EP 86: How to Sell a Business in the Pet Industry with Erin Fenstermaker

Ed Mysogland  00:02
One of the industries that business owners are most emotional about is the pet industry. And the funny thing is, it is a.. I mean, the people that are passionate about animals are really passionate. And it's really unique to find a deal maker that specializes in just that. Pet related businesses. Well, I found her and her name is Aaron Fenstermaker of the birdseye advisory group. And they have an investment bank. And that's what they focus on 100% all pet related businesses from manufacturing, to distribution, I don't believe they get too far into too

Ed Mysogland  01:21
into retail, but never, but they are into professional services. And so what we're seeing, and what and in our conversation, it was really interesting to visit about what's going on in the industry, because it really tends to be recession proof. And their practice.

Ed Mysogland  01:42
You know, they're they're killing it. And, and they are not seeing any kind of bumps in valuation, if anything is just the opposite. So today, we had the opportunity to Aaron and I visited about, you know, just what you need to do in order to prepare your business for sale. What are the metrics within the pet space that that really amplify value? So I hope you enjoy my conversation with Aaron Fenstermaker of the birdseye advisory group.

Ed Mysogland  02:18
Well, Erin, welcome to the show. 

Erin Fernstermaker  02:20
Thank you for having me. Well, I'm delighted to have you, one of the, the pet industry is always an industry, everyone likes to talk about, you know, regardless, anybody that has a pet knows that there's a big, big industry behind it. So I guess where I want to start versus to talk a little bit about your practice and the things that you're focusing on in the industry. Yeah, so um, so I work for, for its advisory group, we are a boutique investment bank, specifically in the pet industry only, that's the only vertical that we work in. So that's a little bit unique in that respect. And then within that, you know, the pet industry is 100 plus billion dollar industry. And,

Erin Fernstermaker  03:09
you know, it includes, you know, veterinary services, and then let's say hard goods, we actually specialize in the hard good area, not services and veterinary. So that kind of narrows down at least a little bit as to where we're, we specialize and my personal background, you know, I've been in the pet industry, about 20 plus years in various capacities. So, you know, I happened to be a certified dog trainer. But I've also worked in both marketing and operations in a lot of different businesses, both pet and non pet. And all of that combined.

Erin Fernstermaker  03:49
experience really has has translated well in in the m&a world.

Erin Fernstermaker  03:57
I happen to focus, my work tends to focus on I create the marketing book, they call it the sim, you know, the confidential information memorandum, I put that together, that is also the first level of due diligence that a banker is doing with their clients, you know, we're looking under the hood to make sure that there are that everything looks good, or if there are some issues that we address them prior to going to market. So, you know, I focus both on the marketing side on the front end, and then on the back end with due diligence.

Erin Fernstermaker  04:26
So that, to me, that's where the details.

Erin Fernstermaker  04:31
A lot of the meat isn't there. A lot of the problems might also be in there.

Erin Fernstermaker  04:37
Where I feel the most comfortable. 

Ed Mysogland  04:39
Well, that's awesome. Well, so Well, let's, since you're writing the Sims, let's talk a little bit about kind of the state of the industry and and where where we're at and where we're going. Okay, yeah, it's actually been a really, really interesting last few years. I mean, obviously the pandemic has impacted me

Erin Fernstermaker  05:00
was industries in one way or the other in the pet industry, you know, you may have heard reports about the increase in pet adoption, all of those things are true. But if you look at it a little bit more closely, while the pet industry was growing at a higher rate during the pandemic, it actually hurt the service segment of the business pretty dramatically. So people that had grooming businesses, you know, dog daycare, pet sitting and dog walking, those businesses really took a hit during the pandemic. But conversely, the pet treats and hard goods and food all did phenomenally well. So while in general, the industry grew very well, you have to really kind of dig in to look at the different segments of it and see that there was some pain for a group of that of the industry. But the overall industry, you know, grew at about 10%, I believe, during that timeframe. And now, we're pretty much post pandemic knock on wood and the the services segments are recovering. So that is great to see that, you know, they're they are back in business and doing well. Well, we,

Ed Mysogland  06:17
we had seen that there was a lot of consolidation, you know, after COVID Is that is? I mean, is that, is that a fair representation of, you know, especially on the service side? Is that what you guys saw or no,

Erin Fernstermaker  06:31
in some segments, yes, there are some service segments that are, I would say, easier to consolidate than others. So as an example, the veterinary space has seen a lot of conduct consolidation. And for the most part, I think that's been a really good thing for the, for that segment, you're also starting to see consolidation within boarding the boarding market. And again, that's it's not as mature in terms of that level of consolidation as maybe the veterinary space, but boarding is probably the next frontier. But then there's others like grooming and dog daycare and pet sitting and things like that, that are going to be much harder to consolidate if at all right, so we'll have to see how those, how those segments fare over the next decade? Yeah,

Ed Mysogland  07:21
well, what, one of the things that really surprised me was seeing private equity getting into the bed space. And, you know, a number of of, you know, not only friends, but also, you know, just here in the community, you know, pe was picking up picking up some practices, which, which I don't want to say, surprise me, it just, you don't think of private equity, into into the vet space. So what

Erin Fernstermaker  07:52
you actually looked at, if you dig into what that's actually do, and where there are economies of scale, and extra profit margin to be gained, that a single practice can't take advantage of, you know, you think about, you know, buying power as an example, you know, so if you have a group of practices that are buying medical, medical related supplies, and prescriptions and things, obviously, their buying power is brighter, if there's more of them together, the same thing happens with marketing and advertising. You know, so if they need to do marketing and advertising, you know, typically, vets aren't known for being the best marketers. So it's much better if you've got a more polished organization that's leading that for a bunch of different practices. So if you actually look closely, into what what we're doing, it did, it made a lot of sense, you know, as long as the private equity firm had some of those capabilities, you know, as part of their their group,

Ed Mysogland  08:51
right? Well, the funny thing that I shouldn't say the funny thing that it was, it's growing more alarming. And I don't know if this is true, you know, more than more than i But in that bed space, there's not a lot of a vets coming out of school to acquire, you know, the the sole practitioners, are you seeing the same or am I wrong on that? Yeah,

Erin Fernstermaker  09:16
in fact, you know, one of the things that's it's not actually very well known outside of the pet industry in general, but, you know, there aren't the number of vets coming out of that school these days as there were previously and definitely not enough to support the growth that we're seeing in the pet industry. And if you if you think about what a vet does day in and day out, and you think about, you know, one of the areas that that is reaching a crisis state is really the mental health of veterinarians, because they're seeing huge volumes of pets, you know, and you're seeing them usually when they're not at their best, you know, in many cases, there's you know, they're they're sicknesses or accidents or what have you. You know, they're having trouble for euthanasia, as on a regular basis, those things take a toll on any human being. And you take that, that that fact and then you multiply it by there's this huge surge of more clients coming in, it makes it very difficult to, to be let these days and stay healthy and happy.

Ed Mysogland  10:21
I had no idea and my wife, my wife's a therapist, so it's, it's funny you say that because I, you know, you would think I would be attuned to, to, to, you know, those types of things.

Erin Fernstermaker  10:36
But the convergence of, you know, factors, you know, impacting in a negative way. And so I think about it a lot, you know, when I go to the vet, because I know how difficult, you know, on a personal note, I have, I have been on the board for a shelter. And, you know, so I know, the the day to day things that that happened to 120 animals and their gut wrenching. You know, and that essentially, is a very similar experience for what Yvette is going to see on a daily basis. And so you have to have a certain constitution to be able to do that and still maintain a good mental health?

Ed Mysogland  11:15
No, that's a that's a great point. And, and again, so what's the what's the solution? I mean, or do you foresee a solution on? How, how is, how is that going to correct itself? I mean, because you, you, certainly people are going to continue to have pets, but you know, who's going to treat them? You know, what I mean? Or?

Erin Fernstermaker  11:39
You know, it's a great question, it's not an area that I happen to, I would even say that I have expertise, I'm aware of it. But I don't know enough about that, you know, to me, it has to start on the vet the appeal of the veterinary practice in general. And, you know, whether it's how much income that they're making, because unlike a human doctor, they don't make the same financial return that, that a human doctor. So I don't know, if that's going to translate, then eventually, you know, prices are going to have to go up so that what people are interested in becoming better, and to me, that's kind of the obvious, possible solution, but I would hope that there's other ones as well, I just don't happen to know what they would be.

Ed Mysogland  12:25
Well, and that may explain, you know, the, this the, the sophistication of the private equity getting into that space, because they recognize that they're, you know, the the long play is that, you know, we're going to have to increase prices, we increase prices, you know, we're going to increase profitability and increase valuation. And that's, that kind of takes me to where I was. My next question was, as it relates to value, you know, I, it's really interesting about some of the profitability of pet related businesses, because again, I think, a lot has to do with the, the emotion, you know, like my dog, I mean, I love my dog, and I, and I was always a tough guy. And I said, you know, I budgeted this much for that dog this year, and we go over it, and, you know, I'm, I'm not paying more than whatever, 500 bucks for the dog. And, and now, you know, he's, he's part of the family, I would be your child. That's exactly it. And so, and so as it relates to value it, these become, you know, and rightfully so, you know, they are some of the more profitable businesses that you see. So, anyway, I wanted to talk about, you know, if I know your practice, you have kind of a broad, you know, a broad practice of who all you serve. So I'm just kind of curious to know, from a valuation standpoint, you know, are the multiple staying static? Or, you know, are we seeing a bump? We are where, where are we in, in, in the value world?

Erin Fernstermaker  14:07
Well, I'm happy to say that the pet industry is is alive and well and thriving. From a valuation perspective, I would say we've seen some of the highest multiples over the last five years. I do think that right now, with the economy softening to some degree, yeah, there's less deal flow. So there's less people that are wanting to take their chance they're shot now to sell potentially, but if you have a good company, there's always going to be a buyer. Just there. People are just falling all over themselves trying to get into the pet industry. Because it's it's it's almost considered recession proof. And, you know, just keeps showing great returns year after year. So you know, it makes a lot of sense that that it's attractive to a lot of financial groups. But in terms of, you know, the other thing to think about in value, you know, valuation terms, when it comes to the pet industry is there is there is quite a bit of difference based on the type of company that you are. So as an example, a hard goods company that sells, you know, beds and leashes and harnesses and things like that tends to trade in, in the lower range than a consumables company that is, you know, food or treats. So, so, you know, depending on what product line that he chose to interrupt you, that's going to affect to some degree what your potential exit is going to be. The other thing that's also really important in our industry, that affects valuation is whether you're a branded product, or whether you're a private label product. So a branded product is going to be higher valued than a private label product. So when we counsel different businesses about you know, what we think their valuation is going to be, you know, people get a lot more excited about a branded business than they do a private label business. So, you know, so that they can make the decisions that they are wanting to make, but they just need to be aware of what the, you know, what the impact might be. And then I also think, you know, another area to consider, you know, is your revenue size, because, you know, once you get past 2030 $40 million, the multiples are going to go up as well, because of the size of it, because of dries of the business. So you can be a trades company today and be 5 million at one, then you know, there's another one, that's 50 million, well, that was gonna, we will treat companies and maybe they have the same profitability, but that 50 million that they're gonna get a higher multiple. So

Ed Mysogland  16:46
they're going to get a higher multiple. And that's where I want to poke a little bit on the types of buyers who are the types of buyers at the at these different price points. Can you talk about?

Erin Fernstermaker  16:58
It's a great question. So um, so we are very much for tiers, kind of tiers where different buyers come in. Yeah, so. So in the pet industry, what we typically see, if you're under a couple of million dollars in revenue, there aren't going to be very many buyers, for your business that are a strategic buyer or a financial buyer, it's most likely going to have to be somebody that wants to run a business, and we'll buy your business for that purpose. Once you start hitting about half a million to a million in EBIT, da, that's when you're going to start potentially gaining some interest from some strategic buyers, strategic buyers being those that are already in the industry and see some sort of advantage that they would have for buying you whether it's, you have a specific product they want, or maybe you have a customer set that they would like to also get into. Or maybe it's the personality, you know, whatever it happens to be. The strategic buyers tend to start being interested at that level, but very few financial buyers get interested at that level, there are a few you know, we know of some that might look at a business that's 500,000 to a million and EBIT da, but there's not very many. So, you know, if you want a really healthy pool of potential buyers, that really starts at about 2 million in EBIT, da. And if that were at that level, there are a lot of both strategic and financial buyers that we could potentially, you know, show your business to, you know, at that rate, so you kind of have to go up those tiers to get a bit more attention for your business.

Ed Mysogland  18:42
So the where are those buyers coming from? Are those national players, regional players? Where do Where do the the the half a million and end up EBIT up buyers come from? Well, typically, you

Erin Fernstermaker  18:55
know, if it's a strategic buyer, it's almost always a national business in the pet industry. Again, you know, I happen with Birdseye advisory group, we focus on the hardgoods global space. So we're not talking about service businesses that are tied to a specific, say, local area. So you know, I'm selling treats or collars or what have you. Most of my potential buyers are can be from anywhere, they could even be international, but more likely they're going to be a national, you know, a national company. And then, you know, the financial buyers are generally going to be private equity firms and those also be from all over the country. So we're not when we go out to market with a potential business, it's almost always casting a national net and even an international one depending on what they sell.

Ed Mysogland  19:49
Yeah. And, and that takes me to my next question on and what's the best way and again, this is a this is a tough question. but I'll ask it anyway. So on these different tiers, I mean, I know you guys have a really good success rate on this on selling. But I mean, as an industry as a whole, what is the sub half million dollars in EBIT? Ah, what's the likelihood they sell percentage wise? Because I mean, as a as a, you know, most businesses what 80% Don't sell. That's theoretically,

Erin Fernstermaker  20:25
when I was when I got my Exit Planning certification. I think they told me 70%, but it was remarkably high.

Ed Mysogland  20:32
Right. So, so in this industry, I mean, because my next few questions is how to how to fix that. And so, I mean, what does that stand true? Like, the smaller businesses, there's probably a 70% chance you're not going to sell? And as you move up it curves?

Erin Fernstermaker  20:53
Yeah. I mean, if you look at it, you know, I come from a consulting background also. So I if I, if I had a client, that was half a million in EBIT, da, usually there are half a million EBIT da for a reason, instead of 2 million in EBIT, da, you know, whether it's not the right personnel, maybe their pricing is too low, you know, it really depends what are they doing incorrectly to not, you know, be experiencing a higher growth rate. So, so to me, if you're getting if you're going to be that small in a in the, in the litterbox, that we plan

Ed Mysogland  21:28
to use that as an industry time, in the letterbox,

Erin Fernstermaker  21:32
that's great, there's probably a problem that needs to be addressed or corrected, in order for them to be more appealing, that doesn't mean that there isn't a potential buyer at the pool of buyers, again, is shrunk. And typically, at those levels, they're probably going to have to use a business broker. And, you know, Does, does a business broker have a network of contacts that have experience in these industries? I mean, it really does. My business partner at Birdseye will say, you know, that the pet industry is like the mafia, you know, it's it's very hard to get into, but once you're in it, you know, you don't want to leave. And so it's if you don't have experience in the pet industry, it's very difficult, you know, to come in and be successful on day one, running whatever the business is going to be. It's just an experience. Yeah. So you know how to increase I, the first thing I would do is, is look at what are you doing wrong, if you're under half a million dollars, and maybe you're growing, but maybe you're just you don't have capital or something like that. God has solved the things that aren't getting you to the higher those higher tiers, you have to really look at your business from an objective way.

Ed Mysogland  22:49
I got it. So what So what your what I hear you saying is that your first step in making your business more saleable is is is critical mass, that you have to be a bigger business that's going to attract a larger pool of buyers?

Erin Fernstermaker  23:04
And if you think about that, the reason why that's important, because I was like, Why Why does that matter? Well, because if you think about it, the cost of a due diligence process that is going to get a buyer is going to undertake that's a strategic buyer and national company, you know, it's gonna cost on the low end, half a million dollars, and you know, on the high end, a million, a million and a half dollars. So why would they spend that on a company that is that small? You know, so they need economies of scale to make that investment in the due diligence? Make sense?

Ed Mysogland  23:37
Yeah. Well, and that's a great segue. So let's and by the way, swinging back to in the litter box, that would be that would be a great podcast.

Erin Fernstermaker  23:49
We have one already it will be tomorrow.

Ed Mysogland  23:53
litter box. So So you were talking about due diligence? How? How do sellers in this industry survive due diligence? What what I mean, you because I'm certain you're like you said, You did consult you do consulting in this. So so how are you consulting to, to these types of sellers at night? You know, everybody says you got to have clean books and records, but but specifically in this industry, what where where should somebody spend some time looking?

Erin Fernstermaker  24:27
Well, I would say the number one pain point for any due diligence process, is the financial diligence. And so it's their accounting and record keeping. And I can line up 10 business owners in this industry and say, Do you think you have adequate bookkeeping and accounting and all 10 will say yes, and probably the bulk of them are correct, you know, so So this is where I think that changes is if you have a CFO, on staff, whether it's a part time CFO or Full Time CFO, that's when we start to see a lot more legitimacy in that in the answer that, yes, they have proper accounting to pick typically, because a CFO, not only do they have accounting background, so even if they aren't doing all of the accounting function, they can oversee what the accountant is doing. But they can also do budgeting and projections and, and do mock cash flow models and things like that things that really are necessary for a business that's moving out of a small, small into a medium sized business, I would love it every company that we ever sold, had a CFO, or at least a part time CFO, a minimum of 12 to 20, more 24 months before they sold, because everybody thinks that they are adequately prepared, and the bulk of them are not. And they don't know what they don't know. And so that's the hard part is trying to convince a business owner that the way that they've been doing it, while it might be fine for them, filing their taxes is not going to be gonna withstand a due diligence process.

Ed Mysogland  26:06
Yeah. So are there any particular areas of of the due diligence that, that you run into, you know, that you run into friction?

Erin Fernstermaker  26:17
Um, you know, I guess, a couple of couple of areas come to mind. I have horror stories from shows that we have encountered over over the years, which is why I'm so adamant that this needs, you know, needs to be addressed. But I think you know, that the first thing that we asked you know, is are you able to, to read reports for a minimum of a three year look back period. Okay? And do those reports allow you to slice and dice revenue segments? So if I have three or four different areas of revenue, can I break them out in those ways? Can I also break out the cost of goods for those different revenue segments. And can I also do it on a product basis, a single product basis, somebody's got to have reporting that does that. And you've got to be able to look backwards at it. Again. The other thing that's also important in that three year look back period is is you need consistency across across the years and how you're looking things. So as an example, if you had two different accountants during that time, and one of them is putting marketing expenses and cogs, and the other one is putting it in operating expenses, well, then when somebody that looks at the three year period, it's not consistent, because they're not following consistent principles. So you really want that to be all resolved and clean before you ever go to market. And usually, for a period of three years or more is the ideal look back. And then, conversely, projections, if you've never done projections before, which many of our clients when we took them to market have never done that that, frankly, is very risky, because the 12 month look forward period, is what most buyers are buying, right. And so, and usually our sale processes take about six months. So you know, the first six months of your projections, you better be hitting those targets throughout the process. Otherwise, you know, the wheels may fall off the process, because you're not, you are not standing up to the numbers that you put out. So do you really want to make the biggest financial transaction of your life on numbers that you have zero experience in predicting? Because you've never done it before? You really need to have that sort of, of variance prior to going to market? Yeah,

Ed Mysogland  28:54
I mean, that I mean, you're from a valuation standpoint, that certainly, you know, the predictability of what's what's coming is is certainly important. And, and that's really interesting that you bring that up, because I I add to all these podcasts, no one has said you need to be able to, you know, forecast what what you're going to do I know everybody asked for it. But as far as a, you know, this is kind of mandatory for for the likelihood of you selling and the reliability of you as a business owner and, you know, as an operator of the business that you

Erin Fernstermaker  29:33
know, your business predict the future, at least at least in short term intervals to a reasonably accurate degree, then why should they believe in the other any things that you tell them? That's really what your your forecast is saying? And if you've never done it before, I mean, what's the likelihood you're gonna hit a bull's eye on the first go round, right? No.

Ed Mysogland  29:57
You're right. And that's funny because Again, but by you being able to, to understand or make your business more predictable, the less risk and the higher value. So that's

Erin Fernstermaker  30:10
it. So if you, you know, as an example, we just closed a transaction about a week ago, that took a lot longer than we, normally, we have about a six month process, this took almost 12 months. And I can tell you every single month as the deal was going on, you've got to hit your numbers, or you've got to be pretty darn close. And fortunately for them, and for us, they, you know, while they had ups and downs, they were pretty darn spot on with where their forecast was. So fortunately, that did not derail the process. But that can be and it has derailed other processes. In the past.

Ed Mysogland  30:44
Do you see buyers often retraining?

Erin Fernstermaker  30:48
Unfortunately, yes. Well, but

Ed Mysogland  30:51
But my question is, do they retrain based on a month or they breach trade? Because you know, you missed you missed it based on the year? And, you know,

Erin Fernstermaker  30:59
that's a great question. So, you know, our goal, obviously, on the on the banking side, you know, is we never want to retrain, and what there are a number of safeguards that you can do to mitigate the likelihood of that, as an example, in the deal size that we're typically doing, you know, we often recommend a sell side to have the quality of earnings done, that can typically cost 50. Ish, let's say, on average, 50,000, maybe maybe a little mature for depending on who the firm is. And, you know, we get a lot of business owners that hem and haw about wanting to pay that in advance. But if their books are suspect, and they want a premium valuation, you know, as in, you know, I can even give a generic example, we spoke to a client who was doing about $60 million in revenue in the direct direct to consumer space. And we recommended that he do a quality of earnings because he was looking for a premium multiple, but we had some suspicions that his books just weren't going to going to going to do well under scrutiny. And so we said, Let's mitigate that, let's spend 50, grand, find out what areas that are present are going to be the problem points, and point them out in advance, and fix them if possible, but at least bring them to the attention before indications of interest and letters of intent get written. Because that nobody wants to have the retreating conversation. And a lot of times, those things are retreats are preventable. If you are transparent about whatever works, that there might be in your business, I'm a master at putting lipstick on a pig, as my mom would say. And in doing that, in the marketing document, I can turn any negative into a positive, if I know about it, know and position it accordingly. But those things that are found out during the due diligence process, it's one, maybe you'll be okay, but you get a few. And then maybe you miss your numbers. I mean, it really it kind of depends, obviously, on each scenario, because they can be unique, but you don't want to have any surprises, you want to be 100% transparent, so that you can control the narrative. And so that's what we recommend, you know, to any of our clients, and in order to mitigate the retreat, and then the company size, and you know, end result, we think is going to be of a certain size, we say you can buy the security or the insurance policy by doing a sell side movie.

Ed Mysogland  33:39
So how often are you seeing, you know, pre sale Cuvees being done?

Erin Fernstermaker  33:46
I would say pretty regularly. Oh, nice. If you are form, I'm gonna this is arbitrary. But if the deal is, you know, more than three, four or $5 million in EBIT, da, it's not uncommon. It also depends too on what is the what has the financial history been of the company in terms of if they have a CFO in place for the last five years? Well, then you probably don't need to do one. Or maybe you need to do one if you are a two division company and you're selling one of the divisions maybe that that would be no reason you know, to do one. So you know, size can dictate it. The lack of financial oversight for the history of the company can dictated the complexity of a deal, you know, if it's, it happens to be one division out of two, you know, those kinds of things can really, I you know, it would be scenarios where a banker would might recommend it. We don't see it all the time or, but we know that the buyer most is going to do want and in most scenarios, so if there's any possibility that they're going to find something negative. We think it's the best insurance policy again, Instead, let me spend 50,000. So you don't get a 3 million or four or $5 million haircut on a retreat at the end. To me, it's a no brainer.

Ed Mysogland  35:07
Yeah. You know, it's funny, he said, so I had Elliot Holland, from Guardian due diligence and their qv company out of Boston, I think. And, Eric, we were talking about that. And I was hoping that, that at some point, we get enough empirical evidence where there is a case study that can be done that you can quantify that, you know, what, if you do the QV, you know, that either A, you're gonna, you're gonna pick up an extra turn on your multiple, you know, something, something like that, where we're now we're now you have, other than, you know, my experience is that, you know, if you do a QB chances, you increase your chances of selling, and the seller is like, Well, I'm not spent 50 grand unless you got something. Yeah, you got to come with me with more than that. So

Erin Fernstermaker  35:57
I would love the same things. Because, you know, we just see that we see the fallout if they don't do one. We also try to, you know, in some cases, we can, we've been fortunate enough that and successful enough in some of the work that we've done that, you know, we're gonna walk away from a potential sale transaction, before we take the client on, if we think that there's any possibility that the books aren't going to withstand that scrutiny, and the seller is not willing to do the additional investment in it. Because, you know, we don't we don't want to take the risk that we're not going to make our commission. So you know, we have to be smart about it. And you know, what I did on this business, knowing that they haven't done this work. Hmm. You know, it really, you know, makes makes you pause.

Ed Mysogland  36:48
Right, and people fail to understand the reputational harm of bringing, bringing a business to market that, you know, is is not ready, or it's, it's just unrealistic. Yeah.

Erin Fernstermaker  37:04
So, so I guess,

Ed Mysogland  37:08
with the time we have, you know, I guess I'm looking for where, what, you know, the podcast is how to how to sell a business. And I'm just curious to know, you know, some high level guidance that you might be able to say, you know, this is, these are, these are the things that in this industry, that are specific to the industry that you have to do, and you have to get your arms around? Well, I know, we've talked about the financials, understanding the financials, but what are the what other areas should a business owners start to focus on?

Erin Fernstermaker  37:46
Going to market? That's a good question, you know, that, I'm gonna approach it maybe from a little bit of a different perspective. When I look at the companies that we saw, that have been had successful outcomes, I look at what are the unique threads that I have seen about them that made those transactions successful. And the first thing that I would say, just kind of from a generic perspective, and this really kind of addresses competition, in a sense, as well, as, you know, most of the people that have successful outcomes are successful, because they're really passionate about whatever product that they're selling, they have a really good story about why they got into it, and why they're doing it, why they believe it, and they've done a really good job of conveying that story. And you have to remember, the pet industry is highly personal, we're not selling, you know, we're not selling, you know, scissors or staplers or something, we're selling products for the equivalent of four legged children. And so people want to develop a relationship with the providers of their goods, goods and services, because these creatures are so incredibly important to them. So having a really strong connection with your who your end consumer, because of this, you know, your passion and how you got into it, how you message it, all of those things, those are automatically going to resonate with a pet owner out there, because they're gonna go Oh, my God, these people care the way I care, you know, so those, you start with that magic that you don't need to look around and see what's the competition doing, you know, years, you know, it really doesn't matter. As long as you know, you you have the right product and message and you're focusing on how that how you resonate with your consumers, you know, so So the sellers that I think about, you know, were really focused on who they were working, who they were working for, you know, and then you know, when it comes from an actual nuts and bolts perspective, you know, when they actually came to the table? I would say that all of them were also they, you know, I've used the same before with clients, you know, if you were going to be in college and take a test, would you prepare, you know, hopefully, most likely, I know, I was very, you know, I wanted straight A's I was going to practice I was going to study well, what so you have to think about the sale of your business, kind of like the biggest test of your life. And when you show up to the biggest test of your life not having prepared, and people just think that they decide one day they want to sell, so they must be ready. Wait, wait a second, you know, they haven't even really looked at their business from a seller's from that angle, you know, where is my business attractive? And could I would stand a due diligence process. Yeah, and, most most back, or most sellers, unfortunately, don't do that kind of homework. So the ones that have been successful are the ones that have decided, Okay, I'm gonna sell in probably two to three years, and they start making all of the right preparatory steps, they meet with their financial advisor, talks about, you know, tax structures, and, you know, potential, you know, deal points that may be important to them, you know, they start, if they don't have a CFO, they start working with a CFO, and they start doing projections and you know, suddenly start doing the work to prepare for that giant test that they're gonna take, you know, they're getting all of their documents in a row, they're writing down processes for everything in their business. So the people that come to the table prepared, in that sense, are going to have the better outcomes than those that have done zero planning and simply thought, Well, my my business is good. So you know, I pay a high multiple, I'm sure. The other side is, is most sellers, I think, because they may have had a lot of success in what they're doing, doesn't mean you're automatically going to be successful in selling their business. They have blindspots. About that. And so this is where I highly recommend developing relationships with, you know, several investment bankers to get some environment some advice around, particularly those that have experienced in your industry and start talking to them two or three years before they are what are ready to go to market, so they can start getting an idea about what what are the areas that they might need to shore up before they come to market? So no planning in advance to me is really is is one of the markers of a successful exit. You know, and I use the chest example, it's the biggest test of your life where you're going to, you're going to study and those that study tend to do better.

Ed Mysogland  42:57
Yeah, well, I agree. And in fact, I can tell you, it over, you know, we've done 2200 deals, and the common thread, and you know, 87%, that if you do any value work, and I mean any value work that you now understand the value and you understand what drives the value, you're going to sell, because now, you know, like, like you just said, you just, you now understand what, how a buyer is looking at how financing institutions gonna look at it. And so you're more prepared, but, but I want to circle back to your practice. Because I know you do a lot of planning. So again, so can you talk, I guess, how, how your practice works, and the consultative side of the practice, because I know, I know, you do deals, but the people that hear this, they're gonna say, alright, well, how do I how do I work with her? And can you talk a little bit about, you know, just the practice in general? And who, who's right for you and who's not?

Erin Fernstermaker  44:02
Right, so sure, that so I'm a certified Exit Planning advisor. So I have my credential in that. And so, yes, I spend a lot of my time working on mostly sell side transactions, but we do side by side work as well. But in my free time, you know, I want to talk to business owners, particularly in the pet industry that because that's where we focus that our planning and exit, let's say three years or less, and we have a program that we call the business exit bootcamp. And that is a process where it's a mini due diligence exercise, and it's a mini financial preparatory exercise where as an example, we I asked a business owner to provide me the last three years of historical financials three years of project Did financials and provide any adjustments to EBIT da, and the the ease or dis ease that that whole process takes just in that doing that preparatory work tells me a lot about how they were they are financing their financial preparation. Then the rest of the bootcamp is a series of interviews, where I ask things from a buyer's perspective. So we talked about, you know, how long they've been in business, where they are, what's their brand? Like, you know, how are they? How are their gross margins? You know, how profitable are, you know, I ask all these things. And then there's another series of questions and interviews that's around the due diligence side. So we do a deep dive into your HR practices, and what product development do you have coming? And, you know, who are your key employees? And, you know, how are you protected? You know, in terms of IP related things, all, you know, we ask all of these questions that would essentially be part of a due diligence practice, due diligence process, and then we provide a score as to where they are on that today. And we provide valuation guidance. So we say, okay, we think that your business today is worth X, and that your valuation range would be between you know, these parameters, and then we get a series of recommendations, these are all of the things that we would recommend that you do to move yourself up that sliding scale to the highest valuation, and some of them are more short term and quicker and easier to do, and others are much more complex and harder to do. And then obviously, the owner is open to doing as many of them as they wish to do. But essentially, it gives them a book that says, This is what I need to do to improve my valuation. And if I choose not to do any of these things, I at least know that yes, they may lower my valuation, but I'm making that decision from an educated perspective versus being surprised about it, you know, just coming up to the selling table and not knowing. So it's such a hugely advantageous process to go through, we recommend every everyone go through it, before they sell. We obviously can't force anyone to do it. But, but to me, it's a roadmap on how to run your business, if you want to add value and make your business more valuable. Follow this roadmap, and you will get there. And then obviously, from there, depending on what the guidance is, yeah, we can, if we have connections in some of the areas that they need assistance, we obviously are happy to make those recommendations. Because we are industry specific. We, we do know a lot of people. But it's, you know, I recommend it for everyone. And it's hugely, I mean, I love these processes, because I love to learn, you know, what drove somebody to create the business that they did. And also, it's, it's fantastic to be able to give them some really good information about how to do better, you know, that she may not have looked at their business from this perspective. It's so valuable, and it's, it doesn't cost that much for what you get. So, you know, I recommend every every business owner, whether it's through myself in the pet industry or through somebody else, that that is a sepa, it's just a highly valuable exercise, if you have a plan for your exit, you know, do do an equivalent of a business as exit bootcamp, you know, a couple years in advance and you will be a lot smarter when you get to the selling table. Nice. Well,

Ed Mysogland  48:56
after I think you'll be close to my 90th episode, so I asked this of every every guest that's on and and that question is, you know, what advice would you give the listeners that would have the most immediate impact on the business? And I think I know what your answer is gonna be, but nevertheless, I'm still asking the question.

Erin Fernstermaker  49:19
Well, I would, it's gonna be around the financials. I hate to say it because it's not that exciting and sexy but it's, it's what I see over and over again. You know, my recommendations are, if you are going to go to market and you do not have a CFO on staff, at least do find a part time CFO, there's a lot of programs out there that have a fractional CFOs I highly recommend getting one at least 12 months before you sell, to start organizing your financials and finding any potential holes that there are to start doing projections. Um, you know, it's an investment, but you will more than pay for itself by having a higher valuation. And assume even if you are bookkeeping and accounting has been fine for you all of these years, I also would add there, make sure that you identify an accounting team that has m&a advisory experience, that's a good point. Because if you are at least $2 million in EBIT da, and are expecting a premium valuation, you're going to you know, you wouldn't want to show up at a gunfight with a water gun, you know, you want to have some if somebody else is doing a quality of earnings, accounting quality of earnings on your business, you want to have somebody that's representing you the same credentials and same abilities. So identifying the practice, if you work with a small accounting firm, now I would I plan 18 months in advance moving to a medium sized accounting firm that has m&a experience on that, it's going to cost you more, but it's absolutely the right move.

Ed Mysogland  51:07
Good advice. So what's the best way we can connect with you?

Erin Fernstermaker  51:12
Well, um, you can go to Birdseye advisory.com, you can reach out to me on LinkedIn, I, we don't do the Facebook and frankly, we are fortunate that that

Ed Mysogland  51:23
you don't have to,

Erin Fernstermaker  51:24
we don't have to. And it's less busy and that we don't have time to do it. But I would say LinkedIn or reaching out through a bird's eye advisories probably the best way to find me.

Ed Mysogland  51:38
Okay, and I will I will put a link. I know I saw on your website, the link to the bootcamp, I will I will make sure that there's a link to that in the show notes. So Aaron, thank you for for your time. I learned I learned a lot and I'm certain our guests did too. So thanks for coming on coming on and hanging out.

Erin Fernstermaker  52:00
Oh, you're so welcome. I'm glad I could I could make it and the pet industry is the best industry in the world. You're lucky person

Ed Mysogland  52:11
I can sense the passion and like said i It is certainly an industry that is not going away. And so it's

Erin Fernstermaker  52:21
not usually my pets will most on most I have at least one of them will typically show we've got a home meeting with any of my pets coming.

Ed Mysogland  52:36
The funny thing is so Dodger, my my my black lab normally when when a squirt, you know I'm at my office, but if I'm in my home office if a squirrel infiltrates the perimeter all hell breaks loose and and that's when the editor has to work on it. So same

Erin Fernstermaker  52:54
with my when my dog had the mailman comes over, you would think over here

Ed Mysogland  53:02
right out well again, thank you so much for for for being on and and I look forward to when we next visit.

Erin Fernstermaker  53:09
But likewise, thanks for having me. I really appreciate it.