Adrianna Smith and Lana Hout - Key Factors to Drive Up Business Value

Hi everyone, it's Bill Black, the exit coach from the Exit Coach Radio show. You know, one of the biggest questions I get on the show is what exactly goes into a business exit plan and when should I start creating mine? Well, I always tell people that the best time to start was 5 years ago, but the next best time is now because you never know when you might need it. So we put together a free report that describes what an exit plan is and what you should know. You can get it free by texting Exit plan with no spaces to 44222. That's exit plan to 44222. Again, text exit plan to 44222. Welcome to the Exit Coach Radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for their best tips, strategies, and precautions so you can be well planned. And now here's your host, the exit coach Bill Black. And thank you for joining us today. It's always a pleasure to have you with us. And my next guest, we're going to talk about the other side of things, selling a business. Adriana Smith and Lana Hout of First Choice Business Brokers are joining us from Los Angeles, and we're going to talk about, you know, how you can sell a business. We're going to talk about the factors that increase the value of your business, especially on the way towards the sale. So I think I have you both on the same line here, ladies. Welcome. Thank you so much for joining me today. Hi Bill. We have both of us, Adriana and Lana. Thank you for having us. Oh, good. OK, I've got you both. OK, great. Thank you for coming on. I'd love to hear the story of how you each got into the business and came together to start First Choice Business Brokers, if you would please let's start with you, Adriana. Sure, so, uh, Lana and I actually met at USC here in Los Angeles, and we were both doing our finance degrees at the Marshall School of Business. We were in the same classes and then we kept bumping into each other at the finance job interviews, and I noted quickly that she was the other girl going for the same jobs. And so after that we became friends and essentially I started my career at Deloitte doing business valuation and transaction advisory and Lana did the same thing but she started at Duff and Phelps and so we were working at competitor firms until I was finally able to poach her from Duff and Phelps to come work with me at Deloitte. Yeah, and once we got to, you know, Deloitte, we worked there for a couple of years, and again we were really working on doing business valuation, transaction advisory, really working with large public companies and privately held companies, and we quickly started to realize that, you know, we really could master the entire project on our own, and it was the beginning of us. I, you know what, we can go on our own and we can go and work with entrepreneurs and really help them through a sale process. And actually Adriana is a 3rd generation broker. Her dad's been in business brokerage for over 50 years, and that company, which is First Choice Business Brokers, was looking to expand to Los Angeles and therefore kind of went to Adrian and asked her. Um, if she wanted to open up the LA office, and she came to me and was like, Hey, do you want to do this with me? We've been friends. We, you know, we both have been talking about kind of going off on our own. And so 6 years ago we started the First Choice Business Brokers LA office and uh we've been growing and, you know, moving ever since. Well, that's a fantastic story. That's really great. Uh, it's uh how, how you came together, you know, and you kept running into each other, you know, there's no such thing as a coincidence, right? So, uh, great, uh, great story of how you got started. Now, um, when, what size and types of businesses do you typically work for and are you primarily on the seller side of the transaction or buyer side or both? So we specialize in business sales for transaction sizes $25 million and under, and we can go under a million dollars too, and we're industry agnostic, so we've worked with all types of companies from manufacturing to wholesale service, retail, e-commerce. Pretty much you mention it, we've probably worked on it and you know, we focus on companies in California, but our company is national, so we have the ability to help companies who are throughout the US. And um just to add in terms of the buyers versus sellers so we mainly target sellers and we're hired by sellers to you know promote their companies find buyers and so through that process we will end up working with buyers down the line but we primarily um market to sellers. What's the environment look like now? I mean, I hear there's a lot of dry powder out there, especially private equity groups and other buyers. What's, what's it feel like now? Is there, is there fear in the marketplace on a seller's behalf, especially on like what their valuation might be if they're having a COVID moment? Yes, so you know, COVID has dramatically impacted everything and every industry, including ours, um, you know, we, we've seen, you know, especially in the beginning, a lot of transactions, you know, fall out. And closing delayed, you know, there's like right now I think, you know, that definitely puts, you know, the sellers who had the intention to sell this year that puts them, you know, kind of in a really uncertain position and so that's definitely everyone's concerned about and also, you know, is the value of my business going. To be less if I sell now and the thing that we're seeing is, you know, for companies that are the essential businesses and such, those companies did really well during this time and so there is additional demand for those. I don't really see discounting or any real difference in multiples there. Um, but for the businesses that were nonessential and had to close, there's going to be a lot of due diligence around trying to isolate the COVID impact, and that is done to, you know, really help the seller get the most bang for their buck in terms of their price, but also for the buyers to know that they're not now buying a melting ice cube. And so really trying to see the proof, you know, pre-COVID, you know, what were financials during COVID, OK, closed, post-COVID, how are you recovering and seeing those same periods in the prior year just to try to prove that declines were really COVID related. But we do also expect to see a wave of distress sales that come out of this, and you know that's going to be the businesses that closed and Don't have really the resources to weather the reopening um you know I've gotten calls for businesses that say they don't want to reopen just sell my business now. And so we expect to get more of those and then there's going to be the ones that try to resume but you know, given the, you know, differences in capacity guidelines and also just the general public's, you know, psychological fear of going out, um, they might not resume fast enough to survive and so that's gonna be kind of the next set of business stress sales. Yeah, you're right. There's there's a tremendous number of businesses that have just had enough. They've just said let's let's just get out of this thing and it's going to take some imagination on both sides, the buyer and the seller side, to figure out, you know, I would imagine for sellers it could be a segment of the marketplace could be a tremendous deal because the economists that I listened to through Visage Worldwide and other groups say look, it's going to come roaring back, it's going to be a while, it's going to be A 2021, mid mid 2021 till we might be back where we were, but if, if owners are desperate to get out, it could be a tremendous bargain for sellers who are savvy to that. What are some of now this is also a good time for owners to sit back and say, well, OK, we, so my sale plans got delayed a bit if they're not in the groups that did really well. So what, what should I start doing now? What are some of the key factors? I can work on to drive up the value of the sale of my business when it does come back. So that's absolutely that's so important. I think that COVID has given business owners an opportunity to really reflect on their business. One of the issues that really affects value is key man risk. So key man risk is really the fact that a lot of the times business owners build a business where really the business is reliant on them, so much so. That it becomes a risk to a buyer because the buyer's like, well, you know, all the clients know you, Mr. Seller, so if you leave, then you know, is the business going to leave with you? So making sure that the business owners are really building infrastructure in their business and you know, delegating to their team so that they are not the key man, if you will, in their business is really important. Another factor is that we do see often buyers will really discount a business if the business does not have clean and accurate financials. If it seems like it's kind of a mess, if it's not organized, if they just don't have the financial reporting, that could really damage them getting that value that they want for their business. So we definitely recommend. That they make sure that they hire the right bookkeeper, the right accountant to keep those financials clean and accurate, and then also really looking at their business and understanding the growth and scale. I think with everything that's gone on how quickly we had to adjust as business owners to the current environment is something. That I think will stay with business owners moving forward, which actually I think could ultimately be a good thing because it's allowing them to identify weaknesses in their business so that they can actually improve upon it. And one of those areas really is kind of like growth and scale like do you have things in place that would allow your business to easily grow and scale? I think for example, With restaurants, restaurants who had already, um, you know, online ordering and had delivery, those businesses, it was pretty easy for them to move forward, but businesses that were more just brick and mortar, you just come in, you order and you leave, they really had to struggle during this time period and obviously this is a simple example, but Really the idea is that you make your business such that it's flexible enough that when you know different obstacles come towards you you're able to adjust quickly and granted we can't uh you know fix uh our businesses to deal with every single problem that could ever but we definitely know weaknesses that we have in our business and we can kind of work. You know, to fix it and you'll see, you know, for another example for growth and scalability, if your business relies on only one supplier or one manufacturer thinking about like, well, if something were to happen to that, you know, one vendor, what am I going to do for my business to continue to grow? So those are some of the things that I think business owners really need to. Take this time to reflect on and if they start to address those things, what they're really be doing is actually increasing the value of the business because they're making a stronger business that's more attractive to buyers. Very well put. Thank you so much. That was a great tip for our listeners. If you're listening out there, these are great tips on how to grow the value of your business in a time when you might be sitting back going, OK, how do I make sure that uh. When things come back and my business can be sold, it's worth even more. Now the other thing that I have a question about is technology. A lot of people have put off updating technology and of course we've all been become used to using technology better nowadays because, you know, we've had things like Zoom that existed for years, but Now we've put it into, you know, where everybody knows what a Zoom call is these days. What are some of the other big mistakes that business owners make when they're thinking about getting ready in a business sale? Yeah, Bill, uh, the technology issue is a big one, and I would even say, you know, prior to COVID, um, you know, this is becoming with buyers more and more of a sticking point item and something that Buyers were already starting to discount businesses that don't have electronic records or you know systematized operations or some sort of enterprise software uh to manage and track the business performance um as well as things like inventory and. And things like that and now that literally within, you know, a month or two, the whole world has had to implement technology to survive and the, the businesses that did are going to last and be better for it, but the ones that didn't, you know, you are automatically at a disadvantage now because now it's even more expected. Um, from buyers so that I, I think that if you didn't take the time or are not taking the time now to incorporate the latest technology into your business that you know your industry expects for going forward that you're definitely gonna miss out on business um on the the value of your business and getting the price you want um you know some of the other. Mistakes that owners make, I mean, the biggest ones that they don't plan for a sale before, you know, really you should be thinking about your exit 2 to 5 years before you actually want to leave the business and you need to, you know, that's a big conversation from everything, you know, considering. Um, you know, your personal financial affairs, considering your children, considering employees that could take over and all of the ways to ready your business for sale that Lana mentioned, but most of the time people come to us when it's too late and You know they need to sell like right away or you know they're too old or somebody's fallen ill things like that and they don't have the ability to put the right plans in place or to make the the business better and stronger and more attractive for sale um another thing that they do is they scale back the business um prior to selling or even during the sale so. You know, maybe their business was doing, you know, $5 million in revenue a year um and you know they're sitting pretty. They make enough income, so they, you know, they decide to scale it back to $2 million. Well, they still want to get paid based on $5 million but it's now $2 million so. Um, you know, they don't realize that a buyer doesn't understand that you purposefully took, uh, you know, days off and decided not to make as much money just so that you could be happier, but that doesn't translate, you know, it's all about the bottom line and your financials as a business owner that's your report card, OK, if the grades don't look good, that's it, the buck stops there. Yeah, you wouldn't want to walk the last 2 miles of a marathon, and this, this type of a sale situation is where you really need to go out when things are strong and when things are good. And I guess the main reason for that is because most business sale structures don't give you a big check all at once for 100% of the value of your business. You usually get some and earn earn out on some. Is that right? Well, it, you know, that depends on the business and the industry. You know, some industries are a little bit more prone to earn out structures than others, but I would say that really the reason why you want to focus on making sure that your business is being sold when it's at its highest point is because that's when you're going to get the highest value for it. If the business, if you have a lot of the time. We've seen clients what they do is they're like, you know what, I'm going to sell anyway, so I'm just going to kind of scale back. I want to take it a little easy, but what they're really doing is sort of shooting themselves in the foot, so to speak, because really what that means is that you're now declining your own business and then that dip in revenue or that dip in profit is what the buyers are. Seeing so oftentimes it's it's just very prudent and wise to make sure that you sell on an uptick for your business because that's what buyers are going to be excited about. They don't like to Adrian's point, they don't want to buy something that looks like a melting ice cube. They want to buy something that looks like it's growing and has a lot of potential for them as a buyer to come on and make money too. Great point. Yeah, so it's, uh, for owners, a lot of them wonder if I sell my business, how long do I have to stick around after the sale, and I know that's situational as well, but is there an average time an owner should expect to stick around after a point of sale to make sure that the business transitions well? I would say if if the business is relatively simple in nature, then you know it might only be 30 to 60 days, but if it's something, a type of business that has a lot of deep-seated relationships or a more, you know, complex sales cycle and really the seller needs to do a lot of introductions and really be there for certain milestones in the year, you know, a seller could expect to stay on 6 to 12 months. OK, that's, that's good advice for our listeners who want, you know, they wonder, you know, like you said, you don't just, uh, list your business like your house and in a hot market it sells over the weekend. You have to do a lot of preparation. It takes time to make sure your business is going to present well. You might have to fix some things. You might have to lock in some key employees. You just have to get your business ready so that because it's probably not going to be the only business that buyers are looking at. So you have to present well. Now what you offer is a free business sale consultation for our listeners, which is very nice, and you can inquire on the website biz BrokersLA.com. That's B I Z Brokers LA.com. And also look, check out the website and the YouTube channel and social media at the biz Hotlist. All you got to do is put that into your your URL browser, the Biz Hotlist, and a lot of great stuff will come up. You've brought us some great tips, ideas, and precautions. Any final things you want to leave our listeners with today? I think the final thing that we want to leave the listeners with is it's just really important to really plan your exit and really take this time to examine your business and identify weak points in your business and just work on those weak points little by little because what you know, when you are ready to sell all that work that you did will come back to you. Great, great, great tips. Thank you so much. Now one thing I want to mention to listeners before we go is that you, like I, are members of a well networked group of professionals called Provisors, and what that means is that Adriana and Lana can also point you in the direction of other capable professionals who they network with and know and like and trust. So don't be afraid to ask them for referrals to attorneys, accountants, valuation professionals, or others that might help out. Of course I guess you guys do the valuations as well, so they shouldn't, they shouldn't ask for that. I'll take that one back. But, but for, you know, if you want to know what's going on in the marketplace um and if your business is salable, um. Call these ladies up because they are the top business, top female business brokers in America. So thank you so much for coming on. It's been a real pleasure and I hope you'll come on again and we can get deeper into some of these topics in the near future. Thank you, Bill. It was a pleasure. Yes, we'd love to Bill. Thank you for listening to Exit Coach Radio.