Prepare Your Business for Successful Sale

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Prepare Your Business for Successful Sale

business growth, empathy, m&a, business exit, strategy, planning, cash flow

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Starting the conversation:

Selling your business isn’t as simple as it seems. For sellers, this means understanding their role in the business and preparing it for a successful transition. For buyers, this means knowing what they’re looking for and what kind of business aligns with their skills and goals. David C Barnett, Private Transaction Advisor, shares how to uncover the hidden truths and be real about the business you have to sell.

Maximizing your business’s value, attracting the right buyers, and creating a seamless transition is something that business buyers and sellers want to have confidence in. To do that, strong business fundamentals are necessary. This includes depth of knowledge and ability to communicate cash flow, operational efficiency, and customer satisfaction.

In this program you will hear about the real cost of burnout and selling your business, an exercise to know what you are really selling, and what to know about a person who is buying your business. Jess Dewell talks with David C Barnett, Private Transaction Advisor, about why it is BOLD to take the time to get real about a business that is salable.

Host: Jess Dewell

Guest: David C Barnett

What You Will Hear:

0:15 There are no stats to know how many businesses actually sell.

  • It is complex and there are many ways to record the “sale” of a business.
  • Approximately 80% of businesses advertised to sell don’t sell

4:22 David C Barnett’s aha moments, and why he does this.

  • It is imperative that actual good information gets out there.
  • Bad deals can be avoided for buyers and sellers.

6:20 The things that cause a business acquisition deal to fail.

  • Selling when there is real pressure being faced.
  • People want to keep their profitable business — it is financially good.
  • Reality: it comes down to cash flow.
  • Be real about what your business actually is.

15:45 The secret cost of burnout.

  • A business buyer will follow the style of the current owner/operator.
  • Your attitude toward the business.
  • The result of your attention and its effect on business operations.

21:10 How to sell for different (and MORE) money.

  • Customers are happy.
  • Buyers are looking for cash flow
  • Ways to leverage sales, operations, owner effort.
  • Understand how your actual take-home pay is different from business revenue.

24: 31 Reality check exercise: What are you really selling?

31:09 How well is the seller set up when they sell?

  • “I can just tell you how to do this business.”
  • Tools, reports, and processes.
  • How to open up the buyer pool.

38:10 A person is buying a business from you. Or, you are buying a business.

  • Know yourself first — two questions to ask yourself.
  • Know what you are buying — four types of purchases.
  • Intangible effect of goodwill and clarity about customer groups.

51:40 David C Barnett’s routines and ways to reflect.

  • Set a morning routine.
  • Ask: If something were to go wrong, what was the thing that made it go sideways?
  • Identify weak points to mitigate risk along the way.

55:55 It BOLD to take the time to get real about a business that is salable.

Prepare Your Business for Successful Sale - David C Barnett
Prepare Your Business for Successful Sale - Jess Dewell

Resources

Transcript

Jess Dewell 00:00
I’m so glad you’re here. Thanks for stopping by at the Bold Business Podcast, we are normalizing important conversations. Yes, there are tips. Yes, there are ways to solve problems. More importantly, are going to be what do you need for yourself to be able to solve those problems and make the most of the education, the training and the programs that you are already using. This is a supplement to that it can sit on top of it, fuel your soul, fuel your mind. And most importantly, regardless of where you’re at, on your journey, maybe you’re starting out, maybe you’re ready to scale. Maybe you’re going through reinvention. The conversations we are having will help you at each of those stages. Hang around to see what’s going on. And I look forward to seeing you engaging with our videos.

Jess Dewell 00:49
I’m excited to introduce you to David C. Barnett, David’s been working with small businesses for over 20 years. Not only has he helped them grow, he’s helped entrepreneurs buy and sell them too. He’s also helped on the financing side to make those deals possible. Not only is he the author of seven books about business transactions, and local investing, he’s also the host of YouTube channel, which I personally like and watch and listen to, with hundreds of videos about buying, selling and financing. As well as managing Small and Medium Enterprises. We go into a lot of depth in this conversation. And let me just tell you, I’m going to call out three things that you will hear and take away. The first is the real reasons you will sell your business. And as a potential buyer of a business, the real reasons that business may be for sale. The second thing we’re going to talk about is being real, what is the raw truth about your business, and an exercise that you can go through to evaluate yourself and your business to understand exactly what you have to make strategic decisions right now, also to design a business that you may choose to exit later. And lastly, but not leastly is to face what you fear. What does that actually mean? How does that work in our business capacity, and when we know ourselves first, much more as possible, because we set the stage for the design and the steps and the actions and the products and the services that we are offering.

David C Barnett 02:30
Because what is the buyer of your business want, most people will just say we want to buy a business. That’s not what they want, what they want us to acquire a cash flow to support themselves and their family.

ANNOUNCER 02:43
Wow, you are listening to the Bold Business Podcast, where you will hear firsthand experiences about what it really takes to ensure market relevance and your company’s future. Yay.

Jess Dewell 02:56
Let’s start the stat how many businesses that want to sell actually do, David?

David C Barnett 03:01
It’s hard to tell because there are no good statistics at all out there. In fact, even the government doesn’t know how many businesses are sold. And I’ll tell you why. A lot of small businesses are sold in what we call an asset sale. And so the buyer ends up creating a new entity, for example, a new LLC to be the buyer in the transaction. But a lot of times when businesses are sold, not all of the money crosses the table on closing to a sometimes there’s a seller financing component, which means the seller who is the legal entity of the seller, the owner, it may have to continue to stay open for a couple of years while it collects some of these payments. And so over at the government and Department of State, for example, depends where you are in which country you are there, what they’re going to do is they’re going to require record the buyers new LLC being formed, they’re actually going to say it’s a business startup, even though it really isn’t, it’s actually going to have something to do with the business being sold. But then later years later, when the seller maybe winds up their legal entity corporation or whatever it is, then the government might record that as a business closure. And so even the government doesn’t quite know. And when there’s a stock sale, there’s a change of directors and things like that go on. But again, it’s there’s all kinds of reasons why directors of corporations might change. So again, there’s no real clear cut statistics. And then you have to decide what, which transactions are we going to count. If some people bring on a new partner, are we going to count that as a purchase? If there’s three partners and they decide to buy one of their partner? Are we going to count that as a sale? Are we going to count if we’re talking about a family succession, where parents sell a business to their child, for example. So it’s tough to know, but here are some things that are more generally agreed upon in the broader business for sale community is that probably 80% of businesses that do change hands do so without any kind of intermediary. So that means if you’re looking at business for sale website, It’s or talking to business brokers, you’re not accessing the majority of the market, you’re just talking to people who’ve decided to go down that route to sell a business. And we also know from statistics published by some of those big business for sale websites, that almost 80% of the businesses that get advertised for sale there, don’t sell. But, again, not everything advertised for sale, there is really a business. Sometimes people close a business, and they still put an ad up saying, I’ve got all this machinery and equipment for you to do this kind of business. And it’s for sale as a package. Or some people might put up a listing for a franchise opportunity available in a certain city. Some of their statistics even can be a little bit off, it’s hard to tell. And it just has to do with the private nature of small business. These are all privately controlled entities. And so there’s a real opacity in the marketplace opacity being the opposite of transparency. So there’s a lot of stuff going on that isn’t clearly visible to all the people that are involved in the market, whether they’re intermediaries, consultants, buyers, or sellers. And so it makes it interesting because different things can happen in different parts of the market that may or may not become news, or be made aware of to people in other places in the market. And it means that for those who are willing to roll up their sleeves and do a bit of work and actually go looking for deals that they can actually come across some good deals, unlike a market that’s more transparent, like, like houses, you know, like a houses in a given city, almost all of them are going to be reported to the MLS system. And it’s very easy to see the data on how things are changing over the course of time. And so that I think would be sort of an example of the other end of what things can be like.

Jess Dewell 06:51
It was interesting, because I’ve been watching your YouTube channel for a while and you have a lot of information, and you actually work really hard to make it less opaque and way more transparent. Was there something that allowed you to say this is really necessary? And here’s why I want to do this.

David C Barnett 07:07
Yeah, there were a couple of aha moments, when I first got started making YouTube videos about buying and selling businesses. I started to get emails from people who would say things like this, they would say, Hi, Dave, I really enjoy your YouTube videos, although I wish I had found you two years earlier, because me and my wife put all of our life savings into this deal, which turned out to be a bad deal. And if we had known what you are teaching, we would never have done that we wouldn’t have lost our life savings. And then I was like, oh my god, there are people that are quite literally making bad mistakes when it comes to small business deals because of ignorance, and just not knowing information. And if I create the information and put it out there, it’s not going to reach everyone who needs it. I know. But at least if it’s there, there’s an opportunity for people to find it. So that’s what kind of gave me my mission. And my impetus was to and even today, the company values that we have our mission is to help people avoid bad deals. And that is not a statement specifically about buyers. Because sellers equally fall victim to this idea of bad deals in a different way that we can get into if you want.

Jess Dewell 08:21
Let’s you know what I think we should because I when I look at a transaction personally. So this is actually good to point out because I would have glossed right over that. As everybody knows that. No, we got to say some of those things out loud. So thanks for that, David. Because a deal can fall apart for any kind, any myriad of reasons. And it could be a buyer, it could be a seller, it could be something totally external that cascades right into it. And so yeah, let’s go down that path.

David C Barnett 08:47
First, let’s get a couple of things on the table. Number one, small businesses sell for very low multiples of cashflow. So typically, you’re talking like high ones like 1.7 to the mid to high twos maybe have what we call seller’s discretionary cash flow, which is the total amount of money available to an owner-operator that works full time. You might say, hey, two times cash flow sounds like a really good deal. A business produces $100,000 of cash flow, I can buy that for $200,000. But it’s the amount of money available to an owner-operator that works full time. So in addition to paying $200,000, you also have to work 40 hours a week. And so if you realize that your labor is a part of that you realize, okay, it’s actually quite a bit more than what you might see at the first glance, okay. But this is the fundamental basis that has been arrived at over the course of the last 40 years about how we value these businesses. And there’s a few reasons for that, but so, there’s not a lot of benefit in selling a small business. If you think about it in this way, like small business owners do not sell to quote-unquote cash out in the way that Mark Zuckerberg sells his Facebook stock to cash out right now. When do small businesses go up for sale, they go up for sale, when there’s some kind of pressing personal concern on the part of the owner that that forces them to want to do something or need to do something different in their life. Because otherwise, they would just keep the business a good profitable, successful business, you would just keep that it makes every bit of financial sense not to sell. So what are those reasons people sell a business? There’s five big reasons I put the first reasons into one bucket together, I call them the mental basket and burnout, boredom and fatigue. So you become exhausted, you become frustrated, you get creative, you lost your urge, what Aviv about the business, it just gives you anxiety and worry and stuff like that. So that’s one reason people will put up a business for sale, then there’s a divorce, or health, the need to relocate and retirement. So if you think about those things, the only one of those five things, people plan for his retirement, all those other things are things that come up in life, because we’re human beings, and these things happen to us, right. And so when one of those things happens, and someone realizes, gee, I really can’t continue to run my business anymore, because of this new circumstance in my life, I need to sell it. If that person is not properly calibrated in their thinking as to what their business is truly worth and what someone can pay for it, what can happen is somebody will decide, okay, so my, let’s say they have a $200,000, discretionary cash flow, and they meet the wrong business broker, or they talk to the wrong advisor, who says to them, Oh, you got a million dollar business there. So then they go, and they put their business up for sale for a million dollars. And based on what you and I just talked about, that might be a four to $500,000 business. That person, though now believes it’s a million-dollar business, because they’ve gotten advice from someone they looked up to or trusted, and they now put the business up for sale, and it sits on the market, and different people come to look at it, and maybe some people make offers, maybe someone even makes a million dollar offer. But by the time that person brings that offer to their lenders gonna sit down and show them how it just doesn’t cash flow, and the deals gonna fall apart. And so that person is suffering from burnout, boredom and fatigue, or they’ve been told they’re getting a divorce, or they’ve been told by their doctor, they have limited time, or they know that they need to move, for example, because their spouse got transferred or something like that. So one of these pressures has been applied to them. And they have a completely off-base conception of what their business is worth. And what ends up happening is they end up spending a lot of time trying to sell the business. And while they’re working on trying to sell the business, they lose the focus on the operational side. And what will start to happen is sales start to turn down, earnings start to turn down and the value actually starts to decline. While they’re looking for that, that unrealistically high price. And these are some of the businesses that never change hands. Because what will eventually happen is that personal stressor that’s applying itself to the owner, will eventually cause the business to close. And the reason why I say this is a bad deal for a seller is because if they had their expectations properly calibrated in the beginning, and that person had been told your business’s worth between four and $500,000, and they meet that buyer who gives them a reasonable offer, they could have been out of there in three or four months. Right. And, and they would have preserved value, employees would have preserved their job customers would have been able to carry on dealing with that company, it would have been easier for everyone. But it’s the setting of the expectation. That is the critical factor that has to be done up front.

Jess Dewell 13:46
My side is how do you make a business grow that thriving, so that the three things that you talk about the burnout, the fatigue? And the I don’t remember the third one, because I’m now seeing them out? Thank you boredom. Well, oh, wait, no, I’m never bored. What’s that?

Jess Dewell 14:00
I’m just getting the three reasons that people decide they want to sell, it’s their business wasn’t designed to actually have a good understanding from them. And then they go and they make this unfortunate jump. Is that something that you’re talking about in in your YouTube channels, it just hears the expectation of what to get and how to have a good conversation. Are you also trying to help people that are like, I think I want to sell so you got to put some design work into it. You’re talking about that too, aren’t you?

David C Barnett 14:28
Yeah. So interestingly enough, you’re familiar with that Michael Gerber book E Myth revisited loves. So I really got into this space in between Oh, eight and 2011 when I ran a business brokerage office, and over those three and a half years, I sold 35 companies for other people. And that’s where my brokerage experience came from. Later, I evolved into doing working with buyers and sellers as a consultant. So I’m still working on deals just in a different kind of business model. But I would run into business owners, and they will be operating their business from what I describe as Big Bird’s Nest. And so if you can imagine an office or a cubicle completely surrounded with little yellow sticky notes, with little reminders and notes and important numbers jotted down, they have to be passed on to the accountant or something like that. Right? I would meet these people. And they would have all this stuff going on around them. And they’d be working 50 hours a week, and they never taken a vacation. And they’d been telling me, they would tell me, I need to sell my business because I’m burned out. And I would say to them, like, I can’t bring anyone here to see how you live and expect them to pay money to step into your shoes. Exactly. That’s, it’s true. For a while I actually tried buying copies of E Myth to give them to these people. And of course, they would never read them.

Jess Dewell 15:48
Yeah, that’s right, thanks for the book, and it goes into the pile with the sticky notes.

David C Barnett 15:52
And so eventually, I started to work a little bit with these people. And I, one of the one of the programs I have is called build a business that people will want to buy. And it’s a step by step how you organize a business more clearly and create an org chart and all that kind of stuff. But I do not coach people toward an exit. That’s not part of my practice. And really, when people come to me, and they say, I want to build this so that it becomes something that is more sellable. I’ll point them to that program. But if they want to work with someone hand in hand, I’ll say what you need to find is some kind of business coach that can help you with your systems and processes, and all that kind of stuff.

Jess Dewell 16:30
You’re listening to the Bold Business Podcast. I’m your host, Jess Dewell. This is your program for strategizing long-term success, while diving deep into what the right work is for your business.

ANNOUNCER 16:44
Right now, if you are ready to make a real impact in your business, and you’ve waited too long to take actions, go to Red direction.com and click on Solutions to find out how.

Jess Dewell 16:57
And like you, I have done deals, I’ve been part of deals, but it’s not unlike you. I’m on the other side of that, oh, if that’s really what you want to do, you can have fun with that, let me help you get ready, and I can talk to you, you’re gonna go see David. Right, for example, it’s a huge opportunity to really stay in a lane that is supportive, and can help the person with the business.

Jess Dewell 17:21
Be real about it. And that’s what it is. And I’m thinking about this concept of being real. And we’ve talked about secret erosions we’re talking about, we’ve touched on some, some ways that deals might we have going into a lot of depth deals might fall apart, and it can come from anywhere. And so I really want to spend a little bit of time and talk about the erosion piece, because I don’t think people understand that. And when you said it, it’s not only is it worth repeating, it’s worth going into depth, just a little bit of, hey, somebody needs to understand what they’re buying from you. And when you can’t see it clearly. When you don’t know or when you look at yourself and you’re burned out, somebody else is going to end up in the exact same place, if they just step into your shoes as a phrase that you used.

David C Barnett 18:05
Yeah. So I think one of the, one of the things to think about is that in any small organization, so if you’ve only got 20 people or fewer in an organization, the corporate culture is entirely driven by the owner who’s an owner operator, right? That person being in the middle of everything, the way they act, the way they behave, the way they stop and say no to something that might they might feel is not an ethical way to operate or anything like that. That’s all going to be observed by the employees, that’s going to set the tone of the way we do business here. And so if the attitude of the owner is an energetic one, and it’s a we’re going to serve customers, we’re going to aggressively Chase business, we’re going to bring in new sales, etc, etc. But if that email comes in, after hours, we’re I’m going to reply to it because I’m eager to bring business into my company, that kind of behavior is going to be infectious and people are going to observe it. When your attitude as an owner changes, and closing time hits, and you start to act like a government employee or something, you’re like, oh, five o’clock out of here, log out of my email, I’m done. What’s going to happen is your behavior and attitude towards the business is again, going to infiltrate and trickle down through the other employees and your other employees interact with customers and suppliers. And so that attitude is going to filter through, all you have to do is go into a business like for example, a business where there’s a public space, like think about a restaurant, you got a dining room, you got bathrooms, there’s places where the public is functioning in that business. And so you get in there and there’s a light bulb burned out, or there’s like something is obviously in disrepair, or someone put a cardboard box that has something in it in the corner. They set it they’re out of the way but you can see it and it looks unsightly. And no one’s taken the time to go and remove that or hide it or put it in a closet. Write, an owner who’s got a real keen interest in creating the best possible experience for guests isn’t going to tolerate that. But somebody who’s just going through the motions, not really too excited, they’re going to gloss over those things. And the thing is this going to have an impact on the clientele. So I drove by a restaurant yesterday that had a broken window that the owner has fixed up with duct tape. So now it looks like a Halloween decoration, like it looks like a spiderweb decoration on the window. And I looked at that, and I was like, Oh, my God, it’s probably $500 to call and get the glazier to come out and measure it up and fix it up and do all that kind of stuff. And it’s been like that for weeks. So that either it either tells me the business is just marginal, right? Or it tells me the owner doesn’t care. Either one of those things is a reason not to eat there. Yeah, yeah. So that’s a direct example of what I’m talking about how the owners position or attitude is actually creating a negative impact on the business. They may not even be aware, but they could be doing more, if they just, here’s one of the biggest things that I find that sellers have an issue with is empathy. So just understanding the point of view of the buyer. And most business owners that are successful, have a high degree of empathy with the customers they serve. Just when you’re thinking about an offer or a program or something you’re going to do with your customers, you probably sit there and think, Okay, what does the customer want? What do they need? What do I think they’re going to benefit from this? We know what is the likely value? So how do I price it so represents a good value, like you’re actively thinking about the person on the other side of the table, in what they want from you as a service provider. And business owners do this all the time, I find that when it comes to someone selling their business, they somehow detach themselves from the fact that they’re still selling something, it’s just that instead of a bit of inventory that like something you would see on a shelf, it’s now the business, which is the inventory, the object being sold. And I ran into this in a big way, we in one case that I’ll share where there’s a business owner who had a small little cafe in an office building. And so the hours were great from a business owners point of view, because they were only open when the offices were open. And so they were busy at Coffee Break. And they were busy at lunchtime and a little bit in the afternoon. And they would wind things up just after five. And I took a look at our business, I looked at her numbers. And I said, I think this is a totally sellable business. It’s got a lot of attractive features, especially the hours. And based on your earnings, I think I could probably sell it for about 65 grand. And she looked at me she said, Oh, no, that’s not enough, I need over 100. And I said, Oh, I said, if you want to sell this business, for over $100,000, you only have to do one small change, you just have to implement a two-drink minimum policy. So anyone who comes to the front counter has to order two cups of coffee, you won’t serve anyone that wants one cup. And because you need to double your sales. And she said last month going to work most people don’t want two cups. And then I just asked her I said, So you’re saying that what your customers want is important in this. And that’s when she got it. That’s when she was like, oh, because what is the buyer of your business want, most people will just simply want to buy a business. That’s not what they want. What they want is to acquire a cash flow to support themselves and their family. For most small businesses that are going to be owner-run businesses, they’re looking to acquire a cash flow. And they’re going to be putting their full-time labor into it. So part of that cash flow has to represent their day-to-day paycheck. And then part of that cash flow has to go towards servicing any debt they might take on to buy the business. And then if they’re going to have a down payment, and they’re putting a down payment to acquire this business, small businesses risky, they need to get some kind of ROI on that downpayment. So they’ve got to get a return on that capital two. And on top of that, this seller’s discretionary cash flow is based upon the accounting concept of EBIT da, which doesn’t include Depreciation or Amortization, which is how accountants basically describe equipment wearing out. So any kind of new replacement equipment acquisition, what we call capital expenditures, also has to come out of that discretionary cash flow and on top of it all any tax bill, so when you start to look at it from the buyers point of view, and you say, okay, because most sellers if they’ve got like a 200 or $250,000 cash flow, discretionary cash flow, they go wow, look at this, who wouldn’t love to have a $250,000 income, but it’s not going to be their income? Because all those things I just mentioned have to come out of that 250 grand. And I met a banker who has a great saying, she says, the business someone buys is not the same as the business you sell them. And what she’s basically saying is that the seller often has a really great cash flow, if they’ve been successful and profitable for years, they probably have very little in the way of debts, a lot of the cash flow is free and clear to their pockets. And but when that buyer takes over, they’re gonna get a loan, and so they’re going to have that debt service, and then maybe they’re going to have to start replacing equipment that’s all going to come out of that cash flow. And that’s where the empathy comes in. Because what I often challenge some sellers with who are detached from this, is I’ll put them through the exercise, I’ll say, let’s say you’re buying this business, what kind of downpayment Do you likely think the person is going to have? First of all, who is this person? Because sellers will often not even think about that, who is the prospective customer. So if you’re selling like, for example, a small restaurant or cafe, in all likelihood, the buyer is going to be somebody who is currently an employee in the hospitality industry, and industry known for low wages, right? So in all likelihood, this person is going to have a very limited downpayment, unless they’re fortunate enough maybe to have some family support or something like that. And so now we have a limited down payment, you’re looking at a larger loan, either from a bank or from the seller, like I mentioned earlier, right? And so when you start to walk a seller through the process, and they start to see how this cash flow, they’re so proud of is gonna get parceled out to all these other needs, they begin to realize, oh, wow, if somebody paid the price I was asking for, they’d be working for free for five years. And it’s easy to understand, no one’s going to do that. And working with a good professional to help set the expectations is key. And sometimes people will go to a business broker, for example. And there are some really fantastic qualified Business Brokers, who, who understand that a business has to be priced right in order to sell. And they will do this kind of reality check with sellers. But there are also a lot of business brokers out there who don’t do that at all. They just want to get the listing, and they’ll ask you, what do you want for your business, and they’ll put that price on it. And they’re not really serving anybody’s needs, because they lead to this misunderstanding on the part of sellers do inflated expectations. And then when buyers come along, they don’t they a lot of there’s people out there who, who are quite connected to what they’re supposed to be doing. And there’s a huge turnover in the brokerage industry. People get attracted to the big what they perceive as big commission rates, and then they don’t make it and they end up turning over.

Jess Dewell 27:43
I really appreciate the example make everybody buy two drinks. Yeah, because understanding our capacity and where we have the opportunity to grow is first and foremost, the right thing, I was actually talking to a business owner the other day that said we’re maxed out at our current location, and we’re going to be getting another one. And we want to do all of these other things. And so here are all the ways I can do that. So they’re thinking a little bit differently about expanding. But I can imagine, if they didn’t, there would be burnout, because there’s an expectation of more that they can’t get in the one space that they have. So they’re avoiding some of that right now. But it’s going to be interesting to see how that progresses. And are they successful? Can they do all of the, the awesomeness with the location of a new building and the rent of a, of a recently redeveloped awesomeness, but knowing that the clientele is right there also, as this is a place where they’re working on really making compact 15-minute cities, that’s actually a focus to retrofit. Have you heard that phrase before a 15-minute city?

David C Barnett 28:44
Yeah, and I’ve been to a few places before this sort of fit this paradigm, there’s a brand new high speed rapid transit system that they just opened the first leg of in Montreal, and at the end of this line, there’s this mega neighborhood block. It’s interesting because there’s a bunch of densely compact, high-rise buildings that are office apartments, hotel, etc. And there is parking, but it’s all hidden, underground or in behind. And so it’s all laid out very much so that you can easily walk around all these places, and then hop on that new. I think it’s called the rim train to like, zip downtown. And so I can see how people are planning these things. And with the forethought of making it very walkable. I’ve seen so many instances of people trying to expand to another location. And of course, you realize, you know, you’re doubling your overhead instantly.

Jess Dewell 29:35
At least depending on what your rent is. And then you’ve got the on ramping. Do you have enough staff to do that? How do you train them and onboard them? Are they specialists? Can you get them quickly? Right?

David C Barnett 29:47
Yeah, I think that there has to be a lot of different thought and experimentation. The other challenge that I sometimes give people who want to do that is I’ll say, is there a way to make more money with the current law occasion, even if you serve fewer people, maybe there’s a way to change the product offering or the pricing or something to try to make it more productive. Because obviously, it’s risky opening that’s taking on the double of the overhead.

Jess Dewell 30:14
There are some other factors that have the what they have next to them they have been using, it’s likely that will not continue. So their partnerships and the space that they have is actually not big enough to serve what they’ve been doing, which is interesting. So who knows what will happen there. But to your point, can we be curious, can we look at something in a different way? And that’s actually one of the things I’ve been gleaning is, how can we look at this differently? Not only with if we’re tired? If we’re burnt out? Will somebody want to just come in and do this because somebody who’s going to be attracted to this is gonna be just like us. That’s one of the big takeaways that I’m getting. The second one is, it sounds like when the reality sets in, have a sense of somebody selling a business and the person or people who are buying the business have a really good understanding, it seems like integration would be pre not only everything you’re doing up with potentially a business broker to get to the sale. But even afterwards, there’s some good foundational pieces to work from, to maximize the correct reality and the correct expectations that have been given from the beginning, all the way through.

David C Barnett 31:25
Let’s walk through that a little bit. unpack that, because the buyer is not necessarily just like the seller,

Jess Dewell 31:30
I was using your example of the coffee shop most likely in that case because you’re right, it’s not always like that.

David C Barnett 31:35
It depends on how well organized and set up the seller is. So I like to use the example of a roofing business, if it’s if there’s a roofer that owns a roofing business, and has a couple of crews of workers. And that person is doing the quotes every day in the evenings and placing the orders for the material, running everything on a notepad and a cell phone. If anyone goes to look at that business and says, How do you run this business, and the guy says, I’ll just explain it to you. It’s easy, right? That basically the only person who can buy that business is a roofer that’s 20 years younger, because they know everything that the person is doing. But if that person has a highly systematized quotation process based on spreadsheets and measurements, and you put in the price of the shingles, and labor estimations that have been calculated through observation, and says, here’s the tool for quoting, anyone can fill in these numbers based on measurements you can do from the ground. And here’s the process for billing. And here’s the process for ordering. Here’s the process for scheduling. Now you can sell that business to almost anyone. And so the people who typically are sellers are most often people who are business starters. Okay. And so these are entrepreneurial people, they’re people that have a vision, a dream, and then they start their business. And maybe things don’t quite work out. So they pivot a little bit. And they keep amending and adjusting course correcting, and they make it work. And they bet on the dream. What makes them very different from business buyers is that business buyers often look at small business ownership and say I’d really like to own a business. But I’m not willing to go through this risky endeavor. And typically you’re looking at people that may be a little bit older, a little bit experienced, they have some amount of capital saved up because they’ve had a career of some kind. They’re often also people who have maybe some experience in larger organizations, so they’re actually familiar with better organized and managed entities that have systems and processes in place. And so what that business buyer is doing is they want to pay money to avoid the risk of doing the startup. And so they are rather than being entrepreneurs, they are investors first. So they’re buying a cash flow, just like someone might buy a government bond to obtain the coupon yields, okay. Now, they’re in the world of small business, which means they have to be entrepreneurial to some degree, they’re thinking of ideas and ways to change things and how to grow the business, all that kind of thing. But that’s a fundamental difference. And the seller is usually very strong operationally. So if you want to think about a large company, it’s like having a 400-hitter CEO, oh, but the CFO and CMO and the HR person, all these kinds of people are a little bit weaker. And but the buyer typically is someone maybe who is the strong CFO, CMO, HR person, but operationally, they’re fearful because maybe they don’t quite have a lot of experience with that industry. This is why buyers will typically be worried about things like a training and transition period, to help with the changeover because they fear the operational side. They’re often more capable at some of the other aspects. And so it’s the buyer seller, you can very often get very different kinds of people. And so that entrepreneur who might be really growth-obsessed and vicious wanting to grow the business, they could sell it to someone who has no aspiration for growth, they might sell it to someone who in that small cafe kind of example, they might sell it to someone, for example, who’s just new to the country and just needs an income. But they just need a sure thing, because they’ve only got a limited amount of money that they brought with them. And they can’t endure the risk of a startup, because that’ll really leave them in a bad spot. Right. And so this is why you might sometimes see, for example, someone start a small food business or a corner store. And then it gets sold maybe to someone who’s new to the country. And then all of a sudden, you realize, hey, it’s all just family members working here now. And so what they’re doing is they’re just applying a different kind of strategy. And they’re saying, We want all the money being paid in wages to stay within our family. So it’s the buyer and their outcomes and their desired need, or whatever they need out of the business. This is part of what you need to think about when you’re putting a business up for sale. And so when I work with sellers is one of the things we talked about, who is likely the who’s going to be the likely buyer. So the bigger more complex the business, maybe there’s a likelihood for a strategic acquirer. Some other business that’s in the same or similar industry might want to buy them to grow geographically, for example. So the business that you were mentioning that wants to add another location, you know, is there another similar business to them in another location that they might want to grow into, maybe it makes more sense to acquire that other business versus planting a greenfield location, right, planting a new flag. So that’s how big companies typically grow as they grow through acquisition is, but this always makes me chuckle. When sellers go online, and they Google things about selling their business, what they will find is they will find articles about doing an ESOP, that’s an employee stock ownership program, or how private equity is buying businesses, or strategic roll ups and all this kind of stuff. And the funny thing is, the most common kind of buyer is often not mentioned in these articles. And the most common kind of buyer is someone who’s a middle-aged person that hates their job and wants to leave their career by buying a business. That is the most common buyer out there is a person, right? And so that’s the one we most often have to prepare for, is a person. And so we ask yourself, what kind of person is this going to be? What kind of money are they likely to have? What are they going to likely have to borrow and you can sketch out how that buyer is going to look at the business.

Jess Dewell 37:42
I’m your host, Jess Dewell, and we’re getting down to business on the Bold Business Podcast. This is where we’re tackling the challenges that matter most to you with actionable and achievable advice to get real results that lead to your success.

ANNOUNCER 37:56
While listening to the Bold Business Podcast hosted by Jess Dewell, a nationally recognized Strategic Growth consultant. She works with business owners and executives to integrate just two elements that guide business through the ups and downs of growth. Number one, know what work is necessary. Number two, do all the work possible. Schedule a complimentary consultation to find out more at Reddirection.com.

Jess Dewell 38:00
Hey, you’re right. Business starters are different than business buyers. And it’s interesting, you said something you said you have to face what you fear. And I find that fascinating because as we’re going into this conversation, and where I’m sensing it heading into is, if we don’t know what we fear, if we don’t know what makes us stop? How could we even go through the process to understand who the person might be that would be buying our business?

David C Barnett 38:53
On the other side, the buyer, they asked two primary questions, they say what is the cash flow? And that’s going to determine what they think the business is worth? And then the second question is, will this cash flow continue under my stewardship? And if the answer to that is unknown, or no, it doesn’t matter what the cash flow is, like, they’re not going to do the deal. They have to be certain that they’re going to be able to carry on that cash flow. I did a consulting call with someone the other day and they found this business that provides services to properties and they get a lot of their business through property managers. So the issue is that even though this company may claim to have 200 customers 40 of those customers may be coming because they have a relationship with one property manager that’s helping condo associations and property owners manage a bunch of buildings. So it represents a customer concentration in a different kind of way a relationship concentration. And so the current owner has got these really solid relationship IPPs with basically half a dozen individual people that are driving all this business. So from a buyer’s point of view, if I buy that business, what am I buying, it’s basically six relationships. And if for whatever reason those relationships don’t transfer, I didn’t get what I paid for. So my advice to them was, number one, based on the cash flow, here’s the valuation, here’s what it’s worth. But number two, because of the nature of the riskiness of this business, we’re looking at, to protect the buyers interest, the deal has to be largely seller-financed. And the seller financing has to be tied to those six relationships. And so from the sellers point of view, like they just want a check, and they want to cash out and leave. But when you start to understand it from the buyer’s point of view, and you realize, hey, if the six people I do business with don’t do business with the new person, that’s the risk they’re facing, you can start to empathize with that. So if you don’t want to be the bank for someone, if you don’t want to risk, the ultimate purchase price, relying upon the six relationships transferring, then you have to address that risk well, before you put your business up for sale. And so what would that look like? It would look like maybe having employees that deal with customers. Right? So that at least when ownership changes, the customers are not dealing with someone new, they’re still dealing with familiar employees, right? Or maybe it has to do with a concerted effort to diversify the sources of all the work, we can’t rely on six relationships, we have to have 20, right? Without further diversify this. And so it makes you start to think a little bit about how you build and design and grow the business by keeping that buyer in mind.

Jess Dewell 42:02
And I know we’ve been talking about them where it is, it’s going to your otherwise, right? What happens if the relation if the relationships are the key, what’s less valuable than that, but still has a value is the list of customers. And right, so if you go down, you’ve got this list of customers, you’ve got the people who are managing those relationships, or a team that’s doing something. And then on top of that, you might have the product that still might be connected by the people. But it’s still a standalone item, or on top of that some sort of a platform. And what I notice in businesses is they want the top to the product line, that standalone or the platform at the price of the for the price. They want to sell their list for the price of a platform. And it’s interesting, because to your point about can I get what I’m paying for? The answer is absolutely not. Unless it’s price, right.

David C Barnett 42:58
So what’s interesting in this conversation I had with these prospective buyers, is they actually revealed that through their conversation with the seller told them what another offer he had received looked like. And so this other offer was from somebody in the industry. And the other offer was simply Sure I’ll take over your business. And I’ll give you $100 for every job I do from the people on your list for the next five years. And so if you think about that, basically what that person is saying, I’m completely discounting those relationships, I will only pay you something if they if it bears fruit, and I have my cash register ring. And when I was talking with the buyers, I was like think about that. This is a person who knows the industry knows maybe the price sensitivity of the clients understands the importance of the relationships, and they’re not willing to write any kind of check up front. They’re entirely saying that they will only pay based on actual performance in the future. There’s an accounting term called goodwill, and it’s a literal accounting term. It’s basically the difference between the tangible assets and the personal purchase price of the business. But people use the goodwill term to also refer to the feeling in the marketplace people have about a business, right? And so what the seller is expecting in this service business with very few assets, is that their past performance indicates a strong amount of goodwill. And what the buyer is doing is they’re calling me to get my opinion about whether or not this business is really worth something whether they should buy it or not. What the other buyer the industry buyer has already indicated is that they don’t believe that the business itself has any degree of goodwill. Do you know where the goodwill is? With the individual owner, because he is the person who’s friendly with these reference points. And so it was it really great example, in understanding sort of the The different facets of this. But if you want to sell a business, you have to make sure that the goodwill moves from yourself as an individual to the actual business or brand. Another great example of this difference would be plumbing companies. There’s two very different kinds of plumbing companies. There’s the kind of plumbing company that goes and acts as a subcontractor for a big condo tower that’s being put up. And that company will go and bid and create tender bids for jobs for general contractors. And again, the owner of that company probably knows a lot of the general contractors in the market, and they had these one-on-one relationship. But they’re limited because the general contractor understands their business enough to know what their margins should be and what pricing should be. So there’s an upper limit on the types of margins you can get in that subcontractor role. And the relationship between the general contractors and the plumbing company owner are probably really important in helping to get those contracts. If you compare that with a residential service plumbing company, and you can just think of someone in your own city, you maybe you see their advertisements at one time, they would have had a big ad in the Yellow Pages, right? And people know of them, because you see the vans around, you don’t know who the owner is, you might even remember their phone number from a radio jingle, they played by at some point. And once every three years, something happens in your plumbing at home, and you need a plumber. And those are the people you know, and you call them. And so in that example, the goodwill is entirely with the brand and the company, that business could be sold every year, and the people in the public wouldn’t even be aware.

Jess Dewell 46:45
That’s actually one of the things that can happen in business design. And so for everybody that’s listening to this. Take a look at where you’re at what your goals are. Because what I would say to this would be how can you design to be too deep for how can you design as especially if you’re that awesome owner that is friendly with everybody and has those relationships, your biggest risk, is wanting to take a vacation for six weeks, and not burn out of your business, your biggest risk it and so design yourself a vacation, design yourself the ability for other people to have these, not only do you develop people, not only do you strengthen what’s going on within your company, you’re adding to this concept of goodwill that you’re talking about David, and that I think is an incredible piece so that there is something else intangible because the relationships are more with the business than it is with a person.

47:41
That’s true, I get that in small organizations with account managers that happens also, to your point about where we started before we were talking about plumbers with the property managers got the property manager, if they go you’re probably gonna go my on my way with my hairstylist, I go where my hairstylist goes, I don’t care what place I’m going to sit in the chair to get my haircut kind of thing. And so that’s an interesting concept of so what kind of Salon Are you building? Are you building one for hairdressers to come to? Or are you building one that people are coming because they like your space and the people that you have employed? And that’s an interesting concept too.

David C Barnett 48:17
It’s an interesting tangent, but to further build on the hair salon example. The question would be is who is your real customer group. So we’ve heard a lot over the last couple of years about labor shortages in certain key areas. And so a business’s ability to succeed often has to do with their ability to attract talent to actually have the capacity to serve customers, right. And so, in a business like a hair salon, where there’s a strong relationship developed between the end customer and the the person who does the hairstyling, the hairstylist is actually a customer group, right? You have to make sure that your offer is competitive visa vie any other place around town.

Jess Dewell 48:59
And what made me think of the hairstylist was the plumber, because I’m thinking the plumber with the brand that is known. Who knows who’s in the vans, it could be four or five different companies that have white labeled this for white labeled the bigger brand, to be able to be part of it to your point who is the cause and there’s a two fold customer group, that people when you need them every few years, but also the people who can help make sure that they have their employees taken care of or they want to be part of something bigger, or they write whatever their goals are.

David C Barnett 49:30
And then here’s the difference. So you think about a beauty salon where people make an appointment with a particular stylist versus sort of the salon that’s inside Walmart. And so those franchise salon like hair places where you get the inexpensive haircuts and maybe you don’t even have to make an appointment you just show up there. The clientele who’s drawn to that brand probably doesn’t really care who cuts her hair a lot of the time, right, but the person who is really particular and is willing to make the investment To have a particular kind of hairstyle, they want a certain kind of service, they’re gonna go to the salon where they can make an appointment with that person. It’s almost like a law firm. So in a law firm, people will get attached to specific lawyers that are at the law firm. And so what it has evolved over time for law firms to try to make sure that they don’t have a constant revolving door of people coming and going, is that when people demonstrate a significant contribution and capacity for earnings, etc? Or do they do they make them a partner? And so that whole design of that kind of business is meant to create a sticky factor to retain the best and most capable and highest earning people within that fold. And so I’ve seen people try to execute these sorts of things in beauty salons, where they’ll introduce some kind of profit sharing or bonus plan, etc, etc, to try to make him more attractive. I don’t know anyone who has who has really succeeded to the same degree as like the law firm example. Just because people who people are motivated by different things.

Jess Dewell 51:09
What are some of the self-reflections that you’ve done over the year or exercises that you’ve done to really get to know yourself to keep you aligned to your mission and purpose.

David C Barnett 51:19
I have a walking routine every morning, I get up early, and I go for a walk with a cup of coffee, and I usually listen to audiobooks or a podcast. And that soundtrack in my head usually just creates a space for me to do some deep thinking, create some ideas. One of the questions that, because I’m giving advice to people and helping people to negotiate things is I will just ask, if something goes wrong with this, what will it likely have been? That was the problem, it’s almost like you’re trying to put yourself in the future. In a point of reflection, it forces you to think about how something might play out for a person in their business deal. And it helps you to identify what the weak points are likely to be. And once, once you have a greater awareness of what the weak points are likely to be, it can help to inform your strategy or your course of action a little bit.

Jess Dewell 52:16
David, what makes it bold, what makes it bold to take the time to do this thought work to really understand exactly what we have as a business owner, before we ever might even consider selling a business.

David C Barnett 52:31
I don’t think it makes it bold. I think it makes it practical and pragmatic. And if you are running a business, then your day-to-day is filled with practical. The reason people don’t want don’t do it is because they don’t want to do it. Because they probably have this niggling voice in the back of their head, saying that there’s problems. And if they sit down and go through the exercise of really thinking about it through the eyes of a buyer, then they know that they’re going to have their eyes opened or have to recognize the fact that there’s a bunch of other things that need to be worked on. And I think that’s what people are afraid of is that there’s going to be a lot of work to fix things. And if business were easy, everybody would do it. Like, the reality is, yeah, business is hard. There’s all kinds of work that has to be done. And when I started to actually, when I was a business broker, and I started to be a little bit more proactive, and I started to do the things that led to the program, I created the build a business people want to buy, a funny thing started to happen when people put a little bit of effort into better organization and getting processes in place, etc. Some of them then told me that they didn’t want to sell their business anymore because their business became more pleasant to own and run. And I already mentioned earlier that you don’t sell a business to cash out, the real meat and business owner isn’t owning it and operating it and collecting the cash flow every year. And so if you can grow a business in a way that is going to be a pleasant business to own and it’s gonna be easier to operate, it’s overall gonna be more lucrative for you over the long haul. And the ultimate creme de la creme exit from a small business is when you exit, meaning you leave the door, but you remain the owner. Because if other people can make it go, and you can still collect the cash flow with death, that’s worth far more than any kind of exit. Because you still get to keep the good part while you’ve handed off the work part. That’s probably the toughest one to execute. There’s no question.

Jess Dewell 54:34
Every single time I have a conversation, I take away something that I want to share with 25 people. I know when you’re listening to this podcast, you’re also listening for that and we’ll have something that you want to share in the comments. I would like for you to engage with us. What is that thing that you want to tell 25 people from this program? Here’s why it’s important. It’s important because yeah, they’re going to be how-to’s. As Yes, there are going to be steps. Yes, you’re going to be like, Oh, I wish I wrote that down. I wish I wasn’t doing this. And I could actually take action on that right now. But guess what, you’re not. So engaged right now because that one thing you want to share with others will be the thing that you can figure out how to incorporate in your business in your workflow in your style, tomorrow.

ANNOUNCER 55:24
Jess hosts the Bold Business Podcast to provide insights for building a resilient, profitable business. By deeply understanding your growth strategy, ensuring market relevance and your company’s future. It is bold to deeply understand your growth strategy with your host, Jess Dewell. Get more information about how to drive solutions and reset your growth mindset at Reddirection.com. Thank you for joining us and special thanks to our post-production team at The Scott Treatment.

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