May 9, 2024 • 24 mins
We're at the IBBA Conference this week and unable to connect, so we wanted to bring you one of our favorite episodes from the vault.
We're talking all about Value Discounters in this episode. We dissect industry trends and real-world scenarios to illustrate how factors like organizational structure and customer concentration can affect your business's value. Gain insights into industry multiples, sole proprietor businesses, and other key considerations that can influence your business's worth. We discuss the importance of maintaining clean financial records, understanding seller motivations, and fostering honest relationships with clients.
Don't miss this compelling discussion! Tune in for actionable insights to help shield your business from potential value discounters. Whether you're a buyer, seller, or simply curious about the business transition landscape, this episode offers invaluable tips for you.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Music.
(00:09):
Welcome back to the Apex Business Advisors Podcast. I'm your host,
Andy Kavanaugh, not joined by Doug Hubler.
Doug's traveling for a conference, as we may have mentioned.
We are fresh into conference season, and with conference season comes misaligned schedules.
And this week's one of those weeks
where Doug and I just could not get together to record a new episode.
(00:29):
But we wanted to bring a special episode to you, so we went into the vault,
found one of the best of the Apex Business Advisors Podcast,
podcast and that's what we're going to bring for you today.
This is one of the podcasts that we recorded pretty early on.
I think it's maybe like episode 22 or 23.
And what we're talking about today is value discounters. This one actually came
(00:50):
on the heels of a value drivers.
So what are the things that will drive value in your business?
Well, those things, if they're not done correctly, those will be value discounters.
So what we're talking about today are things that if you leave unattended in your business.
When you go to sell, these are things that can discount the value.
So when you're looking at my industry average is a three multiple,
(01:14):
well, you don't always get a three multiple.
So if you don't have your business set up and ready to sell,
you can discount the value of that multiple just by the way that you're structured
organizationally, or if you've got concentration issues or, you know, a myriad of things.
And so that's what what we discuss on this episode i hope you enjoy it and we'll
look forward to bringing a new episode to you next week.
(01:36):
Music.
Welcome back to the Apex Business Advisors Podcast. I'm your host,
(01:58):
Andy Kavanaugh, joined as always by my co-host and president of Apex,
Doug Hubler. Doug, still standing.
Still standing, still in pain.
Well, we'll get the- What are you going to say about that? We'll get the massage table in here.
Apparently, time does not heal all wounds. It takes a little time. It's okay.
(02:18):
Okay. I'll be fine for this. We'll get you stretched.
Let's get a good stretch in. That's what I need. We'll do podcast and then we'll
follow that by team yoga. Okay.
So today we like the value discounters as we don't like them when we get a listing,
but they do make for entertaining stories on podcasts and at cocktail parties.
(02:40):
Well, usually we hope that we're running up against the train wrecks before we engage the seller.
So we know, I hate the surprises. rises
so that's why we ask a lot of questions leading into
working with the with a business owner so the
story that i shared last week about the the one man band that was the hvac company
(03:02):
yeah had about 150 000 in revenue told me that he was taking about a 20 percent
margin off of that so that would mean that he's bringing in approximately 30
000 i hadn't seen his books yet. Okay.
So a couple of value discounters right out of the gate. One,
you're one man in a truck. Yeah. What have you got to sell?
(03:23):
Number two, he had a banker friend that told him, rule of thumb,
his business is worth three times his revenue.
That is bad advice. And I said, well- Was that at a cocktail party, maybe?
I asked him, I said, well, will your banker friend loan on it? Hmm.
(03:44):
Better yet, will your banker friend buy it? Every business that we,
every one of these things that we talk about could be a value driver.
It could be a value discounter.
It really just depends on where do you fall on that scale? Right.
So last week we held up having fully trained employees with a general manager
in place and the business basically operating itself with the owner providing
(04:07):
oversight as a value driver.
The example I'm giving, we're on the opposite end of that spectrum. No employees.
Owner's doing everything. Owner's doing everything. All his knowledge is in his head.
Customers know him and that's it. So somebody taking over that business is going to struggle.
(04:28):
His cell phone is on the side of the van. Right.
That's who people are calling. And that also leads to, we talked about customer concentration.
Well, regardless of the number of customers that he has, they know him.
And it's like me calling my buddy.
Oh, my buddy, so-and-so, you know, he fixes my air conditioner for me when it
(04:51):
goes out. He sells that business.
Well, no longer, that's no longer my buddy I'm calling. Right, right.
And usually what you see on these one-man band shows is reveals that there's
really no barrier to entry.
I've told my plumber when he's asked me, what is my business worth?
Can I sell it? And I just say flat, no, it's you. The name of the company is you.
(05:15):
You've done great. You've done well.
You made a living. You're ready to retire. I can't help you.
That is probably the biggest value discounter that we see come through here.
Would you agree or what would you say? Yeah, probably. Well, I'll put it this way.
The majority of the businesses that we can't help tend to be the super small
(05:38):
one or two man operations.
And I say man, person operation.
That we just, we don't have a market for that.
Generally, those are difficult to sell, difficult to finance,
difficult to find the right buyer.
Well, and the other thing too, that say the one man operation does is.
(05:59):
Oftentimes they're taxed as either a sole proprietor or LLC as a sole proprietor.
Right, right. And the business becomes their piggy bank.
Right. They live out of the business. Yeah.
Because, well, I don't have any employees to pay. Doing that plumbing gig over
at Doug's house, I got to go buy some materials for that.
(06:20):
And then, okay, those materials cost me 500 bucks and I charged Doug a thousand
to do it. Well, I paid that $500 out of my checking account and that money came back in.
And now that I need something to eat because I'm hungry, I got to go get some food off of this.
And so, and they end up, the books become dirty.
(06:41):
That was one of the other things that you had mentioned as clean books is something
that's a value driver. Yeah.
Explain why dirty books. You're reminding me of a story of a client that I had
early on where I really learned a lesson in somebody using their business for personal and business.
(07:02):
But she literally ran her business from her checkbook. She had no financial statements.
She had a tax return, but generally they were delayed, extended.
Extended so I couldn't tell
anybody what her I couldn't tell what her
profitability was except from last year's tax return that
(07:23):
was nine or ten months old and I wasn't
going to go through her checkbook to figure out what she was making but she
was using it for personal stuff too so it would have been just really impossible
and that was a business that was I think it was the owner and she may have had
a helper and they were in a wholesale fabric business.
(07:46):
So she had a lot of inventory.
She had a legitimate business, but the way she was running it,
nobody would, nobody could tell how profitable it was.
When you are ready to sell that business, you're not really selling a business.
And in many respects, it's almost like you're, you're getting your retirement from the factory.
There's really nothing left because the business becomes unsaleable.
(08:11):
Right. You know, something else is.
What's the future look like? Historically, there's been some pretty dominant
industries that coronavirus has killed. I think you're talking about industry
trends and also the business trends.
So, you know, we talked about bad books, but we also do look at,
(08:31):
okay, what's the industry doing?
Is it a dying industry? Is it the buggy whip industry, you know, that kind of thing?
Or is this something that's got a future to it? But all of our buyers,
typically, they're going to be looking at those things as, what's the industry doing?
They're going to go out and do
(08:52):
their research and find out if this is something that has some legs to it.
Or is it just the business that's trending downward?
So it's a thing that is going to hurt the value of the business if either the
industry or that business itself has downward trends over the last several years.
Because we don't know if that's going to turn around. That's the question is,
(09:15):
why is it trending downward?
Especially if the industry's stable, why is our client's business trending downward?
What are the answers there? Is it retirement?
Is it the owner's been out because of illness, which happens a fair amount of
times with businesses that we see. So if there's a legitimate reason for it, that's great.
(09:41):
It's still not going to help the value of the business, but at least it'll be an answer for a buyer.
Yeah. Last week, we talked a little bit too about the business operating systems.
You got your employees in place and those types of things.
Something we didn't touch on was the reputation of the business.
I've had buyers that have actually done the NDA, got the CBR,
(10:05):
read through it, and decided not to pursue any further.
I went out and saw their Google reviews, and they're like a 2.5 star.
They don't have very good Google reviews. Right, right.
That HVAC company I was telling you about, I did the same thing.
Went out, searched them, looked them up.
One Yelp review, one star. Yeah. That's not good.
(10:29):
I don't know that you necessarily think about it, but that is something that
will turn a buyer off. Yeah.
I've got actually two clients right now who I've talked about their reviews
because they've basically ignored them.
Not thinking it's important. You know, somebody who really is like,
you know, I'm busy. I'm making a lot of money. I don't really need to bother with that.
(10:50):
But I show them the reviews and they're a little bit surprised what's out there.
I say, all you needed to do was respond, fix it, show them that you care.
But if it just goes silent and you get a one star, that's going to show people
that you don't have a good reputation, especially if you have multiple of those.
(11:13):
And if it's just a short blip in your business model because of the coronavirus, things happened.
And one of my clients had to make some changes to adjust for short staffing and that kind of thing.
Well, rather than ignoring the negative review, he could have easily responded
and said, sorry, this is something that we're working on.
(11:36):
This is a short-term problem, but we are aware of it, and thank you for visiting
us, whatever. But you don't just leave it.
And we touched on this early in an episode. So if you're going to keep your
Google reviews and those types of things, if you're going to pay attention to
those and keep those clean, also keeping a clean store, clean showroom.
(11:56):
You know, we talk about clean books. You know, when you're looking at selling
a business, it's very similar to when you sell your house and you clean up the
landscaping, you mow the yard, you keep the house clean, remove the clutter.
Or, you know, I've had a lot of deals where they go and they do the inventory
count and they think they're getting $50,000 in inventory.
(12:17):
And when they get in there and count it, 30,000 of it is obsolete, unsaleable, damaged.
At a minimum, it will cause stress. But they can kill the deal or severely at
the closing table devalue what your seller's walking away with.
Another thing that businesses, certifications, or licensing needs, and in some cases,
(12:46):
you know, on one side it's positive because you have to have expertise in the business to operate it.
You've got the right staff on hand. The downside could be if I'm looking for
an owner for a minority-owned business or a women-owned business certification,
and we need to maintain that for their clients,
(13:08):
then I've got to find a buyer who's meeting those requirements and can apply
for it to keep those customers.
Or I'm going to be dealing with buyers most likely who don't have those certifications,
now they're going to risk losing some of that business.
And so it can be difficult in a transition for those certifications.
(13:32):
You know, the other thing too is that, and we talked about this,
is the reason for selling if it just doesn't make sense. Yes.
32, I've got a business that's doing $450,000 in revenue.
I'm bringing in $90,000 a year off of that, and I'm going to retire.
Right. Was there a lottery in their past? Right. Like, do I have family money? Right.
(13:58):
So, and I've actually had this with a young client that I said,
people your age don't retire.
Right, yeah. You may retire for a month and regroup, but you need to,
what are you doing? Right.
We need to call it what it is. Just tell people you're burned out.
I've been doing it for 20 years.
And people generally will understand that because a lot of our buyers have that
(14:21):
burnout from their corporate experience.
Sure. So people understand that. Yeah.
Burnout's a real thing. And wanting to move on and move into different things
is not always a bad thing.
Where it becomes a bad thing is when you're burned out and you've got five years
of declining revenue, declining profit.
Right. Right. Then your burnout is like, well, it's because you're burnt out
(14:42):
because your business is tanking. We've got some bad trends there.
And what's going on. Well, I was just thinking about that.
The motivation by the seller is important. We want to know that.
We want to know that we're working with a client who has legitimate reasons to sell.
And we're going to shoot for the truth.
(15:05):
We want to really know what's going on behind the scenes. and I think usually we do.
It's either health issues, could be marital issues, the retirement, burnout.
And if it's something related to.
Maybe employees, we see that now because people are tired of trying to find
employees and they're getting burned out from that.
(15:26):
And that's, so it's understandable. We just need to say what it is.
And I think that the value detractor here on some of these businesses when they
can't find employees is the buyers looking at that and saying,
I'm going to have the exact same problem.
Why am I going to have it any differently? So I know I'm going into this with
(15:47):
meeting some headwinds, I guess.
Well, and especially on the employees thing, if they're coming in new,
what makes me feel like this person has been doing this for 10,
15 years, what perspective am I going to bring in that's going to help me find people?
Like they know where to look and they can't find it.
How am I going to do better?
The other thing too is you talk about the reason for selling.
(16:10):
Do you have clean books? You know, we, I know we, we kind of got off on,
onto clean books last week, but, you know, dirty books are going to be the biggest
detractor because if I can't, if,
if I have to go through a matrix to find out where all the trace and,
you know, I use the analogy of untangling a bowl of spaghetti to figure out
(16:34):
where you're stashing this and where the bodies are hidden and, you know, all of that.
Well, okay, if I'm a buyer coming in.
Am I going to trust it? And also, you know, the other thing we see more often
than not is that people will just get into it and be like, you know what?
This is too complicated. It's too confusing.
I'm out of here. Well, yeah, they see a couple of things.
(16:57):
It's going to cost them a lot to have a CPA help them untangle that mess,
even if that's possible.
And they're looking at this as additional cost, but also their risk is going up now.
Every time they look at it and say, I don't understand how you're doing this
and why you report it this way and where's that line item going,
(17:22):
then they're going to say, yeah, I'm going to step away from this.
Well, the other thing too that those dirty books lead, it's going to lead to
owner financing, which introduces risk and most owners do not want to,
they don't want to finance it. Right.
The likelihood of actually getting all of your money is not very high.
(17:44):
Well, and I think that's a really a red flag for a buyer when the books are
not clean and a seller refuses to finance any of the deal.
And maybe their motivation is, yeah, I just want to do something different.
Then, you know, all these things coming together and a buyer's typically not
even going to negotiate a price.
(18:06):
You're probably just going to walk away from it. Yeah. And we talked a little
bit about ad backs last week. Those ad backs, great.
You've avoided some taxes on it.
But if we're getting a three multiple on your business, you probably shouldn't
expect the full three multiple on your boats and your lake house and those types of things.
Things, probably on your cell phone, probably on your life insurance,
(18:29):
some of those more legitimate type things. Yeah, you're probably going to get full multiple.
But if you're running every family meal through their home improvement projects,
if you got a three multiple, you're probably going to maybe,
if you're lucky, get a one multiple on that.
I just remember that one that I had where a guy had $75,000 on his taxes as
(18:51):
his profit and taxable income. come.
And when you added all the ad backs, it had, I think it was like 225, 250.
So he's looking to get $750,000 out of this business.
And we're looking at it going, you know, man, I think a bank will give you about 225.
Right. So we got a big old gap here that we've got to come up with.
(19:12):
And that's going to lead to, if the buyer trusts, all of these things that you
put in here on your mileage and your vacations and your road trips and your
dog's vet visits and some of the other things,
if they believe you.
I was going to say, that becomes a huge trust issue, not only for the buyer,
but then the bank is not going to finance all of that.
(19:37):
So they're going to be one of the ones behind you going, yeah,
we're not going to include that in the cash flow number.
So one last thing. Yes, as we get down. As we finish this up.
Yes. One big thing, customer concentration.
And we talked about it a little bit last week, but if you've got somebody who
(19:59):
has, and I've got a client or potential client who has, you know,
80% of their business with one customer.
And on one side, that's been very good for them over the years.
They developed it. They grew that.
But a buyer is going to, especially if they're new to the industry,
they're going to avoid that deal or they're not going to get a big multiple.
(20:24):
The seller will probably have to finance that situation because with that much
customer concentration, a bank generally will not finance it either.
So something that on one side, a business owner might think that's a great deal,
a great customer, but everybody else is going to look at that as a huge risk. Yeah.
Just one final thought on customer concentration.
(20:46):
What I've found is the, I've had these customers for 20 years and.
And a lot of times that I've had these customers for 20 years,
if you catch the customer in an honest moment, they would have probably liked
to have moved on 10 years ago, but they just couldn't break the relationship, couldn't make the call.
Yeah. And when the person retires, it's the excuse they were looking for for
(21:10):
the past 10 years to go shopping.
Well, we have ran over our normal time.
I knew we would encroach upon a marathon episode for us with this one. It was such a good one.
Yeah. And we've got so many more that I feel like we barely scratched the surface on this. Right.
And so, I don't know, maybe we'll occasionally come back and talk about value discounters.
(21:30):
But we're going to shut it down for now.
So, maybe next week when we come back, you'll stop towering over me.
Either that or you have decided that this is a bunch more. I would like to sit in a chair again.
Well, I appreciate you troopering through on this. I can tell you're uncomfortable,
(21:51):
so I appreciate you doing it.
If you are looking at getting more information about buying or selling a business,
as always, we're going to send you to our website, kcapex.com.
That is the place you need to go.
This will be the final update that I will give on our friend that can email
me now because he has recalled that my email is andyatkcapex.com.
(22:13):
So I think we've given him a hard time for about a month, so it's time to let
that shtick go. He and everyone else knows.
Yes, he and everyone else knows where you need to go.
Blogs are out there, podcasts are out there.
Music.
(22:35):
To look through there. Obviously, you're not going to get through it.
Always timely and current.
Yeah, and you know, the nice thing too is even if you go back six months or
a year, there's probably something relevant out there.
And that's a lot of why we do these podcasts as well because we don't know where
people are in their journey.
And so we want something out there that people can go and use as a resource.
So kcapex.com, that's the best resource that we can offer you that's got all
(22:59):
of our current listings and of course, how to get in touch with all the brokers
here. so until next week if you're looking at buying or selling a business we got you fam.
Music.
And if your buyer really senses that you're little um,
(23:34):
Hey, Russ, can I call you in five?
Yeah, maybe five. All right. I'll give you a call back here in view. Okay, thanks. Bye.
I meant not to answer that. I meant to send him a text, and it did make it on here.
But I may actually just use that as an outtake.
(23:56):
So much for do not disturb. Right. Well, I'm down to about 16% on my. Okay.
We're getting close here. What was I talking about? You were talking about,
well, we were talking about the bad books, the you're not going to get all everything
that you want. Yeah. All right. I'll pick up from there.
Music.
(00:09):
Welcome back to the Apex Business Advisors Podcast. I'm your host,
Andy Kavanaugh, not joined by Doug Hubler.
Doug's traveling for a conference, as we may have mentioned.
We are fresh into conference season, and with conference season comes misaligned schedules.
And this week's one of those weeks
where Doug and I just could not get together to record a new episode.
(00:29):
But we wanted to bring a special episode to you, so we went into the vault,
found one of the best of the Apex Business Advisors Podcast,
podcast and that's what we're going to bring for you today.
This is one of the podcasts that we recorded pretty early on.
I think it's maybe like episode 22 or 23.
And what we're talking about today is value discounters. This one actually came
(00:50):
on the heels of a value drivers.
So what are the things that will drive value in your business?
Well, those things, if they're not done correctly, those will be value discounters.
So what we're talking about today are things that if you leave unattended in your business.
When you go to sell, these are things that can discount the value.
So when you're looking at my industry average is a three multiple,
(01:14):
well, you don't always get a three multiple.
So if you don't have your business set up and ready to sell,
you can discount the value of that multiple just by the way that you're structured
organizationally, or if you've got concentration issues or, you know, a myriad of things.
And so that's what what we discuss on this episode i hope you enjoy it and we'll
look forward to bringing a new episode to you next week.
(01:36):
Music.
Welcome back to the Apex Business Advisors Podcast. I'm your host,
(01:58):
Andy Kavanaugh, joined as always by my co-host and president of Apex,
Doug Hubler. Doug, still standing.
Still standing, still in pain.
Well, we'll get the- What are you going to say about that? We'll get the massage table in here.
Apparently, time does not heal all wounds. It takes a little time. It's okay.
(02:18):
Okay. I'll be fine for this. We'll get you stretched.
Let's get a good stretch in. That's what I need. We'll do podcast and then we'll
follow that by team yoga. Okay.
So today we like the value discounters as we don't like them when we get a listing,
but they do make for entertaining stories on podcasts and at cocktail parties.
(02:40):
Well, usually we hope that we're running up against the train wrecks before we engage the seller.
So we know, I hate the surprises. rises
so that's why we ask a lot of questions leading into
working with the with a business owner so the
story that i shared last week about the the one man band that was the hvac company
(03:02):
yeah had about 150 000 in revenue told me that he was taking about a 20 percent
margin off of that so that would mean that he's bringing in approximately 30
000 i hadn't seen his books yet. Okay.
So a couple of value discounters right out of the gate. One,
you're one man in a truck. Yeah. What have you got to sell?
(03:23):
Number two, he had a banker friend that told him, rule of thumb,
his business is worth three times his revenue.
That is bad advice. And I said, well- Was that at a cocktail party, maybe?
I asked him, I said, well, will your banker friend loan on it? Hmm.
(03:44):
Better yet, will your banker friend buy it? Every business that we,
every one of these things that we talk about could be a value driver.
It could be a value discounter.
It really just depends on where do you fall on that scale? Right.
So last week we held up having fully trained employees with a general manager
in place and the business basically operating itself with the owner providing
(04:07):
oversight as a value driver.
The example I'm giving, we're on the opposite end of that spectrum. No employees.
Owner's doing everything. Owner's doing everything. All his knowledge is in his head.
Customers know him and that's it. So somebody taking over that business is going to struggle.
(04:28):
His cell phone is on the side of the van. Right.
That's who people are calling. And that also leads to, we talked about customer concentration.
Well, regardless of the number of customers that he has, they know him.
And it's like me calling my buddy.
Oh, my buddy, so-and-so, you know, he fixes my air conditioner for me when it
(04:51):
goes out. He sells that business.
Well, no longer, that's no longer my buddy I'm calling. Right, right.
And usually what you see on these one-man band shows is reveals that there's
really no barrier to entry.
I've told my plumber when he's asked me, what is my business worth?
Can I sell it? And I just say flat, no, it's you. The name of the company is you.
(05:15):
You've done great. You've done well.
You made a living. You're ready to retire. I can't help you.
That is probably the biggest value discounter that we see come through here.
Would you agree or what would you say? Yeah, probably. Well, I'll put it this way.
The majority of the businesses that we can't help tend to be the super small
(05:38):
one or two man operations.
And I say man, person operation.
That we just, we don't have a market for that.
Generally, those are difficult to sell, difficult to finance,
difficult to find the right buyer.
Well, and the other thing too, that say the one man operation does is.
(05:59):
Oftentimes they're taxed as either a sole proprietor or LLC as a sole proprietor.
Right, right. And the business becomes their piggy bank.
Right. They live out of the business. Yeah.
Because, well, I don't have any employees to pay. Doing that plumbing gig over
at Doug's house, I got to go buy some materials for that.
(06:20):
And then, okay, those materials cost me 500 bucks and I charged Doug a thousand
to do it. Well, I paid that $500 out of my checking account and that money came back in.
And now that I need something to eat because I'm hungry, I got to go get some food off of this.
And so, and they end up, the books become dirty.
(06:41):
That was one of the other things that you had mentioned as clean books is something
that's a value driver. Yeah.
Explain why dirty books. You're reminding me of a story of a client that I had
early on where I really learned a lesson in somebody using their business for personal and business.
(07:02):
But she literally ran her business from her checkbook. She had no financial statements.
She had a tax return, but generally they were delayed, extended.
Extended so I couldn't tell
anybody what her I couldn't tell what her
profitability was except from last year's tax return that
(07:23):
was nine or ten months old and I wasn't
going to go through her checkbook to figure out what she was making but she
was using it for personal stuff too so it would have been just really impossible
and that was a business that was I think it was the owner and she may have had
a helper and they were in a wholesale fabric business.
(07:46):
So she had a lot of inventory.
She had a legitimate business, but the way she was running it,
nobody would, nobody could tell how profitable it was.
When you are ready to sell that business, you're not really selling a business.
And in many respects, it's almost like you're, you're getting your retirement from the factory.
There's really nothing left because the business becomes unsaleable.
(08:11):
Right. You know, something else is.
What's the future look like? Historically, there's been some pretty dominant
industries that coronavirus has killed. I think you're talking about industry
trends and also the business trends.
So, you know, we talked about bad books, but we also do look at,
(08:31):
okay, what's the industry doing?
Is it a dying industry? Is it the buggy whip industry, you know, that kind of thing?
Or is this something that's got a future to it? But all of our buyers,
typically, they're going to be looking at those things as, what's the industry doing?
They're going to go out and do
(08:52):
their research and find out if this is something that has some legs to it.
Or is it just the business that's trending downward?
So it's a thing that is going to hurt the value of the business if either the
industry or that business itself has downward trends over the last several years.
Because we don't know if that's going to turn around. That's the question is,
(09:15):
why is it trending downward?
Especially if the industry's stable, why is our client's business trending downward?
What are the answers there? Is it retirement?
Is it the owner's been out because of illness, which happens a fair amount of
times with businesses that we see. So if there's a legitimate reason for it, that's great.
(09:41):
It's still not going to help the value of the business, but at least it'll be an answer for a buyer.
Yeah. Last week, we talked a little bit too about the business operating systems.
You got your employees in place and those types of things.
Something we didn't touch on was the reputation of the business.
I've had buyers that have actually done the NDA, got the CBR,
(10:05):
read through it, and decided not to pursue any further.
I went out and saw their Google reviews, and they're like a 2.5 star.
They don't have very good Google reviews. Right, right.
That HVAC company I was telling you about, I did the same thing.
Went out, searched them, looked them up.
One Yelp review, one star. Yeah. That's not good.
(10:29):
I don't know that you necessarily think about it, but that is something that
will turn a buyer off. Yeah.
I've got actually two clients right now who I've talked about their reviews
because they've basically ignored them.
Not thinking it's important. You know, somebody who really is like,
you know, I'm busy. I'm making a lot of money. I don't really need to bother with that.
(10:50):
But I show them the reviews and they're a little bit surprised what's out there.
I say, all you needed to do was respond, fix it, show them that you care.
But if it just goes silent and you get a one star, that's going to show people
that you don't have a good reputation, especially if you have multiple of those.
(11:13):
And if it's just a short blip in your business model because of the coronavirus, things happened.
And one of my clients had to make some changes to adjust for short staffing and that kind of thing.
Well, rather than ignoring the negative review, he could have easily responded
and said, sorry, this is something that we're working on.
(11:36):
This is a short-term problem, but we are aware of it, and thank you for visiting
us, whatever. But you don't just leave it.
And we touched on this early in an episode. So if you're going to keep your
Google reviews and those types of things, if you're going to pay attention to
those and keep those clean, also keeping a clean store, clean showroom.
(11:56):
You know, we talk about clean books. You know, when you're looking at selling
a business, it's very similar to when you sell your house and you clean up the
landscaping, you mow the yard, you keep the house clean, remove the clutter.
Or, you know, I've had a lot of deals where they go and they do the inventory
count and they think they're getting $50,000 in inventory.
(12:17):
And when they get in there and count it, 30,000 of it is obsolete, unsaleable, damaged.
At a minimum, it will cause stress. But they can kill the deal or severely at
the closing table devalue what your seller's walking away with.
Another thing that businesses, certifications, or licensing needs, and in some cases,
(12:46):
you know, on one side it's positive because you have to have expertise in the business to operate it.
You've got the right staff on hand. The downside could be if I'm looking for
an owner for a minority-owned business or a women-owned business certification,
and we need to maintain that for their clients,
(13:08):
then I've got to find a buyer who's meeting those requirements and can apply
for it to keep those customers.
Or I'm going to be dealing with buyers most likely who don't have those certifications,
now they're going to risk losing some of that business.
And so it can be difficult in a transition for those certifications.
(13:32):
You know, the other thing too is that, and we talked about this,
is the reason for selling if it just doesn't make sense. Yes.
32, I've got a business that's doing $450,000 in revenue.
I'm bringing in $90,000 a year off of that, and I'm going to retire.
Right. Was there a lottery in their past? Right. Like, do I have family money? Right.
(13:58):
So, and I've actually had this with a young client that I said,
people your age don't retire.
Right, yeah. You may retire for a month and regroup, but you need to,
what are you doing? Right.
We need to call it what it is. Just tell people you're burned out.
I've been doing it for 20 years.
And people generally will understand that because a lot of our buyers have that
(14:21):
burnout from their corporate experience.
Sure. So people understand that. Yeah.
Burnout's a real thing. And wanting to move on and move into different things
is not always a bad thing.
Where it becomes a bad thing is when you're burned out and you've got five years
of declining revenue, declining profit.
Right. Right. Then your burnout is like, well, it's because you're burnt out
(14:42):
because your business is tanking. We've got some bad trends there.
And what's going on. Well, I was just thinking about that.
The motivation by the seller is important. We want to know that.
We want to know that we're working with a client who has legitimate reasons to sell.
And we're going to shoot for the truth.
(15:05):
We want to really know what's going on behind the scenes. and I think usually we do.
It's either health issues, could be marital issues, the retirement, burnout.
And if it's something related to.
Maybe employees, we see that now because people are tired of trying to find
employees and they're getting burned out from that.
(15:26):
And that's, so it's understandable. We just need to say what it is.
And I think that the value detractor here on some of these businesses when they
can't find employees is the buyers looking at that and saying,
I'm going to have the exact same problem.
Why am I going to have it any differently? So I know I'm going into this with
(15:47):
meeting some headwinds, I guess.
Well, and especially on the employees thing, if they're coming in new,
what makes me feel like this person has been doing this for 10,
15 years, what perspective am I going to bring in that's going to help me find people?
Like they know where to look and they can't find it.
How am I going to do better?
The other thing too is you talk about the reason for selling.
(16:10):
Do you have clean books? You know, we, I know we, we kind of got off on,
onto clean books last week, but, you know, dirty books are going to be the biggest
detractor because if I can't, if,
if I have to go through a matrix to find out where all the trace and,
you know, I use the analogy of untangling a bowl of spaghetti to figure out
(16:34):
where you're stashing this and where the bodies are hidden and, you know, all of that.
Well, okay, if I'm a buyer coming in.
Am I going to trust it? And also, you know, the other thing we see more often
than not is that people will just get into it and be like, you know what?
This is too complicated. It's too confusing.
I'm out of here. Well, yeah, they see a couple of things.
(16:57):
It's going to cost them a lot to have a CPA help them untangle that mess,
even if that's possible.
And they're looking at this as additional cost, but also their risk is going up now.
Every time they look at it and say, I don't understand how you're doing this
and why you report it this way and where's that line item going,
(17:22):
then they're going to say, yeah, I'm going to step away from this.
Well, the other thing too that those dirty books lead, it's going to lead to
owner financing, which introduces risk and most owners do not want to,
they don't want to finance it. Right.
The likelihood of actually getting all of your money is not very high.
(17:44):
Well, and I think that's a really a red flag for a buyer when the books are
not clean and a seller refuses to finance any of the deal.
And maybe their motivation is, yeah, I just want to do something different.
Then, you know, all these things coming together and a buyer's typically not
even going to negotiate a price.
(18:06):
You're probably just going to walk away from it. Yeah. And we talked a little
bit about ad backs last week. Those ad backs, great.
You've avoided some taxes on it.
But if we're getting a three multiple on your business, you probably shouldn't
expect the full three multiple on your boats and your lake house and those types of things.
Things, probably on your cell phone, probably on your life insurance,
(18:29):
some of those more legitimate type things. Yeah, you're probably going to get full multiple.
But if you're running every family meal through their home improvement projects,
if you got a three multiple, you're probably going to maybe,
if you're lucky, get a one multiple on that.
I just remember that one that I had where a guy had $75,000 on his taxes as
(18:51):
his profit and taxable income. come.
And when you added all the ad backs, it had, I think it was like 225, 250.
So he's looking to get $750,000 out of this business.
And we're looking at it going, you know, man, I think a bank will give you about 225.
Right. So we got a big old gap here that we've got to come up with.
(19:12):
And that's going to lead to, if the buyer trusts, all of these things that you
put in here on your mileage and your vacations and your road trips and your
dog's vet visits and some of the other things,
if they believe you.
I was going to say, that becomes a huge trust issue, not only for the buyer,
but then the bank is not going to finance all of that.
(19:37):
So they're going to be one of the ones behind you going, yeah,
we're not going to include that in the cash flow number.
So one last thing. Yes, as we get down. As we finish this up.
Yes. One big thing, customer concentration.
And we talked about it a little bit last week, but if you've got somebody who
(19:59):
has, and I've got a client or potential client who has, you know,
80% of their business with one customer.
And on one side, that's been very good for them over the years.
They developed it. They grew that.
But a buyer is going to, especially if they're new to the industry,
they're going to avoid that deal or they're not going to get a big multiple.
(20:24):
The seller will probably have to finance that situation because with that much
customer concentration, a bank generally will not finance it either.
So something that on one side, a business owner might think that's a great deal,
a great customer, but everybody else is going to look at that as a huge risk. Yeah.
Just one final thought on customer concentration.
(20:46):
What I've found is the, I've had these customers for 20 years and.
And a lot of times that I've had these customers for 20 years,
if you catch the customer in an honest moment, they would have probably liked
to have moved on 10 years ago, but they just couldn't break the relationship, couldn't make the call.
Yeah. And when the person retires, it's the excuse they were looking for for
(21:10):
the past 10 years to go shopping.
Well, we have ran over our normal time.
I knew we would encroach upon a marathon episode for us with this one. It was such a good one.
Yeah. And we've got so many more that I feel like we barely scratched the surface on this. Right.
And so, I don't know, maybe we'll occasionally come back and talk about value discounters.
(21:30):
But we're going to shut it down for now.
So, maybe next week when we come back, you'll stop towering over me.
Either that or you have decided that this is a bunch more. I would like to sit in a chair again.
Well, I appreciate you troopering through on this. I can tell you're uncomfortable,
(21:51):
so I appreciate you doing it.
If you are looking at getting more information about buying or selling a business,
as always, we're going to send you to our website, kcapex.com.
That is the place you need to go.
This will be the final update that I will give on our friend that can email
me now because he has recalled that my email is andyatkcapex.com.
(22:13):
So I think we've given him a hard time for about a month, so it's time to let
that shtick go. He and everyone else knows.
Yes, he and everyone else knows where you need to go.
Blogs are out there, podcasts are out there.
Music.
(22:35):
To look through there. Obviously, you're not going to get through it.
Always timely and current.
Yeah, and you know, the nice thing too is even if you go back six months or
a year, there's probably something relevant out there.
And that's a lot of why we do these podcasts as well because we don't know where
people are in their journey.
And so we want something out there that people can go and use as a resource.
So kcapex.com, that's the best resource that we can offer you that's got all
(22:59):
of our current listings and of course, how to get in touch with all the brokers
here. so until next week if you're looking at buying or selling a business we got you fam.
Music.
And if your buyer really senses that you're little um,
(23:34):
Hey, Russ, can I call you in five?
Yeah, maybe five. All right. I'll give you a call back here in view. Okay, thanks. Bye.
I meant not to answer that. I meant to send him a text, and it did make it on here.
But I may actually just use that as an outtake.
(23:56):
So much for do not disturb. Right. Well, I'm down to about 16% on my. Okay.
We're getting close here. What was I talking about? You were talking about,
well, we were talking about the bad books, the you're not going to get all everything
that you want. Yeah. All right. I'll pick up from there.
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