EP 2: The Business Owner's Challenge

Ed Mysogland  0:36  
Welcome to the defenders of business value Podcast. I'm delighted that you've joined me today. My name is Ed Micic. Landon, I am a business appraiser and equipment appraiser, a certified Exit Planning advisor as well as the certified value builder. And what I do on a regular basis is I serve small and medium sized businesses. For the last 30 years, I've been serving the business brokerage industry where we have facilitated nearly 2100 sales. And the purpose of this podcast is I want to share with you various tips and tricks and best practices for you, as the business owner to understand when you go to sell your company, I'm not advocating that now's the right time. But in this podcast, we're going to talk about how you know because these are this is that's a frequently asked question that I get is when do you know that it's time to sell your business? So this podcast is designed to to be an easy way for you to get information with business owners that that we've worked with over the years, most of them have, it's a challenge for them to carve out time that they don't have to learn about these things, these things about selling your company. And what we want to do is put you into a position where you understand what it is that you have to sell when that time comes. So some statistics that I wanted to share with you is the first one is that, can you believe that 75% of the people that sell their companies regret selling? Now that's a that's a startling statistic when you think about it that you know you work all your work your your entire life, or professional life building a company, and then you go to sell it. So you might be wondering, well, why? Well, the first reason is that one, did you get your value? Two, did you time the market? And three did you get to go to do what it is that you wanted to do? So it says it is a situation where it requires a great deal of planning and and as we move through the various podcasts, we're going to talk about those things. So you as a business owner can can leave your business, how you want when you want and for the amount you want. So let's first talk about about the statistics. Now, a lot, a lot of business owners are baby boomers, you know you you can hardly turn on the the television without talking about this particular demographic. So there's roughly 76 point 4 million baby boomers of that there's 12 million of them that own small businesses. In other words, there are approximately 42% of all US businesses are owned by baby boomers. So here's some statistics, I want you to to think about. First, look, every business owner is going to leave their business, whether it's voluntary or involuntary, at some point, they will no longer be or you will no longer be the person in charge 80 to 90% of the business owners net worth is likely tied up in the business. So what that means is in order to extract that value, or extract that, that equity or cash as it would be, you have to create an event that causes it to go from tangible assets and intangible assets into cash. So you have to find that buyer. So you're looking at like I said at the end 90% of business owners net worth is in the business, so you can see why it's so such a big issue for, for a business owner to get this right, because that's, that's what happens next for them. The next statistic I want to tell you about is, you know that 78% of business owners intend to fund roughly 60 to 100% of their retirement through the sale of their business. And when you think about it, you know, the, the average retirement is approximately 18 years. So when you when, as you as you look at the business, you know, you're you need your and you're planning on using the, the cash that you received from the sale of your business to fund retirement, and when you think about that, its costs are that, you know, the average retirement is nearly 20 years, that's an awful long time, and an awful lot of money, especially if, if you have been using your business, like a, like your personal checkbook. And, and we'll talk a little bit more about how you operate your business and, and, and how we can preserve how you've operated your business financially. And then how we will be able to move into a situation where you can you can recast the financial statements, so it reflects an investment that a normal buyer would look at. Okay, so, of those 12 million businesses that we just talked about 8 million will go on the market. Okay, the other 4 million will probably transfer to a family member. So believe it or not in this, in the currently in this? I think this first, this is the first year that that the ideal option for family owned businesses was not to go to the kid. Instead, you know, they're looking for a third party to either acquired or a private equity group to to come operate it. And the funny thing is that as you consider this, the the business owner you know, what are I guess? More? So why would you think that would be the case. For the first time that visit, mom and dad don't want to be the bank. And these are, these are the reasons that we hear mom and dad don't want to be the bank, Mom and Dad, don't think that Jr. has the ability to operate the business as effectively as they have. And, and lastly, that they're just not certain that there is a market for their business. So it's take your cash now rather than then move down the road. And that and the ancillary reason also is that they may not want their children to experience some of the trials and tribulations that often accompany small businesses. So going back to the 8 million businesses that go on the market, approximately 1.6 million of those will sell. So roughly 20% of them have that 1.1 million will simply close the doors. They, we had a situation where, you know, they people just don't know what to do with the business. When they're done with it, they they auction off the equipment and close the doors and move down the road. So again, 1.1 million will simply close 5.3 million will not sell and here's the main reasons and this came from a statistical analysis or a survey that was done by by

Pepperdine University, the private capital markets project. So the reasons that businesses don't sell typically 26% fail because of value gap. And what that means is that the difference between what the buyer is willing to pay and the what the seller expects 20% fail because of unreasonable demands of the buyer or the seller and that again, that's more than likely a financial or structural situation because they again, As the buyer is trying to mitigate risk through various structures and vehicles that, that, that facilitate that, and the seller typically is like, Screw that, no. And so that's why we get into a situation where the unreasonable demands, typically scuttle the deal. 12% fail, because the economic uncertainty of, of the business and the industry for which it resides 11% due to insufficient cash flow, and that kind of relates to, to back to value. So, the purchase price has to be supported by the cash flow that the business generates 11% Is, is due to financing that they they lack the capital or access to capital to finance 10% believe that there is because there's no market for the business. And then the other 10% is that they're they're just weird things happen. And that's why they don't they don't close. And we've we have experienced that. And in our practice where we had a buyer that that died, you know, roughly two weeks before closing, I mean, he just that it happens. So when we look at the reasons that they don't sell, approximately 40% Are our value related challenges. The other 40% are emotional related challenges. And then 10% I'm sorry, 20% are our other other particular reasons, no market for the business. And just other reasons. So as we move into, into what comes next, we want to, I shouldn't say we I want to share with you some of my experience and the things that that we that I've seen in helping small business owners understand what it is that they what they have to sell. And so the first thing that we that we're going to talk about is what creates value, and we have company specific. And in the business appraisal community, it's called the company's specific risk. And this, these are the things that we look at in a company. And as part of this podcast, we're going to focus in on those things that that create value, or detract from value and how you might be able to amplify and or offset those particular aspects of your business. So the first one we start with is performing. The first one we start with is financial performance. Now, what that means is how does your company perform relative to the industry and, and it's peer group. And it also takes into consideration the quality of the financial data that you have. And we're going to talk a lot about your business and cleaning up your books and why you clean up your books, and how a buyer is going to look at your particular business. And just from a financial standpoint, because remember, there's no there's, there's probably no interaction initially until, until due diligence, Strike that. So, when, when a buyer is looking at your, at your financial data, the integrity of it, or the quality of it's called quality of earnings, the quality of earnings, and the and the quality of the information that you provide them will facilitate or offset risk to the buyer because the buyer understands that this is a well performing business. And they take great care in their in understanding the financial performance that that they have. They understand margins, they understand operating expenses, and they understand reinvestment. So when we're looking at financial performance, those are the kinds of things that we want to talk about on this podcast. The next thing is growth potential. Now grow with potential every business owner, when they, when it's time to sell, they believe that you know what, there is all kinds of potential for this business, and you should pay me for for it. The problem is that most business buyers should not pay for that, because from the time of the sale onward, it's their risk. So while the business may have growth potential, if it has such growth potential, the buyer sent me an error saying, or they Why are you getting out? So, we're going to talk about, about growth, how to facilitate growth, and how to find growth. The next thing we want to focus on is customer concentration. We want to know how a buyer is going to look at your your business suppliers, customers, employees, how dependent is you? Is your company on on certain aspects of of certain aspects of the business? Like I said, if you have a key employee, that's great. And it's likely that that buyer will retain that that employee, but at the same time, we have to be sensitive to recognizing that that is a risk to the buyer. So how do we mitigate that risk in order for you to maximize your value while minimizing their risk. So we're going to talk about employees customers, customer concentration, we're going to talk about suppliers and diversification of suppliers. The next thing we're going to talk about is how your how your cash flows through the business, the way your cash flows, or for example, how fast or how slow it does, is also a challenge for a buyer. Because remember, when a buyer buys your company, they have to write two checks, they have to write one for working capital. And two they have to write they write the other check to you for the business. So understanding the working capital needs and how quickly products and services are converted to revenue. And from revenue through the income statement is important for a buyer to understand, and when, when you have slow collection of receivables, we have to that is a risk to the buyer because it will require more equity in order to fund the working capital. Our next item that we want to focus is everyone everyone has heard. It's in nearly every article that that's written about exit planning and business valuation is recurring revenue. Certainly there is recurring revenue benefit. And we're going to talk about various different channels of recurring revenue that perhaps you might not have thought about in your business, but I can tell you as a business appraiser, recurring revenue is certainly one area that amplifies value. So, we want to focus on how you might be able to in your particular business, come up with a recurring revenue model that that would be attractive to a buyer. The next is identification of how you stack up against competitors. And when we do competitive analysis, what does that look like from the buyers perspective because the buyer is going to be doing this due diligence and we want to be in a position to to be able to say how we stand out from the crowd.

The next thing is customer satisfaction. So when we look at a business or when I look at a business, I want to know that what is the likelihood that customers are going to continue to buy from from the existing business. And what happens is a seller is Yeah, absolutely they will the but these are customers they will stay with you. After after the sale. They don't have anywhere else to go. Well maybe they do. Maybe they don't have Mmm. But we, but how many buyers are willing to stroke a check, just based on what the seller has said. So what we do? And well, what I examined is that customer, we want to know the quality of customers, we want to know the attrition rate of the customers, we want to know, what's the likelihood that post sale they are going to continue to buy from us. And then lastly, and this is a big, this is a big challenge for a lot of business owners is that they are the business and and that doesn't necessarily disqualify them from from selling. But we have to get into a position where we understand how the buyer is going to behave when there is so much concentrated risk tied to you the business owner. So in this podcast, we're going to talk a little bit about how that how we might come up with strategies that would that will facilitate getting that reliance on you, the business owner out away from us so that your business becomes more of an investment than just simply a lifestyle. So these are the areas that we're going to focus on, as far as how to establish where your chinks in the armor are when you go to sell. And like, like I said, earlier, I'm not advocating that now's the time to sell, it may or may not be for you. But what I do know is that I want you to be into, I want you to be in a position where you understand what it is you have. So. So as we move into this podcast we're going to talk about, it's going to be divided into two sections. On Mondays, we're going to have sort of an educational time where we talk about a different attribute of the the company, we're going to talk about financing. How does, how does a bank look at your business? We're going to look at operational matters, we're going to look at social media. How How does that all work? We're going to talk about the equipment appraisal, we're going to talk about things that you as the business owner, intuitively know, but need validation that you're on the right path. So when you do decide that, today's the day that I think, you know, we need to start considering moving on, you'll you'll remember what you heard here. So like I said, on Mondays, we're going to have the, the educational component of this podcast. And then on Wednesday, we're going to have something really special. It's called, what's it worth Wednesday, and we're going to take a business, and we're going to dissect it and show you where the value is in that particular business. So when we're done with that particular business, you'll you'll see the same themes over and over again. So you can apply it to your business. So they're like said, regardless of the type of business, we know that intuitively, you have to have revenue, there's costs associated with it. So you deduct your costs from your revenue. And that leaves you with your profit. And that's, that's the mechanics of a business. And that's what but how you operate within it is an entirely different story for each and every person. And that's what we want to talk about it on what's it worth Wednesday, we want to say, Alright, here's a manufacturing company. Let's let's go through all of the areas that we talked about, and identify the chinks in the armor and how that particular business might be able to solve that problem. When if and when they choose to go to market. So when you hear that, you'll say you know one, that that sounds a lot like my problem and or sounds a lot like my business and hopefully you can deploy that those strategies into your business so that when you know unsolicited offers happen and so when you should you receive an offer you'll understand your business so that you can maximize your value. So as we move into as I bring this to a close I'm grateful in advance for your attention, I know that you don't have a lot of it. And I just hope, you know, we, we've worked with so many business owners over the years, and so many just don't know what they don't know. Because they never have sold a company, most business owners, this is a one time event, so you got to get it right. And for us, we want to be in a position to to help you with that, not, not from a, we want to help you understand what it is that you have to sell, because we understand the risk associated with what happens if not, you've worked your entire life building a business and for you to not be able to convert that into cash, and do what it is that you want to do after the sale of the company. We we just want to be part of that and, and help you understand. So again, thank you in advance for for participating and listening. And if we can be of any help whatsoever, just go to defenders of business value.com You are welcome to leave us a voicemail, or drop us an email and we'd be happy to help you in any way we can.