Secrets of Selling: Is Your Small Business Ready for M&A?

Meet Paul Cronin, a seasoned Mergers and Acquisitions expert, as he shares insights with Ed Drozda, The Small Business Doctor on turning your small business into a sellable asset. Discover the secrets behind the art of business transitions! #BusinessGrowth #Entrepreneurship 

Transcript

Ed Drozda: 0:10

Welcome to the Water Trough where we can't make you drink, but we will make you think. My name is Ed Drozda, The Small Business Doctor, and I'm really excited you chose to join me here as we discuss topics that are important for small business folks just like you. If you're looking for ideas, inspiration, and possibility, you've come to the right place. Join us as we take steps to help you create the healthy business that you've always wanted. Welcome back folks. This is Ed Drozda, The Small Business Doctor, and I want to welcome you today to the Water Trough where I'm joined by Paul Cronin. Paul has over 30 years of professional experience in sales management, consulting and entrepreneurship. He's owned three businesses, including a data analytics business, a golf training business and an exit planning consulting business. He's been a part of the M and A world since 2009, initially in the exit planning field before moving to transactional work at several firms, and most recently, Paul joined the M and A practice at Touchstone Advisors, in 2025. Hello, Paul.

Paul Cronin: 1:23

Hi Ed, so great to be here again.

Ed Drozda: 1:26

It's great to have you back Paul. I was really looking forward to bringing you back. The business of mergers and acquisitions is important to business owners. But one of the things that I was hoping we would be able to talk about today is that unique set of characters who are in small businesses, my kind of clientele, who are perhaps asking the question, does this matter to me? Is there something for me to sell? Or does it really make any difference. And I will start by pointing out a person like myself. I'm a solopreneur. I am a small business coach, and so at the end of days for me, I really have nothing to sell. That is you don't sell a book of business when you, the principal are the principle, the principle thing behind it. I can't sell a book to somebody else; they won't be me. So, the clients aren't going to get the same thing or what have you. In my case, it's too small to be appropriate. I think a lot of small business people think their business is too small to care about M and A. So, let's talk about that. Is a small business too small to care?

Paul Cronin: 2:35

No, the short answer. A longer answer depends on the nature of the business and the way I describe it is a buyer would consider buying your business if they believe with a reasonable amount of risk that they can replicate your results. It's true that people who are in the art of coaching, business consulting, or consulting in general, we are a solopreneur, it's so dependent on your thoughts that it would be difficult for somebody to replicate that. It doesn't mean it's completely impossible, but it would require transition time where a new person comes in. They learn the process, get clients in that might allow you to quote unquote retire and hand off so the brand could carry in way. It doesn't mean there's much of a financial transaction from that. The other way is if you've got a methodology that others could replicate, write it down. Turn it into a book, turn it into tools, assessments, what have you, and then you've got a toolkit that you can sell. Again, I'm not an attorney, but there's different ways to package it up and sell it. I call it products plus training, for example. That's one of the businesses that I had, and we were able to take that exit planning practice and then sell it to a number of people so that they could independently use the tools plus the training we offer. However, setting that aside there are a lot of small businesses. A convenience store. You've got inventory, you probably have some part-time employees. You've got vendors and a convenience store; you tend to have a lot of regular customers. It's near the bus stop, it's in the neighborhood, wherever the case may be. So, it isn't a particular high barrier to entry other than you've gotta have the spot, right? The city or town has to zone that particular place for that activity. If you've got those things and it pays you some sort of an income and there's some sort of profit, and those two could be combined for a very small business, you can say, yeah, you could take over. My joke is this is how I make the sausage. Every business owner I talk to tell me how you make the sausage. Everyone makes it a little differently and they get it. So, every industry has a history of those kinds of businesses having been sold, and then folks like myself use the data; there's these large databases and we take a look at that. We take a look at the financials of your business and can someone replicate those results. The price they're willing to pay has a combination of value. The income that an owner, a buyer could receive from it, and the risk they're willing to pay to take it over and can they replicate those results.

Ed Drozda: 5:38

Let me focus for a moment on the word replicate. I presume if one is driven by the ability to replicate, then they are attracted to what it is you're doing in the first place. I don't want to replicate that which is not good. I certainly wouldn't want to buy something that is not good. So how does one position themselves outwardly to motivate the desire to replicate?

Paul Cronin: 6:10

Well, first you have to make profits, right? Sounds remarkably simple, right?

Ed Drozda: 6:14

No, maybe not.

Paul Cronin: 6:15

As you know too well, it can be hard. Showing in your financials, in your tax returns, and in the bank statements that it all backs up, that I make a hundred thousand dollars a year from this business; that's a combination of the income and profits. I may take draws, whatever you wanna call it, again, these are very small businesses. And let's say you do$500,000 a year; you keep a hundred thousand dollars profit. And if you show that consistently and you are smart about your expenses and you're not doing what I call the silly things, which a lot of people do, you know, they replace the windows in their house and they call it supplies. Don't do that in silly stuff. If you're able to do those things, that's a starting point. I can prove through my financials and my tax returns and multiplying my bank statements that this is how much profit anyone running this business, take it over from me, should be able to do. The second part is going back to how you make the sausage. Do you actually write it down? This is how we attract customers. We have these Facebook ads, or postcards or whatever marketing it is to attract people. That you have a financial system or QuickBooks or something similar to that. That you pay your employees, that you're not paying the money and maybe keeping the taxes or not paying the taxes. You pay all your sales taxes. I want to keep using this convenience store as an example. Keep your inventory current. If 30% of your inventory has passed sell by date, well that in terms of a buyer is worthless, and also gets a concern of, geez, they don't turn over their inventory very well.

Ed Drozda: 7:54

Right.

Paul Cronin: 7:54

That's a problem. So those are just a few things to think about, but all of them is like, can you show consistent level of profitability, whatever it is. Buyers, they're like water, they seek their own level. Some need a hundred thousand a year, some need a hundred million a year. All depends who's the buyer.

Ed Drozda: 8:12

I understand that looking for something to replicate, i.e., to continue working in a profitable manner is a motivator. I tend to look at profitability as um, I'm gonna go out on a limb here'cause the way I'm gonna say, it's gonna sound weird I see it as evidence of a deeper purpose. While a buyer might be attracted to the profitability of a company, are there other things that they're looking at or are there potentially other things that we, as potential sellers, might want to keep in mind? If I had two companies to potentially buy both of whom are making the same profit, and assuming for the moment I, the buyer had the capability of doing whatever either of these companies is currently doing, what further stuff is gonna drive me? How am I gonna choose?

Paul Cronin: 9:07

If I had an ability to understand why buyers buy businesses, my goodness, you know they all have their own criteria. Ultimately, they're all trying to get to the risk of buying the business. What risk am I willing to take to buy this business, and how do I as the buyer reduce that risk? Examples might include having the seller sign a contract for 18 to 36 months post-close. It might mean stay bonuses for key managers. It might mean paying out a price for the business over time based upon some metric of customers staying and so forth. So that's part of the reason why people buy businesses. So let's go back to the convenience store. One buyer could say, I've never run a convenience store before. I'm going to need training." That will be a part of the transaction, how much training you're gonna have to give to the buyer. Buyer number two could be someone who owns 14 convenience stores. They are looking at, hey, I've always wanted a convenience store down the street from Bryant University, all those kids walking by, could never get a good spot. And rather than waiting for a vacant spot to open and I have to put my brand in and spend a lot of money on awareness, I'm just gonna buy Joe's convenience store,'cause the kids all stop by there anyway,'cause they get their coffee or vapes or whatever else they're buying these days. All we have to do is announce that Joe's convenience store is going to become the equivalent of a Seven 11 or what have you. Right? And so, there's that transition. That person, buyer two, might be willing to pay more than buyer one, because they're not gonna run the store. And if you as an owner may make a hundred thousand dollars of profit out of that business. The buyer could say I'm just gonna have a store manager run that and I'll pay them$60,000 plus some kind of benefits or whatever." And so, you look at the seller and say there's a hundred thousand dollars of profits in the business, and that buyer could say, geez, it's really only 40,000 to me. And then you get into the weeds. And the weeds could be, wait a minute, I pay a lawyer and I pay accountant, and I have all these other expenses. All those go to zero when you acquire my store. I actually wrote about this on LinkedIn, the add backs as it's called. Then ultimately sometimes buyer number two will pay a premium. Let's say your industry trades at three times profit. That's the median. Buyer number two,'cause it's strategic, they want the location, they know how to do it. They can create synergies. They can extract costs from the business.'cause they already have an overhead that does those things. They'd be willing to pay three and a half X over somebody who just wants to own your convenience store. Maybe they're a store manager or somebody else and they want to run their own thing and change it; add stuff.

Ed Drozda: 12:18

Mm-hmm. You referred to the add back, did I get that right?

Paul Cronin: 12:24

Yep.

Ed Drozda: 12:25

Can you expand upon that concept a bit?

Paul Cronin: 12:27

Sure. Profit for most businesses is stated as EBITDA or earnings before interest, taxes, depreciation, amortization. EBITDA excludes the salary for the owner. Just so you know, okay?

Ed Drozda: 12:40

Mm-hmm.

Paul Cronin: 12:40

There's another expression called seller's discretionary earnings, SDE, that includes a salary. That's sort of the total compensation an owner can receive a total benefit, but I prefer to use EBITDA because it's a real clean standard. The idea of the add-backs is to say your company, if it's a corporation, pays income taxes that has some interest on business loans, and most businesses have some level of appreciation, and some may have amortization as well. So, all of those elements, again I use a hundred thousand dollars of net operating income. There might be 10 or 20 or 30 or a hundred thousand dollars of those other elements. That all gets added back. Because some of it's just accounting gimmickry, to reduce taxation. And some of it like interest on a business loan. You add that back to the profits or the adjusted EBITDA, because someone buying the business may not have a business loan. Or they will have a different level of interest that they're paying. Therefore, they need to understand that adjusted EBITDA. The guy who decided to replace his storm windows and charge it to the company, as supplies, that's an add back. The buyer is not going to recur that expense again.

Ed Drozda: 13:53

Right. So, there's two sides to this coin, and for the moment, let's look at the seller as a small business owner. Let's go back to the convenience store that you talked about. I think that's rather convenient. Leave it at that. I have been in business for, maybe it's a family business, I've been in business for 60 years, but I'm the end of the line. My children have no interest in continuing this business. They don't think it's desirable for them. I have essentially gotten to the point where, you know, yes, I've built a good clientele. People are coming to my store. They know me. I know them. I know what they want. I necessarily bring in the sorts of inventory that appeals to them and so on and so forth. In other words, I'm your neighborhood shop. Okay, so all this time and effort that I have spent in building this reputation, building this store that's providing for this community, one of my biggest concerns is that when I retire, sell the business, is that it all goes away. Now I know that I can't continue'cause I have gotten to that point that age, health matters, whatever it might be, I have to move away. So as a business owner in that position, I'm gonna take the emotional side out of it because I realize that's not something any of us can realistically address. That's a one to one situation, it's personal. But aside from the emotional aspect, what kind of guidance does someone like yourself bring to that business owner? I hope that's not asking too much here, but I presume that in your role you're doing vastly more than just marrying potential buyer and seller. There's gotta be more to it than that.

Paul Cronin: 15:47

Yeah, well the first thing that I start with is a business valuation. The valuation that I would do is for purposes of selling to a third party. We could say for example, your adjusted EBITDA is you take a hundred thousand, your adjusted EBITDA is 150 and go out and then get comps. They're trying to find 20 or 30 different companies that may have transacted similar size in the last three to five years. That gives me a sense of that$150,000 of profit based on the industry, I'm gonna use three X to say, all right, your business could be worth as much as$450,000 to a buyer, plus or minus 10%'cause that's a variable depending on who the buyer is. You can help them understand what is your compound annual growth rate? If it's 2%, that's going to get one kind of a buyer. If a business is growing 10% a year, that's a different kind of buyer. What's been driving that? Obviously, our economy has been in complete, crazy turmoil the last five years with COVID, getting outta COVID, supply chain issues, and now more recently, tariffs. It's a lot of turmoil, but buyers, particularly sophisticated strategic buyers, and industry buyers, they've been through all that too. So they're like, okay, we get it. And that's why it's important in many ways to understand who could be the best buyer for your business. Often it's an industry player,'cause it's efficient to sell to somebody that already knows the industry, already knows how to do it. But there are times when you get a business that you know, there's a Seven 11 down the street, Seven Eleven's not interested in buying it. And so now it's a question of somebody who wants that because they could do something else with it. Let's suppose you never wanted to get into prepared foods, sandwiches and such. You just chose not to. Someone else could come commit and say, geez, my lease says I'm allowed to sell prepared food. So, you find a distributor who can deliver sandwiches to you every day, and you take out a row of Coca-Cola or whatever else, you see now we have sandwiches here.

Ed Drozda: 17:58

Right.

Paul Cronin: 17:58

Now you've got people like, wow. So that's the growth opportunity.

Ed Drozda: 18:02

Mm-hmm.

Paul Cronin: 18:02

And so, taking the time to understand the opportunities that a buyer might have in the business and on one hand, identify them and the other, you have to justify. If it's such an opportunity, why haven't you done it?

Ed Drozda: 18:16

Hmm.

Paul Cronin: 18:16

I don't want to bring in a refrigerator. I don't wanna set up the new relationship, and so forth. But somebody else, you could have a situation where a convenience store doesn't have a beer and wine license. Are the convenience stores are allowed to do that?

Ed Drozda: 18:29

Mm-hmm.

Paul Cronin: 18:30

And you may have tried in the past it was too hard. It's this, that, whatever. And you give up. Somebody else may have two or three or four different convenience stores, but they already have beer and wine licenses so they can go before the liquor commission and say we have a great track record. We know how to do this, we'd like a license, they get the license and all of a sudden, again, they're adding on a layer of profitability that you as the seller couldn't get or chose not to get.

Ed Drozda: 18:58

Presumably, the prospective buyer is entertaining these things as they go into that search process. They're already thinking ahead as to what can I potentially do with this? In other words, what's on the table is not all that there is there for me.

Paul Cronin: 19:13

Let's suppose a corporation has decided, and again, one of the big convenience store chains around here just went through that and they decided they had locations that had gasoline fuel sales, and a bunch that didn't. And the company that acquired this chain, local chain, is in the fuels business. And so they made a very strategic decision. He says,"I know you've got literally 1500 stores, but 500 of them don't sell fuel. We're gonna sell those all off." You as an independent could then say, well, gee, I'm competing with so and so up the street. Well, that location may not even be that great a location for that corporation, let me just shut it down and turn it into a fruit stand or something.

Ed Drozda: 19:58

Right, right, right.

Paul Cronin: 20:00

You need to be aware of your competition, what's happening out there.

Ed Drozda: 20:05

When you were engaged in the purchase of companies or sale of companies, is it similar to real estate where the realtor represents the buyer, not the seller? Or does it go both ways?

Paul Cronin: 20:19

It's the opposite. Typically in M and A, you have to choose a side. So, I'm a sell side agent, if you will, brokers, some people use the word or advisor is the word I like to use. So, I represent the seller. They're my boss on this deal, and my job is to help fulfill their goals, one of which is some financial outcome. When I'm negotiating with the enemy, as I like to say, the buyers know that. I don't represent them. I have to disclose everything that the owner has disclosed to me, and that's it. Anything else, it is caveat emptor. The buyer must do their due diligence. I prepare what's called a data room that's got all the financials and tax returns and all that other stuff, licenses, anything that goes with it. And then I have to tell them how I'd made my adjustments. I have to justify my adjustments to that EBITDA. I'm negotiating with the other side, but I don't represent them.

Ed Drozda: 21:19

Okay.

Paul Cronin: 21:20

They may have their own representation. Often for very small transactions, buyers who do not have their own representation other than they may have their own attorney or their own accountant, take a look at it. Much more sophisticated businesses, both sides have some kind of M and A advisor helping them.

Ed Drozda: 21:35

You said that persons such as yourself have to choose a side. So are you saying that there are those who actually do represent the buyer or...

Paul Cronin: 21:43

Yeah, there are buy-side advisors. There are a number of people who work with private equity firms. Outsourced corporate development for that. There are other folks who would work with a strategic buyer, again, someone who owns 14 convenience stores, they wanna buy more, so they will pay somebody to call convenience store owners and say,"I represent a buyer. Would you be interested in discussing a sale?" Understanding that you as the seller, in that case, you're kind of naked out there. You don't have somebody representing your interests.'cause the guy who's representing the other side, he has no fiduciary responsibility to you. All his responsibility is to the person writing his paychecks.

Ed Drozda: 22:22

Okay, so let's go back to the convenience store and my story. I am ready to depart. I don't have a successor. How do I begin the process then of selling? I presume, I presume naturally that one could sell on their own.

Paul Cronin: 22:40

Yes, it can be done. I don't advise it unless you've sold other businesses before.

Ed Drozda: 22:45

I'm sorry to interrupt you, but what are the pitfalls that I should be aware of? If I think I can go off and sell it by myself, what am I likely to miss?

Paul Cronin: 22:54

Well, essentially you're taking on a second full-time job. If you're already working 40, 50, 60 hours a week do you really wanna work another 10, 20, or 30 hours a week? Because that's really the big issue. The other part is if you haven't sold a business before, you don't know what the expectations are. You don't know how to set up a data room, how to do your own business valuation. You don't know how to prepare the marketing materials known as a confidential information memorandum or a CIM for short. All of those things are what a professional M and A advisor will do for you. The other part is you have to find a market, you've gotta find the buyers. Now, it is true, most people who run a business have competitors, they have relationships with some of their competitors, friendly or otherwise. And you can think of, well, hey, here's six people who have said to me, over the last 20 years, geez, Paul, if you ever feel like selling your convenience store, think of me. Great. But they're not your friend when it comes to buying your business. Money talks, everything else walks. So it is wise to have some kind of representation. Depending on the nature of the business, you've gotta figure out who can represent. For very small businesses, it's typically some kind of business broker. There are some online marketplaces which also have paid advisors, and they can be more affordable. Once you're getting a business that say, has$500,000 or a million dollars of EBITDA, that's when you're getting up to the real M and A folks. You'll be given a lot more services. It costs money, but you can get a lot more services and you get represented. It's like selling a house. I could sell my house. I could clear all the crap outta my attic, in my basement. I've owned a number of homes over the years. Then you can buy an ad on Zillow today. Just boom, for sale by owner. You can run an open house. But if you don't know how to disclose all, and I happen to be called real estate license, I don't really talk about it too much'cause that's not what I do, I sell businesses, but sometimes I sell real estate related to a business. But you have to know what the state rules are you violate those as a seller, you can be in big trouble. It is better if possible to get advice selling your business because you'll prepare the information that a buyer's expecting, you'll have somebody who's doing all the hard work, the slog of talking to all the different potential buyers. And there are a lot of looky-loos who, oh, I really wanna buy a business, and they're clueless.

Ed Drozda: 25:26

Mm.

Paul Cronin: 25:26

Or they want to have you become the bank. In other words, I don't really have any money, but I'll pay you for your business, but I'm gonna take five years to pay it, in other words, I'm gonna pay you out of the profits. That can be part of a transaction, but it's not advisable to do all of it that way.

Ed Drozda: 25:42

There's so many variables and things that the average business owner is not gonna be aware of or know what to do with, and that's where people like yourself come into play. When it comes to the way that an M and A advisor is paid, is it typically commission based or is it upfront, a certain fee? How does that work?

Paul Cronin: 26:03

Sure. It's a blend. Virtually everybody who's any good at this is going to require some upfront payment called a retainer, for other folks, it's a marketing fee. For very small businesses, a broker might charge a marketing fee, and then it's a percentage of the transaction, and it can be as high as, for a very small company, it be as high as 10 or 12%. For larger businesses, it can be as small as a 10th of a percent, multi-billion dollar transactions, and everything in between.

Ed Drozda: 26:33

Okay. Excellent. Well, this is really enlightening for me. I like you dearly, but I know I won't be taking advantage of your services because I'm committed to the notion that when I'm done, I'm done. But I do thank you for all this information. I think it is important and useful to small business people'cause I truly believe that a lot of people don't even think it's worth entertaining the notion. I think that what you've done is you've opened up the door to say, well, it doesn't hurt to take a look inside, and there are people out here that can support you in that process. So Before we wrap up here, I was just wondering if there's anything you'd like to leave us with, any last things you'd like to impart?

Paul Cronin: 27:13

Yeah, I would say if you are considering selling your business, pick a date in the future. 10 years from now, three years from now, and an actual date, circle it. January 31st, 2021, because now it's a goal, right? That you can achieve. How do I build towards that date? And ask your accountant like, what do I need to do to improve profitability? Look around. Is your bathroom clean? I have this thing called the toilet test. When I go see a new customer, I go in and see what it is. If it's clean and neat this guy probably runs a clean business. If it's disgusting, I'm probably not gonna represent this guy. So those are a few little things to think about.

27:54

The toilet test. I can't believe it. I love it. By the way, mine would be clean, if it came down to that. At least I'd like to hope so.

Paul Cronin: 28:04

I'm glad to hear that.

Ed Drozda: 28:06

Well folks, our time is up. Again, I want to thank my guest, Paul Cronin. Paul, it has been a pleasure talking to you and you have brought some great information to the table. I really appreciate it.

Paul Cronin: 28:19

Thank you. It's been my great pleasure, Ed.

Ed Drozda: 28:21

Alright, thank you sir. This is Ed Drozda, The Small Business Doctor and here at The Water Trough, I want to wish you a healthy business.