Why Structure is More Important Than Valuation. Lessons From a Goldman Sachs to Founder Journey

Jay’s Introduction and the Exabar Startup Failure

Anthony Codispoti (00:01)

Welcome to another edition of the Inspired Stories Podcast, where leaders share their experiences so we can learn from their successes and be inspired by how they've overcome adversity. As you listen today, let one idea shape what you do next. My name is Anthony Codispoti, and today's guest co-founded a network security startup called Exavar right out of college and raised capital from Softbank. Three years later, the company closed its doors for good.

From there, he spent time at McKinsey Company as an engagement manager and then moved to investment banking at Goldman Sachs. At Goldman, he worked on sales of Yahoo, MuleSoft, and Sandisk before leaving in 2018 to start something of his own. Jay Zhang is the founder of Embark Advisors, a corporate finance and MA advisory firm built to bring Goldman and McKinsey caliber work to startups, small businesses, and middle market companies.

He holds an MBA in finance from Wharton, has more than $50 billion in completed transactions to his name, and let embark to number 477 on the Inc. 5000 list in 2023, and has since made the list three years in a row. But before we get into all that good stuff, today's episode is brought to you by my company, AddBack Benefits Agency. And if you advise business owners heading towards an exit, this is a lever most of your clients don't know they have.

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Learn more at AddBackBenefits.com. All right, back to our guest today, the founder and managing partner of Embark Advisors, Jay John. Thanks for making the time to share your story today.

Jay Jung (02:37)

Yeah, it's great to be here, Anthony. Thanks for having me.

Anthony Codispoti (02:40)

Okay, Jay. So I want to go back to something we talked about there in the intro. Two thousand three, you co founded Exabar, network security startup, right out of college. You brought in capital from SoftBank and other venture investors. Clearly there was a lot of initial excitement around you were doing, but two years later, you had to close the doors at Exobar. What happened?

Jay Jung (03:05)

Yeah, so it it was an enterprise network security company. And here's what I learned looking back, it was kind of obvious. Bunch of 20 something year olds going to big enterprise customers and saying, Hey, you should use my new disruptive cutting edge network security instead of the old school stuff. That's a horrible sales proposition. I know a lot of IT people, because I have a lot of IT services clients.

No IT person is gonna put their neck on the line to try out this new disruptive technology for their enterprise network security. And so, you know, what really happened was we had a really hard time you know, with go to market. It was very hard to sell into these. And uh we at at some point pivoted to more of a B2C application and we got a little traction there, but it just it was such a niche product for B2C, we just

It didn't justify the investments and we didn't have the runway. So we actually shut it down, returned what capital we had left, and you know, win our you know, not so merry ways.

Anthony Codispoti (04:13)

Looking back, is there anything you would have done differently? Like if you had had some maybe some gray hairs on the team, some more senior folks going in to do those sales calls, do you think the results might have been different?

Jay Jung (04:27)

Yeah, I I think so. Look, I the like the whole founding team, the co-founders and the you know, the engineers were all in our early twenties. and I don't think we had the the credentials and I don't think we had the proof points to recognize kind of like the the true nature of the security. And we didn't understand our customers. And you know, I had this um bold idea that if I had a great product, I can sell anything. turns out that's not the case.

And so I I do think if we had gone through and credentialized our technology better and also had maybe more experienced team members, certainly on the technology side, but also on the go to market side, it could have been different, but you know, also early two thousands was a different time uh from where we are today.

Anthony Codispoti (05:18)

Yeah. Very astute of you. Like you know, not everybody can do that, sort of take a step back and say, Okay, here's what we did wrong. Now that we're in the rear view mirror, I can understand that. explain to me what you mean by credentialized the the service.

Jay Jung (05:36)

Yeah, I I think we should have gone through some kind of testing. I mean, now nowadays there there are these credentials around like SOC two type two. Um, and you know, now like they're they're doing like CMMC. There's a lot of ways to kind of validate the nature of the security. But you know, ours was a new product. It worked well, it worked well in theory, but it was never tested in the field and we didn't have anything to point to that, you know, that that it works. And you know, I think that was a little bit of a naivete and and uh enthusiasm.

From McKinsey and Goldman Sachs to Middle-Market Advisory

Anthony Codispoti (06:06)

Mm. Well, things that we learn from and we move on. And you moved on. Uh, ended up having some great roles with McKinsey Company, joined Goldman Sachs. And I'm curious to understand a little bit of the difference between the level of service that is traditionally offered at some of these big firms like McKinsey, like Goldman Sachs, and how that's typically different from what you'll see offered in the lower to mid-market deals. What are those big differences?

Jay Jung (06:36)

Yeah. So when I first started um, you know, my practice, it wasn't really in the first couple of years, it wasn't really an MA practice. I was, you know, helping companies with financial modeling, some some decks, some ideas. Because I always thought MA required so much more than one person. if you think about a big company where they're look, they're looking to sell, they'll bring in McKinsey for the strategic work. They'll bring in the investment banks for transaction work. They a uh

A big four accounting firm to get the quality of earnings ready, do the tax structuring. And then they have lawyers. They have they have the corporate lawyers, the MA lawyers, the tax lawyers, IP lawyers. And so it it takes a gigantic team to do a deal really well. And to think that I could just do it on my s on my own, just I I just couldn't fathom it. But I did have a great client. Um, you know, we helped him raise some money, run his business a little bit as a CFO. And then said,

Hey, I got this offer. Can you help me sell it? I was like, I don't know. Jeez. And he said, like, you're a smart guy, you can figure it out. And then that's when I realized, you know, the middle market is incredibly underserved. Um, a lot of people sell their business without an advisor, maybe just with a CPA and a lawyer, and they're not getting the expert advice that r is really required to execute a an amazing deal. Um, they kind of, you know, half ass it. Um,

And so there's a lot of room to support a a middle market business owner or startup founder to execute a great transaction.

Anthony Codispoti (08:12)

So this is before you had a first officially started your firm, you were working for one of the big guys, and somebody came to you on the side, and it would have been a deal that was too small for the group that you were working with and said, Hey, can you help me with this?

Building Embarc Advisors

Jay Jung (08:24)

No, no, so I so I left in 2018. I thought I was gonna join a startup. Um, and I was I was still talking to some, but then along the way, like people reached out to me and said, can you help me like consult on this, consult on that? So the first two years um after I left um was really just a I was a solo practic practitioner, I would hire a contractor here and there. It's only in 2020 that I really rebranded, reincorporated, um, and you know, the current form of embark advisors took shape.

Um, you know, I I still think that the first two years were the formative years, but it was in those two years I I did the the first transaction. Um, and that's when I realized, there's a there's a really big opportunity here because middle market business owners and startup founders aren't really getting the level of advice they should be getting because even if a deal is small, they still need the to cover all their bases. And they just weren't getting that.

Anthony Codispoti (09:18)

And they're not getting that because a lot of times they're working with a CPA or a a traditional lawyer that maybe doesn't have the level of and A experience that somebody like you does.

Jay Jung (09:29)

correct. And the other thing is a lot of MA, a lot of the proficient MA advisors, they don't want to work on small deals. small deals uh small deals, large deals require similar amount of effort. One could argue smaller deals require more effort. And but smaller deals are harder to do and they pay less. So proficient MA advisors gravitate towards working on bigger deals.

Anthony Codispoti (09:53)

And so what's the sweet spot for you? What's the ideal deal size?

Jay Jung (09:59)

deal size wise, I we do a lot in the, ten million to two hundred million. you know, those are kind of like more or less similar in the nature of the deal, the buyer enterprise value. Enterprise value.

Anthony Codispoti (10:09)

And that's enterprise value or that's their annual s okay. Yeah. Um,

okay, so lay out for us, Jay. Give us kind of the sound bite today. What does Embark do, soup to nuts, and who do you do it best for?

Jay Jung (10:24)

Yeah, so we started off as an MA advisory firm, um, doing buy-side, sell-side work, just given my background. I've been doing MA for 20 plus years. But then I realized, you know, all the businesses think they have clean books. They're a simple business, they're, you know, they're they're ready to sell. And the reality is they might have clean books, but they don't definitely don't have exit ready books. Um, so the first thing I built out in addition to our MA practice was to do transaction diligence, quality of earnings.

So every deal we take to market, we do our own quality of earnings. So that's pretty unique for an MA advisory firm or an investment bank to have their own Q of E practice. And then, you know, we started selling companies, our clients are happy. And then I realized, you know, our clients are happy, but as a finance person, I see this. And the reality is if they had actually prepared for 12 months, 18 months in advance, they would have had a much bigger exit.

If they had deliberately prepared. And so I started building out a CFO services group. And I brought in people that are from public companies, from private equity portfolio companies, because these guys know how to prep a business for a transaction. And that last year can have a disproportionate impact on the exit outcome. Um, so we do three things. We have a CFO services group that helps companies grow, prepare for an exit. We have the transaction diligence team that will do the quality of earnings and maximize the EPITA.

And then we have the MA team that will execute MD MA deals, whether it's a sell side or a buy side. And we do this primarily for startups or middle market firms. Um, again, transaction values from like 10 million to 100 million. But we know we also have done it for smaller businesses um that would be like a five million transaction. And and one thing is we build hourly, which allows us to kind of scale up and down that spectrum and still deliver the same quality of service.

Why Embarc Bills Hourly

Anthony Codispoti (12:17)

I wanna talk a little bit about that because that's an unusual billing model in this space. You guys, if I understand this correctly, Jay, you don't charge that traditional success fee. You're charging an hourly rate for your services. How did you come up with this?

Jay Jung (12:31)

Yeah, so when so when I started thinking about doing MA, well, there's a little bit of a conundrum because like I said, I I worked on a lot of big deals and I worked in investment banks. So I know that bigger deals are easier to do and they pay a bigger fee. So you have to be a little bit crazy as an investment banker to say, I'm gonna go down market and work on smaller deals and make my life harder and make less money. Um, but I wanted to work with startup founders. I I love working with business owners and founders, and I thought, okay, how do I make this work? I looked around.

Who does this? Lawyers. Lawyers can work on a startup from series A, series B, all the way to their IPO and then sell the multi-billion dollar transaction afterwards. So I called up my lawyer friends and I asked them, hey guys, like, how do you make this work? Um, because I'm I'm trying to build a firm and I don't know how to like how the unit economics work. And he said, Oh, it's really simple. Smaller deals, you put less lawyers on and you build less hours. Bigger deals, you put more lawyers on and you build more hours.

That is pretty simple. Thank you. And so, you know, we decided to cop copy that model um and and bill hourly. And again, that just means that you know we're able to scale up and down. And you know, we're gonna treat all of our clients the same, whether they're a 10 million EBITDA company or a 1 million EBITDA company They get the same level of service um and we're able to deliver great outcomes for all of them. And you know, what I realized almost as a byproduct is

That business model works for us because we want to work with startup founders, but it actually really works better for the sellers as well. And the reason is when someone goes to sell their business, we always talk about what's your EBITDA, what's your multiple, what's your valuation. And that's great. And now the traditional success fee takes a percentage of that valuation. So I got five million EBITDA, it trades at eight times, it's $40 million. And

You know, you take a five percent fee as two million bucks. Okay. But the but the reality is after that forty million dollars, there could be ruled equity, seller's note, earnouts, taxes. And then you're left with this much smaller number, which is cash at close for the seller. And the success fee model does not solve for that. It solves for the valuation, and it kind of doesn't care for everything that comes afterwards. Um, and our model is kind of geared towards.

You know, doing as much work as possible to really maximize the cash at close, which I think that's the most important number for a business owner when they sell their business.

Anthony Codispoti (15:03)

Is it I think I know the answer to this, but I want to ask anyways, is it harder for some groups to wrap their head around this pricing model because oh, I'd rather pay you your big fee at the end once I get my big check rather than taking money out of my cash flow?

Jay Jung (15:21)

Totally. I think we get a lot of pushback on that and I understand that. But the real but I think that the trade off is, you know, our model ends up being a lot cheaper overall. and I think in this, in this day and age, business owners are quite well educated. So they know that their business is sellable. They already have a lot of buyers knocking on their door, pinging them like that that private equity is interested in buying them.

And so as long as they know they want to sell, as long as they're not gonna change their mind, the probability of close is very high. The probability of close is very high. So then you have to they have to weigh, do I wanna just pay pay as you go monthly and pay a fraction of the cost? Or do I come do I de-risk myself, but then pay like, I don't know, three, four X more at the end? like we we closed a $50 million deal and our total fees came out to

Maybe five hundred thousand dollars. That's like one percent. Like a like an investment bank would have charged like two, three million dollars. So

Anthony Codispoti (16:23)

Nobody's doing a deal at 1%. Yeah. Uh,

you know, one of the things you called out is that you've got your own CFO services group. And one of the benefits of this is that, especially in those last 12 months ramping up for the sale, there's a lot of things they can do to help maximize that exit value. What are some of these big operational levers that they like to pull during that process?

Jay Jung (16:52)

Yeah, when when when people build their business, they don't go back to revisit a lot of their their cost items. so for example, we had a client that grew from well, from almost nothing to 200 people, and they never revisited their PEO cost. So the PEO was paying was charging them an astronomical amount uh per employee. Normally it's supposed to go down as the employee base grows, but they grew so quickly.

And they never revisited it. So one of the first things we did was we renegotiated that and that added tens of thousands to the bottom line. Now you multiply that by 12 times, that's a lot of money. Um, the other thing is I think especially for businesses that trade on Ebita, um, business owners start to get reticent about investing because they're thinking, well, if I invest $100,000 in in marketing, well, that's $100,000 now minus $100,000.

Multiply by eight times, 10 times. So it's worth a lot more. And I need to maximize my EBITDA. But the reality is, uh, there are some way, some investments that you can categorize either as addbacks or get credit for it on the back end as growth. So I think the right strategy is actually to continue to invest in growth, knowing that you're gonna get credit for it. But I think without the

the guidance of a well informed C CFO that understands how the exit process works. Um, people generally try to turn off the spigot. Um, and that actually hurts them, I think, uh, during the exit process.

Quality of Earnings and Protecting Business Value

Anthony Codispoti (18:30)

Yeah, it's very short-sighted. The other thing that you called out, Jay, was that and this is unusual, you said that you've got your own quality of earnings within the company. Why is that unusual and why is it so important?

Jay Jung (18:45)

Yeah, so most of these companies trade on Ebita. Um, if I use the house analogy, it's the equivalent of your square footage. You would never sell a house without knowing the actual square footage. Yet a lot of business owners will just go out, the buyer asks for their financials and just give their QuickBooks. It's almost like you figure it out. Um, but the EBITDA is not a gap metric.

Ebitha is not really in QuickBooks. Adjusted Ebitha is most certainly not there. And there's a lot of things you can add back. It's not just the owner's salary and the owner's personal expenses. Like usually we have, you know, a couple dozen items that we add back: 10,000 here, 5,000 here, 20,000 here, you know, 50,000 here. And that that adds up. And then you put a whatever, eight to twelve times, fifteen times multiple on it, it makes a big difference. And we need to do that. The seller's quality of earnings is all about.

Maximizing the EBITDA. The buyer's quality of earnings is just validating that number or pushing it down. And people don't do that. If they don't maximize the EBITDA, you're kind of ignoring one factor, one of the two factors that drive your valuation. Um, so I felt like we needed to do that. And you know, it's just like anything else, I I think there's a there's a quality difference between someone who's trained at the top firms and someone who hasn't. I mean, that's just a a fact of life.

But our clients can't afford to pay $100,000 to KPMG to get a Q of V. Um, so I went out and I recruited a bunch of people from big four firms. Um and we built out our own quality of earnings teams that's primarily comprised of ex big four professionals. So our clients get big four quality at middle market prices. And so then when a buyer comes in with their firm, our guys can defend the Q of V 99.9% of the time. uh

Um, so it's become an essential part, and that's why our deals um, you know, don't get pushed back on the Ibitha once we go into diligence.

Anthony Codispoti (20:44)

Well, and it sounds like it's even less than middle market rates because you guys are charging hourly rather than the success fee. So

Jay Jung (20:51)

Mm-hmm.

Anthony Codispoti (20:51)

it's sort of like a double bargain.

Jay Jung (20:53)

Yeah, yeah. I mean we're we're priced to win.

Anthony Codispoti (20:55)

Now, yeah. So okay,

you started in twenty twenty, sort of officially incorporated. since then you've grown to twenty six employees. You've made the Inc. five thousand list three years in a row. I'm curious, as you're growing that quickly, what kinds of things broke inside the business?

Jay Jung (21:17)

Yeah, and it really comes down to hiring and people. Um, when I initially started the business, um, you know, I I use the word f family a lot. Like, you know, my employees are my second family. The company's my second family. I'm gonna treat everyone like family. And, you know, there's a place for everyone. and then I read a lot where they said like never treat your company like a family because they're not. And I think that's that's very true. Um, I think you should treat your employees with respect professionally.

But it's different from family, um, because family's unconditional. And I think that's where the we started to kinda have misalignment where some people were were viewing this more of like a you know kind of a break in their career, like a lifestyle kind of stopover. Some people were, you know, very gung-ho, they were hustlers, they were they were very entrepreneurial, they wanted to grow this. And you know, like if you're building a elite sports team, you can't have some people that are just gonna chill.

And some people that are that want to win all the time. Cause I think that dilutes the culture. And each side doesn't like the other side. And so it it it creates strife. And so that was a big learning. That I at one point we had to do like a a hard pivot where we re-established our values. We made it very clear. Uh we're a c we're a company that strives for excellence, continuously learns, never gives up, and is immensely dedicated to our clients.

And once we made that very explicit, I think I lost like a third of the company and we had to rehire. Um

Anthony Codispoti (22:51)

How were you communicating that? Was it just sort of like you sit down and you're like, here's our new values. If you're in, you're in. If you're not, thanks.

Jay Jung (22:58)

Yeah, yeah. So

we do something called EOS, the entrepreneurial operating system. I saw a lot of my clients use this. they kept using the same nomenclature. I was like, what is this? I I I learned about it and I decided to adopt it because the clients that were on it were doing really well. Um and part of that was to make very clear what your vision mission is and what your values are. And frankly, when I was in business school, I always thought that kind of stuff was mumbo jumbo. ah and you know, the the hard.

science around finance and economics with and accounting were the important things, but I I really come to appreciate um the soft aspects of business like division and values. And so um as part of that EOS system, we clarify what our values were. And then throughout our practice, we emphasize the values. We recognize people that do an outstanding job of demonstrating those values. And I think that kind of permeates through the organization. And

It kinda helps people self select, like do you wanna be part of this kind of, you know, hardworking organization or or not?

Anthony Codispoti (24:04)

What does that recognition look like when somebody is really meeting the standards, meeting the values?

Jay Jung (24:09)

Yeah, so every every month we do a state of the firm. Um, and then every quarter we have a in-person off site because my whole team is remote. And in every one of those meetings, people will volunteer and share who has demonstrated a certain value, what they did, what the impact was, and and we share a story.

Um and it's it's a great opportunity to kind of spotlight and recognize people and also show what it means to strive for excellence. What it what does it mean when we say, you know, dedication to our our vocation? And we we we're putting like real stories out there of what their colleagues have done. And then, you know, people learn from it, they emulate it. And I think it's it's just it's like celebrating these small wins if we're if we're a sports team.

Why Founders Shouldn’t Sell a Business Alone

Anthony Codispoti (24:58)

If you think about all the experience that you've had in selling businesses, what are the common threads? What's the biggest misconception you see founders have about selling their

Jay Jung (25:08)

Well, I think the biggest misconception is that people think they can DIY it. Um, I tell my team, you know, our competition is in other investment banks. Our competition is non-consumption. I think there's a very especially in the middle market, I think there's a small portion, like a moderate portion that uses advisors to do their transaction, but there's a much broader universe that never uses an advisor.

I don't know why. Um, I have some hypotheses, and so I think that's the biggest conception. I tell people I can't even sell my condo without a real estate agent helping me. Um, and selling a business is vastly more complicated and difficult. Um, and the stakes are higher. Um, and you know, we do a lot of buy side work, and a lot of times we're when we're on the buy side, the seller has no MA advisor,

It just crushes me that they're they're gonna sell their life's work and they don't even know that they're getting a the short end of the stick.

Anthony Codispoti (26:13)

So, how does the buy side work for you? I get on the sell side, somebody comes, hey, I've got a company, I want to sell, I need your help. On the buy side, are groups coming to you saying, hey, we're looking for a specific type of business, or do they already have the specific business in mind? What does that process look like?

Jay Jung (26:30)

it's across the whole spectrum. Um, you know, especially when like a owner operated business wants to do an acquisition, they don't know how to go about find sourcing a target. So we can help source the target. Um, like private equity firms will usually have a target already in mind. And then if they need help structuring the term sheet, because when you're in the middle market, it's as much about the valuation, but it's also structure. Structure plays a big bigger role than valuation. Um, and we help negotiate that.

Once they sign the term sheet, we'll help with the buy-side quality of earnings to do the diligence. And then if there's any post-merger integration, we'll help them do that as well. So it's really, you know, end-to-end. we can cover end-to-end with all the team members that we have. and nowadays a lot of business owners are also interested in doing MA. They see what private equity is doing, and there's no reason they can't do it. the cap the the debt markets are there. uh

A lot of business owners prefer to sell to other business owners and private equity. So a lot of business owners are kind of taking um their their steps to emulate that playbook.

Anthony Codispoti (27:35)

Hmm. You made the comment, Jay, that structure matters more than valuation. Can you explain what that means and give an example of it?

Jay Jung (27:45)

Yeah. So sometimes, you know, we'll meet someone that says, Hey, um, I so and so got this really high multiple. It's like, really? That's very interesting. And then we look at it and well, the cash at close was this much. And then they had like earnouts, seller notes, and some some equity and all that stuff. And and the reality is when you're buying a small business, a medium-sized business, especially it's an owner to owner transaction. Um

There can be a lot of risks, a lot of concerns around it. And an owner-operated business doesn't have a billion-dollar fund behind them. So they have to be more prudent. And so there's a lot of structure around how to mitigate the risk, how to mitigate any customer concentration risk, how to mitigate um customer churn, how to incentivize so that the seller remains engaged. And you know, if you do a 100% cash and close.

you don't get to do any of that mitigation or incen all those incentives uh by putting in certain types of seller notes or forgivable seller notes, putting in the right amount and structure around the earnouts, um, giving them some equity. All of that helps structure the deal so that the seller will eventually, if they perform, get the dollar amount that they're looking for, but also in their interim that after close.

The seller and the buyer are aligned to, you know, drive the business in the right direction. So I think structure

Anthony Codispoti (29:15)

How

Jay Jung (29:16)

matters a lot.

Earnouts: Why They Often Fall Short

Anthony Codispoti (29:17)

in your experience, Jay, how often do earnouts actually get fully paid out?

Jay Jung (29:22)

that's a that's a great question. So I think there was actually a study recently by SRS Acum, and they're like an escrow company. So they track escros and they say that on average, earnouts pay out twenty one cents on the dollar. And actually, forty nine percent of deals don't pay out anything.

So earnouts are pretty brutal. um But A, we don't we don't like earnouts. When we sell a company, we don't like earnouts. So our clients don't have a lot of earnouts. When they have earnouts, they generally achieve it. And I follow up year after year to see how it goes, and it's like 90% plus attainment. And the reason is, it kind of goes back to the Q of V and the CFO services. um The earnouts are often

The buyer and the seller will align on the spirit of the earnout. But then the earnout is not well documented, not well defined. It's not clear how it's gonna be measured. Um, and so when after the deal is done, that document, the purchase agreement, goes from the deal maker to the CFO or the accountant, whoever's gonna do the work on the back end. And that person looks at the document and just follows the document. And they say, well, it says

It says we're gonna do it based on gap. Well, guess what? The seller was never on gap. And then, oh, it it didn't talk about how when small company gets acquired by big company, now everything gets more expensive from the ERP to the health insurance to all the other overhead, everything got more expensive. So so by definition, their EBITDA goes down almost from day one. it didn't talk about any of that. So it was kind of set up for failure. It's not like the buyer was trying to.

um shortchange the seller from the get go. The buyer actually wants to

Anthony Codispoti (31:18)

That's my that

was my that was gonna be my question. That's my impression of probably what takes place. You're saying it's just it it wasn't well defined from the

Jay Jung (31:26)

Yeah,

I think that's the bigger problem. I when when a buyer and I think buyers get a uh bad rep for this, when a buyer puts in an earnout, it's because they wanna keep the seller. They wanna keep the seller engaged. So they want the seller to hit their earnout and stay engaged and be happy and stick around further. they don't want to get in fight about whether the earnout was correct or not. Um

So the intention was for them to hit their and by the way, they'll create a lot more value if the seller hits their earn out for themselves. Um, but I think there's a mechanism where the seller does not have the expertise on their side to examine is this the right metric? Was the metric properly defined? Did we discuss how that metric is going to be adjusted? Did we discuss how that metric's gonna be measured? They didn't go through that, and that's why uh they feel the pain on the back end.

Anthony Codispoti (32:21)

Jay, if we can, I'd like to walk through a couple of call them anonymized case studies. Um let's first take one. If you've been in this space long enough, if you've if you've done deals, been on either side of the table, there's a there's a saying that goes with it: every deal dies a thousand deaths before it happens, right? Uh most deals they hit all kinds of speed bumps along the way. What is a particular deal in your case study existence?

that really looked like it was dead. This wasn't gonna happen. It had completely fallen on its face, but you did something creative to bring it back to life and bring it across the finish line.

Jay Jung (33:05)

Yeah, I mean, that's that's true. Like every every deal is different and every deal has has some issue. Um, you know, we we recently had a transaction where uh you know we we went through the process, we got a lot of interested parties with management presentation, we finally selected a party. They were a great fit, and we were getting through the documents, and then we found that there was this one tran one uh commercial agreement with a

Specific party that was an important, important vendor, and they provided certain hardware uh for this company. And there was a change of control provision. And they needed to have this hardware for the business to keep working. And this vendor was tangentially in competition with the buyer.

So it was, I mean, that probably like slowed down the deal for like two or two or three months. And now I felt like not only are we negotiating with the buyer to get this transaction done, we had to negotiate with this third party technology vendor um to get them to, you know, sign the waiver or the consent. sign the consent.

That was a that was a real struggle and you know it

Anthony Codispoti (34:27)

Any concessions

that you had to give up? Like is there what do what do you do in that case? Like what what can you go to that vendor and say, Hey, if you'll agree to this, we'll do something for you.

Jay Jung (34:39)

yeah, we we did have to give give some some concessions. we had to work with that party almost as if they were like another buyer. and we now we had to get them to work with our client, but also get them to be comfortable with the buyer. And it it was uh

That that was an ordeal. That was an ordeal. It was a l it was a lot of man hours and um but we we we eventually found uh a middle ground where everyone could be moderately happy.

Anthony Codispoti (35:11)

Mm. I mean, not knowing the details of it and I understand you can't get into it. I'm thinking it's like, okay, we'll pay a little bit more for the product. Or here's like a cash sum here, like just, you know, help us out. Right. Like

Jay Jung (35:25)

Yeah, they they

have to lock in for a certain period. And so again, like technically the the the buyer has a competing product that they could replace, um, but they can't rip and replace all the existing uh customers. So they they had to commit to a certain period to keep using basically a competitor's product.

Driving a Higher-Than-Expected Sale Price

Anthony Codispoti (35:45)

Gotcha. Okay. So let's go to another case study if we can. I want to hear a fun one where you came up with something creative that really helped to drive a higher valuation, a higher multiple for your client than what they were expecting.

Jay Jung (36:02)

people sometimes ask, hey, so what do you think the valuation of our company will be? And I tell them, Look, valuation in MA is really two parts. One is what is your company worth? We can do we can analyze that. That's pretty straightforward. But the other half is what is your company worth to the buyer? And so sometimes the latter half can drive more of the value than uh

Than than the former. And so with this client, they were kind of like in typical like industrial services. And so these businesses, it's not it's not like uh recurring revenue or anything. They they sell industrial equipment, they service it, and then they have a lot of you know big and small customers. And those businesses typically trade for six to eight times EBITDA multiple. But this company had

You know, they did a really good job of winning some marquee uh customers. They had ex for a small company, they had exceptional service deliveries. Look, those big Fortune 500 customers love them. Um, and they were, I would say they're they were more cutting edge in what they do. They were always kind of adopting new technology and they were did a good job of implementing that with their customers. Um, so you know, they had a good value proposition.

And so when we ran the process, um, and our clients thinking, um, you know, I'm gonna get like six to eight times multiple. Um in the process, someone comes in and says, Hey, I wanna preempt this this transaction. Um, we'll pay nine times. And that's a premium to the market multiple. So our clients ecstatic, it's like nine times. Wow, that's really good. Um

So what we did, and we built hourly, right? we're incentivized to do as much work as we can. So what we did was we called every single person that took a sim, that took the presentation, and we said, hey, look, you know, understand the short notice, but we did get a preemptive offer. Um, so if you're still interested, you're gonna have to come in within 36 hours. Totally understand if you can't. No big deal. And then I think um maybe six or seven parties started coming in. they started coming in with with with bids.

But the thing is, when, and we told them it's gonna be have to it's gonna have to be in um low double digit multiples. Cause we're already at nine times. so we're guiding towards 10 times plus. Um, and I'm thinking, worst case, they're gonna tell me like, can't do 10, we'll like nine and a half. so we guided towards 10 times double low double digit multiples. Um but you know when when someone stretches like that, when when when someone bids

Above market like that. They don't just give you a piece of paper. They they call and they preview and they say, Hey, um, I think we're coming out around like 10. Like, how do you think? you know, it's like, look, I think that'll be interesting. Like put your best foot forward. And the next person calls and they say, Hey, I think I'm coming out of 10. Well, I know I already have a 10. So uh, you know, certainly happy to share with my client, but I think this is gonna trade closer to 11 to 12.

Now they gotta come back with something that's in the 11s. Next person calls. So you got this literally feeding fringe. And this is all happening like within 12 hours. we keep moving things up, and that's what a big investment thing

Anthony Codispoti (39:24)

It's gotta be exhilarating.

Jay Jung (39:25)

does. Yeah. And when we're when we're when like a Goldman or Morgan Stanley sells a company, they don't just like sit back and relax and take, take, take a piece of paper and look at it. They they drive the valuation up like that. And again, this is this is what happens when you adopt like a Fortune 500 level MA. uh

playbook to middle market. And so long story short, they they signed the LOI at over 12 times. And it was all cash. Structure matters, right? Yeah, anyone can get 12 times when there's a big earnout. It was 12 times all cash. So

Anthony Codispoti (39:58)

That's an incredible

deal. And and w where did it start? Remind again? It was more like in the six to eight range?

Jay Jung (40:03)

Yeah, our client was thinking six to eight times because he was getting people knocking on their doors saying, Hey, I'll I'll buy your company for seven times. I'll come buy your company for eight times. So he's and he knows other people getting acquired in his industry. So he was thinking like six to eight times. He got uh signed that lawyer for over twelve times. Um and he said, like this is this is one of the few times in my life where I just don't know what to say.

Anthony Codispoti (40:26)

You had a speechless client. So, and this is my understanding of one of the big differences between lower middle markets and the the upper end is that in the lower middle market, you traditionally go to market with a price tag, right? And so folks have an idea of what it is that they're bidding towards. Sort of like when you put a house on the market. Whereas at the upper end of the market, it's not like that. It's more of this sort of like,

auction style that you're describing, are you doing it exclusively the latter way with your clients or is it sort of a combination of the two?

Jay Jung (41:03)

Yeah, no, I'll I'll never put a price tag on anything. I think that's like negotiating rule number one one on one. Um you never start with the first number. You ne you never give the first number in any negotiation. Um that's like a textbook. And so we'll never go out with a um list price. Like if if it were up to me, even when I sell my comp my my my house, I would I I don't want to put a list house on a list price on it, but that's not how the market works, unfortunately.

Anthony Codispoti (41:31)

So what kind of companies should be calling embark right now?

Jay Jung (41:36)

we work with startups that have five million plus in revenue that might not have any EBITDA. We work with owner operated businesses that are, you know, like 500,000 plus in e an in in EBITDA. So like maybe like four million plus in revenue. Um and if they're start starting to think about an exit, and it's probably worth a conversation. I'm not gonna charge them for that conversation, but I think the earlier they start thinking about it and planning.

they'll have a disproportionately better outcome. And if someone comes to us and says, hey, we want to sell now, we can do that. But I think if they're even if they've built a company that they might sell, I think it's worth having a conversation. So they at least know their options and they can plan and invest for it.

Anthony Codispoti (42:22)

Jay, I want to talk about another deal. twenty twenty four, you were the sole MA advisor on Vizia Technologies sale to HID Global. Walk me through how that deal came together from that first conversation all the way to signing.

Jay Jung (42:37)

Well, let me share first how I how I got Vizia as a client. Um so we were initially in the buy side. We had a client that was interested in that company. so they hired us for buy side MA. We looked at Vizia and we ultimately walked away. But uh about a year or so passed, and they I got an email from to folks at Vizia.

And they said, are you available for a conversation? Sure, I'll have a conversation. And they said, Hey, look, you know, we met a lot of folks along the way. I mean, we try to sell the company, didn't sell so far, but we like to hire you guys to sell our company. Because among all the guys that you know came to like kick the tires, you guys were the most thoughtful in how you approached it. So, okay. So I talked to our prior client, um, you know.

He released us from any conflicts. And that's how we got got to work with him. And it it was a complex business, because Vizia has some hardware, some software, some services. Uh it's a complex business. And being able to tell a story that's not your traditional SaaS company or traditional hardware reseller, you know, it takes a little bit more time and effort and attention um to do that. And so, you know.

I think that's what we did really well. And, you know, just like anything else, we we ran a a full auction process. Um it's a great company and they received a lot of interest. and yeah, it's uh they they were able to sell to a decabillion European company.

Anthony Codispoti (44:21)

So here's what I love about this is that in a normal circumstance, this shouldn't have been your client, but they were so impressed watching you from the other side of the table as you're representing, and not that it always needs to be adversarial, but there's typically some tension between buyer and seller during the negotiations and that closing process. And so

They saw the way that you guys carried yourself and were so impressed by how you were on the other side of the table that even though that deal didn't work out, they came back and they wanted to work with you. it just speaks volumes for what you guys do and how you do it.

Jay Jung (45:01)

So I appreciate that. Yeah.

Mentors and Lessons From Clients

Anthony Codispoti (45:05)

Any particularly powerful mentors for you along the way that have really helped to form your approach to business, your approach to MA?

Jay Jung (45:18)

Um I've been fortunate to have a lot of mentors. And you know, some I I have some like the guy, the partner that hired me into McKinsey, he's still a great friend. I talk to him and you know, every time he he says something, I I listen very carefully. But I'm gonna share something maybe a little bit unconventional. I think I'm in I'm in a very unique seat where we get to work with a lot of companies. And some companies are are bigger than us, they're more successful than us, they've been around for a longer period.

And what I see is in almost every one of these companies, even though they hired us to be their advisor, there's something to learn. as we prepare a business for sale, you know, we always ask, hey, what do you do? What makes you great? How do you win? And a bunch of other questions. And as we talk about, because that's what that's what sells the company, what makes them great and how they win and then how they grow.

And when we talk about that, I learned so much from them. And a lot of my clients, even after that we sold them, they become really close friends because selling a business is such a such an emotional involved journey. Um, it's almost like you can't not be become friends. and I learned so much from them. Like I I I've learned to do EOS from them. I've learned to I've see what kind of marketing works, what doesn't work, how to do it better. Um I learned about

You know, how to manage people, how to, how to build an organization. So I would say I don't I I don't have like some one single formidable figure that has been the mentor. Um, but I've had so many mentors along the way um that are business owners and entrepreneurs that came ahead of me that I learn from through, you know, every day on all these engagements.

Anthony Codispoti (47:05)

Every one of these deals, every one of these clients that you get to interact with becomes a mentor in some way, shape, or form. Yeah.

Jay Jung (47:11)

Yeah. Yeah. And I'm grateful for it.

Anthony Codispoti (47:14)

it's clear that you are a student, that you love to continue learning. One of the powerful ways to learn is from mentors, from you know, other people who have come before us, who've done it well. Another way that we often learn powerful uh lessons are from going through really hard things.

Jay, what is one of the hardest things that you've had to overcome and what did going through that teach you?

Jay Jung (47:41)

Yeah, so I don't think I quite understood the nature of starting a business when I started it. Um, to go back a little bit, one of the things I I didn't like about the investment banking world is eventually everyone has to become a salesperson. And when I was a like a senior VP, I was doing a lot of big MA deals, a marquee deals. I kind of said, Hey, if I can just stay um as an MA person.

And not do sales. I don't even need the title. Just you just keep paying me more, but I'll keep doing the same MA work. Can I do that? And like, that's not an option. Everyone has to become, everyone has to bring in business. Um, and that's how you become a managing director, that's how become a partner, just like a law firm. And so that was like a big bummer for me. I just as I I wasn't good at it. I didn't like it. I hate networking. And so I left and started my own business. little did I know.

Um starting your own business is all about selling. It's about business development. It's about getting those people and bringing in, bringing home the bacon. And that's why my first business failed too, right? Like my first startup, we were not good at go to market. We couldn't sell to our clients, who are probably not the right client, customers. um So learning how to like realizing that, and then learning how to sell was probably one of the

Toughest things to kind of get through. Um, like every time I go to a good networking event, I I had like heartburn. I'm like, what do I do? Like, like what am I gonna say? It was so painful. Um, and you know, just learning to do that has like completely transformed, you know, my life, the business. And that's also the advice that I give when someone says they're gonna leave their company, especially someone that's working at a big company, they're gonna leave and start their own business. I tell them, hey, one thing you gotta do is like,

you're gonna be doing sales and people management. And those are two things that a lot of people don't like. and that's gonna be like eighty percent of your time.

Anthony Codispoti (49:46)

So I want to hear how you learned this because there's so many business owners or or people who want to be business owners that will listen to this and say, yeah, like I don't love sales. And they have this preconceived notion of what sales is, and they think either you're born with it or you're not. And clearly, listening to your story, Jay, you weren't born with the ability to sell, but you developed it. So talk to us about how you did that.

Jay Jung (50:12)

Yeah, I think it's really important to find what works for you. Um, you know, I think if you hear about like, hey, who's the great sales guy? And then you hear about someone who like plays golf really well. And everyone loves that person. And um, every time he plays golf, he brings in business. That's not me. If everyone run away if I played golf with them. um, you know, some people they're just really good at like building relationships and ah

You know, just, you know, grab a beer, go to a sports bar, and then be you become best friends. You know, as as a first generation immigrant who doesn't follow any sports, that's probably not me either. Um, so I think it's really important to figure out what works for you and embrace that. Like enhance your strength. I enhance your strengths. Don't try to cover your weaknesses because your covering your weaknesses will never be as good as someone else's strength.

Um, so I think you gotta enhance your strengths. I think I bring a lot of good content. Uh, I'm a I'm a little bit of a nerdy guy. Uh, I get really deep into some of these, some of these topics, whether it's like MA or taxes or or finance. and I think I bring a lot of good content, and I think I'm good at distilling that content down to something that's easy to understand. So

That was kind of my thing. And you know, some people, and so a lot of my clients are people that are very um intent on learning new new topics and getting educated. Those people jive really well with me. And, you know, they find me very helpful. And that's how I kind of build the relationships. But I think it's really important to kind of find what your speed is, your flavor is, embrace it and enhance it. And so in the early days, I kept looking back at what worked, what didn't work.

And it's important to kind of look back at that, not just say, Oh, I will you win some, you lose some. you want to figure out why you won some. And then you want to keep trying to build a repetitive process around that. And then it became really fun because now I put myself in an environment where where I can be myself, I can be genuine, and you know, I I I can embrace what that is. And I see I find people that appreciate that and I'm okay. I'm okay with people that, you know, where I'm not their cup of tea.

Content Marketing and Section 1202 Tax Benefits

Anthony Codispoti (52:35)

So what kind of content are you producing and how are people finding it that leads it to you?

Jay Jung (52:42)

Yeah, so I become like an incessant poster on on on LinkedIn. So I think I post like four or five times a week. Um, you know, I I write a lot of blogs. Um, uh I get invited to um present um at a lot of these conferences or peer groups where I talk about how to plan for an exit, how to maximize valuation. uh I one of my favorite topics is qualify small as business stock, section twelve two. So when you sell your business, you don't pay any taxes.

so I talk a lot about that. So, you know, generally more technical topics. but tech technical topics that can add millions, tens of millions of value to to a business owner. So, you know, that's kind of my niche.

Anthony Codispoti (53:28)

Okay, so let's not bury the lead here. What is section twelve two? How do you sell your business and not pay any taxes?

Jay Jung (53:34)

Yeah, so section twelve two, for for qualifying businesses, um, if they hold the business in a qualifying manner for five years or more when they sell their business, you get federal capital gains tax exempt by up to fifteen million dollars per person. So if you have two business partners, that's fifteen million fifteen million bucks each. So what qualifies? Um you have to be in a qualifying category. So you know, restaurants, hotels.

mining, farming, they don't count. But if you make a widget, um, or certain types of services, um, you know, those all those all count. So your qualifying business business category, you have to be a C Corp, um, and you have to hold that C Corp for five years. And there's a couple other other

Anthony Codispoti (54:20)

Before y you

have to hold it before you sell it for five years. Okay?

Jay Jung (54:24)

Yeah.

so most tech startups, they take advantage of this. So I live in a Bay Area. So most tech companies around me, they take advantage of this. But once you leave um the Bay Area, people don't even know about it. So, you know, we we helped a lot of client coup companies because they're typically S Corps. We helped them uh reorganize into a C Corp. And then five years from now, when they sell, they're gonna get at least $15 million per shareholder.

capital gains free. And it's just a it's not a loophole, it's not a trick, it's a legitimate um tax incentive that the government put in because, you know, middle market firms and startups are the backbone of the US economy. They took the risk to create a company, create a lot of jobs. And so basically the government's saying, hey, we're gonna reward you. We're gonna reward you so that when you sell, because you took all this risk and we know that you didn't take a lot of money in the first few years, you don't you don't have to pay a lot of taxes. So we're gonna

Exempt not defer, exempt a bunch of taxes. So it's a it's a great tool that unfortunately a lot of people don't know about.

Anthony Codispoti (55:31)

So it's one of those things, since you have to be a C Corp and most small businesses are not, right? So uh you were just saying that most small businesses are taxed as S corps. You need to be confident, relatively con there's no crystal ball, but you need be relatively confident that that's the direction that you're going, that you are going to sell in in five plus years time. Otherwise you're gonna get double taxed on all the money that you're taking out of the company, right?

Jay Jung (55:55)

Not not to make this a com tax conversation, but there's also ways to mitigate the double taxation. so

Anthony Codispoti (56:01)

Bring it on. Let's hear it.

Jay Jung (56:03)

also when you when you do an F reorg, so to get from an S-corp to a C Corp, you have to do something called a section Section F reorganization. When you go through that reorganization, as part of that reorganization byproduct, you end up with a S-corp holding company on top of that C Corp. So the owner would still

own the S Corp and the S Corp owns a C Corp. So a lot of the double taxation can be mitigated by that S Corp holding company. and that's you know, that's what a lot of holding companies do. Yeah.

Anthony Codispoti (56:37)

fascinating. So

you can basically get the best of both worlds in that case.

Jay Jung (56:44)

Kind of. And by the way, once you get really big, if you think about it, if you're doing, let's say you're doing like millions in EBITDA, any money you keep at the C Corp, you're just paying a 20% tax on it and you're gonna probably reinvest that for growth or acquisitions or whatever. Any money that you funnel up to the S Corp, you're gonna to pay probably 40% plus. So at some point, uh once the company is really big, it makes sense to keep money down at the C Corp as long as the idea is to keep investing and growing it.

So yeah, I think it's a it's a more advanced structure. There's a lot of benefits to it. and is definitely worth explor exploring.

Anthony Codispoti (57:22)

Okay. Well that's fun stuff.

Jay Jung (57:24)

Yeah.

Anthony Codispoti (57:25)

Speaking of fun stuff, what's your favorite thing to do outside of work? Have any hobbies, interests?

Jay Jung (57:30)

Um, I have the greatest hobby of all, which is enjoying good food and good wine. It means I can enjoy it every day. Um, my my wife and I, ah you know, we we love going to like good restaurants, trying out new foods, traveling the world for food and wine. Um, wine's a big passion for us. It's almost like a science. so you know, that that's that's pretty much where we spend our our extra time and money.

Anthony Codispoti (57:55)

Jay, as you think about the work that you're doing now, what is it that you most want to be remembered for?

Jay Jung (58:00)

You know,

like a dream of mine would be, you know, one day, maybe many years out, um, we have a big celebration where we invite all the clients that we helped exit and bring them together for like some some big, you know, celebratory dinner or like a reunion. I think you know, one of the things that I kind of missed when I was at uh at a big investment bank is you sell a company, people make eight figures, nine figures, whatever, and then you're done. You just move on. You just move on to your next thing.

it's very transactional. What I love about the middle market is it's such a, like I said before, such a personal journey. And you get to know um the client so well. And uh, I was just down um in Orange County. I met with a client that we're that exited recently, uh, him and his wife, and we had dinner together, and you know, just kind of like reminiscing the ups and downs of the transaction and and how great their life is right now. Like there's nothing more rewarding than that. And

You know, that's our goal. Our goal is to help clients have exits beyond what they could have even imagined. and just kind of building those relationships.

Anthony Codispoti (59:14)

I love that. Jay, before I ask my last question for you, I want to do three quick things for the audience. First of all, anybody that wants to get in touch with Jayong, go to his website, embarcadvisors.com. Now, embark is spelled embarc. E B-A-R-C, embarcadvisors.com. It'll be in the show notes, but embarcadvisors.com. Also, if you're enjoying the show, please take a moment to subscribe wherever you're listening.

It also sends a signal that helps others discover our podcast. So thank you for taking a quick moment to spread the word. And if you advise business owners on their wealth, retirement, or legacy, here's a lever most of your clients don't know they have: a program that counterintuitively turns their healthcare plan into higher net profits, freeing up capital they can redirect into your planning and raising the value of the business itself. Backed by Bain Capital Insurance, so you know it's solid.

Bring your clients that kind of win and they'll pass your name along, AddBackBenefits.com. So last question for you, Jay, a year from now, what is one very specific thing that you hope to be celebrating?

Jay Jung (1:00:26)

A year from now? Oh gosh. Um

You know, well we we have a very aggressive growth goal goal. So uh I hope we achieve it. And like I said, we do quarterly off sites and I I hope we have the biggest off site that that we've ever had and I get to celebrate with my employees and you know, they f they feel good about it. That would that would make my day.

Anthony Codispoti (1:00:49)

How are you driving

that growth? I know I promised one last question, but I need a follow up on that one. Is it is it the the content marketing? Is that still what brings most people in the door?

Jay Jung (1:00:59)

Well, that's that's been like a a really stable activity that we've been doing for the last couple of years. But, you know, we're kind of getting that stage where um I think we need to keep adding fuel to the fire. the way that we do it is we typically have like a a budget, a discretionary budget for growth investments. And then we kind of lay down our bets, maybe like three or four different initiatives, um, and we let them run. Um, that could be like hiring a a bus business development person, like

investing in AEO or you know trying something different on on LinkedIn LinkedIn ads, like whatever, trying different things. And then you see what works, what doesn't work. And what doesn't work gets nixed. But then we we put more fuel on the ones that work. And so I think because there's not there's no one single thing, there's no single sil silver bullet. And I think you do have to experiment and and take some risks. But the ones that work, I think will give

multiples in returns to cover all the other beds. So it's almost like a like kind of like a little portfolio of growth bets.

Anthony Codispoti (1:02:03)

Well Jay Zhang from Embark Advisors, I want to be the first to thank you for sharing both your time and your story with us today. I appreciate you being here.

Jay Jung (1:02:11)

Yeah, it great that was a great session. Thank you, Anthony.

Anthony Codispoti (1:02:14)

Hey folks, that's a wrap on another episode of the Inspired Stories Podcast. Thanks for learning with us. And if one thing stood out, put that into action today.

Connect with Jay Jung:

Website: Embarcadvisors.com