← How I Built My Small Business
How I Built My Small Business
Loren Vandegrift - 2025 Insights from BUSINESS EXITS broker on sales, values, and trends
00:39:07
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- [00:00]
Ann McEntee
Foreign welcome back to How I Built My Small Business. I'm your host, Ann McEntee. Today I'm excited to bring back a guest whose first episode was one of the most listened to of season one. Lauren Vandegrift is a partner at Business Exits and has brokered over $500 million worth of business sales in just the past five years. He's also no stranger to the founder journey himself. He previously built and led a couple of tech strategy consulting firms, but it was actually a bad experience selling his own companies that motivated him to jump into the world of mergers and acquisitions, determined to give other entrepreneurs a better path than the one he faced. Full disclosure Look, Lauren was my business broker when I sold my last company in 2020. Because that experience was so positive, we've kept in touch and I'm lucky to now call him a friend. In this episode, we talk about how business brokering has changed in just the past year and a half and what current trends buyers and sellers should be paying attention to. If you've been tuning in, you know this show isn't about selling anything. It's about sharing meaningful stories and learning along the way. If How I Built My Small Business has brought you any insight, inspiration, or even just a spark of curiosity, there are a few simple ways you can support the journey. Follow the show, share your favorite episode with a friend, or leave a quick review. Each one truly helps me grow this show. Thank you. Let's get started. We spoke about a year ago, so so much has happened. What are you seeing as being the biggest shifts in the small business market?
- [02:07]
Lauren Vandegrift
Yeah, we've had, oh my goodness, a lot of stuff has happened. You know, at its core, it's most of the stuff remains true, but we are in a bit of a different phase here just because I think way back when we talked, interest rates had already kind of gone up, but they've been stubbornly staying quite high and it's just led to just a different way that we do things, different processes. You know, I think it was all starting to happen before, but like, you know, some things are changing around SBA rules and things are tidying up. There's a lot of shifts in the government and how they're running and the whole DOGE stuff. And, you know, it's nothing political, but just trying to sort of have people understand like how and what is flowing from the government in terms of funding things. Right. And so especially on the small business side, a lot of these SBA loans and stuff, it's, they're still flowing Money's still flowing, don't get me wrong. But it's, it's shifting, it's getting tighter. It's like a moving target all the time, which is, you know, has its own challenges but also its own rewards too because there's also a lot of really cool businesses that are doing a lot better than they would have been back last time we spoke.
- [03:04]
Ann McEntee
So some are winning and some are losing. With the interest rates being still slightly elevated. I mean they're not as bad as what they were. What exactly does that do to your world as a business broker?
- [03:16]
Lauren Vandegrift
It does a few things. One is that in some ways valuations have had to come down a little bit and other sides they've come up E commerce businesses have lost a ton of value because not only is it tariff concerns, imports, manufacturing concerns, costs of goods, all that stuff. It's also people's fear, you know, since we spoke, I mean it's starting then, but a lot of people were buying Amazon businesses like crazy. A lot of these like private equity groups and they people are now like allergic to anything Amazon because they're worried that you're going to lose your shirt on that. And there are exceptions always. Right. But that's one thing that's really shifted a lot. And then sort of how and what we fund and the, and the multiples, all this stuff is sort of kind of shifting all around. But then on steel, businesses that use American made steel or businesses that deal with transmissions, auto transmissions, where they rebuild auto transmissions, well that's doing really, really well. Because the market two years ago would have told me that, you know, everything is EV like fixing transmissions. They would have tried to make an argument for a lesser price. Whereas for me now those ones are now doing really well because people are worried about the price of tariffs and used car costs. And so people are going to keep their cars longer. And so now there's a huge rush on this business. As an example, or I have one that does non emergency medical transportation and that's been really successful because it's sort of completely separate from anything going on on the macro world stage, right. All kinds of shifts happening.
- [04:40]
Ann McEntee
What other industries are resilient in this current economic environment.
- [04:46]
Lauren Vandegrift
To hark back to the previous episode, H Vac companies we've mentioned that really it is, I mean that remains true, you know, that has not changed, right. Is service businesses of different kinds are still really wanted and needed and they're withstanding the test of time through all this stuff. The stalwart remains just different kinds of businesses. That service people's needs, whatever they are. So whether it's auto transmissions, H VAC or a asbestos remediation, another good one, you know, and I guess the other thing is people are rolling more equity. They're actually keeping a piece of their business more these days, like a private equity deal with any deal, even with regulars. I mean, now actually sba, SBA has changed some rules around that, which is actually a struggle. But that's like two weeks ago with private equity deals or anyone, that the idea that if you keep some skin in the game, even if you're not working day to day, let's say you want to sell your business, well, I'll really recommend that you actually keep 15 or 20% because A, the market shifted. So if you roll equity, you're going to get more cash up front instead of having more structure, which we can talk more about, like deal structure. And the other reason is that there are just people that are really good at buying businesses and scaling them. And so if you can give someone the reins and stay on the board, you know, and be there for moral support, basically, you know, not their day to day. A lot of people can really take these things and run with it right now and follow this model and playbook and that you can have second exit down the road that can be as big or bigger than your first and that that's a real powerful way to get some money off the table, get your life back, enjoy your family, but also then be able to see this thing that you build grow and kind of profit from that yet again. When it's sold in three, five years, whatever it ends up being. What's funny is what I've experienced with people that I've strongly encouraged to roll equity because it meant likely they were getting more cash and that there was a reason all of them universally have said, you know what? It turns out, when I only own 10% or 15% of the business, it's more like a stock and it's something I care about. It's like watching a stock and not something I have to really be as invested in, but I also feel like I have a piece of what was other than my family and the most important thing in my life. And the other thing, if tragically something happens and the business falls apart, you still got 85, 90% of the money anyway, right? And so it's, it's almost just like a little chip, like a poker chip or like a part of a diversified portfolio. It's how people end up kind of thinking about it. And I like that a lot, especially now, like, as things are changing, interest rates are going higher. For a buyer to know that you're willing to keep invested in the thing that you built, it gives a lot of goodwill and it just makes for a better sale overall. And I think it leads to just like a better, more bonded buyer and seller having somebody put their equity where their mouth is about their business and what they say. Because no one's saying, oh, hey, 2025 has come and I see the writing on the wall. I had every thing going and it's likely going to stay flat or go down. Like, no one's going to say that. Right. And so if you can say, hey, I'm willing to leave 15% on the table. And sometimes too, the way that equity and leverage works is that if they put debt on the business, you can leave 10% of the money and end up with 15 to 18 to 20% of the business because you become like an equity investor. So it's sort of separately from what the debt you put in the business. So often you'll. You'll end up with more equity than the money you left. It's not like you leave $2 million on a $10 million deal and you have 20%. It might be that that 20% is being 34% because of how, how much debt that they put on the business, which, of course, that's a whole other conversation for another, Another. Another podcast, I assume. But you can end up with quite a lot of equity. Yeah, just a better deal overall.
- [08:28]
Ann McEntee
When you structure these deals, does it mean that there is a guaranteed exit date or the seller is on the hook for the remaining equity until that buyer decides to sell it Again, it.
- [08:43]
Lauren Vandegrift
All depends on how you structure it. Generally you are sort of at the whim. Your control level goes, really. I think the thing to think about it is that you want to believe in the buyer. I really care a lot more about who is buying, not just how much they're buying for. It's more important than the money part often because that's, that's what matters in the long run to make this a.
- [09:04]
Ann McEntee
Whole successful thing for the sustainability. Right.
- [09:06]
Lauren Vandegrift
Yeah. And I talked about this before like, you know, the no assholes policy that I had and like the shared incentives and all that stuff, that all remains true. But I now mean it even more because with the world equity and with these different things, like, you are your legacy more. I think that that side of it, I weigh a lot heavier than I did even back when we talked before. Especially as things are getting harder in the market, as interest rates are going up and people are uncertain and tariffs and all these things that are just happening. It's just how do you navigate that? And with that uncertainty, what you need is a real trust in the other party at transmission business. We have a ton of offers right now. I'm really looking at the who, not the number, more than anything before. And we're lucky because we have a lot of offers. So it's a nice, it's a nice place to be. And you know, sometimes it's not, we're not that lucky. And it's a more of an if, you know, but it's just something I think about.
- [09:54]
Ann McEntee
The right fit. Yeah, yeah. So right now, and this might be a hard question for you to answer because I know that may be a conflict of interest considering that you represent sellers often. But would you say that it is a seller's market or a buyer's market?
- [10:08]
Lauren Vandegrift
Gosh, that's interesting. It depends because of what I was saying about what's popular and what sells has really shifted. But it's probably more of a buyer's market if you can buy, if you can get the financing. I mean, sadly, it's a really good buyer's market if you're one of those people that has a lot of money and can go and buy things on the cheap and grow it. I mean, if you have cash in the bank, it is your market. So on the flip side, I mean, as a seller, I think you have to look at the realities of what someone's payment is going to be when they buy you. If someone buys your business that was doing a million dollars in profit, let's say. And it used to be that the debt service, like the amount you paid monthly on your bank payment would be, you know, three or four hundred thousand of that. So you had all of this wiggle room to pay off seller notes, to pay more people to invest money in growing all that. And now it's like, you know, 6, 700,000 and you have taxes and if anything goes wrong, you're much closer to the metal. So I think there needs to be a lot of understand as a seller of what your buyer will deal with because you're like, hey, so what if my million dollar a year profit business goes down to 800,000 or 600,000? It's fine, you're still making all that money. Well, it's like you might be, but your buyer is actually underwater because they have to make that debt service. Right. And so you really have to think about on both sides, the buyer and the seller, like, what the reality is. Given that things are settling, businesses aren't just sort of growing. I guess I could say it's a buyer's market if I had to pick. But I think that that truly depends on how you view it. Because in some levels, it's much harder to be a buyer because if you sell your business, you're looking pretty good. You know, the flip of it is a buyer, right, they'll cry poor. But when interest rates shift in two, three years, if they survive, they might be able to refinance, and then they've got a business for way cheaper than they would have five years ago. Right. So it might be some pain now, but that can all get shifted because things can be refinanced. You really have to look at it from all sides now in a way where before it sort of all worked and mathed so it didn't matter as much, you know?
- [12:15]
Ann McEntee
Yeah. It's similar to mortgages and buying homes.
- [12:17]
Lauren Vandegrift
Yeah. Oh, yeah. Very similar to that.
- [12:19]
Ann McEntee
Yeah. Yeah. So is it typical that valuations go up if interest rates go down?
- [12:25]
Lauren Vandegrift
Yes, exactly. Because more can be afforded. So, yes, that is absolutely true. Is a business that was doing a million in EBITDA will sell for more when the interest rates are lower, because you can pay for that much more business for that price.
- [12:37]
Ann McEntee
Right, yeah. And beyond the seller retaining equity, are there any other creative financing options available that you've seen, given that it's harder to get an SBA loan or that it's harder to process one?
- [12:50]
Lauren Vandegrift
Yeah, so we're doing a lot more structure than we used to, which can be good or bad, because there's different ways to kind of handle things as well. Because if you really like your buyer as a seller, if you believe in them and you're willing to finance some of it, you can get some decent interest and get creative and get maybe more money over time, and then you have more chances to make smarter tax planning moves. For instance, like a lot of times, if you get paid out over time, you can kind of pay a lower tax rate potentially, which is helpful. So there are different strategies, right? We are doing definitely more seller financing at times. Equity roles, seller financing. There's a concept of an earn out. But you know, people are pretty allergic to this idea. That portion of your business sales is dependent on how it does in the future feature. Because I'm sure Ann can speak to this, but nobody wants to say, hey, when I sell the business, I can't Control what you do. So why should I be paid off of something I can't control? Does that sound familiar?
- [13:43]
Ann McEntee
That's how I felt.
- [13:44]
Lauren Vandegrift
Yeah, yeah, yeah, yeah. And it makes sense. And I've seen examples where they absolutely have tagged things. But so what I'm doing more now. Let's just say I want to get a higher price. Well, it used to be like, hey, we have to grow 15% a year or 20% a year in order to get your numbers. And sometimes now I'll do things where it's like you have to stay more or less flat on revenue, right? Like, or things have to be down less than 10% to get more money. Or I do a thing where you make a bonus to get more money than asking based on the earn out. So it's less of a penalty and more of like a, hey, if the bottom doesn't fall out from us here, there's obviously an inherent risk in that. But I think that if you're selling someone in your business and they're giving you a lot of money, I think that it's a reasonable expectation to say it's not going to drop too badly. It's tricky. But there we are definitely getting more creative. And I think that'll shift as interest rates go down. It'll go back more to the traditional model. But it's definitely something that we think through. Because at the end of the day, I need everybody to be happy in the business to be successful. And 90% of the time it works out that way even with this kind of structure. Because also no one who's buying a business doesn't want to pay the earn out, right? Because if you have a business, you have all these employees that love you, right? And then let's just say you have an earn out and then you don't get it and somehow the buyer screws you out of your money. You're probably going to tell those employees, right? And those employees are going to be unhappy. And this doesn't happen in a vacuum. Like there is no buyer that doesn't want to pay the earn out. Because if an earn out happens, it means the business is doing better or things are going great, right? And every single buyer would rather pay that earn out happily knowing that they've bought a success. Then somehow like nickel and dime and fluff the numbers and like, you know, buy some secret materials to just get under that threshold. Like the bad will that that would have on both the relationship with the seller who you want to keep, right? And the employees and the people like all of that, people really only aren't paying their earnouts when things are actually really going badly. Again, I represent sellers almost exclusively, but I am also a buyer also in businesses and I partner with people and I put deals together more now where it's. You get the equity and the operator and the debt and you're kind of putting it together. And to make a business is hard. A successful business. To sell it is easy, relatively speaking, although it's no cakewalk. But then as a buyer you have to deal with a whole bunch of things coming into something. You can't just buy three income producing businesses and go hop on a plane and be gone for six months. Unless you're Ann McGinty. But it's, it is an incredible vehicle for wealth and growth, but it also is really hard and tricky and it takes a lot of your life energy and you have to find people that you can trust. And this is all stuff that is not said or explained in these TikTok reels showing people hanging out on the beach as their laundromat produces 500 grand a year for them.
- [16:29]
Ann McEntee
You know, for anybody that's listening in who is hearing that entrepreneurship or buying a business is, is hard, they also have just as many difficulties in their careers.
- [16:41]
Lauren Vandegrift
Oh for sure. Or right. For me, like the one I see now is I have a lot of these friends that, you know with AI and things, they're VPs or senior director levels at tech companies and they're being laid off and they have really expensive mortgages because a lot of them live in California and they don't have the flexibility. You know, if you have a business and the business goes down, it's likely not going to zero. Right.
- [17:02]
Ann McEntee
Yeah.
- [17:03]
Lauren Vandegrift
It's a lot scarier to lose your big corporate job that you've been at for 20 years than it is to have your profits go down by 20%. Right. So that's true too. Is like the single point of failure.
- [17:14]
Ann McEntee
Yeah. I don't know if you heard recently that Google is doing voluntary buyouts, which we all know is in preparation for probably massive layoffs.
- [17:21]
Lauren Vandegrift
Yeah.
- [17:22]
Ann McEntee
So this AI piece is going to change a lot. What we think we're doing today with AI is going to look so primitive in a year.
- [17:31]
Lauren Vandegrift
Totally. I'm a total optimist about everything all the time and even I get a little scared about it. I find it to be supremely helpful in what we're doing because it makes us better at our jobs and I find it to be something that enhances us as brokers and the service that we can provide for people. I record most calls that I have with permission, obviously. Right. And then I give any to dos or tasks that I've agreed to do or what we do or follow up and then it creates all those tasks. Not only as a broker, but I'm building software that utilizes AI around the deal process and actually getting from the letter of intent being signed saying, hey, this is what I'm going to pay for your business to getting that money in the bank. Like that is a really hard process and it can fall apart easily. And so I'm building software that utilizes AI to kind of track a lot of that, to collect the documents, to work with financial institutions, to pull their reports, to do all these things that kill deals. Because that's the hardest part is like getting on top of these different, the legal and the financial and the insurance diligence on all this stuff. So that's stuff that I'm working on sort of separately from my broker role just because that's the point of failure in any M and A transaction. So we've been using a lot of that for helping on that front because it's hard. It's hard to get a business closed.
- [18:44]
Ann McEntee
Yeah. Well. So touching back on AI and the changing job prospects, how do you feel about younger people buying a business instead of getting a corporate job?
- [18:54]
Lauren Vandegrift
To your point, buying a business makes a lot more sense often than working in a corporate job. But at the same time, I get a lot of kids trying to buy a business that have no right doing it because they have no business experience and they didn't go to school and get training and they think they can just sort of be good at business. But it turns out you need to know how businesses work and how to sell things and communicate with people and call people on the phone and know what a profit and loss statement is and learn about accounts receivable and accounts payable and all of these things that you need to run a business. And there's a whole bunch of 22 year olds that have been given $300,000 from mom or dad and met a guy at a business school training and they think that they can buy a business. You know, it's all sides. It's a shifting landscape.
- [19:40]
Ann McEntee
Fair point. So basically graduate from college, get some experience, work for some other small businesses, then go and buy a small business.
- [19:48]
Lauren Vandegrift
Exactly. And the college thing might even be, I just went to my college reunion and my campus is actually being merged with another one because enrollment's so down. But it costs 70 grand a year. When I went there, it was 38. And that was like the most expensive college in the world. And so that. I think that is shifting. But then I think getting the training and actually looking at how these things work and businesses and like, learning. I always complained about how we never actually learned any practical skills or math. Like, why am I learning calculus when I can't balance the books or the budgets? And apparently that is shifting. I'm hearing from parents now that kids are learning, at least in some schools, more practical skills like that, which I think is really good because used to be programming, and now that's going to be going out of the way. So it's nice to know that there are some people that are learning the right skill sets for entrepreneurship and business.
- [20:36]
Ann McEntee
Well, I sure hope so, because my son, for his eighth grade graduation, he was speaking at the podium, and he's funny, but he's very thoughtful. And he said, he thanked his teachers for teaching him what he considers to be a whole bunch of useless information that he believes will help him in his adult life.
- [20:53]
Lauren Vandegrift
In eighth grade, you did that. That's amazing. It's amazing. I mean, that is. I mean, I. I went to a liberal arts school right here I am doing M and A in finance. But for me, it was, you know, I did. I learned how to think. You know, I thought that was actually the most meaningful ever because I actually know how to think through and execute a problem. And if you really are trained how to think through stuff, then it makes you, I think, able to do anything, you know? You know, I said. I remember I said on that last podcast we did that I made a quip about how, you know, if you spend a year locked in a room, you could be anything. You know, you could be a rocket scientist or whatever. And I. People, a lot of people, like, made fun of me for that because they're like, it's not true. And I was like, well, I mean, I was maybe being a little inflammatory, but. But at the same time, I think that you really can put your mind to something, learn how to do pretty much anything. Like, I kind of stand by it, even though I got a lot of. A lot of flack for it.
- [21:44]
Ann McEntee
Well, so, okay, back to, like, business brokering. I know on the last podcast, you and I talked about, like, people who were importing dead rats, stained glass window companies, H Vac, a few times.
- [21:58]
Lauren Vandegrift
Too much. Too much H Vac.
- [22:00]
Ann McEntee
What have been some of the most interesting businesses that have crossed your table over the last 18 months?
- [22:06]
Lauren Vandegrift
I sold a business, a pretty big one that they just do staffing for the auto industry and other industries, which sounds really boring, but it's actually amazing because they could say, hey, you need a warehouse, you need 2,000 employees in some place in Ohio in two days and they can go and make it happen. They can go and hire that many people instantly. They can just go and be like, hey, go to this set of people and say, we need these many people. Get bodies, just get tons of people. And it's not the highest skilled labor, but labor nonetheless. And their ability to sort of go anywhere in the country and put up a warehouse in two weeks and solve really big, big scale problems for people fast. But that was really interesting just because I'm used to thinking about tech companies and what people can do virtually. But to be able to physically manifest that kind of a thing, I thought was so cool. I'm selling a business right now that's in the medical space, selling hormones and peptides and the high life extension stuff. Like there's a whole bunch of that now which is really popular. I mean, there's so many cool things. I mean, I have one that they make all of the cool stuff. If you go to Disney World or Disneyland or any of these theme parks, all the cool stuff you see and the floats and the characters and the Pokemon running around and all that stuff, Someone has to make all that right. I'm selling a business that does that. And it's so neat because they just have a bunch of these big kid adults that want to build all this really cool things that fill up these theme parks because people want more experiences. They want to go to the Disney's, they want to go to the Legolands and all over the world too, you know. And like in Dubai they're building tons of these amusement parks. And I thought that was neat, you know, building escape rooms. Like people have to build escape rooms. It's not a thing. They're all, they're in every city you go to, but someone makes that stuff, right? We have a helicopter tourism business right now. That's not my deal, but it's super neat. Like, okay, cool, go fly over the Grand Canyon. I mean, it just is all these like neat things that people are doing.
- [23:53]
Ann McEntee
And when you look out at the world and you just, you know, you've got a business brain. Like you've started businesses, you've bought them, you help people sell them. What are you looking out at and noticing gaps in.
- [24:05]
Lauren Vandegrift
I think, don't steal this, but I think med spas have gotten really popular as, you know. Right. To go and get an NID shot and all these things because Huberman and Brian Johnson and all these guys are trying to help us all live forever as the millennials get older. And I think stuff supporting that space is really, really exciting. I really think longevity, I think that's going to be a huge, huge thing. And the costs are prohibitively high right now, so it's really for the kind of coastal elite. But I think that that's, that's changing really rapidly. I think that's going to be something that in the next 20, 30 years is going to be 10, 20 times bigger than it is now. I think that's, that's a market that I'm seeing a lot of activity in, but also I think a lot of room to grow.
- [24:43]
Ann McEntee
So. Interesting. Yeah, Health and wellness and longevity. Those topics keep on crossing. Always everything that I'm looking at at.
- [24:50]
Lauren Vandegrift
The moment, and I just thought it was because I was naturally getting there because as a you age, you know, you start trying to like, bed. Yeah, I became a parent and I trying to be faster, better, stronger. But I think it's just sort of a universal thing. It's not just my cohort, you know, I think it's, it's a pretty global thing from what I'm seeing.
- [25:05]
Ann McEntee
So what advice would you give? Let's say somebody approached you today and they said, hey, I'm not ready to sell my business yet, but I think I will be in the next one to four years. What advice would you give them to prepare for that?
- [25:19]
Lauren Vandegrift
One obvious one is that you want to make your books be as good as they can be. Right. You know, it's worth it to pay maybe more taxes than you might otherwise for a year or two. Knowing that it's going to pay dividends when you sell it for more later on, or being really thoughtful about how you do write offs. The other big one I'd say is it's about management team. You know, if you have good people that you can elevate. It's a funny thing because if you want to sell your business, you're like, well, I'm getting out. Who cares? But you are going to have a much easier time selling if you have good people in place. People would love it if they could run the business. But even people that you know are going to stick around that you can put some faith into because it might be that by doing that you don't need to sell because you find the stresses are clear and feeling good and maybe you don't need to sell and you can just keep making money, which go for it, right? But it also means that when someone's coming to buy you that they're going to have a lot more faith and be willing to take more of a risk. Like having people know and have faith in your key people and your management. That I think would be a really good investment. Even if in the short term there's a small dip in the income, it's worth it to get good people.
- [26:24]
Ann McEntee
What does that do to the exit multiple? So, like, I'm reflecting back on when we sold our business and wondering, what if we had put more upper management into place and potentially even hired a CEO to replace me? What would that have done to the valuation?
- [26:40]
Lauren Vandegrift
One is that, you know, if we sell a business and you are there and you have a salary that you are, are earning and you work your butt off in that business, like, we can't add back your full salary because you're germane to the business. You worked there, right? If you pay yourself $500,000 and your role is worth 150, we'll adjust that difference, but we have to kind of keep on that role. But if you truly have a manager that like runs the day to day, that you can go off for a month or two, I'll add back all of your salary and all that money because you have those people in there so often it can be like a wash. So, like, your multiple will be the same. And then more importantly, it's not just the multiple, it's who comes to the table and the offers you get. You know, like, I might value something similarly, but you're gonna get 20 offers and there'll be people competing to pay you more if there's good management versus if there's a risk that you're the key man. And if you go away, what's gonna happen? And anyone's gonna pay more money. If there's someone that can kind of run the business, you know, it's closer to the head to Bali and hang on the beach model of things, right? Or if it's an equity group, right? They, of course, they don't wanna have to put in their own people. They will and they wanna bring their own people. But having somebody that really knows the business and also it also will mean now, these days that you have to stick around less too. Because if you're really important in the business, they're going to want you to be there consulting longer. They're going to rely on you more heavily than they would in the past. So that's another reason when you're looking.
- [28:00]
Ann McEntee
At a business that is potentially going to become a listing for you, like what documents are you scanning through that are the most important to you? I mean, there's obviously the profit and loss and balance sheet and things like that. But like, what else are you doing to evaluate the business to see whether or not it's the right fit for you to represent them?
- [28:18]
Lauren Vandegrift
That's a big one. I mean, one thing that I look for, it's very obvious when people are squeezing every dollar they can to increase profit and they're not reinvesting in the business at all, right. You can tell pretty easily when somebody like, oh, these numbers look really good, but they're spending a lot of money on, off the balance sheet, let's say, for instance, to, to bolster things. And you can tell when somebody's been trying too hard to like make their numbers look good. And that's one thing. It's like you want to be healthy with that because there's the P and with profit and loss statement that you can show and especially you can talk about accrual versus cash accounting, but you can do things to make those numbers look good when the underlying business isn't as much. Or there's the concept of free cash flow, which is a business might show up, makes a profit, but if you are buying off of the balance sheet, all your, your trucks, let's say, so you have these capital expenditures that aren't on that profit and loss statement. Well, you could have a business that looks like it's making $2 million in profit, but you're spending a million and a half dollars in trucks every year, right. And that, that then brings your free cash flow down to very little. That might be for a purpose and that might be totally fine, but it's, it's going to be something that we look at as well because it's really easy to have something say it looks like it's making so much money, but it might not be right. So that's something to think about. So for us, you know, PNLs, balance sheets, and then we might even ask for free cash flow because we want to see what capex, you know, capital expenditure. The capex of a business is important because you can depreciate those assets and there's advantages. But it's definitely a thing to think through, like how much money do you really make and how do I optimize that without making it look like I'm goosing numbers?
- [29:57]
Ann McEntee
If Somebody had a business and they kind of were curious about their own valuation. Are there any rules of thumb with equations?
- [30:03]
Lauren Vandegrift
I touched on this last time, but yeah, the multiple range is the same. It's just that where people fall in, it's different. Roughly in 90% of cases, your business is going to sell anywhere between three times, maybe two and a half sometimes if it's very small, but three to seven times this sort of net profit. So the kind of EBITDA plus any adjustments, you know, adding back anything personal that isn't germane to the business, we'll multiply that anywhere from 3 to 7. Almost always there are exceptions. I've sold things at 10, 11. There are some people that sell at a 1x because of some other factors. Right. But generally speaking, if you make a 6, $700,000, you're probably going to sell for 2 to 2.5 million. That rule changes. Once you kind of get above 4 or 5 million in EBITDA, those numbers go up and there's a lot more nuance to it. But you know, 90% of businesses, right, where you're probably under 50 million in revenue and under 4 million, 5 million in kind of EBITDA, that's your range across the board.
- [31:00]
Ann McEntee
Interesting. For the ones that are like 10x11x. Is that software?
- [31:04]
Lauren Vandegrift
Yeah, so software and that kind of stuff for sure. But then even if you have a business that's growing a ton, has a lot of subscriptions, recurring revenue, making 10, 12, 15 million, he but tell, you know, I have businesses that are doing that now and they're, they're trading at, you know, 10x. But also how you structure, that's different because typically you'll be rolling a lot more equity. You're going to stay on as the operator. You're trying to find growth partners and big capital groups. And it's kind of a whole different game at that point, right, because you're, you're trying to scale. You've set off a rocket ship and you got to keep the rocket ship going. That's typically where those businesses are because it's, it's less so selling your business as it is, finding the right partner to keep scaling your business.
- [31:41]
Ann McEntee
Well, just to close up here, is there anything that has shifted for you? I know you're a dad now, so that changes things. Your son, like when he gets older, as he grows, like, what do you think are the most important lessons for him to learn or skills for him to acquire over his next 18 years?
- [32:00]
Lauren Vandegrift
Oh, that is a great question, truly. So I Had a friend in town, I just left this morning actually. This couple with their four year old daughter. And he's a very successful guy in software stuff, you know, entrepreneur, sold many companies. And he's definitely a kind of a guy who would say, hey, I want my daughter to be a doctor or a lawyer or a developer. Right. He was saying he thinks that he's going to actually be much more open to pushing her creativity and her artistry because he sees that there might be more value in being an artisan than there is in being a developer. The way that things are going. And this is guy is like, he is an engineer guy, you know, and even he's saying that and I thought that was extremely telling. And I think about my own son and I feel similarly. I think you have to be tech forward and enabled and learn everything as it's happening. But I do, I think the people that are going to win the day, it's not going to be the fact that you can code. It's going to be because you can really think on a broader level about how to solve a problem and use whatever tools exist at that time to do it right. And so whatever the need is, being able to sort of adapt with things that are changing and figure out how to problem solve using all the tools available, the people that are willing to shift and grow are going to be okay. And those that aren't, I think it's going to narrower their paths. Again, I'm optimistic. I'm so into this stuff we're developing. What we're able to do now is just so different than when we talked a year and a half ago. And I think it's going to have some growing pains. But I think ultimately you're going to be able to execute on things that you want much faster, no matter who you are. And that can't be a bad thing, right? It's going to mean that more people are able to build the things that they want and execute on their vision. I think that there will be things that come out of all of this that will lead to people having more success and being happy and making things more accessible for people. Because things are getting so expensive, it's hard to live. And so maybe the AI and the robots help stuff become more democratized over time. Like, I do think there's a silver lining to all this.
- [34:08]
Ann McEntee
I think you're right. There can be a silver lining. And while it's unsettling to see certain roles disappear, it's also creating space for new kinds of work that didn't exist before, so it'll be very interesting to see what happens. Well Lauren, thanks again for coming back on to chat with me. We might have to turn this into a yearly thing. I'm always so fascinated by the work that you do and I really appreciate you taking the time.
- [34:34]
Lauren Vandegrift
Yeah, no, for sure, anytime. Happy to come back. And again can answer anyone's questions. You know my business is built on connection and communication so you can reach out. I'm at Lauren at Business exits and then business exits.com I have 50, 60 businesses that I'm just kind of guiding them as they work their way towards that exit as opposed to being ready to sell. And that's how I get most of my business is referrals from people telling other people about it. So happy to help anyone who's interested.
- [35:02]
Ann McEntee
Today's Key Takeaways Interest rates have shifted the landscape. Higher rates have compressed some valuations and changed how deals are structured. Certain industries like E commerce and Amazon based businesses have fallen out of favor, while others like auto repair, H Vac, asbestos remediation and non emergency medical transport are thriving because they provide essential services. Buying power has diminished unless a buyer has cash on hand, making it more of a buyer's market, but only for the well capitalized. Rolling equity is becoming more common and smart. It increases upfront cash, makes the deal more attractive to buyers and preserves upside potential in a future second exit. Sellers feel less burdened with minority ownership, more like watching a stock than running a business, and buyers feel more confident when sellers stay financially invested in the future of the company. In volatile markets, trust between buyer and seller is critical, to the point that it may be more beneficial to prioritize the whole over the how much in offers A shared vision and values can lead to smoother transitions and better outcomes for employees. Culture and performance. Deal structures are getting more creative now in response to lending constraints. More deals include seller financing with interest income and tax planning advantages. Earnouts though these are structured conservatively, requiring revenue not to drop instead of needing to grow and equity rollovers. As mentioned earlier, if you're preparing for a sale one to four years out, clean up your financials. Prioritize accurate understandable books, even if it means paying more taxes. Build a strong management team and keep in mind that buyers may pay more when founders aren't essential to operations. Don't optimize short term profit at the expense of long term health because buyers can tell when a business is squeezed too hard before a sale. Most small businesses under $50 million in revenue and less than 4 million in EBITDA sell for 3 to 7 times seller adjusted net profit. 3 to 5 times is common for solid businesses with less than a million in earnings, six to seven times is reserved for those with strong growth, recurring revenue or exceptional fundamentals and 10 to 11 times is possible for high growth software or subscription based businesses. Watch out for capital expenditures. A business may look profitable, but free cash flow can tell a different story, especially if it requires high reinvestment such as equipment heavy businesses. Buyers will scrutinize capex and depreciation when evaluating real earning power. There is a huge growth opportunity in longevity in MedSpa Adjacent spaces driven by consumer interest in health, youthfulness and performance. It's possible that the category could grow 10 to 20x in the next two decades. Buying a business isn't a shortcut to easy money. Take caution against the oversimplified Buy a laundromat and chill narrative. Buying and running a business is hard work, not a passive income hack. And experience matters. Young buyers often underestimate the skills needed sales, communication, financial literacy, management. However, for those willing to learn and to get the experience needed, it can beat the corporate treadmill. That's it for today. I release episodes once a week, so come back and check it out. Have a great day.