Shownotes
With everyone either selling or buying, you would think it’s a simple process for them to meet and finish the job. However, many business owners and buyers alike still have a hard time looking for the right business or buyers for them. Rob Amerine, certified business intermediary of The FBB Group, Ltd, talks about selling a business and helping buyers see what they want and need. He shares some nuggets about how to have good businesses that are ready to sell as well as the things you need to have a higher sales price. Rob walks through the process and discusses the small business development council (SBDC), the market, some expectations and misconceptions, and more as he advises businesses to build to sell.
Rob Amerine: What You Need To Know About Selling A Business
We’re very fortunate to have Rob Amerine. He is a Certified Business Intermediary with the FBB Group in Colorado Springs. If you would, tell us a little bit about your business and who you serve.
Our firm was originally started in 1982 called the FBB, First Business Brokers, and then we changed the name to the FBB Group. We wanted to become a little bit more nuanced, people have a lot of questions about confidentiality so we want to make it more straightforward. We actually added the ability to do stock transactions at that time as well. Our Founder, Ron Chernak, had his FINRA license. There was a little branding and name change at that point to the FBB Group.
What is it that you guys do?
If you don’t live in this world, you don’t realize that a lot of small businesses transact through intermediaries like ours where a seller needs to sell and we have buyers that come to our firm. It’s a very niche industry, but it’s very important to the economy, being able to find buyers for sellers that are looking to transition their business. It’s one of those businesses where you don’t realize it touches a lot of different facets of the business from the legal side, to the accounting side, to the marketing and the operations. You can imagine all the different things that we touch and see. It’s vital to what sellers need. Rarely do businesses sell without someone like us. If it does happen, it’s some of the bigger businesses. Small business is the engine of the economy, and selling businesses is where this value changes over.
Looking back over the past few years, would you say that there’s a fair quantity of businesses available to be sold? Is there a shortage?
There are a lot coming on the market, more so than we’ve seen before since the recession. We’re going through that cycle. No one knows when it’s going to end. There’s a lot of them out there. There are also a lot of businesses that are not ready to sell that out there. They’re trying to sell and they’re very frustrated. About one in ten go to the market actually sell. When you use a firm like ours, that can increase to maybe three or four out of ten. You increase your percentages by having a firm like ours involved.
It’s better to know than to wait.
You’ve got the business owner reading this and he goes, “I know what my company’s worth.” When you find the nine out of ten businesses that don’t sell, what are the typical reasons you run across as to why they don’t?
Unrealistic expectations. Most of the time, business owners have gotten their valuation from their accountant. The accountant does a great job of doing accounting, but they’re not selling businesses. Usually, when they value business, they may not have the latest information. Some accountants do a great job, others don’t. The question is, does your accountant value your business at the market rate that is today and not off something maybe they heard or something in the past that they’ve held to? Accountants don’t sell businesses, we do. We work with a lot of accountants. We like accountants. They have a very important role in this process, but we always say, “Let’s check your numbers with your accountant and see what it’s worth.” If it’s off, wouldn’t you want to know that instead of waiting until it’s time to sell?
I think about some of the information that’s available to the business owner. The business owners are typically in the business, not on the business. When you’re out there in the marketplace, where do your typical buyers come from?
Buyers are dime a dozen. Buyers are out there. There are estimates of over $1 trillion in cash on the sidelines waiting to invest in small businesses, all the way up from private equity groups down to individual buyers. There’s a lot of cash out there. We always say that buyers will come, but you need good businesses that are ready to sell. There are businesses that are good but they’re not ready to sell yet, especially for the price may be the owner wants for it or they need to be tweaked a little bit. There are some things we can help them do to get them ready to sell and that may take two to three years to do. If they go out now on their own, they may be leaving money on the table.
When you walk through the door and the business owner says, “I’m in the mode.” If you’re not immediately in the mode to sell, what are the things that you would recommend to a business owner that might help them achieve a higher sales price?
Selling A Business: Buyers are number-driven.
Buyers are numbers-driven more and more. You’ve got buyers coming out of Ivy League schools that have the numbers figured out. They’ve got the multiples figured out. The numbers help drive the conversation. Whereas before, if you had a good business that maybe was attractive, the numbers didn’t have to jive. They would get in and maybe look at the numbers later. Now, the buyers are looking at the numbers because there are so many out there. The numbers have to match even for them to even inquire on the business. It’s important that the numbers match up to what the buyers are looking for. We help do that. Of course, we have to start with the financials.
We start with tax returns. Tax returns tell a lot about the business. Profit and loss can basically show one thing or another, but the tax returns are where the foundational part of that cash flow starts and where the banks and the lenders start as well. We start there and build on top of that and use the profit and loss and balance sheets to help supplement and figure out what is the true cash flow of that business. We can start level setting the numbers expectations going from there. That usually drives more recommendations. What’s going on with their cost of goods sold? What’s going on with your balance sheet? Those things that buyers are trained to look at, we’re going to look at the same way and help you say, “We need to move these things around. We need to have your accountant do these things.” We make sure that you’re prepared when you’re ready to sell and that these things are ready to go and you do not have to backtrack.
What I’ve run across and have heard is that there some of the things that are obvious. EBITDA, I don’t think everybody knows what that is so if you would.
Buyers are diamond dust. They are out there.
It’s actually a term that most people know. It’s looking at their earnings before interest, tax, depreciation and amortization. That’s where you get your EBITDA from. A lot of businesses though aren’t priced on EBITDA. If it’s under $1 million of cash flow, we use a term called seller’s discretionary earnings, which includes the owner’s salary. EBITDA usually doesn’t include the owner salaries as an add back. There’s a difference there. You can back in the multiples one way or the other. You could do a multiple on SDE for a business over $1 million. SDE, that’s seller discretionary earnings. That’s a similar term to EBITDA.
I had a client that came to us, we had an SDE calculation. He was talking EBITDA multiple. We had to change our approach on the financials to say, “Let’s talk EBITDA,” because we want to talk their language versus SDE, which is more of those businesses that are under $1 million in cash flow. Multiples are out there. It depends on what term you’re using. You got to be careful that you could be talking about the wrong term and the wrong multiple which can be confusing.
For a lot of the business owners, there are some of the obvious things that buyers look for, revenue and whatever. What are some of the things where a business owner may have a very successful business but they don’t see that as risk, such as the concentration of customer base?
I was talking to a client and found out that one of their customers is 80% of their revenue. What do you do with that? How do you determine a multiple? It’s a very profitable business, but the question for him is when does he want to sell. The question now is, “Do I try to drive up revenue and get more clients to push that percentage down, or do I try to basically see if I can find another way to maybe split up that contract and not make it such a high risk for a potential buyer?” Those things do factor in. Your multiple would go down if your customer concentration is high. Anything over 15% or 20%, buyers are going to go, “This is significant.” If you can keep it at 15%, you’re pretty safe.
From my experience, many business owners don’t know the broad range of selling options. They’re typically going, “I’m going to cash out. I’m going to go fish or golfing.” When you’re looking across your experience, how frequent is an all-cash deal?
We pride ourselves of getting all cash for our clients. The last two deals I’ve done have been all cash, which has been great because seller carry, with the new SBA rules that came out, the buyer equity required dropped from 25% down to 10%. A lot of banks are going still higher than that maybe 15% or so. That made up the difference of what we were seeing, some of that 10 % to 15% seller carry that will come with SBA loans. That’s pretty much gone away. We haven’t done a deal recently that has gone through SBA or even through private financing where a seller carry was a big part of it. The SBA has made those changes to help bring that into their financing into the seller. That gives the sellers a little bit more money in their pocket upfront versus having a two to three year standby where they have to wait a couple of years to start getting paid on their seller carry. It’s working out pretty well.
I think about the nature of our discussions so far. I think about the business owner that’s going, “I’ll just sell next week.” What’s the proper time for a business owner to start working with you if they’re thinking about selling?
That question comes up quite a bit. People don’t realize that even a year or two out can be too late. Three to five years is what we’d like to see because that gives you enough time to get the business to where you want it to be. You have enough runway there to make the changes. We know that’s the ideal scenario and things don’t happen that way. Events happen and life happens. We’d like to see that. We can do some retroactive work sometimes with your accountant and move things around a little bit to help you get the business ready to sell.
Selling A Business: It’s not only about getting to the finish line. It’s also about what happens after the finish line.
What we’re trying to prevent here, which is why I volunteer with the SBDC and other organizations, to get in front of that. SBDC is Small Business Development Council. Small business drives the economy. They’re a government arm of SBA. There are a bunch of volunteers there that are trying to help these businesses before it’s too late and things are already in a place so it’s hard to change where they’re at. Getting out in front doing education, webinars and seminars, we do quite a bit those and just try to get out in front of people. We’ll get the calls when they’re ready to sell, but sometimes we would rather have talked to them earlier so we could help them out better.
Typically, when the business owner reaches out to you, what’s the reason that they want to sell?
In this Baby Boomer generation, there’s a lot of burnout. Burnout happens at any age. It’s when the business owner has gotten the business to where they want to get it. I closed on a business where they had gotten the revenue to $1 million and they were doing great cashflow off of that. You could tell they were done. They’re in their mid-40s. They’re not in retirement age, they’re just ready to move on and they felt it. I agreed with them. You’ve got the business where it needs to go. Now someone else needs to come on and take it over and go to the next level.
If I was to talk to the past business owners that have engaged you to help them out, what do you think they would say is your chief value-add to the process?
It depends on how the transaction goes and what they have to do with the transition. The transition is that critical point where you close on the deal. Everybody is looking forward to getting a new owner. The other owners are maybe retiring, moving on. Now you’ve got employers, now you’ve got the transition piece. There’s a lot of stuff that can go in to it. It’s us not only getting to that finish line, which is the important part, but also what happens after the finish line and what happens to that business? We know if that business doesn’t do well and because someone could write a check for it and buy it, if that business isn’t set up to do well, that’s not going to help anybody.
Buyers will come but you need good businesses that are ready to sell.
You’ve got a legacy of those people that are selling and the fact that their employees are being taken care of. A couple of years later they can say, “That was a great deal. Your business is still going well.” That drives the economy as well. We don’t want to set up businesses to fail. We do everything we can to help that transition. Of course, we make clients out of buyers. They come to buy and that’s something that’s been happening here in this firm. I’ve seen it firsthand where buyers of ours, years ago, then become sellers because they knew how important the process was and our involvement in it.
In a worst-case scenario, that’s where you have that quantity of businesses that come to market and don’t sell. If you’re that business owner sitting out there and they attempt to do it themselves and it doesn’t work out, what typically is the fate of that business that doesn’t sell?
There are a lot of buyers out there that come to our firms, but they also go directly to the clients. They try to get them to come off and start working. I was talking to a lady that has a great business. It will sell very well, but she got pretty involved with a possible acquirer. They milked the information out. We always say if you’re working with one buyer, they’re in the driver’s seat. If you work with multiple buyers, you’re in the driver’s seat. We try to help people understand. When you’ve got some emotion involved, you’re just done and you’ve got this person to knock on the door, you’re like, “Who else is out there?” You don’t know. You think this is the only one and you almost convince yourself that this is the best deal when the reality is it may not be. We have sellers come to us and say, “I’ve got so and so looking at the business.” So we say, “We’ll add them into the mix,” but one out of 100 actually buy that business actually come in. We’ve seen that happen over and over again. They’re not the buyer, it may be buyer number four or five that actually ends up going through the process and buying it.
That’s why you have auctions. You have multiple buyers for a single deal. In looking at a business owner and he goes, “That makes a lot of sense to me. I want to talk to you. It may be that I want to sell my business in three to five years maybe not.” How much time on a monthly basis do you think getting the business ready would entail?
Not that much. There are some obvious things. That’s the thing. It’s not about trying to say, “I’m going to give you ten things that you never thought about before.” It’s going to be eight out of ten of them you probably thought about, but there are two things that you didn’t think about. You’re going, “I didn’t even think about that way.” A good example is if they own a real estate. How’s their market rent? Sometimes they say, “I’m not paying myself rent.” “How do you think the new owner is going to look at? What is market rent?” “I don’t know.” We have to look at that and that drops the price of your business if you’re not realizing that expense. They don’t think about that way. We always like to provide people with options. If they have real estate and the business, is selling the business better and then having the real estate as good retirement revenue a good idea? Can we combine them and do both and get a good chunk of change over to you that you can then reinvest somewhere else versus being a landlord? What’s the best scenario there? How does that work together?
A lot of those come into play where we want to give them the most options and then help them tweak that along the way as they’re getting ready to sell. That’s why I said three to five years because you can make those adjustments. You can move the real estate into a separate LLC and have that setup. You may go to your accountant and say, “We’ve been saving our taxes here in these areas, but I need to start reporting this to the bottom line. There’s about $100,000 in this business that is up in this area here in expenses, but it’s not profit. The banks don’t like that. Let’s start changing that over so we show it’s profit. Pay the taxes on that and then realize that three times multiple or four times multiple on that revenue. $100,000 turns into $300,000. You just pay a couple thousand dollars in taxes over the next two years. That’s a good return on the change in your investment and how you’re reporting your numbers.
