January 13, 2025 • 43 mins
Want to Buy or Sell a Business? – Owner of Compass Business, LLC Doug Cabral joins this
episode for an in-depth conversation on the process and challenges of buying and selling a small
business. Doug, Chris Boyd, Jeff Perry, and Russ Ball dig into a variety of issues involved,
including maintaining confidentiality, putting a valuation on an ongoing small business, whether
a franchise is a good option, and financing a transaction. Doug also explains the difference
between a buyer who is looking for a job and a buyer who is seeking an investment.
For more information about Doug Cabral, click the link below:
https://compassbusiness.net/
For more information or to reach Chris Boyd or Jeff Perry, click the following link:
https://www.wealthenhancement.com/s/advisor-teams/amr
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to Something More with Chris Boyd.
Chris Boyd is a certified financial planner, practitioner,
and senior vice president and financial advisor at
Wealth Enhancement Group, one of the nation's largest
registered investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome, everybody.
Thanks for being with us for an episode
of Something More with Chris Boyd.
I'm here with Jeff Perry and Russ Ball.
We are all of the AMR team at
(00:45):
Wealth Enhancement Group and glad to have you
joining us for the show.
You can always find more about our episodes
through our team page.
You can find that by going to somethingmorewithchrisboyd
.com or we'd love you to follow the
show wherever you like to listen to your
podcast so you get all of the good
(01:05):
ones just like this one.
We have a great guest lined up for
our show today.
Joining us is Doug Cabral.
He is of Compass Business Intermediaries.
And Jeff, where you guys are connected, friends,
I assume it's friends for a long time,
but who knows.
Tell us a little bit about Doug and
(01:27):
give us our introduction.
I met Doug when we lived on the
Cape and Doug was a practicing attorney for
many years.
I won't dare to guess how many, Doug,
and actually handled one of my real estate
transactions as well.
Got to know him through the community, very
involved.
Doug was very involved in the Cape Cod
community and also ran to, I think we
(01:49):
ran into each other at an airport as
we were both heading down to our vacation
homes in Florida once, didn't we, Doug?
I believe we did, Jeff.
So why don't you start off by telling
us about your transition from the grind of
running a law firm to helping businesses, business
owners and business buyers.
Sure.
(02:09):
Jeff, happy to.
As you mentioned, I was an attorney, practicing
attorney in Massachusetts.
I did that for about 30 years and
I enjoyed it.
But after 30 years, you've been involved, you
know what a grind it can be.
I decided it was time for a change.
So I looked at what I enjoyed.
(02:31):
I did a lot of transactional work, a
lot of real estate conveyancing work, also a
bit of estate planning work.
And I also worked with a lot of
small businesses, helping them set up their businesses,
you know, in corporation, start structuring LLCs.
And as they grew, you know, helping them
restructure them at times when they needed them.
(02:51):
And also when they reached the end or
when they were looking to expand, helping them
with purchasing and selling other businesses, you know,
all from the legal aspect of things.
And I really enjoyed working with the small
business owners.
They were very, you know, very focused on
what they wanted to accomplish usually.
(03:13):
And it was just, it was fun to
be able to help people grow their dreams.
So when it came time for me to
find something else, I decided to move into
the business brokering, small business mergers and acquisition.
And I had, you know, I've got a
mentor who is actually a family member.
(03:33):
He's my wife's uncle, great guy, a real
interesting backstory on him.
And he had been doing it for 20
years.
And he said, this is what you really
should be doing.
You know, it's a lot of fun.
You get to meet a lot of people
and you get to help people.
So that's kind of a little bit of
my backstory of how I made the transition
from practicing attorney to business broker.
(03:56):
Did you happen to buy his business?
I did not.
He actually built a very successful brokerage and
they have an offshoot, which is probably the
primary business now that specializes actually in mergers
and acquisitions of property and casualty insurance agencies.
(04:19):
He's actually left that now.
He's finally retired.
He's in his 70s and he is enjoying
retirement.
Excellent.
So Doug, when you had this transition and
thought about all the ways that you'd like
to help, are you still practicing in Massachusetts?
I know you're part-time or full-time
(04:39):
in Florida.
What's your geographical region that you're helping people
in?
Well, I am physically located in Florida.
We've been here now full-time for a
year and a half, but I still have
a lot of my contacts and I actually
have active clients in Massachusetts still.
A couple of legal matters, but my goal
(05:00):
is to wrap that up and completely move
out of the practice of law and focus
strictly on the business brokerage.
Got a couple of- Where is it
that you do that activity?
Is that primarily Massachusetts because that's where your
contacts are or is it anywhere?
It's pretty much anywhere.
Some states have licensing requirements where I'll need
(05:22):
to work with someone in that state, but
primarily I've been focusing on Florida and Massachusetts.
Do you find that people who are business
buyers tend to be serial business buyers?
Do you have a lot of repeat business
as a consequence of people who tend to
acquire more than one business?
(05:44):
That does happen.
There are people, like you've referred to the
serial entrepreneur, that they buy a business, they
love the challenge of it, they build it
up, get it functioning to where they're ready
to let go because now they're looking for
a new challenge.
(06:04):
That does happen.
You will also get repeat businesses from someone
who you sold the business to.
You sell them this business and they run
it for several years or maybe longer.
Then when it comes time for them to
step out, they call you because they've dealt
with you.
That makes sense.
(06:24):
Talk a little bit about- Jeff, you
were talking about this earlier.
Maybe you can phrase the question better, but
the idea of buying a business versus buying
a job or something along those lines.
Buyers come in at all different levels, I'm
sure.
Doug, some with a lot of money, some
with no money, some looking to build a
(06:46):
family legacy and some just looking for a
job that they can control because they don't
like working for the man anymore.
Can you draw that distinction on how you
help people focus on what they're a buyer
in this case, what their goals are and
how they should start?
Certainly.
When you're dealing with a buyer, first thing
(07:09):
is to help them ascertain what it is
they want.
Usually, someone is going to come in with
a certain skill set.
They know what they know and they know
what they like.
Those are usually going to be good people
who just maybe they've decided to step out
of corporate life and they just want to
(07:32):
start off with something that's going to keep
them busy and make them a little bit
of money.
Those are what we refer to as the
people looking to buy a job.
That's all well and good and that's great.
Those are usually going to be your smaller
businesses, personal things, whether it be something along
the lines of a locksmith business or maybe
(07:55):
even some type of small light manufacturing.
Usually, they're going to be the businesses that
are going to be on the smaller end
of the revenue spectrum.
Then you have other buyers who they're not
so much looking for a particular type of
business.
They may have experience in a certain industry
(08:16):
and they may want to stick with certain
industries, but they are looking to buy a
business not necessarily to physically work in the
business, but rather they want to work on
the business.
They want to manage that business or bring
in a group of people to manage it
(08:36):
who are going to basically turn this business
from being a job into being a revenue
generating machine.
That's ideally what the investor is looking for.
They're buying a business not because it's something
that they want to do.
They're buying it because they want the revenue
(08:59):
or the cash stream that the business generates.
Neither one is right or wrong.
It's just what's the preference.
Let's talk about that for a minute.
I just think that's really intriguing, the idea
that someone buys a business, but doesn't necessarily
have to be immersed in the business, have
to be an expert in all things of
(09:20):
that business.
I think of people who are great business
people in our region.
I think of Bill Zamer as an example.
He wasn't in the kitchen cooking as a
chef.
He was running a business that other people
(09:42):
were doing the actual day-to-day operations
of what's on the menu this week or
whatever it is.
How do people identify what's a business that
they can operate from that kind of a
step back as opposed to having to be
(10:05):
the expert in all things?
Sure.
A couple of key things that the investor
really should be looking at.
First and foremost, it doesn't hurt to educate
yourself about the business to understand how it
operates.
That's important.
People who come in cold and have no
understanding of how a particular type of business
(10:28):
operates put themselves in a position where they're
a little bit at the mercy of the
people running the business.
It's always good to educate yourself.
That being said, restaurants are a great example.
You don't have to be the best cook.
You don't have to be the one washing
the dishes.
(10:49):
You don't have to be the one bringing
the food to the table, being the server.
If you understand how things operate and you
know how to manage and hire good people,
you can run a successful business.
You can run a successful restaurant.
There's every industry.
The people who can actually be on the
(11:11):
ground doing that stuff.
Oh, yeah.
Right now, and that's not limited to any
particular industry.
Right now, finding good people to work is
not easy.
When you do find them, you want to
keep them, but you're constantly looking because people
do move.
They move around from business to business.
(11:32):
That's reality.
A little bit of our current situation in
our current society, but it can be done.
When you find the good people and you
work with them and you manage things well,
you can run a successful business, even though
you don't do every aspect of it.
In fact, being that business where the owner
(11:54):
is doing all the aspects and they've got
their fingers in every part of it is
not necessarily a good thing when it comes
time to sell.
If that business is you, what is there
to sell?
It's a lot more difficult to sell a
business when you're doing everything.
Go ahead.
(12:15):
Sorry, Chris.
No, I said that's a great point.
Yeah.
Especially true in law firms or service firms,
right?
Because I go in and I want to
see attorney Doug Cabral or financial services.
I want to go and see Chris Boyd.
If I go to the dentist, I want
to see my dentist, John Smith, right?
The relationship part.
(12:36):
Yep.
I go in and he's not there, she's
not there.
I'm like, oh no, they don't understand me.
Right.
Yeah.
That personal relationship is always the challenge when
you're dealing with working with a professional service
firm, whatever it may be when you're doing
a sale of that.
(12:59):
Before we go on into, I want to
talk about the buyer just for a little
bit longer, then let's talk about succession and
the thought process there.
But when I'm a buyer and someone comes
to you, maybe just start by telling us
a little bit about process, how you identify
what they're looking for, what's the right fit,
(13:20):
is it all about budget, that kind of
thing.
Then I'd be interested in hearing your thoughts
on the question of franchise versus just an
independent business, pros and cons and how that
all works.
Yeah.
Also, do you vet the buyer at all?
You don't want to spend a lot of
time with someone who's really not capable of
(13:43):
buying a business.
Yeah, exactly, Jeff.
You do have to vet buyers.
When you're representing a seller, you're doing a
couple of things.
You're that buffer between the seller and the
buyer.
That's an important role for a couple of
reasons.
One is so that you're not wasting the
seller's time with someone who may be a
wonderful person, but they don't have the financial
(14:05):
ability or they don't have the ability to
get necessary financing as a buffer in keeping
the parties apart, because it's important to maintain
confidentiality between the buyer and the seller.
You don't want it known as a public
knowledge that this business is for sale.
I'm sure, yeah.
That's one of the things that people don't
(14:26):
really think about is how important it is
for them to maintain confidentiality when they're selling
their business.
I don't want to lose all of your
audience because you're thinking about selling.
Well, when you're looking at a sale and
you're considering selling, one of the things, and
(14:48):
I see it all the time when I
go out to put a listing up on
a website like BizBuySell or something like that,
and you see all these businesses that are
listed by the owner, and you can tell
they're being listed by the owner because they've
got the name of the business and the
contact name for the owner and all of
this, and they don't realize what they've done
to themselves.
(15:10):
First of all, they've told all their employees
they're looking to sell.
The employees, they may be great people.
They may be loyal to a fault, but
this is their livelihood.
This is how they put food on the
table for their family, and they're going to
get nervous.
Exactly.
Most of the time, a buyer's going to
want to keep those employees because they're generating
(15:30):
the income, but they don't know that, and
they don't understand what's going on, and they
get panicky, and they start looking for other
places to go.
You lose some key employees, and that's going
to decimate the value of your business.
You're also letting all of your customers know
that you're for sale, possibly.
Customers may love you, but you're providing them
(15:52):
a service they need, and they're going to
look for somebody else to provide that because
they want the security of continuity of it.
Your competitors are probably going to help spread
the word too, right?
That's the last thing.
The competitors are going to find out, and
once the competitor finds out you're for sale,
business can be a contact sport.
They're going to look for an advantage in
(16:12):
it.
That's why confidentiality is important.
That's why we vet a buyer when we're
representing a seller, and we always use non
-disclosure agreements.
Anytime we're providing any information to a potential
buyer, to add as much protection to that
seller as possible.
(16:33):
Once you get nervous about an NDA, that's
part of the process when you're going through
this.
You want to keep that information confidential.
When a seller is going to reveal their
details, they want to make sure that that's
not public information.
Absolutely, because when you're in the process, you
have someone who has expressed interest, and they
(16:55):
look like they're a viable buyer.
You're going to be providing them a lot
of information.
You're going to be providing them an overview
of financials at that stage, and the whole
backstory on the business.
It's usually put together in what's referred to
as a confidential information memorandum.
That's something that you circulate once they've executed
(17:17):
the NDA, so that they have an idea
in this business and if it's something that
they are interested in pursuing.
Very good.
Just real quick, you didn't touch on the
franchise question.
Do you care to, or do you want
to move on?
Sure, absolutely.
Franchises are really good in a lot of
ways.
(17:38):
They have upsides and downsides.
With a franchise, you're paying somebody for the
rights to use their logos, their name, and
their process.
The good side to that is that you
do get the process.
That is what makes franchises more successful in
(18:01):
survivability than regular startup businesses.
Franchises will succeed at a higher rate than
most regular startup businesses.
That's because part of what you're paying for
is basically the roadmap.
This franchise tells you, here's how you do
the business.
(18:22):
They bring you along and they do a
lot of marketing.
You're paying for that a lot with your
franchise fees and your advertising fees, but what
you're getting is the knowledge.
You're very good.
(18:45):
Here's how you do it.
There's a manual.
It's proven.
The franchise is interested in your success because
if a franchise doesn't perform well, it looks
bad on the whole organization.
In that process, there's some clarity around the
amount of cash flow, the reserves you got
(19:07):
to come into it with, and so forth.
They tell you everything that you need to
know.
You pay for it.
If you're a really innovative entrepreneur, a franchise
might not be right for you.
It may not be.
If you're the type of person who likes
(19:30):
to do things your own way, then maybe
a franchise is not so good for you
because it is going to be very structured.
Let's talk about succession a little bit.
There's a lot of people who own businesses.
They start to think about, how do I
(19:51):
extract value from my business at some point
in time?
When's the right time to do that?
A lot of times, you talked about involvement
with professional services.
A lot of times, people think, well, I
can keep doing this a long time and
maybe I don't need to sell the business.
(20:12):
I'll just keep working, but there's maybe missed
opportunity if they have some value in that
business.
Let's talk about the internal versus external succession
planning.
What's your role in that process?
Do you help people when they're dealing with
internal succession?
(20:34):
Yeah, at times I do.
Usually, that's going to be more of a
consulting situation.
When you're dealing with the internal type of
succession, it's usually going to be one of
two ways.
It's usually going to either be continuation with
the next generation of the family or it's
going to be transferring ownership to a key
(20:56):
person, someone who's been working with you for
years and they've decided that they would like
to take over the mantle and you're ready
to let it go.
Both of them have their advantages.
They both have potential downsides as well, though.
Yeah.
When you're dealing with family successions, it's like
(21:17):
that business owner's dream.
They built this business and now they want
to pass it along to their children.
When it works, it's great.
The downside to that is that there's a
lot of potential pitfalls there.
I'll just touch on that.
A lot of times, there's not a lot
(21:37):
of cash flow in terms of the buyer
doesn't really come into this.
That's probably true with most internal succession.
The buyer doesn't come into this with a
big budget.
Yeah, they usually don't.
That's the first question is, how is this
going to get paid for?
Are you going to be taking a significant
discount because it's family?
(21:59):
Can you afford to?
Many people don't realize how large of a
portion of their personal net worth their business
owner's is.
That's something they may need for their future
retirement goals.
How is it going to be structured?
Is it going to be structured as a
(22:21):
loan coming from an outside source?
Or is it going to be, in essence,
seller financed and all of the risks that
go along with that?
Usually, the biggest issue I find dealing with
some of these business owners whose plan is
that it's going to be passed through the
family, they haven't talked to their children.
They haven't actually sat down with their children
(22:42):
and asked them, is this what you want
to do?
They assume that, sure, my kids are going
to want to do this.
Many times, the children don't.
They may not want to do this.
They don't have the passion for that business
that their parent did.
That's a red flag.
(23:03):
Sometimes, they just don't have the skill set.
They may have been around this business, but
they may not have actually physically been involved
in it all that much.
They may not have the skill set to
continue to manage and run this business successfully.
The last thing that people don't really think
about is, how is it going to impact
the family dynamic?
(23:23):
You may have one child and that's great.
There's no sibling rivalry there.
What happens when you have multiple children?
Three kids, one's really involved, one's peripherally involved,
and one's not involved at all.
How do you deal with that in a
way that's fair?
(23:44):
In terms of ownership, the one who's really
involved wants to be the owner.
The one who's peripherally involved has a job,
but hey, I'm still involved.
Then the one who's not involved at all,
what's their part in the estate?
How do you deal with this in a
way that's equitable?
Equal is not fair.
Exactly.
How do you balance this out?
Equal is not necessarily fair.
(24:05):
Do you give one of the siblings the
business and other assets to the others?
Business does really well.
That can raise some issues.
Or do you just decide that you're going
to give it to all of them?
Now you have a contest between the kids
(24:26):
where one's running the show and only getting
a third of the benefit or whatever.
One's waiting at the mailbox at the beach.
Exactly.
The one who's maybe never been involved in
the business, who doesn't understand it, thinks they
know how it should be run.
You run into all of these issues.
There certainly are things.
One of the things I like to always
warn my clients when I'm dealing with that
(24:49):
type of situation, the family succession, is what
is going to be best for your children?
Is it best to leave them the business
and make the transition to ownership to them?
Or is selling the business and leaving the
money ultimately to them, which is going to
be best for them?
That's a decision that owner's got to make,
(25:10):
but as long as they've opened their eyes
and they've looked at it rationally and reasonably
and really thought about it and talked to
the children, whatever they want to do is
what's right for them.
Let's say for discussion's sake that internal succession,
the longer the runway, the better because it
(25:31):
takes a while to get that money out
of the business, usually because it's not coming
as quickly and better for a longer runway.
Let's talk about the external transition, an external
succession of finding a buyer.
How long should one do some planning in
(25:52):
preparation for that, ideally versus what do you
see the most common?
Is it something that suddenly people have or
an unexpected illness or death?
It could be a disability or a death,
divorce, something like that.
Things of that sort that prompt it or
is it something where, hey, most people plan
sufficiently and here's what's the right amount of
(26:13):
time for planning?
Talk about that.
Sure.
Well, when we're dealing with your smaller businesses,
five million in revenue and less, probably about
two-thirds of them really don't engage in
much, if any, planning.
It's a scary issue because the owner isn't
(26:37):
prepared.
That's a lot of what we end up
doing is working with them to prepare them
for a sale.
I like to work with a business owner
who says that, I'm thinking of this.
I'm not there yet.
Maybe I'm a couple of years out.
(26:58):
That's a great time to start talking to
them for a couple of reasons.
One, you can help them prepare for it.
You can help them get their books in
order.
You can help them get their processes in
order.
You help to prepare them emotionally because a
lot of people, they don't realize that what's
stepping away from this business that they've poured
(27:22):
their heart and soul into for years is
going to mean.
You hit on a couple of things there,
that emotional transition, the books, but you talked
about process.
I'd like you to elaborate on the importance
of that because most small businesses, I think,
(27:44):
don't necessarily have as thorough a detailed documentation,
at least, of their process.
They might have a process, but it's not
particularly you mentioned.
I'll share with you just anecdotally.
I have a client who you talked about
professional services and insurance business.
This guy is semi-retired, but he has
(28:06):
an insurance business.
And his wife said that everything's on note
cards.
It's not really computerized and all the rest
of it.
It works for him, but that makes it
harder to sell in that scenario.
(28:26):
Talk about process a little bit.
Sure.
Every business and every industry has its methodology.
They have their way of doing things.
And you really want to have that, if
not standardized, at least clearly set out for
a couple of reasons.
(28:47):
One, for operation purposes, it makes it easier
when you're onboarding new people.
You're able to explain what the role is,
what the tasks are, how they all interconnect.
From the perspective of a sale, one of
the things you have to realize is when
you're looking to sell your business, what you're
(29:09):
looking to sell is its ability to generate
income.
And it does that by doing certain things.
And those processes are what that buyer is
paying, or at least part of what that
buyer is paying for.
It's analogous to the franchise.
(29:30):
When you buy a franchise, you're buying the
process and the right to use all of
the name and trademarks and all of that.
When you're buying an established business, you're doing
much the same, just on a little bit
smaller scale.
You're not dealing with a national entity that
(29:51):
tells you how to do everything, but you're
dealing with an owner who's run this business
for a number of years to get it
to the point where it's mature.
And now he's looking to sell this.
And that's kind of important, especially when you
consider survivability of startups, the rates that startup
businesses fail.
(30:11):
You know, I think the SBA puts out
some statistics.
I think like 80% of businesses, new
startups may make it past the first year.
But by the time you get to the
five year, only about half of them have
survived.
And to make it to 10 years, only
about 20 to 25% of them make
(30:32):
it to 10 years.
So when you're buying an established business, you're
buying that knowledge.
That owner is the one who's already made
the mistakes and they figured out, okay, this
is how this business makes money.
And that's the process, the how it's done.
And that should be documented or it should
(30:54):
be easily to explain.
The more documented it is, the less transition
period that seller is going to have to
be involved in.
Doug, before we run out of time, I
want to focus on maybe the most important
question for a seller is how much is
my business worth?
(31:14):
Yep.
That's usually a great starting point.
Actually, when someone is thinking about, maybe I
want to sell my business, that's where you
should start.
What is my business worth?
And there's a lot of different ways to
value a business.
Accountants will tend to value a certain way,
looking at the book value of the assets
and looking at what's the revenue of this.
(31:39):
What I do when a client comes to
me and says, I want to start looking
at this, what do you think my business
is worth?
I take it from the perspective of if
you were going to sell your business today
in its current condition, what would it sell
for?
And to do that, we basically start off
with their finances, go through ideally three, maybe
(32:02):
five years worth of their finances, tax returns,
P&Ls, looking for what we refer to
as either seller's discretionary earnings or EBITDA.
And that is basically a measure of profit.
What does that owner actually get from the
(32:22):
business?
And we alluded a little bit to when
we're talking in planning out this, what about
these businesses who put a lot of expenses?
They run a lot of expenses through their
business.
Those are some of the things we're looking
for.
Because when you're the owner of the business,
you may get, depending on how it's structured,
you may get a salary or you may
(32:44):
get a draw from this business, but you
may also be running your personal vehicle through
the business, or you may be running your
cell phone through the business.
I've got a friend who's got all those
kids on the payroll.
Exactly.
And that's all part of what that business
generates for the owner.
So we're doing a recast of the financials,
(33:04):
looking for all these items.
And people who are serious about buying businesses,
they understand that.
And when you explain to them that, yes,
this is actually a benefit to the owner,
it's an expense, but this is actually something
that's benefiting the owner directly, they get it,
they understand it.
So we come down, we break that down
to find out what that business is actually
(33:25):
generating for that owner.
Then we go to various databases looking for
other businesses that are like this, similar size,
similar revenue, and what have they sold for?
And there are stats out there that will
show, let's say you're running an accounting practice,
(33:48):
because I've done this for a couple of
accounting practices.
An accounting practice that generates this much in
EBITDA, or this much in seller's discretionary earnings,
usually sells for a certain multiple.
Maybe it's one and a half times, or
maybe it's two times those discretionary earnings.
(34:09):
Those are stats that come from deals all
across the country.
And they're usually pretty accurate, and they're going
to have a wide variety.
So you do a little looking at it,
you do a little bit of art form
on it, and you come up with a
number that, okay, this is what I think
that is the proper multiple for this business.
(34:29):
And this is what your discretionary earnings are.
So I think you would sell for 1
.5 times discretionary earnings or whatever that may
be.
The other important thing to doing that is,
each business also has a certain benchmarks.
(34:50):
Every industry is a little different.
But usually for certain businesses, the payroll is
going to be a certain percentage of revenue,
or it should be.
Your occupancy costs are going to be a
certain percentage of revenue.
And when we see something that's out of
whack, that's an opportunity to advise this business
(35:12):
to help them improve their numbers and improve
their valuation.
That's a little bit what we do and
why I like working with people before.
That owner comes in, I'm done.
I need to get out.
I want to sell now.
Great.
Happy to help you.
But when they come in and say, I'm
a couple of years out, I'm thinking of
(35:33):
this, that gives us an opportunity to work
with that owner, help them improve their business,
help them improve their finances sometimes, and help
them boost their valuation ultimately.
Doug, you mentioned the accounting practice.
That's an intriguing one.
Is that considered a one-time revenue or
(35:54):
recurring revenue?
Most people go back to their tax person
year after year, but not all.
But how is that treated when it comes
to thinking about that?
Maybe just to elaborate for our listeners, recurring
revenue is generally preferable over one-time revenue
when it comes to the business.
(36:16):
Yep, absolutely.
And it plays a role in those multiples.
Businesses that have recurring revenue insurance agencies are
great for that.
How often do people change their insurance agent?
Not very often.
It's all residual income, which is why a
lot of the bigger investment companies and the
bigger PE companies really got very interested in
(36:39):
insurance agencies over the last 15 years or
so.
When you're dealing with a business that's got
recurring revenue, it's usually going to be factored
into that multiple that they're getting.
A lot of people will say, oh, accounting
firms, one-time revenue.
That's not necessarily true, though, because just because
(37:01):
something has a higher revenue doesn't mean it's
a better business.
I like to tell people, which business would
you pay for more?
The business that's got a million dollars of
revenue, but has got 900,000 of expenses,
or the business that's only got 500 in
revenue, but only has 200,000 in expenses.
(37:24):
It's really the profit that drives the valuation.
When you're looking at these businesses and the
kind of practices in particular, the fact that
they generally are recurring revenue certainly helps boost
those values.
The downside, however, when you're dealing with professional
(37:46):
services firms, and you mentioned this earlier, Chris,
is it's the personal relationships, which is why
usually when you're dealing with a professional services
firm, the transition period is going to be
extremely important.
It may be a little longer than some
of the business.
It's not uncommon for a selling accountant to
(38:07):
stick with that business for a year to
help with that transition, make sure that those
clients are introduced to the new firm and
things are brought along slowly, so you don't
get a sudden drop off.
Also, there's usually going to be provisions in
the purchase agreement to deal with what happens
(38:28):
if clients drop off.
Good point.
Hey, Doug.
One question I had.
Let's say someone's thinking about selling their business.
Rather than creating that biz by sell account
and just putting their business up there, what
(38:49):
can they do to get organized and get
everything in order before giving you a call
and starting the whole process?
Okay.
If they want to start organizing themselves, first
thing they want to do is they want
to go through and make sure that all
of their records are in order.
If they're a corporation or LLC or all
(39:12):
their annual reports filed, are they actually in
existence?
People sometimes don't file their annual reports and
then find out a couple of years down
the line that they were dissolved by the
Secretary of State's office.
How are their financial books?
Oh, I've seen a lot of it.
What about their financial records?
(39:34):
Are their financial records in good order?
Are they not co-mixed with their personal
records?
Are they not co-mixed with their personal
records?
I've run into some businesses where you have
a business owner who has one corporation, but
he's running two businesses under it.
That's always fun.
(39:56):
A lot of times the accountant may not
care because the corporation balances out and that's
what they're reporting.
But these two businesses may be co-mingling
expenses and co-mingling income.
That makes for an interesting process and unraveling
all that.
(40:16):
And the other thing too, the most important
thing too, is don't be afraid to call
someone to help, whether it be a business
broker or have a sit down with your
financial advisor or your accountant and say, here's
what I'm thinking.
What should I be doing?
Who should I be talking to?
(40:37):
I believe in the team approach.
I'm not an accountant.
I may be an attorney, but I don't
necessarily want to do both the broker work
and the attorney work.
I think that having that team approach is
a good way to go because every situation
is different.
Some businesses may have real estate, some don't.
(41:02):
Do they want to sell the real estate
as well, or do they want to hold
onto that and maybe lease it back to
the business for an additional cash stream?
Each situation is different, so you really want
to work with that owner and work with
their team to find the right solution for
them.
Well, it's been a really interesting discussion.
(41:24):
We probably went a little longer than planned,
but there's so much to talk about and
I'm sure we could probably plan to have
you back in the future, Doug, because it's
been- We'd be happy anytime, Chris.
All right.
Anything, Jeff, you wanted to add as we
wind down?
I'd just like to give Doug an opportunity
to share his contact information on how he
(41:46):
would like, if someone's listening, a buyer or
seller and might want to have that initial
conversation, what's the best way to reach out
to you, Doug?
Sure.
Best way to reach out to me, give
you a couple of ways, email dougatcompassbusiness.net.
Phone, I've got a mass number, 508-375
(42:08):
-7196 and a Florida number as well, that's
321-378-4038.
If you have questions, if you're thinking about
it, you're thinking of selling your business or
you're thinking about buying a business or maybe
you've got an existing business and you're looking
(42:30):
to expand through acquisition.
Be happy to talk to you and see
if I can help you.
Thank you, Doug.
Great job.
Thanks, Doug.
Appreciate it.
Thank you.
Conversation.
All right.
With that, everybody, thanks for being with us
for another episode.
If there's anything you need for help from
us with your financial planning and portfolio management,
don't hesitate to reach out.
(42:50):
Until next time, keep striving for something more.
Thank you for listening to Something More with
Chris Boyd.
Call us for help, whether it's for financial
planning or portfolio management, insurance concerns, or those
quality of life issues that make the money
matters matter.
Whatever's on your mind, visit us at somethingmorewithchrisboyd
.com or call us toll free at 866
(43:13):
-771-8901.
Or send us your questions to amr-info
at wealthenhancement.com.
You're listening to Something More with Chris Boyd
Financial Talk Show, Wealth Enhancement Advisory Services, and
Jay Christopher Boyd provide investment advice on an
individual basis to clients only.
Proper advice depends on a complete analysis of
(43:33):
all facts and circumstances.
The information given on this program is general
financial comments and cannot be relied upon as
pertaining to your specific situation.
Wealth Enhancement Group cannot guarantee that using the
information from this show will generate profits or
ensure freedom from loss.
Listeners should consult their own financial advisors or
conduct their own due diligence before making any
financial decisions.
Welcome to Something More with Chris Boyd.
Chris Boyd is a certified financial planner, practitioner,
and senior vice president and financial advisor at
Wealth Enhancement Group, one of the nation's largest
registered investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome, everybody.
Thanks for being with us for an episode
of Something More with Chris Boyd.
I'm here with Jeff Perry and Russ Ball.
We are all of the AMR team at
(00:45):
Wealth Enhancement Group and glad to have you
joining us for the show.
You can always find more about our episodes
through our team page.
You can find that by going to somethingmorewithchrisboyd
.com or we'd love you to follow the
show wherever you like to listen to your
podcast so you get all of the good
(01:05):
ones just like this one.
We have a great guest lined up for
our show today.
Joining us is Doug Cabral.
He is of Compass Business Intermediaries.
And Jeff, where you guys are connected, friends,
I assume it's friends for a long time,
but who knows.
Tell us a little bit about Doug and
(01:27):
give us our introduction.
I met Doug when we lived on the
Cape and Doug was a practicing attorney for
many years.
I won't dare to guess how many, Doug,
and actually handled one of my real estate
transactions as well.
Got to know him through the community, very
involved.
Doug was very involved in the Cape Cod
community and also ran to, I think we
(01:49):
ran into each other at an airport as
we were both heading down to our vacation
homes in Florida once, didn't we, Doug?
I believe we did, Jeff.
So why don't you start off by telling
us about your transition from the grind of
running a law firm to helping businesses, business
owners and business buyers.
Sure.
(02:09):
Jeff, happy to.
As you mentioned, I was an attorney, practicing
attorney in Massachusetts.
I did that for about 30 years and
I enjoyed it.
But after 30 years, you've been involved, you
know what a grind it can be.
I decided it was time for a change.
So I looked at what I enjoyed.
(02:31):
I did a lot of transactional work, a
lot of real estate conveyancing work, also a
bit of estate planning work.
And I also worked with a lot of
small businesses, helping them set up their businesses,
you know, in corporation, start structuring LLCs.
And as they grew, you know, helping them
restructure them at times when they needed them.
(02:51):
And also when they reached the end or
when they were looking to expand, helping them
with purchasing and selling other businesses, you know,
all from the legal aspect of things.
And I really enjoyed working with the small
business owners.
They were very, you know, very focused on
what they wanted to accomplish usually.
(03:13):
And it was just, it was fun to
be able to help people grow their dreams.
So when it came time for me to
find something else, I decided to move into
the business brokering, small business mergers and acquisition.
And I had, you know, I've got a
mentor who is actually a family member.
(03:33):
He's my wife's uncle, great guy, a real
interesting backstory on him.
And he had been doing it for 20
years.
And he said, this is what you really
should be doing.
You know, it's a lot of fun.
You get to meet a lot of people
and you get to help people.
So that's kind of a little bit of
my backstory of how I made the transition
from practicing attorney to business broker.
(03:56):
Did you happen to buy his business?
I did not.
He actually built a very successful brokerage and
they have an offshoot, which is probably the
primary business now that specializes actually in mergers
and acquisitions of property and casualty insurance agencies.
(04:19):
He's actually left that now.
He's finally retired.
He's in his 70s and he is enjoying
retirement.
Excellent.
So Doug, when you had this transition and
thought about all the ways that you'd like
to help, are you still practicing in Massachusetts?
I know you're part-time or full-time
(04:39):
in Florida.
What's your geographical region that you're helping people
in?
Well, I am physically located in Florida.
We've been here now full-time for a
year and a half, but I still have
a lot of my contacts and I actually
have active clients in Massachusetts still.
A couple of legal matters, but my goal
(05:00):
is to wrap that up and completely move
out of the practice of law and focus
strictly on the business brokerage.
Got a couple of- Where is it
that you do that activity?
Is that primarily Massachusetts because that's where your
contacts are or is it anywhere?
It's pretty much anywhere.
Some states have licensing requirements where I'll need
(05:22):
to work with someone in that state, but
primarily I've been focusing on Florida and Massachusetts.
Do you find that people who are business
buyers tend to be serial business buyers?
Do you have a lot of repeat business
as a consequence of people who tend to
acquire more than one business?
(05:44):
That does happen.
There are people, like you've referred to the
serial entrepreneur, that they buy a business, they
love the challenge of it, they build it
up, get it functioning to where they're ready
to let go because now they're looking for
a new challenge.
(06:04):
That does happen.
You will also get repeat businesses from someone
who you sold the business to.
You sell them this business and they run
it for several years or maybe longer.
Then when it comes time for them to
step out, they call you because they've dealt
with you.
That makes sense.
(06:24):
Talk a little bit about- Jeff, you
were talking about this earlier.
Maybe you can phrase the question better, but
the idea of buying a business versus buying
a job or something along those lines.
Buyers come in at all different levels, I'm
sure.
Doug, some with a lot of money, some
with no money, some looking to build a
(06:46):
family legacy and some just looking for a
job that they can control because they don't
like working for the man anymore.
Can you draw that distinction on how you
help people focus on what they're a buyer
in this case, what their goals are and
how they should start?
Certainly.
When you're dealing with a buyer, first thing
(07:09):
is to help them ascertain what it is
they want.
Usually, someone is going to come in with
a certain skill set.
They know what they know and they know
what they like.
Those are usually going to be good people
who just maybe they've decided to step out
of corporate life and they just want to
(07:32):
start off with something that's going to keep
them busy and make them a little bit
of money.
Those are what we refer to as the
people looking to buy a job.
That's all well and good and that's great.
Those are usually going to be your smaller
businesses, personal things, whether it be something along
the lines of a locksmith business or maybe
(07:55):
even some type of small light manufacturing.
Usually, they're going to be the businesses that
are going to be on the smaller end
of the revenue spectrum.
Then you have other buyers who they're not
so much looking for a particular type of
business.
They may have experience in a certain industry
(08:16):
and they may want to stick with certain
industries, but they are looking to buy a
business not necessarily to physically work in the
business, but rather they want to work on
the business.
They want to manage that business or bring
in a group of people to manage it
(08:36):
who are going to basically turn this business
from being a job into being a revenue
generating machine.
That's ideally what the investor is looking for.
They're buying a business not because it's something
that they want to do.
They're buying it because they want the revenue
(08:59):
or the cash stream that the business generates.
Neither one is right or wrong.
It's just what's the preference.
Let's talk about that for a minute.
I just think that's really intriguing, the idea
that someone buys a business, but doesn't necessarily
have to be immersed in the business, have
to be an expert in all things of
(09:20):
that business.
I think of people who are great business
people in our region.
I think of Bill Zamer as an example.
He wasn't in the kitchen cooking as a
chef.
He was running a business that other people
(09:42):
were doing the actual day-to-day operations
of what's on the menu this week or
whatever it is.
How do people identify what's a business that
they can operate from that kind of a
step back as opposed to having to be
(10:05):
the expert in all things?
Sure.
A couple of key things that the investor
really should be looking at.
First and foremost, it doesn't hurt to educate
yourself about the business to understand how it
operates.
That's important.
People who come in cold and have no
understanding of how a particular type of business
(10:28):
operates put themselves in a position where they're
a little bit at the mercy of the
people running the business.
It's always good to educate yourself.
That being said, restaurants are a great example.
You don't have to be the best cook.
You don't have to be the one washing
the dishes.
(10:49):
You don't have to be the one bringing
the food to the table, being the server.
If you understand how things operate and you
know how to manage and hire good people,
you can run a successful business.
You can run a successful restaurant.
There's every industry.
The people who can actually be on the
(11:11):
ground doing that stuff.
Oh, yeah.
Right now, and that's not limited to any
particular industry.
Right now, finding good people to work is
not easy.
When you do find them, you want to
keep them, but you're constantly looking because people
do move.
They move around from business to business.
(11:32):
That's reality.
A little bit of our current situation in
our current society, but it can be done.
When you find the good people and you
work with them and you manage things well,
you can run a successful business, even though
you don't do every aspect of it.
In fact, being that business where the owner
(11:54):
is doing all the aspects and they've got
their fingers in every part of it is
not necessarily a good thing when it comes
time to sell.
If that business is you, what is there
to sell?
It's a lot more difficult to sell a
business when you're doing everything.
Go ahead.
(12:15):
Sorry, Chris.
No, I said that's a great point.
Yeah.
Especially true in law firms or service firms,
right?
Because I go in and I want to
see attorney Doug Cabral or financial services.
I want to go and see Chris Boyd.
If I go to the dentist, I want
to see my dentist, John Smith, right?
The relationship part.
(12:36):
Yep.
I go in and he's not there, she's
not there.
I'm like, oh no, they don't understand me.
Right.
Yeah.
That personal relationship is always the challenge when
you're dealing with working with a professional service
firm, whatever it may be when you're doing
a sale of that.
(12:59):
Before we go on into, I want to
talk about the buyer just for a little
bit longer, then let's talk about succession and
the thought process there.
But when I'm a buyer and someone comes
to you, maybe just start by telling us
a little bit about process, how you identify
what they're looking for, what's the right fit,
(13:20):
is it all about budget, that kind of
thing.
Then I'd be interested in hearing your thoughts
on the question of franchise versus just an
independent business, pros and cons and how that
all works.
Yeah.
Also, do you vet the buyer at all?
You don't want to spend a lot of
time with someone who's really not capable of
(13:43):
buying a business.
Yeah, exactly, Jeff.
You do have to vet buyers.
When you're representing a seller, you're doing a
couple of things.
You're that buffer between the seller and the
buyer.
That's an important role for a couple of
reasons.
One is so that you're not wasting the
seller's time with someone who may be a
wonderful person, but they don't have the financial
(14:05):
ability or they don't have the ability to
get necessary financing as a buffer in keeping
the parties apart, because it's important to maintain
confidentiality between the buyer and the seller.
You don't want it known as a public
knowledge that this business is for sale.
I'm sure, yeah.
That's one of the things that people don't
(14:26):
really think about is how important it is
for them to maintain confidentiality when they're selling
their business.
I don't want to lose all of your
audience because you're thinking about selling.
Well, when you're looking at a sale and
you're considering selling, one of the things, and
(14:48):
I see it all the time when I
go out to put a listing up on
a website like BizBuySell or something like that,
and you see all these businesses that are
listed by the owner, and you can tell
they're being listed by the owner because they've
got the name of the business and the
contact name for the owner and all of
this, and they don't realize what they've done
to themselves.
(15:10):
First of all, they've told all their employees
they're looking to sell.
The employees, they may be great people.
They may be loyal to a fault, but
this is their livelihood.
This is how they put food on the
table for their family, and they're going to
get nervous.
Exactly.
Most of the time, a buyer's going to
want to keep those employees because they're generating
(15:30):
the income, but they don't know that, and
they don't understand what's going on, and they
get panicky, and they start looking for other
places to go.
You lose some key employees, and that's going
to decimate the value of your business.
You're also letting all of your customers know
that you're for sale, possibly.
Customers may love you, but you're providing them
(15:52):
a service they need, and they're going to
look for somebody else to provide that because
they want the security of continuity of it.
Your competitors are probably going to help spread
the word too, right?
That's the last thing.
The competitors are going to find out, and
once the competitor finds out you're for sale,
business can be a contact sport.
They're going to look for an advantage in
(16:12):
it.
That's why confidentiality is important.
That's why we vet a buyer when we're
representing a seller, and we always use non
-disclosure agreements.
Anytime we're providing any information to a potential
buyer, to add as much protection to that
seller as possible.
(16:33):
Once you get nervous about an NDA, that's
part of the process when you're going through
this.
You want to keep that information confidential.
When a seller is going to reveal their
details, they want to make sure that that's
not public information.
Absolutely, because when you're in the process, you
have someone who has expressed interest, and they
(16:55):
look like they're a viable buyer.
You're going to be providing them a lot
of information.
You're going to be providing them an overview
of financials at that stage, and the whole
backstory on the business.
It's usually put together in what's referred to
as a confidential information memorandum.
That's something that you circulate once they've executed
(17:17):
the NDA, so that they have an idea
in this business and if it's something that
they are interested in pursuing.
Very good.
Just real quick, you didn't touch on the
franchise question.
Do you care to, or do you want
to move on?
Sure, absolutely.
Franchises are really good in a lot of
ways.
(17:38):
They have upsides and downsides.
With a franchise, you're paying somebody for the
rights to use their logos, their name, and
their process.
The good side to that is that you
do get the process.
That is what makes franchises more successful in
(18:01):
survivability than regular startup businesses.
Franchises will succeed at a higher rate than
most regular startup businesses.
That's because part of what you're paying for
is basically the roadmap.
This franchise tells you, here's how you do
the business.
(18:22):
They bring you along and they do a
lot of marketing.
You're paying for that a lot with your
franchise fees and your advertising fees, but what
you're getting is the knowledge.
You're very good.
(18:45):
Here's how you do it.
There's a manual.
It's proven.
The franchise is interested in your success because
if a franchise doesn't perform well, it looks
bad on the whole organization.
In that process, there's some clarity around the
amount of cash flow, the reserves you got
(19:07):
to come into it with, and so forth.
They tell you everything that you need to
know.
You pay for it.
If you're a really innovative entrepreneur, a franchise
might not be right for you.
It may not be.
If you're the type of person who likes
(19:30):
to do things your own way, then maybe
a franchise is not so good for you
because it is going to be very structured.
Let's talk about succession a little bit.
There's a lot of people who own businesses.
They start to think about, how do I
(19:51):
extract value from my business at some point
in time?
When's the right time to do that?
A lot of times, you talked about involvement
with professional services.
A lot of times, people think, well, I
can keep doing this a long time and
maybe I don't need to sell the business.
(20:12):
I'll just keep working, but there's maybe missed
opportunity if they have some value in that
business.
Let's talk about the internal versus external succession
planning.
What's your role in that process?
Do you help people when they're dealing with
internal succession?
(20:34):
Yeah, at times I do.
Usually, that's going to be more of a
consulting situation.
When you're dealing with the internal type of
succession, it's usually going to be one of
two ways.
It's usually going to either be continuation with
the next generation of the family or it's
going to be transferring ownership to a key
(20:56):
person, someone who's been working with you for
years and they've decided that they would like
to take over the mantle and you're ready
to let it go.
Both of them have their advantages.
They both have potential downsides as well, though.
Yeah.
When you're dealing with family successions, it's like
(21:17):
that business owner's dream.
They built this business and now they want
to pass it along to their children.
When it works, it's great.
The downside to that is that there's a
lot of potential pitfalls there.
I'll just touch on that.
A lot of times, there's not a lot
(21:37):
of cash flow in terms of the buyer
doesn't really come into this.
That's probably true with most internal succession.
The buyer doesn't come into this with a
big budget.
Yeah, they usually don't.
That's the first question is, how is this
going to get paid for?
Are you going to be taking a significant
discount because it's family?
(21:59):
Can you afford to?
Many people don't realize how large of a
portion of their personal net worth their business
owner's is.
That's something they may need for their future
retirement goals.
How is it going to be structured?
Is it going to be structured as a
(22:21):
loan coming from an outside source?
Or is it going to be, in essence,
seller financed and all of the risks that
go along with that?
Usually, the biggest issue I find dealing with
some of these business owners whose plan is
that it's going to be passed through the
family, they haven't talked to their children.
They haven't actually sat down with their children
(22:42):
and asked them, is this what you want
to do?
They assume that, sure, my kids are going
to want to do this.
Many times, the children don't.
They may not want to do this.
They don't have the passion for that business
that their parent did.
That's a red flag.
(23:03):
Sometimes, they just don't have the skill set.
They may have been around this business, but
they may not have actually physically been involved
in it all that much.
They may not have the skill set to
continue to manage and run this business successfully.
The last thing that people don't really think
about is, how is it going to impact
the family dynamic?
(23:23):
You may have one child and that's great.
There's no sibling rivalry there.
What happens when you have multiple children?
Three kids, one's really involved, one's peripherally involved,
and one's not involved at all.
How do you deal with that in a
way that's fair?
(23:44):
In terms of ownership, the one who's really
involved wants to be the owner.
The one who's peripherally involved has a job,
but hey, I'm still involved.
Then the one who's not involved at all,
what's their part in the estate?
How do you deal with this in a
way that's equitable?
Equal is not fair.
Exactly.
How do you balance this out?
Equal is not necessarily fair.
(24:05):
Do you give one of the siblings the
business and other assets to the others?
Business does really well.
That can raise some issues.
Or do you just decide that you're going
to give it to all of them?
Now you have a contest between the kids
(24:26):
where one's running the show and only getting
a third of the benefit or whatever.
One's waiting at the mailbox at the beach.
Exactly.
The one who's maybe never been involved in
the business, who doesn't understand it, thinks they
know how it should be run.
You run into all of these issues.
There certainly are things.
One of the things I like to always
warn my clients when I'm dealing with that
(24:49):
type of situation, the family succession, is what
is going to be best for your children?
Is it best to leave them the business
and make the transition to ownership to them?
Or is selling the business and leaving the
money ultimately to them, which is going to
be best for them?
That's a decision that owner's got to make,
(25:10):
but as long as they've opened their eyes
and they've looked at it rationally and reasonably
and really thought about it and talked to
the children, whatever they want to do is
what's right for them.
Let's say for discussion's sake that internal succession,
the longer the runway, the better because it
(25:31):
takes a while to get that money out
of the business, usually because it's not coming
as quickly and better for a longer runway.
Let's talk about the external transition, an external
succession of finding a buyer.
How long should one do some planning in
(25:52):
preparation for that, ideally versus what do you
see the most common?
Is it something that suddenly people have or
an unexpected illness or death?
It could be a disability or a death,
divorce, something like that.
Things of that sort that prompt it or
is it something where, hey, most people plan
sufficiently and here's what's the right amount of
(26:13):
time for planning?
Talk about that.
Sure.
Well, when we're dealing with your smaller businesses,
five million in revenue and less, probably about
two-thirds of them really don't engage in
much, if any, planning.
It's a scary issue because the owner isn't
(26:37):
prepared.
That's a lot of what we end up
doing is working with them to prepare them
for a sale.
I like to work with a business owner
who says that, I'm thinking of this.
I'm not there yet.
Maybe I'm a couple of years out.
(26:58):
That's a great time to start talking to
them for a couple of reasons.
One, you can help them prepare for it.
You can help them get their books in
order.
You can help them get their processes in
order.
You help to prepare them emotionally because a
lot of people, they don't realize that what's
stepping away from this business that they've poured
(27:22):
their heart and soul into for years is
going to mean.
You hit on a couple of things there,
that emotional transition, the books, but you talked
about process.
I'd like you to elaborate on the importance
of that because most small businesses, I think,
(27:44):
don't necessarily have as thorough a detailed documentation,
at least, of their process.
They might have a process, but it's not
particularly you mentioned.
I'll share with you just anecdotally.
I have a client who you talked about
professional services and insurance business.
This guy is semi-retired, but he has
(28:06):
an insurance business.
And his wife said that everything's on note
cards.
It's not really computerized and all the rest
of it.
It works for him, but that makes it
harder to sell in that scenario.
(28:26):
Talk about process a little bit.
Sure.
Every business and every industry has its methodology.
They have their way of doing things.
And you really want to have that, if
not standardized, at least clearly set out for
a couple of reasons.
(28:47):
One, for operation purposes, it makes it easier
when you're onboarding new people.
You're able to explain what the role is,
what the tasks are, how they all interconnect.
From the perspective of a sale, one of
the things you have to realize is when
you're looking to sell your business, what you're
(29:09):
looking to sell is its ability to generate
income.
And it does that by doing certain things.
And those processes are what that buyer is
paying, or at least part of what that
buyer is paying for.
It's analogous to the franchise.
(29:30):
When you buy a franchise, you're buying the
process and the right to use all of
the name and trademarks and all of that.
When you're buying an established business, you're doing
much the same, just on a little bit
smaller scale.
You're not dealing with a national entity that
(29:51):
tells you how to do everything, but you're
dealing with an owner who's run this business
for a number of years to get it
to the point where it's mature.
And now he's looking to sell this.
And that's kind of important, especially when you
consider survivability of startups, the rates that startup
businesses fail.
(30:11):
You know, I think the SBA puts out
some statistics.
I think like 80% of businesses, new
startups may make it past the first year.
But by the time you get to the
five year, only about half of them have
survived.
And to make it to 10 years, only
about 20 to 25% of them make
(30:32):
it to 10 years.
So when you're buying an established business, you're
buying that knowledge.
That owner is the one who's already made
the mistakes and they figured out, okay, this
is how this business makes money.
And that's the process, the how it's done.
And that should be documented or it should
(30:54):
be easily to explain.
The more documented it is, the less transition
period that seller is going to have to
be involved in.
Doug, before we run out of time, I
want to focus on maybe the most important
question for a seller is how much is
my business worth?
(31:14):
Yep.
That's usually a great starting point.
Actually, when someone is thinking about, maybe I
want to sell my business, that's where you
should start.
What is my business worth?
And there's a lot of different ways to
value a business.
Accountants will tend to value a certain way,
looking at the book value of the assets
and looking at what's the revenue of this.
(31:39):
What I do when a client comes to
me and says, I want to start looking
at this, what do you think my business
is worth?
I take it from the perspective of if
you were going to sell your business today
in its current condition, what would it sell
for?
And to do that, we basically start off
with their finances, go through ideally three, maybe
(32:02):
five years worth of their finances, tax returns,
P&Ls, looking for what we refer to
as either seller's discretionary earnings or EBITDA.
And that is basically a measure of profit.
What does that owner actually get from the
(32:22):
business?
And we alluded a little bit to when
we're talking in planning out this, what about
these businesses who put a lot of expenses?
They run a lot of expenses through their
business.
Those are some of the things we're looking
for.
Because when you're the owner of the business,
you may get, depending on how it's structured,
you may get a salary or you may
(32:44):
get a draw from this business, but you
may also be running your personal vehicle through
the business, or you may be running your
cell phone through the business.
I've got a friend who's got all those
kids on the payroll.
Exactly.
And that's all part of what that business
generates for the owner.
So we're doing a recast of the financials,
(33:04):
looking for all these items.
And people who are serious about buying businesses,
they understand that.
And when you explain to them that, yes,
this is actually a benefit to the owner,
it's an expense, but this is actually something
that's benefiting the owner directly, they get it,
they understand it.
So we come down, we break that down
to find out what that business is actually
(33:25):
generating for that owner.
Then we go to various databases looking for
other businesses that are like this, similar size,
similar revenue, and what have they sold for?
And there are stats out there that will
show, let's say you're running an accounting practice,
(33:48):
because I've done this for a couple of
accounting practices.
An accounting practice that generates this much in
EBITDA, or this much in seller's discretionary earnings,
usually sells for a certain multiple.
Maybe it's one and a half times, or
maybe it's two times those discretionary earnings.
(34:09):
Those are stats that come from deals all
across the country.
And they're usually pretty accurate, and they're going
to have a wide variety.
So you do a little looking at it,
you do a little bit of art form
on it, and you come up with a
number that, okay, this is what I think
that is the proper multiple for this business.
(34:29):
And this is what your discretionary earnings are.
So I think you would sell for 1
.5 times discretionary earnings or whatever that may
be.
The other important thing to doing that is,
each business also has a certain benchmarks.
(34:50):
Every industry is a little different.
But usually for certain businesses, the payroll is
going to be a certain percentage of revenue,
or it should be.
Your occupancy costs are going to be a
certain percentage of revenue.
And when we see something that's out of
whack, that's an opportunity to advise this business
(35:12):
to help them improve their numbers and improve
their valuation.
That's a little bit what we do and
why I like working with people before.
That owner comes in, I'm done.
I need to get out.
I want to sell now.
Great.
Happy to help you.
But when they come in and say, I'm
a couple of years out, I'm thinking of
(35:33):
this, that gives us an opportunity to work
with that owner, help them improve their business,
help them improve their finances sometimes, and help
them boost their valuation ultimately.
Doug, you mentioned the accounting practice.
That's an intriguing one.
Is that considered a one-time revenue or
(35:54):
recurring revenue?
Most people go back to their tax person
year after year, but not all.
But how is that treated when it comes
to thinking about that?
Maybe just to elaborate for our listeners, recurring
revenue is generally preferable over one-time revenue
when it comes to the business.
(36:16):
Yep, absolutely.
And it plays a role in those multiples.
Businesses that have recurring revenue insurance agencies are
great for that.
How often do people change their insurance agent?
Not very often.
It's all residual income, which is why a
lot of the bigger investment companies and the
bigger PE companies really got very interested in
(36:39):
insurance agencies over the last 15 years or
so.
When you're dealing with a business that's got
recurring revenue, it's usually going to be factored
into that multiple that they're getting.
A lot of people will say, oh, accounting
firms, one-time revenue.
That's not necessarily true, though, because just because
(37:01):
something has a higher revenue doesn't mean it's
a better business.
I like to tell people, which business would
you pay for more?
The business that's got a million dollars of
revenue, but has got 900,000 of expenses,
or the business that's only got 500 in
revenue, but only has 200,000 in expenses.
(37:24):
It's really the profit that drives the valuation.
When you're looking at these businesses and the
kind of practices in particular, the fact that
they generally are recurring revenue certainly helps boost
those values.
The downside, however, when you're dealing with professional
(37:46):
services firms, and you mentioned this earlier, Chris,
is it's the personal relationships, which is why
usually when you're dealing with a professional services
firm, the transition period is going to be
extremely important.
It may be a little longer than some
of the business.
It's not uncommon for a selling accountant to
(38:07):
stick with that business for a year to
help with that transition, make sure that those
clients are introduced to the new firm and
things are brought along slowly, so you don't
get a sudden drop off.
Also, there's usually going to be provisions in
the purchase agreement to deal with what happens
(38:28):
if clients drop off.
Good point.
Hey, Doug.
One question I had.
Let's say someone's thinking about selling their business.
Rather than creating that biz by sell account
and just putting their business up there, what
(38:49):
can they do to get organized and get
everything in order before giving you a call
and starting the whole process?
Okay.
If they want to start organizing themselves, first
thing they want to do is they want
to go through and make sure that all
of their records are in order.
If they're a corporation or LLC or all
(39:12):
their annual reports filed, are they actually in
existence?
People sometimes don't file their annual reports and
then find out a couple of years down
the line that they were dissolved by the
Secretary of State's office.
How are their financial books?
Oh, I've seen a lot of it.
What about their financial records?
(39:34):
Are their financial records in good order?
Are they not co-mixed with their personal
records?
Are they not co-mixed with their personal
records?
I've run into some businesses where you have
a business owner who has one corporation, but
he's running two businesses under it.
That's always fun.
(39:56):
A lot of times the accountant may not
care because the corporation balances out and that's
what they're reporting.
But these two businesses may be co-mingling
expenses and co-mingling income.
That makes for an interesting process and unraveling
all that.
(40:16):
And the other thing too, the most important
thing too, is don't be afraid to call
someone to help, whether it be a business
broker or have a sit down with your
financial advisor or your accountant and say, here's
what I'm thinking.
What should I be doing?
Who should I be talking to?
(40:37):
I believe in the team approach.
I'm not an accountant.
I may be an attorney, but I don't
necessarily want to do both the broker work
and the attorney work.
I think that having that team approach is
a good way to go because every situation
is different.
Some businesses may have real estate, some don't.
(41:02):
Do they want to sell the real estate
as well, or do they want to hold
onto that and maybe lease it back to
the business for an additional cash stream?
Each situation is different, so you really want
to work with that owner and work with
their team to find the right solution for
them.
Well, it's been a really interesting discussion.
(41:24):
We probably went a little longer than planned,
but there's so much to talk about and
I'm sure we could probably plan to have
you back in the future, Doug, because it's
been- We'd be happy anytime, Chris.
All right.
Anything, Jeff, you wanted to add as we
wind down?
I'd just like to give Doug an opportunity
to share his contact information on how he
(41:46):
would like, if someone's listening, a buyer or
seller and might want to have that initial
conversation, what's the best way to reach out
to you, Doug?
Sure.
Best way to reach out to me, give
you a couple of ways, email dougatcompassbusiness.net.
Phone, I've got a mass number, 508-375
(42:08):
-7196 and a Florida number as well, that's
321-378-4038.
If you have questions, if you're thinking about
it, you're thinking of selling your business or
you're thinking about buying a business or maybe
you've got an existing business and you're looking
(42:30):
to expand through acquisition.
Be happy to talk to you and see
if I can help you.
Thank you, Doug.
Great job.
Thanks, Doug.
Appreciate it.
Thank you.
Conversation.
All right.
With that, everybody, thanks for being with us
for another episode.
If there's anything you need for help from
us with your financial planning and portfolio management,
don't hesitate to reach out.
(42:50):
Until next time, keep striving for something more.
Thank you for listening to Something More with
Chris Boyd.
Call us for help, whether it's for financial
planning or portfolio management, insurance concerns, or those
quality of life issues that make the money
matters matter.
Whatever's on your mind, visit us at somethingmorewithchrisboyd
.com or call us toll free at 866
(43:13):
-771-8901.
Or send us your questions to amr-info
at wealthenhancement.com.
You're listening to Something More with Chris Boyd
Financial Talk Show, Wealth Enhancement Advisory Services, and
Jay Christopher Boyd provide investment advice on an
individual basis to clients only.
Proper advice depends on a complete analysis of
(43:33):
all facts and circumstances.
The information given on this program is general
financial comments and cannot be relied upon as
pertaining to your specific situation.
Wealth Enhancement Group cannot guarantee that using the
information from this show will generate profits or
ensure freedom from loss.
Listeners should consult their own financial advisors or
conduct their own due diligence before making any
financial decisions.
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