In this episode I am joined by John Ovrom, founder of Exit Consulting, which provides consulting and brokerage services for businesses and owners to prepare for and execute a sale or similar change in ownership. John is a specialist in creating roadmaps for business owners anticipating a transition. John shares from his experience helping parents transfer ownership to the next generation, owners sell to key employees, businesses establish an Employee Stock Option Plan, partners buy in or sell out, orchestrate outside sales transactions, and sellers create long-term exit plans. John partners with business owners to define success, develop specific goals, and establish a plan of action to achieve them. He shares his experience creating lasting value for clients with solutions to business challenges and his deep understanding of the complexities, unknowns, and pressures of selling a business. A serial entrepreneur, John understands the day-to-day challenges of running a business. He’s founded and owned large and small companies with 1-50 employees.
Selling a business is the American dream, the pot of gold at the end of the rainbow, the reward for years of hard work. Successful entrepreneurs make countless sacrifices in hopes that they would someday reap the benefits of their labor and live a new life of vacations, recreation, and prosperity.
You only exit your business once, so you should feel confident passing this milestone. A successful business exit reflects the preparation done beforehand. Failing to plan is planning to fail.
The owner of a privately held company has several alternatives on how to exit their business. In the absence of an exit strategy, events will inexorably dictate the final exit plan. A costly involuntary exit may be caused by death, disability, divorce, disagreement, or distress.
Selling Your Business with David King will help you take control of the sale process and make it positive one.
In this episode I am joined by John Ovrom, founder of Exit Consulting, which provides consulting and brokerage services for businesses and owners to prepare for and execute a sale or similar change in ownership. John is a specialist in creating roadmaps for business owners anticipating a transition. John shares from his experience helping parents transfer ownership to the next generation, owners sell to key employees, businesses establish an Employee Stock Option Plan, partners buy in or sell out, orchestrate outside sales transactions, and sellers create long-term exit plans. John partners with business owners to define success, develop specific goals, and establish a plan of action to achieve them. He shares his experience creating lasting value for clients with solutions to business challenges and his deep understanding of the complexities, unknowns, and pressures of selling a business. A serial entrepreneur, John understands the day-to-day challenges of running a business. He’s founded and owned large and small companies with 1-50 employees.
Selling a business is the American dream, the pot of gold at the end of the rainbow, the reward for years of hard work. Successful entrepreneurs make countless sacrifices in hopes that they would someday reap the benefits of their labor and live a new life of vacations, recreation, and prosperity.
You only exit your business once, so you should feel confident passing this milestone. A successful business exit reflects the preparation done beforehand. Failing to plan is planning to fail.
The owner of a privately held company has several alternatives on how to exit their business. In the absence of an exit strategy, events will inexorably dictate the final exit plan. A costly involuntary exit may be caused by death, disability, divorce, disagreement, or distress.
Selling Your Business with David King will help you take control of the sale process and make it positive one.
| Speaker 1: | Welcome back to Selling Your Business with David King. I'm David King and I'm the author of Selling Your Business. Begin With The End in Mind, and it's available on Amazon. Today I am joined by exit consultant John Ovrom. John, welcome.
| Speaker 2: | Thank you, David. Thank you for having me.
| [00:00:30] Speaker 1: | John is the founder of Exit Consulting, a firm in Coronado, California. Lovely Coronado. Anybody might remember visiting Coronado. It's the location of the hotel. Dell serves businesses in Southern California and works with them to prepare to be sold and helps them through this sale process. So gentlemen, why don't you tell us a little bit about you, about your background, and Sure. How you got where you are today.
| [00:01:00] Speaker 2: [00:01:30] | Um, well, I got here not based on a plan. I didn't decide that I wanted to go into exit consulting or be a business transaction guy. Um, I've always been an entrepreneur, so I was a military kid. And, um, when I moved around, you know, I was not raised on a lot of money. My dad basically said, What, you know, we'll give you what you need and whatever you want, you better go earn. And my parents' definition of need in mind were different <laugh>, so I had to go work. Um, so I've been working, you know, since you were young enough, 12 pulling weeds and, you know, doing things around people's houses and have always worked and really found it much more enjoyed, be self-employed. And, um, and so I decided to go more to college and got an accounting degree because people said, Hey, if you wanna run your own business, know your numbers.
| Speaker 2: [00:02:00] [00:02:30] | Um, so my dad being an engineer, accounting seemed pretty basic to me. Cause that's where my brain worked. So I went and worked for R Arthur Anderson. Um, now I'm dating myself there. Uh, while, while my, uh, girlfriend, now wife went to law school and then I was gonna get my mba, um, uh, all of that went according to the plan until, uh, my wife graduated, had a job. I quit, was gonna go start working, um, go for my mba, and the economy tanked. And so then I was unemployed without a job, put a bunch of emails out and my cousin said, Hey, let's start a construction company. And I said, Well, I'm one thing about construction. And he said, Well, I don't anything about business. So, you know, 23 and 25, a few beers and a couple of napkins da, we're now in business, you know, And so basically started construction because that was a business opportunity.
| Speaker 2: [00:03:00] [00:03:30] | Um, grew that company together, uh, until, um, we had about 50 guys and had multiple entities, multiple companies, uh, painting contract, got my broker's license developing, and just been an entrepreneur and seeing opportunity in everything. We sold the company, uh, 15 years ago, and that experience was really bad. I didn't enjoy that experience at all. I didn't think that the people out there, the, the brokers and the people were very servicing the smaller business. And so, um, after that I just started helping people and I found myself basically really enjoying helping the business owner as a business owner. And so for the last 15 years, this business has grown, um, into being a ceo, CEO when it comes to a transaction and figuring out what it takes to get out. Um, we don't look at it from a professional side of, you know, this is what a student Ty says. We look at it as a street fighting, you know, cage fighting entrepreneur and understanding what it means. And we really, um, connect with our clients. And so that's kind of, we've ended up here. So 15 years later, you know, we now have 13 people on team. We're interviewing for two more and we're continuing to grow. And, uh, it's been good. Thank you.
| Speaker 1: [00:04:00] | So generally, if you could back up just a step. Tell us about exit consulting and what you do for clients when you start working for them. What, what are your typical clients? Their size, their industries? Okay. And and what do you help them to do?
| Speaker 2: [00:04:30] | So the, the, the typical world that that was out there that is out there is you have a transaction person who wants to sell your business. And whether that's an investment banker, an m and a or a business broker, they basically just do listings and they wanna sell your business. And if you're not interested in selling your business in within a year, they kind of say, Hey, I don't wanna talk to you. You know, call me when you're ready. Mm-hmm. <affirmative>. Um, and that's the transaction side. And then you've got the consultants out there that are cfo, ceo, ceo, kind of transition people that will try to help your business get ready to sell, but they're more focused in one particular area. You've got some financial planners that are gonna try to sell you a plan, um, that they put on a shelf. And, and, and oftentimes there's a lot of, um, what happens after.
| [00:05:00] Speaker 2: [00:05:30] | And so we designed the business more about the business owner, and our first question is, what's the win? What we do differently is we don't care what you want to do. I don't care if you want to sell it third party, you want to give it to your kid, you want sell it to a key employee, you want to do an esop. We deal with partnerships that when one partner wants to leave, um, so just this week I have two that want to go to market. One that we're meeting where the two partners want to give it to their two kids. So each partner has a different perspective. Each of their kids is a different, So we're meeting with them to try to figure out what that looks like. Um, we have another one where an owner, um, got wants to buy another business person's business and they just want some help in coaching on that.
| Speaker 2: [00:06:00] | Another one is saying, I don't even know what my choices are. What's the difference between me handing it to somebody? How long does it take? There's just trying to answer the CEO's question of what's their win and let 'em understand all their choices. It's really hard to get information on the internet out there. It's all about service providers trying to sell service. And so we, we don't really, we don't care if we can consult them and help 'em grow their business. We don't really have a strategy in mind. Our strategy is, what do you want and what, how realistic is that? So that's our approach different than, than most.
| Speaker 1: [00:06:30] [00:07:00] | I I can totally see the need that you're filling because it's highly fragmented in terms of everyone's expertise and the types of services they're willing to offer. Someone that's just looking for a tax advisor goes to their tax advisor, their attorney, their attorney, uh, their estate plan or is state their investment advisor. But being able to integrate all that together in advance, right. Of sale transactions, usually they don't look for some sort of, you know, over overriding plan until they get right to the sale and it's gonna, Well, if you could, we could rewind here a little bit. We might have done things differently back when. So how early in the stage of a business's life do you typically start working with them?
| Speaker 2: [00:07:30] | When I started the business, I thought I was going to be an exit consultant in helping people design their exit. And that would be, you know, two to five years out and help them design that exit. Um, I have found that most business owners actually don't plan that far. <laugh> mo most of the business owners, as much as I would love to say that they're gonna plan it out, it, they don't. They usually come to a place where they're about a year. They're like either ready right now, like, I'm done, just I'm done <laugh>. Or you know, Hey, I think next year I want to get rid of it. I would say my thought was my ideal is two to three years out. But realistically it's within a year when business owners finally are ready to start focusing on this because so many business owners are so responsive.
| Speaker 2: [00:08:00] [00:08:30] | Like most business owners don't even have a budget. Like, why would I budget? Cuz I don't know what it's gonna be in the future. Like I, because you've been doing it for 30 years, you know, you're 30 million in revenue. We oughta have a budget. They don't budget, they don't plan. When they're ready, they're ready. And that's the way business owners, particularly G one, the generation one business owners that are real kind of cowboys and mavericks, um, they don't plan. I'd love to work with them two to five years cuz then you can really maximize the value and you can really work through options. That's the ideal time. But realistically, I would tell you most people are within a year and then it takes another year to sell. So one to two years is realistic,
| Speaker 1: | But you do work with some companies that you get as clients earlier and Sure,
| Speaker 2: [00:09:00] [00:09:30] | Sure. That yeah, absolutely. So, so the clients that, that, like I have a client that we did a broker's opinion of value, a Bov, and um, and he says, Hey, you know, his revenue's doing about 5 million and he wants to sell it at 15 million because we did a math and said, Okay, here's what it's worth. Now here's what it would be worth then, and if that's the case, can you help me grow it? So we're on his team, our consulting side is growing this company to five to 15 million. We have another client who was going from three to 10 million, you know, and so, but the, the, they actually didn't start with the plan. They just found out that the value of their company wasn't what they thought it was gonna be. And then they said, Well, if that's all I'm gonna get, I guess I better put a plan in place. Um, and so that's where, that's where the consulting side works in. That's why we have the consulting side because most of it's education, you know, Dave, that most of our clients just don't know what they don't know. And, and we spend so much of our time just trying to help them understand the different scenarios and the different options. Um,
| Speaker 1: [00:10:00] | And, and how much time should you, in an ideal situation, how, how much time would you have with a client working with them towards their exit? You know, T minus five, T minus one. I mean, how many years in advance do you need in an ideal situation to plan for the proper
| Speaker 2: [00:10:30] [00:11:00] | Exit? Three. Three is ideal. Mm-hmm. <affirmative>, that's kind of the minimum. Cuz we need two good years of financials, right? Three good years of financials is kind of the ideal, but, but two years working with them and then putting on market and it takes about a year to sell. So if we can get three good years of good financial, so if we're anywhere from three to five is our, that's our target, right? That, that's the dream. Most business owners we meet with say they're five years out when they're not ready because it's far enough away for them to not actually do anything but close enough that they're like, Well, you know, I'm still thinking about it. And every year they're still five years out. If you ask business owners, Hey, when are you ready to go? Oh, I've still got five more years in me. Cuz it's a safe number. If you, if they say I'm two years out, they're like, I better get something going in 10 years is too far. Mm-hmm. <affirmative>. So, um, we'd love to work with them three to five. Unfortunately, most of ours are one to two. And you know, we get three to fives and those are the great wins. Um, because they're actually planning.
| Speaker 1: | Yeah. And you stay on with your clients through the, the completion of a sale, the closing of a transaction, you actually stand in their corner when they get their title, fight their big day in the ring and make sure that they can close a deal.
| [00:11:30] Speaker 2: [00:12:00] [00:12:30] | Yeah. So we typically kind of consider ourselves like a Sherpa, right? Like we've done this mountain ride enough times, we've, but we're not gonna just give them a map and say, climb Mount Everest, <laugh>. We're actually on their side walking Mount Evers with them and saying, Hey guys, okay, we're gonna take a break here today because it's gonna be a long run tomorrow. Get yourself rested, be ready, and then this is how the days are gonna go. And then when they get to the top, we get to the top with them. Um, we are are not, we are not just, um, outside people. We are boots on with them and then even post close mm-hmm. <affirmative>, um, oftentimes we work with, uh, the transition because if it's an asset sale and they have to close their company up afterwards, a lot of times they want help closing the, the company up that they just sold the assets of. Or if it's an internal sale and just selling it to their key employees or to their kids. A lot of times business owners are not really good at being managers. <laugh>, they're, they're really good at doing work. So trying to coach the new employees into being a CEO and a coo, <laugh>, uh, we stay on afterwards, uh, because owners have to summer carry so much of the paper, they want help coaching their kids or those senior managers.
| Speaker 1: | Okay. And do you typically fill the role of, uh, say an investment banker, business broker? You, you don't be bring on somebody else to do that work? Or do you, does exit consulting typically handle that? So,
| Speaker 2: [00:13:00] [00:13:30] | So that's consulting as two, two divisions. We have the consulting side, which is really trying to drive value in getting the company ready to sell. Yeah. And then we have the transaction side, which is, we are our business broker. We're licensed to the state of California and we do a lot of transactions. So like right now we have $60 million worth of real estate that we, I mean, 60 million worth of business transactions that we have on the market. Mm-hmm. <affirmative>. So we do quite a few, We have between six to 10 listings. Um, and they're everywhere from, we just closed a $30 million sale and then we closed $1,000,002 million two last month. So, you know, most of them are in that kind of two to $10 million range. Mm-hmm. <affirmative>, um, um, picking up two more listings, one's listed at 4 million and another one's gonna be listed at 3 million. We're picking those two up this week. So that's kind of what we're doing on the outside third party sale.
| Speaker 1: | What, what's the mix in terms of asset sales, stock sales, mergers?
| Speaker 2: [00:14:00] [00:14:30] [00:15:00] | So, you know, the smaller deals or definitely, which I'm saying are kind of the million, 2 million we're doing, you know, we're doing asset, it's interesting on the stock, we do a lot of construction or a lot of manufacturing and the stock sales, um, are definitely at more than half of our deals. If, if there is a, and they'll do the 3 38 H 10 where it is the stock sale from a legal, but an asset for tax. Right. And it's mainly because I, in construction, so many of the contracts are under progress, work progress mm-hmm. <affirmative> that it's difficult to, to convert a lot of, or if there's a major manufacturing, uh, distributor contract with like a Costco or with the military, if you, you know, do an asset sale, it becomes something that you have to deal with. And so it becomes a little more hairy in that type of of environment. So people are looking at stock, um, with key employees or their family members. That's oftentimes stock for simplicity. Yeah. So it really just depends on the idea of the client themselves.
| Speaker 1: | Wh who are your typical buyers? Are they serial entrepreneurs, strategic buyers, uh, financial buyers, private equity, family offices? Do, do you get a mix of all those?
| Speaker 2: [00:15:30] [00:16:00] | So really interesting. Now with covid, right, on a to on a, we've seen a lot more private buyers come out with Covid. We saw the same thing in 2008 through 2012. Or a lot of senior managers got let go or, you know, kind of had a reflection on life. So they're, they've, you know, they've put enough money into their 401k, they're around 40, you know, they've done well, but they're, they want, they wanna try this entrepreneurial, you know, they wanna scratch that itch. And so SBA has made it you available to them. Financing's really good. So the individuals have actually come out in the last year where prior to covid we had some individuals, but people were pretty happy with their jobs. There was a lot of self-reflection going on with covid and people were thinking, this is my time to hop. And so we actually have more individual, but to be honest, the individuals have to be under, I mean, we just sold one for two and a half million, but, but you gotta be pretty well off to be able to get an SBA for a $2 million, $3 million purchase.
| Speaker 2: [00:16:30] [00:17:00] | So, you know, once you start getting into the five to 10, there's just, they don't, they don't qualify. So anything under a couple million bucks, particularly under a million are private invest, private or strategics. Um, strategics are always, always out there right now because the money's so cheap and they don't, they're sitting on cash. So we're seeing a lot of, uh, a lot of growth acquisition, um, that way because it's hard to get good people and we're seeing it not necessarily competitors, buying competitors, but we're seeing it vertical. Mm-hmm. <affirmative>. So if there's a vertical line up and they're part of the vertical service, they're picking up everybody along the, the same vertical to try to be a full integrated package. Um, not just, this is my direct competitor, but this is my whole manufacturing line or service line. Um, and so definitely strategics are, are there private equity guys?
| Speaker 2: [00:17:30] [00:18:00] | There's a lot of money out there. The private equity guys are kind of nichey, I found them. You know, they're, they're not really into the service business as much. You know, some of their, they might be more in the tech side or the medical side, um, but you know, professional engineering services, construction services, you know, and some of the service providers where there's a lot of market, they're not really interested in that niche so much cuz it's so owner driven mm-hmm. <affirmative>. Right. And so, um, so manufacturing, um, a lot of times there's some pretty heavy risk associated with some of the smaller companies with manufacturing because they, they have customer concentration, um, or they have relationship issues. Um, so definitely private equity when you get into the bigger deals. Okay. But on the smaller ones, I would say it's strategics. And then below that would be the individuals. My experience,
| Speaker 1: | I had heard that about strategic acquisitions, and it's consistent with my experience that the most value will often be someone, another business that's making a strategic acquisition, but not just someone buying market share, Right. Someone this as a fit to an existing line of business, but not the same thing they've already got.
| [00:18:30] Speaker 2: [00:19:00] | And it, and it does get kind of hairy and some, and some negotiations. So we had one of a manufacturer who's been supplying a fairly large company and they were 40% of their revenue, but, um, and this company said, Yeah, we don't want 'em to go to somebody else. We don't want 'em to go to the competitors and not be able to provide us what we have, but I'm not gonna give you a multiple on our own work mm-hmm. <affirmative>, you know. Right. So then, you know, then it was like, Oh, well that's a little bit of a challenge. That's not right. You know, so they're like, Yeah, but why would I buy myself <laugh> at a multiple with the gross profit? Right? So there, there is, it can get, you know, you can get a little hairy when you, when you're, when you're selling it to your key customer, you know, or you're in a vertical line and someone in the line wants to pick you up.
| Speaker 1: [00:19:30] | When you're working with smaller businesses that may have one owner, maybe a husband and wife, maybe two owners, um, how much of their net worth do you typically see tied up in the business versus, you know, other assets typically, You know, with smaller businesses, I I've heard as high as 85% is the average, uh, percentage of, of small business owners net worth tied up in companies. And, and it depends on, you know, what, what's the definition of a small business, But that's a lot of your net worth and it's amazing that more people aren't planning for these sorts of exits.
| Speaker 2: [00:20:00] [00:20:30] | It is an ama it is amazing. Yes. I, I don't know the percentage. I will tell you that like some of the manufacturers mm-hmm. <affirmative> and some of the bigger contractors have bought buildings and that the buildings themselves that they're rented, they're rent is actually worth more than their business. Okay. Um, so that was a good strategy. Right. And you know, when I kind of ran the math, I kind of said, Hey, if you're gonna be in a building for 10 years, you might wanna buy it mm-hmm. <affirmative>, um, based on the math that I, that I was running. But it's always great where people have, um, had both the business and the building, um, so they can build some equity. Some of the other businesses, d particularly the older people that have been earned their seventies, you know, they, they're more conservative and they suck some money out every year and, and re diversified in and different, it's the growth model companies where people struggle is that they keep putting money back in, back in because they're, they're thinking that this business is going to be their liquidity event mm-hmm.
| Speaker 2: [00:21:00] [00:21:30] [00:22:00] | <affirmative> and this is going to be their exit. And, and there are some businesses like mine and yours and service providers where it's hard to get a large liquidity event out of. It's better to, you know, it's a good exit strategy to take money out every year, put it in and diversify it, and still at the end, sell your company for not much, but at least you've used it though. The exit strategy is don't reinvest all your money back into something that's not gonna build value. Let, let it go. Understand that that business model's not going to have a 10 time multiple and just take money out every year and in the end solid for a million or two, which is great, but you've taken 2 million out of the whole year instead of not taking anything out, continuing putting it in and hoping that there's gonna be a three to 5 million liquidity event. Um, and the older generation has been good about just putting it aside and saving for me. They don't do debt, they don't like debt <laugh> and, um, and they're very protective about it, but still a substantial amount of their personal net worth is absolutely in the business. I mean, by far our biggest referral is a, an estate attorney or a financial planner because this is a large liquidity event at a high risk for their families.
| Speaker 1: | Right. Right. Now with the business owners that also own the real estate, do you typically see them sold together or holding bank the real estate, leasing it out to the buyer, having an income stream and then maybe selling it later?
| Speaker 2: [00:22:30] [00:23:00] | I don't usually sell the real estate. Okay. Usually the buyers, even when they're big buyers want like a first write of refusal or want a first look or want an opportunity, but they just wanna focus on the business right now. Right. They wanna have a five year lease, you know, maybe with a five year option or a two, they just don't know where it's gonna go. And so they just don't wanna make that additional cash contribution into that. They wanna save the cash for the business. So business owners typically will keep the, the building get a decent lease, and then if they wanna sell it to somebody else, they can, um, with that lease in place. But most business owners keep it for cash, cash flow for a while because they're carrying the paper anyways for the business if there's any, you know, carryback. And so it kind of keeps them all engaged together for at least a couple of few years until they kind of figure it all out. Cause transitions are tough. Mm-hmm. <affirmative>, it's, it's, it's a, it's a tough time After you close,
| Speaker 1: | Do most of your transactions have an earn out component on the purchase price?
| Speaker 2: [00:23:30] [00:24:00] | The construction guys? Yes. Actually, put it this way. All of the clients where there is a deep owner relationship that is at risk has an earn out p part to it. Okay. So I, if the owner is central to the organization and is key, then they usually have an earn out portion. If the owner's not as involved and they've got a good manager, general manager, ceo, coo, that's there, then there's less of a need for it. I mean, I wouldn't even, like, I had an owner pass away and they had put in a CEO for three years and the company grew actually better and was doing better. And then when we took it to market, we said, no earn out. Mm-hmm. <affirmative>, there is no earn, there is no reason for an earn out. There's nothing that this owner's doing. <laugh>. Yeah. It's a widow who's getting a check. The business is running, the business is going take it the way it is or, but if you are an owner centric where it's a wagon wheel and you're sitting in the middle of all the ownership and everything runs by you, you're gonna have an earn out.
| Speaker 2: | Okay. Or just not get paid very much.
| [00:24:30] Speaker 1: | Yeah. <laugh>,
| Speaker 2: | You know, you just say, owners want a lot of money. And they're like, Yeah, but that doesn't mean it's gonna happen, so you gotta run the risk with me.
| Speaker 1: | Okay. That's a helpful insight there. So what difficulties and mistakes do you see through transactions? What, what are the some of the most re recurring issues that come up? Most common problems,
| Speaker 2: [00:25:00] [00:25:30] [00:26:00] | The owners, every time it's the owners, I would say it's the buyers, but it's, it's not the buyers, it's the owners. The owners. Selling your business and leaving your business is very emotionally hard. It's very difficult, particularly for generation one G one business owners when your name's on the building and this, and you've built it from nothing, and this is your life and your business and your family are all combined and your fun relationships are your business relationships and you don't know what you're gonna do next. Mm-hmm. <affirmative>. Um, it is the biggest issue we have is, is an owner being willing to not come to the office. And when you've been an entrepreneur in a street fight the whole time, it's like asking, you know, Drew Brees to retire. Right. Or Peyton Manning or any, uh, any successful athlete who's, this is all they've done since they were 10 is dream of this. And then you gotta tell 'em to walk off the field unless there's a physical need. You know, my wife and my life, my family, you know, something, they have a hard time leaving. And so emotionally, I think business owners use money as a reason to not leave. Oh, that's not the right price. Uh, that's, I mean, literally we just brought a client at 10 million, he's 80 years old. We brought him a 10 million offer and the land is 25 million. And he said, not now. Mm-hmm. <affirmative> not now.
| Speaker 1: | Yeah.
| [00:26:30] Speaker 2: [00:27:00] | Not, not now. Not now. When I mean, Yeah, I mean, you're, I, I just, I, I, I don't, I, that's my, there is no reason that that at 80, you should say <laugh>. Yeah. So the re and, and there's it there. And so my biggest challenge is an owner's willingness. And we saw this during Covid, we lost half our listings in April of last year. Right. So we had a whole bunch of listings. We lost half in the other half. All the clients came in and said, John, I'm done sell it. And we sold them all. We actually had our best year last year because our owners just said, We're done sell it.
| Speaker 1: | Mm-hmm. <affirmative>.
| Speaker 2: [00:27:30] | And they, they allowed the market and they allowed it to happen instead of Yeah, but what if, what if I don't know if I want to, I don't know. And they used these things like, but if my employee comes back and says they're not happy, and what am I gonna really do? And I didn't know that after tax cash was gonna be, and, and they struggle, owners really struggle. So our biggest challenge is what we call owner readiness. We have owner readiness, and then we focus on market readiness and we focus on business readiness. Those are the three areas we drive. And owner readiness is where we have to spend most of our time.
| Speaker 1: [00:28:00] | And when you're addressing that, what, what can you say to them to get them comfortable with the idea that this is the thing to do, that this is your retirement. It's sitting there. Um, you know, you, you, the American dream is to sell your business, not to die behind your desk. Um,
| Speaker 2: [00:28:30] [00:29:00] | You would think, but I, I just had a guy who said, Hey John, I appreciate all your help and Yes. Um, but I, I've decided I'm gonna have a Viking funeral and I'm just going to basically just basically just go into a dumpster. They're gonna light my body on fire and then they're gonna all mess around. And that's, that's my exit. And I went, I mean, it is an exit. I mean, you, if that's where you want to go, uh, it's, it's just, it's a process. It ends up being, it's a very cyclical, so owners have to, when we're interviewing them, I spend most of my time making sure that they're actually gonna sell mm-hmm. <affirmative>, because I don't get paid until, unlike investment bankers, brokers can't get paid along the way. Mm-hmm. <affirmative>, we can't, we can't take any kind of money. So investment bankers will charge five or 10 or 15 grand a month and say they'll offset that against a future commission, or they'll use that as a percentage. In the brokerage world, we're not allowed to, but state of California. So unless I sell it, I get nothing. So I could spend a year, or in this particular client, this 80 year old, a year and four months, bringing him five, six different offers of good. And now he's finally just said, I'm not gonna sell it. Mm-hmm. <affirmative>. And we had 120 people sign NDAs, we met, you know, seven, 10 different groups on site. And then the owner's like, No, I've changed my mind.
| [00:29:30] Speaker 1: | <laugh>. So
| Speaker 2: | Really hard. Really hard.
| Speaker 1: | Wow.
| Speaker 2: | That's why there's not a lot of brokers out there. Right? Yeah. Coronado has like 75 real estate brokers in Corona selling real estate
| Speaker 1: | And you're the only
| Speaker 2: | <laugh> and there and, and you and I don't think we have 75 business transaction brokers in Virgin, San Diego. Mm-hmm.
| Speaker 1: | <affirmative>. Yeah.
| Speaker 2: | I mean, I mean, no Fri way. Yeah.
| [00:30:00] Speaker 2: [00:30:30] | I mean it's because it's really hard because business owners, it the business, you can track your business, right? So like I'm meeting a client and the first thing they ask about is price. And they say, you know, and what first thing I asked them is, is I was explaining that I can't sell this unless you're willing to sell it. And I said, Are you willing to sell it at fair market value because you said you wanna sell your business. And they said, That depends. I go, I can only sell it at fair market value. I I can't sell it at more than fair market value. I can try, but you need to be prepared that that's how people buy businesses is fair market value. Now, we could wait for the ideal buyer, but there's still a range that we should be expecting. And if you're not willing to sell it within that range, it's not worth me putting it on the market.
| Speaker 2: [00:31:00] | So I spend an enormous amount of time figuring out what that range is, giving them after tax cash calculations, figuring out what their networking capital figure out cash free, debt free, and make sure that they understand how this transaction's gonna work before we even take a listing. Because it's not, because all that blows up the deal at the end. Yeah. And, and it's just better to know, I wish someone would've told me when I signed my agreement that, that I didn't know that cash free, debt free me and I had to pay off all my debt with after tax cash and that there was networking capital gonna be included or not included, and that the government was gonna pick off 35% <laugh>, you know, But
| [00:31:30] Speaker 1: | Now do you typically go through all that, uh, those projections and cash flow yourself? Or do you have them do it with their financial advisor, their cpa?
| Speaker 2: [00:32:00] [00:32:30] | Do you typical No, we do it, we do it for them and then we send it to their advisor or ask them to send it to their advisor to review it. Cause we're not a cpa, we're not doing tax. All we're saying is based on our formulas, based on the ebida, based on what we're seeing in the 12 month rolling networking based on, based on, based on here's kind of what, you know, you've gotta figure out what your triple A account looks like and how much you're gonna have to pay in taxes. But here's a basic idea. So I just met with a client and he said, he said $2 million in after tax cash he would sell. And his wife said two and a half. And I said, Okay. And when I did the bov, it was 3 million that I think they're gonna net. And I said, It doesn't change the purchase price, It just means that I think I, we can get you the number that you want. So I'm willing to take the listing because I think I can sell it at a place that you guys would sell it for. Now let's go figure out how to sell it for as much as we can. Mm-hmm. <affirmative>. But at least we're realistic that, that they're gonna sell it.
| Speaker 1: | Mm-hmm. <affirmative>,
| Speaker 2: | That's really where the effort is.
| Speaker 1: | Yeah. I know that there are a lot of business brokers out there that don't take that, that sort of, uh, diligent approach that you take and they just get anybody in the door, get the listing, and if it sells, it sells. And if people are unhappy with the, you know, time it's taking, they wait, You know, wait to see if it sells. There's, you know, so
| Speaker 2: | That's why, that's why only 20, 25% of the businesses sell.
| Speaker 1: | Right.
| [00:33:00] Speaker 2: [00:33:30] | I sell, I sell 70, almost 80% of mine, cuz I, I, I take less than half of the people I meet and I spend, we do our own internal review and audit of their books before we take the listing. I gotta verify that their sales tax returns tied to their tax returns and tie to their fi because I know that if sophisticated buyer's gonna do that, and if I don't do it ahead of time, I'll just, Was it mm-hmm. <affirmative> a whole bunch of time. So it needs to be a partnership. I'm, this is not a, this is not a, I'm looking for a listing so I can put it on a website and say, Look at me on busy. I I'm in the business of selling businesses and I want to be an escrow in six months and sell it in nine. Yeah. That's what I want. And if that's not what we're looking for, then I'm not your man.
| Speaker 1: [00:34:00] | Yeah. I know being a business broker is difficult and I know several of them that I have respect for and their abilities and the work that they do. But when I think of John over, I, I don't immediately say business broker. I, I think you're, you're an exit advisor, you're an exit engineer. You, you get the deal. You, you dig in there much more completely kick the tires more thoroughly with the people, the owners and make sure that they're gonna go through with this that
| Speaker 2: [00:34:30] | In. And also, Dave, I think it's important to bring the advisors in. I think it's really important to be collaborative. I think you need to bring their CPA in. You need to get a good transaction attorney that understands not a business attorney, a transaction attorney who understands this. And you need a financial planner who can help you. Not just someone who's gonna take your assets and put it under management or sell you insurance, but actually help you strategize. And we, we all work together as a group. That's, that's, that's the right way to do it. The right,
| Speaker 1: [00:35:00] | Yeah. Now what advice would you give most businesses that you see, you know, as they're getting ready to sell, um, and you look back years up the road, things they might have done and you think they might have done it better. What sort of issues do you typically see come up either in their accounting, legal matters, what have you, the, the personnel sales teams, uh, that common mistakes that businesses make?
| Speaker 2: [00:35:30] [00:36:00] | I would say that probably most business owners are very shortsighted. I don't, I don't think, you know, looking far out into the universe of, like they say start with the exit in mine. Mm-hmm. <affirmative>, you know, I mean your book, like, I mean it convincing a business owner to do that. Very few do ver most business owners, you know, you're either a sales ceo, an op ceo, or a finance ceo. And most of the people I work with are op CEOs, which they started with either a service and they did it really well, or they're making a widget and they're doing it really well, or they're doing something and they've just grown a business out of their hard work ethic and integrity. And that's just who they, they didn't plan to do anything bigger or smaller. They just love what they do and they're really good and they're very good at it.
| Speaker 2: [00:36:30] | But they're not good at managing, They're not good at running a business. They're good at running a lifestyle. And our biggest challenge is to convert it from an owner managed business to a professionally managed business. And when you move it to professionally managed, that's when you have qualified managers, not just because there's family and they have your same last name, but qualified managers with, you know, invested into your accounting system and actually paying good qual a quality accounting people to do the books, have a crm, have a, uh, have an e r P system, have a marketing plan, have an org chart where you're not in the middle and everyone reports to you and run it, you know, designed it to run it like a professionally run company in perpetuity. I think the best way to describe it is, I think business owners are helicopter parents.
| Speaker 2: [00:37:00] [00:37:30] | And what I don't want, I don't want them to be a helicopter parent. I want them to raise this child, this company, and I want them to grow this thing up from elementary school to high school into college where it's out on its own and it's been successful on its own. You be that proud parent, you be up there in the stands and cheer 'em on when they're playing collegiate or wherever they are doing. But you don't have to be that person always controlling everything around that business. Let it grow up, let it mature. Most business owners don't let that happen. They can't. They have to control it. They're controlling people. They don't trust people. And that's, that's the biggest problem I see when it comes to actually making a business saleable and making it valuable to somebody is how do you take a helicopter parent and, and then say, Okay, now you can take my child versus look at my child and now you can work him.
| Speaker 2: [00:38:00] | It's like, it's like your kid, you know, is playing baseball and then you got a club coach coming over going, Hey, I want to take your kid cuz he's got a lot going. I can elevate him because I'm a, you know, I'm a professional coach. You're like, I've only done so much as a parent, I'm glad they've got it. Now you take 'em, club coach mm-hmm. <affirmative> and let 'em go. That that's when you see those kind of business owners, those are the businesses that will be successful in a transition. Those that say, No, I'm the best. I'm, I'm, I'm me. I are the ones that I struggle with on the next team even in a transaction because they still think they're their, their team.
| Speaker 1: | Well, when business owners are looking for their club coach, they need to find John o
| [00:38:30] Speaker 2: | Because
| Speaker 1: [00:39:00] | Folks, uh, John, I really appreciate your time and coming, sharing all this information with our listeners. Um, and I definitely want to have you back on, uh, again to, we can go over specific topics and future podcasts that we do together. Awesome. Um, listeners, please subscribe and, and like this podcast selling your business with David King and, and rate the episodes that you enjoy. Um, thanks again to John over and please check out my book on Amazon selling your business. Begin with the end in mind and we will see you next time on Selling Your Business with David King. All right. Yep. Good.