Martinka Consulting's Getting the Deal Done Podcast
Informative insights and conversations with owners, CEOs, M&A dealmakers, and other professionals on lessons learned, tips, current business conditions, and more.
Martinka Consulting's Getting the Deal Done Podcast
Business buy-sell "facts/musts" - 10 for buyers and 10 for sellers
•John & Jessica Martinka•Season 3
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
0:00
|
10:48
Using the word "fact" got Dave Chappelle in some hot water. Not paying attention to these buyer and seller facts, aka musts will get you in trouble and may cause your deal to blow up (listen to get the metaphor about blowing up).
This is John Martinka in another educational episode of the Getting the Deal Done podcast series. And today's episode is about facts. And Dave Chappelle got into a bit of hot water, as he always does whenever he comes out with a special. And the thing that a lot of people grasped onto, and by the way, if you don't follow him, he insults just about everybody, is he's he had a comment that said gender is a fact. And I don't want to talk about that. I just want to concentrate on the word fact, because in the buy-sell world, there are a lot of facts, and you can't get around them no matter how different or special you think you or your business is. And if you look at my background, and I'll move over a little bit, that is the island of Montserrat. And taken from a boat off of Antigua, where we do our rotary service projects, and you can see steam coming out of the volcano. And I use that as today's backdrop because if you don't pay attention to these facts, your deal could blow up just like that volcano. So let's start with business buyers, and we're gonna have 10 buyer facts and 10 seller facts. So buyers, sellers don't care if you have Six Sigma or lean, a lean expert. They care that the division you wrote ran uh grew to profit 10% more than other divisions every year, or that you cut attrition by 50% over two years. Face it, buyers, you will get buyer fever. Just control it, keep it under control and don't let it get you into a dumb deal. You will sign a personal guarantee. If you're using bank, probably even if it's a seller finance and they they have a good lawyer. The bank is going to make you sign a personal guarantee. And it always reminds me of a story my friend Mike Flynn, who used to be the publisher of the Pugisound Business Journal, told about a bank president who said, if you're not willing to put up your house, why would we take the risk on you and lend you money? You will need some of your money for the deal. It will not be 100% financed by the bank and the seller. You'd need skin in the game. It is work. And it's hard work, time-consuming work to find a mature, profitable, and fairly priced company. They don't come to you, don't sit there waiting for the phone to ring or just looking at ads on the internet. This is a tough one for a lot of buyers. The seller controls the deal if it's a mature, profitable company. You want to control the deal, buyers? Look for a down and a dumps, turnaround business, and roll the dice. Otherwise, the seller controls the deal. The non-financial factors are just as if not more important than the financial statements. The customers, the employees, the supply chain, the technology, the lease. Jessica recently lost a small deal because the landlord wouldn't give a lease on a location-driven business. Dependencies are real and they are a serious issue. A year or two ago, I was talking to a business broker, and the company was an interesting model. And I pointed out, I said, Well, what about the customer issue? And he goes, What issue? I said, Well, the top two customers are almost 60%. And his exact line was, I don't see that as a problem. Yeah, let's get over that. That is a problem. And especially when the number two customer had been brought over two or three years prior when the company hired a general manager from a competitor. Think that customer is loyal to the company or the general manager. Don't over-leverage like the big players do. You need to keep your debt coverage ratio between 1.5 and 2 to 1, or even greater. Do not fall for the lines that, oh, the bank will go down to 1.1 to 1, that's plenty of cushion. That won't even cover your taxes. Don't get analysis process. There can always be another question, as and I say in the preface to my book, find a business that makes you rich. You want to leap off a chair, not the roof. So, sellers, here's 10 for you. The numbers are the numbers, and they have to be correct. Yeah, they have to be correct. Don't rely on AAA, adbacks, adjustments, and assumptions. We all know what adbacks are. But what about assumptions? Well, there's a company here in the Seattle area about five years ago, and they they put out a sim on the business and they projected they assumed the gross profit margin would be five points better from 40 to 45. Deal never sold, ran into it again a year or so ago. So, like three years after, uh gross margin was still 40 percent. Uh number two, buyers buy because of potential, but they pay based primarily on history. Uh, they're not buying the blue sky, they're buying the goodwill and the profit. There are valuation ranges, and no, your business isn't so special. Those ranges don't apply. Those methodologies of valuation don't apply because it's your business. Every industry has different ranges, every size uh strata of companies has different ranges, but they tend to fall in there almost all the time. In the small business world, the more profit, the higher the price. Let's face it. Profit drives the price. Another fact make yourself expendable. The business should not be dependent on you. I talked about buyers and the dependencies they look at. Well, you, the seller, as a dependency, is the number one they are concerned about. Make yourself expendable. Planning increases the business's value, but not overnight. You can't say I hired a general manager two months ago, now everything's fine, and uh profits higher and it'll be higher. No, do it over a few years because three years is typically what banks and buyers ask for in financial statements. Show the results. And while you're showing things, show growth. Don't just say it can grow, show growth. Even if you don't want to work a little harder, don't want to hire another employee, show growth. They are buying your people. Don't forget that. Yeah, they're buying it, legally, they're buying the company, they're really buying your people your people. And one of my favorite stories is one of my clients who, when the seller said, No, I can't at least talk to my management team before it closes, looked them in the eye and said, You may think I'm buying your company, I'm really buying your people. And another quick story on that. I was hired a number of years ago. Uh, a business owner bought a second business. He wanted me to dissect the deal because he definitely overpaid and uh it wasn't, it wasn't a pretty picture. Well, I looked at the write-up on the business, and the first thing I realized is this guy, he was so cocky because he was a business owner, he did very poor due diligence. And it simply would have started with the people, because the the memorandum on the on the business had this this great line, and it said, unprecedented employee loyalty. Come to find out, there had been an 80% turnover of employees in the last six months prior to when he bought it, and the general manager was the owner's grandson who was had only been there two or three months. It's called due diligence, and they are buying your people. The IT department is more important than ever, whether it's internal or outsourced. And think of all the cybersecurity stuff going on. And the insurance agent said, You really should raise your limits. Uh reminds me of a company a number of years ago that the seller was an engineer and he patchedworked his computers, and he had five different versions of Windows running on various machines around the office. Uh make sure your computers, your and software are current versions, legal, etc. And then finally, depreciation is a real number. You will hear the term EBITDA thrown around. And yeah, that makes a lot of sense if you've got an office with 20 computers, but if you've got a bunch of trucks or machines, forklifts, stuff like that that wears out and has to be replaced. That D in EBITDA is for depreciation, and it is a real number. It is cash out, whether it's you write a check or get a bank loan, it's a real expense. So 10 facts for buyers, 10 facts for sellers. Be careful out there. Don't let your deal, your company, blow up like the volcano behind me. Thank you for watching and stay tuned for another episode of the Getting the Deal Done podcast series.
