Business Buyer and Seller Perspectives
Business Buyer and Seller Perspectives
When it comes to the business buyer and seller perspectives, you need to understand them in order to understand how to be successful.
In this Exit Your Way Roundtable Episode, our guest speakers were Darrin Mitchell and Thomas Campbell. Darrin is the President of Mitchell Industries. Thomas is the Owner and Founder of Argyll & Co. This seller and buyer share their experiences with the process.
The conversation of this episode started with Thomas introducing himself. Thomas said that he grew up in Carolinas and got his MBA from UNC-Chapel Hill and spent the last decade, operating and scaling small businesses. He said that he always worked in the CEO roles, so then he decided to work for himself by starting his business.
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After this, Darrin shared about himself saying that he is in the manufacturing business for 23 years now. Moving on, Damon asked both the guests about the challenges they faced from the business buyer and seller perspectives being business brokers.
Answering this, Thomas said that his biggest challenge was the risk that they faced while not knowing where it will end. Moreover, he said that he had formerly run businesses but those were not completely under his diligence. Therefore, this is what he was scared of the most.
Moving on, Damon asked the same question from Darrin. To this, Darrin asked that he wanted the alignment that a business should have. Especially from the business buyer and seller perspectives, having the right alignment to run order was the key.
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In between the conversation Thomas also explained what a search fund buyer is from the business buyer and seller perspectives. In addition, he also elaborated on the difference between committed capital and raised capital.
Thomas said that committed capital is when the buyer has the capital and he just needs some other partners for the business. Whereas a raised capital is when the buyer has to raise capital and find investors to run the business before buying it.
This is how both the guests explained the key differences as seen from the business buyer and seller perspectives.
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The conversation ended with Damon thanking them for their time.
business, buyer, darren, customer, process, risk, thomas, seller, company, searchers, people, selling, investors, deal, big, capital, concentration, buy, perspective, talking
Damon Pistulka, Thomas Campbell, Darrin Mitchell, Andrew Cross
Damon Pistulka 00:00
Darren, do you have to turn on your mic and camera? Oh, you know what is when Darren was here last time? I think we had challenges with this. Yeah. Oh, there we go. Awesome. Awesome. Awesome. All right. Well, we’re ready to go guys. Well, I’m going to get us going live on LinkedIn here and then we are we are going to take off so are we doing intros or what people don’t? Not gonna do intros today at the end, we’ll have we’ll stop and so there’s enough time for people to talk at the tables and do that. Okay, so all right.
Andrew Cross 00:50
Damon Pistulka 00:52
Alright, everyone, Welcome once again to the exit your way Roundtable. I am so excited today we guys because we’ve got some special guests with us. And we’re going to be talking about business buyer seller and advisor perspectives.
This is something that we deal with every day talking between business buyers, sellers, and Andrew myself being advisors in this process. I’m pretty excited to share things with people about this and just understand and show everyone else, the perspectives that we’re going to hear. So, first of all, I would I would like to introduce who’s on the stage with us today. So Thomas Campbell, tell us a little bit about yourself. And, and we’ll get we’ll get onto Darren after that.
Thomas Campbell 01:43
A little bit about me, I grew up in the Carolinas, maybe Brett both folks career officers went to school up at Babson and Northeast, for those that know it, got my MBA at UNC Chapel Hill, and spent the last decade plus operating and scaling small businesses, a variety of different industries.
So everything from energy, infrastructure, tire recycling, manufacturing, ecommerce fashion, come to yoga studio for a while you name it, but largely in CFO and CEO type roles. So decided if I was going to do it again that I would do it for myself rather than somebody else. And as a result, kind of during my MBA warned about the search fund model and kind of what a fire under my ass so just go that route. So
Andrew Cross 02:35
cool. Oh, no demons out.
Thomas Campbell 02:41
Damon can’t hear your mic.
Damon Pistulka 02:44
Oh, sorry. Sorry. So thanks, Thomas for sharing that. Yeah, I hit the mic. I always mute so I don’t echo but thanks so much for sharing that. And we’ll talk a little bit more about the search fund buyer process and that as we get into this, but Darren, tell us a little bit about yourself, Darren.
Darrin Mitchell 03:04
All right, thanks, Damon. 23 years manufacturer, while the school of hard knocks, manufacturer heavy highway equipment all over the world. So we were in Japan, New Zealand, Australia, Middle East Europe, all across North America, making big pieces of infrastructure, building equipment, and recently sold Christmas. So I’m happy to share any of that process with you and your listeners today.
Damon Pistulka 03:33
Awesome. Thanks. Thanks so much, Darren, because I think this is gonna be this is gonna be great. So, Andrew, now, people may know us to Dave’s your way. They know what we do. They’ve seen these things, but we are investment bankers or people rather use the word Business Brokers. Let’s talk a little bit about that. Yeah,
Andrew Cross 03:53
yeah. And another term for it is an intermediary. So there you go. Classic description, or m&a intermediary? Yeah, we’ve seen it several names for what we do. business broker, m&a intermediary investment banker, Yeah, yep. They’re all they’re all the same kind of work, but at different levels may be really different, the size of the deals, but it is what it says it is. I mean, we, you know, we help to facilitate you represent the sellers in the business. And in this case, you know, Darren is a business owner has been through transactions. And I’m from that side of it.
And Tom here, coming on to give us an idea what perspective is from the buyers look at it, too. So, yeah, yeah, as you know, our job is really, and we get buyers of all levels of sophistication and stuff like that, too. But it’s just it’s helping to both parties to kind of understand how the process works. You know, what each side is looking for, because there are it is a challenging, very difficult process, and there’s different mindsets on both sides. Yeah. Yeah.
Damon Pistulka 05:04
No doubt. Well, thanks. Thanks for that, Andrew. So, I want to start out the question and we’re gonna go, we’re gonna ask both of you this. So, Thomas, from your perspective, what was the what was the? What was your biggest concern going into the process? I guess what, what, what did you think was going to be your biggest challenge?
Thomas Campbell 05:27
So my biggest concern was, you know, I think the risk involved of not doing it right. And not knowing what I didn’t know. So, you know, I spent my entire career in these companies operating my plenty of confidence in my ability to run a company, but I’ve never really gone through a formal m&a process of, you know, diligence in company. And, you know, getting it to a close.
And so what I didn’t want to run into is, you know, worst case scenario, either not being able to find a good business, because I wasn’t, didn’t know, the best practices for, you know, running a search process. Or even worse than that, you know, spoiling the opportunity, because of my lack of knowledge or experience, and, you know, diligence in these companies and having a fall through as a result. So that going in, I think, was one of my, you know, biggest concerns and why kind of went the single sponsor route, and took the approach that I did. That being said, certainly, I think, definitely no longer concern, you know, I got through pretty quickly once I got into it,
Damon Pistulka 06:47
yeah, yeah. So, what? Okay, so we’ll stop there on that one. So first of all, and back to this to what kind of companies were you are you targeting in your in your search process, so people better understand that.
Thomas Campbell 07:05
So, you know, at the tech companies that typically searchers are aiming for are those that are kind of foolproof, for lack of better, so they have really high quality, revenue, meaning it’s either very highly repeat or recurring. And there’s a big difference between, you know, a company that has best case example, being a software company where you’ve got monthly recurring revenue, sometimes contractual on one end of the spectrum. And then on the other end of the spectrum, you’ve got project based companies where you got consultancy, and you may wrap up a project, and then you have to find a new customer.
So, most searchers are trying to aim somewhere on the other end of the spectrum, where even if it’s not monthly recurring, they’ve got annual contracts in place to go out and do perform inspections, or they’ve got highly repeat business revenue. Second, you know, thing to be looking for would be risk profile, are there any existential risks to the company? And most cases, one of the bigger ones would be customer concentration. Right? So if you lose a customer, does that kill the business? other risks, though, would be stroking the pet.
If the industry is exposed to state or federal government changing a law, does that ruin the business? And, you know, in the case of like health care, for instance, if Medicare for all would have come to pass, what would that do? Yeah. As an example, you know, and then other risks would be vendor concentration, contractual, what have you. So that’s the other thing that we would be looking for. And then, you know, lastly, it’s just kind of, is it something where one other major risk I should mention, is the family and or keyman risk in the business?
So the owner has been running this thing for 20 years, few weeks? What does that do to customer relationships and or the employee relationships? And do they have a lot of family members in the business that potentially could leave? And or are they playing golf with their customers on a regular basis? And, you know, that’s really yeah, this exists?
Damon Pistulka 09:29
Yeah. Yeah, good stuff on my screen is it’s great to listen to your perspective. I see Derek go out, and he’s like, yep, yep. I had those questions. They didn’t. So Darren, from your standpoint, we Oh, what was your biggest concern going into it? And then the same thing back to you, what are some of the things that that you that came up that you didn’t really anticipate
Darrin Mitchell 09:54
where they bring you guys two years ago? Even with Tom was talking now, I’m still taking notes going, why didn’t I know all this stuff two years ago? That would probably be my answer to the question is one of the biggest had going into it was alignment. And understanding that the seller had my needs in mind. And I think it kind of diluted the process a bit as I was a little one, I didn’t have a coach to guide or a Sherpa to guide me through the everything I had to discover was literally a punch in the face every step of the way.
Because again, it was the buyer that was coaching me. So the challenging. And the other thing, like I said, is making sure that there was a lot. And I think I was a little blind. I was so passionate about the business and the opportunity that I wasn’t taking a step back and going, you know, I just got a two and a half million dollar contract with Japan, is nobody jumping up and down excited about this.
It’s risk, and I’m going no, it’s this is the best thing. And the other party was looking back going could be risk, and I’m going No, no, we got export, do the following things. And the things the seller was not necessarily looking for. So for me, the thing would be is making sure there’s an alignment.
So you’re not 17 steps down the process. And you realize that you know what, my employees going to be safe going forward those that comes later on in the process. So I think two things very early on would be how to care about and what they care about. So we can have some alignment on what the goals are? And how quickly can we discover before it comes out. You know, after you’ve both been working on it for six months going, I don’t think this is blinking going anywhere. We have too much a gap. And that’s on behalf of the buyer and the seller.
Damon Pistulka 12:14
is great. That is great. Yeah. This, what do you think about this, Andrew, as an advisor, this process, listen to these two perspectives.
Andrew Cross 12:24
I mean, this is a this is awesome, that we get to, you know, kind of bounce back and forth between the two. So you can really see the different perspectives of both sides, because this is not something you get to see. And this is one of the reasons a seller, like there and runs into this trouble is because you know, these are privately held companies, these transactions are not in the press, you know, you know, they’re not publicly traded companies that don’t have requirements, you know, we’re all under confidentiality, no one wants things to find out.
So it’s really hard to get just get information, you know, you know, gets people to relax, and especially about risk having, the more you know about it, the better. So it’s really the, that’s another thing about it on that factor. But you know, so this is, you know, we like to really open up that it educate, you know, to help people get deals, and so you can share and see these experiences. But yeah, I mean, this is fantastic. I mean, there has been selling, he’s been selling his services product, his companies, you know, for years and years and years.
But you know, we’re not selling it. This is a very typical situation we run into, we’re not selling your product, or service and all the things you get excited about, you know, we’re selling your business now. And the customer is different in and they’re not looking to buy the product. And so many times I come into, when we start working with a client, you’re right, we have to kind of guide them through stop selling the product, because you can’t turn that off very easily because you’ve been doing it for 20 years. And you’re passionate about it. We’re not selling the product, we’re selling
Darrin Mitchell 13:53
the business now. Nobody. Nobody seemed to care how many soccer game missed, and how many birthdays I meant, and how many things I screwed up that had to go back and fix the next day. It really didn’t show up on our balance sheet.
Andrew Cross 14:10
Yeah, yeah. Well, you know, Thomas has an MBA and you have an MBA too, that you earned through trial and error and the school of hard knocks and you know, but the difficult part is your perspective from the buyer coming in on Thomas inside and search ones are really interesting because the but the buyer itself is going to be active in the business, they’re looking for a business to step into it run and take over from the owner who’s exiting.
So that that’s a unique type of situation rather than the next level up like an equity group that strictly buying for an investment, but with investor money and capital to put into it. And that’s a whole different animal from your organization is run like that than it is run the you know, now you got boards to answer to you got, you know, weekly things and metrics and processes to be written up? Where’s what’s the stuff? You know, Aaron is up here, you know, and is a need to know. I mean, you know that kind of stuff. But you know, when people start taking other people’s money and putting it into it, you got to answer to somebody that it comes to job.
Thomas Campbell 15:18
It might be worth just mentioning, too, that there are different views of those risks, and what’s important between the different buyers, right, so my risk as an individual buyer is, this is it, like I’ve got one shot, make or break my career potentially. Whereas a strategic or private equity buyers looking at things a little differently. So a strategic buyer, who’s already in a space may look at, you know, Darren’s Japan deal and be just as thrilled as he is because they see the opportunity that it means for their own products and services.
And they also understand, you know, the risks and costs and whatnot. And likewise, if it does fall apart, the customer concentration wise, they are pretty well established within the space, they’ll survive, there’ll be just fine. You know, and they can make it up elsewhere, where he is an individual buyer, that’s, you know, one of those existential risks, that deal falls through, you’ve already invested a bunch of Capital One, and you have a bunch of overhead riding on that contract. Then, you know, you’re in for a pretty hard time.
Damon Pistulka 16:19
Yeah, yeah, that is that is interesting. And it’s a great, great perspective to share as a buyer, you know, you’ve got, especially a search fund buyer, you are putting it on the line, and that, and that’s where the diligence that comes in is, is going to be maybe a little bit more focused, and different.
Andrew Cross 16:37
I think, for the benefit of the audience. Maybe we should explain, you know, what a surge ahead.
Damon Pistulka 16:42
Andrew Cross 16:43
Do you want to do that? Take that. Go ahead. All right.
Thomas Campbell 16:45
Sure. Yeah. So search fund essentially, is now kind of what a lot of people refer to as the an individual buyer, really. And it comes in three different forms, you’ve got the traditional, which is a structure where, you know, a individual, like myself goes out sources, a bunch of capital of investors, high net worth individuals, sometimes boutique private equity, what have you, and with a goal of, you know, going out spending two years where they’re paying themselves a salary, hiring analysts, or to an insurance, office space,
everything to hunt for a business to buy, that fits their investors and their investment criteria, with the goal being that when they find something they like, they go back to their investors, raise additional equity, close on the business and become the CEO. And then from there, they get 25% give or take sweat equity in business, the best and three trashes 1/3 of close 1/3 as a, you know, vest over time sticking around for four or five years and 1/3 as a after hitting a performance hurdle.
Kind of another version of that traditional model is a single sponsor model, which is kind of the route that I went, where instead of having a dozen different investors backing you that you have to go back and re raise capital from when you find a good business, you have a single either family office or small boutique private equity group backing. And the advantages, there are institutional knowledge and training that they have, you know, an exist pre existing database resources, vendor relationships, what have you.
That deal and there, you’re getting a lot more of their time, attention and money during your search process. And likewise, you know, from a buyer’s perspective, and sorry, sellers perspective, it’s better because not only is there committed capital, where the money’s already there, you don’t have to go and raise it. But it’s also you’re dealing with a much more, I guess, organized and proficient buyer team with lots of deal experience simply under their belt. And then final and most common search fund, quote unquote, is really just the self funded searcher.
And that’s somebody who’s got their own or family wealth and means, and they’re typically looking to buy a business using an SBA loan, as financing, oftentimes a little bit smaller, maybe we’ll come more for kind of a quality of life type business where, you know, landscaping or HVDC, where it’s just kind of steady as it goes. But yeah, definitely, you know, those types of searchers quote unquote, been around for ages before the term even existed. But now we just call them searchers.
Damon Pistulka 19:47
Yeah, yeah. This this is awesome here and here. And this Thomas and I, there’s one thing you said that I want to make sure everyone understands is committed capital. Now, this doesn’t matter. If you’re a If you’re selling a $50 million company, or a $1 million company, then someone comes in saying they’re a search fund buyer.
Committed capital, the difference between not having committed capital and having committed capitalist, committed capital is already said they will invest if you find a business that meets these criteria, or these rough criteria, and they’ve, they’ve committed that money to you rather than you, you’ve talked to 17 people, and they said, Oh, yeah, if you find the right thing, I’ll put in whatever. But can you explain the difference from yours perspective, Thomas? So everybody understands that committed capital or having to go out and basically raise capital one once you found a deal?
Thomas Campbell 20:43
Yeah. So the difference is, frankly, pretty huge. Win a Yeah, deal them. So the non committed capital means that, you know, you’ve got some a buyer who really may or may not have the money to buy business, they don’t know themselves, no matter how enthusiastic they may be, no matter whatever sales pitch they may be giving you, at the end of the day, they, as you alluded to a while ago, have to go out there and, you know, do their own sales pitch and roadshow to their investors and potentially other investors to kind of get their buy in, on Yes, this is a great investment, and I will fork over quarter million dollars, or whatever it might be to, you know, buy a couple units in this business.
Committed capital, on the other hand, means that really, I’ve only got to convince a couple other partners. And at that point, they go to their investors and say, Okay, you’ve already agreed to buy what whatever, you know, we found what we found something now, you know, you need to cut that check.
And, you know, it’s kind of how traditional private equity works. But it makes a huge difference in terms of both the amount of time that the buyer is spending, raising capital, like, I only half I’m working with these two guys, pretty much every step of the way, anyway, they’re already read into it, it doesn’t really require any additional effort on my end to raise capital, and don’t have to do a roadshow so that I can spend that time, focus on diligence in your business, building rapport with you, as the seller, and you know, closing the gap on any negotiating items that might be there.
So it really speeds up the diligence process reduces the risk and buying it. And likewise, you know, it does mean, oftentimes, the, you do have an established group behind you where you know, exactly who you’re working with on the other end, versus a bunch of investors that, you know, just may have recently gotten to know the searcher or have not really spent that much time getting to know the searcher.
Damon Pistulka 23:00
Yeah, great, great points.
Andrew Cross 23:03
Of course, it’s one of the first questions we ask when a buyer comes in, is interested in buying the business, but where the where the money where it is and where it’s coming from. But when we hear it’s committed capital, yeah, it’s a huge advantage. Obviously, it’s hard enough to sell a business to one buyer, let alone having to go through and convince, you know, a panel of other people that you have to get through to get to the finish line. So
Damon Pistulka 23:26
yeah, and that’s a great point, Andrew, because you are typically you in that situation, you’re selling the business two or three or 10 times because it’s not just that the person leading the research in the buyer, the individual, you they have to then sell it to all their, their investors, which, as Thomas pointed out, is a much riskier process.
Andrew Cross 23:47
So we like we really like search fund buyers, even if they don’t have committed capital anyways, I think the model is they fit they solve unique problems. You know, with most of our clients now are baby boomers and are not going to put you know, they just got done, they’re not going on more into the business, the family isn’t taking it over.
You know, Darren you got to be you know, that you’ve got to be replaced. And that’s what the search fund offers that’s different than the investor buyers to that. You know, I’m much more willing to put my investor money behind a guy like Thomas and I’m because that mitigates my risk. I’m comfortable that you know, when you leave, and that risk happens, you know that we have a good operator who can come in and keep the culture going and, and keep doing what, you know, what, what you’ve been doing on that. So,
Thomas Campbell 24:42
the one thing I will say, too, I didn’t if I spoke a little too harshly on the traditional model, that wasn’t an intent here, but there is a lot more professional search fund investors now than there used to be right it used to be just pure high net worth individuals investing in the space now you have established between private equity. Yeah, are very professional and provide their searchers with a great deal more support than they have done in the past. Yeah, yeah. And
Andrew Cross 25:16
it’s better than the old days when you had a guy would come and say, Yeah, my uncle’s gonna help me by this. Yeah. Yes. First flag.
Damon Pistulka 25:24
So let’s, let’s switch back to Darren here. Because they’re in, you know, how long did the process take from the time you talk to this, this buyer? And you got the deal closed?
Thomas Campbell 25:46
No, I think you’re on mute. So
Damon Pistulka 25:48
you’re on mute. There we go.
Darrin Mitchell 25:52
Almost a year. Yeah, I was just thing that I did process was is that there were so many, just even on the buyer side, there was two legal firms, there was two accounting firms. Just trying to get everyone to work together, there were some that were told me how, or don’t need one party to be right. We want to have a process where everybody wins. But a few times, I found myself actually wrangling in professional services to make sure things should be flowing were actually flowing.
Really good example of something that surprised me though, was delays in the process. So in the middle of it, and just stuff you don’t think about, had to do an environmental assessment. And that took two months. Yeah. Now you’re going. I didn’t think about that. But anyway, we’re good. So yeah, stuff like that. Just re planning and understanding that flow in that process. Very important. Because typically, people like me, you’re making 100 pins a day, you’re go, go go when all of a sudden, hey, we’re on hold for two months for an environmental assess. I okay, I just wasn’t expecting that to take so long to dig a hole for crap.
Andrew Cross 27:14
So where did that come from there in the invariable did that show up in diligence. Was that a request or requirement from
Darrin Mitchell 27:24
on the data?
Damon Pistulka 27:27
Yeah, it was.
Andrew Cross 27:31
Damon Pistulka 27:32
yeah. Then that’s, that’s common. I mean, it’s and as you bring up a great point, because we were working with a client a few years ago that their industrial property was encroached by an actually an adjacent a fuel depot that had spilled some fuel on it, and it leaked into their stuff and then the other places totally responsible for it. But the people buying were as you said, they wanted to make sure a that it was cleaned up be that that there was clear legal agreements that it was not there, you know, the other the other businesses thing and yeah, it’s these kinds of things are typical that show up.
And one of the things that that I was I was going to talk about I wanted to ask kind of both you about is it I’ve talked a lot in and people look at a poster to mine about customer concentration or vendor concept, you know, supplier concentration key employment constant, you know, if you got even one person makes the business kind of thing.
And my thought is around like Darren as a person that runs a business for for 10 1520 years, you get time you have time to build that comfort level with Hey, I’ve got one client that buys 80% of my stuff and they are great and you don’t even understand that’s really not a risk that that plays into your daily thoughts that much anymore. And then you know from Thomas’s side that’s like an almost an OH SHIT moment. Just to be honest that it’s could be the one that you’re that kills you. So do you think I’m
Darrin Mitchell 29:22
yeah, I don’t I don’t mind touching on that. business owner that I work with today that should be your priority whether you’re thinking of selling or not. So lots of companies I work with in the past in places like the oil sands and the oils and when you go do to realize while you were making money hand over fist you have one egg in one basket. So this goes a lot back to why we were doing business in other countries because I found the more product I was least the more sales would go up in the so the doing was insurance or not just because well, so the biggest bread and butter we have for 60 70% of the business was in road building.
So we were concentrating our efforts into getting into agriculture into mining into other types of margins margin at the end. And again, I found that one thing, you if you were successful in one of those areas that would actually propel sales in the other area, because what happens is your sales team gets all excited going, Oh, we got a big order. I better get all my orders in for Utah. Yeah. Those are things that owners doing on a daily basis, I’m currently working with three small, you know, anywhere between the 10 and 15 million mark manufacturers, and we’re talking 6771 and 77 years of age. And you’re exactly right is how dependent aren’t? Are you on these six customers?
Andrew Cross 30:59
And, you know, all of
Darrin Mitchell 31:02
that, like, I don’t know, COVID hitting, and you’re going now we’re in trouble. So it’s business to business, probably thinking of selling or not?
Damon Pistulka 31:14
Yeah, yeah, that’s a great, that’s a great perspective. And I love the fact that, you know, you’ve been through the process, sold the business, and now you’re helping others, you know, in their plans, whatever their future might be. And that is one of the bigger things your, your you talk about.
Andrew Cross 31:33
Darrin Mitchell 31:35
very real story that happened to me last week, company, probably around the million mark B. We started working together in the in the last year, they even while I was in the transition process. And the biggest thing that I felt from somebody else’s viewpoint that wasn’t my own, who was living it was at that age, and I think at any age, you sometimes you feel like you’ve lost control. And the Yeah, for the owners of the businesses is you feel good. When you feel like you’re in control, and you have choices. And getting back to that point, you can feel much more comfortable the day you decided to.
So you didn’t have like the health risk, or something tragic happened that scared you. Each reaction really planned out. So I would, ultimately I would come back to the home and I made to all three of you. As long as you have a decent guide or Sherpa to take you through the process, the seller starts to feel in control again. They understand what their business is, and where the value is. And they’re able to make good choices. So I couldn’t say that enough is that we love feeling like we’re in control. And we have choice. The day we don’t we back away. And we go in a different direction.
Damon Pistulka 33:00
Yeah, yeah, that’s a great point, Darren, and I’m gonna I’m gonna let Thomas give us his perspective on on risk like this, because, you know, you’re coming into it as a as a as a buyer. And, man, what does it look like when you come into a company and you got, you know, 70% of the revenue with one customer?
Thomas Campbell 33:22
Yeah, unless there’s some really strong mitigating factors, like this customer has multiple decision makers. So it’s spread out across like a bunch of different plants. There’s no competition in the space. So they’re basically having to buy from you. There’s no other choice. Unless there’s things like that.
Typically, that’s a deal killer. Yeah, at that point, it’s just like, like I said, this is this is make or break for me. If that one company or customer gets a new purchasing manager, if they hit hard times because of COVID, or oil crisis or whatever. You know, that’s it from this, you know, the company. I’m also I’m also buying this business with, you know, a certain amount of leverage. Yeah, that adds risk that I’ve, you know, certainly the seller may not have to worry about, but I’d because if I’m not able to make those debt service payments, then, you know,
Andrew Cross 34:21
I’m in bankruptcy. Yeah, yeah. Yeah. Joe, I think it’s a good point. Darrin, from the sellers perspective, you were living with that risk, but you’re not levered out in having a big debt, you know, for the next five years going forward, which is what they’re stepping into, and also stepping into a business that, you know, you’ve been running it for 20 years, you know, you know, you just learn to live with it.
There are exceptions, you know, what, what Thomas is talking about aerospace automotive companies, you know, in 98, you know, they’re really their big customers or, you know, one of the big three or Boeing or Lockheed or something like that, but, you know, they’ve done A History of that’s just kind of that’s the nature of that business. So customer concentration is, but you know, they’ve been suppliers and are locked into that for a long time. And some government contractor type is with this as well, but for the most part, you know, it’s very common in manufacturing to have tied in in oil and gas, it’s, it’s kind of the life they live.
But it what I wanted to point out too is, you know, this is the problem with this market, you’re selling businesses, you know, that it doesn’t make you a bad company, that you’re making money have been making it for years and all that kind of stuff. But I want to say, you know, because back to the question, you know, what’s the valuation of the company? You know, in most markets, you just go Okay, yeah, that’s fine. You know, it is a problem with the with the product we’re selling, so we reduced the price, but we don’t have that here. This is zero song. Yeah, no. It’s a no call that one?
Thomas Campbell 36:02
No, and to echo a couple of Darren’s comments, too, I think it is a process. And sellers are often best served, if they start that process, you know, a few years before they actually intend to sell, you know, figure out your advisory team, start gearing your company up, you know, reducing that customer concentration.
You know, oftentimes sellers, when they’ve been in it for 30 years, or whatnot, they let their foot off the gas, because they’re like, yeah, I’m getting older, I don’t really got a nice quality of life. That’s the opposite of what you should be doing. If you’re getting your company ready to sell, you should be showing a steady growth trend. And yeah, you know, trying to get in the buyers mindset and taking care of those risks, whether it’s reducing keyman risk or otherwise, you know, get a better valuation, and make it a easier process just in general for everybody.
Andrew Cross 36:54
Yeah. Yeah. Yeah, I think it’s good to because it doesn’t even need to be you do need to. I mean, this is what exit your way is all about, we come into clients, when it’s the first thing we want to identify this because that’s a very common thing to have this customer concentration is, especially with small businesses.
And it’s just that it will you at least have to show one, one way to mitigate that risk is to show that you are deploying resources within your organization, and its business development, either getting into new market, getting different new clients, and that kind of stuff. And if you can show a track record of, yeah, hey, we know this, we’re working on it, you know, then then you might be able to get Thomas rethink about this is like at least you know, we may still have a customer concentration problem. But you know, they’ve been acquiring new customers, they’re into a new market, whatever you need to do, but it’s got to be that strategy needs to be there. Yeah. See it?
Damon Pistulka 37:52
Yeah. So Darren, I’m gonna give you an in it’s, for whatever reason, is saying we don’t have a connection. So if you can hear me, I will just move on. But what is one thing you would do differently if you were to do it over? Oh, he might be he might hear me. Yes, again? Yes, again.
Darrin Mitchell 38:16
All right. I think that in the future, and this is what I’ve been now talking about with the manufacturers that I’m working with. I’ll question them a on their age. And, and then I’ll just say, Listen, if you got three years for me, because what we need to do is work on that gap in the next three years from now. That’s what people care about. And coincidentally, that gap is what you should care about your top line, bottom line are pointed in the right direction. And again, if we can get these things in place, these are the things that people care about.
But a financial person by any means, but I get really excited about the results from our efforts. And yeah, I have conversations with business owners about what actions do you need to take to change directory of what’s happening? because someone’s going to look at your last three years and say, creep on your top line that doesn’t look good. Well, you need to understand I said, it doesn’t really matter in the selling process.
One’s going to see that what I just seen within minutes and go, there’s not the multiplier here you thought there was so what I get excited about in speaking with manufacturers is how what can you do today to change that? So that that’s what really starts getting my heart pumping is saying how do we grow that margin and put those systems in place so you can feel like you’re in control? So the day someone decides to approach you or you decide to approach someone else, you still feel like you’re in control?
Damon Pistulka 39:52
That’s awesome. I’ve said here just grid dude, because it is it is what you guys would just said it’s as try it’s summed up so much of what we like to tell people and understand. And it’s nice here and other people’s perspectives on it, because one of the things that you touched, touch was there and I think is very, very relevant for business sellers to understand is this is going to be a process where you’re going to feel like you’re not in control, when the loss of your life in your business, you have been many times in control of most things.
And that’s where I think, yeah, that’s, that’s, that’s a feeling I saw different. But if you’re doing like you say, and you’re talking about, and you get the financials and the KPIs rolling in the business, and understanding how, you know, a monthly review of financial, after the sale, that gives you a lot of a lot of comfort in the fact that yes, there may be a seller note that you’ve got to be but you’re involved in a board moving or whatever it is, they’re get the monthly financials, and you understand how the company is being running.
But these kinds of things, that the control factor is something that cannot be understated in this process, because it’s so different from your normal operation of the business.
Andrew Cross 41:11
Yeah. Yeah, Darren, there is experience there is great, because, you know, again, to it, he switched and started to work, and understand and drive his decisions and run his business towards building his equity, rather than just running the cash flow. And you know, what, oh, how do we do at the end of the month, and now looking at how that affects the equity that you’re building in the company, and that changes significantly changes things. So now you do it. And that’s how you get a business. Oh,
Darrin Mitchell 41:39
Andrew, I want to be very, very careful with this. I don’t want you to think I’m intelligent I was when I would meet with my hitters in Ohio. And again, they you know, hundreds of millions of dollars, they’re next to the customer. They’re next to the supply chain. And I would meet with the owner and say, listen, you’re big and mighty, I’m only a million mark. insignificant, everything. We’re happy with five to 7% margin, and I would go, Oh, my God, kill me literally. Were my factories that model.
So everything we did, we had to change that model for margin. It was, you know, I just very passionate about ensuring manufacturing isn’t a race to the bottom. And again, exactly as we’re talking about today, you can’t so many things restrict you that you end up feeling like you’re getting really, really good at building something nobody wants to pay you for. And I feeling like I’m a foreigner. And I think other manufacturers my size, usually feel that way is that they love choices and options.
Damon Pistulka 43:03
Yeah, yeah. That’s great. Darren, I guys, we could go on here for a long time. But I just want to say we’re gonna we’re gonna wrap up here, here now. And I just want to say thank you, because it has been awesome having you guys on here. Andrew, your thoughts on this conversation?
Andrew Cross 43:24
I think this is fantastic. You really, because you just don’t get to see this. Every day, these conversations, what Darren’s learned in his career, you can’t learn that in business school. I mean, you’ve got an MBA Thomas, but you know what he’s learned there. It’s too bad. You know, however, we can get that out. And that’s great education for anybody who’s in business.
Damon Pistulka 43:48
Yeah. And then Thomas here, you’re, you’re, you’re educating us on, you know, your perspective, because it’s so different than the long term business owner. It’s, it’s so great. It’s so great to hear this. So I just want to say thank you, everyone. So if you’re listening to us live on LinkedIn, we’re gonna stop on LinkedIn. And we’re gonna go back to the tables here for a few minutes. So people have time to talk for a minute and wrap things up.
We’ll be back again in a couple a couple of weeks when because we’re doing this the first and third Thursday Thursday’s of the month. So our next one is on October 7, I believe it is. And we’re going to be talking about business valuation fundamentals. So thanks for joining us on LinkedIn. We’re gonna go off there and we’re gonna go back to the tables here on Remo and just talk for a bit and wrap things up.
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