Shownotes
Managing director of IBG, Dan Roth, went from being a business owner to advising business owners himself. Taking all of those experiences he has gained through the years, he is now one of those rare people who can give you genuine advice about the entire processes and struggles in starting, maintaining, growing and selling a business. He lets us in into some of the methods and approaches he uses in advising business owners while also sharing some pointers on how to deal with buyers and selling. He also discusses topics such as acquisitions and risk management, and shares some personal regrets. And he provides great nuggets of wisdom that’ll help you move your business forward.
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The Art of Advising Businesses with Dan Roth
Today, we’re incredibly fortunate to visit with Dan Roth. He is a Managing Director at IBG, a merger, acquisition and advisory firm. This is his second appearance on the podcast. We’re honored to have you on the show, Dan.
Thanks for having me again, Bob. I’m looking forward to the time with you.
Dan, tell us a little bit about your business and who you serve. In a thumbnail sketch, what does your business do and what does your ideal client look like?
I work for IBG Business Services, which is based in Denver, Colorado. We’ve been in business since the mid-1980s. We focus on primarily mergers and acquisitions of mid to small-sized companies. Most of the companies we work with are looking to sell either all or part of their companies. Occasionally, we’ll work with companies that are looking to make acquisitions where they have specific types of companies they want to acquire, and we help them manage that process. For the clients that are looking to sell, sometimes they have us work with them right away. When they want to sell the company, we work quickly to get that started. Other times we work with companies that are not ready to sell, but are looking for advice on, “What should I do now to prepare my business for sale in a year or two years or five years?” We do a lot of advising as well to help companies know, “What should I do now so that when I sell my company, I get the most value for it and I find the best buyer.”
What folks may not know is you also started and have run a number of businesses as well.
Earlier in my career, I had the entrepreneurial bug. I started a company when I was in high school in technology and software and was fortunate to hire a number of people and build that up and sell it. A few years later, I started another software company. I was building software for International Banks with a partner in London and we were again fortunate to sell that company to a buyer out of Brussels, Belgium. Working with another partner, we created an investment banking firm in New Port Beach, California. That still runs. I’m not part of it anymore, but the company as I understand is doing well.
From there, I helped start up a company in home healthcare that is now one of the largest private companies in the home healthcare space in the United States. I’ve been involved in a number of early-stage startup companies in technology and healthcare. I love the process. I love to be part of startups. I love building companies. I love to work with business owners, because business owners are a different breed. They are people that take risks, who want to build something themselves and I find a real affinity for working with folks like that.
I think about the experiences that you’ve had in the past. You’re a business owner that’s now coming in to advise business owners. What type of advantage or benefit do you think you bring to that business owner that’s going to be looking for help?
I hope experience. I hope the fact that I have run several companies that were sold or continue to be successful. I have had to make payroll every week, had to manage my profit and loss statement, learn how to figure out how to get new customers, how to deal with unhappy customers, how to hire people, how to let people go, how to grow companies, how to deal with tough times and recessions. I’ve been in their seat where you’re running the company and everybody is looking to you to figure it out. I hope that gives me some ability to relate to other business owners that are going through the same thing and may want to be across the table from somebody that’s been there and done that.
People like free advice.
That would make you somewhat unusual. I don’t think there are a lot of guys that have run businesses successfully. For the guy that’s listening, he goes, “Am I the ideal type of client? What makes me ideal for you?” What’s your prototypical client look like?
I have different types of clients. The most obvious are companies that are ready to sell and would like to get a transaction done in the next year. I come in and help them get that done. Many companies that I work with aren’t clients yet. These are owners that I have met because they have been referred to me and who are looking for some advice, some counsel and some coaching on, “How do I position my company so it’s more valuable down the road?” I have all different kinds of businesses that I’m talking to on a monthly basis or a quarterly basis. Some are in the process of selling, some are clients where we’re looking to buy companies, but others we are simply talking periodically regarding goals and progress towards their objectives. I often focus on figuring out what are the next steps to get that company positioned for sale so the owner can maximize the potential down the road. These clients are from all different types of companies, ranging from manufacturing to distribution, from business services to consulting and staffing, from government services to engineering. Also, quite a bit of software and healthcare because that’s a pretty good part of my background, but also education and pretty much the gamut of different kinds of companies that I find that I end up helping in one way or another.
For some of the business owners out there, they’re going like, “If I talked to Dan, what type of information should I have at hand to have a meaningful conversation?”
Most of the initial conversations that I have, we don’t share a lot of confidential information. I’m happy to provide a confidentiality agreement if we’re going to have those levels of discussions, but typically the initial conversations are pretty high level where we decide whether they want to ask for my help and whether I can be helpful to them. Those typically focus on, when would you like to be selling, what does your business do, how did you start your company, and what are the challenges that you face. The basic questions I used to ask when I was a consultant on Arthur Andersen. They don’t change, it’s not complicated and typically that first discussion is do we even have a rapport or reason to keep talking to help each other out, and then we go from there. If that’s the case, then we might share some more specific information, but that’s well down the road typically.
Advising Businesses: The first discussion is finding out if you have the rapport or reason to keep talking to help each other out.
You had the business owner and they go, “There’s value that you can bring to the table. I’m interested in talking further with you. I’m assuming there’s a fairly typical series of questions you might ask that business owner. What are the top two to four questions you typically try to ask business owner getting ready to go down this road?
They’re pretty much always the same. The first one is generally, “How did you get into the business? What made you start it? Did you inherit the business from your dad or your mom? Did you take over the company from a former boss? How did you get into it? Why did you get into it? What made you want to be a business owner in the first place?” The second question is usually something like, “What do you do? What does your company do? How do you make money? Why do customers buy from you? What gives you an advantage over your competition, and what are the things that concern you about your business?” The third general question is, “Where do you want to go with it? Are you loving it? Do you want to keep running it for the next ten or twenty years? Do you envision selling it at some point?” Sometimes I talk to business owners and at the end of the conversation we go, “We shouldn’t be selling this business, we should be buying other companies. Let’s put a strategy together to go do that and I’ll help you figure out who to buy, how to buy them and how to buy them right.” The fourth question is simple, which is, “Can I help you? Is this going to be worth your time?”
Who are business owners you do not want to work with?
If I get a call from a business owner and they say, “I would like some advice, but I don’t want to have somebody like you represent me.” I get a lot of those calls because they don’t want to pay the fees that are charged. My typical response is, “Why are you calling me?” People like free advice and that’s fine and I’m happy to give my share. Then they’ll say, “I can find my own buyer. I already have buyers calling me.” I just say, “Good luck.” We use a line in our business, I didn’t come up with it, “Don’t do your own brain surgery.” I, for the life of me, do not understand why business owners build something for years and years. It’s the most valuable thing they own. It’s going to be the most valuable business or thing or entity that they ever sell in their entire lives. Even though they never sold a business before, they think they could do it themselves. I just say, “Good luck,” because you’re going to leave so much money on the table if you even get a deal done and you’re not going to understand how to get a deal done right. The buyer is going to take advantage of the fact that you don’t know what you’re doing.
You have to be realistic about what's really going on because too often, people are not.
There’s a statistic that I’m aware of about three-fourth of the businesses that come to market don’t sell. You and I think about that business owner who says, “I don’t know that the fee is going to be worthwhile.” I don’t think from my experience that business owners have an understanding the full range of exit options that they have, whether it’s a strategic sale or it’s a competitor that they sell to or carve out or any of the other things that go on. For you, in the business, you have an understanding where their revenues are and earnings and all the nuts and bolts, what do you do to start trying to collect potential buyers to take a look at the company?
There are two scenarios there. One is if I or our firm have been retained by the business so we have an agreement to market them. Then we’ll do a lot of research using databases that we have on who are the buyers that are out in the marketplace, who are interested in their kind of company. We invest quite a bit in those types of databases, whether it’s strategic buyers or private equity firms or family offices. We’ll use databases typically to do that as well as our own knowledge of the marketplace. The second scenario is if I’m mentoring a company that I may not be selling for two, three, four or five years. Because I have a dialogue going with that business owner, as I see potential buyers come across my desk in one shape or another, I will keep track of that.
As an example, I’m about to market a company that I started talking to in 2014. At that time, the company wasn’t ready to sell, but the husband and wife knew they would sell in the near future. I’ve been talking to them about what to do and how to get the business where we can sell it. They’ve gone from about $16 million in revenue to well-over $40 million in revenue, an extremely profitable company. Along the way, as I’ve had the dialogue with this family, I’ve been keeping a list of the buyers that are buying companies like theirs. When we go to market in the next couple of months, I’ve already got a preset list of about 30 to 40 buyers that I know who are going to take a look at that deal.
When you look at that revenue change over that period of time that had been advising the company, do you find that unusual?
Yes, I know every company thinks that they are going to go from $16 million to $40 million in five years, but rarely do I see that.
For these folks, without disclosing who they are, what they do, what do you think were the top one or two things that you helped them with that changed their value metric?
The number one piece of advice that I gave them several years ago that they stuck to was focus on profit. At that time, they were more focused on generating revenue. I told them when we get to the time when we’re going to sell this company, the most important factor is going to be how profitable you are. Start now with cost reduction programs to generate a higher profit, start going after higher profit contracts, shed lower profit contracts, so that when we go to market to sell your business, we’re showing the highest profit margin that we possibly can. The second thing that they did, which worked well and they were fortunate, is they focused on getting long-term contracts, two to four-year contracts that have helped their company and allowed them to do exceptionally well in a competitive environment.
You have this company out here, they’ve moved their revenue numbers and they started establishing longer-term contracts. From the perspective buyer first thoughts, when they come talk to you, how big a difference is a longer-term contract versus a short-term contract in their eyes?
If you’re in a business where contracts are important, the length of the contracts and how solid those contracts are is extremely important to the buyer because that’s almost like guaranteed revenue. When I’m selling companies that are oriented around contracts, government contracts, large company contracts, the more solid those are, the longer those are, the larger amount those are, the stronger the buyer views that business because it’s much lower risk. Lower risk almost always translates into higher value.
Don't do your own brain surgery.
Within that process, when you look at some of these companies that are coming to market, when you look at the structure of the company between customer concentration risk and whether the owner of the company is the main salesman, do you have much input with those folks when you have those circumstances occur?
If I’m helping them years ahead of the sale, yes. If I’m helping them and we’re selling the company in the next twelve months, no. It depends on how early I get involved to help that business owner with essentially coaching to an exit value, but those are the types of things that we would focus on ahead of time. Customer concentration, do you have a management team, long-term contracts, recurring revenue? These are basic fundamental aspects of a valuable company.
I’m thinking you’ve got the one company you’ve worked with for a very long time and then I’m assuming periodically you get a call and says, “I need to sell my business in the next six to nine months, I’ve had an event.” What’s your typical thoughts and dialogue with that business owner that maybe had a health event or distress with a partner or something like that?
Those are harder. You never want to be in a position where you sell a business because you have to. Unfortunately, that does happen, whether it’s a health event or a divorce or a partnership issue. Too often I see that situation. It’s a case-by-case deal but generally my approach is to sit down with the owner if they trust me. If we have a relationship going, do a very quick candid assessment of the situation and then hopefully bring my experience to how do we position this company to buyers in a way where we don’t take too big of a hit because we’re selling it under a duress situation. It takes some planning but you’ve got to move quickly. Probably the number one thing in those situations is you have to be realistic about what’s going on and too often people are not. They still aren’t real about what’s happening when they have to sell. The more time that you waste, the worse it gets typically.
Advising Businesses: You never want to be in a position where you sell a business because you have to.
“The guy down the street, he sold his business for this, so I should be able to sell my business for that, too.” I’m sure you’ve heard that all the time.
Every business owner I talk to has heard about some other deal that somebody sold for some amazing valuation and therefore that’s their value. That’s simply not how it works. Unless you’re a company that Google’s going to buy because Google has crazy money and you’re in the software industry with hockey stick projections and social media tech company or whatever, right now that’s super-hot. There are very few companies that get those types of valuations. Unfortunately, too many owners delude themselves into thinking, “Since that guy got it or that woman got it, therefore I’m going to get that value and that’s what I deserve.” It’s simply not the case, the market doesn’t work that way.
Putting my head on backwards, you have the guy that comes in or the lady that comes in with their company and they fall in love with their company again and they go, “I don’t think I want to sell my company.” You look at them and say, “Maybe you should be acquiring.” How does that discussion go?
Typically, the acquisition discussion takes place when I’m working with a business owner that has big plans, that has capital available, that wants to grow fast. That has quite an engine behind their company. They’re not looking to exit, they’re looking to build, and they love the process of owning and building. The acquisition side of the discussion is generally more oriented towards somebody who wants to grow and grow faster and is willing to take the risk of buying companies and has access to the capital to get deals done. That’s probably less than 10% of the...
