business, buyers, sale, people, sell, andrew, buy, money, owner, investment, deal, customer, big, talk, business owners, market, thumb, terms, pay, transferability, Business broker, Business value builder, M&A consultant.
Damon Pistulka, Andrew Cross
Damon Pistulka 00:00
Again, and there’s having trouble getting on stage here. We’ll see if we can get him. Oh, here we go. Here we go. Now I should I should be able to come on Andrew. It’s gonna be a little hard because if we can get him on there we go. Got it. figured it out. All right. Thanks so much
Andrew Cross 00:38
was in mobile mode.
Damon Pistulka 00:40
Andrew Cross 00:42
you’re in mobile mode you can’t present in desktop mode and we’re trying to I don’t know why I didn’t know I wasn’t desktop.
Damon Pistulka 00:48
Yeah, yeah, good stuff. Well thanks everyone, as you’d expect, after a little two month hiatus and many updates to their software we it’s a little a little rocky start today but we’re gonna get going here again. Thanks so much for being patient with us. I’m going to get us live on LinkedIn and then we’re going to get going music’s playing over here. All right, everyone. Welcome once again, to the eggs your way Business Roundtable. We’ve been away for a couple months. So it took us a little while to get on. I mean, quite honestly, the software updates in the in the little knockin a little rust off today. So I just appreciate everyone being here.
Andrew Cross 01:31
Yeah, suntan lotion. Yeah. Come Brad Smith. Troy. Yeah. Yeah, I see them coming in the chat. Good to see you. coming in here.
Damon Pistulka 01:40
If you’re watching this on LinkedIn, go ahead and drop to where you’re you’re watching from so where do we start? Hey, we’re back. Yeah, first of all, we’re back summers rolling to an end. That was, yeah, that was fast. It was really fast. Glad to see everyone in the audience. Thanks so much. Like like Mark’s doing, drop your LinkedIn profile in the comments if you want to connect, and do those kinds of things. But man, I am so excited to be back because I love the summer love taking the time off in the summer because those nice warm evenings and having a cool drink on the deck is always a good time with family and, and friends.
But I am excited about this fall, I think there’s a lot of good stuff that’s coming on. And, and we’re we’re gonna have some fun with what’s going on. We took some time over the over the summer to kind of revamp what we’re doing. And we’re going to be talking more about specific topics that will be helping business owners run better businesses that are more valuable and that they can sell or succeed someday when they want to. So Andrew, what do you have to share with people today?
Andrew Cross 02:55
Well, we’re going to talk about things that prevent a business sale.
Damon Pistulka 02:59
Andrew Cross 03:00
nah, you know what, why don’t we get right into what we do to help people’s businesses?
Damon Pistulka 03:07
Well yeah, we’ll talk we’re gonna we’re gonna do a little presentation here on this and the one thing you’re gonna see with this the format’s gonna change right. Today I open the open the room up if you’re listening on LinkedIn, I open the room up at 15 minutes before but what we’re going to do is we’re going to keep this to one hour it’s gonna be one hour long all the way beginning to end you’re going to be able to have plenty of time to talk to people a little bit before a little bit after we’ve experimented over the year with the manufacturing Success Series at Kurt Anderson
I do on Fridays and man if we get this dialed in right one hour is a good time frame and hopefully we can provide a lot of impact in that hour so without further ado, we’re gonna get this thing going because we got some we got some fun stuff I think fun stuff for me anyway. And maybe not so much for for Andrew and me but are for others that are listening but fun stuff for me to listen to.
And and I know the people on on LinkedIn live are going What the heck is going through the screen now because I had to set things up but I’m set up over there so I can share and we will get going. So without further ado, and this is something new because we don’t do presentations much in here often. But we are going to run through a quick one here. And I’m going to hide that that so we got that. We should be ready to go. All right. So things that prevent a business sale. We thought we’d start with the end when we when we go through this stuff because really this is where you don’t want to be
Andrew Cross 04:52
we get a reverse engineer this
Damon Pistulka 04:54
Yeah, we’re gonna reverse engineer it. That’s a good selling how to sell business. Let’s
Andrew Cross 04:57
let’s talk about how not to sell
Damon Pistulka 05:00
Yeah, how not to and then over the next month, we’re going to talk about different things that you need to understand like valuation and the organizational structure and, and wealth management and other things like that, that really get you as a business owner, ready. And, and mentally, financially, business wise, ready to do this the right way, whether you’re going to sell or succeed a business. So let’s get started, you know, most of the time, Andrew and I, or more business investment bankers in general, they get the call when people just wake up and decide to sell their business, right. And if you don’t prepare, that’s, there’s, there’s a lot of things that can happen.
But what what happens and far too many times in this industry is they’ll reach out like that, and someone will list their business for sale. And that’s cool, their business is listed for sale, they’ll get some people that look at it, they’ll get some buyers that are interested in it, they’ll talk wires, and they might even get an offer or two. But in the end, lots of deals die at the offer stage diligence stage, and in other ways. Andrew, talk a little bit about that. That fact, just in that, you know, just going ahead and trying to list the business for sale. How many buyers? Are you going to talk to before you get one that makes an offer?
Andrew Cross 06:39
Well, I you know, I think too, that people don’t think about listing their business for sales process, a lot of the times it just, you know, like you said, it just happened, somebody picked up the phone and call them, you know, hey, I’m interested. And that’s where everything starts, you know, there wasn’t a planning about it, you know, we weren’t you know, just to give us some framework to this is this is focused towards small medium businesses, typically owner operated, you know, all of us in this room are in business, or we are working with clients who are in business.
And you know, the thing about it is you don’t go into business with the goal of selling your business, you go into business, your goal is to provide your service and sell your products and do those things. But you know, it’s so it’s interesting that without understanding what that is, then that’s going to prevent a business sell, because you’re not working towards it until it lands in your lap. And it’s like, well, it’s time to sell now.
Damon Pistulka 07:39
Yeah, yeah. So you’re right, the thought the thought to prepare a business usually doesn’t come and tell, tell you’re about ready to sell the business. And that’s one of the things we’re going to talk about a little bit today. So hopefully today, what we can do is basically turn the light on a little bit and really think about what are some of the things to do that, that you might want to look at with your business to really Hey, effect change if you can before you get to this point.
And most people in this and this is a fun fact that I think that if you are in business, know people that are in business, or helping people in business, most of the people that we talk to about selling a business are not your typical 65 year old person that wants to retire.
Most of the people that we talk to selling businesses are in their 40s and 50s. And it’s simply because they built a good business, they want to cash outs, take some money off the table and do this. It’s not something so when you look at people and you go oh, you know, they may not be old enough, don’t think that’s the case there. When businesses are of a certain value, people start thinking about taking money off the table. What do you have there, Andrew?
Andrew Cross 08:58
Well, I think that, you know, a lot of people are, hey, yeah, I’m gonna sell a business when I’m ready to retire, you know, or when I’m done, or, you know, when it’s when I’ve got something else I want to do. You know, and then if one of the first things you do when a buyer comes in, and you’re actively thinking about, you know, preparing, selling your business, you know, one of the main things is What’s the reason?
And there are a lot of good reasons to sell a business and these are this is like probably that we have buyers come in the first question that’s always asked what is it you have to have the correct answer for that and preparing it is the sale to sell is you know, if that was your, you know, the goal, you know, that generally isn’t the case. So, yeah.
Damon Pistulka 09:50
And you’re right, if the buyers are gonna ask that question and you say, well, the owners tired and in wants to get out because they’re exhausted. That’s gonna say The the wrong tone right from the beginning. So you know, if you can say the buyer, you know, has specific goal in mind they’ve met that we think they’ve met that and they’re ready to they’ve prepared the business, they’re ready to exit, it’s quite a bit different for the conversation with those those potential buyers.
Andrew Cross 10:17
So, go, you know, it talks about, you know, why are you selling? And then the next question is, when are you selling, and then generally, the framework is I’m going to sell when I’m, you know, that that’s the part in and if you think about it, and you go back to your goals, right? I don’t, you know, if you readjust your goals to I building a business to sell it, instead of I’m just, you know, my goals are to, you know, sell my services and products and do that to my, for my clients, you know, you’ll sell you should sell then the answer should be when is when the business is at its peak?
Damon Pistulka 10:53
Andrew Cross 10:55
The best value? You know, because, and obviously, that can because that, that just makes sense. That’s when it’s most attractive to the buyer to come in with the least amount of risk.
Damon Pistulka 11:06
Yeah, yep. So,
Andrew Cross 11:08
cuz that could be, you know, true. I mean, if you think about it, it may not be when you’re 65. Yeah, that might be tomorrow.
Damon Pistulka 11:15
It has to do with asset value. And that’s what a lot of a lot of, you know, you get into business people start a business or buy or, or, and they’re building it and they’re, they’re running it, they often don’t think about what they’re building an asset, right. And if you build the the asset, right, then somebody else will pay for it. If you build it wrong, you won’t get paid for it. And we’ll go some through some of the things there as we do this, but couple couple fun facts on business sales, you know, you would have thought that COVID would have killed business sales.
But some of the some of the estimates that we’ve seen is that there was a slight dip in it. But business sales are back up to within 15 or 20%, of where they were at the very peak in 2018 and 2019. So there’s businesses being sold every day. And that turmoil in the job market is caused that and Andrew, you know, there’s some there’s some investment that’s waiting to be deployed.
Andrew Cross 12:13
Yeah, you know, I think that, you know, also there’s political ramifications that are affecting that, too. So there’s, there’s some rush to the exits for, you know, to avoid the pending tax,
Damon Pistulka 12:29
capital gains increases next year,
Andrew Cross 12:31
that’ll be a short term blip and activity, but generally, when there’s turmoil, money moves around. Yeah, it’s to look for other places to go. You know, and then I think that generally, it’s a bellwether, but I think everybody’s thinking, you know, business isn’t going away. Yeah, we’ve got COVID in businesses just changing. It’s going into for direct Money, money, and the buyers are gonna go find what those opportunities are. Yeah, so I was gonna do that.
Damon Pistulka 13:05
And I don’t know the accuracy of this number. But I read something recently that said, there’s $4.5 trillion of dry powder or investment waiting to be deployed. And this is quite a large number, because not too many years ago, that was a little over a trillion. So if that’s true, there’s a lot of people are still out there buying it. I know, investment buyers are more aggressive than ever, in finding deals and, you know, getting the right deals.
So So let’s talk about the the thing that probably drives, business owners, and people that sell businesses, the craziest, and the old rule of thumb. And people use rules of thumb, like, you know, my business is worth this much, because that’s, that’s a rule of thumb. But I like this picture, because this picture shows how different thumbs are. And I think that what we have to remember is rule of thumb is made for a common thumb that looks the same across the world. And that is, that is a myth. So yeah, talk about that a little bit.
Andrew Cross 14:20
Exactly. A little bro rules of thumbs are helpful. They are helpful, you know, but they’re also can be, they can be an enemy too. And, you know, a good example is, you know, the owner who’s got a company with, you know, 20 million 20 million in sales. And the rules of thumb are, you know, and this is good, you can use it as a good guideline, but I’ve got 20 million in sales and my, you know, businesses are selling for 70% of sales. So my company is worth, you know, what is that 17 million, 14 million?
Yeah, whatever. Yeah. And, um, however, the other rule of thumb is, you know, you You’re going to get a multiple of profit or you know, earnings. So, again and the owner comes in goes, my earnings are, you know, so you got a $20 million company and it’s 70% of sales, then that’s great. It’s 7 million bucks. You got one company that’s doing 20 million that’s you know, profiting 5 million. Man, you got another company that’s profiting. 500,000. Yeah. So which is worth more?
Damon Pistulka 15:26
That’s a great point, because the rule of thumbs are usually like you’ll read on revenue or on profitability, or certain things and and the uniqueness of businesses affect the value, just like the uniqueness and thumbs affect the way the thumbs turn out. Right. And that’s the thing I’ve tried to kind of show here real quickly that it is it is literally that different. So let’s move on to the next thing that we get to talk about that, that I like to bring up. If you you know, if you’ve been seeing a post that I do ever I talk about this a lot. And the success rate of selling a business, Andrew, let’s let’s talk about that a little bit.
Andrew Cross 16:10
What are the numbers? Yeah, yeah. What are the numbers? Yeah, one out of one out of five?
Damon Pistulka 16:16
Yeah, it’s one out of five. It’s like, so when we talk about this with people, and we, and we stress the importance of preparing for the sale, I can’t emphasize this enough, you had a one out of five chance. And that’s and that’s even profitable. Now. Don’t think this is different because I make money, right? It’s not making money. There’s a way and we’re going to go through some of these reasons why it’s one out of five, because you may have a very successful business today, you may be making millions of dollars, and you’re going my business could sell because I make millions of dollars today. But is that the case? Andrew?
Andrew Cross 16:57
Damon Pistulka 16:58
Andrew Cross 16:59
no, I mean, starting to understand what what buyers buy?
Damon Pistulka 17:03
Andrew Cross 17:05
it really is the revenue stream, you know, stability transferability. They do buy that it’s, it’s a big part of it. And it has to, it has to make sense in that respect. But then you go on to all the other factors that why buyers buy and what they’re looking for so but it is a you know, it is a head scratcher. Yeah, that is trillions of dollars in in dry powder out there people looking to deploy by businesses, we know that.
And like you said, when we go to market with a company, and we positioned it for sale, we’ll get hundreds of calls, looking at the business, but hundreds and sometimes 1000s Yeah, you know, and, yeah, they’re looking hard. It’s not hard to find that, you know, somebody to come and look at the business. But you know, for 120 buyers out there who are out there actively looking. And working. One may actually give us you know, it’s a high commander, you know, but there is, you know, it’s a strange market is not a it is, you know, it’s not a rational market.
Damon Pistulka 18:16
Yeah, it’s not a rational market,
Andrew Cross 18:18
even with all that money in there. You know, the basic point is they have the money. They’re all competing, looking to buy good businesses, when the key is good. And, you know, that’s there’s there’s low demand. I mean, there’s there isn’t a lot of them to buy.
Damon Pistulka 18:37
Yeah, yeah. There’s a lot of things that they have to they have to consider. So let’s look at that. Because Because really, the next thing is, as you mentioned, this buyer’s perspective, I love pictures like this, because this is kind of how it is. Buyers look at one the business one way and the business owner looks at the businesses the other way. And just like with this or any of these visual things like this, they’re both right.
They’re both right. The owners, right, they make millions of dollars. You know, they can make millions of dollars in their business and continue to make millions of dollars if they continue running it. And the buyer can look at and say well, it’s too risky for me. And they’re both right. So the buyers perspective, Andrew, what what do you think a little bit about that? Yeah,
Andrew Cross 19:30
I’m looking over in the chat too. And marks marks surprise and says don’t sell it expected value? Well, value that’s important, you know, to in it values in the eye of the beholder. Yeah. And, you know, these statistics are four to five businesses don’t sell that that fall squarely in the lower middle market. Yeah. And small medium businesses that we’re talking about. Men a big aspect of it is is perspective. And, and the owner, ya know, and store up the business? Well, ya
Damon Pistulka 20:08
know, some of these things, the buyers perspective is really affected, I think by me one main thing is they have not had time in the business like the owner has, they have not been in that in that driver’s seat for as many years as that owner has that owner has gotten comfortable with employees and suppliers and customers and the market all the things that that buyer may not have a clue about.
And that’s where that perspective is so different. They’ve got the time of Yes, I’ve had this, put insert here business for 1015 years, and I made good money, and I’m continuing to make good money, but I’m ready to sell without buyers coming in. And they they may be getting into that industry, they may be into that industry and don’t want to buy that company, but it’s different customer base or something like that. They don’t understand it.
Andrew Cross 21:00
So and also, you know, they’re also it’s a bit of an empathy and really listening to your customer, your customer here is the buyer. Yeah. And they’re coming in to buy the company, and they’re going to be taking on a big load of debt. In order to buy the business, which you have equity in the business on the other side of the table, you you’ve already built your equity in the past so that you don’t have that hill to climb anymore. That is great. You know, you know, you know, so a lot of things need to be in place to sell that the buyer gets comfortable that they can, you know, they can climb that mountain, they can they can pay off that debt in a reasonable amount of time. Yeah,
Damon Pistulka 21:39
Andrew Cross 21:40
so then that’s the factors, you know, that are there to prevent that.
Damon Pistulka 21:44
Yep. So yep. And that’s, that’s one of the things Andrew makes a good point. So the buyers perspective really is they are going to be paying back a loan, they’re going to be paying back some sort of investment or looking for a return on that investment, that has to come out of the cash flow of the business. So just for simple numbers, if you buy a business and and it’s a million dollars in cash, free cash flow a year that you can use to pay yourself, whatever else you got to do, and and pay back that loan, you might spend half a million of that or more that alone.
Andrew Cross 22:20
Yeah, I mean, and that’s, you know, getting the seller to understand that, as you’re preparing your business, your buyer, I mean, this is real. I mean, your buyer is most of them. And a lot of the deals that we’ve done, the buyers are putting their homes up as collateral. Yeah, that is how much risk the banks are putting, you know, first in line, if this doesn’t go through, these people are homeless,
Damon Pistulka 22:44
well, in some some of that. And then the investment now now the investment world where we work to is, is when we’re selling them to an investment buyer guarantee, yeah, they have guarantees, they still have skin in the game like that all the way through. And they don’t they as an investment buyer, their reputation, their long term success, everything hinges on them investing that money wisely, because they don’t make any money if their investments go sideways. I mean, it’s with them. It’s similar. It’s like, it’s like, you know, investing their grandmother’s last dollar, in some cases to get that money for these businesses.
So they really are talking about that, that kind of risk, and they’re really risk averse. So you I know Andrew said it, I’ll say it again, this buyers perspective and understanding their risk tolerance is something that really, the sellers need to understand and business owners need to understand as they prepare. And when you’re doing it more talking about preparing, you know, really, if you’re going to sell a business that save $5 million in value, you know, you gotta if you can start a couple years early, that’s, that’s good.
If you’re still on the business, that’s 10 1525 $30 million or more. Listen, if you start five to 10 years early with some tax planning strategies, that’s the thing where where the right legal help the right financial help, can literally save you millions of dollars in tax consequences when you sell the business. So this is this is a huge decision that preparation takes usually takes years if you really want to do it right and maximize your value going out the door. So it’s something to least be thinking about and doing some of these things early.
Andrew Cross 24:38
Well, is a good example to I mean, two years is you know, that’s that’s probably the minimum. Yeah, no, and it’s gonna take a little page because I’m working on a deal in a real estate deal right now to these guys kind of get this right but the business owners don’t because they don’t have the tangible bet, you know, the assets that you know, Real Estate does Bo. But when they go in and do an investment, maybe an apartment building or, you know, revenue generating property, you know what that the prices on those are supported, the value of that is by the revenue that’s created from the project, and then the terminal value and a certain amount of time.
And that’s what, that’s the step that’s missing. But nobody goes into those investments, they would never do it if they don’t cash out at the end. Because that’s what really gets your return over that period of time. Business owners don’t see that they just see the cash flow from it without that tangible asset. But if you don’t prepare to get all that, you know, you the only the only return you’re getting on your investment, which is your time and money in your business over those years, is that cash flow? Yep. It’s not going to be worth your time at the end of the day with if you don’t prepare and think about cashing out at the end. Yep.
Damon Pistulka 25:57
Yep, that’s a great point. So we’re gonna run through some of the things, the business sale bombs, waiting or ruin it. They will ruin your day, if you run into some of these. So we’re gonna go through them pretty quick, because they’re not and we’re going to be, we’re going to be done here plenty of time. So people can talk after this, as well. But here’s where we’re going to talk about the big one. The big one, I mean, go gotten Google this stuff, too. Because you can google this stuff. We live it, you can Google it. There’s people that write about this. So we just bring it to light price in terms man, that, you know, they are tied together at the hip, aren’t they? Andrew?
Andrew Cross 26:42
Yeah, it’s not about the price.
Damon Pistulka 26:46
There you go. It’s not about the price. So let’s talk about that a little bit. So when we talk about the price and terms, the first thing people talk about is the the ultimate number all in number you get paid for the business. And and we go back to that dreaded rule of thumb. And at the end of the day, there you know, there are generalizations you can use that get you close. But the market really sets the value for your business, doesn’t it? Andrew?
Andrew Cross 27:19
I think solid value is a it’s a funny thing. You know, who’s the decider is where value is in, you can value a business. In some cases, if you’re having a dispute, the decider is the court, the judge, that’s a different completely different number than what you’re going to get in a business sale and in our in our world. But the the, the the decider is the market, you know, we can you can get all the valuation techniques, you want the world and there are a lot of them, and you can get the biggest experts in the world.
They can do your future earnings, cash flow, discount back, you know, all the bells and whistles and numbers, but at the end of the day, they’ll come up with a number and it’s this, you can go to market. And but it’s what that what buyers willing to pay is what the real value is. Yeah. You know, terms, you know, the terms determine a lot of that, that valuation too. If you if you don’t let
Damon Pistulka 28:22
us know. Real quick, though, because this is this is one thing that i don’t i don’t think business owners realize is sellers now have very good or buyers now have very good information on business values. They, you know, there’s they, they pay for the same things in the investment sellers. They have the comparables, they have comparable transactions, just like the valuation experts that are doing this. So they understand what’s being paid. And then they’ve they factor in and compare your business against industry standards. They also look at the risk of your business as you’re doing it to come up with this ultimate number at the end, don’t they Andrew?
Andrew Cross 29:05
Yeah, absolutely. They’re being
Damon Pistulka 29:07
located. It’s not like even if they’re buying a smaller business, the the SBA people will help them with some valuation and some of their things like that to really help them hone in on the value. So value is not something that unless your performance is uniquely different than the industry, or there’s other mitigating or other extraneous factors that will drive your value up. The market value is generally pretty good.
Andrew Cross 29:35
It’s a good place to start. Yeah, it’s for certain, you know, and yeah, there is always buyers out there that buy for different reasons. Yeah, you know, but yeah, but the buyers are sophisticated in most cases, even even on the main street level. And you know, at the end of the day, the banks are sophisticated and they understand the risks and they’re they have their metrics to under Stand to so there’s limiters on this.
Damon Pistulka 30:02
Yeah, yeah. So now that the big one, the deal terms, now you start talking about I kind of had to stop, because deal terms, I think I wanted you to take a little time on deal terms and some of these other ones we may not get to. But I really wanted to talk about deal terms, because this is, this is where people can make or break a deal.
Andrew Cross 30:24
Well, you know, as a valuation technique, you go in and you go, Okay, if I’m talking to somebody who wants to sell their business, so what terms are you willing to offer, if you, if you’re very flexible on your terms, you’re going to get more money for your business, if you’re inflexible on your terms, you will get less money for your business, it is a straight, fundamental thing of value. And I think if it makes sense for everybody else, people go in to buy anything, any commodity, and you’re in the market. If you go in with 100% cash, you expect the price to come down?
Damon Pistulka 31:02
Yeah, yeah. It’s like a, like, it’s like buying a car with cash, or, you know, you’re going to be from a private transaction should get better deal and,
Andrew Cross 31:11
and offers, you know, if I want, you know, I want 20,000 for my car, and somebody walks in with a bag full of cash says, I’ll give you 17 for cash. Yeah, that’s the discount factor. Yeah. That’s terms that you know,
Damon Pistulka 31:25
yeah. That terms. And when you look at the terms, there’s there’s a lot of different ways to skin it. I mean, there there are, there are, you know, there’s there’s all different kinds of things there’s, there’s a seller notes, which are very common, as for part of the business, there’s money, there’s money down how much money you get at the close, is there a seller know, what are the terms on seller note,
there could be owner earnouts, if they want the owner to stay and you know, transition some of these other things, there’s all kinds of things they want to and sometimes businesses are sold, where the owner is really taking out, say they’re taking out 55 51% of the business is going to get they’re going to sell that and then they’re going to sell another section of the business later down the road. So there’s a lot of ways these deal terms can can affect what an owner gets paid for the business ultimately.
Andrew Cross 32:13
Yep, yeah. Yeah. So visibility on terms increases value. Yeah, if you can
Damon Pistulka 32:18
be flexible on the terms, you can get more money for your business, that’s for sure. And that’s where a lot of people that sell into an Aesop and I don’t want to get down that road, you can get more money for it, but it’s gonna take you 510 years to get all your money out of the business. And you’re probably gonna have to do a lot of the work to get it but it’s a good a good option. Um, so,
Andrew Cross 32:39
Scott, Scott’s asking, yeah, Scott Gregory, if there’s a particular go to resource or finding details on cops value sales prices? The answer is yes. And, and No. on that, but because this is one of the big challenges of selling your business. So one of the reasons businesses, it’s hard to sell a business is because of confidentiality and privacy, lower middle market companies, privately held companies is what they are called. So they’re, you know, it’s not an open out there market where you can, like the real estate market for buying houses, we’re all everything’s highly regulated.
Yeah. You know, it’s not a publicly traded companies where you’re buying stock and by law, and sec regulations, they have to disclose absolutely everything that’s going on in the company, you don’t know. So you’re kind of on your own for that.
But yeah, there’s, there is an in ironically, in the lower middle market, there’s more activity there than there is in the public markets as far as dollars going through in the amount of transactions. Yeah, that’s cool. But yeah, I mean, you know, the broker groups the deal guys, we do, there’s a lot of good companies. corralling information. One of them’s in Seattle, pitchbook, you know, that, you know, their data, they’re actually spending the time going out, you know, and talking to the business owners and the deal, the brokers, the lawyers, attorneys, everybody to get data on that. Yeah. available, they generally cost money to get it.
Damon Pistulka 34:12
Yeah, there’s private companies, you know, and to do it, but yeah, pitch books are good example of that. They’ve got those, those they’ve collected and organized the data for people to use. So that’s, that’s look at the second big one. And I think that’s that’s owner or involvement, man. You know, it’s, it’s really a couple things. Andrew, when you talk about owner involvement, what comes to mind first for you,
Andrew Cross 34:36
when you Yeah, yeah. transferability Yeah, yeah. You know, tribal knowledge. Yeah, no, I’m sale bombs. Um, you know, are your processes written down? I mean, you know, do you have a plan? Do you have a playbook? Do you, you know, you measure those into, you know, the attractive And do things accordingly on that.
Damon Pistulka 35:02
Well, I think I think too, that that we run into things where if if you are the owner ardra. And, and in this in this instance, we’ll show it it are the, let me see here, I’m not, I’m getting used to this presentation thing. But the if you’re the if you’re the hub of the business, you’re probably gonna have a hard time selling it.
Because you you can’t, it was very hard for somebody to see themselves in their selves in that role. And owner involvement is something that if you can limit your involvement in the business or set your business up, so that the more you can set it up, the more you that it runs itself, the better off you’re going to be. If you’re if you’re in a law firm, and you have the end, your name is on the door, and you have the key relationship with the big clients, and no one else in your organization does, you’re probably not going to be able to sell it to anyone other than the people inside your business that would not well enough to buy it from you if that’s the case. But
Andrew Cross 36:06
that I think one really good example is I love that one is dental practices. Yeah. You know, what are you selling? And they do sell? Yeah, I do. But it’s difficult because the customer have a very personal relationship with your dentist. Yeah. That’s what you’re used to see it and you’ve been seeing him for years. And then when he sells that, you know, is that customer going to stay? When next week? There’s a young person who new young dentists that you’ve never met before? That’s in your mouth? Yeah,
Damon Pistulka 36:39
that’s a great example.
Andrew Cross 36:41
Are you gonna lose? Yeah. During that transfer transfer ability? Right?
Damon Pistulka 36:45
Yeah. Again, that’s the transferability. And the owner has had a long time to get used to those risks. Your buyer is just seeing him for the first time. So the other one is concentration risk. And we talked about concentration, Andrew, you know, it can come from customer employee supplier, talk about that a little bit.
Andrew Cross 37:07
Sure. risk. You know, how many customers do you have? How what’s the percentage of sales? And you know, right now, one of the most active spaces right now is people doing work with Amazon. But that’s heavy customer concentration, if Amazon is your 98% of jet generates 98% of your sales, difficult to sell your business?
Damon Pistulka 37:31
Yeah, yep, there’s some you limit your opportunities. Because some of the buyers can’t, by mandate can invest. If you have more than one certain percentage in one customer. Even if you look at what’s common in the area, here, an aerospace company that does machining for, say, a large, large aerospace company in the in the area that starts with the B, then they have 90% of their revenue in that business. The other thing that you run into with customer concentration that people don’t think about, sometimes your customers have to approve the sale of your business.
And that is another thing that can really hurt, you can get down to that point. And all of a sudden, when you’re trying to talk to that, that customer and letting them know you’re going to sell a they go back to the contract and go, Hey, you have to ask us and by the way, we’re not ready to, to approve this or being they can decide that they really don’t want to do business with you anymore at that point. And that’s the risk that that that second risk is the one they’re really looking for when the buyers are coming in,
Andrew Cross 38:40
they also may take the opportunity to go maybe we can improve our contract.
Damon Pistulka 38:44
Yeah, yeah, a new negotiation that happens that point. So that risk is real. Then the employee risk, like we talked, you know, if you’ve got, if you’ve got somebody in there that is is the heart of your business, and nobody can replace them at technical knowledge and other things like that. I think that’s one of them that you need to address, and then
Andrew Cross 39:05
be also good and bad thing, you know, on that as well. So people are important, you know, you’re not just buying the revenue stream, necessarily. And the next question is to what’s, you know, who are the people? What’s the management team? What’s the culture? Yeah. So, you know, if if it’s set up in the right way, you can sell but it also if it looks tribal, and, and, you know, what if if your manager gets your main guy or key employee gets hit by a bus tomorrow, what happens to the business you need? Yeah, but yeah, those questions.
Damon Pistulka 39:42
Yeah. And this last one, we’ll go through quickly because I was talking to a business buyer the other day, and he explained to me this really interesting situation. He was looking at a business to buy the main vendor for this business.
They only had one there could only be one and was the primary competitor. The business he couldn’t his investment, his investors, they wouldn’t invest behind him on that. And it was one that he had to walk away from the deal. I thought that was pretty interesting. So we’re gonna get through five of these bombs before we get going. And then we’re gonna go through some other ones really quick, we’re gonna, we’re gonna go through these fast. But Andrew, this is one that we we talk about a lot. How to pour revenue growth or slow revenue growth affect the sale of a business.
Andrew Cross 40:31
It affects it, there is no sale.
Damon Pistulka 40:36
There you go. I’m gonna tell you, you know, killer. Yeah, it’s a deal killer. It is an absolute killer killer deals, because people buy businesses to be able to see themselves grow and make more money and all this kind of stuff. And if you’re setting their own business that’s limping along for 10 years and hasn’t grown at all. They’re gonna wonder why, you know, as Andrew was saying that they they’re looking to build that value. So that terminal value gives them more money.
Andrew Cross 41:03
Well, you know, they got to climb, like I said, they’re going to take on debt. So you know, they declining sales. It happens fast, you know, that’s the thing. And and you could, you could have been making money and chugging along as a good company for five years in a row.
And then, and this happens, often, owners get tired, the process of selling the company and getting it ready to sell is exhaustive. And it’s also demoralizing and stuff like sometimes they just tired and they take their eyes off the road or the foot off the gas and got a little downturn in sales for a few three months. That’s enough there that just brings fear into the whole equation. So you run into those things, you’ve got to fix that. Yeah, buddy. You know, declining sales, the
Damon Pistulka 41:51
big head kills a deal. The last one, number five, the big one, legal and tax issues. Man, I can’t tell you how many times I stuff that comes to bite people in the sale of a deal, legal and tax issues. And they’re the ones that you don’t think of right? And just us in the last year, or last few years, I can tell you environmental problems. You know, if someone if you got a spill on your property, and it’s not completely resolved, that’s a big one, you got some HR issues where you’ve got an outstanding lawsuit. That’s a big one. And then you turn around you go, Okay, what are what are the things that we need to take care of, because we have to take care of these before you get into the deal.
And I know some of them. I mean, we we’ve had deals where there’s pending lawsuits and other things that we have to figure out. And then you get into the legal costs of just trying to mitigate that out of the sale of the business and other stuff that you run into. So these legal and tax uses and some of the tax issues follow the business, not the ownership. So you can’t sell the assets of the business to some or to someone else and you take the risk, like an asset. So they all normally because it follows a business. Isn’t that correct? Andrew?
Andrew Cross 43:05
That’s correct. Yeah. Right. Those are successor liabilities. Yeah. So
Damon Pistulka 43:09
that’s your liabilities. There you go.
Andrew Cross 43:13
Yeah, you can you can avoid a lot of liabilities when you when you buy a business that may have gone on before you bought the business. That is not one of them that will follow everybody. Yeah, I’m in there hidden sometimes. Yep. So I think I think I think the main thing on that sales bomb is knowledge. And, and, and you can you can do that anyways.
And we do have a client that we worked with it is assuming you know, he’s already he’s based what his proceeds will be from the sale off of tax burden everything else he you know, so he’s basing his sales price on the fact of what I’m going to receive because he only thinks he’s going to get 39%. And this is a deal killer, too, because he just doesn’t have the knowledge get out there and get with the tax people, the financial planners. There’s some great ones in the room right here seeing ya know, where you’re going to be and then you can plan for that. Yeah. On the on the other things too, because it’s it’s Yeah, it’s the knowledge don’t assume you know it.
Damon Pistulka 44:18
Yeah, understanding your net proceeds is probably the the single most thing, you the single most important thing as a seller of a business, along with that financial advisor telling you Yes, that’s gonna be enough money to do what you want to do after this. So I had to put this nice nice car in here because I these, these new ones coming out are cool. So we’re going to talk about things that help us sell real quick. It goes without saying
Andrew Cross 44:47
the ones that kill the sale are declining sales. Yeah. So what could increase as a sales? Yeah, you know,
Damon Pistulka 44:56
maximize the profits and one of the things that I really wanted to talk Talk about quickly in the maximize the profit is red zone thinking. We talked to ours about Red Zone thinking what Red Zone thinking it is, listen, if I got a construction company and I love equipment, I love going out and buy a new backhoes and bulldozers and everything else, and I’m making lots of money. And I want to do that, because I just do it. Man, I like to buy a new backhoe every month, or something, or the biggest one stop investments like that, when you’re near the end of you to sell your business and less, they are going to return you money. Don’t do it.
Because at the end of the sale, you’re more than likely going to have to pay off all the outstanding loans, on equipment and everything else to clear the sale of the business, you really have to think about, what are the things that are going to going to maximize the cash flow of this business, to the ownership in this in this next two to three year period. It’s one of the things that you have to do so.
And notoriously people in construction and manufacturing love equipment. And it’s lots of times it’s million dollar equipment. So the next thing is increase your growth, growth trajectory, if you can, that’s always helps. Andrew loves it. Because what’s it like when your growth is growing really fast, and you’re trying to sell a business, Andrew,
Andrew Cross 46:16
that’s real time, you know, to you just do you can do you know, again, we work with small medium businesses, a little goes a long way can really kick your value up when you’re in the red zone. And the way we’ve done this, too, is is, you know, I could be talking to buyers. It can change, you know, and we can have our key salesperson, I can talk to him on Thursday about the terms and the deals and structure that they want to offer on Monday.
And this is this is a real situation we had, we had one of the our key sales people out having a meeting in Atlanta with Home Depot. And and I had a lot of No, I mean, but we were we were getting calls he was coming home with a new customer a new contract, you know, yeah, the price is going up. Yeah, you’re increasing those on it. Because right by Monday, the price is going up. Yep.
Damon Pistulka 47:09
If you’re increasing those sales year over year, that price goes up based on a multiple of your cash flow. So if that’s happening during the terms of the term, you’re selling your business that helps drive the buyers to want to get in before the it gets more expensive. And and I can’t, that’s where redzone thinking makes you go the other way too, don’t make a big financial decision. That’s going to that’s going to crater your cash flow for a month. Because it’s it might be long term, the right thing to do really think about those before you do and talk to writers.
Andrew Cross 47:42
And that all runs back to the very first slide plan, plan plan, you know, and you don’t you don’t go make a decision on buying a million dollar piece of capital expenditure without, you know that should be part of that plan from the beginning to and it ties back in the terms because the buyer is going to come in to because they’re one of the you know, they’re going to want to know what the capital expenditures what is the cap axis business? What’s it going to do? That will be shaded done? Yeah, if you’re not careful about it, so yeah, there’s no definite, you know, again, plan, plan plan.
Damon Pistulka 48:17
You bet we’re getting up to the end here. So we’re gonna go through these kind of quick, this goes without saying, but listen, you can run a $50 million a year company out of your checkbook if you want. But you can’t sell that company, if you don’t, if you don’t have the financial records set up. So take the time, take the money, spend the money, get him set up, right, you’re you’re not going to don’t start unless you got them good. And you’re getting your months, every month, you’re getting them done and all that kind of stuff. And you’re talking about team and culture.
Listen, the buyers are gonna, they’re going to want to there, they’re going to sense the culture, they’re going to want to talk about your team, they’re going to know about your team, they’re not going to want to be able to go on something like Glassdoor and see that you got 100 employees that were complaining about your business, you know, and the last thing is customer satisfaction, you as an owner, run your business forever. You may not worry about Google reviews, but I can guarantee you the buyer that’s significantly going to spend a significant amount of money is going to search down every customer review they can on you. So get the good ones out there. Thank you.
We’re, we’re done presenting now. That was the end of our end of our spiel for today to talk about. And of course, if you want to talk to us, you guys know where to get ahold. So we’re gonna go back here we got just three minutes left. Before nine o’clock we’re trying to get out of here on time, everyone. Thank you so much for for being here today. Thank saying so much for taking the time to listen and join us. We’re going to end here on LinkedIn live. We’re going to go back to the tables on Remo and talk for a couple minutes because we said we’re going to get out of here by nine o’clock and we’re going to get out of here by nine o’clock. So Thanks everyone, and we will
Andrew Cross 50:05