E273: Are You Making This Mistake? – Why 80% of Small Businesses NEVER Sell - How2Exit: Buy, Don't Build - M&A of Small Businesses

Episode Transcript
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Speaker 1 (00:00):
If you've sat in that chair, you know that great
employees fall in love and move to Alaska, or they
get tired of looking at your face and they quit,
or you suddenly had a plan and now you're sitting
at the office at midnight stuffing envelopes. Because the person
who was right, I mean, that's ownership. We should create

(00:21):
a translation book and on one side we'd have what
small business owners say, and on the other side we'll
have what potential buyers here. And when the owner says
I reinvested all my profits, the buyer hears you didn't
make any money. If you could inject one change into

(00:42):
the small business zeitgeist, if you could create one change
in the market of small business owners that would result
in more small businesses being sellable? Is this the thing?

Speaker 2 (01:05):
Hello, and welcome to the How to Accept podcasts, where
we introduce you to a world of small to medium
business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors,
and other influencers with the sole intent to share with
you what it looks like to buy or sell a business.
Let's get rolling and now a moment for our sponsors

(01:32):
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(02:14):
every month. Acquisition of Ficionado Magazine brings you tactics for
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(02:34):
acquisition entrepreneurs wheretherver they are in the journey. And I
want you to visit Acquisition Afficionado dot com today. Hello,
and welcome to that how to Exit today. I'm here
with Mike Finger and he is the founder of Exit
Oasis and an advocate for the small business owner. You
put out great content all the time. Thank you for

(02:54):
being here today. I'm looking forward to this conversation.

Speaker 1 (02:58):
Yeah, Ron, thanks for the opportunity away enjoy our conversations.

Speaker 2 (03:02):
I like what you put out there all the time.
You actually have a cool writing style where it's kind
of a story where you, you know, you have the
story punchline of you know, what's happening in the industry,
capturing some of the more unique situations that happened all
the time, and some of them are unfortunate right where
business owners are trying to sell and they're not being

(03:23):
told one hundred percent of what's going on by the
particular actors in the community and stuff. So thank you
for taking the time and energy to create that content.
I don't know if it's just you or if you
have a team like I do, or how that comes about,
but it's good stuff.

Speaker 1 (03:38):
Yeah, thank you. You know, it's funny you talk about
is it common? What's the experience of the average owner.
You and I both know that success stories are compelling, right.
We know that, hey, I stole my business in eight
hours for eighteen million dollars on a Tuesday, you can

(04:00):
do it too. Kind of stuff is compelling because I
want to learn how to do that. But it doesn't
matter which angle you look at the space from. The
truth is that most buyers don't buy. Most owners never sell, right.
So the most common experience in this space is one

(04:23):
where we don't get what we want. And I don't
think those stories get told enough, not because we want
them to be the example, but because we don't define
for from my place. We don't define for owners well
enough the reality of their current position, and most of

(04:46):
us as owners live in this fantasy space of whenever
I'm ready, I'll be able to sell, And to me,
that does such a disservice to the owner. It also
does a disservice to the buyer, because, as you and
I both know, there's not as many buyable businesses out
there as any of us hope there would be.

Speaker 2 (05:04):
Yeah, I don't know how many times we go through
looking at stuff and just realize it's just not ready.
Like I'm helping roll up right now trying to buy
cabinatry companies, and we've had conversations with at least a
dozen owners, and not a single one them were where
they should be by this point, right, even if they
have numbers or numbers though some of the numbers are

(05:24):
impressive enough to get the phone call, right if they
have the numbers to get the phone call, but they
don't have the rest of what we're going to talk
about today. Now, you know this from firsthand, and just
because I know you from previous experience and I know
your backstory a little bit, not everybody on the audience does.
So let's do that real quick. Let's cover your origin story,
how did you end up in this space, and some
of the lessons you learned as to why you're doing

(05:46):
what you're doing now and helping others.

Speaker 1 (05:49):
Sure started a business in the mid nineties. My wife
and I cut our dining room table in half to
make two desks and started serving clients out of our
living room. Turns out I'm a bit of a growth junkie,
and long story short, a decade later, I've got fifty
full time employees. And I wake up one morning and

(06:12):
I look in the mirror and I'm a crispy piece
of toast. Looking back, I had done the seven days
a week, eighteen hour a day thing, and I was
ready to be done. And that's when I had my
personal what do you mean I can't sell my business moment?
Broker after broker said two owner dependent, not enough cash flow,

(06:37):
Fix this, this and this and call me back in
three years. And found myself at unquestionably the lowest point professionally,
but also retrospectively. It was a pivot point for me
because it was it was that point where I looked
and said, Okay, enough of the enough of the surface

(07:01):
learning what does it really look like for a small
business to be sellable? What does a buyer look for
when they look to buy a business? And so I
went back in the trenches, and five years later, I've
still got essentially the same sized business, but the features

(07:24):
were different, right, Profitability was different, owner dependence was different,
all of those factors that make that business potentially buyable
for buyer. And we were lucky enough to be able
to sell the business. That was a freaking life do
over for me, a huge opportunity for me to step

(07:48):
back and genuinely explore what it is that I found
engaging and satisfying. I'd like to tell you I figured
that out right away. That's not the case. I worked
as a business broker for a year, loved part of that,
hated part of that, ran a startup and growth incubator
for three years, helping startup and growth companies start up

(08:10):
and grow faster, loved part of that. Got exposure all
the time to small business owners. Realized I missed that
ownership thing, went back and subsequently bought and sold to
small businesses as turnarounds, and then at after that last sale,

(08:31):
realized that I loved this transition space, but that I
carry ownership really heavy, and so looked to be in
a space where I could walk alongside owners who were
interested in prepping their business for sale. I'm not a broker.
I don't care if somebody ultimately decides to sell. The

(08:52):
goal is to get a business to a place where
you can own it forever or sell it tomorrow. And
so that's the work I do now as i'm I'm
a coach for small business owners interested in having a
business that they could sell if they wanted to.

Speaker 2 (09:08):
A lot of business owners don't get that. They don't
get that if it's ready to sell properly, and it's
a great company to sell. A lot of the reasons
why you would have sold it might have went away, right,
if you're selling a business to retire. But a lot
of times, even though I talk to these business owners, yeah,
I want to retire, but I still like to come
around and help. I enjoy certain parts and I want

(09:29):
to come around and help for those, So they still
want to work for five hours a week, you know,
doing advising and stuff. And I was like, well, if
you had it truly ready to sell, and you had
a general manager in there and you were doing that,
you could still own the entire thing. Stop, buy a couple,
you know, three four hours a week to do your advising,
and the income would still be there for you. Now

(09:51):
you're giving, it'd be a little less because you had
to pay somebody to do your role. But there's a uh, well,
only one gentleman in all these interviews I've done for
well over three hundred interviews, now he had the idea, well,
I'm not going to sell my business to retire. I'm
going to acquire to retire. And I was like, what
do you do? What do you mean by that? He says,
I'm going to buy a competing business down the road.

(10:12):
I've been talking to him for a while. He runs
his business so much smoother than I, and he just
want he's wanting me to mentor him. I'm going to
buy his company. I'm going to own both, and you know,
this guy's already agreed to it. And then I'm going
to retire out and just be the advisor of both companies.
And he's going to do what he wants. He's going
to grow them both. That's what he wants to do.

(10:33):
And I thought that was brilliant. You know, acquired interest
sire so it.

Speaker 1 (10:38):
Own ability is sell ability, right, And that's that's the
dirty little secret of the space is that if your
business has the characteristics that make it possible and probable
to sell, then that's a great business to sit back
and own forever. And it is that pain of ownership

(10:59):
is that it's it's it's so interesting. I don't know
what the percentage is, but so many of us, as
small business owners, myself included, we view a certain pain
level as a prerequisite of ownership. Right that I've got
to carry this weight, I've got to carry this stress.
I've got to do this, this, this, and this, and
that's just the cost of ownership. And we make that

(11:21):
the norm of how we engage the operations we run.
And the truth is it just doesn't have to be
that way. That's a choice how I'm going to run
this business, how I'm going to operate it. Those are
choices we as owners, and only we as owners get
to change that if we decide to.

Speaker 2 (11:39):
So, what are some of the initial things, the low
hanging fruit that some people can Let's just dive into
what you know, what is it what makes a business sellable?
And what makes it you know, remote manageable or where
you could own it for eternity and pass it on
to your children and stuff. What are some of the
key elements that you see?

Speaker 1 (12:00):
Yeah, I mean for me, I break it down to
three real basic questions. And I do it that way
Ron because I got I think, like many owners, I
got lost in the complexity of this space. Right, this formula,
that criteria. You know, if I want to sell to

(12:21):
private equity, I need X, Y and Z. And we
begin to believe that there's this hidden sorcery that determines
whether a business is sellable or not. And so For me,
when I sat down and I started looking at this,
it was a process of whittling. How do I get
rid of everything that's important so I can focus on

(12:44):
what's critical. And so again for me, three basic questions.
Question Number one, are your results desirable? Are the financial
results that your business generates at the end of the year.
And I call that out specifically, is what hits your
tax return desirable to a potential buyer. I don't mean

(13:06):
where you're profitable in the first quarter, in the second quarter,
in the third quarter and then spent down all the
profit and ended up with a zero on the bottom.
Are your results desirable? If they are, we've taken a
huge step towards creating a sellable business you alluded earlier.
The numbers are the numbers. If they're not, we've created

(13:26):
a huge barrier to selling the business. So number one,
are your results desirable? Number two? Can a buyer duplicate
your results? If I walk through the door and you
walk out the door, is it likely that the end
of that year looks like the end of the previous year?
And what we're what we're getting to there is owner dependents, right,

(13:47):
We're we're asking questions like did you build a system,
did you build a team? Are these things? Is this information?
Is the are the formula that result in the desirable results?
Do those live somewhere other than your own head? So
are your results desirable? Can a buy or duplicate your results?

(14:09):
And last, but not least, can you document your results?
And to me, I think that's probably the It's the
saddest one. If you find an owner who can answer
yes to the first two questions, but their record keeping
is so bad that they can't prove it to me anyways,
it's again a non starter because I can't go to
the bank and say, well, hey, Ron says that he

(14:30):
makes a lot of money in this business, so you
should loan me the money to buy it. So those
three basic questions, and I don't use that as okay, now,
there's seventeen other things we should talk about. If you
can answer yes with a capital Y to each of
those three questions, you are well on your way to

(14:51):
sell ability. If you get to know or maybe or
sometimes now we know where we're spending our time. That's
the low hanging fruit.

Speaker 2 (15:01):
A lot of people don't get that. Running a business
day over day to be your income source to be
your lifestyle business and running a business that you want
to present as well as you know as two sellers,
are two distinctly different things. When it comes to the
tax ability. You brought this up at the beginning. You know,
at the end the fourth quarter of most years, most

(15:21):
businesses do everything they can to minimize what their tax
is going to look like the next year. R right,
They're gonna buy new equipment, you know, stretched, stretched, you know,
some growth acquisitions and stuff like that of equipment and
everything so that you know, they won't have to pay
as much of a tax burden. And they don't get that.

(15:42):
We need to see the tax returns on top of
whatever you claim your books are. So that's that's something
you have to And I'm not saying neglect equipment or
do anything like that, but you know, be be aware,
being aware that you know your true profit that you
know you're taxable profit, you're you know, seller discretionary earnings

(16:04):
or you know the big fancy word that people like
to throw around ebit to If that's not there, then
we just assume that you're not running the business very well.

Speaker 1 (16:12):
Yeah, yeah, I mean it's we should we should, we
should create a translation book, and on one side we'd
have what small business owners say, and on the other
side we'll have what what potential buyers here. And when
the owner says I reinvested all my profits, the buyer
hears you didn't make any money. Right there, They're different words,

(16:36):
but they get interpreted differently, and that's call it a
change of perspective. But you know, it's it's funny. I'm
working with a couple owners right now, one in particular
that comes to mind where these owners are in the
place of transformation on that front end, where they're going
from a place where it's real lean to a place

(16:58):
where we're actually making money. And one of the things
I have to watch for, and I'm talking it through
with this one owner in particular, is that his mindset
is such that the end of the year is going
to be zero or lower. And right now we're you know,
at the end of the third quarter and we're at

(17:19):
a one hundred and twenty grand on the bottom line,
and it's like, no, it's going to grow from there.
Right We're changing the dynamic. This is going to be
different and feel different, which means we have to act different.
And that is that's a big part of this, from
my experience, is how owners interact with the business, not

(17:43):
just how the business operates. It's how I view what's
happening and the decisions that I then make, and how
they impact that.

Speaker 2 (17:53):
P and L. Most of the time. One that we
come across the other side of it is a lot
of small business owner. They just especially in the trades
such as home services or small manufacturing and stuff. I
would say in that oh two million dollars in revenue
or less, their accounting practices are less than desired. Also,

(18:17):
you know, they do their accounting just enough to keep
their tax person off their back, right so the tax
i thing can get done. But you know, I would
say it shot, which it shocked me, but it doesn't.
Because I grew up a painter's son who my dad
owned a painting business. I ran it from the time

(18:38):
I was sixteen at the time I was twenty. I've
owned probably three or four businesses before I went and
got my first college degree, And until after college, I
didn't know what a balance sheet or income statement was.
My dad never used them, right. My dad quite literally
took a bag of receipts to the taxman at the
end of the year. And when I took it over
when I was sixteen and dropped off those bagg of receipts,

(18:58):
he said, could you please do this every month or so?
Right like giving me you know, literally, I'm not I'm
not joking. It was no joke. They were somewhat organized.
They were in envelopes inside of the bag, but it
was a brown paper grocery bag that had gathered all
the receipts for the previous year, and Dad had sorted
them into like Manila envelopes for each month. Each month,

(19:19):
you would just take an envelope and stuff that month's
worth of receipts in there, invoices and supplies and receipts
from people paying stuff, and you would print out of
bank statements and the receipts and hand and shove it
all in that bag and hand it to our tax guy.
And I thought bookkeeping, you know, till I joined the
military and got a college degree. I thought bookkeeping was
handing your tax guy, your your your bank statements and

(19:42):
all your receipts. Too many of these businesses, and I
laugh about it now, but so many of these businesses
we come across, that's what they when you ask them that, hey,
can you show me your quarterly uh bank you know
bank statements where you're you know they do that, But
if you ask them for income statements, balance sheets or
you know, standard accounting practice type of stuff, if they're

(20:03):
under two million dollars in revenue and have it prepped
themselves for sell, they just kind of get glossy eyed.

Speaker 1 (20:08):
Absolutely. And you know what's interesting as you tell that story,
because I can I can flash through the mental role
Index of literally hundreds of businesses I've come across where
that's the case. But the truth is it's the second
belief that causes the problem. The first belief is this
is how I can run my business, Okay, good, bad otherwise.

(20:32):
The second belief is I don't need a retirement fund
because I'm gonna sell my business to fund my retirement. Okay.
The problem is that there's a massive disconnect from the
first belief to the second belief. If you want to
just own a job and you hate doing bookkeeping, and

(20:53):
that's just how you want to run your business, okay,
I mean you and I both know lifestyle business owners
who are just gonna do it that way until they
shut the door. And you know, go on to whatever's next. Fine,
But if you have a secondary belief that's dependent on
selling your business or exiting successfully or transitioning, if any

(21:21):
if anything in your brain is pegged on that needing
to happen, then we've got a huge problem with that,
with that front part. And to me, the problem is
is that you've got a lot of those owners who
run things the way you just described, who also believe
about what comes next, and that, to me is it's

(21:41):
just tragic, right.

Speaker 2 (21:43):
And there's something to be said for that. You know,
I guess there's an old saying even that's that which
is measured is improved upon. Right, Seeing monthly income statements balance,
he's understanding what's on them in most cases truly helps
a business. Right. Some of these business owners wore probably
scare them rightfully, so right they don't. You know, I've

(22:07):
had business owners go back and you know, there was
one or two businesses they were just so good. I
was like, look, you're making lots of money, you've got
decent you know you're not you know, he gave me
his bank accounts and there it's not like he's perivolously
spinning out of his bank account like a peron. He
kept his personal expenses out of his stuff. I said,
with a decent you know accountant, even a decent bookkeeper,

(22:29):
we can go back and recreate or create your last
three years of books what I what I need and
what what we need to make your bankable, Like if
I'm going to use a bankl and we're gonna have
to have this anyway. It's going to take a couple
of months, but it's worth the expense to hire a
bookkeeper to do this for you. And you know, they
start getting their you know, past monthly income statements and

(22:51):
all this stuff turning in, you know, get the bookkeeper
learns and teaches them how to read that, and they'll
they'll even blatantly tell me over the over the phone.
I don't know. I made it through some of these months.
Had I had I seen how bad it was run
for those four months there, like how negative I was,
I might have given up. So maybe there's something to
be said for not knowing how what, what kind of
condition you're in. It's like, you know, prefer it, you know,

(23:14):
like they say, if you're in, if you're in hell,
keep going, you know, maybe you'll get out. For the
devil even knows you there, right, I think so there's
something to be said for that, because there's been a
couple of business owners where had they known where they
truly were at the moment that they were there, maybe
they wouldn't wouldn't have made it. But because they were
so into the mix and trying to get by and
trying to you know, pulling off all the stops, and

(23:34):
they weren't focused on how ugly it was, they pushed
through all of it. They had perseverance and got to
the other side. But that doesn't translate to sellable. Right
at some point, you know, we need to see that
month month over a month, you know how it's running.
Every Here's here's another reason that a lot of people miss.
Almost every business on this planet is cyclical in some state.

(23:57):
Either it's yearly, it has yearly cycles where you know
there's certain months it's really big, really really small. Everything
from government contracting businesses to long care and pest control
companies have life cycles. And without your book and in
different markets and different climates and everything else, that's change. Right.
I owned a pest control company in Oklahoma. I promise

(24:17):
you the life cycle of that would be different now
that I mean California. If I fired up one here, right,
different critters are here. We don't have dry wood termites
in Oklahoma, right, they don't exist, and here they do.
So you're around. You know, in Oklahoma, all the termites
have to go into the ground and hibernate during the winter.
So during the winter we don't get the terminite jobs

(24:38):
because nobody sees them crawling around, Nobody falls sees the fallout,
nobody freaks out. You know. Terminity inspections even come back
negative when they shouldn't. Sometimes. That said, out here, it's different.
The same thing goes with all these businesses. There's there's
life cycles inside of these business and stuff without Probably
one of the reasons as a buyer we demand seeing
proper books history, three years worth the history and stuff

(25:02):
is we need to determine, you know, like a swad
and all the risk, risk and rewards are what is
the life cycle of this business. I've seen more than
one business try to sell me like, oh, yeah, the
last six months have been great, and when I finally
look at their stuff, yeah, they do all their business
from Thanksgiving to Christmas and they're trying to sell it

(25:22):
to me. On January first, and you know, and they
want to pull all the money out of the company,
and I'm gonna have to pay salaries until Thanksgiving because
the company makes zero dollars profit until Thanksgiving comes rolling
around again.

Speaker 1 (25:34):
Right, So, Ron, here's the question that put that that
brings to mind for me. Do owners not do that?
Do the small business owners that don't look at their
financials or run things that way? Do they not do
it because they don't know better, or because they know
but don't really care, or are they just too busy?

(25:57):
Is this a lack of knowledge? Hey, did you know
if you actually looked at the dashboard on your car
you wouldn't get as many speeding tickets?

Speaker 2 (26:05):
Oh?

Speaker 1 (26:06):
I had no idea? Or is it? Is there something
else at work there?

Speaker 2 (26:11):
I think there's something else that work there, and I
think it's human psychology right to some extent, we're resistant
to certain things. I can tell you I've got both.
You know, I was forced to take accounting in my
undergrad In my undergrad and in my masters. My MBA
is in marketing, So I've had at least two accounting

(26:32):
classes and undergrad and two accounting classes and my master's.
And I don't enjoy it. I never enjoyed it then
to this day, I still pay somebody else to do
it for me. All right, But I'm now and even
until I got into mersion acquisitions, I would probably say
most of my business books were a mess. Right now
that I'm in this, it makes a lot more sense.
We have somebody to do book keeping for our stuff.

(26:54):
We kind of know where we're at a little bit
better than we ever had before. I've learned. I'm fifty three,
so I've learned some lessons of the years. I think
before that it was just psychological for me was I've
just I've got to get to the next hurdle, right,
you know, I got to get the next sale, right.
You know, there's there's this mortgage to be paid, or
this house to close. I had a real estate investment firm.

(27:14):
We got to close this.

Speaker 1 (27:15):
Do you think it was unimportant? At that time?

Speaker 2 (27:18):
It was less important than closing the next transaction, Like
there was a time and energy of my focus. And
as a business owner, a lot of times you focus
on what you can accomplish and you just I think
it's a fallacy to some extent, but you think, if
I just get this next closing, there's'll be thirty thousand
dollars there that covers all the bills, and the rest
of it doesn't make any It doesn't really matter because

(27:40):
I pushed the problem down the road far enough that
you know, that gives me. Sure, we're looking at runway. Right,
If I close this deal, that gives me three more
months a runway, surely I'll close more deals in the
next three months. So we kind of know in our
own head what the run rate is. You know what
our company costs to run every month, what payroll costs,
what you know everything else. And if you get to
the mode where you know you're trying to do something,

(28:03):
you kind of know. It's kind of like managing a
bank account without without a checkbook. Many of the same
business owners do the same thing. If I asked them
to see their personal checkbook, they won't have one, right,
I didn't for years. Right, I could just tell you
what's in I can tell you right now what's in
all my accounts. We have these phones and we look
at them three four times a day, so you know,

(28:25):
so we don't keep check books as often as we
used to. The problem with that is is when it
comes down and going Where did it all go? You know?
Now we've got to resort and start digging through bank
statements where used to we'd have a little book in
our you know thing. And there's something to be said
for writing something down. There's a memory correlation that's been
proven scientifically that when you take pin the paper write
something down, it triggers certain things in your brain. You

(28:48):
remember it better. So I think we're missing out a
little bit on not taking these activities. But when it
comes down to why business owners do it, I just
think it's basic human psychology. Know, a little bit of
procrastination and a little bit of not knowing what wanting
to know where they're at because they think it's not
as good as it possibly could be.

Speaker 1 (29:08):
Yeah, this brings me back to what we talked about before,
a little bit before we started. Is this the thing?
Is it? If you could inject one change into the
small business zeitgeist, if you could create one change in
the market of small business owners that would result in

(29:32):
more small businesses being sellable. Is this the thing?

Speaker 2 (29:37):
I think it could be. Let's take a look at
Let's take a look at what's going in the world
right now. There's all this AI and technologies. If banks
were to take AI and make an AI app that
works with your bank account and says, hey, I see
a deposit here, what was it? And the AI asked
you stuff and send this receding and you know, send
this thing and the AI. I think AI could really

(29:57):
easily do your standard set of business books. It would
be one of the simplest things AI could ever do.
Not a CPA level, not tax advising, because that's maybe
it could or couldn't do that. But I'm saying at
the most basic level of a bookkeeper, a decent AI
tool could be a great bookkeeper. And if you had
that for every single business to where if you owned,
if the business had a bank account, it automatically had

(30:20):
a decent set of books by nature, by force, I
think a lot of more businesses would be sellable. Because
one of the things that we have the biggest problem
right now is the owner, especially if as off market deals,
is the owner's panic when you ask for certain things
because they don't know how to get to it, and
so let me call my person and then they call
their tax wrap up and go, hey, I need balance

(30:41):
statements right, or I need balance sheets, or I need
income statements and a lot of times those even those guys,
they knew what they are, but they don't know how
to go back and create them from that because they're
tax people. That's not what they do. I think it's
possible that that's one of the biggest players in this.
But you know, maybe that's the can down the legus.
As soon as we see the books, you can also

(31:02):
come back and go The other two elements are critical too, right,
I need to I need to be able to see
your history and where you're going to see that it's
well run. But being well run also means I've got
systems and processes, right, I have less owner dependency, Right,
I have people on the team that you know, you

(31:23):
go on your owner goes on vacation for a month.
Does a business continue to grow or does it?

Speaker 1 (31:30):
Yeah, you know it's interesting with the information piece, with
the financial data. If you look at the sale of
online businesses, you know, Shopify stores or whatever the thing is,
and you realize you're now dealing in a marketplace where
there's an external validation of the information, it fundamentally changes

(31:54):
the ballgame. Right, It is definitely we don't have to
play the wink wink nudge game anymore. We don't have
to wonder if what you're telling me is true. And
to me, that's instructive to what it would look like
if if there was a higher level of financial acumen.

(32:14):
But again that the implication there is that a lot
of businesses that fail or that don't sell are as
a surprise to the owner. And I'm not sure that's
the case, right. I think most even those that are
uninformed about the details of their financials, have a fairly

(32:35):
good sense that the sink the ship is sinking, right.

Speaker 2 (32:39):
They have the instinct, especially if they've been running it
for long enough to know they know whether or not
there their status of the business is good, bad, growing
or sinking. Right, they have to it's or they wouldn't
if they made it past ten years, I'd say they
got They got that knowledge right. So it brought to mind, though,
when you were talking about this and the shopify and
stuff and all that. One of the things that's real

(33:01):
hard for all the online guys to do is the
thing that I see a lot and they say, well,
a lot of cashwalks in the door. I'm sure you've
seen this one too, where well, you know, my taxes
say this, my books say that, but a lot of
cashwalks in the door, and I have to go, what
do you? And I know what they mean, but I
like to say, oh, cool, what do you mean by that? Well,
not everything's on the books. I was like, okay, well

(33:21):
you can't have the cake, you know, and eat it too, right,
if you don't pay taxes on it, it's not in
your books, you can. You're telling you know I have.
One guy said, well, that's about a third of what
I really make. So that's what you're saying, two thirds
of your business is surrounded by tax evasion. I almost
hung up the phone on me, but I said it
in a laughing way. I like, I laughed to you,

(33:42):
so he kind of realized that. I was like, not
being too judgmental because I've never heard it before. But
he's like, well, it's not tax evasion, I just don't
pay taxes on it. I was thinking, okay, kind of
the definition of tax evasion.

Speaker 1 (33:55):
Well again, we're back to that translation book right ron
When the owner says, these aren't my real numbers? What
the what a what a an experienced buyer will hear?
Is I lie to the I R S but Ron,
I'd never lie to you. They can put me in jail,

(34:16):
but I'd never lie to you. You should trust me
about everything else I've told you about this business.

Speaker 2 (34:23):
We were visiting one where we were it was a
they did tinted windows, and we looked at two or
three of these. So a buddy of mine when I
looked at a couple, and then I went and looked
at a couple of my own. There they do tit
windows for auto dealerships, and they do detailing and put
car radio advanced car radios and stuff, and believe or not,
a lot of them are very very profitable businesses. There's
a lot of money in uh uh tinting car windows.

(34:46):
But uh So I go into the one guy and
I was like, there are two things that struck me
is He's like, I would like to work less hours.
I was like, so I put that, it's okay, that
sounds cool. He wants to hang around, he wants to stay,
you know, keep relationships up with clients. Luckily for he
was he was golf pro too, so a lot of
his clients were car dealerships. You'd take them out on
the golf course. And that's how I land and well,
I don't play golf, so if he wants to continue

(35:08):
playing golf with the with this, with the businesses that
he does business with, it'd probably be good. The second
thing is when he said I'd like to spend a
lot less hours here, I should have asked how many
hours he spent, because it was later on the conversation
two or three days later when I asked a question.
I said, well, what does less hours mean to you?
He goes, man, I'd love to only have to come
into the office forty hours a week. So I'm like,

(35:31):
you know, what is Zacher are you doing now? Seventy
five eighty? And I'm like, holy cow. So there were
two things going on when we When when I visited
the site, I seen at the end of the day
he had three employees that came up for the register
and he paid them out of the register at the
end of the day. And I'm like, so I had
So did you just pay those guys for their you know,
I just seen you hand three different people cash. He goes, yeah,

(35:53):
they're ten ninety nine. I pay him at cash at
the end of the day for their hours they put
him that day. They bring me their time car I
pay him out of the register. I said, yeah, but
your register isn't tracking that the way you know you
think it is, because it's one of the old paper registers.
And he just ring it up no sale, no sale,
no sale. It's like, how do you track that? He goes, Oh,
it's just I kind of know. I write it down
on a log in the office and stuff. So when

(36:15):
he told me, like, you know, this company makes a
lot more cash in this stuff. He's paying people on
you know, not you know, off the table. He's collecting
cash off the table, and the only thing that ever
makes it to the the irs or credit card receipt
you know, things that are recorded computerly, you know, on
the computer. And I was like, I just don't want
to untangle this right and he's doing that. Guy was

(36:37):
doing twenty three million dollars a year right out of
a shop. Yeah.

Speaker 1 (36:42):
Yeah, And again it's it's I've I've bought businesses where
that was happening. But the dynamic of the sale changed fundamentally.
It no longer became a relationship of trust. It was
no longer it was no longer a transaction with the owner.

(37:04):
It was me navigating my way through the bank and
others to see what was the fundamental and again, long
story short there, I ended up buying that business for
twenty five percent of my original offer, and I ended
up buying it from the bank when they got it
back after a sheriff sale from I mean, it was

(37:27):
this eighteen month epic and it all broke down because
that trust got violated because I'm trying to present to
you something that is a certain way and then you
find out it's not and it's just a okay, you

(37:49):
and I are no longer in a transaction. Now I'm
looking to see if I can buy this business out
from under you. And it's again there are owners out
there that do that. There's owners out there that approach
this this way. But that gets us back to that
third question. Can I document my results? And if the

(38:10):
answer is no, to your point, you can't steal it twice.
You know, you don't get to you don't. I'm not
going to pay you for your dishonesty. Has it happened?
Has some has someone out there bought paid a higher
price because of the hint, hint, nudge, nudge, Maybe I know.

(38:32):
I mean there's industries where that happens, where there's other
ways to verify, right, you can you buy a laundromat
and you get the wink wink, nudge, nudge, here's the
real cash flow here. But now I'm analyzing water bills
to determine how many turns are happening on these machines,
to calculate if the numbers are actually what you claim

(38:54):
they are.

Speaker 2 (38:55):
Yeah, as I say, that's the prime example, right, I
can tell that, you know, on a wandering amount, I
can tell how many gallons of water I paid for
on the last water bill, and then I can tell
what the average load size for my machine is and
I can kind of go figure that out. And there's
some other industries you can do that too, Right, But

(39:15):
even then you're opening yourself up to you know, all
that guy had to do is go run around a
bunch of empty washers for the lot, you know, two
or three times, two or three times a week and
really skew those numbers, if you you know, if you
if he knows how the industry is doing that.

Speaker 1 (39:31):
So it's so I had I had a guy ron who,
in fact, it was that same situation I was just
talking about, claimed a certain revenue number turned out to
not be true, claimed a separate revenue number. I said,
screw it. I don't trust a word you're saying. I
need to see your bank accounts. Saw the bank accounts,

(39:51):
saw that he was depositing his retirement check. He was
a pilot who was a retired pilot. He was depositing
his retirement check into the business account, claiming it as revenue,
using its I mean, it was just this hot mess
of again, you run your business the way you want

(40:16):
to run your business. It's the secondary belief that gets
you into trouble. I'm going to run this my business
this way, and I'm going to get paid full price
when someone buys it. It's not going to happen.

Speaker 2 (40:30):
I actually ran into that one where somebody had a
fairly hefty retirement account me and deposited into their business
and it was showing up, as you know, try to
show it as part of the revenue, and I just
come out and ploy this. At this point I was
frustrated with the guy. I said, well, how are we
going to how are we going to arrange me keeping
your retirement income right?

Speaker 1 (40:50):
You're going to sign that pension check over to me
each how how.

Speaker 2 (40:54):
How you like you're counting it as revenue. I'm buying
it as part of the company. What is that going
to look like with the you know whatever trades union
or whatever that's coming from, because they're not going to
be happy with continuing to where that money to me
when when you're gone, right, you know, you're the guy
was eighty one. I said you're eighty one, and you know,

(41:14):
maybe you'll make it another nineteen years, will make it
a one hundred, but at some point I'm going to
own this business. You're not going to be on this
planet anymore, and they're not going to be happy about
needing to send me that money every month, right. And
he's like, well you don't get that money. It's like,
then why you think you're going to have it on
the on the income statement?

Speaker 1 (41:29):
Should I pay you for it now?

Speaker 2 (41:31):
Yeah? And he's like, will my accountant do that? I
was like, I already talked to the accountant and like,
you know, he said the same thing about your right.
So anyway, it happened.

Speaker 1 (41:42):
Ron, how often does that happen? Do you think out
of ten out of ten businesses that you come across,
how often do you think you're dealing with money under
the table.

Speaker 2 (41:53):
I would probably say at least two or three times
there's it is a lot more rampant. Maybe it's higher
than that. It's a lot. I take that back. It
all depends on how much business is cash. Touching cash
has has a tendency to affect small business owners, so
meaning that cash goes in and out fairly easily. I've

(42:16):
seen people buy all their supplies. My wife and my
son run a small business. I teacher all the time.
Everything has to go into the account, right because a
lot of that they own a concessions business, and I
you know, probably a third of their they have tap
to pay now, so you know, in her payment system
for the phones about a third of their income service
or cash. And then she'll pay her a booth rent
for that day in cash and she keeps the receipt.

(42:38):
But as like, everything has to go through the account, right,
And I said, I even told her she really shouldn't
even be paying the booth rent out of the cash.
You should bring a check book with you, write a
check for that which shows up in your banklogs. Because
in two to three years from now, when we want
to move, like we're talking about, you know, later on
and like moving her away from here. Well, we're ready
to sell this. We don't want to have to wait

(43:00):
three years to clean up your books to sell this, right, right,
we want the last three books from the you know,
the day we decide it's okay, this is big enough,
we're gonna sell this. My son's using it as a
learning list. My son's fourteen. He wanted to start a business,
so I helped him do it. At some point he'll
be off to college. My daughter won't want to do
anything to do with it, my wife will be burned out.

(43:20):
It'll be time to sell this thing, right, And I
don't want to wait three years to clean up everything. Yeah,
I think it comes down to cash. The more cash
that's involved in a business, the more likely you're going
to see that. Not all of it's on the tax returns,
not all of it's in the books. It's just too
tempting for most small business owners. Yeah.

Speaker 1 (43:36):
I think that's true. And it's again if you I'm
sure you've done this math the dozens of times, but
if you do the math on the savings from a
if I if I if I put that dollar in
my pocket and I save the quarter versus if I
leave that dollar on the P and L and I
get a three X for my business. I do save

(44:00):
that quarter cost me three dollars.

Speaker 2 (44:02):
Right, Yeah, it's you know, you saved a quarter, so
you leave it in the business. That dollar becomes seventy
five cents. But now when you sell it, you get
three times that. Right, See you get a three was
it two dollars at a quarter back? So is that right?

Speaker 1 (44:18):
Yeah, it's the math doesn't work. Most of us are
not don't have enough foresight to see twelve years in advance.
Right that we should stop running things that way because right,
it just make some money, pay your taxes, sell your business,

(44:39):
make more money.

Speaker 2 (44:40):
It just.

Speaker 1 (44:42):
I tend towards the simple.

Speaker 2 (44:44):
The interesting thing is is you just said most people
can't see twelve years in advance. Most of us buyers.
I'm a buyer. I'm still looking at businesses. I'm a
buyer for myself, and I do some roll up activities
where I help roll ups that are actively purchasing and
have made purchases in the past. I don't miss with
new guys. But if you've made one or two purchases
and you want to, you'll continue doing that. I'll go
on out and help you do the search, help you

(45:06):
do the negotiation. It's something I find. It's fun. I
do it part time. That said, the interesting side of
it is is we're only looking for your last three years, right,
And you just said that. You know, business owners can't
see twelve years down the thing. I tell you, they
can't see five years down the road, right, or three
years down the road. The problem is when you when
it comes time for you need to sell. Most of
the time, it's not a one to sell right. You

(45:28):
have some life event, a divorced, some medical thing, you
finally found yourself most burned out. You're finally selling yourself
burned out. And most business owners don't see themselves burning out.
It's like one day you woke up and you realize, Man,
I haven't been running this the way I should have
been running it for the last two or three years.
It's declining. I must be burnout. It's a realization of
I must be right, I'm not doing as well as

(45:50):
I used to, I must not be into this as much.
And by that point you've heard it.

Speaker 1 (45:55):
So even worse. Run the scenario where I find a
better operation.

Speaker 2 (46:00):
Tunity, Yeah, that happens a lot.

Speaker 1 (46:02):
Here's a business I could get into, but I can't
get rid of this other one because of the way
I've been running it.

Speaker 2 (46:10):
Or they start a second business and it starts making
more money than the first. I see this often. Actually,
somebody is out there, they're doing X, y Z. They're
making decent money. Somebody asked them to do something else,
you know, similar, maybe even And I'll give you a
good example. We were running into a few people that
own cabintries, but they really they live in Florida because

(46:31):
that's where the search is. But they have this thing
where they're creating custom hurricane rated storm doors, those fancy
front doors for your house. Those doors can run anywhere
from ten thousand to fifty thousand dollars to eighty thousand
dollars installed. Right, so I can either go out and
build some kitchen cabine and some profit five or six
thousand dollars from after I pay for all my labor

(46:51):
and manument and design and install and everything else, I
can make you know, five six grand make a twenty
percent profit margin. Where I can design a front door,
put it on there and make a you know, a
thirty five or forty percent profit margin on an eighty
thousand dollar install, So they start doing that on this side.
The next thing they know, they got this cabinetry that's

(47:12):
in their way right right, And that happens that the
software companies happens a lot too. Uh. You know, they
create a software company, it's doing X, Y and Z
and the next thing, and they know they have a
little SaaS component that they sell memberships to that starts
to grow and it starts to outpace their previous business,
and then they call it. They start calling up brokers going, hey,
I want to sell this over off and focus on this.
And unfortunately, like you said, they got to go back

(47:35):
and do a lot of work to make the previous
ones sellable. So a lot of those end up just
getting kind of wrapped up and sold or they want
to steal so many recess resources from it it's not sellable.
I've seen that way too many times on the software tide. Yeah.
I want to sell you the software and the IP,
but I want to keep all my guys.

Speaker 1 (47:53):
Yeah.

Speaker 2 (47:53):
Yeah.

Speaker 1 (47:54):
And again this brings us back to the whole own
ability equals sellability thing, right, because if I was running
the business that way to begin with, not only would
it have been easier and more profitable and more benefit right.
But again, we get stuck as owners in that place
of this is how I do this, or I don't

(48:16):
have any choice, or it Again. I get frustrated because
whenever I talk about this, I flash back to being
that guy. I was running my business that way I
thought it was going to it was supposed to be painful.
I thought I had to do eighty hours a week

(48:36):
and I didn't, but that was my belief. That's the
way I operated the business, and a lot of us
as owners get stuck there.

Speaker 2 (48:45):
One of the biggest problems I see currently in this
space is from the buyer's perspective. All the buyers I
meet with and stuff is our own buyers inflated sense
of ego. And I get onto people all the time
for this because they'll present a deal and like, well,
I'm going to fix X and stuff. And I was like,
and a lot of these companies they're second or third generation.
I said, So that family's owned that business for sixty

(49:06):
two years, the current guy's running it's been there there
for twenty five years. And you're telling me you've never
run a businessman because you have an ivy MBA. You're
going to step out of your educational environment into an
operational mechanical environment, and you're going to operate that company
better than a sixty two year family history and a

(49:28):
guy who's been sitting there doing the same thing every
day for the last thirty years. You think you're going
to improve upon that? Who the hell do you think
you are? Right? That's the hell of an ego.

Speaker 1 (49:39):
The lack of understanding of the breath of knowledge that
these small business owners have. And I'm sure you've seen
it as I have. You see the owner. I'm walking
through a factory floor with an owner on his way
on the way to his office, and he says, give
me one second because he hears something from a machine

(50:05):
that's across the room that he goes over and he
tells the manager to adjust because he knows if he doesn't,
the line's gonna go down in twenty minutes. Tell me
how long it takes your buyer to develop that skill set? Oh, well,
the man, you know, the floor guy should do that. Well,
maybe he should, but he didn't that time. Right, It's

(50:26):
like the lack of understanding of the breath of knowledge.
We get these You see the ads right, by a
basic business, by a simple business, by a blue collar business.
Like these things are easy to run. Like there's not
a depth of knowledge and experience that gets built up

(50:47):
that allows somebody to know that they can use part
X and part instead of Part why because Part why
is one hundred and twenty five percent more expensive and
the difference between those prices. Is this entire pro fit
for the week?

Speaker 2 (51:01):
Right?

Speaker 1 (51:01):
I mean it, yeah, it's.

Speaker 2 (51:04):
I grew up with my father working for the same
company for forty four years, right, and you know, of
course young, you know, not as many years, but he
was there the whole time I grew up. So but
by the time he passed away, he'd been there for
forty four years. I remember going up there on a Saturday,
and you know, he worked up and where he was
blind in one eye. He got shot. He's the poster
child for when the when the parents tell you not

(51:25):
to play with BB guns because you can put somebody's
eye out. So his brother was shooting at glass jars
at ricochet hit him right in the pupil and he
blinded him in an eye when he was a kid.
So he's blind in one eye, and uh so, but
he mixed the colors for them. He could do better
than the damn computer could for making paint match colors.
But I've been up to that factory before and seeing

(51:45):
him standing there mixing colors, and you look over at
the production line where they're pouring, where they're pouring it
in the cans, and you call Bentley over as the
old old man that ran the production. He said, something's
wrong with that. And he said why because that's this pain.
It's too thin coming. I can hear it from here.
It sounds wrong, like something's wrong with that batch. You know,
go check that. And he's just like, because you know,

(52:07):
certain things have certain sounds right to a certain speed
the pain, And just look at him. Never said a
word to him, Just go over there and double check it.
Sure enough, they forgot to put something in there, right.
It just sounded wrong. And because you know they have
the just certain things have certain sounds and stuff. I've
done the same thing. My grandfather worked in a you know,
machinery called Patty Precision. They made the bomb launchers for airplanes,

(52:32):
like the thing that hold on to the bomb and
let it out of the plane. And he used to
tell me all the time that he could walk through
that factory and tell you if one of the machines
are gonna break because the way it was making noises
and vibrating right, he can. He his job was the foreman.
He took care of all those machines and stuff. And
he said, they you know, Boss loved him because you
know he could catch things weeks and months before they
go down, bearings going out in the machine or whatever.

(52:54):
He just he could just tell it by the way
the machine vibrated.

Speaker 1 (52:57):
These days, Oh you go, but Ron, that doesn't count
because I'm going to have a general manager run my
business for me, and I'm.

Speaker 2 (53:04):
Gonna I'm gonna hire you about the street.

Speaker 1 (53:05):
I'm not gonna put it. I'm not gonna have to
put any hours in on this on this business. Again,
the naivete of if you've sat in that chair, you
know that great employees fall in love and move to Alaska,
or they get tired of looking at your face and
they quit, or you suddenly had a plan and now
you're sitting at the office at midnight stuffing envelopes. Because

(53:31):
the person who was right, I mean, that's ownership.

Speaker 2 (53:35):
I go. Tyson said, everybody has a plan until I
punch him in the face. Right, that's right, that's right.
That business is gonna punch you in the face at
some point, and you're gonna be there. And that's what
I told you all these guys, all these operators. I
was like, look, at some point, you're gonna be find
yourself in that office on that side trying to hire
the next CEO and stuff, and you're gonna realize it
doesn't happen overnight. There's a reason why these executive search

(53:56):
firms take six months, eight months, twelve months, eighteen months
to find a great operator is because you know, great
operators aren't unemployed. They're not looking for jobs. They're not
knocking on your door. They're working for somebody else. You
gotta you can't just go pick one up the shoet.
You gotta steal one. You gotta entice them to come
from something else that's running well so that that process
takes time. And they don't get it right. They think

(54:18):
they're just gonna I'm gonna buy this and slop our
operator in there and then it's just gonna run really great.
And I was like, cool, who is he? How long
has he worked there? You know, I'm gonna go hire one,
it's like okay.

Speaker 1 (54:29):
Or even if they're lucky enough to find a business
that has an operator in it, you had better work
walk through that door with a level of humility and
supportiveness and and open ears to listen to that operator.
Because if you walk through the door as the uh,
you know, the new ball in the china shop, guess

(54:51):
what that operator can do. They can go find a
different job.

Speaker 2 (54:55):
So let's let's talk a little bit about what kind
of stuff you do to help help business owners. How
do they find you to get that help and that
type of stuff.

Speaker 1 (55:04):
Yeah, best place to connect with me is on LinkedIn.
That's where I'm most active. You can find me at
exit oasis dot com. What again, what I do with
owners is we we work to change businesses and owners
approach to the business so that we create affirm yes

(55:28):
to those three questions we've been talking about, create sellability
in the business whether or not you decide to sell. So,
but yeah, to find me LinkedIn exit oasis dot com.
That's the way to do it.

Speaker 2 (55:42):
Awesome. And if if people could just remember one or
two things from today's show, what would you want to
take as a takeaways?

Speaker 1 (55:50):
You know, to me the biggest issue in this space.
The biggest problem in this space is that we as
owners wait too law to engage it. So my call
out is always that stop waiting. I've got a real
simple prescription for small business owners. Put in your calendar

(56:13):
one lunch period a month where you're going to spend
some time on this topic. Listen to how to Exit,
Read an article, watch your YouTube video, do something to
start to educate yourself about what is it? What does
a sellability? What does a sellable business look like? How
do you sell a business? Take a little time to

(56:37):
start to educate yourself. Over time, you're going to see
that education start to produce dividends in the decisions you
make and the impact it has on your business. Stop waiting,
do something awesome.

Speaker 2 (56:50):
Well, thank you, Mike, and it's always a pleasure chat
with you. We'll call that a show. Hang out for
just a second.

Speaker 1 (56:56):
Thanks Ron.

Speaker 2 (56:57):
This episode of How to Exit is brought to you
by Final Ascent, the Batique m and a firm helping
lower middle market business owners achieve their ultimate exit. At
Final Ascent, they know selling your business is one of
the business decisions you'll ever make, and they've been in
your shoes. Their team isn't just made of advisors. They
experienced business owners who have successfully navigated their own exits.

(57:18):
Final Assent specializes in preparing businesses for sale, building value,
and connecting with a national network of qualified buyers who
will compete for your business. They don't take on a
client unless they're confident they can sell your business at
the current market maximum value. Whether you're ready to sell
now or planning for the future. They'll craft a roadmap
tailor to your unique goals so that you can walk

(57:40):
away with maximum value and a peace of mind. Start
your journey today at Final Assent. That's www dot final
ascent dot com, because your next chapter starts with a
successful exit.

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E273: Are You Making This Mistake? – Why 80% of Small Businesses NEVER Sell

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}E273: Are You Making This Mistake? – Why 80% of Small Businesses NEVER Sell