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BNI & The Power of One
BNI 812: Business Matters 119 - Valuation of a Business
00:45:30
In this week's Business Matters episode we discuss valuating a business for purchase or sale.
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- [00:30]
A
Welcome back to bni, the Power of Water, our Business Matters podcast. Tim Roberts, with me, Michael Martin.
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B
Michael, Morning.
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A
How are you?
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B
I'm doing well. Doing well.
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A
Give our weather update our typical weekly spring.
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B
Spring is sprung. It's been hovering. It's been in the Yesterday I got at my house, I had a high of 72.
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A
This is the classic beautiful.
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B
And today it's in low 40s and.
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A
Overcast and Saturday it's snowed 2 inches. Yeah, it's past Saturday.
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B
So it's a little spring snowstorm.
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A
New England's freaking spring. I mean, I woke up Saturday morning, I literally went, oh my God. It was like a white out for a second. I was like, I took a picture.
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B
Of it because it looked just like Christmas. I was like, man, you might as well be in the middle of January. Here it was, everything was blanketed in snow.
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A
Yeah. And I was gone like the next morning, but it was just like Jesus. And then. Yeah. The last two days have been 70. This weekend's supposed to be 70. It's all over the place.
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B
Yeah.
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A
So we were talking off air about today's topic again, for everybody listening, go to bnipower of1.com Leave your questions, topic ideas, those kind of things, how I've had just like multiple meetings this week randomly with different people in different situations, but all around buying or selling businesses.
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B
Yeah.
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A
Business valuation and all the things that go with it. So I thought it'd be a good topic for us to talk about again, just because I think there's opportunities on both sides. One of the true stats out there is about how many baby boomers are set to retire in the next like five to ten years. Like millions upon millions upon millions of them.
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B
Yeah.
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A
And how many are small business owners? So there's going to be a lot of opportunity for some people to be looking to maybe buy additional investments in, in businesses if that's something that's up your fancy. But also there's a lot of people who might be looking to sell soon or even in the future. And it's been kind of eye opening to me on how a lot of people struggle with even figuring out how to value it, how to put a value or set their business up for valuation to sell or what to look for when buying those kind of things. So I just thought it'd be an interesting topic for us.
- [02:48]
B
Yeah, we've always talked about like if you're in the buying mode, that there's always opportunity out there. And I don't know, I can't recall that we Got in the really great detail about what to actually look for in the decision making process and that decision tree. So yeah, I guess we can get into it now. You were telling me off air of a story fairly recently from you, so why don't you share that for some context and then we can kind of go from there.
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A
Yeah, so. And again, it just talks about, you know, making sure kudos to the person I met with because they knew they, they had lacked insight on how it all worked and would just seek counsel because they were about to make a pretty big mistake. But I think for any of us, it's important to study these things if you're in business because there are going to be some great opportunities out there, but there are going to be some really bad deals out there. And more importantly, setting yourself up. So it's kind of a story both ways. Right. So person in town reached out to me because they had an opportunity to buy a small marketing company that had just been kind of established a couple years ago. So it's relatively new. And they were given, they were, they're an employee. So they were given an opportunity at day one to come in and basically run the show and get this thing up and running. For, for the owner, it was kind of like a side hustle for the owner. And now a couple years in, the owner wants to kind of just let it go, sell it and is offering it to this employee. Now the challenge here is there's a lot of emotions involved right from the beginning. One is because whenever I feel like anytime you're an employee buying the company you're working for, there's just that emotional attachment to how things are and you have a relationship with the person you're buying it from. Right. A very close relationship potentially. And you might be overly excited about the opportunity and make a bad deal for yourself. That hurts you in the future because you're just like so ingrained in, in the business and to think of yourself as the owner, there's emotion to it and there's also a play on emotions the other way, which is what was happening in this scenario. So I generally look at this is like there are really, there's more. I'm not an expert. I would say this for caveat. I'm not an expert in this either. I've gone through it a few times, I've studied it a few times. So take that for a grain of salt in everything we say. But I generally look at like, there's kind of like two main ways to value a company, each maybe More depending on the industry and stuff like that. But especially in this type of industry they're talking about or even in a BNI industry, there is the, hey, we're closing the doors and we're selling all the assets value. So like what are the physical tangible things in the building worth? Equipment, computers, supplies, whatever. That's one value. It's probably the lowest value. It's like the lowest you could sell your business for is physically what you could sell tangible products for. The other one is typically a multiple of either. I've seen revenue, gross revenue, I don't typically go that way. Or EBITDA for like, you know, I mean anybody is an interesting term and I think even like, who is it? Warren Buffett's like not a believer in EBITDA because I think it could be manipulated and whatever. But you know, what's left? Yeah, some kind of multiple of the, of the profit. And for ebitda, just for those who have never heard or barely heard, it's earnings before interest, taxes and amortization. So it's your profit with your add backs, right? Your add backs on your interest on your loans, your Amazon you write off each year from your purchase, your taxes.
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B
Appreciation.
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A
Yeah, appreciation. That's what, yeah. So this one was presented. So this person met with me, they were get, they got a price and I immediately looked at and went like, no, no, no, no, no, no. First of all, this is a company who's running the red every year mostly because the owner I think was doing it almost purposely to offset income from his big company that he owns.
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B
Loss leader.
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A
Yeah, right. So you know, like a lot of people do in business, pimped out different things through it, you know, whatever, but it, it made it red on paper, which if you go to multiple of ebitda is not worth anything. So it's worth zero. It's literally worth a negative number. And so that was part one when, when you know, just get your, I was telling them, teaching them kind of about is like when you're thinking about selling your business, you got to pay attention to that number. There's a lot of planning that goes in usually a couple years out that you got to start changing maybe some habits that you have through the company. Maybe you're writing off less meals, maybe you're writing off less travel, maybe you've paid off the vehicles for two years and you're not buying a new one. And you're doing these things that yes, isn't most tax advantage for you, but is increasing that bottom line. So you Get a bigger multiple. So that was one thing. I was like well first of all, I think the asking price was like I'm just going to make up numbers down. So it's roughly like 175 grand, let's just say.
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B
Okay, Y.
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A
So that's what they're asking. I was like well it's a negative number. Then it was the assets they valued at like 30 grand except for their used assets. So they're really not even worth that. Right. I was like is that how much it cost to like replace it or is that like the depreciated value of the assets that you're buying? Tools like equipment, whatever, Cameras, computers, those things. I was like, because those things drop in value instantly. Like right. And if it's been three years, it's not worth 30 grand. And so they're like oh my God, I don't, you know. And they're like no, I think that's like replacement values. Like well that's an unfair number then because why wouldn't you just go buy a new. It's not worth 33 years old. Cash in the bank. And then this guy, he put in value of 2. He was going to give him 2 years free rent in, in his building, in his office or whatever at he, he said twenty five hundred dollars a month. So he said that's a sixty thousand dollar value which he put into the valuation. I go well that's not free rent, right? Like you're paying for it up front. It does like, you know.
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B
Yeah.
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A
But she was, you know again the emotions of like this sounds like a really good deal. I've talked to some people and like oh my God, he's taking care of you. Because the brings in let's say 20 grand a month in revenue. Not, not profit, just straight gross, top of the line revenue. So people look at and be like oh this is a 300, 000 quarter of a million dollar business. You're getting it for 175, 000. Like that's a really good deal. He's really taken care. It's like no, this is like again trying to capture somebody's emotions. And like I don't. For me it's like stick it to him. Now here's the best part. That, not that that wasn't gross, because it was. They then added a random $75,000 valuation for reputation in the, in the market. And like, like, I forget how it was titled. It was like reputation and intellectual property ideas brought from the business coach that they had. And I was Just like, what? That's not worth anything either. And then what they were starting to do and this, this definitely comes up. This is an emotional question. And I said it's really dirty that they asked you this because it's completely designed to play on emotions. But I've seen it even in my own case. So when I bought, like, this emotion came up, which was, well, you know, you're going to get such a good deal now, and five years from now you should be making millions of dollars. And, you know, and like, so there's like three parties involved. There's the seller, the buyer, and there's like coach in between. And the coach is like, you know, and I asked so and so how he'd feel about that. And, you know, he said he'd be really happy for you if that was the case. And I was like, that's a dirty, manipulative, emotional play. I go. Because there's no value for the seller on future opportunities. So we've seen it in bni.
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B
In this case, I'm willing to bet the coach has a minority.
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A
Oh, 100% has some kind of play in this. There's no question about it. So.
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B
But I've seen that sounds like the razzle dazzle.
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A
Yeah. Right. And so I've seen this, though. Even in bni, I've seen this. I've seen people try to sell their BNI franchises and one of their arguments in the sale is, well, you can raise rates and you can. Or this is an underdeveloped market. So the opportunity is great. And it's like, right, that might be why I'm buying it. That has no point on the current value. You cannot sell future opportunity. Hopefully the future opportunities. Why I'm buying it is to try to capture that future opportunity.
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B
Yeah, I think you can, you can sell future opportunity as part of the, as part of the process. So let me.
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A
As part of. But not on the price.
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B
No, no, no. Well, it depends. So. So the, the. And I'm not defending anybody, and I'm not defending tactics. So what I'd start was you're in a, you're in a buyer's position. You probably know your numbers. I'm assuming you know your numbers pretty well. So this is the old, well, we got to put lipstick on the pig. So they come up with, you know, here's like, basically a small marketing strategy for how to sell it. And this is what you're going to do. And you want, as the seller to get the highest possible value out of it that you can so you're going to start listing all of this stuff. There's like a whole menu of things and all the points you said, you know, it's got this in assets. You're going to get free rent, you're going to get the future opportunities. The coach who, you know is telling you you're going to make tons of money. And then by the way, you're going to get our happiness and gratitude when you make all this money on this business. So it becomes a sales pitch all the way down the line. And I'm not saying it's wrong. Yeah. But so let me say this. And this is, this is, I think, where it gets real important to the gist of the person you met with and what anybody looking at opportunities. You, we, we talked about this in the decision making tree for kind of like running your business that you got to pull emotion out of things 100. You got to kind of step back and look. And I think it's the same thing. If you're buying, the worst thing you can do is emotionally buy. And I can tell you that because I bought something, I bought into a company about 11 years ago that I thought really had a valuable product. And I was doing it based on emotion. A lot of it came from the industry I was in. It was in like helping people, like be better athletes and helping people with better life and all this kind of stuff. And I kind of bought into it even though when. And this is where I'm going to get to. When I was looking at the numbers, I was like, something ain't right. And it wasn't just the numbers that I could see. It was also the way they were answering about the numbers. But I still donated. And then it went belly up within a year and lost everything. Yeah. So as did other people that had invested in this. So what I should have done was when I had that gut feeling, I should have said, something's wrong, something seems odd now. I remember you and I going out to a kind of a meeting, an investment meeting out in the seacoast.
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A
Yeah.
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B
Yeah. And I just remember, you know, the emotions of people around the table going, oh my God, this seems so awesome. This is so great. Especially the person who was going to end up being the majority owner. And, and I, and I really, really believed in it and really talking. And I remember asking pointed questions to the quote unquote partner. And I didn't get good feeling out of it. And I walked you out and I just said, don't do it, man. Something's wrong here. Really wrong, because at that point, I wasn't emotionally invested because I didn't know anybody in the room. So I was just there to listen and ask a few questions. And there it is. So I think in the case of the person you met with and anyone else listening is looking to buy, you need to know the numbers. And you have to start making some decisions based on those. Like you've got to ask hard questions. And even if you're an employee now look at manager and employee buyouts happen all the time.
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A
Oh, yeah.
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B
And there's an expectation that you've got to know what you're doing. And. And it, you know, the other person is going to be trying to make as much money as they possibly can because it may be their retirement. If they're getting out of the business, it may be that they're just greedy, which, you know, okay, whatever you want to say about it. But if you know that going in, you got to be unafraid and unemotional and ask really hard questions about what are the real values. And if you get all those answers and you still decide to make a purchase because you think in your mind, hey, I'm going to be unburdened by previous ownership and unburdened by what they were doing, and I'm going to run it differently. You know, you may be accepting of the price because in this, in the specific case here, if they're churning, you know, $240,000 a year in gross revenue, but he's. But the current owner is using it as a loss leader and basically writing it down to negative equity, you may not do the same thing. If you manage your operating expenses differently, you may flip a profit really fast. You may pay it off in a year or two. But you've got to know the numbers first, because what this comes down to is all of the window dressing. You have to rip it all apart and get down into the engine and see does this thing actually work Right?
- [16:42]
A
Which is what I just was part of that conversation. It was all about the emotions at first because I was like, just the conversations you could hear. It's a young person buying from a seasoned business person. I was like, there's a lot of manipulation kind of going on here. That's what that. Because one of them said, you know, there's like a. I think they use moral instead of ethical, which is just a weird choice of words. But they were like, there's a moral way to do this and an immoral way to do this. You know, the moral way to do this is to buy a deal immoral way is to just leave and do your own thing.
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B
Well, the owner is like, getting out of the business, so that would be immoral on its face.
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A
I was just like, this is just unethical at best. But I. I agree. Motions. First of all, let's go with the emotion part, because that's the hardest part for people to pull out, especially if there's a tie into that business piece, whether you're selling or buying. There's this, like, emotional p. I see this in BNI more than anything is we'll get into, like, lack of planning and what the plan and all that. But it's just the. The thought of being gone or out or what have you is like killing people when it comes to these transitions. Do you know? I mean, on both sides, either they're. They're holding on too long and they're actually devaluing the company, or I've seen on the other side where people got so emotional and frustration and stuff that they sold super cheap, super too early. You know, I mean, so there's just like that emotional decision thing is, I think a tweet, a real hard situation, and that's where this one was really coming. It's like, I just. I started asking questions about, you know, is the equipment new? Is the. Is. Is there. Is this name out there really powerful right now? Like, are you buying a name that instantly, or are you better off buying kind of the client list but changing the name, right? So then, like, that.75. Whatever reputation value isn't real. If there isn't really a reputation to be there. What's this company worth if you did go, how much would it cost you to go out on your own anyways? What would happen there? Like, and, you know, I'm just getting them to dig into this. And the long end of the story is like, for me, I was like, this thing's worth, like, a third of what they're asking. Maybe at that.
- [18:50]
B
Maybe. Yeah. Yeah. But, you know, it's tough. But this is the important part. But here's the good thing. At least this person overcame a certain amount of emotional barrier instead of just pulling the trigger, right. And sought out advice. And that would be the. The thing that I would say is, find your mentor and ask the question. Someone who's not attached to either side, right. And can just guide you with unbiased opinion about it and a good mentor. And I've done this for people. I've looked at, you know, people's P. Ls that they give me. And I'm like, yeah, this seems to be lacking in detail or this doesn't seem right based on what you're telling me. The revenue stream is, you know, like, how do you, how are they actually in business at all? Like there's those types of things that are serious and, and you have to do your due diligence, but you can't do it based on emotion. And you're right that, that listen, I've been part of things where I am very vested in what was accomplished, right? Whether I was on the selling side of things or whether I was on the managing of sales and watching a business grow and helping be a part of that and get super emotional in defense of the brand for sure. But again, when it comes down to business, you got to work really hard to kind of get that aside and just look at the detail. You know, the one thing about numbers, even though people can fudge them enough, but ultimately the numbers don't really lie because if you ask enough questions, you'll get to the heart of the matter. And the questions are, you know, well, why are you losing money? Let's get that right out on the table, right? Okay. Because if there's a morality thing going on and a sales pitch and they're saying, well, you know, I was doing this to kind of get my other businesses kind of more in the black and just take it as a write off and all that. And so then it's like, okay, so you didn't care about the business. I'm the one who grew it. Which is probably why they went with it's moral if you buy, but immoral if you go on your own. And let's just stop there for a second. That is also another opportunity for this person. If this person is the one who developed the clients and actually worked with them and provided the results that the clients were looking for, whether it's on behalf of another business or not. Why not go into business for yourself? You kind of already know what to do, so, you know, start your own. It might be smaller to begin with, but it'll be yours. And the cost of entry into that is time and probably a very small amount of investment money.
- [21:39]
A
That was one of the questions I asked was how much to go on your own, right? And it basically came down to about the same amount of money that the what I valued the company. I was like, so it's basically kind of a wash on that part, you know, and then there's value then in the relationship. I was like, you know, I told him, I was like, this is what I would offer, this is what I would explain to them and know that they may not accept it. They may be emotionally and be like, no, now you're trying to. And what's your plan then? Are you going to walk away? What are you going to do? And so like the hassle go into the equation. I. Not only is that the case here where this is the one who built it and has the relationships and all that, the owner is like completely non existent in the actual service or product that they do.
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B
Yeah.
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A
No contracts, no non competes, no non solicitation contracts. Like this thing was really built half ass. Really. So I was like, you know, you can go and you can probably capture 90% of this, 100% of this, even if you wanted to. And so, you know, at the end of the day it was like, maybe there's a deal to be made to save the relationship. Because I think that part gets into the emotions too. Right. Like all of a sudden there's a friend or there's a maybe a mentor is type feel to the previous relationship, whatever that this can pull at the strings at.
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B
Well, I would say this and this is another part of the emotion. Your perception of the relationship may not be shared with the person. Now, now across the table. And I've seen that a lot.
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A
Yep.
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B
And here's the thing. If that person is doing certain things that are raising red flags, like bringing up morality, saying they didn't really care about the business, but they have such a high value on it, not disclosing whether or not in this case this coach is a part owner of it. You know, all those things, that person's not your friend.
- [23:43]
A
Yeah, yeah, that's what I said too.
- [23:44]
B
Your friend would be like me at that meeting out on the coast saying, tim, don't do it. Here's why, Here are my red flags. Here's what I'm thinking. I think this is a boondoggle. You know, they're gonna, you know. And I also give you the straight dope. Here's why I think it's worth this right now. There may be some talk back and forth because again, I may think just, you know, the value of it. I want it to be worth more. I think it's worth more. I started this thing and da, da, da, da, da. But ultimately your friends are going to, you're going to get down to the nitty gritty of it and go, okay. And they're going to be there to help you grow it. They're not going to put this, there's not going to, they're not going to try and create a sense of urgency. They're going to try and create a sense of, you know, kind of good stewardship.
- [24:30]
A
Yep.
- [24:31]
B
I'll give you an example of this kind of going on right now. And, and it's a past guest of ours, Jeff Eisenberg. So he, he had a story career in the, in the sporting goods world and when any, and excuse me, in sports teams management world. And when he left he bought a advertising company.
- [24:50]
A
Yep.
- [24:51]
B
In Manchester and a very successful one, one that had been around, had a great reputation and you know, he bought it. I'm sure he went through his due diligence and I won't speak for him and what his mental process was and maybe at some point we can get him back on. As I told you off air last week, he's just published a book on leadership so it'd be kind of fun to bring him back and ask this question again. But he bought that and now he's, you know, in, in a piece where he's not really in the day to day business so much. He's teaching at a, teaching leadership and business management courses at a local college. And you know, at some point he may be considering, you know, selling and selling it to his employees or something like that. You know, who knows? Again, I don't want to speak for him but you know, he is always the type of person who took the role of mentoring really, really, really carefully and, and very seriously. So you know, he's the kind of person that would walk you through it and make sure you're not being super emotional and not, you know, create the sense of urgency and things like that. And you know, maybe it's premature to discuss too much about it and like I said, maybe we can get them on again. But, but I think a good partner in a sale is going to be willing to work with you. Right. And you know, you mean like say.
- [26:16]
A
I'll give you two years free rent but it's part of the value. Yeah.
- [26:20]
B
Which doesn't really make a lot of sense, you know, but I, but I hear here's probably what they ended up doing. They, they probably said no, I want to sell it for X amount and oh by the way, we're going to give you this on but they've behind the scenes built it in so they're not losing anything. So if you back that out you're saying okay, so in this case, whatever it was 60, 50, 60,000 off the top. Okay. So now we're looking at, you know, something just over a hundred thousand dollars and the real. And so this is why knowing the numbers is really important in order to go back. But here's the thing that I think is the most important decision all. There's the mechanics of what to look for in the numbers. There's the mechanics of determining, you know, is the person across from me, you know, a reliable source of information on the business and all of that. But the most important thing of all is, is this what I really want from a business perspective? And if this person is saying, I have the skills to do all of this stuff, even if this deal feels bad, he or she can't look at it as I've lost an opportunity.
- [27:29]
A
Right.
- [27:30]
B
Because it's not a loss if you save yourself the trouble getting bad deal that you might be paying for for a long time and like, literally financially. And you don't want to inherit any kind of those bad, you know, kind of mechanics in your budget lines. You don't want to inherit a ton of debt, you don't want to inherit a bad reputation. You don't want any of that. But in this person's case, they've worked in the business, they clearly have made the business go. You know, I think they should go back with some low offer, but I don't even know if you need to. I think you just go start your own company, do it the way you want, and it's probably going to cost you way less.
- [28:11]
A
I think it's about the same. That's why. That's what was my advice. I was like, I'd offer what it would cost you to go out on your own. Yeah, like, you know, and. And then there's like, we could talk for days and days on a bunch of. Because this conversation went from that to setting up LLCs and the importance of that to should she do her own or is she buying this one? And I told her, do your own to name change to financing. And there's, you know, nowadays a lot, especially in small business, there's owner financing opportunities, there's SBA loan opportunities, there's those kind of things. So we went into those conversations. I think one of the biggest things with the emotion piece is proper planning. This is what I have seen most recently, and I would tie that to this story too, is I'm seeing a lot of people get to the end of whatever their career or timeline is in a business, whether it's desire, age, you know, energy, whatever they're at the end this, this the guy selling this isn't like retiring is just more of like, man, I'm done with that, like, side project or what have you. And yeah, but. Or whatever, however they're getting there, they're finding themselves at that point and they have not properly planned for any of it. And I think the more planning you put into it and the more thought you put into it and the, and the in, the, in your exit, the less emotional you will be because you're not just making up a number now. You're not just saying, I feel like it's worth this. You've properly planned to show the valuation. And then you're not emotional. When somebody starts arguing with the other way, you can stand on more solid ground.
- [29:40]
B
And you know, you have to defend your number.
- [29:42]
A
Right. Because this person, what I told the person I met with is I go, what do you think the reaction is going to be? And they're like, I think he's going to flip out. I was like, okay. I was like, the key is you can't. The only reason he's flipping out is because he's just put out this number. Right. And you're going to come in logically with a much different number.
- [30:01]
B
Yeah.
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A
And you can't let his crazy become your crazy in that moment. And I think his number was. Because again, a lack of. It was more of a just, I'm done. So let's, let's flip this and, you know, make up numbers and make up these things to try to get a certain thing or I've seen again, other people who hit the end of their career and they're like, well, I've just always, I need this to retire. And it's like, well, it's not worth that. Right. And because you didn't do X, Y, Z along the way, I think for anybody who's thinking about this, and you should always be thinking, I think about mine, mine's like 10 years from now. But I still think about it all the time. And I know, like, okay, if my goal is 10, eight years from now, I got to start doing things differently in certain. Not drastically differently, but like, in certain things. Right.
- [30:43]
B
Like, and that's kind of like still kind of late. Like, if you, if you have. And here I want to. I'll step back to one thing you said. And I think it's. It's important to stress this. If you're a seller, you have to be really ready to go.
- [30:55]
A
Right.
- [30:56]
B
Like you, you already have to have. You can still enjoy what you're doing. And all that. But I know far too many people that just want to hang on, right?
- [31:04]
A
That's what I said earlier, right?
- [31:05]
B
They just wait and like, and then when they're offering it for sale because they're hanging on, they start putting all these conditions in that keep them somehow into the business, right? The difference between that person and the person who's like, yeah, I'm ready to sell, but I really enjoy what I'm doing. So I'm happy to stay on for, you know, a year or two, whatever, at your leisure. You're going to buy it and I'll help you with any transition type things. But then I'd just like to maybe do this, right? Like I could do sales or I could keep the books or I could just do something that keeps me involved because I'm still too young to actually fully retire and be bored out of my mind, you know, And I've seen that work really well. Those are kind of the earn out situations that you hear about a lot where the current owners stay in the business for a certain amount of time to make sure there's a smooth transition. Those people who want to get out of the business from an ownership perspective, not necessarily from a working perspective, right? The people who are saying, I want to get out of it, I want to sell it, but I still want to run everything, you know, like it's like it's still theirs, right? That's a bit of, that's a bit of a problem or can be a bit of a problem. So you know, you, you as a seller have to be like ready to go. And in your case, when you're saying like, I have a, a goal, like, and it may change, like you say, okay, my, my goal might be be out in 10 years and maybe it's five depending on the opportunities, or maybe it's 15 depending on what you want, you know, down the road. You've always said to me, and so I always credit you for this one, but the best time to plant a tree was 10 years ago, right? And I think that's the thing. Like if you're, if you have a hard set goal of 10 years and you're saying, okay, at 8, I got to do things different. You're already behind the eight ball in terms of achieving maximum value for the business. If your goal is to get out in 10, you probably have to start putting some things in place now, trying.
- [32:59]
A
A lot more, I think. Yeah. Let me clarify my comment because you're right, you're right generally on the vague comment meant just from Like a bookkeeping standpoint. Things like there's certain things you need like a two year look back, right. Like yeah, I would not be buying vehicles two years out from my cell goal. I would not be going on certain trips maybe two years out from my things. I would not be. You're just going to become a little bit tighter in your books.
- [33:23]
B
Your operating expenses need to start going down.
- [33:26]
A
Yes. The second, what you're talking about is the second thing, which is the game I always play, which is okay, I want to build this up to a certain value. Like I, when I say 10 years from now, I don't know that I'll sell 10 years from now. I want it to be at a value where I could. That's like a different game you're playing. But so that. Yes, operation. Because one of the things which I guess goes to your earlier comment around opportunity can have a value. The things that go into the multiple, that's a big piece too. And you got to research every industry is different one what the multiple would be. And in each industry there's like a range. It's not just in this industry, it's X. It's usually like it could be 3 to 5, it could be 6 to 9, it could be whatever, some kind of range and you're planning and your growth and all these different, the different factors that go into where are you in that range go into how essential are you. So that means operationally, is it like if I buy this, can it keep running or do I got to refine you again? Like how like if your day to day, you're the man.
- [34:28]
B
Yeah.
- [34:28]
A
Your value's less. Your value is a lot less than if you have teams in place that then the value goes high. What's the reason? What's the growth trajectory like? Has it been growing? That's the opportunity. Well, it's been growing at this. The opportunities that will continue to grow. So that messes with the multiple. There's no such thing as like a flat fee or number on the opportunity. But there's a multiple factor in there. What else? The general business model, like how it runs, what are the margins like? All of those things go into the most. So again, if you start really becoming tight, I always joke around like if you stop pimping out your company, your multiple goes up because the margins are higher and thus the multiple is higher. Right. So in, in businesses like mine, I've seen people whose, you know, margins are half of others. Well, the person who's twice X on margins get a higher Multiple, they're selling the same thing, but it's at a different operation. So all of those things go into play. All of those things take thought process and planning to increase that value. That when you just go, you know what? I think I'm done. You, you now you're too late to like, you're, you're stuck with whatever it is at that point. And that's where the emotions get out of whack because they're like, well, I thought it was worth 5 million. And it's like, well, it's worth 2 million because you haven't done any of these things.
- [35:45]
B
Yeah.
- [35:45]
A
Unless you want to wait two years or three years or four years or whatever it is to start doing.
- [35:50]
B
Yeah.
- [35:51]
A
And that's where I see the selling side. And that's what this guy's situation is. He's just done. And now he's just making up numbers because he's just done. It's like, well, this thing does, you know, whatever, $300,000 a year in revenue, it's like, yeah, but it is not profitable. So it's not. That doesn't matter. Revenue doesn't matter.
- [36:06]
B
Yeah.
- [36:08]
A
You know, I mean, from your value, I might look at and be like, yeah, I'll do it differently and I'll make more money from you, but that doesn't mean I'm going to pay you what it's not worth to do that. Like, that's my opportunity that I'm seeking.
- [36:18]
B
Exactly, exactly. And that's what they call, you know, opportunity cost.
- [36:22]
A
Right.
- [36:22]
B
You know, if you're, if you're, if you're being sold on the opportunity and you see it and go, ah, you know, the opportunity is here to do this and do this and do this. But you're paying an upfront cost that doesn't, you're basically buying all the problem of how it was run. And even if you make changes like overnight, it doesn't matter. You still paid for all that. And so you have the like, I don't know if it's going to be short term or long term debt strategy. I don't know how that's going to go. But then the other part is, you know, can this person actually get the financing to do it?
- [36:50]
A
Right, right.
- [36:51]
B
So there's, there's a lot that is going to go into this now. But I, but I think, you know, if, if, if someone is dealing with you in numbers and they give you lots of information and not creating a morality conundrum or a, an urgency, you know, conundrum, then that's great. But if they're doing those other things, you know, my gut feeling is walk away.
- [37:22]
A
Right.
- [37:23]
B
You know, or be ready to go to the table hard. Like, I think you coached and, and, and just say no, it's really only worth this. And this is what I'm willing to.
- [37:33]
A
Pay you 100 or walk away. That was like. That's why I asked.
- [37:36]
B
And then. And then. Or walk away. I did like what you said, though, about, you know, one of the big things people don't understand. And this happens a lot, like in. I see it a lot in, like, restaurants and things like that. There's a relatively low success rate when companies open up and they tend to close quick because they think they understand the mechanics of it. They may have worked in the business, but they can't make the business work at all because there's a certain skill set. You got to have it. And a lot of them do it because they're passionate about it. And a lot of them, you know, meet a lot of heartbreak in the end because they put their life savings into something and it goes belly up. And, you know, I think you, you. That's another emotional piece. You know, you can't get caught in that trap. And when you said you might have to find someone as a seller and as a buyer, do I need to find someone that's like you. Someone buys your chapters, like, are they going to get all your staff? Is the staff turnover going to increase? Is everybody staying on from. That's managing the day to day. I have a neighbor who, you know, was really into motorcycles and Harleys and, you know, wanted to get out of the current career was that and own a business. And he always thought owning a Harley dealership would be great. It took him a bit, but, like, one of the first things he did was make sure that all the staff was going to stay. And the general manager that was at the place that he ended up buying, you know, stayed on to run it for him because he wasn't. He didn't. He had business savvy, but it wasn't in that market, so he needed somebody he could rely on. So he did that due diligence. He didn't just buy it and then go in there and day one and go, okay, here's what we're doing. Because he didn't know. So you, you got to be savvy enough to understand those things. So it's not just about, you know, a sales price. It's is their staff. I don't. In this case, I think Is this person the only staffer?
- [39:33]
A
No, there was a couple, but this was the lead person. The other ones would be gone. It's kind of. Yeah.
- [39:39]
B
But so a lot to it. I mean, I, I would say always explore the opportunities, but make sure you get down to brass tacks and work really hard to not be emotional. The worst thing. And I've seen meetings get super emotional. I've been in meetings where thankfully I was just kind of on the periphery, but watching and watching the emotions of both sides kind of escalate.
- [40:06]
A
Oh, yeah.
- [40:07]
B
And then nothing gets done.
- [40:09]
A
Yep.
- [40:10]
B
And it can be a slog. It can be emotionally draining, especially because you've put so much thought and time into it up front before you go into the meetings and there's the emotion of, okay, I got the meeting, got the meeting. Get the nerves, tamp them down the adrenaline dump, be objective, stick to your guns. And, and to me, you know, you have to just like a seller should be able to adequately defend dispassionately, even if they're passionate about their business, adequately defend their asking price. A buyer should adequately defend with facts and figures and data their offering price.
- [40:50]
A
Correct. Correct. Now I would say just to put a cap on both of it. Number one is just. I want to sit back as you were talking. I made me think of something else, if you like. There's a lot of people who own a business, but really it's. They are the solo person. It's like they own a job. Those things are really hard to sell and you have to be planning something different. Right. I know. I have a friend of mine who's in the trades and that's the case. And it's like all you're going to be able to sell is the equipment, used equipment at the end of the day because there's no operations here to sell the. At this time. I would tell everybody the. There's so much lack of preparation and lack of thought or even education in it. There's a lot of people who own great businesses but never studied transactions like this. Right. They, they started a. Whatever marketing company and they grew it, but they never bought one. They've. They've, you know, now. So there's a lot of lack of preparation on both sides and that's going to create a lot of opportunity for those who spend a little time educating themselves in this. And it's going to cause a lot of heartache for those who don't on both sides of it, whether you're buying or selling. And so I would just encourage people, again we're giving you, you know, our, our experience and stuff. There's so much information on it. You should really be delving into it. And I mean, go to YouTube University, that's what I call you. You know, just millions and millions of videos on it and then start thinking about your own and like, okay, how does this play? Cave somebody was, if you were going to sell today, how would this go? And then properly plan along the way, where do you need to grow it to? How many, you know, what sales you need to grow it to, what operations do you need to build, what kind of things to maximize this value at that point? And those are the things that are going to grow your business along the way anyway.
- [42:31]
B
So, yeah, and I think avail avail yourself. I mean, YouTube University is great, but avail yourself of, you know, a lot of times your local chamber of commerce will run seminars on, you know, bi members.
- [42:41]
A
You've got tax attorneys, you've got lawyers, you've got all these things that you can tap into, pay for their time. You know, you don't always have to, but be willing to pay for people's time to get that advice and just learn or just tell me, like, what are the things. If you deal with these sales as an attorney, what are the things? As an accountant, what are the things that matter? And that way you just educate yourself.
- [43:01]
B
Yeah, educate yourself. Here's the, and here's the thing too. When you, when you get from that long pool of people, like, be. Be certain in this person's case, they came to you, I hope they took a lot of notes because when you start talking to a lot of other people, you're going to say, well, this person said this and this person said that. But if you have it all written down, I think the thing to look for is what are the common themes that people are saying. So if five out of 10 people said this was the number one thing to look out for and there were five other things that were uniquely different, those five common things might be the thing you should worry about first.
- [43:32]
A
Right?
- [43:32]
B
Like you need, you know what I mean, based on everyone's experience, especially for coming from different industries. So if you're getting, if you're getting like a tax professional, a banker, you know, someone in the industry you might be interested in looking into kind of telling you things to watch out for. And it's. That should tell you something. So take a lot of notes, you know, go and ask for information. You know, in this person's case, if they're, I don't know if they're in BNI or a chat or a networking group like that, get into one, but I think they have to have a business.
- [44:07]
A
I said, when this happens, then call me. Because you got to get in.
- [44:09]
B
Yeah, yeah, because. Because you got to get in and do it. But, you know, there's a lot of information out there. But whatever you do, don't make a snap decision like I did because, you know, I regret it. I regretted it. I looked at it as I paid a huge amount of money to learn a very valuable lesson.
- [44:28]
A
Yeah, it was like a college degree.
- [44:30]
B
Was just really dumb. But, you know, so I, I'm not upset about it today. It's just, you know, but back then I was like, ah, why? You know, and I knew it. I had a feeling and I just.
- [44:43]
A
So there's a lot of truth to that gut feeling. There's a lot of truth in that gut feeling.
- [44:48]
B
Yeah.
- [44:49]
A
All right. And there's so much more that goes around this. I think at some point we could talk about like owner financing deals and stuff like that too. I've seen those, been a part of those. Those are always interesting. A lot of people don't know a lot about that too. But if you got any comments, questions, topics, etc like that, go to BNIP power of1.com, leave it there. We'll continue to build on. I appreciate everybody who does and Mike will be together soon again.
- [45:09]
B
Sounds good. Bye everybody. It.