Armando (0:00 – 0:47)
Hi, I’m Armand Roman, host of the Founder’s Guidepost. You’ve built your business over decades, and now it’s time to think about that once-in-a-lifetime exit. You’ve come to the right place.
Here, you will hear business exit professionals talk about what you should know before exit. Besides hosting the Founder’s Guidepost, I’m CEO and founder of Axiom Founder’s Family Office, working with founders to help preserve their American success story. And it all begins with a founder stress test.
We also host the Scottsdale Founder’s Forum for the founder considering exiting in the next 36 months. Here’s to your hard work and to your American success story. Enjoy.
Hi, Armand Roman with the Founder’s Guidepost podcast here with Bradley Scott of Score Commercial. Brad, how are you doing today?
Brad (0:48 – 0:49)
I’m doing awesome, Armando. How are you?
Armando (0:50 – 1:06)
I’m doing great, thanks. Hey, I’m excited to have this conversation with you, Brad. Your name is Brad or Bradley Scott, and I’m glad that you also go by Tiny because that I will remember because you’re anything but tiny.
Brad (1:07 – 1:31)
That is true. A colleague and former boss of mine loved ironic nicknames, and it’s just something a little to remember me by. If the cowboy hat wasn’t enough, they’re like, oh, why is the name of Tiny?
I find it as a term of endearment. I’ll go by any of those names.
Armando (1:33 – 2:17)
Well, good. Well, you have obviously, you’re a business broker here in the Phoenix, Arizona marketplace. And I am very glad to hear that your background is much more than commercial real estate, which forces the licensing that is required to do that in Arizona.
But prior to that, I would like you to touch a little bit on your background and how that helps you as a business broker here in the Phoenix metro area, because your background is unique in the legal space, in the merger acquisition space, corporate lawyer space. I’ll ask you to talk about that a little bit as you introduce yourself more here, and then we’ll have a conversation. Perfect.
Brad (2:17 – 3:21)
No, that works. So again, I know we’ve talked about it a little bit. I’m from Arizona.
I’m a native Arizonan. I lived in northern Arizona, Flagstaff and Payson growing up. So the cowboy hat is remnants of those roots.
Obviously, as I’ve told you, real cowboys put me to shame, it’s more of a, this is where I’m from kind of thing. And this is how I relate to the northern Arizona. But been here all my life.
And yeah, I practiced law. I still do a little bit of that now. But I practiced for about seven years.
And then about three, just over three years ago, I jumped into the brokerage realm. And so, also, as we’ve talked to that legal background was, I did a variety of M&A stuff, corporate formation, structuring, and just compliance with a variety of business things.
Armando (3:21 – 4:04)
Excellent, excellent. And so Brad, we have an event called the Scottsdale Founders Forum, which is all about the exit of the business. Obviously, you as a business broker, that is the exit and the way many people will actually exit their business.
So let’s have a conversation for that business owner who’s never sold their company before. They just don’t know how this works. And they’re having that first conversation with you.
And they’re trying to get their arms around, if they hire you, what does that look like? What is the timeline? What is the process?
How are you going to help them? And why really should they have that conversation with you as they’re thinking about that exit from their business?
Brad (4:05 – 6:04)
Well, perfect, perfect. Obviously, that’s a loaded question and gives us a lot of things to talk about. So I’ll kind of start that off.
Feel free to interject if there’s something particularly interesting and we can pause on that. But I think the first part is, people first come to me, they’re looking to sell their business. I think other than any houses that they’ve owned during their lives, that those are historically their biggest assets or things that they sold in life.
The second is going to be a business, right? You have a bunch of small business owners that have done really well in their craft. And now they’re like, hey, do we have value in our business?
Have we ran our business in a way that is marketable to someone else? And those are some of the very first things we start discussing, right? They’re like a lot of baby boomers right now.
We’re kind of at the tail end of the boomers. The next three years should be a lot of boomers selling their businesses. And a lot of people and their kids, they’ve gone to college, they have different careers.
They don’t want to take over mom and dad’s business, but there’s some sort of value there. And they know that, but they don’t know what they have a lot of the time. And they don’t know with just a few tweaks, what they could do or change that up and sell in a couple of years.
So generally, the perfect kind of person is, all right, you want to sell right away. That’s one thing, but it’s people that are about two years away from selling, where again, you can bring in some other consultants and people and plug them right with the right professionals to increase the value of their business dramatically just by putting in some systems, processes, management, marketing, HR systems that go a lot farther and is a lot more valuable. So those are some of the early questions we’re asking, because they have no idea.
They have no idea at all.
Armando (6:05 – 7:19)
Right, right. And they might have run their business really well and had a lifestyle business or what have you, but it’s done what they want for their family, provide the lifestyle they want for their family. And there’s going to sell exactly what you said.
We had an event or several events over the last couple of years. And one of the biggest questions that the founders had was, what is my business worth? And the second biggest question is exactly what you said.
Well, what can I do now to help increase that value so that if I sell in say two years or three, the value is much greater? Yeah. And it sounds like you’re having those conversations with them.
And there, of course, are experts who can come in to talk about the HR or the sales or what have you. When you’re working with the client, Brad, who’s going through that first time sale of their business, as you said, this is often the most valuable asset they’ve ever owned. They might have bought a house or two along the way, but they’ve never sold a company and they don’t know what they don’t know.
How does that work? Let’s say they hire you and you’re going to work for them. What does that look like?
What do they see? What should they expect?
Brad (7:20 – 9:10)
No, that’s a great question. One of the first things I do in the first meeting is I generally bring a questionnaire. I think people that have done estate plans and things of that nature are used to questionnaires like this.
They’re a little tedious, but it really does help guide the conversation because depending on the type of business, we’re trying to put together the various documents and information that they would need to sell their business. So I bring that in. We discuss what they have, what they don’t have, what they can get, and what they can start compiling because once we get past the valuation stage, when they do want to, we’re ready to sell, we’re happy with the range you gave us, we need all of that information to give them the best opportunity so people can do their due diligence.
A buyer could do their due diligence and say, oh man, this business really is what they’re saying it is, projecting it is, and they can follow the numbers. It was one of the big things that I’ve seen in the industry. It’s generally for businesses that sell on the lower end that they pick a value and you ask for numbers or you ask things in advance because you’re not trying to waste anyone’s time and it doesn’t exist.
If they’re not willing to open up with me, again, the first goal is to have them open up with me, trust me, take my process, and go through what we should put together to have a successful sales process from pre-listing, to listing, to post-listing, to under-contract, and again, and that’s the very first thing. It’s a list of questions, it’s a list of items, do we have these, do we not, can we put them together? And that’s generally how it starts out.
Armando (9:11 – 10:14)
Okay, fantastic. And I want to go back to your prior experience in the legal field because to me that really makes you stand out. It gives you such a whole different perspective than most people who do what you do.
And I just think it adds so much value to the client that hires you because even though you’re not their practicing lawyer, you have that experience and what that tells me is you might see or smell things that need some attention that if you didn’t have that prior experience, you wouldn’t even see them, the client would never be made aware of them and they would never be addressed until they came back to bite someone later because they were not addressed.
So maybe you could talk about that prior experience you have in the merger and acquisition legal space, the corporate lawyer, business lawyer experience you have and how that comes into play when you’re talking with that business owner and walking through those steps on selling that business. Yeah.
Brad (10:15 – 14:42)
I think the biggest part, as a lawyer, you’re trained to point out risk and address risk. And it’s sometimes, again, I come from most sales with that, it’s hard to take that hat all the way on and off, the risk analysis, even though that’s not my role. So when I’m helping someone buy and sell, but they certainly benefit from that knowledge in the early phases.
So the early phases, if they don’t have a business attorney, if they don’t have a CPA, if they don’t have some of these people, I’m plugging them with them because they are integral to, is that even the right word? It is the right word. It’s integral to a successful closing, right?
The financial planner, the people that’s going to manage their wealth, their tax strategies, because getting all those people and quarterbacking all those people is imperative because we’re talking, again, it’s their biggest asset. But as you and I know, their basis is probably zero at this point, they started it with nothing. And so all the money they’re going to make is going to have some sort of taxable event related to it, unless you have the right planning.
But the next part is the liability part. The liability part and having the attorney on board. The biggest thing, whether you’re doing an interest sale, whether you’re sharing the shares of a corporation or interest in a membership interest in an LLC or something like that, is there’s different structures for liability when you’re trying to get out.
When you’re selling the biggest asset of your life, there was probably some liabilities that came along with it. So there’s a lot of negotiating around that piece and making sure the right things are handled. What are some of those things?
I think there’s a lot of tax issues that have liability, whether it’s employment taxes, income taxes, or sales taxes, wherever they’re located, because a lot of the times you have to turn on those accounts, turn off those accounts. And it depends on if it’s an asset sale or an interest sale, whether it’s shares or membership interest in an LLC. It’s what happens when we cut that off, right?
What does the new person have to do as they’re setting it up? They just don’t know that. What liabilities do they have after the asset sales over?
And I think having the right team and being able to spot that out where I’m like, Hey, I love your business. You have a value of a million. Let’s sell it.
There’s a pre-printed contract that we’ve used for years and years, and it works perfectly for every sale. To me, it’s just never been that way coming from the lawyer world. Every deal is a little bit different.
And so I think that’s the biggest thing because there is the tax consideration coming out, how much they’re going to receive and how to limit their liabilities so they’re not coming back. That takes me to the other part of the liabilities, which is what does an owner have to do to disclose? In residential real estate, they have something called a Binser.
We list everything that we know about the property, right? Whether it’s been good or bad or indifferent, just so we’re not going to get sued later. That’s a really big liability.
If you do a good job on the front end, as a broker help people gather this, it really helps with that process because we’ve disclosed if we have liabilities. We’ve disclosed if there’s some lawsuits or some outstanding issue. You’re doing a search with the secretary of state to see if there’s any liens against their equipment.
And those liabilities are the simple ones that anyone should find, but it almost never happens. I don’t want to say almost never, maybe that’s wrong, but it happens a lot less than you think. People aren’t looking at that.
And so you wasted everyone’s time and now we’re in this negotiation process where up front, if they have everything, they can make a decision. And by the time we’re under contract, again, they have most of this information and we’re just going through the process of giving the right notices. They’re working on getting the lending, we’re helping answer questions.
But again, I think that boils down to the liabilities and making sure the right accounts are open, the other accounts are closed, and you’re dealing with your liabilities. Because we all see the million dollars in this hypothetical, right? A million dollars.
But what is that million dollars going to cost you in taxes and commissions and lawyer fees and all these other things?
Armando (14:43 – 16:52)
Right. And you touched on a couple of really, really significant points that taxes are really critical in this once in a lifetime sale. Basis, of course, is what’s often called cost basis.
And the reason that matters is that the sales price less basis is going to be the taxable gain somehow, some way. And so it’s important to whittle that down as much as possible during that sale to minimize those taxes. So taxes, one big consideration, having a good tax CPA on board who understands the sale of the business on the client side is really, really critical.
But then you mentioned the other thing as well about liability. And liability is just as important, if not more, because if their owners, when they sell, of course, they want to be able to walk away and feel good and just, hey, I’m done. It was a good run.
Now I’m done. I’m walking away. They don’t want to walk away with strings attached.
And that really is what liability can become if it wasn’t addressed correctly, appropriately, fully disclosed, et cetera, up on before that was actually sold. So I’m glad that you brought that up. And then liability, it can take many, many forms.
You mentioned as an example, sales tax. If sales taxes were not paid, well, someone’s got to pay the piper. Either you or you own the business today or the buyer will pay it.
And then he’s going to come back after you because it was your liability. And now he had to cover your costs. So that’s why it’s just so critical to have both those areas addressed appropriately going forward.
So when you’re walking through with that business owner, Brad, and they’re saying, yep, I want to go ahead and sell. Let’s say that my business is worth $5 million, just to use a number. In their mind, that’s what it’s worth.
And maybe that’s the real value. And so now you’re helping them to begin to gather documents and just walk through that process of gathering documents, looking for a buyer. And just what does that look like when they bring you on board?
Brad (16:53 – 20:54)
Right. And so we’ve talked about the original list I provide them. One of the first things people want to see is the numbers.
If you don’t have your numbers up to date, up to snuff and ready to provide, that’s thing number one. You need to be involved with your bookkeeper and CPA. And we need to either build that from your last couple of years of bank statements and anything else and build that.
Or if their numbers are in good condition, we’re looking at those. Why are we looking at those? A couple of different reasons.
Most valuations under $5 million are going to be some sort of multiple of EBITDA or SDE or something like that. And so we’re working our way back from gross, cost of goods sold, the rest of the operating expenses, and we’re coming up with our net income. So that’s going to be our starting place.
Then we’re talking about interest, amortization, all these other things. There’s going to be add backs. There’s going to be things that they don’t consider.
And the reason they don’t consider it is because another owner may not have the same debt. They may not have the same uses. They may not write off as many things as that person does.
We’re all trying to take advantage of the tax laws. But that’s the first thing that we’re looking at. We’re looking at numbers, we’re coming up with value, and then we’re trying to prove up those numbers.
That’s the other part about the list that I put out is I’m like, hey, I need bank statements. I need your income taxes. Because a buyer who has good counsel representation, whether it’s an attorney, a CPA, another broker or something like that, those are the things they’re going to look at.
They want to confirm your valuation and how you got there. So that’s why you need the numbers. The second piece that I find very, very important is their contractual obligations.
Why is that important? Whether you’re a franchise, whether it’s your vendor contracts, whether it’s your client contracts, are they assignable? Meaning, for those that don’t know, can I transfer it?
Armando is my buyer, can I assign that contract to Armando? If there’s nothing in there, it’s generally freely assignable under the law. But most people have some sort of clause that they need to notice or an approval or something, some sort of process in each contract.
So if you’re a business that has 20 contracts, and those are going to be your biggest clients or your biggest vendors, people need to know that. Truthfully, that’s one of the biggest things because you want to provide notice. You want to reach out to those vendors and our clients, let them know that it may or may not happen, but you’re exploring it.
And if there’s nothing in there, like, hey, what process can we do to make this smooth and seamless? And you’d be surprised, there’s a 30-day notice, they need an approval for an assignment, and your business becomes less valuable if you know we’re going to immediately lose in your $5 million deal. Well, just by transferring, are we going to lose $500,000?
The buyer is going to ask for some sort of concession or something like that, and we got to be prepared. And we got to try, if we can address some of those vendor and client issues in advance, then we’ll know, have a better idea of what the valuation is and what’s going to stay at. So those are actually kind of the first two, I think, biggest issues.
Everything else, not everything else, but a variety of things are public record. Do I need a certificate of good standing? I need to get my various accounts with my TPT account, my federal income tax account, all those different things you need to gather, because some need to be closed, some don’t need to be closed, some need to be paid off before you sell, and then it’s paying off the liabilities as we’ve talked about.
But to me, those are the first couple of really, really big things. I need all of your major contracts, not even major contracts, any contract that is ongoing. Yeah.
Armando (20:55 – 22:28)
And that makes a lot of sense. I do want to touch on what you said, numbers. Often people have what’s called a lifestyle business.
And so the numbers might be kind of, they don’t care as much about the numbers because whatever it is, the cash flow they’re getting for the business, it supports their lifestyle and their happy. And that works out great for them during that time. But the buyer wants to see good, clean profit and loss statements, balance sheets, nice and neat, monthly accounting, bookkeeping that’s done, that makes sense, because they want to feel confident that those numbers are in fact the right numbers, they’re good numbers, good numbers they can rely on, and that puts together or sets the basis for what they’re willing to pay for that company.
So for someone who’s had a lifestyle business and has had a bookkeeper that does an okay job, might need to switch up that bookkeeper and get somebody who does a great job, at least in the last year or maybe two, so that the buyer isn’t nervous or scared and they feel very confident in the numbers that you’re showing them. You also talked about obligations, contractual obligations. That might be something like maybe even the lease that they have for their space, their retail space, or if they’ve got major vendors that they rely on, that they can just transfer and step into the shoes of the old owner and just take over.
But that’s not always the case in some of those contracts and that, right?
Brad (22:29 – 23:38)
No, that’s 100% the case. I mentioned two different types of sales. I mentioned asset sales and interest sales.
Interest sales means I’m getting all or a portion of either the shares or the interest in that LLC. So that LLC will still have the contract with said vendor, right? Then there’s an asset sale where if they’re going to continue to use that same vendor, almost always they’re going to have to do a new credit application, they’re going to need to do a vendor application as the buyer and that matters.
The other thing is even though their corporation or LLC had the contract, they signed personal guarantees for their lines of credit. Shutting those down and getting the new person and terminating those, people don’t even think about it. They’re like, oh, they’re going to start a new account with ABC vendor, right?
That process just takes a long time and closing it down. So it’s a really big deal that people don’t think about.
Armando (23:38 – 24:31)
Yeah. No, that makes a lot of sense. And then, so you’re, like I said, you start with the checklist, you’re looking at things, making sure they’re going to have good, clean financials.
That makes sense. And to kind of validate the numbers for the prospective buyer in any contractual obligations, maybe the vendors, et cetera, that could create a roadblock or a speed bump along the way that you can hopefully fend off before it becomes a train wreck. And then once you’re going through that, and now let’s say you’ve covered those bases, Brad, and you feel good about that.
You feel like, yeah, you’ve got good information here now. And now you’re going to look for that buyer. How are you looking, local?
How does that work so that that seller feels good about the prospective buyers looking at his or her company?
Brad (24:32 – 27:21)
No, that’s a great question. So again, there’s a variety of different ways to market and a lot of venues to market. In the commercial space, again, you’d be surprised what works and what doesn’t work.
CoStar and LoopNet and their business listing group, which is called Biz by Cell, is one of the biggest. I mean, it’s a data analytics. They have stuff like that.
Sometimes people get really frustrated with that, but it gets a lot of exposure. There’s some of the new stuff. So they list businesses on LoopNet and Biz by Cell.
One of the other, a lot of people lump commercial real estate and businesses together because they’re very closely intertwined. So those are some of the first place. You’d be surprised people find businesses and list businesses on Craigslist.
I see no reason why a broker cannot do that or why it makes it less credible. Because if you do the right things, you can be like, and again, so we get it all ready. We have all the information ready to get.
And then whether it’s Craigslist, whether another place is called Crexi. There’s CoStar, Biz by Cell, LoopNet, all of these places. And then it’s the various different investment groups on the social media platforms.
There’s a lot of places where people are looking to buy businesses. But before you ever give them any of that information, it’s marketed in a way where it provides the basic details where people are like, hey, that looks interesting. We’re talking about gross sales.
We’re talking about EBITDA or SDE or how much cash a buyer could expect. We want to talk about if it’s a passive or if someone’s buying a job. It’s different for different folks.
Some people want to be passive owners or almost passive owners, or some people are looking for a business to work in for a while and build up and do their own thing with. So it’s getting as much of that information into the marketing as possible helps weed out, again, the phone calls and the additional work. If people want passive, we’re like, this is not passive.
You’re buying a job. The reverse is true. Hey, this is mostly or almost passive.
It’s going to take this much time for someone to be involved with it. So that’s the marketing piece. And then when people do reach out and are interested, there’s generally some sort of NDA that is signed before you provide that information.
I like to have, again, we’ve talked about this a little bit. If on the front side, you get all that information together, they should be able, an experienced buyer or an experienced buyer with some sort of representation can take that information and do the analysis very quickly. But the NDA also works as something to weed out folks, right?
Armando (27:22 – 27:25)
Yeah. And the NDA, of course, a non-disclosure agreement.
Brad (27:26 – 27:26)
Yes, sir.
Armando (27:26 – 27:57)
I’m using the legal terms. That’s fine. But the whole idea is that the seller has kept this information very close to himself or herself and doesn’t really want to let the world see it.
But with the non-disclosure agreement that the prospective buyer signs, then they’re agreeing to keep that information confidential. So then you’re able to give them that information for their own exclusive use and determine whether they want to buy that or make an offer in the company or not, right?
Brad (27:57 – 29:08)
Correct. That is correct. And the other thing that it does is, and it’s often an issue, not always, but you have employees a lot of times, right?
So if someone’s going to come in, maybe you’re not ready to tell them, or you haven’t told them, or again, you’re losing some of your talent, there’s different ways to handle that. So the NDA also often will, if that really, really matters to them and their type of business, it’s part of the confidentiality. You’re not supposed to interview these people.
There will be a point later in, if we’re under contract, where you can go and visit and interview, see who’s staying, see who’s not, and have those types of conversations. But sometimes people don’t even know, and you don’t want to lose talent if it’s scary if you’re going to have a new boss or a new owner or something like that. So coming up with a plan to address that is another big issue and why the NDAs are so important.
And again, you don’t want competitors coming in and just trying to get your numbers and see what you’re doing and stuff like that. So again, there’s some reps and warranties that go into the NDAs too, that that’s not their purpose. It’s like they’re really coming in to look at and consider buying your business.
Armando (29:08 – 29:48)
Yeah. And that makes sense. It sounds like once you’ve gathered the information, you’re feeling good about what you have, and now you’re ready to begin attracting those prospective buyers.
You’re going to different places, databases, internet presences that are out there to put that, not teaser, teaser is not the right word, but putting kind of the basics about the company out there without disclosing the name of the business itself, but saying, I’ve got this kind of company, this kind of cash flow, these kinds of revenues. If you’re interested, then reach out to me, we’ll sign a non-disclosure agreement, and then we’ll give you more information.
Brad (29:49 – 29:59)
Perfect. That was actually a really excellent articulate summary of my long-winded response. That’s exactly it.
Armando (29:59 – 30:26)
Okay. Fantastic. Good.
Well, that makes a lot of sense because as you said, people go to different places to get their information and maybe it’s LoopNet, maybe it’s BizBuySell or some even Craigslist where they find it. It doesn’t really matter where they find it as long as they find it, and they’re the right person who has the interest of possibly buying that company, then you can begin that conversation with them to see if that’s going to get somewhere or not.
Brad (30:27 – 31:17)
Correct. And that’s correct. And the last place is also just word of mouth.
As you and I know, you’ve been in the Valley, you’re a CPA and you know a lot of people is your value is also in your network. Whether I’m bringing lawyers or CPAs or whatever to the table, those are a lot of people I’m like, hey, do you have any clients that might be interested in something like that? So they are a huge buyer referral source to myself and other brokers.
That’s a really, really big deal because that’s the other thing. And being in Arizona for that long, I think that’s an additional value. I think you can attest to this.
Over the time, you gather and get to know. And if you’re a person of character, you get to know a lot of other people.
Armando (31:17 – 31:37)
Right. For sure. For sure.
So then once someone then, let’s say they sign that non-disclosure agreement and now that prospective buyer has the information and they say, yeah, Brad, you know what? I’m interested. I think I’d like to buy this company.
What happens then? Just walk through those next steps if you could.
Brad (31:39 – 34:59)
Yeah. Again, we start negotiating on price. It seems where everyone starts to negotiate.
As a former lawyer, I’m like, that’s the easiest part. The hardest part is now doing a lot of the negotiation, asking for a letter. If I’m commercial real estate, most letters of intent are non-binding.
In business sales, whether interest or asset, some of the provisions, and people should know this, are binding. What do those normally look like? Once you go under contract, you’re not going to market it to other people.
From a seller’s perspective, I almost always negotiate that out because again, I want to keep it on the market if this doesn’t fall through for some reason. It’s just knowing that because a lot of people are like, ah, it’s a letter of intent. It’s not binding.
But in my experience, you see a lot more people trying to pass off some binding provisions to an LOI. It’s generally how long it’s off, what they can do during the due diligence period, and how long that will last. If we can’t come to an agreement, you got to wait 130 days, you have to wait 90 days.
There’s some of these things that people need to be aware of that they run into because they’ve gotten bad information in the past. I hope to avoid that so they don’t have those misconceptions. I get an LOI.
There’s a lot of back and forth. This is where either myself or the attorney or both are negotiating. Generally, I can do most of primary terms that go into a LOI.
But some of the things that may be important to our clients early on sometimes need to go in the LOI early. It’s the same for a buyer side too. They want to come in.
They’ll generally submit the LOI. I’m redlining. It might go back and forth between me and the other broker, me and buyer, or their attorneys before we even get to a contract.
So that’s the next step. Once we’re there on the LOI, unlike real estate, where you go under a contract and then a lot of these periods start, a lot of those periods and due diligence starts with the LOI. Sometimes the contract won’t be finished until you’ve given up a lot of the documents.
People are doing their due diligence. They’ve had access to your books because that contract ends up being a lot of back and forth as they’re uncovering things and negotiating things. Where in real estate, you don’t normally get that until the end of due diligence.
You will sign the contract. People will start doing their inspections, phase ones, inspections, and then they’ll ask for a price reduction or something like that because they didn’t anticipate or they did, and they just want a further price reduction. You see that the process in a business or asset sale moves along.
So once the LOI is there, you’ll see a lot of things happening.
Armando (34:59 – 35:45)
Yeah. And let me go back to the LOI before we move on. So that letter of interest or letter of intent that the seller, I’m sorry, that the buyer, prospective buyer provides to the seller, that whole LOI is negotiable is what you’re saying.
So the prospective buyer might give this to you or your seller. And if the seller does not have you in the picture or doesn’t have their own lawyer in the picture or somebody else, and they don’t know any better, they might think, oh, this is the standard agreement, standard document. And they might even be told that by the prospective buyer that, oh, standard document, standard verbiage.
Hey, I use these all the time. Just sign this, we can go forward. Which would be a mistake.
Brad (35:46 – 36:43)
I think it would be a mistake. And again, like I said, more so in the business or asset, the interest or asset sale situation other than commercial real estate. Mostly because there’s provisions in there that are often put out there that are binding for some period.
It doesn’t force them to sell their business. It doesn’t force them to accept a price that they don’t want, but there’s some other provisions, time provisions, not marketing it to other people while they’re under negotiations are things that people just don’t recognize. And so what you’ll see is what I’ve seen in the past is someone will come to me later and they’re like, oh man, I signed this LOI, but negotiations aren’t going well.
I have someone else or someone else has approached me for my business. And I’m like, you can’t do that until you do this, this, and this, or some time period, because there were some binding provisions in your letter of intent.
Armando (36:44 – 36:59)
And that gets to the point that before that seller signs that, they need to get a professional in there who really understands that and could give them guidance before they sign anything.
Brad (37:00 – 38:00)
100%. And I know I’m a former lawyer and oftentimes you’ll hear in our industry that lawyers kill deals. And I always laugh at that, but it’s their job to point out the risk.
Once they pointed out the risk to the buyer and or the seller, those people get to make the business decision to proceed or not. And as an attorney, I think I lucked out and had some really, really good mentorship where my very first boss was like, don’t kill deals and reminded me of my role. I’m in a different role now, but having someone pointing out the risk, pointing out those things is imperative.
I regularly, even though, and it’s because I have some knowledge on the issue, I’m like, you need to talk to your attorney. Please talk to your attorney, please hire an attorney. And I know sometimes it’s a cost that people want to forego, but I highly recommend against it.
Right.
Armando (38:00 – 38:39)
And when you’re selling the biggest asset you’ve ever sold, getting that professional experience expertise on board is just really critical for a successful exit. And great. So the LOI then, let’s say that you talked about redlining.
That means that you’re receiving a document from the prospective buyer and you’re saying, nope, I don’t like this. I’m going to line that out. I might have other words that you might have other words you want to see in place of those words.
And then once you negotiate the back and forth and you are comfortable with it, then you’ll advise your client, hey, you can go ahead and sign this now and let’s move forward. Correct.
Brad (38:40 – 40:11)
That’s exactly right. And so, and you, I think you nailed it on the head, what the term redlining is. We often use Microsoft Word, the lawyers and people are going to use some sort of word processing system.
And there’s a way that you’re going to either strike it out or keep it or whatever and change it. But the other big thing that is customary is that you make changes so people know what changes are made. But the other reason you have a lawyer involved is, all right, Brad just negotiated the change.
Maybe I’m the one redlining, maybe they’re the one redlining, depends on what sort of issue it is. But it’s their job to also confirm the changes that were made. So I can say, oh, me and Armando’s deal, I needed to make this change and we agreed on it.
But someone who has less character may send that back and we don’t see the change. So that’s the job to make sure that that happens. I’d like to, you’d like to think that, and that’s why you do the redline.
You do the redline so people can see the changes and then you confirm the changes. And to your point, yes, once we’re fine with the final language, then we sign the LOI. And a lot of the time, and again, in business sales, we’re negotiating big chunks of the asset or interest purchase while the LOI is still being negotiated.
I know it seems counterproductive, but you’re negotiating a lot of the same things while it’s going on.
Armando (40:11 – 40:39)
Okay. And then you mentioned due diligence, a due diligence period. So that’s when the buyer is kicking the tires and digging in to feel comfortable that they know what you have and that the price that is being talked about is a good price from their perspective on getting that business.
That due diligence, what would that normally take? What should the seller expect that the due diligence period would take? A month, three months, six months, a year?
Brad (40:40 – 41:54)
That’s a really good question. In my experience, there’s been due diligence periods, and this was one of the bigger deals that I worked on in the past. And the due diligence period was like six months, but it was $100 million business, right?
On a lower level, I suspect, you know, five to 10 million or under that, probably 60 to 90 days, because the due diligence period serves two purposes. One is if you’ve done a good job on the front side, like I really try to set my clients up for, if the buyer has lending, they already have a lot of the documents that are going to be necessary to underwrite the deal so they can get qualified, right? The other part of the due diligence for the buyer is confirming your number.
So it depends on how many people they have working for them or working on this, whether it’s a lawyer, CPA, an internal team, or something like that, where it takes some period of time. And that’s my experience in the business portion. But if you’ve done a good job upfront, you can shorten that because they have a lot of the documents already before we’ve even started the LOI.
Armando (41:55 – 42:18)
And that makes sense. And if the financials is nice and neat and clean, they’re asking less questions. If they’ve been audited or reviewed financial statements, they’re probably asking less questions.
If your documents are all nice and neat and lined up, and they’re probably asking, it just makes sense. It would take less time for them to go through all of that and feel comfortable with what they’re actually buying.
Brad (42:19 – 43:43)
Yeah. And that’s exactly right. And so when I provide bank statements or I provide an income tax return, and I’m comparing to a P&L, again, they’re saying, all right, well, what went into our marketing costs?
Well, here’s the bank statements that shows what we spent on marketing and that it’s accurate. They can confirm that number. It’s math, math.
Again, statistics, you can take it and take different facts and present it differently. When you’re underwriting a deal, you’re like, I had five grand in marketing. All right, well, where’s those numbers?
Here’s the bank statements. Someone’s going through and saying, oh, this was all marketing. Oh, it equals $4,000.
And you do that for a variety of things. And then the other process is, hey, you characterize this as marketing. This seems to be something that’s more personal in nature that someone may write off and someone else may not.
And these are where some of those things come in. All right, we need a price reduction or what is this? This is where you get those questions after they’re going through that process.
Their job is to confirm up the numbers, confirm up the contracts, make sure they’re going to be transferred or assigned appropriately. And that’s a due diligence process. It’s confirming the numbers and then checking liabilities and dealing with liabilities and making sure that the various contracts and assets get titled and or transferred correctly.
Armando (43:43 – 44:24)
Are you wondering if you’ve missed anything in your planning? We hear that a lot from very smart, very successful people. And that’s why you may want to know more about our Founders Stress Test.
If so, go to axiomcorp.com. You’ve mentioned, Brad, you’ve mentioned price reduction a couple of times in the conversation we’re having here. What might be some things where the buyer might say, yeah, I know I offered you five mil, but I wanted to make it four and a half now because of this.
What kinds of things might actually cause that buyer to attempt to reduce the price that they were thinking they would pay for the company?
Brad (44:25 – 45:11)
That’s a good question. And I feel that happens more often in scenarios where the books aren’t all the way up to snuff or we didn’t have a double check before. And we don’t always.
We want to gather as much information as possible. So we’re disclosing. But maybe someone incorrectly booked something wrong or like, hey, you’re booking certain types of income and you’re booking it that happens.
Or sometimes in accrual, you’re not accounting, you’re not moving one thing into another thing and you treated it as, again, some of those things can happen. And when they confirm the numbers, they’re like, well, you booked 50,000 more. So it changes up your multiple in the value.
So they might ask that. That’s one reason they found something that doesn’t match up. Again, we try to deal with that on the front side.
Armando (45:12 – 45:23)
And some of this could be very honest mistakes, not that we’re trying to get pulled the wool over the buyer’s eyes, just honest mistakes that were just not seen before. Right?
Brad (45:23 – 47:26)
Correct. That’s 100% correct. Right.
Again, there’s a lot of good people. I like to trust people. And I think a lot of people come from a good place.
And I feel like that is often the case. But that’s then another part of my job is, hey, someone just asked for 150 grand off or 200 or 500,000 off in your $5 million example. Having the education and explanation on why it happened.
Right. And how, you know, right. Having that conversation, managing those expectations, because generally, even when I give them a valuation, you’re giving them a range.
And so long as it’s still on the range, I’m like, it’s often a tool. I remind them, I’m like, hey, you said you would have been happy with anything else in this range. Here’s something that was an honest mistake.
It brought the value down a little bit, but it’s still within our range or changed our range. Are you still comfortable if they still want to buy? And so, again, once we’re under contract, it’s hard to change those things.
But we also can say, no, we can’t drop it. That’s not what we were expecting. And then the buyer gets to decide if they’re going to buy it or not.
They found the issue. They pointed it out. We either correct it or we don’t.
Another scenario is when you often see a drop in price is if the owners are going to stay on for a while. And the reason that’s the case is buyers will come in and say, all right, that makes sense, but the business doesn’t run itself. And I want this to be passive, right?
So we’re going to have to pay you for a while. So that makes our net income not what we were expecting. I think that’s more of a tactic, but sometimes you’ll see people say, oh, we’re staying on a little longer.
It’s going to cost the buyers more money and it changes the value of the multiple. So having those, that’s another reason why the value might go down because the 5 million is based on them not continuing to work for the company.
Armando (47:27 – 47:57)
I’m glad you brought that up because sometimes people, they do want to stay on for a year or two or three after they sell. And sometimes they want to walk away the next day and never look back. But it really gets back to what does that business owner want for him or herself and for their family going forward?
And it’s good if they can have some of that decided probably before they have conversations with you so that not in the middle of the process, they’ve got to all of a sudden make this decision that something changed.
Brad (47:59 – 48:43)
And that’s a really good point, right? Because a lot of the times, and that’s in that original conversation, do you want to stay on? Are you willing to stay on?
Do you need to train? Is it a type of business where you need to train or you have a manager and they can do everything? Have you already turned this into a passive?
And the one thing I also didn’t address is when it’s more passive and the books are in line, you get the higher range of some of the multiples that people might be looking at, that buyers are looking at because your business is efficient. It’s got good systems in place. It’s got good books in line.
It has a manager in place. So you should be at the higher end of the valuation range that I’ve talked about. If we go down to the lower valuation range of some of those things may or may not be messed up or there might be issues or things that haven’t been addressed.
So.
Armando (48:44 – 48:59)
Yeah. And that makes sense. I’m going to just touch on, you mentioned the word multiples a couple of times as well.
And multiple is basically saying that whatever the, the higher the multiple, the higher the sales price on that business, right?
Brad (48:59 – 49:00)
That is correct.
Armando (49:00 – 49:01)
Yep.
Brad (49:01 – 49:56)
So the higher the multiple, let’s use an example of an equipment company. I think the, I was looking at some of the other day and the research suggests that a multiple of the SDE or the EBITDA or EBITDA, however you want to say it, is the range is two and a half to four and a half, right? A two and a half is going to be pretty average.
And again, it doesn’t mean that four and a half, you can’t go over that. That’s the average range. You get a higher range for a well-run business.
You get a lower multiple. And again, so let’s, in the hypothetical, let’s say they clear $500,000. We’ll say they make $500,000 in SDE and the research and industry standards suggest that that should be at a three and a half.
That means we’re, that’s going to be $1.75 million valuation or something near there, right?
Armando (49:56 – 50:00)
Yeah. So $500,000 times 3.5. Yeah. Yes, sir.
Right. Right.
Brad (50:00 – 50:01)
Did I do that math right?
Armando (50:02 – 50:03)
Good enough for this conversation.
Brad (50:04 – 51:10)
Good enough for this conversation. It’s close. And so, yeah, that’s what the multiple will be.
It’s a multiple of the EBITDA or SDE number. And that’s about, and that’s why you can imagine if they stay on or the buyer was expecting that they weren’t going to have to pay someone $75,000 consultant fee to stay on and train their people for a year, why they think the valuation should be less, right? Because in that same scenario, you would subtract that amount from the SDE.
If you were the buyer and saying, all right, you want to make 90K for the next year? Well, the multiple should be based off of 410,000. And that goes to the example I was talking about, where if someone’s staying on or something wasn’t quite what it seems, or you weren’t paying market rate to your manager and a manager really needs to make 80 instead of 45, you can see how that $40,000 swing, because of the multiple, changes how much you’re getting can change what you’re getting drastically or what your business should be valued at, or at least what a buyer is expecting to pay for your business.
Armando (51:10 – 51:42)
Right. And kind of getting back to your example of say half the owners making half a million hours a year, 500,000 a year on the low end, if the multiple is two and a half, then that’s 2.5 times 500,000 on the higher end of the range. It’s 4.5 times that same 500,000. One’s going to get the higher multiple is probably the cleaner, more efficient, where things make sense. It’s organized systems in place. And maybe even the company kind of runs all by itself without the owner in there day to day running the business him or herself.
Brad (51:42 – 51:46)
I think you said that spectacularly. That’s exactly correct. Yeah.
Armando (51:46 – 52:07)
So it really gets to the point where you started earlier about knowing your numbers and having good, clean, organized numbers, because you can see how powerful those numbers have an impact on that multiple, which is the sales price, which is the question that owners always have. What is my business worth?
Brad (52:07 – 53:47)
And again, it’s what you, again, in this perfect hypothetical, if someone wants to stay on for a couple of years as a consultant, your businesses are arguably valued less because you want to stay on. And so is that something you want to do? That’s a conversation we want to have.
We’re like, hey, they’re not going to stay on. This is a passive business. You should get the highest multiple possible.
If you need someone to trade on, there’s earn out provision sometimes, where maybe it’s a little riskier business, or there’s a few things that aren’t there, but they have to meet certain criteria to get their full payout. So you might get 3 million, but if you do this, you get 4 million. If you do this, or the company does this, you get 5 million.
And so it helps keep sellers engaged. And sometimes it’s good for the seller. Sometimes it’s not, sometimes it’s whatever.
But you can imagine from a buyer’s perspective that we’re like, hey, we want to know they believe in their business. And it’s not just tanking. I know the numbers look good.
Is it, do they know something we don’t know? You’ll see some of those earn out provisions in some of those contracts where it’s either riskier, or there’s been some changes in the business, and they’re not sure how it’s going to go. Or someone comes in with a big infusion of money.
That person stays on, the seller stays on the manager and continues to grow their business and then exits later. So there’s a lot of different ways to structure it for a seller. Instead of just, I’m out, I’m gone.
You can stay in, you can get a lump sum, you can structure it, you can hand it off to folks like you to manage that wealth, but still stay on and make their fee and et cetera, et cetera. So there’s so many ways to structure a deal.
Armando (53:48 – 54:36)
Yeah. And this is where I think that your prior legal experience in the business world can really be helpful to that seller who’s going through this for the first time. So I do want to talk about liabilities.
Let’s say that you get to, now you’ve gone through the whole process, buyer’s happy, seller’s happy, and they both agreed to sign on the dotted line and be done. Sellers typically want to walk away clean, not have to worry about it, not have to lose sleep afterwards, not have to worry about having money taken away because something didn’t happen right. How in this process are you helping that seller to walk away clean like that?
What provisions, what needs to happen so that they can do that and feel comfortable after they’ve signed and walked away?
Brad (54:38 – 54:46)
I’m going to add a little bit because I think a little bit needs to happen still before they sign on the dotted line before they walk away that I haven’t addressed yet.
[Speaker 3] (54:46 – 54:47)
So I’ll address that.
Brad (54:48 – 58:46)
But the other piece of that, I actually think both of the answers is still prior to signing on the dotted line or before closing the transaction. One thing is there’s a bunch of debt. We often see it in legal contracts.
It’s going to be the legalese things that sometimes us attorneys like to think we’re the only ones that can write these things. But the case is there’s really, really good provisions and generally it’s indemnity, hold harmless and those types of provisions. And a lot of contracts have them and a lot of people never negotiate them.
I think that’s wrong. Those provisions are huge in protecting your liability after you leave. What could you be on the hook for?
You have a really well drafted and well negotiated indemnity, hold harmless agreement not to sue clause. Sometimes you can even limit your liability, say something does go wrong. Something wasn’t disclosed purposefully or not purposefully.
You could also limit those liabilities. So you can limit to the types of damages in the contract. So whether it’s punitive, actual damages, you can limit those damages.
Sometimes you can limit it to some percentage of the sales that they had. So even if they do sue you and something’s wrong, the limit they could sue you for is half of the price or all of the price or at least limit it to the price of the business. So all you’re giving back is what you gave the business for.
So there’s a lot of different things there. And the other big thing on liabilities and we talked about it early on is the disclosure. If you disclose everything, you should be able to sleep better at night.
If you put all that together and spent the time giving them the right information, because there’s going to be what are known as representations and warranties and all of these types of contracts. If there should be in all these types of contracts, if there’s a broker involved and an attorney involved and or both, there should be reps and warranties, representations and warranties. Are you saying that these facts are accurate and they will be as of closing?
And if they’re not, people can sue you. So you’re saying the numbers I gave you are accurate numbers. They’re true and accurate to my knowledge.
These contracts are our biggest contracts. As far as I know, there might be some other ones that are, you know, there’s some other things, but these are our biggest contracts. Our most important contracts are the ones that have the most liability that I know of.
And you list them out. These are our employees. These are our employee issues.
So you make representation and warranties as to what’s true and correct. And so long as you make those representations and warranties and provide information documenting them and they’re true and correct, that is a very good way to be able to sleep well at night along with well-crafted indemnity and liability limiting provisions in the contract. And that’s where actually the lawyers spend more time than you think, right?
If they’re doing their job, right? Because that’s the risk analysis. That’s the risk shifting in these deals, right?
Because a buyer doesn’t get away risk-free, but you can do a lot of these things. And if you do it right, you shouldn’t have a lot of risk. And again, you and I also know no matter what happens, people can sue people for anything.
You just want to build the best case. So it seems unlikely or seems unlikely that they will be sued, but even more unlikely that someone else would win as a seller. If you do the right things, you will.
Armando (58:47 – 59:20)
Yeah. So a few things that you touched on there. One, the seller needs to really fully disclose anything he or she knows about the business.
So the buyer sees it. Buyer can make an informed decision and that’s going to help limit some potential liability going forward because both parties knew about it. It wasn’t like it was hidden.
Both parties knew about it, but then also there’s indemnity and hold harmless clauses that are written into the agreement, into the sales contract you’re saying that also can help limit the seller’s liability also, correct?
Brad (59:20 – 59:41)
Yeah, that is correct. And so again, once we’ve then gone in and done the title and changing, retitling or transferring the shares or the membership interest, you should feel comfortable. We’re done.
We signed the right things. It’s documented. You keep it.
You disclose correctly. Let’s go on our Hawaiian vacation now.
Armando (59:43 – 1:00:09)
Right. Well, good. Well, I imagine as you’re going through this with a business owner who’s not gone through this process before, I imagine you’re having to educate, tell them what to expect along the way and just help them emotionally through this path because when someone has nurtured a company for 20, 30, 40 years and now it’s time to give it up, it’s like getting rid of one of your own kids.
Brad (1:00:11 – 1:01:30)
It’s their baby. They spent their whole time doing it. There’s a bittersweet to selling your business.
Hey, I’m retired. I did this. I built this.
It’s awesome. It’s great. And you’re like, I’ve been doing this for the last 25, 30, 40, 50 years.
And now I’m moving on to another chapter. So there is a lot of emotional attachment to this move. So luckily, the other part I actually don’t know if you and I have talked about is I’m a trained mediator.
And in that training, it might have been the most valuable. That might be hypocrisy to say of going to law school, but it was a clinic I did in law school that the mediation clinic was the most practical work I did while in law school that has helped tremendously in negotiating, working with other people and managing my own clients to help understand what their interests are and why they’re upset, why they’re happy, why they’re not, and getting to the root of that issue and addressing. And so again, there’s a lot of that, as you know, managing clients, regardless of industry is difficult when it’s legal and business related and it’s their sole value that they have when they’re retiring. Emotions can be hot.
Armando (1:01:31 – 1:02:43)
Definitely, definitely. Well, good. This has been very helpful, Brad, just to have this conversation with you.
And it kind of makes me think, because we’ve touched on this actually quite a bit in this conversation, that as that seller is beginning those conversations with you and walking through the process and getting to closure, that that seller really has to feel comfortable that now is the right time and it is the right decision and that they’ve done everything they need to so that it can move through the process at a nice, smooth clip and get done sooner, but only if they’re really ready to do that, because you don’t want them, nobody wants to have regrets after the fact. And that seller who’s had this one company forever, literally, that that’s all they’ve done, they surely don’t want to have regrets. They’ve just got to make sure they feel and they know that’s the right decision for them at that time.
So that’s part of what the conversations that we’ll have with them so that if it’s the right time, great. They have to know and feel it, that it is the right time, then engage Brad to help them actually get that done.
Brad (1:02:43 – 1:03:29)
That’s correct. And the one other part I want to touch on is you touched on the education. There are people that are serial entrepreneurs that buy and sell business regularly.
This may not apply. I can add a lot of value to those people too, that there’s some sort of education. But in that situation, they’re like, hey, you’re the quarterback, buy and sell my businesses for me.
Like, I get it. They do what I say. It’s whatever.
But when it’s their only one, which is the majority of the time, there’s so much education. There’s so many conversations. There’s those mid-morning, mid-afternoon, night calls.
They’re like, what’s going on here? I don’t understand what’s going on. And I’m like, it’s OK.
We got this. We addressed this. We did everything correct.
And there’s a resolution to this issue. So there is a lot of that. There’s a lot of that.
Armando (1:03:29 – 1:03:45)
Good. Well, Brad, thank you so much for the conversation. Let’s say that a business owner heard this conversation and really wants to pick your brain a little bit, maybe have a conversation with you.
What’s the best way for them to reach you? Is it a phone call, email? How should they reach out to you?
Brad (1:03:47 – 1:04:17)
Phone call or email. So my email is Brad at ScoreCommercial.com. My phone number is 623-476-3238.
Either way, if they just want to call and chat, we can do that. If they want to text, that number works for text as well. We can set something up.
Again, that’s what I do pretty regularly. So they can contact me either way. I’m on LinkedIn.
They can message me there as well. So any of those ways to start a conversation.
Armando (1:04:17 – 1:04:29)
And then Brad, if they’re not really sure and they don’t want to waste your time, maybe they’re two years out or maybe they’re ready now, but they’re not really sure. Should they still reach out to you anyway and have a conversation with you?
Brad (1:04:30 – 1:06:15)
I think so. I know we talked about this a little bit early on, but I think the biggest part of that is they don’t know if they’re ready yet. They don’t know if they want to sell.
Maybe they are fine working a couple more years to maximizing their value. I think so because there’s two things, and I know you do this as well, is plugging them with the right people for the next two years. So we can maximize their value, whether it’s a coach, whether it’s a consultant, whether it’s a bookkeeper, whether it’s a lawyer, whether it’s any vendor for, again, all types of businesses need different vendors, different types.
That’s where we play an integral role early on in the process if they’re not ready to sell yet, or have the discussion that maybe that is the better plan. Maybe they thought they could sell right now, but they’re like, no, we do have some money. We do want to pay for some of these other services to fine tune our business.
So we maximize our value in two years, and that could change their total plan. So I think it’s worth reaching out early in commercial real estate and business brokerage. It’s the long game.
The transactions are much longer. They take a lot of time to develop, much longer than people may think. So early and often for planning, even if you’re three years down the road, you’re planning out.
So there’s the people we talked about that don’t know what they want to do. Let’s have a conversation. Let’s talk about a couple of different plans.
Or there’s people that know they want to sell in three years, and they want to start talking to someone. Hey, what should I be doing? What do I need to do?
So it helps in both scenarios, I think, to reach out early.
Armando (1:06:16 – 1:06:20)
Good, good. Great. Well, Brett, thank you again so much for the conversation.
Bradley Scott.
Brad (1:06:20 – 1:06:21)
Thank you. It’s been a pleasure.
Armando (1:06:22 – 1:06:24)
And I really enjoyed the conversation with you.
Brad (1:06:24 – 1:06:31)
Well, I appreciate it, Armando. Thank you so much for having me. I’m blessed, and you’re an amazing person as well.
So thank you so much. I appreciate you.
Armando (1:06:31 – 1:06:34)
Thank you. All right, Brad, we’ll catch up on this again later.
Brad (1:06:35 – 1:06:36)
All right. Thank you, sir. Have a good one.
Armando (1:06:36 – 1:06:59)
Hope you enjoyed this episode of the Founder’s Guidepost. Whether exit is on your immediate horizon or maybe 10 years down the road, there’s something here for you. Wondering if you’ve missed anything in your planning?
Schedule your 30-minute Founder’s Strategy Call at axiomcorp.com. And congratulations on your business success. You are the American success story.
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