Armando (0:00 – 1:42)
Hello founder, you’ve built a successful business and now it’s time to think about that once-in-a-lifetime exit from your business. You’ve come to the right place. Here, you will hear business exit professionals involved in the buying and selling of companies talk about what you should know before you exit.
If you’ve never sold a business before, this podcast can be super helpful to you. I’m Armando, host of the Founder’s Guidepost. Enjoy.
If you like this information, please subscribe and share. Jim, thank you so much for this time this afternoon. Jim Afinowich with IBG Fox & Fin.
And what we’d like to do in this conversation, Jim, is we’ll just have a conversation about a business owner who say is age 50 and above, maybe even age 40 and above, but more likely probably age 50 and above, had this one company for the last 25 years, built some significant value the company is now worth millions of dollars. And now that business owner is thinking about exiting, about succession, somehow he or she realizes that it’s time for them to begin to not just think about letting go of the business, but how do you actually do it? And since this person has never sold a business before, they don’t know what they don’t know.
They don’t know who to talk with. They don’t even know where to begin. So I realize this, of course, is a space that you swim in every single day and you’ve helped many, many people just like this, navigate this to a successful exit and helping them get on to the next stage of their life.
So let me just turn it over to you. And when you think about that 50-year-old business owner, where do you even begin?
Jim (1:43 – 6:57)
You know, the first thing you’re right, that most business owners know nothing about the sale of a company, what the process is. Another thing that they don’t really understand is the value of their business. You know, I have found business owners can tell you exactly how much is in their stock portfolio, what their real estate is worth, how much their collector car went up in value.
But when they guess the value of the business, they’re almost always wrong. So it’s a matter to make a decision of what you’re going to do. This is one of the biggest assets of most entrepreneurs portfolio, if you will.
A lot of times it’s 80% of their net worth. So they need to do several things. And, you know, one is just get educated by the process.
Now you can read books, you can look at YouTube videos, talk to your financial advisors. You know, it’s likely that you’ve seen other clients go through as the sale. In our firm, what we do is we just sit down, we schedule 90 minutes for the first meeting, that’s not something we charge for.
And we talk about the process, what’s involved. And what I find consistently is that people besides not understanding the process, don’t realize the time that’s involved with it too. They say, well, you know, I want to be retired in six months.
Well, in your business, the average sale is going to take 12 months, and the buyer is going to want you to stay on for one to two years. So if you start today, it may be a two to three year process. That changes entirely.
You know, when you look at what the timing of a deal is. The other couple other things is just like selling a house. Before you go to market, you put a fresh coat of paint on it, you know, you plant some fresh flowers in the garden.
You know, you increase the curb appeal. Yeah, well, you do that with a business as well. And I don’t literally mean a coat of paint.
But if you have compiled financial statements, you might want to think about getting reviewed or audited statements before you go to market, because that’s going to be a help. So get an idea of the process, talk to some experts, learn that and then try and understand the real value of your business. Talk to your financial advisor.
You know, you may be ready to retire from not wanting to work in that business anymore, but is that business going to generate enough income for you to continue your lifestyle the way it is? So it’s basically what you’re doing when you’re selling a business, is you’re taking one asset that’s very illiquid, and the value is very volatile, and you’re buying another asset with it. So if I’m selling a stock that I have, I’m going to go to my financial advisor and say, okay, I want to sell this asset, I’m going to replace it with another one.
When they are selling that business asset, they should know what they’re going to replace it with, what they’re going to have after tax and what their return is. So, you know, going back to education is the main thing, learn about the process, then give yourself more time than you think it should take, because it probably will be more time than you think. And then look at the business from the buyer’s point of view.
If you looked at your business, knowing what you know about it, and said, well, if I were buying this business, where would the problems be? Well, the problem is the owner does 90% of the sales. That’s a problem with marketability.
So that may be something you need to clean up. You know, you run a business, even when you’re going to sell it, you should run it like you’re never going to sell it. You want to run it like you’re going to sell it tomorrow, but you also want to run it like you’re never going to sell it.
You have to look at the business as a living, breathing entity of its own, and do what’s right for the business regardless of who the caretaker or shareholder of that asset is. So a couple rambling things there, I’ll stop and let you jump in here.
Armando (6:57 – 8:33)
Yeah, so I heard you say quite a few things. One, that a review or an audit might be helpful or can or is helpful in that maybe that gives additional validation to the numbers that you’re self-reporting on the financial of the business. I heard you also say, start with plenty of lead time, because it will take longer than you probably think it will take.
I heard you also say that take a step out of the business as if it weren’t yours, how would you expect that business to run? And if there’s a key person, typically that owner, to somehow get some distance between the owner doing the day-to-day activities and letting the business run by itself as its own separate standalone entity. And that, of course, is easier said than done.
It might sound like a few breaths, a few sentences of words, but I can see how that could take months, if not maybe even years, to really get that to happen. And let me ask you, Jim, the mental, the mindset of the person, of the owner of that business, he or she’s had this, you know, 20-25 years or so, and this in effect has become their other child. Even if they have kids, this is another one of their children, so to speak, and they’ve maybe nurtured it along that way, but now they have to mentally come to the place where they are okay with letting it go.
Jim (8:34 – 8:43)
Yep, it is like putting your child up for adoption. It’s time to kick the kid out of the house, but you want to make sure they have a good home.
Armando (8:43 – 9:05)
Right, and we wrestle with that here with our clients as well, and you said talk to your advisor because we want to make sure that mentally they’re in the right place to make that decision, make that next step. How do you help them? How do you help them navigate that part of just getting okay with it before you begin to do any of the of the legwork required?
Jim (9:05 – 10:00)
No, one very simple thing I ask is, if we sell your business tomorrow, what are you going to do the day after? You know, if they cannot see what they are going to do in the next chapter of their life, they’re probably not going to sell their business. They’re going to waste a bunch of time.
They’re going to look at all options, but look at motivation. You know, sometimes we say on a Friday afternoon, you call a business owner and they all want to sell because they had a terrible week. I don’t want to deal with this anymore.
Call them on Monday morning when they’re all rested and they don’t want to sell. So, are you making a Friday decision? And if your response is, if their response to my question, what are you going to do if they say they’re going to play golf?
You can’t play golf every day.
Armando (10:00 – 10:11)
Yeah, so I am curious, when you’ve asked that question, what is the best answer you’ve heard about what will you do tomorrow if you don’t have your business anymore?
Jim (10:12 – 10:39)
I’m going to start another business. You know, I’ve always I like starting businesses. That 50-year-old, you know, sometimes I remember one gentleman, he’s 42 years old.
He said, well, I’m going to retire. Well, this business is worth about two million dollars. Now, I know his lifestyle after two million dollars, then after tax isn’t enough money for a 42-year-old never to work again.
[Speaker 3] (10:39 – 10:40)
Right, right.
Jim (10:40 – 10:56)
You know, that’s now sit down. That’s the kind of guy that comes to you and says, hey, I want you to invest the million and a half I have left over and I need 200,000 a year for the next 40 years. Can you do that for me?
Right. No, no, I can’t.
Armando (10:58 – 11:09)
Right, yeah. So, we all would have to help them talk about the lifestyle and what that’s going to look like and then quantify and see how can those numbers make sense or can they?
Jim (11:09 – 11:24)
Do they make sense? Yeah, right. The other thing is looking in the mirror and being honest with yourself.
A lot of people, their identity is their business.
[Speaker 3] (11:24 – 11:24)
Yeah.
Jim (11:25 – 11:30)
You know, that that is a difficult thing. You’re changing your identity.
[Speaker 3] (11:31 – 11:31)
Right.
Jim (11:31 – 12:08)
Who are you going to be? Who are your friends? What are you going to do?
A lot of people don’t think about that. So, you know, what’s, yes, there’s a transition but you can only go fishing so many times and only play golf so much. I remember one gentleman sold his company, came back six months later and said, I got to buy a business.
You know, I thought I was going to play golf. I can’t play golf every day. And last week my wife said to me, I married you for life but not lunch every day.
Please get out of the house.
Armando (12:11 – 12:24)
At least they weren’t just your family. Yeah, at least they were communicating about it rather than, you know, butting heads and then end up in a divorce later. So, there was communication there.
That’s a good thing. Yeah.
Jim (12:25 – 12:34)
So, communicate with your family. Exactly. What, you know, what are you going to do?
What is everybody going to do? Make sure you’re on the same page.
Armando (12:35 – 13:04)
And so, the audit to me makes me think getting financials clean and organized, maybe getting cost and profit centers clearly defined with all the metrics in place that need to be. And that to me sounds like, you know, an audit firm or a good financial person can help get that done. But that’s only one component of getting that business ready for sale.
What other pieces need to happen that are not maybe as black and white as that?
Jim (13:05 – 15:47)
You know, we’ve already talked about management. You know, how deep is your management bench? Is the business entirely dependent upon you?
You know, one time I had a meeting with a to the business. And he said he typically works six and a half, seven days a week, hasn’t had a vacation in seven years. He’s really taking care of this business.
And when the buyer left, I said, are you trying to talk him out of buying the business? No, he doesn’t want to do that. Now, this guy looked at another business a couple of weeks ago.
The owner said, I work about 20 hours a week, but I got good manager in place and I take about three months off a year. Both of them made the same amount of money. Which job do you want as a buyer?
So make the business appealing. Make sure that everything is up to date. Occasionally, I have people that said they have a lot of assets.
They got a fleet of trucks and they replace their trucks typically every three or four years. And now they say, well, you know, I’m going to sell in a couple of years. I don’t want to invest all that money.
So they start putting off capital expenditures because they think, oh, I’m going to save that money. Well, buyers just going to come in and look at it and say, you know, for the last 20 years, you replaced your trucks every three years. Now you haven’t done it in six years.
So I’m going to take the cost of replacing that fleet off of the purchase price. So, but if I’m a buyer and the seller said, oh yeah, all my equipment is up to date. It’s new.
There’s nothing you have to worry about. That’s a lot more appealing. Are there growth opportunities for the business?
Most buyers plan on looking at a business. Is the business positioned for growth? Do you have key employees in the business?
It’s very common for a buyer to say, all right, well, I need a non-solicitation agreement, a confidentiality agreement, a non-compete agreement with key management. You don’t want to go to your key management and say, hey, I’ve got a deal to sell this business. I’m going to make a bunch of money and it’s contingent upon you signing these documents.
You know, you want to get those proper employee agreements in place to begin with.
Armando (15:49 – 16:02)
What are some of the surprises that the first time business seller, you know, when you’re talking with them, what are some of the surprises that that are big aha moments for them that they just didn’t think about?
Jim (16:04 – 18:25)
A couple of things that I’ve mentioned already, the amount of time, you know, what’s the value? Everybody hears stories about value. You know, I hear my business sells for 10 times gross revenue.
Right. It’s based upon net profit. Sometimes that’s a surprise to them.
The amount of due diligence, you know, a multimillion dollar business average, we’re going to spend 90 days in due diligence. That is onerous. It takes a lot of time.
They don’t understand that process. So those surprises kill deals. And so you want to look at your business and as a buyer would, you know, do you have, what have you done for financing in the past?
Okay. Every time you’ve done financing of any kind, the lenders filed a UCC lien against the business. Equipment rental companies, lenders, customers are really good about filing the lien.
They’re very bad about removing the lien, even when it’s paid off. We had a deal closed a couple weeks ago, came back with a UCC lien and judgment search. And there were eight liens against the business.
The owner said, I don’t know any money. How can they have a lien? Oh, well, yeah, I did borrow money from them three years ago.
You know, get that cleaned up. Had another one where I was surprised there were six judgments against this individual. And that looks really, really bad.
You know, what kind of person am I dealing with that’s got all of it? This bad credit and multiple judgments and collection agencies. And I went back to my client very sheepishly and said, you know, there’s a little problem here.
And well, it turned out it wasn’t my client. It was someone with exactly the same name.
[Speaker 3] (18:26 – 18:26)
Oh, wow.
Jim (18:27 – 20:33)
And so there had to be some cleanup with that. You know, if you’ve got a blemish on your credit report, you know, that doesn’t get erased overnight. There’s a lot of mistakes that happen with that.
So those kind of surprises kill a deal. You know, what a buyer is going to look at it more in more depth a lot of times than the owner is. And sometimes that’s awakening, you know, while your business owner looks at it and says, I’ve got a 42% gross margin.
The buyer comes in and says, OK, you’ve got 10 different product lines. I want the gross margin by product line. Your blended gross margin is 42%.
And they dig into it and say, you know, this particular product line over here, your gross margin is 6%. You’re not making any money with that. And the owner is looking at a blended rate.
So what are the components that make up those numbers? It is typical for a professional buyer in today’s market to do a quality of earnings report, hire an outside accounting firm and committed to a quality of Q of E, quality of earnings report. We’re suggesting sometimes to our clients now that they do that before they go to market.
What’s that going to look like? Is there a problem there that we need to take care of? Buyers say, well, what contracts do you have?
Oh, I’ve got contracts with all my clients. Well, you dig into it and found out what you did when you started, but you never renewed them. So 60% of the people you have contracts with are expired.
Now you’ve got to go get all of those done at once to close a sale. Run the business like you’re going to own it forever and make sure all of those things are in place.
Armando (20:35 – 20:58)
So when a business owner comes to you and again, they’ve seen nobody else, they’ve never sold a business before and maybe you paint this picture of what needs to get done. Are you helping them to do some of that? Are you connecting with people who can help them get some of that cleanup done?
What is your role in that process?
Jim (20:58 – 22:33)
We do not do consulting. We will look at their business and say, here’s where we think the value range is and here are your challenges in selling it. And here are some things that you can do to increase that value.
So you need to go out and hire a CFO. You get a wonderful bookkeeper, but it’s time to get a real CFO. So we’re not helping them find that person.
We’ll look at it and say, your waste is 5.6% and the industry average is 3.1%. Your waste is higher than what it should be. Figure it out or get a manufacturing consultant that can come in and dig into that with you. M&A is a team sport.
You need a good financial planner. You need a good accountant, good tax accountant, a good attorney, obviously a good broker. That’s my bias here.
But all of these people working together as a team and you’ve got to make sure you have the right team members as well. I’ll say, do you have a good attorney? Oh, I’ve got a great attorney.
He handled our incorporation. He handled my divorce. He handled my DWI.
He’s a great guy. Well, he’s not the guy to handle a $20 million transaction.
Armando (22:34 – 22:53)
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Jim (22:54 – 23:00)
Make sure you’ve got the right team members in place for this job.
Armando (23:01 – 23:41)
We will often tell the client that we want to have an expert in every corner. To your point, the attorney might have been fantastic at some of those more general type things. But for this once in a lifetime sale worth multi-millions of dollars and really worth helping to solidify the future of that family from the point of sale to the death of the founder and maybe even beyond for future generations of income for that family, you’ve got to get a specialist who really understands that space.
Otherwise, you’re short-changing yourself.
Jim (23:42 – 24:41)
And then look at what you want to do down the road. What are you going to do with that money? Are you going to give some of it to charity?
Well, maybe you set up a charitable remainder trust to begin with. You’re going to give it to your kids, your grandkids. Well, maybe you give them stock and the company to begin with.
So look at what the goal is. Where’s the money going to go? And we can sit down with their financial planner, their accountant, and let’s negotiate the deal toward what you want in the end.
Now, that advanced planning is really, really helpful. And a lot of what that’s doing is just taking money out of the government’s pocket and keeping it in the entrepreneur’s pocket. And I don’t know hardly anybody that would argue with me about that being a worthwhile endeavor.
Armando (24:42 – 25:23)
Right, right. Yeah, and I’ve spoken with some business owners who are adamant they don’t want to incur any cost for someone to help themselves. They can figure it out.
They can do it on their own. They don’t need an investment banker or a broker or appraiser. They can hire the lawyer.
And maybe there, well, I imagine there are some who are capable of that. But for anyone who does something once, there’s no way you’re going to be great at it or be an expert at it. That’s just not how it works.
So for that prospective company owner who you’re talking with who might come and have that mindset, what might you say to that business owner?
Jim (25:24 – 28:46)
You know, a lot of them do. Business owners are used to doing things on their own. You know, an entrepreneur that owns a multi-million dollar business got there by doing deals himself.
But what’s the old saying for the lawyer? If you have yourself for a client, you have a fool for a client. It is an extremely emotional process.
And that’s one surprise to people, too, is they don’t realize how tied up they are in their business. And so having a third party takes the emotion out of it. It’s easier to have a poker face if you’re playing with someone else’s money than your own.
But typically, besides lack of knowledge, in today’s market, they don’t have the connections and know where to go to get the ideal buyer. What we see a lot today are buyers reaching out to owners directly. A lot of private equity groups do that and they negotiate a deal and the buyer thinks it’s a fair or the seller thinks it’s a very good deal.
Then they don’t realize it because they don’t have more than one offer to compare it to. You know, they and they’re leaving money on the table. You know, I’ll give you a quick example of that.
Gentleman had been approached by a buyer, negotiated with that buyer for eight months. And at the end of the eight months, he had got him up to six million dollars in price. And then he came and then he came to me and said, I’m about to sign this letter of attempt.
My lawyer said I should talk to you first. I said, OK, call the buyer. Tell him you’re hiring a broker to represent you.
There’s the largest transaction in your life. You want to be professionally represented and tell him I’ll call him in a couple of weeks when I get my arms around the deal. He called the buyer and said, hey, you know, this is what I’m doing.
And he said, oh, God, don’t hire a broker. They just delay things and screw it up. You know, we’re a good fit.
We’ve got eight months into this. And he said, no, no, I want to hire the broker. Twelve hours later, the buyer called him back and said, listen, if you just keep the broker out of this, you can raise that from six to eight million dollars.
And so the seller called me and said, you know, it took me eight months to get him to six million dollars in 24 hours. You got two million dollars more for me. And so he became a client.
We went to market. We sold it to another buyer for ten million dollars. Now, the reason he’d go from six to eight is he wanted to keep the competition away.
He was still getting the deal. Now, the seller was happy with six million dollars. He was ready to do that.
And if he hadn’t become a client, he wouldn’t have realized that he was about to leave four million dollars on the table. So, you know, having those buyers, having competition, not working with one person, that’s how you know you maximize the value.
Armando (28:49 – 29:10)
And that makes sense. That’s a good example. I’m glad you brought that up.
So, you know, for that particular seller who received a four million dollar increase, which is two thirds of the original six million dollar price, the fee that was paid to you meant he was still way ahead than he otherwise would have been. Oh, absolutely.
Jim (29:11 – 31:33)
And it isn’t people look at it as a cost. Well, what’s the cost of your fee? Well, I can tell you that on average, only 25 percent of the businesses that go on the market actually sell.
In our firm, we run about 86 percent close rate. Hiring a broker is kind of like getting deal insurance. You’re going to make sure that it gets done, but it isn’t always just the price.
What are the terms? What are the reps and warranties? How is the fit of the buyer with your company?
So there’s a lot of things to consider in addition to what the raw dollars are. I’ll give you another example. A client that we had worked with came to us and said, we’ve signed a letter of intent to buy this business.
We want you to come in and get it across the finish line. There’s going to be four or five months worth of work. We’ve already got the deal signed.
And we said, OK, we’re happy to do that. He said, I want to do it on a fixed fee basis. And given the scope of work, we told him it would be $150,000.
And he said, $150,000? Oh, I’ve already got the letter of intent signed. And we said, you know that there’s more to it.
That’s the start of the process, not the end of it. That’s why you came to us. And he said, yeah, you’re right.
And we did the deal for him. And toward the end, we came back and said, here’s a way to restructure the deal. Doesn’t, isn’t going to change with the buyer.
It’s not going to change that. We just move this piece here and that piece there and this piece here. We do this.
We trade this. And he ended up saving $750,000 in taxes by our suggestion. Now, we’ve closed 1,100 deals.
I’ve seen a lot of deals. What first, he bought at the $150,000 fee. In the end, you saved $750,000.
So it’s an investment, not an expense, is the way I look at it.
Armando (31:34 – 32:02)
Yeah, he certainly came out ahead. So you said broker. And a lot of these terms for the founder of that business, who’s never sold a company before or sold his own business before or her own business, a broker, an investment banker, what should, I guess, what is the distinction for them as to where they should select a firm like yours or select you versus someone who does something a little bit different?
Jim (32:03 – 34:44)
There are really three levels of people that sell businesses in simplistic terms. There’s what I’d call a main street business broker. And they’re selling restaurants and gas stations and liquor stores and retail businesses and businesses that are mom and pop where someone’s buying themselves a job.
And there are typically deals under a couple million dollars in transaction value. On the opposite end of the spectrum, you have Wall Street investment banking firms. And they don’t like doing deals under 250 million.
No, that’s a small deal for them. My firm is kind of in the middle of both of those. We don’t sell main street businesses.
You know, most of what we’re doing is going to be priced between 5 million and 100, 150 million. So that we’re, and there’s debate in the industry about terms. So mid market, that could be an investment banker, an M&A advisor, a broker, lower, you know, main street, that’s a business broker.
You know, they’re all terms. And in my view, some of it’s ego driven. You know, in the end, we’re all salesmen.
You know, people don’t like to say that I’m a business broker. Yeah, that’s fine. I just happen to sell big businesses.
So look for someone that sells a business similar in size to what you sell, what you are selling. If you’ve got a $20 million business, you don’t want to go to a company whose average sale is a half a million dollars. And you got a $20 million business, you don’t want to go to a Wall Street investment banking firm, because they’re going to have a half million dollar minimum fee.
So find the right one. And what I do in my firm, when I will meet with any business owner, look at it and say, here’s what I think your business is worth, here are your challenges. By the way, I’m not the broker to sell it.
But I will refer you to the right broker to help you. So I try and be a resource for clients, because I, I’ve gotten more referrals from people I’ve turned away, who said, Hey, he gave me good information. And he sent me someplace else because it was in my best interest.
So find someone that will do that.
Armando (34:45 – 34:55)
Yes, as you said, the five mil to about 150 mil range. And below that, there are are you called a Main Street more, more strictly broker?
Jim (34:56 – 35:01)
Is that is that what they’re business brought their business broker?
Armando (35:01 – 35:01)
Yeah.
Jim (35:02 – 35:41)
Here’s a distinction to an Arizona, you need a real estate license to sell businesses. So everybody that’s doing any brokering has a real estate license. Larger transactions often become securities transactions.
And for that, you need a securities license. And we have those. So if you’ve got a business that’s, you know, worth $10 million or more, if the broker you go to doesn’t have a securities license, I’d be scared.
So, finding, finding the right size sock to go in the right size shoe.
Armando (35:44 – 36:12)
Well, it sounds like there’s a lot to it also sounds like you’ve done lots and lots and lots of these types of deals. What about the owner of the company that that maybe isn’t a unique niche? Is the process the same?
Is the, you mentioned having a list of buyers as well, or knowing how to find the buyers? Can you talk about both of those the niche and then the potential buyers?
Jim (36:13 – 38:09)
The niche, first of all, every business has many common denominators. The niche is the product that there are service that they’re selling. But every business has to manage people, you have to manage money needs to be more coming in than going out.
Hopefully, you provide a product or service the public wants at a competitive price. Valuation principles apply to every kind of business. So it doesn’t make any difference if you’re selling yellow widgets or green popcorn.
Now we learn those businesses, you know, within our firm, we have certain people that are experts in particular areas. People will ask us, well, are you an expert at this? What we’re experts at is the process of valuing your business, finding multiple buyers and negotiating it and getting it closed.
So that that niche, sometimes there’s more learning curve with that. We spend a lot of money on resources. Frankly, I’ll go into my research manager someday and say, hey, I’ve got a meeting next week with this kind of company, you got five days to make me an expert on that industry.
And then I’ll spend hours and hours studying industry reports and industry research and learning about it. And then I can apply the same business principles to what I’ve learned about that business. And if it’s really niche, we sometimes will hire an expert in the industry to work with us on the transaction.
So and there was a second question I talked way too much about the first. So what was the second one?
Armando (38:09 – 38:12)
The buyers, how do you find the prospective buyers?
Jim (38:13 – 39:41)
We, so depending on the broker, if you’re a main street business broker selling smaller deals, you run ads on the internet and people respond to ads. Half the time they buy some a different business than what they called on. With a mid market business like this, we do it entirely by research.
We have a huge database that we’ve built over the years, but everything, every deal we sit down and say, who are the most likely buyers for this company? We go to half a dozen investment conferences a year all over the country, meet with hundreds of private equity groups every year. What are you looking for?
That’s part of the advantage of having offices across the country and have done this for over 30 years. We have a lot of connections and so do a lot of other brokers. We’re not the only ones, but we will pull on our connections and say, you know, call this private equity group and say, I know that you are interested in an HVAC company.
Are you still interested in that? You are? Okay, who is?
They’ll refer us to other people, but most of it’s done by research and then just reaching out to those people. Wow.
Armando (39:41 – 40:10)
It definitely sounds like a process and I can see why you say 12 months of due diligence or maybe a couple of years to get things where they need to be to really have a successful exit. What have we not touched on, Jim, in this conversation that that first meeting that you covered with the prospective new client of yours who has that company, what have we not touched on that you typically talk about in that first meeting?
Jim (40:11 – 41:53)
Going back to financials, a business is going to sell for a multiple of earnings. Now people file tax returns and they want to show as little income as they can to pay as little tax as they can. When you sell the business, you want to show as much as you can and legitimately.
And so a lot of times, you know, business owners will write things off on their business that are legitimate write-offs, but maybe not totally necessary for the business. Stop doing that. You know, the example I’ll give them is, okay, for every one of those gray dollars, let’s call them gray dollars, you’re going to save yourself 35 cents in tax, right?
Yep. 35 cents on every dollar. For my daughter’s college tuition, for my son’s company vehicle who doesn’t work in the company, for all of that, a third of that’s being paid with tax dollars.
And I’ll say, okay, so for every gray dollar, you save 35 cents. We’re going to sell your business for four to five times earnings. So for every 35 cents you save, you’re giving up four to five dollars in sale price.
Now stop it. Clean that stuff up, you know, and if we’re a year or two out, we can do that. You know, those little things can add a whole lot to the value of the business.
So, you know, reviewing financial statements, what costs are necessary and what can we eliminate fairly?
Armando (41:54 – 42:28)
Yeah. Yeah. That makes sense.
And that makes me think about when the companies are starting out and doing exactly that, talking to their tax CPA about minimizing taxes, but then they try to take those tax returns to the banker to get a loan. And the bank says, you’re not showing enough profit. You don’t have enough cash flow.
So same thing. They have to go back, maybe take some of those gray areas and just get them out of the business entirely to show the banker what the banker wants to see and be motivated to lend to the company.
Jim (42:29 – 42:56)
Yep. That’s what the banker needs to see. You know, you have certain requirements and you’ve got to be able to show that debt service.
A buyer is no different than a bank. You know, they’re looking at what are they going to pay? What am I going to have for cash flow to pay my debt service and give me a return on my investment?
And, you know, if you’re saying, oh, it’s making a lot more than it shows, just trust me. Trust me. That’s not a very prudent buyer.
Armando (42:57 – 43:03)
No. And if you go through the review or the audit process, trust me, does not go in those documents.
Jim (43:04 – 44:27)
No, there isn’t. This is what he said. And we really believe section.
So that kind of financial stuff and getting it ready. The other one last thing I would talk about that is very important, and most owners know this and say this, but very important is maintaining confidentiality. You do not want your employees, your customers or your vendors knowing your business is for sale.
Employees today are the backbone of a business. They’re hard to get, but employees assume the worst. They hear the business is being sold.
Boy, I’m going to lose my job when someone new comes in. So I’m going to quit and go get another job before I lose this one. Well, who’s likely to get the best jobs first?
Your best employees. So you don’t and you don’t want to make your employees nervous. You don’t want to lose them.
A competitor. So you you’re a construction company that bids. And, you know, you and I are competitors and we’re both bidding on the same project.
And I say, well, you know, I’m going to just build out as three years. I’m going to be here. Did you know Armando selling his business?
Oh, once you sign a contract with him, he’s going to be gone in any way.
[Speaker 4] (44:27 – 44:28)
Yeah.
Jim (44:28 – 44:34)
Oh, that that isn’t good. So confidentiality is very important.
Armando (44:37 – 45:09)
And when you’re going through the process that you go through to get that business ready for sale or help the business actually go through the sale, I should say, how how do you keep the employees from running to someplace else? I guess when you’re doing your process, you have to really understand the company and the business and and know enough about it to be able to help sell it, I guess, without stirring up the curiosity of employees in that process.
Jim (45:09 – 46:06)
By frankly, keeping the employees in the dark. You don’t want them to know. And, you know, we do a lot of counseling about if an employee comes to you and asks you if you’re selling what you say and what you do.
But we have almost all meetings outside of the business. We have it in our office. Sometimes we have clients set up new email addresses for correspondents so that everything that is going back and forth isn’t going to accompany email that somebody else’s is going to see.
You know, the secretary comes in and checks your email for you. And there’s this thing from Fox and Finn that says, you know, here’s a copy of your contract. So you have to be very cautious about how you sell the business and to keep that confidentiality.
Armando (46:08 – 46:27)
That makes a lot of sense. Well, Jen, this has been extremely beneficial to hear you talk about, you know, just the big picture. What about a success story that you’re pretty proud of that you helped to that owner have that exit?
Does a quick success story come to mind?
Jim (46:29 – 50:15)
Yeah, I do. This is my best story ever, but I will tell you about it. The gentleman, and I can talk about this because it was a public company.
A lot of times we can’t talk about the sales that we do for the confidentiality reason we talked about. But this absolute gentleman, he was a salesman for, I think it was Xerox. He decided he wanted to own his own business.
So he came back to the valley. He opened a little bakery in a strip center. And he went in at 3 a.m. and he baked the bread. And he did healthy bread, organic bread, done GMO. And his wife and his daughter came in and worked the counter during the day. And he slept during the day and he worked at night.
And the business grew and grew and grew and did very well. He met with us and said, can you get me $20 million for my business? And we said, no, not today.
But if you do a few things, I think we can get more for it than that. And we spent 18 months where he got audited financial statements, hired a CFO, took care of his waste, I mean, addressed everything in the business. Now, this was a time when organic bread sales were going through the roof and white bread sales were going, you know, dropping 10% a year.
We went to market, we had multiple offers for the business. We found that the buyer, the buyer was the second largest baker in the United States. And they were not doing a good job with organics.
They were losing market share and they needed an organic answer. And our company had that. And they were afraid of the number one, their biggest competitor buying the company.
So that was a case where they bought not just a multiple of earnings, but they bought to get market share. And they bought as a defensive move against their competition. We ended up selling the company for $120 million.
That was 17 years after the owner was working all night baking his own bread. And just, you know, did a great job. We met with his accountant, we said, you need audited financial statements.
His accountant said, yeah, you ought to listen to these guys. But it made a difference selling to a public company. So that’s my best story ever.
But, you know, I just love the story about the entrepreneur and he gave a lot of money to charity and just an absolute great guy, because he always treated people well. And that showed when, you know, the culture of the company was something that the buyer liked besides the other reasons. But that’s a reason for going to market without a price with getting multiple buyers.
You know, when you put a price on it, all you’re doing is putting a cap on it. And we thought we were going to sell it for a lot less money than we did. But until we started getting bids, and then finally realized the reason for buying was different than, you know, a lot of than a traditional sale.
So that’s my best story ever.
Armando (50:16 – 50:23)
Is it is it sounds like it’s normal for you to go to market without a price tag on that business?
Jim (50:23 – 51:52)
Yes, we do that all the time. Main Street brokerage, you always have a price on it. Mid market, we never do.
We absolutely never do. Because we can estimate value based upon comps. But in this case, you know, we thought that business was going to sell for 45 to 50 million dollars when we went to market.
And we told him that he said, that’s a lot more than the 20 I wanted. Giddy up, let’s go. Because of those extra reasons, they ended up paying more than we ever imagined.
Value is different to different people. We had a deal we closed a year ago, there were 12 offers on the business, and the range of offer was 12 to 18 million. Now the owner was when he got the first offer of 12 million said, that’s great.
I’m willing to sell for that. We said, well, wait a minute, there’s more. And every one of those buyers knew that they had the right price, because that’s what it was worth to them.
Buyer number one, it was worth 12 million dollars. To buyer number 12, it was worth 18 million dollars. We have a saying in our office, one buyer is no buyer.
So we always go to market without a price.
Armando (51:52 – 52:01)
Wow. And that 18 mil was six mil, 50% more than the 12 million offer. That’s a big swing for that that owner of the business.
Jim (52:02 – 52:29)
Yep, it is. And you know, the 18 million dollar offer, they thought that was a fair price. And the 12 million dollar offer, they thought that was a fair price.
You know, the old saying, beauty is in the eye of the beholder. So, you know, find enough buyers and play them against each other in an auction environment, and see who sees the most beauty and is willing to pay for it.
Armando (52:31 – 52:56)
Wow. Well, very, very helpful, Jim. Thank you so much.
I’m hoping that this will be viewed by that seller, potential seller of the business who doesn’t know where to begin, and that they’ll have learned a lot just from hearing your words and your experience in this space. And Jim, to reach you, what number should someone call to reach you if they have questions and would like to have a conversation with you?
Jim (52:56 – 53:34)
Happy to answer any questions. We don’t charge anything for doing that. We have meetings and kind of go through this.
Best number, my direct line is 480-327-6610. Perfect. I would also invite if you’ve got a client that’s, you know, interested in exploring, come to the meeting with them, you know, call me and, you know, you need to be involved too.
And I’m more than happy to have you and them together and just walk through the process.
Armando (53:34 – 54:01)
Good. Thank you. I’m glad you said that because part of our challenge is once that sale is gone, then what does the future look like for the owner of that business and the spouse and the family?
And we walk them through a process ourselves so we can walk down that path as if the business is gone so they can see it and together come to a consensus on how they want to live the rest of their lives.
Jim (54:02 – 54:34)
So, you will probably see- They have to do that. If we can do that as a team to begin with, it creates a better result in the end. We can structure the deal around what their needs are.
And there’s, I could talk for another hour about how to do that. But, you know, every case is different. But again, that’s a team sport.
You know what they need. You know what their risk tolerance is. You know, we can tell you how much money you’re going to have to play with and you tell us how you want to get it, you know.
Armando (54:35 – 55:16)
Okay. Excellent. Well, Jim, again, thank you so much.
Really appreciate the conversation. And I’m sure we’ll be talking again at some point soon. All right.
Thank you, Armando. All right. Have a great afternoon.
You too. Goodbye. Bye now.
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