You really describe it as a language unto itself in a sense, in your book, Selling Without Selling Out, and I quote, Sunny, “Most private equity investors have a background in finance and not much else. They are most comfortable talking about financial analytics, and tools because that is the language they understand.” I think I take that as a value neutral statement, just a statement of truth. It’s about what has been your experience and what are the tools that have gotten you to where you are, and it really is true to maybe realize that some people just have different angles, and sometimes whole industry is just have a different language or a different lens, and just being self-aware and conscious of that is so helpful. Another thing that you advise in your book that sounds really helpful to me again, this is nothing I’ve ever done and I’m hoping to die without ever doing this, but I love this. Take a trip to their headquarters. You advise potential sellers. I love that because of course, one of the four pillars of conscious capitalism is conscious culture. Sunny, what cultural signs I’m I looking for as I visit the headquarters of my potential buyers?
Sunny Vanderbeck: I think the cultural signs start with what your culture is. What you’re trying to look for is as close of a match as you possibly can. I’ll draw some contrast here just as an example. We talked about the dress code one earlier.
David Gardner: You bet?
Sunny Vanderbeck: That’s a marker. Again, none of these are a specific issue by themselves, but your job is just to build this mosaic of what’s it like there. If you have an Aerie, high-energy, open floorplan, people cheering, high-fiving, making eye contact, and you go to your acquirers headquarters or visit their manufacturing plant, and its eyes on the floor, sounds like a library, some dusty old carpet from 1978, and a bunch of trees got cut down to make the wood paneling in the rooms that have no light, that’s information that they might be a little different than you. Just be aware. I’m going to give you one really practical, and in this really happen, and I may be a little light on details to protect the guilty, we were looking at a business that did recycling of flammable materials. We went to go do a plant tour, and it was just dirty. It’s funny, when I look at manufacturing plant, I’m looking in the corners. I want to see under tables and in corners and I want to know is the battery box and the forklift rusted out or not? They seem like little things, it’s not about that thing, it’s about whether it’s a marker for elsewhere. What I don’t want to see is a dirty rag on the floor around delays. Laid spin it, 10,000 RPM, if you get a rag near and they might take an arm with it. They knew we were coming. If you know someone’s coming and you’re cleaned up version of your plant, all these like dangerous safety things? You should pay attention to that stuff.
These little details, there was another one, this one that recycled flammable stuff, I was walking outside of the plant and there were these greater these steel grades, and I looked down between the grades to see what’s on the ground. Lo and behold, there was a cigarette, but on the ground next to this giant tower of flammable materials. Hey, that’s not for me. This might be a good investment for somebody else. For us, the care and pride in your work and your plant and safety, they matter a lot to us. Here’s the reason I pointed out the cigarette, but it’s not about that. When you’re looking for culture, you’re looking for these little markers of who are these people? What do they care about? Who do they care about? Again, trying to take this conscious lens. If I can figure out who’s somebody cares about, I can also figure out how might they behave in a certain situation. If you see a lot of joy in an office or a plant and a lot of high contact and lot of motivation, that tells you some things about what it’s like to work there, which also means it’s going to tell you some things about what it’s like when you work there too.
David Gardner: Great point, and another point, quoting your book again, Sunny, you will not be able to shield your people from the culture they are walking into since the acquirers culture predominates. Makes a lot of sense, but again, playing things forward and being conscious of that is so important, I think. Well, you give really practical advice throughout your book, but in particular, let’s focus on the selling process. It’s born of your own entrepreneurial experience of course, but also working with so many entrepreneurs heading up Satori Capital because you’re looking at other people’s businesses all the time, Sunny. Sunny, by the way, a quick aside. Where did the name Satori come from?
Sunny Vanderbeck: The name Satori came after a year-and-a-half-long journey of trying to find a name. It was so important to Randy and to me to find the perfect name. We actually ran our business with no name for a year and a half. I don’t recommend it. It’s a giant pain, but it was worth it. Satori is a Japanese word, that means the feeling at the moment of aha or the experience of enlightenment, not enlightened itself. It’s the internal experience. Part of what we’re trying to do here is not just, make investments and help companies grow and do all those things. We’re actually trying to bring this aha moment to other investors as well. If we can get other people to copy us, we’re winning. We’ll know we’re done when the things that make us different are no longer different. If every investor thought long-term, had operating experience and was able to make a difference for the portfolio companies, and use the conscious capitalism tenants in what they did, my work is done, I can retire now.
David Gardner: Totally love it. In fact, I’m reflecting operating without a name for awhile and reflecting on one of my early stock-picks as a kid, one of my worst stocks ever. The name of the company was NBI incorporated. They were based in Colorado. Check it. This is the mid 1980s. NBI stood for nothing but initials. At the time, I thought that was hilarious. That was enough for me to buy a few shares as a young guy of a company. It didn’t work out well by the way. But I know Satori Capital is much more sustainable than NBI, but now getting undistracted and returning to my main thread here, practical advice, the selling process. Sunny, how about a few do’s and don’ts when you now know you’re going to sell, and the process begins?
Sunny Vanderbeck: I’ll make a distinction or a lack thereof here that taking on an investor and selling are largely the same thing.
David Gardner: Excellent.
Sunny Vanderbeck: Maybe we’re going to own some stuff. You’ve got to interview them, etc. These are roughly interchangeable.
David Gardner: That broadens it, which makes it even better.
Sunny Vanderbeck: Yeah. Do figure out what you care about. Like if I’ve only said one thing in this podcast 10 times is probably been that. Do be clear with everybody involved, that that’s what you want. If you have all these things you care about, and you don’t tell anybody, you miss the point. Do write it down. Many of us entrepreneurs, oh I remember everything, I’ll never forget. I know what it is. Cool story. Write it down. My own experience because I’m one of those, I’m like I won’t forget it, I know exactly what I mean and all those things. The process of writing it down is very clarifying. My experience was like you write it down and you look at it the next day and you go, no that’s not actually it. Like it’s close but it’s not the thing. So you write it down again and you tune it and tweak it. When you write it down, now you’ve been given the ability to transmit it. There’s this funny thing that I’ve learned about a well-written document that’s arguing in a meeting with somebody who has an off-the-cuff argument almost always wins. Let me translate that into this process. If you go into the meeting and investment banker and you say, oh, I care about X, Y, and Z. The inside voice of that investment banker is going to say no, they don’t. When we get down to closing day and you have to pick an Acquirer A or Acquirer B and this other one’s going to pay three million dollars more, they’re going to pick this other one. They will ignore that comment. They’ll just outright. Is that true of every investment banker? No, of course not. They’re wonderful about this.
David Gardner: Generally.
Sunny Vanderbeck: They care about this. But just in general, they’re going to hear you mumble something about you care about values and culture and blah, blah, blah. There will either be a throw-away comment for them. When you present them with a clearly articulated document about what your priorities are, they are much more likely to take it seriously.
David Gardner: Great point.
Sunny Vanderbeck: They’re much more likely to also remember they need to be able to communicate that too to their organization, to potential investors or acquirers, you got to write this stuff down. It also helps you to share it with other people and see what you’ve missed. When you write it down. It’s an inside only. Go home to your spouse and have the conversation about what else do I care about that I didn’t put on this document. I’ll give you another do. It is OK to care about yourself and your family. Now this seems backwards given everything we’ve been told about CEOs and how they make sense of the world and all of this. Many of us have spent large portions of our lives sacrificing almost everything to make a go at a business. As almost a superpower, we’ve been able to ignore what we want and need, and ignore what our family wants and needs in pursuit of building this organization to do all these wonderful things in the world. This is not the time for that. You can prioritize among them later. But God, be honest about what is it that you want for yourself? What is it that you want for your family? I’ll give you a little side example there. If you’re being acquired and you live in Southern California, and the headquarters of your Acquirers is in Albany, New York, and you think you’re not going to start spending time on a plane flying to Albany, New York. Then you’re confused about how big companies work. [laughs] You have to go to headquarters. That has some implications on your family. Maybe you run your business in a way that you could always go to every recital and baseball game and etc. But now you are working for big co and you spend 50% of your time traveling. Yeah, it’s OK to not want to do that. Again, this is one of the few times where I’m like actually stopping to pay attention to what your family needs and to what you need is an important step. That’s do’s and I’ll give you a 300 pages of do’s and don’ts There are some do’s.
David Gardner: Those are all pretty great. Give us two don’ts.
Sunny Vanderbeck: Yeah. Do not let your emotions get in the way. Something’s going to happen. Sometimes three things. Things are going to happen. They’re going to rub you the wrong way. You’re going to want to go crazy and call the deal off and do a bunch of entrepreneur stuff. Don’t do that. Be deliberate and thoughtful, doesn’t mean dealt be mad. You can be mad, are disappointed or whatever emotion you want to have in process. Just like keep it over there away from your decision-making. As as my partner says, Randy, my business partner. I’ll make this my second do even though it’s kind of a don’t, don’t pass up a good deal in pursuit of a fair deal. There’ll be some term in your 140-page document that’s unfair. Or maybe it’s fair and you’ve convinced yourself it’s unfair. Oh, that’s horrible. They can’t ask for that. That’s not whatever. I’m mad and I want to call the whole deal off. Is the deal a good deal taken on it’s merit’s as a whole or not? If it’s a good deal, but there’s some unfair term, like move on. Of course there’s going to be an unfair term in there. Do not let that thing get in the way of a good deal. If you’ve got the right acquirer, the right investor, then get the thing closed.
David Gardner: Love that. Thank you for highlighting those. You’re right. You’ve written a book, a couple of hundred pages with do’s and don’ts, more do’s than downs. But thank you for just giving us a few there. Moving now toward the end with you, Sunny, thank you for being so generous with your time and insights with us this week. The day after the close, which also happens to be your final chapter. It makes me wonder if it’s like the stereotype we hear about boats. The happiest day of a boat owners life is the day she closes on that new boat and the least happy day of the boat owners life is the day after the close in this case, because of all the responsibilities and maintenance for some people, at least all of those costs can outweigh the advantages of having a boat. As I started really our interview, so much of your book is about mindset. Can you talk us through the typical mindset, maybe the optimal mindset the day after the close.
Sunny Vanderbeck: Well, I’ll draw the contrast between two CEOs. One of them got very clear about what she wanted and who she cared about, and was thoughtful and deliberate and did reverse diligence and found a good deal and closed it. Now it’s the day after, and they know that they did as good of a job for all of their stakeholders in however they wanted to prioritize them, to get them whatever it is they wanted to get them. They’re still going to have a sad, weird day. [laughs] Your best outcome is a sad, weird day. The one who didn’t do any of that stuff and then the day after and the days after that begin to watch the acquirer dismantle the thing they spent their life building. They’re going to have a rough go of it, and no one’s got empathy. They’re like oh, I sold it for a gazillion dollars and I’m sad, and everyone’s like what boo-hoo.
David Gardner: Whatever.
Sunny Vanderbeck: But it doesn’t mean you’re not actually not feeling good about the world, so it’s a weird thing. I don’t know of a good analogy that really fits it, but there is nothing like packing your own junk in a box and going home for your last day. It’s very final and he’s like what do you say. He say thank you a lot, so what I did, I got genuine appreciation for these people that had been on this wild journey as we talked about in the beginning of the conversation. Many of these people had been with me through this entire while journey, so thank you for hanging in there with us but it was still sad and weird because it was over. It was just done, so you’re going to be a little disrupted. What I hope for people is piece that they were able to get the best overall outcome they could get for all the people they cared about and that they don’t have any regrets. That part of this as a regret minimization.
David Gardner: Yeah.
Sunny Vanderbeck: I know your future self after you sold the business because it was me and I had lots of them and I know a lot of CEOs who had that. The sub title of this book is probably a regret minimization. How do I get there and be really OK and then get to hear the stories, you get an email from somebody that was on your team and they’re like, I just got promoted to be the CMO for the whole business and that feels really cool.
David Gardner: That’s great. Such a human answers, such an authentic answer, and again an answer from somebody who has been there and done that and speaking forward to people who one day will be there and do that and with hopes that this was helpful for each person hearing us today. Even if you are not an entrepreneur, don’t want to be one. For those of us following the companies that we have in our portfolios thinking about the implications of AOL merging with Time Warner trying to play things forward, understand, should I hold this investment or not. Thinking about cultural fits and cultures and playing things forward is really valuable in many ways, of course outside of investing in business in life as well. Sunny we’re about to play our game of buy, sell, or hold, but before I do I imagine somebody might want to drop you a line and get some more insight, maybe do some business with you. Sunny Vanderbeck, how does the public get in touch with you?
Sunny Vanderbeck: My website, sunnyvanderbeck.com is the easiest way to get in touch with me or or you can reach me through our business satoricapital.com. Either one is great. I love spending time with CEOs, talking to CEOs, so just reach out and I’ll be here for you.
David Gardner: Before we do play our games, Sunny I’m curious. As you’ve said mentioned Satori Capital. I’ve known you some over the years, although admittedly I thought briefly you were based in New York or your based in Dallas, Texas, so it shows what I know but what size of company do you typically invest in or work with?
Sunny Vanderbeck: In our private equity business, typically these companies are called 100-1,000 employees. Maybe 50 million to 250 million in revenue is really where we spend most of our time.
David Gardner: Well, let’s close with our game buy-seller hold. You know we’re going to play it Sunny. You don’t exactly know what’s coming though because I never let my players know ahead of time the questions. Jeopardy wouldn’t be any fun if people already knew the; I was going to say the answer is, but it’s actually the questions. You ready?
Sunny Vanderbeck: I’m ready.
David Gardner: Great. None of these things is a stock but if they were, would you be buying, selling or holding, and a few sentences as to why, let’s start with the likelihood that CEOs who sell and say they will stay around a year or two actually doing so buy, sell, or hold?
Sunny Vanderbeck: Sell without a doubt. Look, that’s the bankers tell you to tell everybody that you’re willing to stay around for a year or two.
David Gardner: A year or two.
Sunny Vanderbeck: It’s always the same language. I’ll stay around for a year or two and there’s like 10% of them. They’re actually as likely to stay as to go. They just don’t know yet because they don’t know what they’re getting into. Most of them have they already quit three weeks before it closed? You just don’t know it yet.
David Gardner: Yeah, very well set a strong sell. Next one up, the sustainability of the present leaning toward virtual/remote/hybrid work the sustainability of that, maybe the power or productivity of it or not buy, sell or hold?
Sunny Vanderbeck: Remote, so hybrid buy.
David Gardner: Give us a little bit more.
Sunny Vanderbeck: What we have observed is that the limitations of leaders around the challenges of fully remote work, we are seeing that ourselves in our portfolio with our friends and our own businesses that it’s very difficult than who benefits the least from the remote work is the new team members. There’s so much cultural building that happens in-person. There are so much side conversations about how something works. When the threshold becomes, I now have to schedule a Zoom or write a half a page slack to have what could have been a five-minute drive by that imparted an important piece of knowledge. It gets too hard and so we’ve seen it play out at large, but there are some organizations who are built for remote work, and I’m sure it’s going to work out great for them, but what we have seen is fully remote works for a little while and then begins to fray around the edges. On the opposite side though the hybrid work, so at Satori we’ve always had a truly flexible work environment. I guess somebody who needs to do X, Y, Z at 2:00 in the afternoon, well, please go do it. We want you to go do that. We want you to have flexibility in your life. All the jobs here are very demanding. The least we can do is allow someone flexibility in their schedule, and so if someone has a reason to not be in the office that day, great. Don’t come in. One of the things we actually do to support this in our case, we ask people to take a trip every year to deliberately work remotely from a place they love.
David Gardner: Nice.
Sunny Vanderbeck: It helps keep our muscles strong about how do we make sure all our systems and processes work well for the remote team members, and it gives somebody the opportunity. Look, if you live in Minneapolis, being able to bail out and go to Florida for two weeks to work, what an upgrade and a lot of times what we see is we’ll see somebody two weeks of vacation and then work from that location for another two weeks, and so now it’s a month in Florida. I get to skip February in Minnesota, sign me up for that. It’s a benefit to our team members. It’s an opportunity for them to have joy. We’ve got somebody on the team that loves to surf. We might find them in Nicaragua or Honduras. Who knows working from there? We’re very supportive of the hybrid environment, but the remote is just too hard.
David Gardner: Next one up, you frequently refer to private equity as treating the businesses they own as mere baseball cards they’re looking to trade, so let’s talk about the real thing. If they were stocks buy, sell, or hold today baseball cards.
Sunny Vanderbeck: I have no idea. It’s their NFTs on paper. It worked out for lots of people. That once what I have to pass.
David Gardner: We’ll call that a hold next two more for you. In your book Sunny, you’re right and “The typical bankers supervised auction process. It feels a lot like an arranged marriage where everyone leaves the question of whether this is a truly compatible partnership to chance.” Sunny two-thirds of marriages in the world’s most populous nation, India, are arranged. Buy, sell, or hold arranged marriage?
Sunny Vanderbeck: I think the cultural wins there are really clear and did well last. Whether it’s good or not, works or not is not relevant. One of the exports of the West is culture; maybe our biggest export, and we are aggressively exporting McDonald’s, Starbucks and general cultural memes and so I think that one is on the way up.
David Gardner: Agency does feel like something that we want for ourselves, we went for our kids and probably we hope for our future. I appreciate that. Last one for you, I’ve watched the-