Common Mistakes When Selling a Business

In this episode of The Faces of Business, David Barnett, an experienced M&A professional, Author, Speaker, and Consultant, shares insights on the Common Mistakes When Selling a Business to help you navigate the complex process of selling a business and avoid costly errors.

In this episode of The Faces of Business, David Barnett, an experienced M&A professional, Author, Speaker, and Consultant, shares insights on the Common Mistakes When Selling a Business to help you navigate the complex process of selling a business and avoid costly errors.

David Barnett is a renowned expert in the field of buying and selling small and medium-sized businesses with over two decades of experience. He has authored best-selling books on business transactions and valuation, making him an authority on the subject.

David’s practical advice is sure to equip you with the knowledge to help you sell your business more efficiently and maximize its value.

Download our free business valuation guide here to understand more about business valuations and view our business valuation FAQs to answer the most common valuation questions.

Damon enthusiastically opens the show with David. He asks the guest about his background.

David reveals his journey into business brokerage. He started with a childhood interest in business and a frustration with the inefficiencies he observed. He pursued business school but found it geared towards large corporations rather than small businesses. After university, he started a publication business, which led to a job with Yellow Pages, providing small business education. In the late 90s and early 2000s, he anticipated the decline of Yellow Pages due to the rise of Google.

David then co-founded a business and sold it, a naive but successful first sale. He moved into brokering commercial debt for small businesses until the 2009 financial crisis wiped out his lending sources. During this time, he encountered many poorly managed business transactions and saw the need for competent business brokers. He joined a large international franchise, gained valuable training from the IBBA, and sold 35-36 companies over three and a half years.

Do you want to know if your business is ready for your exit or what you should do to prepare? Learn this and more with our business exit assessment here.

Although David was successful, he found business brokerage unpredictable and left to become a banker. However, he continued consulting on the side, eventually transitioning to full-time consulting. Today, he helps buyers and sellers with business evaluations, preparations, and sales on a fee basis, without charging commissions.

Damon praises David’s story and deeply appreciates the hard work of small business owners. He points out that brokers often take on listings they know have little chance of selling, which ultimately disservices small business owners. The host notes a shift in the approach to finding buyers for businesses, citing the impact of social media and platforms like BizBuySell.

David says that the best business brokers use advanced CRMs. These brokers collect detailed data on potential buyers, enabling them to handpick candidates for specific businesses without relying on public marketplaces. Brokers who can effectively manage and protect confidentiality have an advantage.

Get the most value for your business by understanding the process and preparing for the sale with information here on our Selling a Business page.

Before delving into the main discussion, Damon asks David what he is most passionate about in his career today.
“It’s education,” remarks David. It drives him to create content aimed at helping people avoid pitfalls like the one he mentioned earlier. He finds fulfillment in knowing that his work can positively impact even just one person.

Damon asks David about the changes he’s witnessed in producing educational content on buying and selling businesses.

David talks about the evolution of content creation and dissemination, noting that the opportunities available today didn’t exist when he was in high school. However, this abundance of content also leads to noise that requires individuals to be discerning about whom they listen to and where they get their information.

The guest expresses concern about the quality of information available, as mistakes can be easily replicated by individuals who now have platforms to publish books or create online content. He also worries about younger generations’ preference for short-form content and the potential loss of critical thinking and long-form concentration skills.

Damon requests David to talk about the biggest mistake he often sees while selling a business.

David discusses several common mistakes that sellers make when selling a business. Firstly, there is the issue of unrealistic price expectations. Sellers often set prices too high, assuming they can later reduce them if necessary. However, this approach can backfire as informed buyers, well-versed in market norms and industry standards, may dismiss overpriced listings altogether. Consequently, sellers may find themselves dealing with less informed buyers.

Secondly, it is important to understand the customers who buy businesses. Contrary to popular belief, the majority of business buyers are individuals with industry experience rather than corporate entities. Sellers need to recognize the perspective and financial capabilities of potential buyers to set realistic expectations and empathize with their needs and limitations.

Finally, a big mistake is the lack of empathy with buyers. Sellers often become overly focused on their desires, such as financial goals or personal aspirations, neglecting to consider the needs and limitations of potential buyers.

Damon, agreeing with the guest, illustrates how a business valued highly by its current owner might be virtually worthless to an investment buyer who seeks stability and growth potential.

Continuing with the show’s theme, David discusses the common scenario of business owners operating from what he terms the “Big Bird’s Nest,” surrounded by reminders and centralizing all operations through themselves. Such an approach has limitations as owners become the bottleneck in their businesses. Additionally, he warns against undermining hired managers, as this can negate the benefits of delegation and lead to ineffective management structures within small businesses.

The guest recounts experiences from his brokerage career where deals fell apart due to various unforeseen circumstances.

To put it more eloquently, he illustrates scenarios such as government agencies withholding licenses, banks withdrawing financing offers, and franchise companies mistreating potential buyers, resulting in deals collapsing.

He emphasizes the unpredictability of business transactions and the importance of understanding the buyer’s perspective, particularly their fear and financial investment.

David advises sellers to instill confidence in buyers by underwriting them and offering seller financing, which can mitigate risks and enhance the buyer’s perception of security. He draws parallels to the car dealership model, suggesting that sellers should facilitate financing alternatives to make purchasing their business more accessible.

Lastly, he advises against lowering the sale price but encourages sellers to offer flexible terms to attract buyers, thereby increasing the likelihood of successful deals.

Damon appreciates David’s point about qualifying the buyer and compares it to qualifying the business itself. He leads the discussion with a question about the advantages of seller financing.

In response, David suggests that sellers should negotiate terms similar to those of a lender. He shares an example of a bar sale where the seller financed the deal and required the buyer to submit monthly reports, ultimately helping uncover theft. This proactive approach not only protected the seller’s investment but also built trust with the buyer.

Damon sees this as a good opportunity for both parties to benefit, with the seller’s legacy continuing, the buyer expanding their business, employees retaining their jobs, and the community thriving.

Damon thanks David for his time, then closes the show.

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49:02
SUMMARY KEYWORDS
business, buyer, seller, sell, people, today, deal, buy, customers, brokerage, years, good, big, work, business owners, sale, put, brokers, small business, david
SPEAKERS
David Barnett, Damon Pistulka

Damon Pistulka 00:01
All right, everyone, welcome once again to the faces of business. I’m your host, Damon pistulka, and I am excited today because we have a true legend, an expert with us here today. We have David Barnett. Here we are going to be talking about common mistakes when selling a business. David, thanks for being here today.

David Barnett 00:26
Damon, thanks for inviting me. I love to do this kind of thing.

Damon Pistulka 00:29
We’re gonna have fun. We’re gonna have fun today, man. So we always like to start the show out with learning more about our guests and just kind of how you got into what you’re doing today. So David, let’s hear the story. How did, how did you just wake up one day and decide you’re going to help people buy and sell businesses? Well,

David Barnett 00:53
I it was a long journey, and I probably share this in common with a lot of the business owners that are tuned in watching. I just had an interest when I was really young, in figuring out ways to earn money and thinking about how to make a business go. And I would sometimes get frustrated going into a business that I thought was doing things that were silly or inefficient. I would think, you know, if I owned this business, I would do it this way or that way, and and so as I got older, I started to do those childhood businesses, and eventually got into high school, and of course, signed myself up for business school because I thought that’s where you learned how to become a business person. Yeah, after a couple years, I realized what they do there is not quite that they turn you into what I now jokingly call a fortune 500 bureaucrat. But, you know, doing case studies about, you know, whether you should enter the Saudi market with the, you know, General Electric’s new line of products, you know, stuff like that that we don’t ever really encounter in the world of small business, that most people are going to play in my heart was always in the, you know, the businesses you see when you’re driving around in a city or a town, yeah, so when I finished university, I started a business with a friend that lasted less than a year because he moved off with with a girl to the big city. But that first business, it was a publication, and I was doing the ad sales. And I I figured out enough how to do the ad sales well enough to impress someone at our local Yellow Pages publisher during a job interview, and I spent the next seven years meeting with the owners and managers of small and medium sized businesses, trying to figure out what kind of customers they wanted, how they made money, and so that I could help deliver those customers to them. And so I that was my real small business education was just meeting all those people, talking to all those people, figuring out what a customer was worth, what a sale was worth, lifetime customer value, what it made sense to invest, to try to attract another one of those clients. And so this was in the late 90s, into the early 2000s and I remember when if you typed plumber into Google, wherever you were in the world, you’d get a plumber in California, because that’s where Google was, right, yeah, yeah. And, but, you know, smartphones started to come out, and Google started to get better at doing that search thing. And I realized, hmm, this yellow page thing is probably not going to carry on forever. And so I left and started a business with a part, another partner, and I did that for about a year and a half, and I sold that business, and that was the first business I sold, and it was pretty, a pretty naive transaction. I didn’t really know a lot about doing it, and happened to sell it to a straight shooting kind of guy, and the terms of the deal were adhered to to a T and everything kind of worked out well. But I I got out of that, and I started another new business, this time brokering commercial debt for small business. So I was doing loans, leases, capital leases, operating leases, factoring facilities with accounts receivable. And I did that for a while, until we had that big financial crisis in 2009 and the majority of my lending sources for sort of the lower grade credit quality businesses just evaporated overnight when the big the big Wall Street crisis happened there. So during that time, though, I met a few people that were looking for money to buy a complete business that was already operating, and I saw some pretty horrific things. I saw some people got that got into deals that didn’t really know what they were doing. I saw intermediaries that were claiming to represent people on the buy and sell side who clearly didn’t know what they were doing either. I saw people lose deposits. I saw people buy businesses with no regard to things like operating capital and end up in a in a cash crisis immediately upon acquiring the business, all kinds of bad stuff. So I could see that there was room in my local market for a business broker. I also knew that I didn’t know how to do that, so I I found someone to put me under their wing. And so I ended up joining an office of one of these big, international franchise business brokerage. Grants, and that opened the door to the IBBA and the training that those guys offer. So I spent three and a half years doing business brokerage, and bought the office that I was working in, and I sold 3035 or 36 companies over that three and a half years. And it was pretty exciting, but I often warn people against business brokerage as a career, because it’s largely contingency revenue. And sometimes you can work for a year or more on a file before you might sell it. And sometimes you might sell a deal many times, but it never closes. Yeah, the one of the first businesses I listed was a fried chicken franchise, and the last business I sold before I left the industry was that very business. So I had that file on my desk for three years. Sold it three times, and two of the sales fell apart at the 11th hour, not because of the buyer or the seller or me, because of other outside factors, like, you know, banks making certain decisions or changing their mind about certain terms or things like that. And I just I realized I had two small children at the time. I just realized I need to have better control over my destiny. So I left, I left business brokerage. I sold the office to an associate, and I became a banker. Did that for a couple years, and my phone kept ringing, and it was people who had met me during my business broker days, or people who had been given my name and they were trying to do deals and they were looking for help. And I started to do a little consulting on the side to give advice to these people. And eventually the bank reorganized, and I was offered a continuance package to as money to go find another job, but instead I thought, You know what? Maybe I can help people buy and sell businesses again, but maybe I can do it smarter this time, and maybe I can avoid the roller coaster cash flow. And so that’s what I have today. So I basically, I run a consulting business now. I help buyers and sellers. We do evaluation work for buyers and helping them look at businesses. We help sellers prepare their business for sale, package it up. We run ad campaigns for them. We do a lot of the stuff that business brokers do, but we do it on a consulting basis, on a fee basis, and we do not charge a commission, and we deal with some of the stuff that a lot of brokers maybe don’t want to do, and there’s stuff that comes through my door, and when we get a good chance to take a look at it, I actually tell people, you know what this one you probably should take to a broker, they could probably serve you a lot better. And so in creating like the marketing machine to help bring me these consulting clients, I’ve created a lot of content online, YouTube, written a lot of books, got another one coming out this fall, and all of that material just serves the interest of fighting ignorance about this thing. You know, one of the saddest emails I ever got was from someone who was watching my YouTube channel, and he sent me a message saying, I wish I had found your channel last year. I would have avoided a bad deal in which my family lost our life savings of $300,000 Yeah, and it’s heartbreaking, right? And if, if people are facing these challenges, and I can help them just by putting information out there that I I think that it’s my duty to do that, so I’m more than happy to

Damon Pistulka 08:23
that’s awesome, dude. I just, I tell you, I just like, it’s like the angels are singing in the background. Here it is. It is because, you know, I’m just going to say it. I mean, I really, small business owners bust their behind for many, many years to you know, you see it. They they’re there day in, day out. They’re doing that. They’re, they’re they’re doing their best. And I think that you hit a couple things in there. Some of the Business Brokers don’t know what they’re doing, I mean. And some people think it’s almost you said it, it takes, it’s really hard, to sell a business, all these other things that they don’t and some people think it’s a get rich quick kind of thing to go into the business brokerage industry, because they go over the commissions, but they don’t realize that part of it and they and then I think that that, that roller coaster part of it creates this sense of, I have to have a lot of businesses to sell in most brokerages. And that, to me, I think, is the biggest thing that I see as a disservice that the brokerage industry does to most small business owners is they will take a listing even though they probably, in their heart of hearts, know that it’s not going to sell, or it’s really, really small chance of it selling, because that chance. Is a chance, and it does add to their their overall chance of selling something.

David Barnett 10:07
Yeah, and, you know, when I started my office, you know, some of the advice that I got from from the organization I was part of was that when you first open an office, the problem is, is that you don’t have a buyer list. Buyer list is very important tool for a brokerage, because when you go and speak with business owners, you can say, hey, I’ve got 1000 people looking to buy a business on my list. And so what they said was, take everything you can get, because all of those listings will lead to inquiries, and every inquiry gets added to your list. And then you can then use the weight of the list to then talk with and, you know, attract better quality businesses for sale and so it, you know, without much concern given to whether they’re actually sellable or not.

Damon Pistulka 10:54
Yeah, yeah. And, you know, and that mentality has largely been flipped on its head with the fact that we have social media, we have so many other ways to, you know, that was before biz, buy, sell was really a thing, as far as finding buyers and and, you know, this is drastically the fact that we can, you know, AI, you can mine list, you can get the right people. You can there’s so many other ways to find, find potential buyers right now that it’s that I still see it a lot, but I don’t really, I mean, I don’t even consider that as an advantage anymore be and maybe it’s because of the kind of work we do. It’s, it’s all targeted. I mean, we’re not gonna the spray and pray to 15,000 buyers, for me, is, is not really the way that we’re going to do it. But again, it’s a different kind of thing.

David Barnett 11:50
You know, the, I think the sort of the best brokers out there, Business Brokers, they have a really great CRM, not just a list, yeah? So they have data on people they’ve spoken to, and so if they get a certain kind of business, they can actually look in there, and they can maybe even start to handpick candidates that they want to talk to about the business without having to put it onto a big marketplace. So I mean, I talked to a lot of brokers, and there are many of them who will tell you that not all their listings are on the big public marketplace websites, and they’re trying to control confidentiality and and, of course, as a business seller, confidentiality is a really important thing that you want to maintain. So brokers that are able to deliver that, I would think, have have a certain advantage today. Yeah,

Damon Pistulka 12:36
yeah, that’s for sure. Well, it is an interesting it is interesting. As you said, the the ability to sell a business. I mean, if you wake up today and decided you wanted to sell your business, you know it’s it is a difficult thing. So we’re here today, we’re going to talk about common mistakes when selling a business. So before we get there, though, I always like to ask, what is the one thing you’re most passionate about in your career today? Uh,

David Barnett 13:12
well, it’s education easily. I mean, that’s why I produce everything I do. I mean, I It’s I want to I want to teach people. I want to avoid getting emails like the one I mentioned earlier. Yeah, and if, if I can create a video that helps one person in some way to me, that that just feels wonderful. I mean, I don’t know like I, I, I truly believe it in the abundance of the world and the universe. And I think that you know in business, the reason that the way that we make profit in business is by finding customers and serving them to make their life easier or to remove some kind of pain or discomfort from their life. So business helps people, and in doing so earns money. And if we’re all helping each other more and more, we’re all better off, and we’re all going to do well, like, it’s, it’s not a there’s not a limited amount of money that being Yes, or anything like that. Like, the more we create through business, the better off everyone is. And so there’s more than enough room in the world for everyone to be successful in business and be a part of a successful business. Doesn’t mean you have to be a business owner. You know, you can be a successful employee, and you’re still part of that success story in helping that business achieve its ends and helping all the customers and sharing in the success yourself through your wages and other benefits, right? So,

Damon Pistulka 14:35
yeah, yeah. Exactly. So what? What have you seen? I mean, you’ve been, you’ve been producing educational content around selling a business, buying and selling businesses for a while now. What are some of the things that you’ve seen that really have changed the game for your ability to really get that content out there to the world?

David Barnett 14:55
Well, I mean, what I’m doing today didn’t exist. What. When I was a high school student. I mean, the whole idea of, you know, I guess you could be on the radio or something, right? Yeah, or a small handful of people could be on television. But to be able to just plant your flag and decide to start broadcasting to the whole world just on your own with nobody’s permission is the game changer, yeah, and, and it’s also created a new game, because not only does it mean that I’m free to create my content and spread it to the world, but it means that anyone can. And so there’s a lot of noise now, and people, more than ever, have to be really careful about who they listen to and where they get their information. You know, in the 1970s if you picked up a book, chances were that the manuscript of that book had to pass through many layers of gatekeepers to judge its quality and realistic or not, and then someone had to make a commercial bet that there was enough demand to actually get it to be printed. And today, anybody can upload something to Amazon and and all of a sudden be an author, right? Yeah. And it like, there’s I made a video a couple years ago about a book that’s out there about buying businesses, and the author doesn’t understand the difference between return on equity and return on investment. And so in the book, the author is representing these deals, talking about what a great ROI they are. But in fact, he’s describing the return on equity. And so when you actually look at the deal from the point of view of return on investment, you realize the deals aren’t very good at all. And and so not only are there people who are making mistakes, but the mistakes are being replicated through the fact that people now also people who might make a mistake also have access to a platform and can publish books and have YouTube channels and be on podcasts, etc, etc, and so that, I think, makes it even more challenging, And I’m fearful of younger generations, who, for some reason, seem averse to long form concentration, you know, like you see things on Tiktok that are less than a minute. And then there’s conversations like the one you and I are having here today, and the longer conversations, you know, with time to think about what you’ve heard. And, you know, asking some some questions about whether what you heard made sense, you know, like, I think some of that’s being lost as well, maybe with people that have grown up with this stuff. You know, I remember the internet was something that was new. And the first year I went to university, you know, someone said, come to the computer lab, there’s a cool thing where you could talk with people around the world and, that, you know, that was this little chat application back then. And I remember, I remember the very first websites, and so I distinctly remember the world the way it was before and and for people that have grown up with this stuff, like they’ll see something online and think it’s really new, not realizing that the idea of the concept, etc, has been with us for a long time, just in other forms. Yeah,

Damon Pistulka 18:04
yeah. It’s a great point. A great point. So you’ve been doing this quite a while. You’ve been helping people buy and sell businesses. You know, today we’re talking about common mistakes when selling a business. So let’s just start off with the biggest one you see. I mean, what is the mistake that you see the most often that really derails a business sale?

David Barnett 18:28
Yeah, so it’s the seller’s expectation on price, if, if the seller is asking a price that is way too high. Here are the problems Damon, sellers might think, hey, it’s my business, and if I want to ask a high price, that’s up to me, and then later I can reduce the price. But unfortunately, it’s not like that’s the way you sell a painting or a fancy house, right? The problem with a business is that right now out there today, there is likely somebody looking for a business just like yours. They are in the market, and they’ve been watching my YouTube channel, and they’ve read books about it, and they may even have worked in the industry, and they’re familiar with how your business should be functioning, and they’ve looked up the RMA data on your industry, and they know what the margin should be, and all this kind of stuff, right? And they have an idea of what they’re likely going to pay for a business like yours. And this person has money for a down payment. They’ve got good credit, they’ve got retirement savings, home equity, the whole kit and caboodle of what you need to be a good business buyer. And they might be thinking that a business like yours should be worth a million dollars, and then they find it online, asking 2.5 and they think that person’s crazy. I’m not going to waste my time with that person, and so you’re not going to meet that person. You’re not going to meet the ideal buyer. Instead, who you’re going to meet is somebody else who also doesn’t know what they’re doing. You. And that person is going to meet with you. They’re going to ask a bunch of questions. They’re going to ask to see a bunch of things. You’re going to run around providing information. They may even submit a full priced letter of intent, right? You may even sign this letter of intent and think, Oh, my goodness, I sold the business. This is the best Damon told me my business was worth a million. That guy, David, told me it was worth a million. I just got someone to sign an LOI for 2.5 and then that guy goes down to the bank, and the banker explains why you can’t pay that much, and the deal falls apart, right? Yep, so, so the number one mistake is having unrealistic expectations about price, and that is often fed by the number two mistake, which is not understanding who the likely buyer will be. Because if you, if you look at content online, you know, what do you see? You see articles about ESOPs and private equity and like roll ups and platform businesses and strategic buyers and all this kind of stuff. And the reality is, is that if you actually look behind those headlines and look at the real numbers, the numbers of those kinds of transactions are like in the hundreds to like low 1000s every year. Oh yeah, the vast majority of business buyers are people. It’s a person, right? It’s a person who has maybe some industry experience. They know what they want. They go looking, they find your business, and they think, I could run that business. And so that person is going to be the buyer. And so you need to empathize with the person, and you need to actually think about how they’re going to buy your business. So one of the, one of the tests or challenges that I used to do all the time with with people when I had my business brokerage office, is a seller would say, you know, oh, I want this very high price. And I would say, Okay, let’s imagine I’m buying your business. How much money do you think I have to put down? Right? And a lot of sellers you know might coyly say, Well, I want a person with all cash. Here’s the problem. If you want half a million dollars for your business, a person with half a million dollars is not trying to buy a half a million dollar company. They’re trying to figure out how to buy a $2 million company with their half million dollars of cash. Right? So the person who’s trying to buy a half million dollar company might have 6080, maybe $100,000 right? They’re trying to figure out how to buy your half million dollar company with that money, right? Yeah, and so and so you put yourself into that person’s shoes. If I had this kind of down payment, where would I get the rest of the money? Well, I’d borrow some. Well, go look on the computer. You can find, you know what the interest rates are for bank loans. You can figure out what the payments going to be like. You can you can do the math and just figure out, Is it even possible for some guy to put down some money and buy my business with borrowed funds, right? And very quickly, you come to realize, for a lot of these sellers, they’ll be like, it doesn’t make sense, but there’s this cognitive barrier, right? And I’m not sure what it is, because if you talk to most business owners, and I know there’s business owners listening, you probably spend a lot of time thinking about your customers. And you think about what your customers want, what your customers are willing to pay for, and how much and how they’d like to pay, right? And for some reason, when we talk about selling a business, people become very, all of a sudden, self centered. They’re like thinking about their boat and their condo down in Florida or whatever they’re going to buy with the money. Yeah, they’re not, they’re not thinking about the buyer. But the moment you decide to sell a business, the buyer is actually a customer, and the product is the business. And you know, a business brokerage office, you know the businesses they have for sale, that’s their inventory. And a wise broker is going to source inventory from great suppliers who have good prices. You know, the the candy shop is not going to buy from a wholesaler that has sky high prices, and, you know, none of the customers can afford to pay for the candy, right? It’s the same thing with a business brokerage, like they’ve got to have product on the shelf that is sellable to the people that walk through the front door looking to buy businesses. So, so empathizing and thinking about who the buyer is going to be is, is another big one that I find missing a lot of the times on the part of sellers. Yeah, you’ve probably seen this before. You’ve probably spent a lot of time talking to people about about what that other party is going to be like.

Damon Pistulka 24:34
Oh yes, yes. I mean, and especially when the the one thing that we see when you not understanding the buyer and the in the biggest mistake we see that literally cost people millions is when you get into a size of business that’s large enough that it could be purchased by an investment buyer, by a search fund buyer, or by maybe even a private equity. Company that wants to maybe even turn it into a platform company, and they don’t understand that, just because David is super smart and he can build $100 million company around his massive brain that brings in millions and millions in revenue that could be virtually worthless to the next to that investment buyer, because they really need something that David can walk away from. And it continues to make the money it made yesterday, tomorrow and the day after, and grow. And when you look at it, and you start talking about this with people, and you know, even in the in the US anymore. Search fund buyers have gone down in size, you know, some even, you know, over a half a million. You start to get into them in EBITDA, or you get into the, you know, and certainly get close to a million. And the search fund buyers are all over that, and they have similar requirements to another kind of investment buyer, that it’s, it’s, it’s, it’s different than a private buyer, because if I’m a private buyer and I have knowledge, intimate industry knowledge, I can buy businesses that even a great search fund buyer couldn’t buy because they have the investors behind them, and there’s requirements that they have. And we, we spent a lot of time educating people on that. So it’s like, hey, it’s really cool. You got a $30 million business, and you’ve got 5 million in EBITDA, and you’re making great money, but that tomorrow to the next buyer is worth half of what it could be if it was set up, right?

David Barnett 26:35
Well, I say that these are the two questions that buyers ask. The first question is, what is the cash flow, and that will determine the price. And then the next question is, is it likely to continue under my stewardship, and that’s going to determine whether they even do it the deal? Yes, great. They might agree that it’s worth $5 million and then that they don’t want

Damon Pistulka 26:56
to buy it. Yes, that’s a great way to say it. That’s a great way to say it, because that is the case. And we always say, like, Listen, if you’re going to sell into a search fund, you have to have a good middle management team, and you can be the CEO as the owner yet, but you can’t have special knowledge. You can’t you just be doing that executive level thing. You can be that if you’re going to sell to a search fund buyer, that’s probably okay. But if you’re going to sell to a if you expect that your 25 million, $30 million company is going to sell to a PE firm as a platform company, you better have an executive management team that can develop and execute a five year growth strategy, and you can sit on the beach or just come in for board meetings, because that’s what they need. And when people go, Well, I know the business. I built this business. You know, it’s like, I don’t know how many people I’ve talked to the last six, seven years we’ve been doing this here, and I do it. Did it before, when we were when I actually work for private equity, is like, they can’t understand why I’m making all this money. I should be getting this kind of multiple but I’m getting half, or I’m not even getting any offers. You know they and it’s all around because, as you work into an investment grade it, they are putting everybody else’s money up. And it’s like spending the last nickel that your grandmother has and and it really is a lot different deal. So not understanding the buyers, I think, is an awesome, awesome thing to really talk about, because you even if I am the baker on the corner and I have a bakery, I mean, you just really have to go, what is it? E Myth? Is that the book that talks about that, yeah, yeah, you know, you gotta really think about that next buyer. Because, listen, if I set up that bakery and I got a few good employees, and they’re doing a lot, yeah, I’m working pretty good, but I’m not killing myself. I’m not dying there. I still get to go see my kids play sports or do their orchestra or whatever doing once in a while, and get to be out in the community. That might be a good thing, but if you’re slaving there seven days a week, 16 hours a day, you’re still not understanding that buyer, because no buyer is going to want to walk into that situation.

David Barnett 29:12
Absolutely. Yeah, yeah, no, I, I, I’ve met many, many business owners over the course of my career who operate from what I call Big Bird’s Nest. I don’t know if you’ve ever seen this before. It’s when, it’s when someone has, like a workstation set up, and it’s completely they’re completely surrounded by yellow stickies stuck to every surface and the and these are the the things they have to remember, or an important number they’re supposed to give to the CPA, or some bit of information their lawyer asked for, or whatever. And it’s all stuck all around them. And these are the people that, you know, we jokingly say can’t go on a vacation because they’ve they’ve made themselves the central router of their business. Yeah, everything has to pass through them. And you know, I’ve actually seen in a lot of small businesses that the the transaction to a buyer who is. A person that comes out of some kind of larger entity, you know, some kind of middle management background experience actually brings a lot to that small business because they understand, you know, SOPs and checklists, yes, Project flow charts and how to organize the employees and and, more importantly, not just delegating tasks. The difference between a small business and a big business is that in small businesses, the owner doesn’t delegates tasks, and in large businesses, they delegate responsibilities. So so they they say to somebody, you are now in charge of this functional area or this thing or what have you, and that’s what really opens up the bandwidth and the time of the owner, because if you just delegate tasks, the person is going to go and execute the task and then come right back and wait for the next command and that. And that’s not what you want. You want to create the apparatus where people understand what it is that they’re responsible for and how they do it, and what resources they have access to, and they can make decisions knowing that that’s part of their job. And you know, the worst thing is that when someone tries to hire a manager, and then they undermine that person, or they, you know, overtalk that person, or don’t let that person do the job and make the mistakes, because then you just end up with another person on payroll, and they learn very quickly that they’re really not supposed to be managing.

Damon Pistulka 31:26
Yeah, yeah. That is one thing I am thankful for my my time working with the investor owned businesses, is that that delegation of responsibility is key, and then measuring performance. You know that when you look at we, we talk about, okay, my business is small. Why do I really want to take the time to measure performance? I know how my business is doing, but it, it’s so important to be doing that along the way. And it’s, it’s overlooked, like you said, that people come out of the the larger corporations, and they really have been used to the SOPs used to, you know, knowing that, hey, listen, we we do 10 of these every day, if we do 10 of them every day, and we do it this way, we’re okay, we’re good. We’re making money, or whatever it is, and getting people into that, that frame of mind, so that you can, as you say, the owner, can go on vacation for a while. They can do what they want to do, or do other things that help to drive that business farther, longer and and move that forward. So when, when you talked about this before, earlier, when you’re saying Selling A Business multiple times, because I know there’s, you know, there’s all kinds of mistakes when we sell a business, we hit a couple of the real important ones. But explain this i or kind of give your perspective on this, because I, when I’m talking to business owners, I try to convey how difficult this really is. Let me hear you say, if I was a business owner, tell me how difficult it’s going to be to sell my business, even if it’s a good business.

David Barnett 33:08
Yeah. So the last year I was in, had my brokerage before I decided I needed to get out. I had six deals lined up to close over the next two two and a half months, and in all six of those deals, the buyers wanted to buy and the sellers wanted to sell, and all the paperwork had been signed. And then in one deal, it was an industry that required a license, and the government agency that issued the licenses would not issue a license to the buyer. So that deal fell apart. In another in another business, the bank that had issued a financing term sheet called about a week and a half before closing and said, We can’t do this deal anymore. We’ve just been told by head office we’re overexposed to the industry. Great deal. We just can’t finance it anymore, right? And it’s like people say, but I have a term sheet, but this is a deal. What are you gonna do, sue the bank like, you know, give me so it just didn’t close, right? The third deal was a franchise resale. So the buyer and seller liked each other. They got along, and the buyer had to go through the normal approval process that the franchise company had read through the FTD, sign a receipt, do the cooling off period, go through their discovery day, the whole thing as though he weren’t a new franchisee, and they were just jerks to him, like they treated him really poorly. The people he interacted with were rude, and he gained back from that experience. And he just said, I love the business, I love the seller, but I will not get into business with those guys. And so that deal fell apart, right? The other three deals closed, but those kinds of things happened all the time, and then you would sometimes get into issues regarding the advisors. So sometimes. Seems, you know, there would be advisors who would give advice that was not correct, and the other party’s advisor, maybe an attorney, would say that that’s not correct. It’s this is the way it is. But for some reason that other advisor, either through not knowing, or for some other reason, or maybe even it was just that the other party got cold feet and told their attorney maybe to say something I don’t know. Like, like, all these things happen all the time. I call it up. I call it, you know, having other people who can upset your apple credit, right? If you ever heard that expression, yep. And there’s just, there’s all these different vectors of threat to the business. So, you know, imagine this, if you have large customers that represent a big chunk of sales. If you lose one of them, let’s say one customer represents 8% of sales, your business could become unsellable for two years, because now every buyer that looks at your business is going to want to see a steady track record, which, in everyone’s mind is two years of financials, right? And they’re going to value the business based on those two years. You may know in your industry that you lost the customer today, and in three months, you’re probably going to get another one, or maybe next year, you’ll get another one, or whatever. It’s ups and downs, but and this also reflects back on the understanding of the buyer’s position, because most business owners today are not highly leveraged. They don’t have huge loans with big payments, but the buyer is going to Yes, and that’s why the buyers are so sensitive about, you know, the the steadiness of the cash flow and the steadiness of the profits and the sales. And so I was speaking with today, with a guy who’s looking at a cleaning company, a janitorial cleaning company, and asking me all these questions about all the different ways employees could leave or customers could quit then. And I said, Listen, you know, nobody wants to go through the process of hiring a new janitor. Nobody wants to go through the process of finding a new job. Everyone wants everything to work out, right? It’s so this is why you’re buying a business, and with the Seller Support, you’re going to be able to meet these people and hopefully carry on with great customer relationships, etc. But, but let’s not you know, be confused. Something somewhere is happening in one of those customers, in one of those businesses, something is going on. Maybe they’re talking about closing that office or or they’re talking about making some other kind of change, or somebody’s cousin just started a janitorial company. Right? There’s all of these threats that are out there that you’re going to have to live with. And the buyers are terrified. The buyers are terrified because they’re going to take all their savings, they’re going to mortgage their house, take out their retirement savings, they’re going to borrow from the bank, and they’re going to put all of this into a deal, and they hope that it works. And so let’s think a little bit more about that buyer. If the buyer is a person, one of the things that that buyer is facing is fear, yes, and they they know that that the seller knows everything about the business, and they know that they are at a disadvantage. So one of the biggest things that a seller can do to create confidence in the buyer, number one, actually underwrite the buyer. So make sure you’re selling your business to somebody who you think is capable and qualified. If you value your employees and your customers and all those but number two, be prepared to finance part of the deal, because nothing will give that buyer confidence more than a seller saying, Hey, I like you. I believe in you. You remind me of myself 20 years ago. I think you’re going to do great, and I’m going to invest in this right? It, it gives them a huge sense of security. And these seller notes often have offset clauses. So if it turns out the seller is lying about something, some misrepresentation, there’s a there’s a protection for the buyer. And of course, you know, honest good business people aren’t lying or misrepresenting themselves. So you shouldn’t be afraid to do this, but it’s going to add to the confidence. I always tell sellers, if you want to sell for top dollar, you have to remove as many of the risks from the field of perception that the buyer is going to see. Just think about a car dealer. Car dealers know that people don’t have $50,000 in their bank account to buy a car, and so when you walk onto the dealership, they’ve got all these different financing solutions set up already. Think about the buyer as a customer buying your business as an article of inventory. You have to help figure out how they’re going to pay you, and setting up financing alternatives is one of the ways, certainly, that’s going to make it easier for that buyer to buy. Yeah, over the course of my career, I’ve often had sellers who will have some real pressing motivation. They’ll say, I need to get out of this business in a year. Should I lower the price? You. And my answer is always the same, don’t go to market with a lower price. Go to market with more flexible terms. Remove the barriers, right? That’s huge. I mean, the banker, yeah,

Damon Pistulka 40:12
the flexible terms is huge because it and because it does show the buyer you have confidence in the business going forward. And it does show them that, that you really believe in them as well. I think you, you made a great point there by saying, you know, qualify the buyer as much as you, you know they’re kind of qualify your business almost to that point. Because if you’re confident that they could run your business, well, then that’s that’s just that much better, better position for your money if you’re going to do the seller financing that will help you, and seller financing gets you more money too over time. I mean, why?

David Barnett 40:50
Because you you’re going to earn interest. Yeah. And, you know, I point out to people like, when you’re at this negotiation table, everything’s up for negotiation. And so think about it the way a lender would. You know, the bank making the loan has a covenant that says there needs to be financial statements and other reporting issues. You can ask for the same things as a seller. You can say, I want a monthly P and L and balance sheet. I want the annual tax return copies sent over to me. You know, one of the businesses Damon, that I helped sell was a bar. And, you know, banks don’t finance bars, yeah, and so the seller had to hold all the financing for the bar, so the buyer put a down payment, and then the seller held a note for the rest. And one of the conditions was that the the the buyer had to submit his monthly income statement and balance sheet and a report from the computerized liquor dispensing system every month. Three months into the transaction, the seller calls the buyer and says, someone’s stealing from you behind the bar. And this is how I know, right? Because he had 30 years of experience running the bar, he knew what to look for, and that’s why he asked for those things, because he wanted to be on the front end of any kind of problems that were going to happen in that business, and he knew that the new owner didn’t have the experience yet to be able to pick up on these things and notice and so that was part of what he did as the seller to protect his investment. But how do you think the buyer felt? You know, after that reaction. I mean, he really felt like this person trusted him, but was also there to coach and advise. And that’s part of the value proposition of buying a business versus starting something on your own, is you got someone there who can give you advice, someone you can bounce things off of. I think that in a successful business sale transaction, the buyer and seller become friends and can talk with each other for years afterwards,

Damon Pistulka 42:49
you just hit on something that I mean, so much good stuff there. So I want to first of all say, if you just got into this, you need to back up a minute or so and listen to David here talk about that with the example of the bar owner, the previous owner, helping the new buyer understand that there was a problem. But wow, I tell you the whole thing about the buyer and seller becoming friends, I love that because we, over the past couple of years, we’ve really been helping a lot of people do transactions amongst friendly competitors. And one of the things that I love is that is you see someone that has dedicated their life to this community, this industry, you know, they’re a great whatever, HVAC company, and they’ve built a great business, and they want to retire and move off. And you find someone that’s in a different point in their career, and they they’ve got a good business, and they want to buy that, buy that friendly competitor that they’ve known they’ve been alongside each other. And you see those companies coming, those those owners come together, the the experience and the in the ambition and everything in the new and the old, and is so cool because the the seller wins, because they see that legacy continue on. Their business continue on. It doesn’t just get bought by some outside interest and whatever happens to it, then the buyer wins because they are they instantly they’ve grown their business by that much. The employees win because they continue working right which it gainfully employed, and the community wins because it just, it’s just such a good thing when that happens, and I think today, this is one of the biggest opportunities for business owners that are that point in their career growing is to call those friendly competitors that might be on the other end of their. Their business career and just see what’s going on. Because it’s, it’s such a it’s such a great thing, when you say, because you can create better friendships, better businesses, and it’s best for everybody.

David Barnett 45:15
It’s, it can be challenging, though, if you, if you’re actually competitors, like, I’ve Oh yeah. Sometimes, oh yeah. I sometimes have people who will ask me, you know, should I sell to the competitor in my city? And there’s an interesting dynamic there, because the person who’s actually going to value a business the most is somebody who is in the same industry but not in your market, yes, right, somebody in the next state or two counties over, someone who understands your business has some of the same suppliers, you know, but they’re not in your market. They’re going to look at buying you as an opportunity to grow their volumes with suppliers. Maybe they’ll get better pricing across whole the whole concern after they do a deal, they’re going to look at how they’re going to grow into a new territory, maybe be able to go after bigger jobs with a combined workforce, if there’s any, yep, if they’re able to, you know, move people between the two places, but somebody in your city. The problem, the reason why direct in market competitors have a hard time paying top dollar is because at the back of their mind they always have this guy, this little voice that says, geez, if this guy would just go under, I could have all his customers anyway, and and so that

Damon Pistulka 46:27
is, that is, that’s, honestly, that is the way some people operate. And I’m lucky in the in the fact that you can, you know, if you really, I mean, I just love, I love what I get to do because I I get to work with people that want to make the right deal. I mean, and not it. Yes, top dollar, you can get more money from somebody else. But when I’m talking about the passionate kind of deals that that we get to do it, it’s, it’s about making the right deal. They don’t happen that often, but when they do, it’s really special. But you are 100% right that they’re and they’re out there every single day, you know, doing that, coming in, and expanding in geography, and doing those things. Yeah, good stuff. Good stuff. Well, man, I David, we’re gonna have the talk again, because it’s already, I mean, we usually go about 45 minutes. We’re over that already. How can people find your content? Connect with you, learn more about what you do, what? How? Sure.

David Barnett 47:36
So, so right there under, under my face, it says, David C barnett.com, that’s my blog site. And if you go there, there’s all the different videos, articles, etc, that I put up. If you’re a YouTube person, just look for David Barnett small business on YouTube. You’ll find my channel very easily. And I take the audio of my YouTube and I put it on a podcast stream. So if you prefer listening to podcasts when you’re driving around or walking around. Just search David Barnett, small business, on any of the the big podcast apps, and I’ll come up there as well too. You’ll see the feed and and, yeah, and I’ve got an email list that people can join as well. I send out information all the time about new things I’m doing or stories or examples. I always trying to teach people,

Damon Pistulka 48:19
yes, yes. Thanks so much for being here again. We have David Barnett here talking about common mistakes when selling a business, but we were talking about buying, selling deals, a lot of other things. But I highly recommend that you go visit his YouTube channel, his blog post. He’s got eight books. He’s got another one coming out this year. I mean, it’s he is truly educating business people on how to buy and sell businesses, like very few people, very, very few people, one of the best in my, in my opinion. So thanks for being here, David. Hang out just for a moment, and we’ll, we’ll finish up offline.

David Barnett 48:58
Thank you. You.

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