How to Buy an Online Business (Or Sell One) with Mark Daoust
Everybody. Welcome back to another episode of the bread ideas ecommerce, podcasts. As always, I'm your host Trent, deer Smith and, I am here to help you discover, what. Is working in e-commerce today by shining, a light on the tools the tactics, and the strategies, that are in use by, today's leading entrepreneurs. Now. Back in episode 287. You heard how Dave chess on is helping Kindle. Printers to master, the science of book marketing, and in, today's episode number. 288, I'm joined, by mark dosed mark. Is the founder of quiet Lite brokerage, and M&A advisory, firm, for online business, owners they, work with owners of e-commerce Amazon. Sass and content, based businesses, to help them plan and execute, a successful. Exit, their team is made up of entrepreneurs, who have all experienced, the startup the exit, and the acquisition now, before I welcome mark for the episode first a word from today's, sponsor, today's. Sponsor is H Refs and prior to discovering, their HRF stool I have, to admit I was definitely not much, of a fan, or even advocate, of SEO I thought it was too technical, I thought. I was too late to the game and I. Wouldn't really never get any results, so to be honest with you I didn't. Put a lot of effort, into it and boy, oh boy was that a big mistake now. That I've been using their tool for a couple, of months it has become literally. A daily. Resource, that. I use for SEO research, and planning for. Pretty much every, piece of content that I publish, in any one of my businesses, if, I want to know which. Keywords, are driving traffic to a competitor's, website easily. Discovered, using the tool if I want to know how to improve the ranking of my YouTube videos easily. Discovered, using the href tool if I, want to easily perform detailed keyword. Research to identify important, phrases that. I can use is the foundation, of my cornerstone. Content, you guessed it easily, discovered. Using. Their, href, tool it is an amazing. All-in-one, SEO tool, and it's, far more than just a great backlinks, tool as many people who maybe are familiar with the brand might think if you, really want to grow your traffic to your website, age, chefs has everything, you need keyword. To, content, research to rank tracking and site audits, if you aren't yet using the tool as a part of your traffic generation strategy, and you are seriously, missing out and I highly recommend you check out the tool you. Can sign up for a, trial for only seven bucks at, atah. Refs calm, and that's a h r e. FS. Dot-com. All. Right mark thank you for your patience so we got through the sponsor message pleasure. To have you on the show welcome hey, thanks, for having me at naturally I'm a big fan of AHS so I don't mind ah excellent. So. We're going to talk we're. Gonna do it kind of a three, segment, interview, today we're, gonna talk a bit about your company. And and, the. Perspective. It is of, your company for buyers people who are looking to buy a website, then. We're also going to talk about. Negotiation. And closing. And then, we're gonna round up our interview by talking, about it from the sellers perspective. And by in doing so we'll have covered pretty much every, aspect of the audience that we could want to do so. Let's, start off with the basics, why. Did you start quietly was. I would, assume there were sites like this when you started yours and and what were you doing before that put you in a position to start this one. Yeah. There, were some, companies. Like quiet like before but not a lot, I'm not compared to what you see in today's marketplace, right there's a lot of businesses today doing, what. We're doing but I, started. Quiet-like brokerage. After. Having the experience, of actually selling, one of my own online businesses, myself. And kind of going through that process and seeing what it was like and. I. Remember. The, the person the the advisor. Who helped me through that process didn't. Know. A lot. About online businesses. And it just seemed pretty. Basic that. Would be a good thing to know if you're trying to evaluate these things right, and so I thought well you, know I can do this what which is you know what we say as entrepreneurs, that gets us into so much trouble all. The time is is, how hard could this be and. So I took a year off after I sold my first business. I was, trying to start a couple of other things they were gaining, some traction but, not a lot not enough to really be, of. Interest and then a good friend of mine wanted to sell his web hosting company and asked, me to help him and, that's really where quietly it started was was helping that, friend to sell his web hosting company the, first time around it was an educational, eye-opening, and.
Launched. What we we have today. Today. Obviously we're much, different than we were back then and, we have a lot more experience. Just by virtually the number of deals that we have underneath our belts but the really big emphasis. And the big motive for me going into this and starting up quietly brokerage was. To. Be able to provide entrepreneurs, in the online world with, an advisor to walk them through and step through them step. With people through, that process of selling a business or. On the buy side buying. A business, with. Somebody who's been there before right, somebody who's actually gone through this process both on the buy side and, on the sell side and has, enough experience in deal making and, valuations. To be able to really be a good, advisor all the way through and that's frankly. Where our name comes from as well it's the idea that look. For, entrepreneurs, out there you build a business right it's your business you get to do with it as you want, and we're. Here to hopefully be a light, and an advisor we, don't sign papers, we don't do you know sign your contracts we don't tell you what to do but hopefully give you that that proper direction it sounds, a little sales pitchy and I apologize for that but the origins really did come from that right trying to help people out through, this process of, selling. Because, it's complex, and if. You've started a business on your own and Trent you know this because you've you're, experienced. Entrepreneur, when. You start something you get emotionally, attached to a lot of us do at least especially in the first few businesses, that we start and the. Process of trying to sell that the first time can be really really confusing and, then, throwing, all the other things of you don't know what you don't know it's, good to have somebody there by your side who's been there before and knows. Firsthand what, they're talking about. So, I've had the opportunity to actually work with your team in. Looking, at the potential sale of one of my businesses. Versus. When, I actually sold, my very first business, without. An advisor you, know years and years ago and I, will tell you it was a night and day different, experience, there's a lot of questions, that Walker asked, me that, nobody was asking me when I was selling the first one because I you know I didn't, know any better and in. In hindsight I would have loved to have had that counsel, so let's hit for the hat to the team that you've assembled so. When you started this you, know it was because of you or how you were helping a friend to sell I think he said his hosting company. Did. You. Consciously. Decide, way. Back then that hey I'm gonna be focused, on online, businesses, for the founding of quiet light and if you did was, it just. Because you. Had experienced, there and you knew that there was kind of a gap in the market or was there anything more to it no. It's. What I need and what I know I mean I've been in the online world since 1998. Is. And I started quite late appropriate in 2007. At. The time but I mean when, I looked at what do I know I don't know restaurants, I don't know gas stations that's. Not anything I was really interested, in either the. Online space and how do you assess, especially. Back then how do you assess and as the SEO value of a website and how does that play into its future you know how do you really judge whether or not this is a business, or a website that's going to continue on in the future and that's a big, part of this process, of does. Your business have value, is determining, what is it going to do in the future and how do you critically, analyze these things both. From a buyer perspective, but also as an advisor and also as a business owner yourself if I'm trying to help somebody exit, right, how do you critically, analyze that business so, I, focused.
On The online space because eight it's big enough right, there's enough businesses, in here to definitely, keep us very very busy and it does keep us very very busy and. And be that's really, what we know being. Able to evaluate. An online businesses, is unique Joe says you, know what I've talked to an advisor who specializes. In gas. Stations and, you know what that, is a very specific field, as well you have to understand how to do soil, sampling, and environmental. Studies and everything else so when, you get into this world of M&A. You. Do end up having specializations. For that reason because just the way that you look at these business and where, to look, is. Is really important, frankly. Even within the online space you, know our criteria and, how we judge, a SAS business, versus, an e-commerce business built on Shopify versus, an e-commerce business built on Amazon versus, a Content, business those. Are all different types of valuations, and I'm going to ask much, different, questions for, each of those types of businesses, what. Size of companies do, you normally, find, end up being clients. Now. Our average deal. Size so. Of the actual, sale. Value our average deal size is around 1.5, million dollars, the. Low end of what we, would typically transact, would be, around. A hundred thousand dollars you we see them quick drop off underneath say two hundred thousand so you don't, see a lot underneath, that the. Top end of what we're doing is in the the low to mid a figure range we. Don't have a ton of volume in there we have, these in volume in the low eight-figure range but. Again. 1.5 to 2 million is our average deal. Value right now by. Perspective. For. Revenue that's gonna be about 1 times revenue for a lot of businesses or. For. Your bitte, you're, looking at a bit of 500,000, up to about 2 or 3 million dollars for most of what we're working with, okay, now. Let's we're gonna put our buyer hat on here for the next a little bit of our conversation. Do you think, that. It is better, for, someone. To, build or to buy and, what are your reasons for both sides argument. Yeah, the build versus buy argument, yeah and, you get this a lot from a buyer's perspective, right because you take a look at a business and you see what somebody's doing a new thinking I could, do that right. There. Aren't that many moving parts. The fact is it's usually harder, than we think this is what I said when I started quietly brokerage, I said I could do this and luckily. There weren't. A lot of people in this space so is it possible for me to start this and gain, some foothold, while we, were learning I. Think. Buying, versus, building depends. A lot on your. Personality, and B what your goals are what's. The benefit to bind well the benefit to buying is your, binds. With an existing that's gone through the growth pains, initially. You know that there's going to be a product market fit you know that there's clients that are looking for this particular product whatever it may be and, there's.
Some Level of, introduction. To the introduction. And adoption, in the marketplace, right, so you really take out this kind of ramped up period that you see with startups and with. A startup business despite. How clear, your path may be to getting the startup you're, still making an upfront investment. In. That startup that you have to wait to be able to get that payback on even, let's sound like a Content site and you. Want to sort of let's, say a finance, content, website that's gonna focus on credit card points well, you need to source that content, you need to you. Need to have it written you, need to have it edited unique designs you, need. All these things and it's going to take you six nine twelve months to really get to the point where you can see our line so the benefit of buying is, immediate, ROI you're, buying something established, you're buying something that somebody, else has gone through those growth pains they, figured, out what, works at least for them and you can build on top of, that's, a really good place to be I, don't want to say you. Could also be buying somebody's, sick dog, you. Could be behind somebody sick dog and that's hopefully part, of the process we. Are going to look at a quiet light right, is this a dog I'm not going to list something that's really sick and bound to die that, would be, bad and, certainly, go, against our ethos and. I think it's important, for anyone, who even would think about buying. What's. One person's sick dog could be somebody else's greyhound right and. You. Have to understand, what you're good at right, most people sell businesses, that, have a few warts on them here. They're there they're the wards that they were comfortable. Living with so, identify what those are and identify, whether or not you can mitigate those are. Those going to be a problem. That's. With anything I mean it's yeah that there's. Risk its startup its. Startup you're trying to bring a dog to life. You. Know all of this stuff does have um. Habits. Risk on a startup side I think there's benefits to starting up as well and I wouldn't want to say don't do it because first, of all I think your, return on investment can be greater, you, get to customize a business I have, a business that I'm running, right now that I acquired and. I've. Been spending the last two years trying to fix it I try to fix certain things and I haven't got the same traction, that I was hoping to get right. Away you know it was a little bit more difficult than I thought, because. A lot of a business the business wasn't mine and so I didn't have the same ownership. Of it personally so, I think there's benefits on both sides of this a lot depends of your personality, a lot depends what your goals are if, you're looking for something that you can, get into is cash flowing and it's. Proven to a certain extent buying, is a great option and frankly, the preferred option if. You're trying to be disruptive, you, know starting is the way to go in. My opinion or, if you see an opportunity that just is not there yet obviously starting that, makes a lot of sense so. If I am your, brother I want to get into the e-commerce physical, products business you are going to tell me to buy rather than build not. Necessarily, I mean depends what you want to do and depends on your skill set. Let's, say that you're a great product designer right, and that's that's your skill set it, might be better for you to go out and to, do, this on your own now there's risk and then there's risk that you could design, a product source, it bring it in and then have nobody buy it I. Would. Say explore, your options is. What I would actually say right explored, options don't rule out buying I think, a, lot, depends on when do you want that ROI when, you want to start getting paid back I think that's one of the strongest arguments to bind versus versus, building and. I like me a good ROI. A. Beautiful. Segue to the, next thing that I wanted to ask you and that is. You. Know you guys, obviously see a lot of buyers.
What, Are who. Maybe clients, or maybe you know bought. Before you came along or what have yous but what is some of the most common, mistakes. That, you see buyers, making. When. They're searching, for their first company. To buy well, I could cover a lot of things here I'm I'm gonna cover a few things one. First. Of all this, isn't really even about their approach or, mistakes. That they're making in terms of how, they're searching, it's. More of their approach, to the. Sellers they, we. Preach this pretty heavily a client like and that is be, likable. Joe. My business partner tells, a story when he was selling his business through quiet light so he was claims a client before he came, on as. An advisor now as a business, partner but. As he was selling his business, he, had a buyer come on and on, a call and they were reviewing, the business and then the buyer proceeded, towards the end of the call to, tell him everything, that was wrong with the business and what. That buyer was trying to do was. Explain why, he couldn't pay a premium price but what he actually they, did in Joe's mind was I was thinking well, why in the heck do you want to buy this business in the first place you're, just insulting, what I built and telling me how terrible of a business person I am that. Guy obviously didn't, win that deal right so being likable, makes, a difference you mentioned Walker I use Walker as an example because he bought a business through, me before he came on as an advisor with quiet light and. Walker during, the process of buying, this business. Behaved. In such a manner that won, him. A deal just, based on being a little extra considerate, than anybody else at the end of one of our discovery, calls before he put in an offer he, took the time to, thank the seller for, a their time and be even entertaining, his time to potentially buy their business, that. Made such, a difference, in that relationship, and made my client and that's situation. Wanted to sell to him because. Here's somebody who respected, what they built so, first, things first we yeah, it's very very simple, but, be it. Would be a nice person understand that when you're going into a transaction. You're, buying something that somebody else has built right and put in a lot of time risk a lot of money and and it, was probably pretty proud of and they should be pretty proud of that right so be respectful of that more. Practically, though the. The mistakes that we see would either be being. Way too generic, and, what you're looking for not having any criteria. Of what you're looking for or, being, too, hyper, specific. In what you're looking for on. The front side being. Too generic I get calls from people sometimes saying hey I'm thinking about buying and online business do you have any advice okay. What type of online business are you thinking about buying well. I don't really know okay. This is a place to start because running a SAS business is nothing, like running an Amazon business which is nothing like running their content business you. Know what are you good at what are your skills what makes you scared, in the online world versus, feeling really comfortable are you comfortable working, in code are you really comfortable running logistics, you, know having a little bit of a self-assessment, to say where are my strengths, what, am I good, at you, know what do I want, to do on a day to day basis, that's a really good place to start if you're an Operations, guy I had, a client who told. Me once he had. A physical products business he had a warehouse and he. Moved me he made this big move or he went from an 8,000 square foot warehouse to a 22,000. Square foot warehouse and, he. Told me he said. I, had. No more fun at my business career planning out the move from that smaller. Warehouse to larger warehouse me, personally I would rather pluck my eyeballs out it sounds awful like I don't want. Logistics. Of moving a warehouse no, it'd make you but he, wanted to do it he liked it he liked that sort of thing that was what he enjoyed good, for him for him if he was buying and he's not but if he was buy and I would tell him you, want to find something that's a logistical. Nightmare, take. It and fix, it you know that's where you're gonna do really really well so. That's one side the flip side is the. Two specific, type, of buyers the guy that comes in and says I'm looking for a business, in medical equipment, space we don't want supplement but want medical equipment, the asking, price has, to be less than 2.8, it has to be growing for the past five years must, have an intellectual. Property protection, yada. Yada yada I get. It you have your hit, list criteria, you should but.
When You get to specific, a you're, not going to find a deal because it's really, really hard to, get. A deal that matches that specific, criteria, and, B if your criteria. Is really specific especially, on price and, you're looking for certain things understand, that when when we release a new business for sale quiet like we're, getting 150, inquiries, within a few days all right so there's. A lot of people competing for that and, if your criteria, specifically, is something like it's been growing for the past five years and as a multiple, of less than three on the earnings. There's. A lot of people that are going to be wanting that exact same business and market forces are what market forces are and, that. That's going to come in place so those would be the three things be nice know. What you want but. Don't be so specific that you put yourself in a shoe box, okay. So now our buyer is, one, of those 150. People that's inquiring, about a business so it's a very competitive situation. To a very desirable, business, are, there. Specific. Tactics. Aside from what you've just explained, that, that buyer can do to, help make themselves, stand, out from, the, flock of other buyers, well. Again I'll, double, down on the be nice and. Be considerate in, it again you don't have to sit there and flatter. Somebody, to you know like I love. The way you look that sweater is just awesome I mean you don't to get to that point right but. Just being considerate of them, letting. Them know what, your, intentions, are you don't have to tell them all of your plans but. Letting them know your background trying to connect with them personally to some extent. And. And, then letting. Them know what you're going to do with the business afterwards as well you, know and letting them know hey you know I've got I. Even. If I don't buy the business or you don't decide. To sell it for some reason you, know if you need anything I'm here to help you out that's something that can go a long long ways. Constructing. The offer that's another area where you can definitely stand out alright obviously money, plays the, biggest role and it's the people that offer the most value are ten and tend to get the bet that you know the majority of the deals done but. Offer structure. Makes a big difference for better. Or worse and there's a definitely an argument to make that, this is for worse but people, selling the business don't. Want to see a complex, deal right, so if, sometimes. We get these offers where let's, say somebody's asking two million dollars for the business the buyer might come in and say I will offer, a million dollars up front and then we'll. Do five hundred thousand dollars in a, note, with a five-year balloon payment, of this much and we're gonna have an earn out component, on top of that there's. A lot of moving parts that are going on here and the sellers looking this thing you know I just want to cash out and, be done okay that's the investment in tality. 95%. Of sellers have I want to cash out I want, to be done I'm ready to move on right I'm ready to move on do something different with my life they're entrepreneurs, they want to do something different that doesn't, mean that you have to. Completely. Throw out or announce it doesn't mean you have to completely throw up financing, there's good reasons, from a buyer's perspective to, do those but. Do it within reason keep, it simple and keep it understandable, and easily digestible, and also understand that that comes with the cost right. If you're going to ask. For owner financing, if you're gonna ask, for. Performance. Based financing where you, know payouts are dependent, on your job running the business understand. That there should be a little bit of a premium for the the seller in that situation, so. Is, sort of interrupt you but is it okay to. So, let's say it's a competitive situation, you need to get an LOI in because, you want to get picked to go to be to be the buyer to go into due diligence and you, basically, said you. Know here's my offering, price but you haven't spelled, out terms, is. It okay to once. You're in due diligence, to say well you know I'd actually like a note or I'd like this or I'd like that or or will sellers, consider, that to be a bit deceptive and then turn, sour on you because they feel as though you tricked, them into getting into due diligence, yeah, great question great question I'm a yes they will completely consider, that to be a little bit deceptive and.
Be, The broker, herbal as well the advisor will as well and that doesn't, play well right so going. Back to the fact that we have 150, inquiries. Plus per, listening, that we put out if, we're getting multiple offers our client, is asking us what. Do you have any insight on any of these people I and, if we've closed the deal with somebody and they've been good, good actors, through due diligence, that. Plays in that I mean I'm going to disclose hey, I've worked with this guy before he closes deals he's very good you know we trust him I would. Would give him an approval, this other buyer it's, a bit of a disadvantage they're new but they're acting you know they're doing everything right right now but they are new I don't have as much difficult, on them these, are sort of the realities as a buyer that can be difficult breaking, in on. The loi note you. Don't put in an LOI unless. You know you want that business right. Most. Advisors, especially, a quiet light we will do everything in our power to, make sure that you, get all the information you need to make, a good decision before. Placing, another why I don't, want to know a lie if you don't know what you're going to do the purpose of an LOI letter. Of intent says, my intent, is to purchase this business. Assuming. Or dependent. On due, diligence which means everything is verified that it's accurate and complete. If. Everything's accurate and complete the deal should happen if, you're still in your discovery, stage figuring, out do what I want to do this you shouldn't be putting in another why that. Means you're gonna miss out on some deals the best buyers out there know how to move quickly because they know exactly what they want so they can identify that, very very quickly that. Comes with experience one of the things I'd advise buyers, take, some time understand, that looking for that deal it's gonna take some time look at a lot of deals offer feedback, and learn what you, okay. So. Now we're going to transition and, talk about negotiation. And closing. And. You've, already answered my first question what's, the first when the flat buyer finds someone they like what's the first step and the first step of course is an LOI. So, once, the, LOI has, been, issued, and if it they're accepted, and they're going to go into. Due diligence, what. In, terms of expectations. Typically. How long does due diligence, last yeah. It depends on the size of the business and, in, the nature of the business thirty days would be kind, of the average but. If it's a more complex business sixty days is not unheard of if, you're looking at a high, seven low a figure, business getting, upwards of 90 days it makes sense because you're typically have any outside firms come in maybe, to do a quality Bernese report or something like that right so the. The duration. I, think. For most people that are looking in the six-figure, to low seven-figure, range you should be looking at eight thirty day due diligence approximately. For. Most most online businesses, as, far as the the, expectations, you wanted to come. Out with it yeah, well I'll just keep running through the the questions that I want to cover off so I'm. Assuming, that for buyers having bought before you, have some type of due diligence process that, you're going to guide them through well. Due, diligence is primarily, the responsibility of the buyer now I can give some tips but, in, in will.
Be Back up before, I put something after market before any of us would put something out to market we've done some level of due diligence I quite like we're not going to put something out that I don't think it's going to survive due diligence, would be a huge waste of my time, to. Do so but, it's not as deep of a due diligence as you need to do as a buyer right as a buyer you need to verify that the. Books that you're looking at are accurate. And complete which means getting. Access, to bank statements, and credit card statements merchant statements, etc etc verifying. A lot of this and backing into a lot, of the financial statements that you've seen you also have to make sure things are being. Fully represented, sometimes, people forget things, and it's honest, mistakes, when we've had that that happened these are important things to be asking there, are companies that will help you through the due diligence process especially. If you're a first-time buyer and I would highly recommend using, some. Of those companies centrica, comes to mind. Mind they're a good company they help, with a lot of the the due, diligence processes. But, a lot of is common, sense as well right take a look at what was represented and then just ask as many questions as possible we. Do have some kind. Of wrote. Due. Diligence checklist that we can hand over for, people as well but, I want to be careful I don't want anyone, to think that they can rely on this as being all, you need to do you should really make sure that, you're doing a full and thorough due diligence, the. Fact is behind any business buying any investment, is it like, this is risky so you have to do your homework and make sure that you're looking at everything in depth and I would I would hate to find out that somebody missed. A step and and, and. It worked out poorly, for them so yeah. Yeah, I think it was Walker who, shared with me a story of someone. Who bought a business and, one. Of the areas where they made a mistake and due diligence was on payables, instead, of contacting, the suppliers, of the business to see what the payables balance was they. Looked at the financials, and the financials showed no payables, yet there was a desk drawer filled, with unpaid, invoices which, the new buyer then. Had to pay so. That was a $50,000. Surprise, that, came their way, when. I bought a business as. Well and it, was it was a situation where the supplier was actually trying, to collect from the previous buyer right, so I was in this weird situation I still needed my my. Seller, to continue to train me so I didn't want to betray them, it. Was a bad bad spot to, be in but yes I mean that's a perfect example of, what, you need to do so. What are some of the other mistakes. That you've seen buyers make if. You can think of you know two or three doozies, those are those are great stories and great learning opportunities, well. Those. Are very specific I don't have a specific example like that but the number one mistake, I see in due diligence, is somebody. Pitching. Asking. Or requesting, a solution. To something they want to see and thinking, that it has to be that way where we see a heads butting would, be a buyer coming in and saying okay I need you to give me access to this and the, seller saying no. Way no how I'm not giving you access to that that's very very private and how the buyers thinking well we need access to this but. No one's asking. Why right why do you need access for it when you ask that question sometimes, you find out why I need access so, that I can verify X. Right. And then once you hear that you can say okay you, need to verify X that's totally, reasonable here's. Another way we can go about doing it right so I, would say a, couple of mistakes one would be that right don't lock yourself into a solution, understand. The why for what you're asking, for. Secondly. Order. Your, requests. In the order, of what's gonna be, least. Sensitive, to most sensitive right so this.
Is Again having courtesy and respect for, for. That seller and their property, don't, go in from day one saying well I need to talk to your clients to make sure that everything's aboveboard because. Nobody wants you to talk to their clients until they're really sure you're kind of to the deal to, your financial due diligence first maybe give them a heads up and say look I will want to meet speaking system your clients totally. Happy on doing that in week 3 once we've cleared off you know items. 1 through 25 off, the due diligence list, we can put that towards the end so, order in the right way as, well so, those are two things that are different recommend, are, you familiar with the invested, time principle. No. You, probably are just not by that name so I read it and I wish I could remember the name of the book how, to negotiate anything. I think is what it was and I don't remember the author but. The invested time principle, is explained in the book was quite. Simple the longer, two, parties are negotiating. For an, outcome the. More likely it is that both parties want to achieve that outcome so, they, feel as though they got an investment, of return on the investment, of their time so as I the reason that profit in my mind is you're talking about your, scale of least. Sensitive information that you're asking for ask for that in the beginning when it's easy most, sensitive information that you're asking for ask, for that further, on down the road because the invested time principle, is then more in your favor and you're more likely to get the information yeah. And, at the end of the day I've said, this for a long time night but offers. From a buyer are usually, made based off the metrics but, a deal is actually, completed, based on trust, right and this due diligence process is, about verifying, what you're seeing but it's also developed in a relationship, of trust with, the. Seller and the seller developing, trust with you so on day one I've had, so many instances, of, people saying at, the very beginning there's no way I'm gonna be able to give him this and then, they meet in person they go over a few things I have a couple meetings and then you, know what he's a good guy I'm comfortable with it like I'm okay with this now you, know because they've developed a relationship they're, building that trust so absolutely, the invested, time principle I think, another aspect of it would be it. Helps you build that relationship which, is crucial, so. A variation, on an earlier question of mine about what, terms, and so forth in due diligence what are some of the items that are okay. To try and renegotiate in, the due diligence period without, coming, across as, being a dick, or deceptive, or what have you yeah. You, know for some renegotiations. Are completely, legitimate if you find material. Misrepresentations. Or mistakes, right so this. Happens from time to time somebody, forgets, the credit card that they paid for advertising with on their financial, statements and your. Numbers have swung by fifty thousand dollars totally. Totally makes sense to renegotiate. At that point and to. Do so in a way that is fair to. To. The client right so not. Saying hey you know you made this mistake I'm gonna knock off a disproportionate. Amount of money off the purchase price that would not be legitimate. To do. There's. A lot of elements that at the loi stage simply are not negotiated. And, can be negotiated or should be negotiated. Later on such as the scope of a non-compete, agreement or the term of a non-compete, agreement, you know so these are things that you can definitely introduce later, on as far as here's what I'm looking for now, I would just caution you though if. You're, going to be asking for anything extraordinary. Have. It be set up front write it that well, it kills deals, are surprises, and. It can be completely valid. Surprise it can be a completely valid request, but if somebody's surprised by it both on the buy, side and, on the sell side it. Can cause problems on the sell side I know you, know non-competes, would be great example. If. I know that somebody is going to be working. In an industry that's sort of a neighbor to what they're selling my, advice is always tell, them on day one, that, you're planning to do this and when they do I don't ever have a problem with it where I have a problem with it is when we're two days away from closing.
And The buyer finds out whoa, they're gonna be in this industry they didn't tell me that why, didn't they tell me that they should have told me that and now it looks like a much different, issue to them so, just, disclose early but as far as what can be renegotiated, hopefully, not much you. Know if you have cause, you. Know then then it makes sense and approach, that and just. Understand during negotiations. Depending. On how the rest of the deal is gone. It can be it can be dicey to do so do so cautiously. I had. Read articles, about. I. Don't. Know if the term vulture, buyer is the correct term but maybe, predatory, buyer where buyers will, make an initial high offer to, tie somebody up and due diligence and. Systematically. Grind, them down over, a period of two three four or five months now, and, I'm guessing, this probably is not happening in your space maybe it's happening with bigger deals where they're earning as many buyers because you've got this flood of buyers where that the accurate say it. Doesn't happen because we, protect. Against that yes. That happens I and I know some buyers do that and this is where look. If if it were to happen with one of our clients that buyer would not have a very good shot of getting any other deal with, us, so. I mean that's just if. If, somebody is a bad player during due diligence that we think that they are not, acting, in good faith they're, going to have a hard time getting another deal it's not an official blacklist, or anything like that but. There are notes as to how people behaved, and we can look back at that and I, would. Be, not, doing my job if I didn't warn a client hey this guy had, it you know in our last deal we negotiated without. Reason, and look. We've had people renegotiate. With, reason. And the, deals fall apart and we've made sure to note he, would renegotiate, her but it was completely valid if, there's a valid reason to renegotiate, we get it but. If somebody is doing in this kind of predatory practice and yes people do that it's, not welcome and it's. You. Might get a few deals done as a buyer that way and you might save some few bucks it's going to be it's gonna come back against, you your deal flow is going to dry up very very quickly okay. What. Percentage of your buyers are bringing. SBA. Loans to, the table as a part of their financing, package and how. Much. Less. Desirable. Or, attractive, does that make them as the buyer given that the SBA takes.
A Little bit of time to, fund the loan and that's. Yeah. Great great question SBA was non-existent, like. Four, years ago maybe, five years ago you, just didn't see SPSP, ideals being done now it's around sixty percent of our deals are financed through SBA, we. Are seen right now a bit of a tightening in the SBA markets the, banks. Especially. The e-commerce space banks, have quotas for types of businesses that they're going to provide. Loans for especially through SBA, and. We are seeing a little bit of the tightening. Up some of those those criteria, that they're looking for is. It more or less desirable. It depends, on the business right, I mean there, are some cases where I would, question, a. Business's. SBA eligibility. Obviously. The process is not desirable SBA. Lenders will tell you that they can get it done in 30 to 45 days I've. Never seen it happen that way it's typically 60, to 90 days is what you're really looking at and it is a lot more paperwork the. Flip side of it from a sell side is, you. Can often get more money from. It it, restricts. The creativity. Of the deals so you can't do you can't like have an employment agreement after you can't do. Earn. Outs and an SBA deals so form a seller standpoint, you get cash up front or, cash basically, guaranteed. It's it it's, a good deal that way okay. So. Is, it more or less desirable I'd say slightly less desirable but I wouldn't let that discourage people. We. Have a case, study in which we had a cash buyer lose. Out to an SBA buyer. On. A pretty. Significant, size deal, right. And the offers were not substantially. Different in, fact I think they were pretty much the same the. Difference between. The two the. Buyer was nice. Yeah. Found. What. So setting, aside SBA then what would be some other types of common, financing, vehicles yeah. There was really kind of a dearth of it we need more financing. Options out there there are some groups, out there that are doing hard money loans or short. Sort. Of bridge loans and of a product right now which is a interest-only. Bridge, loan with the idea of rolling over to an SBA loan within, a couple of years, we. Have seen some conventional, loans being done, it's. Not, common. But you need to have a very very well qualified buyer, who has a phenomenal. Relationship with a bank in order to do that and. Then funds would be the last thing that we're seen so these microphones, where people are building. Up you. Know funds. Of five to ten maybe fifteen million dollars and they're, deploying those funds into a rollup strategy, that's, primarily. What we're seeing there are some companies at the the smaller end Lauren. That are doing, funding. But I, haven't, I don't have any experience with them the. Interest only bridge loan is there a company name that comes to mind that I can include in the show notes sure ecommerce, lending com okay. Lending. Sorry. I'm not typing faster, folks okay. Now. I want, to, Oh. Actually one more question, regarding. Due diligence, so, we, need to talk about closing. And what. Buyers should expect, in the, you, know four to six weeks after closing is. It yeah I would imagine there are things there that can go, wrong or upset people or what have you yeah. Yeah I mean the the stuff that can go wrong would a be sales not are what you're looking for I mean that's. Obviously. One thing and, and yeah, well you know what Murphy's Law sort of sort. Of plays are all there and, often. Kind. Of rears its ugly head where you have a horrible sales period after you buy a business. You. Know that here's, what you should expect after, the closing right during, the closing you should gain access to all the assets, within that business and you should have them completely under your control, after. That's. Done and the money is flowing into your accounts you should have the similar available, to train you and be. Able to ask questions of them and really. Understand, the business the ins and outs of it over. Those next 30 days you should be able to rely on them less than less over that time where. People run into problems is they learn something that maybe they didn't look at before, the. The example the payables would obviously be. Really, nasty. Surprise. You. Know that the only other thing that I would bring up would be not understanding, how to read financial statements in the buying process and, then seeing. What a business actually looks like from a cash perspective, later on and I think just, this. Sounds, so basic but just understand that a profit, and loss statement is, not necessarily, a statement of how you the cash is flowing in and out of the business all, right it's pretty basic thing to understand understand, this with the SAS business understand this with it with an ecommerce business and get, a sense for what, how, is this money actually going to flow in and out of my account if.
You Feel pretty comfortable with financial, statements you're gonna say, well yes of course but, there are people out there that are not they look at a P&L. And/or, an income statement and they think that that is the money that's flowing in and out mmm. Study, up on that just a little bit study about that and and understand, what you're looking at you, mean it's not the balance sheet that shows the money that's flowing in and out. There's. A lot of documents that are not understood by us entrepreneurs and, we should understand, them I let I say. This when I give talks at conferences right because so, many of online, entrepreneurs, are dating geeks we love our data and, we'll, pour over, it and then we have this thing called our financial, books which we completely, ignore yeah. But, is a whole set, of data that, has hundreds, of years of history and being developed to be really insightful into the health of your business, but. How many of us actually know how to read a balance sheet or, know what a statement of cash flow is compared to an income statement and when I ask this question at conferences I ask people raise, your hand if you know the, difference between cash, basis, and the cruel basis accounting and, I get maybe, about 30 percent of the hands definitely, up they know it and then maybe you, know 10 percent kind of wavier as, sort of and then the rest don't know it's, a pretty, basic difference, take, the time to you know take a udemy course or something and learn you don't have to be an accountant, just know, the basics of what you're looking at can, you tell us the difference in less than 60 seconds sure, cash basis is, piell's. That are represented, based on what money comes in or leaves the business accrual. Is when expenses. Or income is earned or. Incurred, so, the, example would be if. I paid in advance for my web hosting on a cash faces a book, I would I would show the expense in one big box all, right.
Accrual, I would, show that over a 12-month period, here's. A hint accrual. Is the better way right, and now you might hear that say well I want to know about the cash they both have value then, they're both useful to look at but you should be keeping your books on accrual. Basis if you're using software. With such a zero or quickbooks if, you're recording it on accrual, basis you can always, switch back to a cash basis, and see it from a money flow standpoint. So that's the trick looking at the cruel basis is like looking, at a three-dimensional picture versus, a two-dimensional, picture all. Adds more in ten seconds it. Was but that's fine all inventory, businesses, I would imagine need to be on an accrual basis absolutely. And SAS businesses, as well yeah, okay. All. Right we are now going to transition, into the last segment of our time together and that is of all let's make it about the seller for change we've been talking about the buyer and there's a whole lot of stuff that sellers need to consider when they're looking at exiting their business let's. Start off with a. Seller. Comes to you and says I'm thinking of selling but. They don't really know when how. Do you help, them to make the decision, about. When, is the right time to sell a business assuming, that you know it's not an external. Factor like I'm dying or, you know we got a divorce or something like that it just is a drop dead. Right. Right and those those, actually do come up more, often than not my first question, would be why, you. Know why are you saying why do you want to sell is it that feather in the cap, if so okay let's find out what feather what. Number you want on that feather like is, it a million, do you want to say I exited, at a million dollars or. Five million or ten million and. Then my next question if it was just that would be. Rethink. It I don't, think selling just for a feather in the cap is a great reason personally. Yeah. Owning. A business is better, than something in a business and look I make my money on this so I know that I talking about against my own clients. That. Eventually, I hope will come over to me but only in a business is better than selling a business if it was the other way around no, one would want to buy your, business right. It's, a viable asset. Because it's desirable to own. Financially. Speaking it's. Just better if you have an income-producing property, you know the the asset. Value of the business which is part of your net worth plus you have the income that's producing so it's better don't it so, first why are you selling and then from there you can kind of work backwards right, it took to find out let's say the reason is well. I have this other idea I want to do I want to get to move on to that okay well then let's let's figure out what you need to do to get to this other idea but, I do you need a certain amount of cash in the bank. And then we can work backwards again, to say well what do you need to do to get up to that valuation point, so, these are all things to really look at uh I'm, working with a client right now who told me you. Look. Mark I started this business and I'd sent from day one a day I have to hire somebody or move to a bigger warehouse I'm selling because I don't want to do it to, me totally. Legit right there, are people out there they say I want to start I don't want, to have employees, in. Fact I have a number of clients where that's where their their motive, is they've had employees in the past they, don't want to grow to that size so then, that becomes your, exit point right, at what point do you think you need to take on an employee, if that's, what you want to avoid then. Hopefully you call me the next time you get a deal like that especially, if it's an e-commerce brand I can buy, yeah. I definitely. Will we have one that's under an offer right now that's exactly that you, know and it's great it's a great business and the guys like look I don't leave him money on the table but I just I don't want to move, warehouses, I want to take some time off and I don't want to babysit people I met I'm bad with people.
Is. There an accident. Is there an accepted loi and on that deal there, is an accepted alibi yeah okay. Sorry sorry, you. Know I had another situation the years ago that was the same thing where I it. Was a guy he built up a business I built. It up for. I think it, was something like that thirty thousand a year and then when I took it all or. Representative. It was doing about half a million per year and I. Asked more like why are you selling this thing like you're working with your son and it's great it's like because. Right. Now I'm fulfilling inventory, from my garage with my son it's, great we're. Continuing to grow I have no more space in my garage my, son and I are spending all our time doing this I don't, want to bring somebody else on totally. Totally legit reason so, yeah again figure, out the reason first and then we can work backwards from there if there's a number that we have to hit that, also will be something that we can work backwards from but. I would really discourage. This attitude of. When. Is the right time to sell my business from, a financial standpoint the, answer is probably. Monteux. Financial. Standpoint alone it's. Gonna be better for you to own that thing for a long time what. Is the most common reason that. You see, sellers, selling for because I from the buyers perspective I. Think, a lot of folks might think wow there's, got to be something wrong with the business that's, why they're selling it that you know it's not good anymore, but. As you just explained, with the son and the garage and so forth I mean that had nothing to do with the health of the business so what what do you see most commonly. Yeah. Burnout would be the number one reason that I, see and. Entrepreneurs. Shiney odd object. Syndrome right we we go out there and. It's. Having a conversation squirrel. Is. The guy that owns three companies. And. I can tell you the last one I bought was, exactly, that it was shiny object, syndrome and me being a little bit of burnt out with the day to day grind in, yeah and I use it for that to this day right like if I get kind of burnt out and quiet light stuff I kind of go over and work on the other business for a little bit and. It does help so. For. You I have. Three and I what. The hell am i doing it's, tough to own three businesses, but is it comes from that right. Yeah. So I, think. Why. Are you selling frankly, I think it's the most overrated, question, because.
If Somebody, really has a sick business they're, not gonna tell you and. Then second of all I don't, think most people really know when, I saw my first business I couldn't. Have told you one, good reason I just knew it was, time that. Was really all. Came down to I knew it was time I was done I was gonna continue as. Simple, as that. All. Right so I've decided I'm gonna sell I got to get ready what does that look like because I can't just say, decide today and sell tomorrow there's got to be something that happens between those two milestones. Yeah, ideally, ideally, you've talked, to us at least a year in advance right, yeah. You know because we'd like to say don't decide to sell plan to sell if. You very, heard me say it's better for you to hang on to your business than to sell it that said you should know the value of your business today and. You should know what's driving its value today even if you never want, to sell it my business partner Joe does a great exercise at, conferences. Where he asked people to raise their hands and says who here knows how much money they have in their checking account and everyone raises their hands he goes how much in retirement. How much know how much they're homeless worth how much know, approximately, what their car is worth right, this is how much how many of you know how much your business is worth and. Hands drop but the fact is it's probably your most valuable asset if not your most valuable one of your most valuable assets, do, you know what it's worth do you know what's driving its value really really key important questions so what do you do you want to sell someday you decide I do, want to exit somebody or I at least want to be prepared first, of all find out where the value is find out what's driving the value find out what's holding it back that'll. Give you the time to. Hopefully put in place and eggs a plan where you can, implement changes to increase the value it, once you know those things an exit strategy really, just writes itself. Let's. Say you're ready to go now though you've executed your strategy or you, know something else happens and you do have to decide to sell from. There it's still a matter of getting my evaluation, done understanding, where the markets, at getting, a realistic, sense for what can I expect, for. My business and then, going through frankly, a lot, of questions. When. We prepare business for sale we're looking for several. Years of financial records we're. Gonna do our own analysis, on that we're looking for ancillary. Reports, if you are like an Amazon business were looking for some of those reports if you're in SAS we eat some sassy. Metrics you. Know the typical, ones that we would look. For, and. Then we're going to ask you a, gazillion. Written. Questions, and you're gonna wonder what the point of it is our client and interviews are written in can, be anywhere from maybe questions to 120. Questions in length and they take a day to fill out and people, hate us by the end but. It's super effective and super useful. The. Whole thing takes about a week to do them. We. Can go to market at that that. Point once we understand where the value is and you're onboard with understanding, where the value is and, what we can expect from the market and that's really what that exercise, is right are, we going to have a feeding frenzy for your business or should, we expect expect, that people are going, to want you to hold some paper on this these, are important questions to know before, you go into the actual sales process, so, that you can kind of set your expectations.
What. Percentage, the, sellers that come to you have. Thoroughly. Documented, their business processes, and how, important. Is that when, preparing, for sale. Increasingly. We're seeing more and more people document it which is good I think people are hearing some of the the. Influencers. Like yourself who would, say you know you should put, together standard, operating procedures there's benefits, to doing so. Not. Enough do it does have a positive, impact we would talk about within, quiet light we talk about the four pillars of value for a business which. Are risk growth. Transferability. And documentation. Risk. And growth are the two big ones right risk, is going to decrease, the value of your business growth, is, going to increase the value of your business transfer. Ability and documentation, are a subset, of risk right so how. Easy for somebody else to run your business from day one do, you have the processes, in place do you have tons of institutional, knowledge that's going out the door when when you sell, the business that. Makes it less transferable, that increases, the risk for a buyer, if you have processes. Documented. And. Your, your company even diagram delft organizationally. That. Helps. The transferability. Of the business it also has, a psychological. Effect on a buyer the. Buyer sees, all your items. Completely. Documented, and they, see that you've taken the time to do this they're. Gonna know that you have your stuff together right the. One of the scariest, things about buying a business is you don't know what you don't know and do. You trust that person that's, selling to tell you everything or to even know what you should know well, if you have all of your stuff document and you can go into the same look, on, the day of closing I have everything in the last pass account so you're gonna get all my passwords with one password I have all my documents, uploaded, to a Google Drive or a Dropbox, folder I've got everything in these videos set together you're gonna get this handbook with everything Wow.
You Know that that lets me know that this person's plan for this they have all their, stuff together and there's. Gonna be an easy transition there, and if they did forget something it's. Not going to be that big of a deal we'll be able to get it together so it has a real, impact on the value of a business or they, also, could put all of their business processes and a little software application, called flow stir. That's. An awesome plug, we don'twe to say whether I love it it's my own show so I figured I'm allowed to, right. Right. Totally. Allowed to do that no it's a tie hey I played round I don't know that it's great it'd, be a great application to do that in alright, so. In. Terms, of value, for this for the third and the fourth pillar. Transferability. And documentation. All, else being equal how. Much of a bump could someone get, in valuation, are they gonna get an extra 0.1, or 0.2 X or what's it going to look like do you think it. Becomes, difficult to isolate, these things and say that they're gonna have you know this much and that much it's not like just plus and minuses, right so because. Let's. Say all things being equal you, know you have things really kind of documented. There yeah maybe point one point two maybe point three percent. But, there's other things in there that are really going to override it you. Know if your business is down, 50%, year-over-year I don't care how well you've documented the business, you. Know it's it's, gonna be a problem to sell if you're growing you. Know rapidly. Then then. That's. Going to really have upward pressure where, we see the documentation. Really. Have a. Problem. In, evaluation, is really subtracting. From. Businesses. Otherwise, really. Potential value and so. That's. Where I would say get. That right you don't wanna be just kind of I've had businesses, and frankly, there's a lot of businesses out there like this there poorly documented, from, a financial, standpoint and. If you're poorly document, from a financial, standpoint you. Might just be unsellable. It becomes a binary issue, rather than a multiple issue. On. The business because you, can't verify it you can't buy it you know it's it just becomes way too risky for most buyers so. The penalty and not having documentation. Exceeds, the bonus for having, documentation. Absolutely, another way of saying that okay yeah absolutely, all right. We're. Going to finish up on the seller segment, with this question, when. Do you think does it make sense for the seller to consider carrying a note. Well. I would, first, of all encourage, most sellers to not discount. A note right, out the gate, notes. Can, really. Increase. The value of your business if you're willing to carry them because it instills a lot of faith in a buyer.
That. Said most sellers are going to say the same thing I have no interest in it. Look. There's a lot of reasons to care I know tax reasons would be one on. Our podcast we, are, having a tax specialist on and she talks about how you can reduce your effective, tax. Rate on the, sale of business to, a very low amount just. By structuring, a note in the right way right there's there's some huge benefits that are from from carrying a note. Other, than, that then, your own personal financial reasons, of getting more value or maybe reducing, your tax burden if. Your business is. It. Does come with a good amount of risk carrying. A note, especially. A performance, based financing note there's, a way to. Capture. Some value that a buyer might otherwise not be inclined to give you for, example let's say that, your. Business would be worth a million dollars but because of a high amount of risk no one wants to give you more than six hundred thousand, for, the business you, might be able to capture that four hundred thousand, by saying look I am willing to ride this risk with you and. I you know let's let's put it out and do two payments of two hundred thousand dollars based on how things go on the, flipside a rapidly. Growing business, sometimes, we don't see the. Value captured. From. The typical. Valuation, approaches in a rapidly growing company so I'd say that you're growing 200 percent year-over-year, when. We do a valuation on the company the way most buyers look at this is they're looking at the snapshot, over the last 12 months but, if you're growing so rapidly that, you, know looking ten months ago isn't really representative, of what you're doing today that's. Really tough to capture that value so having, a note there can also be a way of capturing value that you wouldn't otherwise see so, those would be a couple scenarios where I think looking at it helps makes sense and that but I would not sorry that note in that scenario would have to have some type of performance kicker or a note or something that yep. Yep, that'd be performance, kicker as well and, again don't don't be afraid of performance kickers in the right situations. They can be very very valuable people. Don't want to do them
2019-11-09 16:54
