Mind Your Business And Sell It!
Naturally there is an art to selling everything but nothing will have higher stakes than perhaps selling your business. It's crucial to know how to position and leverage the value of it to make sure you can make a serious profit. As agency, we believe that consulting with an expert is always the best first move in any business venture.
Our CEO Stacy Jones to got chat with one such expert and he provided some fascinating tips on the art of selling your business. In this blog post, Hollywood Branded gets the lowdown on the best strategies in buying and selling your business from the expertise of consultant and author, David Barnett.
A Little Background on David
As an expert in the field, David Barnett is a consultant who specializes in assisting with buying and selling business. David has been working with small and medium-sized businesses alike for over 20 years and has shared his insights in several books he's written.
To date, David has seven books about buying and selling businesses, franchises, and local investing with titles like 12 Things to Do Before You Consider Selling Your Business, How to Sell My Own Business, and 21 Stupid Things People Do When Trying to Buy a Business.
Interview Transcript Highlights
Question: Can you start off by sharing with us a little bit more about your background and what got you to where you are today to make yourself such an expert?
Answer: Yeah, sure. I've always been interesting in business, so I've been in a lot of different businesses from childhood into my 20's, and after university, I got into a business and ultimately ended up in a sales career working in the advertising world. Do you remember the Yellow Pages?
Back in the '90s, I joined up with the Yellow Pages back when it was still really relevant media because in those days, if you typed "plumber" into Google, you would get a plumber in California no matter where in the world you live, so they haven't gotten the local search down yet, and in those days, if you came home and there was water on your floor, like you had to open that book to find some guy who would drive to your house right at that moment. Right?
I started to meet owners and managers of these small Main Street businesses when I was working with the Yellow Pages, and eventually, I did realize that the internet was going to kill that book and the future was bleak for me working in that field, so I decided to pursue my dream of owning my own business again because I'd always had those childhood businesses. After university, I had a business, so I got back into it.
That very first business was a junk-removal business. I ran it with a partner, and I got tired of it quite quick, and I sold it, and it was the first time I ever sold a business, and then I got into business financing. When I got into the world of business financing, I was brokering commercial debt, factoring facilities, commercial loans, and leases for business owners. I kept meeting people who were trying to get financing to buy a business, and what struck me as very awful is that they were trying to buy businesses, but the people they were working with didn't seem to know what they were doing.
Around that time, the great recession came along, and so my business, brokering and finance, became very difficult because a lot of these funding organizations were having problem selling their paper on Wall Street, and so the pipeline of money slowed down, and I realized I had to make a change for my own career, and that's when I got into business brokerage because I saw that demand in my hometown.
I joined up with a big international brand because they created a path for me to get the proper training, and I became certified, and I was the only person in my province. I live here on the East Coast of Canada. I was the first person in New Brunswick to become certified as a business broker, and so I started operating as a business broker, helping people to buy and sell businesses. Over a three-year period, I sold 36 businesses for other people, and it was exciting for a person like me who likes to solve problems and try to get two different people who have different ideas and desires to fit somehow together.
It was exciting, and it was really cool. It was also a nightmare from the point of view of cash flow, and it's a terrible business because it can take years to convince a business owner to list the business for sale with you, and then it can take years to sell it, and so under that model, it's traditionally a commission-based model, so one of the first businesses I listed for sale when I started off was a fried chicken franchise, and the last business I sold before I finally threw up my hands and quit was that friend chicken franchise three and a half years later.
I left the industry thinking it was crazy, and I started working with a bank actually, and I had to cover a large territory. I'd be driving in my car, and my phone would ring. It would be people who got my name, and they would say, "David, I'm trying to buy this business," or, "David, I want to sell my business, and people tell me you're the guy to talk to."
At first, I would just say, "No, I don't do that anymore," and then I realized this demand I saw before was still there, but there was a different way to do it, and so I got back into helping people buy and sell businesses first as a side hustle, and then later, when the bank wanted to rationalize its sales department, I raised my hand because I said, "You know what? I've already got something here on the side, and I can build it into a real business," and so I started helping people buy and sell businesses again, but this time, I do it as a consultant.
I don't represent people anymore. I don't act as an agent. What I do is I hold people's hand through the process, and I do things for them that they can't do on their own. I liken my relationship with clients to be more like the relationship people have with CPAs and attorneys. You go to them because you need their help. They do something for you. They give you a bill. You pay them, and off you go.
Right now, people pay me... People who own a business, they'll pay me to evaluate the business, prepare the documentation to present to buyers. They'll pay me to run their advertising program, and they'll pay me to coach them through it, and I charge them for each of those things as I go along the process. At the end, when they sell, there's no commission, so it's a different way of helping people achieve the same end, and it allows me to work with people from all over the place, and that things like my books and YouTube channel bring me clients, buyers, and sellers from all over the world really.
Question: I know there are so many questions that people have when it comes to getting your business ready to be sold, and also, from conversations I've had with other agency owners, other businesses, clients who I've had, people tend to put the value of their business as something that's not quite realistic always, so how do you price a business? How do you set yourself up for success? I bet this is a very long response because there's a lot of things you need to do.
Answer: No, no. It's very short. Here is the whole thing in a nutshell. The price someone will pay for your business is a function of the cash flow that the business provides and the riskiness that the buyer perceives. Okay?
Then, they're going to modify that by the number two big thing, and that is the belief, the likelihood of how likely it's going to be that they can carry on that cash flow under their stewardship.
Here's where the problem comes in when you talk about things like an agency business in the world of marketing, advertising, design, anything creative and anything professional. Your engineers, your accountants, your bookkeepers, your lawyers. The buyer is going to be fearful that the reason you have the earnings you do is because people want to do business with you.
One of the things that you have to think about is, "Are these customers coming to do business with me, or are they coming to do business with the firm?" If you think about the barber on the corner and then the convenience store across the street from them, everybody in the neighborhood knows that if they want a Coca-Cola late at night, they can go to that convenience store. Hardly anyone in town probably knows who the owner is. Right? They see the same faces in there all the time, but it doesn't really matter. They're going to the store because they know it's open and they get a bottle of pop, right?
The barber across the street though has a much more personal relationship with the clientele, so the more bad haircuts he gets... he gives to people, the worse that relationship is going to be. Right?
If he gives really great haircuts, the more people are going to be willing to wait, for example, to have their turn in his chair, and so that's the example of the business where... what we call the good will, the willingness of the public to do, and then there's an accounting term called good will too, but the good will of the business and how it's perceived in the marketplace, is it tied to the business, or is it tied to the person?
If the buyer of your business believes it's tied to you, what will end up happening is either you are going to tie yourself into that transaction. Meaning, the buyer is going to buy the agency and you for a period of time so that that good will can transfer, or they're not going to believe that they can actually buy your business, and what they're going to start to do is look at what you've built in terms of less attractive things like they're going to say, "You haven't really built a business. What you have is a client list. You have a bunch of people that do business with you, and I'm willing to buy that, but I'm only willing to pay you a function of the number... based on the number of those clients that are willing to come over to me."
I'll give you an example of that with an accountant. There's an accounting firm that I was working with, and they were very interested in doing small business accounting, but like many accountants, when they first open their doors, they have to take all the business they can get, so they have this long list of people that went there every year for their personal tax returns, and the accountant didn't like to do them, but needed the revenue, and so when her small business practice got big enough, she said, "I want to get rid of these personal tax returns," and so she found another new accountant, and she made a deal.
Basically, what ended up happening is they said, "Look, here's the list of customers. We're going to mail them all a letter, and I'm going to tell them that you're now handling my personal tax return practice, and I want a percentage of everything you bill those people for the next three years." Right? Which is very different from an accountant saying, "I'll buy your personal tax return business for X number of dollars." Right?
The buyer very much bought a client list not knowing and fearful of the fact that some of those people may not come to him, and at the end of the day, he was happy with the deal because he only had to pay for the customers that actually did come to him.
When people think of selling a business, they think of having all this money come through the door. The reality is very few small business owners... When I say small business, I'm talking about what I call Main Street businesses, so anything with earnings under half a million dollars. Most of those businesses, they don't sell so someone can cash out. These internet guys with the online businesses, they build these businesses if they're really lucky, and fortunate, and smart, and they're worth a ton of money, and those guys cash out, and they secure generational wealth for themselves in one big transaction.
Small business owners don't do that because the valuations don't lend themselves to that. Most of the time, small businesses can sell for anywhere between just a little over one times the owner's discretionary cash flow, which is the profit plus the owner's salary that it takes. One time up to maybe three times, and so when sellers learn that, when they say, "Wow, if I stick around for the next two and a half years, I'll have the same money," they're not excited about selling, and so that's usually not why they do it. They do it typically because they can't run the business anymore.
The top reasons why people sell a business, number one, is burnout and fatigue followed by divorce, poor health, and need to relocate, and retirement. These are all the same reasons why people sell a house or sell their sports car they love. A pressing personal concern forces them to need to sell the business so they can move on to something else, and when those things happen, then we have to act fast because if the person is not interested and not able to run the business the way they have been, then that drop in passion and drive is going to start affecting the business, and if they ask way too much like you opened up the conversation where they ask a price that's way to high, what happens is they chase off what I call the qualified or a reasonable buyer.
A reasonable buyer is someone with industry experience who has money saved up. They have good credit. They've got access to bank financing, and they've been doing research, and they know what businesses like yours are going to sell for, and if they see you asking twice as much, they just think, "Oh, this person is nuts," and so the reasonable buyer doesn't step forward. What you get instead are the people who don't know anything or don't know any better, and they'll come and talk with you, and they'll take up your time, and they'll waste your time. They'll negotiate.
They may even make an offer and agree to something, and then they'll go to a bank, and the banker will laugh at them, right, and say, "Ah, this deal is crazy. We can't do this," and so I've seen people price a business the way you would price a nice home or artwork. Usually, they price it high, thinking I can just bring down the price layer, and what ends up happening is a year goes by or two, and they keep wasting time with these people, and the passion, the drive, the dedication to the business starts to decline. Sales start to go down. Profits start to go down, and pretty soon, the good will, the thing that is valuable in the business starts to erode, and then soon, there isn't much left to sell. Right?
This is why it's so key to put the right price on it in the beginning because once you make that decision, "I don't want to run this business anymore. I've had it," or, "I can't," or, "My doctor says I've had it," then it's got to go quickly and you want to meet that reasonable buyer, and the way you attract them is by sending a signal that says, "I'm not foolish. I'm not crazy," and that's by putting the right price on it.
Question: Okay, and so I know we're talking about service industries, agencies, the accountants and the like. What if you flip that and we look at tangible product companies where it is less about the individual and more about the established brand?
Answer: Yeah, that's what makes it easier. If you're a manufacturer of widgets and they get sold through distributors, the person at the end of the road who... in the store, a retail store who buys that widget, they're not as connected to who the owner of that business is. We've seen examples of businesses where they've created that figure head character, and what's interesting is sometimes, the business will be sold and they'll want to keep that figure head. Think of Burt's Bees.
That was eventually bought by a large multinational company, but they still wanted Burt around. Right? They want to bring him out for special events and things like that, and so there can be that marketing tie into who the owner is, but if you went and had to buy parts for your car, chances are you don't know who owns the company that made the part. As long as your mechanic says it's a good part, you're okay with it. Right? That in a lot of ways is easier, and those kinds of companies do tend to sell for higher multiples because it's much clearer that the brand good will belongs to the company, not the owner.
Check out the rest of the interview on our podcast to learn even more from David's expertise!
The Next Steps
Want to keep learning about different ways to innovate your business practices that other experts found to be game changers for their projects and businesses? Check out these other interview highlights!
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