15 Apr Knowing Your Business Buyer
Knowing your business is one thing and knowing your business buyer is completely different. And keeping in mind the latter is what’s important when you wish to sell a business.
In this week’s The Faces of Business episode, our guest speaker was our very own Andrew Cross. Andrew is the Founder of Cross NW-Business Advisory and the Co-Founder of Exit Your Way talking about the importance of knowing your business buyer when you are preparing to sell a business.
The conversation started with Damon asking Andrew a few questions. He said that knowing your business buyer is the most important thing according to him before selling a business. He asked Andrew that what other things are important when you sell a business.
To answer this question, Andrew said that if you have a successful business, you will definitely have enough buyers around you that want to buy your business. However, he said at that time when you don’t want to sell your business you don’t focus on the buyers much.
But according to Andrew knowing your business buyer is important at all times because there are many scams around as well.
Further, into the conversation, Andrew talked about the categories of buyers that exist. He said that there are individual buyers and then there are some operational level buyers as well. Moreover, he said that if you understand your buyer to the way you position your business, then you can surely get going.
Moving on Damon and Andrew shared some more views on knowing your business buyer. They said that when you’re selling, it’s not about your equipment or finances for the buyer. What you have to focus on is the fact that what the buyer is looking for in the position they get when they buy your business.
After this, Andrew said that when you’re selling a business, you have to be brutally honest with yourself. This means that you have to understand the worth of your business and also that where it stands that day.
Apart from this, Andrew shared some more on the types of buyers and how they look at your business when you are selling. He said that the individual buyer will look into your revenue and they generally buy businesses that are 1.5 to 2 million above.
Then he talked about the investor buyers. He said that these kinds of buyers are buying with a strategy and they also have a target industry usually. The next category of buyers that Andrew shared is the strategic buyer.
Adding to this he said that these are the best kind of buyers and you should always pose your business to sell to them because they will give you the best value.
Throughout the conversation, Andrew emphasized the fact about knowing your business buyer. The conversation ended with Damon thanking Andrew for his time.
Andrew Cross is the Founder of Cross NW-Business Advisory and the Co-Founder of Exit Your Way. The purpose of his company Exit Your Way is to help and teach business owners about selling an ecommerce business.
Apart from this, he has worked with The Executive Network of Seattle as a Treasurer and Fiber Dyne Advanced Compositions as Business Advisor. Moreover, he also worked with Seattle United FC as Board of Director and Treasurer.
As for Andrew’s education, he has an MBA Degree from Eastern Michigan University. He is also a certified Merger and Acquisition Advisor and a Certified Business Intermediary.
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Knowing Your Business Buyer
The Exit Your Way Business Round Table Live Stream
business, buyers, buy, company, people, sell, fund, seller, employees, pay, understand, strategic buyer, money, cash, bigger, capital, thinking, talk, position, business owner
Damon Pistulka, Andrew Cross
Damon Pistulka 00:04
All right, welcome. Once again the faces of business with Damon Pistulka. And with me today, I’ve got the very own our very own, Andrew.
Andrew Cross 00:17
I like the new intro. That’s great.
Damon Pistulka 00:19
Yeah. love music. I’ve said here Bebop, and we do that because like you said, it’s a different one, but it’s similar kind of music that’s for that. The other. I hear it in my headphones, but no one else can hear or outer emo.
Andrew Cross 00:32
It’s like getting out. Tyra Bowman. Yeah, set us up with that. That’s why almost makes us look like we know what we’re doing.
Damon Pistulka 00:40
Yeah, some of you think well, I like today that we got the we got the official color of exit your way on today. We both had to put the blue on. But that was by accident. But so this is a you know, we’re gonna be talking today about knowing your business buyer, something we, you know, we brought up in different ways before and talked about before, but I think it’s, it’s worth repeating.
Because, you know, as, as we continue to help people through the transaction and the process of preparing their business and through the transaction, it’s, it’s more and more apparent that the better we understand who is going to be buying a business, the better we can have the business ready, the better they can possibly get more money, then what are some of the other things that you think really, really off the top of your head? Your advantages?
Andrew Cross 01:32
Well, I mean, we sort of we had our meeting our roundtable this morning, and we’re talking about listening to your customer. Yeah, about that. And, you know, I think I think for the most part saw, most business owners, if you’ve got a successful business, you’re gonna get approached about selling your business and buyers can be, you know, tend to be kind of a nuisance, I think it’s more than, you know, that’s kind of the mindset about it. While I’m thinking about selling, I don’t want to be bothered with that.
And I want to think about it. And that’s somewhat valid anyways, too, because I mean, there’s a there are a lot of buyers out there, or aren’t actually ever even capable of getting a business bought or, you know, are kind of kicking tires or wasting your time. And business owners are busy.
You know, but you know, at the end of the day, you know, that that the buyer becomes important to them when they do decide to sell, and it’s just a matter of time. So, yeah, it’s worth taking the time to listen to your customer, like we were talking about today, finding out what it is that motivates them to buy. And, and, you know, and then really taking, you know, a really good close look at yourself and try. Try get from that perspective. Yeah. And I think it’s a good exercise to do, because, you know, it’ll make you a better business.
Damon Pistulka 02:54
Yeah, that’s, that’s for sure.
Andrew Cross 02:56
You know, I mean, there’s the buyers are looking for value, you know, so, and there’s various there’s, you know, there’s many iterations of what that is what that
- Yeah. So it’s said, you said
Damon Pistulka 03:11
something I started out that was really interesting, because I had talked to a couple business owners this week and and across the United States, actually, about their their businesses. And one of the first things that both of them said is I get emails and calls almost every week of somebody wanting to buy my business. And I think it’s a rite of passage for business owners almost once you get above, I don’t even know what the number is a couple million and a few million in revenue. You get on the radar of these places, and you get on the email that the owner, they figure out the owners emails, and then they just blast them over and over with emails and calls.
Andrew Cross 03:51
Mm hmm. Yeah, buyers are great. You know, they have to be they have to be aggressive. It’s not a it’s not easy to find a good business to buy back, it’s really difficult. And, you know, they have to work very hard at it, you know, and get themselves ready to buy at least the good buyers. And yeah,
Damon Pistulka 04:10
yes. Well, the one thing that one part of the conversation that I had with both of them this week was you can’t you can get couldn’t get contacted by just about every buyer under the sun that knows your email address. But just because they contact you doesn’t really mean that they’re interested in your business, you just fit a profile that could be and you gotta go a long ways before that is even anything close to an offer or even really get into a meeting.
Andrew Cross 04:43
Yeah, it most of the time. If they’re fishing, they’re fishing. You know that too, because I got, you know, I mean, I talked to a business owner whose business was doing terrible, you know, and he says, you know, they’re calling me and he goes, You know, I want to buy your business. Well, okay. You don’t even know what my business is? Yeah. Yeah, you know, for the most part,
Damon Pistulka 05:05
that’s a great point because they have no idea of the profitability of these businesses or the position they’re in or what’s happened in the business recently. They’re just it again, it just fits some sort of metric they’ve decided and, and that’s why they’re reaching out to them. But that’s why I’m glad you brought that up. Because it’s something that you should expect as a business owner, as your business gets larger, you’re just going to get contacted by more and more people that say they want to buy your business.
Andrew Cross 05:34
Yeah, you know, and again, it’s just like thinking about is that a customer, the buyer, it will be your customer? Yes. Well, when you’re in business, you’re, you’re always thinking about your customer. And so whatever, whatever product or service you sell, you know, hey, you want to know your demographic, you want to know your targets, you want to know why they buy, what motivates them.
But you’re, you’re on that all the time, do the same thing when it comes around to thinking about selling your business. So that’ll help you with all the time wasters. Yeah, yeah. Because you don’t really understand what who are the buyers? What’s, what’s the, what’s the buyer, I’m going to have? What’s his avatar? What’s he going to look like? Or she?
Damon Pistulka 06:15
That’s a good point? I’m glad I’m glad you transitioned into that, because one of the things that I thought would be helpful for people today is, first of all, why do we talk about this? So often? I mean, we talked about buying and preparing companies, what is the main reason that we do that? I just want everyone to understand that.
Andrew Cross 06:36
Yeah, well, education is good. And it’s difficult to get information about buying a privately held business. Because there is it’s very, you know, these are the privately held businesses, a publicly traded company, sure, you can find all the information you want, when sprint buys, wherever, you know, T Mobile by sprint, you know, everybody’s set up as all the investors are the owners of the company are set up to be protected by regulations. And you don’t have any of that for small privately held businesses.
And, you know, I like to share this information because I just, you know, I want to see people get out of their businesses successfully and get what they want out of it. At the end of the day, and they can’t do that if they don’t really know what’s going on, or how, and understanding buyers and why they’re looking at two is I just see, it’s, it’s kind of sad, in a way, because there’s a lot of misinformation as well, but buyers like latch on to so and a lot of it is meeting the expectations of the person selling the company. And
Damon Pistulka 07:40
yeah, they might,
Andrew Cross 07:42
you know, what I mean, just happened to us this week, we had a business owner, we talked to him, what did you say, you know, he thought his company was worth? Well, yeah,
Damon Pistulka 07:54
yeah, there was someone that we had talked to that they they had thought their business was worth $7 million. And, and the cash flow was about 400,000. And yeah,
Andrew Cross 08:04
I just, you know, I’m exactly I mean, you know, that kind of things happen, because they heard from somebody else that so and so sold their business for that kind of multiple, and, you know, so that’s what you immediately thought that they grabbed it. I mean, it’s that’s just wishful thinking. But I mean, how long? At the end of day two, it’s like, think about that, from the buyers perspective to pay 7 million when your cash rolling a million? And how long is it going to take you to pay back? You know, and, you know, account for interest and everything else gone? And it just doesn’t? doesn’t make any sense. Yeah. You know, I mean, that’s just the financial aspect of
Damon Pistulka 08:46
Yeah, yeah, it is. It’s just the financial aspect. And, and the other thing, too, is, we talked about this a lot, because there’s only about 80% of the business is ever heard, or 20% of the businesses that ever get sold. And, and that’s a it’s a sad fact, when people get to the end of working that damn hard, and they can’t sell their business. Because, you know, value expectations is one that we discovered that’s that’s really good. But man, it’s, it’s a shame when they get to that end, and they they can’t turn it into the cash that can help them do whatever else. Yeah, do after that.
Andrew Cross 09:20
It is a shame. Because if they understood value, and a market is a market, just like yeah, good, but they understood that better. You know, they they could sell their business, you know, the ones that fail typically because they they’ve wanted too much for too long and the opportunity passes. Yeah, they’re having either to liquidate or shut down or, or just stop or something happens. You know, that’s, you know, and we’ve seen that you know, time and time again, it’s just it’s not personal. Rated on you know, what, what amount of money you get for your business. It’s it is what it is. Huh, no one. If you want to do better than that, then Okay, come and call us at zero.
Damon Pistulka 10:11
And yeah, and you got to perform. Yeah, we only obviously help people do that and, and, you know, it comes down to dollars and cents in being attracted to a buyer, it’s, it’s no different than if I have, if I’m looking at a car on the lot, and if I want buy an old car, it looks like heck, but it’s dependable and everything else it might be a really dependable car. But if I see a brand new, whatever that’s, that’s in the in the lot, it looks really nice and shiny and fast and everything else, I can sell it for more money. And, and it’s a lot of the same things happen there. We got Robin off today,
Andrew Cross 10:50
it also has a certain time, you know, I don’t want to say this is all financial, you know, it’s not, it’s just a marker and understand your buyers to is really important because you just have to there has to be a certain step off the financial part portion has to be met has to make sense, right? Then there is wiggle room in there to get a premium. If you do certain things towards your, towards your business. And and that’s, you know, that you can do but yeah, the day, they’re not gonna pay you, you know, for something that’s just irrational?
Damon Pistulka 11:30
Yeah. Well, in the end, we’ll talk about this in a moment. But that’s, that’s really good. Because when we talk about there’s different kinds of buyers, you know, there’s, there’s, I’ve created a painting company, and I’ve got my truck and I go out and paint, I might have a helper, and I make good money doing that right now.
That’s it, the buyer of that kind of business is much different than the buyer of, you know, a plumbing company that’s got 30 people and five trucks, or a manufacturing company with 100 people in it, and 25 million in revenue. So when we look at that, when you look at the individual buyer, like it would be on the first example, I’m a painter in the truck, what is that buyer looking for? in general?
Andrew Cross 12:22
Yeah, I mean, we can classify buyers into certain categories and boxes, which helps, you know, helps us identify as houses zero into what’s the best fit for, for my business, you know, for your business. But, you know, I think what you’re talking about, too, with the, you know, the owner operator type level, yes, you know, there’s a big market for that, and those businesses turnover, you know, you know, there’s quite a lot of them, they sell all the time, you know, they don’t command the kind of price that a larger business for 30 to 50.
Is would would capture, but, you know, there are people out there, we still sometimes say they’re buying a job, you know, but if you know, they can come in and have a place to start it, it makes sense. So that’s, that’s the individual buyer, kind of, they do that that’s one person buy one business, maybe that’s the only deal they’ll ever do in their life. As far as that goes, Yeah, selling it themselves when their time comes. You know, but there are quite a few people around that, looking for that kind of work, especially, especially when we go into, you know, bumps in the economy, people kind of getting displaced, which is happening right now.
Because COVID people with good management skills have worked for solid companies. Yeah, I’ve learned quite a bit about, you know, fancy themselves and Okay, I can operate a business and have a little money because maybe, you know, a retirement fund or the assets or, or exit, you know, that little golden parachute when they left their companies really just saved away.
A lot of local buyers like that would can take over those kind of companies again, may if it makes financial sense, that’s just one milestone to reach but then you get into the other factor is lifestyle, right? And that’s really a big factor on the individual kind of deal. buyer deals or owner operator businesses because, you know, that’s what those people are thinking to.
It’s, I have to go to this job and, and then my bosses, this soul sucking career that I’ve been in for 20 years, I’ve got enough money and I have a dream, you know, so you gotta you gotta sell that dream. And that dream is the dream that you had when you were in the business and why you started in the first place. And you know, some of them I saw, you know, I’ve had a business bought diet, pretty high level Bank of America, executive banker than you but his hobby was woodwork when he bought a furniture company. Passion, you know, and so there’s those kind of things, you know, so yeah,
that Yeah, no. And
Andrew Cross 15:05
if you understand your buyer to the way you position your business, then you can you can, you can really go out and kind of tell that story and get the passion going.
Damon Pistulka 15:16
And yeah, you still your business, that’s a good point. And that carries through. And, you know, you’ve talked, we were talking about the individual buyer, and I think we’ll talk about the, you know, the different levels as you get a little bigger too, but it is really, when you are selling a business, it’s not about you know, the equipment you got, or the even the financials are really not, it’s about the opportunity for the the new person to step in. And what’s in it for them, why would they want to step in this in this seat?
Or step into this position? Why would they want to be here? What is exciting about it for them, because everything to them. And I think sometimes sellers, get get stuck on this about this has been a great business, it’s been cash for me, you know, good solid money for the past 20 years, which that’s wonderful. But to a buyer coming in, they want to know what’s in it for them? And that’s not always the same?
Andrew Cross 16:20
That is no, that’s for sure. You have to be brutally, you know, if you’re selling your business to you have to really be brutally honest with yourself about where your business is at, you know, and what you’re selling, you’re gonna, you know, if you’re talking about today in a buyer comes in and you’re selling, what, where are you at now?
Not where you’re going to be or could be, not necessarily to where you’ve been no come from? It’s the most of the focus is on where it is. Now. That’s what don’t pay for. You know, so, you know, and that’s, that’s another factor as well. And that’s the sad reality is that people make the decision to sell their business, typically, because something bad has happened, and it’s not going well. Yeah. It should have, you know, I say, I should have this four years ago, and, you know, and then COVID happened, and, you know, and this and that, and there’s all kinds of things.
Yeah, you know,
Andrew Cross 17:19
it’s always time with it, just, you know, go back and fix the problem and plan on selling your business. You know, like I said, I think if you’re listening to your buyer, and you’re actually you’re getting actually free consulting from them.
Damon Pistulka 17:35
Yeah. Well, you are in as you position your business like that, and everything down to, when you move into a little bit bigger business, like if you’re going to sell to what they call a search fund, where, basically, it’s a CEO that’s got our high level executive that’s got a fund behind him funding him to find or them, he or she to find to find a business, and then the investors will back them in buying that business.
You know, that’s a little bit different than the individual owner operator, because they can typically buy a little bit bigger business, because there’s more funding behind them. And it’s going to be a little bit more structured in the way that they look at the business and the way that they look at going forward. Yeah.
Andrew Cross 18:26
Yeah, it so that, you know, get it talking about what are what are types of buyers, you know, we have we talked about the individual, one person buyer, and they tend to not add that they couldn’t, you know, pull together some capital or funds and buy it, they can miss us that happens. Not that generally individual buyers are looking at owner operated businesses under million, under a million and a half in revenue a year or 2 million. And then over that, then the next round, you know, category is the investor buyers.
Like you’re referring to the buyer, private equity groups, they’re actually, you know, funds that are raised by investors specifically to go and buy businesses and they have a usually a strategy. And a, an industry that they’re targeting. To search for ads are kind of an offshoot of private equity in that but the difference being that, you know, they’re not looking just to invest by a company as an investment. They’re they’re putting one operator or business or who they’re backing financially to go and buy.
knows, like, usually, the search fund guys are usually have significant professional experience in the industry and in a lot of them are coming out of the MBA schools like Stanford and Yale. And yeah, you know, and basically they’re their backers are putting their talent to work on the business. So when they look at it, they get a different perspective about what they’re looking for, necessarily. Yeah. Then the other And then the other category, outside of the investor buyers are the strategic buyers. Yeah, which probably are the best buyers, for anybody.
And if you want to position yourself, I mean, as a company that if you, you know, if you want to get out and get the most money possible, you want to position yourself to be attractive to a strategic buyer. And because they’ll pay the most typically, out of a business, and a strategic buyer is, you know, it can be your competitor, it happens a lot to me, then, you know, you know, they are your, you’ve been in the industry for 10 or 15 years, and, you know, just getting to that age, you know, your, your competitors are going to call you up, say,
Hey, what do you guys think you want to who will step up and buyers, they can also, you know, they can also pay more, I don’t, you know, don’t fall in love with strategic buyers, because some of them are the cheapest, and they will do the lowball offer, but you sort of, you know, but this is why it’s important to really understand what they’re looking for. Now, because if you can build a company that has some sort of synergistic or strategic, you know, value to the buyer, then they’re not so much looking at a multiple and how to pay back that thing.
You know, based on the revenue, you’ve been receiving a strategic buyer, you know, really good example is we had a process serving company that was for sale, it pretty much had locked up the market, you know, in one state. And I won’t say where that was, but the company that bought them, you know, was developing into that space. And it was a five year plan for that company, a bigger company to actually take, you know, get in, you know, build into that territory.
And so I made a whole lot of sense for them to just buy this company. And then overnight, they were they already had an expanded territory, which saved up. Yeah, you know, so they’re not necessarily looking at a multiple of your cash flow on the purchase price there. They’re just saying, well, that that number works. It’s cheaper than us having to take five years to actually build out this territory.
Damon Pistulka 22:07
Andrew Cross 22:08
people in buildings and everything they had to do.
Damon Pistulka 22:10
Yes. And it’s funny, you said that, because I actually had a conversation with a business owner this week about acquisitions about the fact that they’re having in the Midwest, they’re having trouble hiring skilled people in manufacturing. And they were, they were actually out looking for acquisitions, just just to get talent. Yeah, as a as a way to as a way to grow. And because they were literally said that if I don’t go to the high schools, or the junior colleges and recruit people directly at those places, I can’t hire anybody.
And that’s, that has been my last Harrison and this is somebody who’s got 10 positions open. Yeah. And they said, you know, I’m also looking for acquisitions just couldn’t, because if I can pick up five employees in an acquisition, yeah,
Andrew Cross 23:00
yeah. Yeah, a good example, we just worked with an electrical company was relatively small. So yeah, six to 10, you know, licensed electricians, but by a much bigger company, just because they, and they just tuck them in to become their in house electrical department, which they have
Damon Pistulka 23:19
a good point,
Andrew Cross 23:20
you know, you’re exactly right. That’s it. Those are that strategic buyers strategic getting, you know, the key word there, which can circumvent value, and additional value side of things. Because if you have a need, you just, you know, in a big company like that, you had massive construction projects on hold, because they couldn’t get caught, you know, electricians to do the work. You know, it just didn’t, they didn’t care what,
Damon Pistulka 23:47
yeah, it’s easier just to buy it and get done. So they can move in with what they want to get done. Because it’s cost them too much money.
Andrew Cross 23:53
They’re losing so much money on the other side of the fence. Yes. So what do you want for it? And we were like, yep. Okay, that’s fine.
Damon Pistulka 23:59
Yeah. Yeah. That’s a good point. That’s a good point. So one of the things
Andrew Cross 24:04
again, the you know, to get back around on that, though, is know your buyer, right? Yeah, you can build a business that did it, you know, if you know, in private and private equity groups do this, too, if they’re Their mission is to take companies by the small ones, build them all together, in within their, their ultimate end goal. strategy is to sell out to a strategic plan.
And those are the big big companies like, like Lockheed Martin, or somebody might come in and buy the private equity group of Group of Companies after they’ve, but you know, they can because there’s an intermediate, there’s a step up between individual kind of mom and pop run business to a professionally managed organization.
And that’s really the key again, as far as the financial part of it is have that sort of strategic edge that you That will get someone to buy your company. And if you think about it ahead, you can position yourself. Yeah, I think a lot of people that happens by accident, you know, I built my company, and you know, but it doesn’t have to be for you, if you’re smart about it, and you just, again, talk to the buyers listen.
Damon Pistulka 25:20
It’s like we we’ve we’ve mentioned this many times is, you know, a search fund buyer, that that is a private investment fund with a CEO, they’re intending to place in the business, your business that you’re going to sell, if you know you’re in that size range. And that’s where you’re going to sell your business to a search fund kind of buyer, your management team has to look different, or should look different than if my business is much bigger.
And I’ve got, you know, 10 million in EBIT da and I, and I’ve got, you know, multiple facilities and blah, blah, blah, you better have a management team in there, in outside of the owners, that can develop and execute a five year strategy and plan to grow, they have to have that because some of that’s going to come and buy something for 30 to $50 million dollars, you know, that is a requirement to get through the door is that you, they are not going to bring the expertise to grow that business long term, they are not going to have the you know, they can have some contacts and stuff.
But that team, those teams are very different as you move up the up the length of the ladder, as you go, you know, when you talk about an individual buyer, they may have industry experience or local knowledge in an industry that they can bring to that position that company and they’re fine there. And as you get up into the next one, you’re you’re you better have a management team that can take care of most of the business operations with an executive that can come in, and then you get into the big ones. And it better have the full meal deal. Yeah, and lay it out.
Andrew Cross 26:57
Absolutely. I mean, again, you know, we’ve back to the strategics, we’re looking to buy because they need to skill, yes, well, attrition or whatever. Same thing with the management team, that is an asset of the business you’re selling, you may be your employees, you may not think about it that way. But that it’s hugely important to the higher level buyers to come in and they want to know, again, you know, it’s your value is affected, like we ask your buyers right off the beginning, oh, this is cool. See what you’re doing? You know, your services?
What’s your processes, like, you know, everything you’re telling me about how what you do and how great your business is? Already? Is it written down? Does it you know, do you have management, you know, leadership? Who are the key employees that are making this thing run?
You know, what, how many years have you know, experienced it, you know, they’ll you know, if it’s not written down, you don’t have solid, you know, recognizable business practices and processes with a business Girl by itself. You’re losing money? Yeah. You’re probably losing a deal. You’re the buyers, or just, you know, the one of the biggest frustrations I have is with the people. But if you have a culture and a team in there in place, that runs that business is accountable for it is motivated. You know, yeah, he can.
Damon Pistulka 28:17
Yeah, you make a great point. Because across the board, if you have a business that you can set goals, and achieve those goals, or get pretty darn close, most of the time, you got you’re way ahead of the game, and in most things, because if I’ve got a million dollar business, and I grow at 25%, and I can lay that out that I’m going to do that, and I do it, like I say I’m going to do it, that business is much more valuable than someone that grows 25%.
But they got no idea how they did it, or what they you know what it costs to do it because it’s not repeatable, necessarily for the person that comes in as easily as a business that says, you know, we lay out our goals, this is how we measure our doing and this is how we make sure we’re, we’re, you know, beat number or trying to get there.
Andrew Cross 29:05
Yeah, you know, and in how people again, how, how I hired them, you know, how I trained them, you know, all those processes to you know, those are the kinds of things that they’re looking for, that are extremely important to buyers again, yeah, there’s glitches, thought that’s what we should have done today, instead of bringing me in as we should bring some buyers on and chat with.
Damon Pistulka 29:29
Yeah, there’s some coming on an April, we’ve got a couple buyers, couple professional buyers coming in, which I think is gonna be very interesting to hear their perspective because I want to ask them, I want to ask them, you know, and I want to, you know, once a search fund buyer, we’re going to get an individual buyer we’re going to get actually we’re going to have a bunch of them.
Andrew Cross 29:46
We’re going to listen to them talk about the deals that what you know what they’ve learned.
Damon Pistulka 29:50
Yeah, yeah, it’s gonna be it’s gonna be great because
Andrew Cross 29:52
this company what didn’t work What did work? Yeah, that’s really the gold and you’ll find out where they’re coming from. Yeah. And what they’re looking for. So,
Damon Pistulka 30:00
yeah, because I think it’s gonna, it’s it’s really important. And when we bring them in, we can talk about that more. And one of the things that I wanted to discuss briefly is, is put yourself in the buyers shoes. When you when you look at the business because I’m a first of all, I heard this I was reading a book a couple months ago, about the road less stupid by Keith, I think it’s Keith Cunningham that wrote it, but he talks about a bit about, there’s a whole section in that book about several chapters about building a business that you can actually sell someday.
And the whole books not about it. It’s about running a good business. But I thought it was really interesting, because one of the things he said, he said, if, if you’re working so hard in your business, that you don’t have a life, you’re burnt out, and it just killing you. Why the hell would somebody else want it?
Yeah. So, I mean, that’s just as simple as convenience, like, you know, if you don’t have your business running well enough that it’s not burning you out. And it’s not at least given you a reasonable return for your effort, then you really are not in a position to even start thinking about it. But I thought that, you know, from a buyer’s perspective, that is probably one of the most simple ways to measure where you’re going, how’s it going? brutally honest,
Andrew Cross 31:20
you got to be brutally honest with yourself. And it’s difficult to do, especially for a business owner, because they’re self made for the most part, and, you know, you know, that they’re only accountable to themselves. They don’t have to. Yeah, you know, and it’s, it’s, it’s tough to look in the mirror and say, what, what are they saying? But it’s critical, it can help you, you know, if you’re really good at that people who are good at, you know, I can really assess themselves honestly, like that are do what’s difficult. They do the difficult stuff first. Yes, they definitely do. It is. You know, it’s, it’s common sense.
But that’s absolutely right. It’s your right, if you’re burned out, you know, you got to figure out why. Because you’re right, it’s it. The buyers, the first thing they’re going to ask, and we when we sell a business presented, right on the front page, we have, you know, the basic highlights of this, this opportunity for a buyer to read. And one of the things that we ask you to put right in there is the reason for selling. Yeah. And to ask yourself, you know, why are you selling? And that’s really important to the buyer, because it tells them a lot. Yeah. Yeah, burnouts one of them? Yeah. Well, it’s not a good reason to sell No,
Damon Pistulka 32:35
no, because it would never be putting yourself in the position to be just being burned out potentially. And in the future, and I think that’s a huge deterrent to someone wanting to go into a business, even though it can make really good money, it can be a really lucrative event or opportunity, but they would still turn it down. Yeah.
So the other thing I was thinking about in putting yourself in the buyers shoes is, let’s talk a little bit about the financing of the purchase of the business. So now, I’m a seller, I’ve been in this business a long time, I’ve had years to pay down debt, I, you know, I’ve got my equipments probably paid off. Now, the new buyer comes in, explain, explain how the new buyer is probably going to finance the purchase of that business.
Andrew Cross 33:23
Sure. And yeah, most most likely with other people’s money. Yeah, they’re going to come in with a little cash, and they’re going to try and leverage so that they, you know, they can buy a bigger business. And that makes sense. If you, you have 100,000 in cash, you can buy a business for $100,000. Or you can buy a million dollar business and use the 100,000 as your down payment with the bank. End of the day, you’re gonna have a lot more value out of that larger business. And a lot less risk. Yes, the buyers are, you know, yeah, buyer seller.
So think about that, you know, it’s because they’ve already paid down the equity, they have equity in the business is taking years for them to get there. And they have to understand that the buyers are starting from zero, yes, zero, you know, and they got, you just got to make the you have to assume that they’re going to be borrowing money, so that you have to factor that, that cost of capital into the purchase price. Yeah. And, again, it’s, again, be brutally honest with yourself, the cash flow has to support as we call it, a price sanity test.
You know, if you’re looking at it from an individual who’s buying a business, there’s got to be enough cash flow to cover the debt service. And there has to be enough cash flow for the owner operator to pay himself at least market value for the 5060 hours a week he’s going to put into this business. And then there’s leftover for that to reinvest in the business as you’re going along.
And that, you know, within a reasonable amount of time, which is Most people, I love a five year window, I want this I want this business paid for, I want to own it, and have all my debts just like you know, within five years. And if there’s cash flow to support that kind of basic level of your asking price, then you know, your, your prices. Not right.
Damon Pistulka 35:19
Yeah, yeah, it’s probably probably too high. And that’s a good sanity check, like you said, and it’s really the same no matter the size of business. I mean, there’s usually a bank component or a loan component from somebody outside, there’s an equity or cash in by the buyer, or investment group. And then the seller usually has to carry a note of some sort or some percentage of the sale going forward as well.
Andrew Cross 35:46
Yeah, it again, it’s, it’s part of educating yourself, when you when you’re getting ready to go sell the business. Go talk to professionals about it, bankers who actually lend for for m&a activity. And yeah, have a look at your business. It’s probably your even your own banker, they’ll they understand your cash flow and that kind of stuff, they can be a great source for that. But, you know, they’re going to be able to say, we’re only going to be able to lend up to this not for where you’re at today, I’ll tell you kind of where your value is.
Damon Pistulka 36:19
Yeah. You know,
Andrew Cross 36:21
it also tell you the kind of things you need to work on to So, you know, the cost of capital is really important. And the professional buyers really know this. I mean, that’s what but you know, you could still be growing really fast growing, you know, 20% year over year growth on a business. But you know, that’s even, that’s all great news, but can be difficult to get a transaction done, because growth is expensive. Takes a lot. You’ve got to not only have the purchase price, you have a significant amount of capital, working capital to fund that growth, right?
Damon Pistulka 36:58
Yeah. Yeah. Especially if you’re if you’re, you’re in a industry that takes expensive equipment, and you’re nearing your capacity on that equipment. I mean, they’re still rolling. I payroll. Yeah. If it’s high labor. Yep. Yeah, there’s so many different things that that can affect that. And that’s a that’s a great point that, where are you adding in what you can do with the capacity you have with the space you have currently is really important as well. Yes, I bought that buyer against
Andrew Cross 37:28
going think about that, too. So yeah, there’s a lot of bankers are good at doing that, you know, as well, because they’re not it, they’re there. They want to see deals get done. I mean, they’re in the business of lending money. Yes. Well, you know, but they’re not, they’re cautious, you know, and so it’s it and they’re not a buyer. So they’re not, they’re not lying to you, you know, that you can go to them and say, but, you know, and that’s what, that’s where we run into trouble with buyers or sellers, who, you know, they want all cash or they want, you know, to keep the receivables in the in the company.
You know, working capital adjustments are a big headache and buyer sellers just do not understand that but a bank, will you talk to the bank about that, first of all, know what your working capital requirements are for your business? How much chaos? Do you need to keep this thing running? A learn about it, talk to your banker about it, because there’s ways to access that kind of capital. But you know, the buyers, no bank will fund a deal if they don’t see sufficient cash there too. Because right after the deal is done, the sellers, the buyers are starting at zero,
Damon Pistulka 38:41
Andrew Cross 38:42
know, and they’ve got they got to have cash in there to pay the employees keep the business running, pay the rent, pay the taxes, because those bills, don’t they start day one? Yeah, you’re close. And the sales go out, and maybe you get paid in 30 days or 60 days or 90 days, some cases, sometimes not at all, you know, for that cash to catch back up. So you’ve got a lot of bills you got to pay before you get to
Damon Pistulka 39:08
Yeah, so, you know, working capital can be significant. And it really can be it can be millions and millions of dollars and in so many transactions easily. And and, you know, people don’t understand don’t consider that as the second check.
Because just like the loans we talked about, before that the buyer has coming into a business, the seller has also had plenty of time to build up that working capital over a lot of years. You know, if I’m putting $100,000 a year in working capital every year in 10 years, it’s a million dollars. Well, the buyer comes in and he’s got to fund a million dollars and they’ve got to fund a million dollars coming into that business. it’s it’s a it’s a tough it’s it’s a significant number.
Andrew Cross 39:49
Yeah. Then if the banks don’t see enough cash there to support that, that you know, they know they know how to you know, that’s the one of the main things they look for, you’ve got to be well capitalized, so It’s not all on the buyer to do that, because they don’t do that the seller has to has to contribute to that working capital it but it’s it’s a negotiation just like anything else. But yeah, it affects it affects the sales prices significantly. Yeah.
Damon Pistulka 40:17
Oh yeah, yeah, for sure. For sure it can swing it a lot in this way and seven figures were the other do that. So one of the things that I think was interesting been on while talking about this, and it’s gonna be fun when we get some of these these actual buyers on in April. But one of the things that’s come up in the, in the recent past, the past couple of years anyway, is the importance for online reputation management.
Because as it as we look into these, these buyers, now, whether it’s an all the way through the board, top to bottom, you know, everything’s on the internet, everything’s on the internet anymore, if you get it if you got, you know, a small manufacturing company, and you got three pissed off employees, for whatever reason could be legitimate could be not, and they get on Glassdoor and they’re bashing the company that could severely change your chances of selling that company.
Andrew Cross 41:18
Yeah, certainly can. That’s reality, it doesn’t matter what business you’re in what industry, it’s, it’s across the board. And a lot of the clients and sellers that we work with are near retirement age, and they’re not really kind of, you know, they started business in a different era.
So, you know, they’re they don’t, you know, a lot of them will ignore some of this stuff, or that kind of stuff, but now can’t be can’t be ignored. It’s not only, you know, it’s an attack on your business. And it’s think about it that way to think about your value, right? Yeah, it goes down. And that’s crisis management. But you’re probably looking at not even being able to sell your company. It’s just another one of those reasons that companies don’t sell. Yeah. And there are people who can help with that stuff.
Damon Pistulka 42:09
Yeah, it’s definitely because I was thinking about that, and how that’s changed so much. Even even the point of you may have never even really needed a website to do a business. But if your website is 1520 years old, and you’re trying to sell your business, it’s just another part of the outside, like if they drove up to a half torn down, junky building is what it equates to.
Andrew Cross 42:34
Yeah, here’s a small, small thing to and I think it makes an impact, right. Got a pretty good sized business going for sale. And the the email for the owner is, you know, Joe seller, you know, Joe business firstname.lastname@example.org. Yeah. Yeah. You know, it’s, you know, it’s not his company name. It’s not his own URL. Yeah. known it. At the end of the day, does it really matter?
He’s making good money, it’s a good business. But, you know, what, you know, the, what the sell is, is a psychological thing to Yes, it is. They haven’t kept up with the technology, you know, and that’s a very, very small little detail. But what else Haven’t they kept up on? Yeah. And that’s, so the buyers, you know, immediately are kind of reluctant. And it’s things they have to fix, you know, after they go in and do it and, and also, that’s telling you something
Damon Pistulka 43:28
about your culture. It is it makes it any of this stuff that we talked about that’s, that’s digital that that even the extent that you’re saying there that the email addresses, if you don’t, you know, if you’ve got a multimillion dollar company, you don’t have your own domain, your own website, and everybody’s got their own email addresses.
And people are using a Gmail, there’s, there’s some wrong, I mean, people and buyers Look at that, because the buyers now if you look at it, the vast majority of buyers have been around since, you know, the internet was prevalent, they started, they grew up on Google, they, they they know that that web, you should have an email address that’s from the company. That’s just the way it should be. And,
Andrew Cross 44:15
you know, a goal is also accessible. Yes, you know, you’re in business, you need to be accessible. Again, that’s, it’s not that it’s hurting you because I you know, I can I can fix that right? I can buy this business and you know, we can get the Euro fix, we can make it so people actually return calls and you don’t get voicemails all the time.
You know, all that can be fixed, but it tells you something about the culture of you know, it, you’ve got to be brutally honest with yourself about that. And, you know, buyers are looking for companies embrace, you know, technology and use those tools, you know, yeah. So, it’s quite important to them, when they see stuff like that, then they, you know, they they feel this as a company that’s falling behind.
Damon Pistulka 44:59
Yeah. It definitely could be. And when you look at it, and you go, you made a good point there. I’ve had people in the in the past past few years now, really start looking at companies, even to the point of you said accessible, the executives being accessible. How does the How does associate and do the social media accounts for the owners? Like, are they on LinkedIn? Do they have a picture on LinkedIn? Does their website have an employee page?
You know, because we’re moving into a time when you know, employees want to be part of a bigger, a bigger mission or an overall in you know, cause, and the companies that understand that small and large, right, it can be a small company, you can have a you can have a three person restoration company, that the owner is active in the community active in, you know, we were out helping the food bank every month we have, you know, those kind of things go are huge. Yeah, for buyers now, because because they see the kind of goodwill effect that spreads throughout employees, the community and for the business in general. Yeah,
Andrew Cross 46:08
I mean, we could go, you know, perfectly good examples. Again, this is about the business seller, you know, the first thing the buyers gonna do is go in and go do their research. Yeah, start online. And there’s such amateur and guessing, you know, the first thing they find is they can’t find the business owner anywhere. Is LinkedIn or he’s on LinkedIn. And he’s got two followers. Yeah, he put a profile up there 10 years ago. Yeah. You know, you know, can’t find him on Facebook can’t find anything on him. And, you know, it’s okay. It doesn’t mean you’re not a successful business. But it’s a successful business for you can hide like that.
Damon Pistulka 46:49
Andrew Cross 46:50
The, you know, because you’ve been there for 25 years, your customers know who you are. And you’re making enough you’re making money. That’s called the lifestyle aspect of it, the seller is happy with what I’m making, but a buyer isn’t going to be satisfied with what you’re making. You know, they’re gonna, they’re gonna want to grow the company, all of them come in with ideas on how to do that.
And, you know, if you can’t be found, you know, then yeah, that’s a cultural problem. Yeah, yeah. It’s a flag. That’s a flag. Yes. But there was very hard also to change that kind of culture in an organization. So yeah, you know, but you’re right to get through a deal and then have to deal with all that stuff. Yeah.
Damon Pistulka 47:34
Yeah. If they’ve if they’ve got that history, it gives people a bit a gives a buyers coming in another opportunity to get to know them the company the culture, like you said about that business before they move in. Because it’s a it’s a huge detractor for somebody if you can’t find any of that. Yeah, sure. Good stuff. Well, Andrew, if if someone was going to be thinking about selling their business, what is the most important thing if you boil it down to one thing? What do you think that they should be concerned with first?
Andrew Cross 48:16
Damon Pistulka 48:18
There you go. That’s a good one. I didn’t know what you’re gonna come up with. That’s a good one. I think you’re right. Yeah, right. Cuz you got strong sales and it’s growing. And they’re probably good.
Andrew Cross 48:30
What’s your process? Is it written down? Who are your people? How good are they? Are they a people the people see people? Yeah, you know, this is what the buyers are going to be looking at to
Andrew Cross 48:44
do we do we look at our you know, our performance do we do earnings reports and checking, you know, monthly quarterly?
Andrew Cross 48:52
did you do last year what did you think you were going to do? What did you do and that this next quarter are all those places all those things in place? Number one, that’s the first thing that the buyers are you know, want to talk about?
Damon Pistulka 49:04
Yeah. That was like 20 seconds massive knowledge dump right there. Listen, they say sure back that up and they should write all those down because I think you hit it about in the right order, you know, and because it is it’s so much about that. Are your sales strong because you can see that easy if they’re strong, they’re moving up and they’re good profitable sales that’s that attract somebody. I think you move down the list the other things that you said there I think that was a great advice.
It’s it’s really cool to you when you walk into these companies that that have their they have things together and people are doing doing their best work because they’re there we got the right tools and the right opportunities to do do that the right people in the right seats, man, it’s the buyers feel that they feel that buzz they feel it in their chest when they come in there and they go man, this place is hot. And then and then you talk about Yeah, but that’s just the start. Yeah, they’ve got they’ve got four things beyond this that, you know, then that buyer gets excited.
Andrew Cross 50:10
Yeah, I mean, it’s a key employee, right, somebody who has been working for you for a long time, you know, they’re going to want to talk to them, you know, the buyers are going to want to hear, you know, and then you can go talk to them. And it’s good to understand what, you know, you may have an idea, this is what I think my business is, what is your key employee think this business is is?
You know, and let them be honest, you know, it’s okay. Yeah, you definitely want to hear that it might be a lot different than what you’d expect. But if Yeah, if you run into that, and you’ve got a key employee, who’s, you know, you can just tell, you know, they’re, they’re passionate about it, you know, things are working, they’ve got the tools they need. They are rewarded, you know, you know, that if they’re satisfied, you know, that that’s a huge bump for a buyer. Yes.
Damon Pistulka 51:02
Yeah, it is. Yeah, it is. Well, that’s been it’s been awesome talking about this. And I’m excited, because we’re kind of kicking that off with you and I talking about this stuff. And then in the in the coming weeks, we’re going to have several business buyers, talking about, you know, from their perspective, what do they look for when they’re buying businesses? And I think, you know, overall, we’re just going to be trying to give people that are selling a business, more information, so they can be working on this earlier, because when it comes time to sell a business, and you haven’t done these things, you’re probably too late.
Andrew Cross 51:36
Yeah, it’s hard to catch up at the end. It’s make you a better business anyways, you know, really, if you’re ready, then be ready to sell. There’s, there’s, you know, it’s looking at every one of those value drivers, talk to the buyers. That’s what they’re looking at, what are the what are the value points they’re looking for? Now, you know, an hour besides the financial, that’s the obvious, but there’s quite a bit more to it. The great tune in with us and talk to some real business buyers.
Damon Pistulka 52:06
Andrew Cross 52:08
I think if you’re a business owner, you’ll learn a lot.
Damon Pistulka 52:10
Yep. Awesome. Well, Andrew, thanks. Thanks for stopping by today. We will be back again. Today’s Thursday. Yes, it is. It’s Thursday. So next week, we will be back and have some more interesting people talking about life and business. Thanks a lot. You bet. See y’all later