Why Don’t You Just Sell the Business?

Hello everyone. Welcome to the 21 Hats podcast. I'm your host Lauren Feldman. This week, David Barnett, Mel Gravely, and Kate Morgan discuss a somewhat unusual approach to succession, which is to not sell the business. Basically, it's about taking a step back from leadership while maintaining ownership. And both Kate and especially Mel are moving in this direction. The approach can pay off financially in part because businesses often are worth more to the owner than they would be to a buyer. Why is that? As David explains, the business that the buyer buys isn't really the same business that the owner sells. If you've owned a business for a long time, he says, the balance sheet is probably pretty strong. You've had time to earn money, pay down debts, you've got a good equity position. This makes the business strong and it makes it better able to weather storms. But as David goes on, if he were to buy Mel's business, he would probably have to borrow money to finance the acquisition. That would leave him with a much weaker balance sheet than Mel has today. And a significant portion of the cash flow that Mel currently generates would have to go to the bank, which is part of the reason Mel's keeping his business. Of course, this approach to succession does have some challenging elements, including the need to find someone to run the business. Plus, we also discuss whether it's possible to sell a soloreneur business. Even in good times, owning and running a business can be a lonely pursuit. Our hope is that these weekly conversations will let owners know they are not alone in facing challenges. In fact, that's the whole idea behind the 21 Hats community, engaging with other owners to get the kinds of insights only another owner can offer. If you're interested in learning more, step one is to sign up for a free trial of the morning report newsletter, which helps you navigate this interesting world in which we live every day. It highlights the most important news for business owners and also tells them how other owners are coping with and finding opportunities in that news. Step two is to get on our Slack channel where you can ask questions, get vendor recommendations, and tap the wisdom of a very impressive crowd. Just search the 21 Hats Morning Report to subscribe. Joining me this week on the podcast are regulars David Barnett who is based in New Brunswick, Canada and helps people buy and sell businesses, Mel Gravely, who is chairman of Triiversity Construction, a construction firm based in Cincinnati, and Kate Morgan who is CEO of Boston Human Capital Partners, which is based in Boston and offers recruiting and fractional HR services. The episode is titled, Why don't you just sell the business? Welcome David, Mel, and Kate. It's great to have you here. Given the uh interesting times in which we live, I'd like to start by just checking in on how each of you are doing. Kate, maybe start with you. How's it going? I mean, it's it's always interesting. Um I think it's going pretty well. It's not thriving like it was four years ago, but that's okay. I like the challenge, I guess. How about compared to one year ago? How's business? Yeah, I think I think we're doing a lot of the a lot of interesting things. So, we're really going deeper into some of the markets that we had just tipped the, you know, had the tip of the iceberg. Uh, so particularly when we start looking at biotech, uh, life science, met device. So, I'm actually really enjoying that and I think we're starting to get a lot more play just because of the book launch and uh just getting kind of promoted because of that. The last time you were on, which was actually the first time you were on, Paul DS and Jay Goultz strongly encouraged you to raise your prices. And I'm curious, did you give that any further thought? Yeah. So, we played around with it a little bit actually, you know, because I I I am a big proponent of the the adage of I think we talked about it, right? Revenue is is vanity, profit sanity. So, I've always felt pretty good from a cash standpoint, but yeah, it was like, okay, so I took that message back to the my team and I said, we need to really focus on profitability and where we can increase our our profit margins. And so, yeah, we actually we actually are, you know, we've done some things. It, you know, I'm not going to be charging what the accountant rate of 350 an hour, but, you know, we're moving it here or there in there. David, how about you? Um, how's it going? Are are people still buying and selling businesses? Yeah. Well, um, my business is doing okay. Like, we uh we have year-over-year growth and so um I'm happy about that. It's hard though to shake this apprehensive feeling that uh you know there's something lurking, right? That with with all these people and all these headlines being negative uh or or pointing out problems, you always kind of worry like uh is is something going to change? And so, you know, over probably a year and a half ago, uh I started to think that maybe there were signs that things could not be so great in the economy. and I started to think more about how I might want to change my business and uh I've been working on that since then and some of the challenges I've been thinking about actually are things that we can talk about today. But so far so good. It's being a very good year and I just came back from a small conference. Uh actually I was in I was in Michigan just a few days uh apart from when you and the rest of the crew were there. Uh and it was a very positive conference. I made lots of great new contacts that are going to be leading to more business for me. So, you know, all things being equal, just looking internally at what we're doing, it's it's shaping up to be a good year. I'm glad to hear that. Mel, how about you? I think the last time you were on, you told us that you your sense was that we were already in a recession, although the it was too early for the numbers to to show that obviously. Are you still feeling that way? And how how are your businesses doing? businesses are doing uh well. Um the construction business is um probably up more than they wanted to be up this year. You got kind of drugged there by big consistent customers. So you you you go with them because they need you to go with them, but we probably grew in 25 a little more than even they wanted to. Is that a problem? Yeah, it can be in our business, Lauren, because it it means you're going to hire faster than you otherwise do. and um that constraint culture uh it will lead to higher turnover as that bubble ripples through and so we'll pay for that in 18 24 months but again the alternative is to tell ongoing customers no man that's just really I'm not sure that's the right thing to do either so you do it the best you can but they they will likely see a ripple we I shouldn't say they I don't you know I'm not the CEO anymore but they're going to see this Ripple roll through is my guess because we're going to grow you know, a little over 20%. And we should be growing between 8 and 12 and because you can grow talent at that rate and and higher to create some of that growth, but the most part you're kind of growing your talent. When you go faster than that in our business, you run into some struggles. Uh, but the business is healthy and the fundamentals are good. Our customer satisfaction is high. Our employee engagement is off the chart. Very, very pleased with our employee engagement scores. The other business is, as you know, has been um a bit of a headache. bought under d in duress or in distress. We we should remind people the first business you were talking about is a business you own. It's a substantial construction business that you stepped back from being CEO of about a year ago. Correct. About 14 months 15 months ago. Yes, that's Tiversity Construction. So they're a think construction, you know, commercial construction. The other business is a business facilities management. So we managed the facilities of large complex customers and the business when I bought it was not profitable. Uh we've worked really hard to get the profitability finished last year profitable and um continue to deliver profitability uh through uh April. I don't have my May numbers yet but um through April. So feeling really good about where we are from a execution and profitability standpoint, but man, it's been a heavy lift for such a small business. You I believe you've told us that uh you actually wanted your main business, Traversity, to buy this company and they rejected the idea, so you went and bought it yourself. Yeah. Well, yes. They Well, they didn't really understand a facilities management business and they're busy. So, in their defense, they're busy. They're growing faster than um they really had planned to grow and taking on another thing was something they decided they shouldn't do. And they were probably right. I just wanted them to do it cuz I'm in love with the facilities management business. I like the ongoing consistency of it. And you know even this question of the context we live in today this uncertain world what's certain is property owners will take care of their property and facilities management business you get to earn the right to come back the next day every single day by the execution that you have and so that's why I like the business and it's turning out to be okay. I was also asking because you you referred to it as having been bought under distress. I think you said well the business when I bought it was under distress. I see. I was giddy to get it. I wanted to be in the business. I was too giddy. I was too anxious to get it. And I'm sure that uh uh David would have some cautions for me around buying a business that you just too excited to get. There's a medical term for it. It's called buyer fever. I had it bad, buddy. I don't know how you test for it, but I had it bad. What do you prescribe for buyer fever, David? I don't know. I don't know. It's a a cold plunge, maybe something like that. Mel, I believe uh you've been working on getting an evaluation for that business of late. Uh what's that about? Actually, we've been working on getting an evaluation for traversity. Oh. Um, so as we go from a as we separate leadership from ownership, um, we want to make sure we've got a way to incentivize executive leaders to grow long-term value in the business. So, we've created a value appreciation program that um, gives the executive team rights to a percentage of the growth in value from year to year. So each year you do a calculation against the change in value from the previous year to the current year and you allocate rights to executives. In order to do that, you got to have a value a valuation approach and a consistent method and good rigor around that or it's not a very robust program. So we had never done a formal valuation on our business. And so we're working through that process. Now we've got the report. The struggle is is the methodology and everyone having 17 opinions about how it should have been done. Can you give us a sense of what's tricky about it? Why are there so many different opinions? Yeah. Well, because um there is science to valuations, but even the science has multiple scientific methods to use, right? Some are are are used primarily for when you're buying something. some are used for the the some approaches are used for the way we're doing it now for you know for some kind of synthetic stock or something. Um so there's all these different sciences to get it valuation but then every valuation process has art to it cuz you're doing comps out in the world. You're picking discount rates and there's an art to doing that and some people are very uncomfortable. They want to pick apart the art. Why did you pick that comp comparative set? Why did you pick that discount rate? and they're just uncomfortable with the balance of the science and the art. And um so I've got a bunch of opinions right now trying to tell me that this approach is some people are actually using the word wrong. Did you hire someone to do it for you? Oh, for sure. Absolutely. Absolutely. Is that an expensive process? Not too bad. Um that's a great question. I should have been more prepared for that one. Um I I think to total I had to do two years, right? Cuz you got to have one year to compare to the other. So, I had to do two years at once. Um, and it's more expensive when you initiate than when you do it annually, but um the annual is less than 20 grand a year. The upfront one cost a little bit more, but all in all, not a horrible number. Listen, I wouldn't do it if I didn't need it, right? Because it's just money to It's like doing an audit. I hate doing audits cuz you you know um but you got if you need them, you got to have them. But I didn't find it to be cost prohibitive to for the reasons we're using it. I believe a lot of people recommend that businesses should do valuations regularly whether they need them or not. That it's a a good thing to know and prompts good questions to be asked um and keeps you focused on you know your ultimate goals. You're doing it for a for a different reason though. Could you tell us more about the the plan that you're hoping to put in place? Yeah. What I hope is is that we're creating an infrastructure for professional leaders to want to be senior executives in our company because they will get wealthy on growing the value of the company over time and the owners will share that wealth with them. Uh because we're we're planning to keep ownership separate from the decision of who's leading the business. So this is not a family business. So, I'm not expecting my sons or my daughter to take over. And so, we'll be professionally run, but we need to have incentives in place for them to um reap the benefits of leading a business that grew in value. And I agree with you, Lauren, that this tool can be educational because you get to begin to learn what the value drivers are to creating real value in a business and making it more valuable. And whether you ever plan to sell it or not, a more valuable business is usually a stronger business, more resilient business, business that can last over time. David, do you do valuations for businesses? Yeah, this is a this is a big part of what we do. So, uh, and we do them specifically for people who might want to sell their business. And so to Mel's point about how there's different methodologies based on what the purpose of the evaluation is for um he's absolutely right because valuing a business as a a family asset or valuing it amongst a various group of shareholders, you could end up with methodologies that are going to give you one kind of value with the idea being that the ultimate buyer of each other's shares are probably going to be other insiders who have the same sort of attitude towards the value of the business. If you then said, "I want to sell this business to someone from the outside." Now, you've got an outsider who who lacks the same kind of internal knowledge of what's going on in the business. And that outsider is probably going to see a lower value than the value that the insiders see. And so, what you intend to do with the business and why you need the valuation is really important to understand before you before you engage in this process. And what you know Mel was saying about how you know the formula can create a little bit of conflict. I've seen this many many times where two people will be talking about buying or selling a business and uh the buyer will be steadfast in their insistence that their method is the correct one and whatever the seller is doing is incorrect. And and that doesn't lead anyone to resolution usually. it just leads to conflict between the two people and I often uh have this conversation uh with engineers who are involved in construction somewhat and it's it's almost like um people with a certain background have the idea that there is a certain methodology or path to getting a solution like if you asked an engineer how thick should the steel be on this you know bridge uh pier they're going to do some math and they'll come up with the correct answer and just like Mel said in business valuation it's not quite so clearcut and some people get very uncomfortable with that. Um I would also say that whatever the ultimate methodology is for the ongoing revaluation every year uh you really have to think about the alignment of incentives. Um and I I'll give one you know simple simple idea is that if you had EBITDA in your formula or you had free cash flow or distributions in your formula it would encourage or discourage certain attitudes or behaviors towards capital reinvestment in equipment. So, someone who's more short-term focused might be focused on free cash flow. A manager might decide to not replace equipment to increase the free cash flow to boost the value of the business. And then down the road, someone's got a problem of a whole bunch of deferred capital investment. Now, they need to spend a bunch of money. And so, the drivers of value or the incentives you're trying to create for management are really key in these formula. Mel, was that in fact part of what you were going through, trying to make sure that the method you used to value the business incentivized the right behavior going forward? Absolutely. Um I I actually saw it the more negative way. I was making sure it didn't provide an opportunity to manipulate the numbers to to get to a higher valuation. And it's tricky, right? Um and that creates the debate. And sometimes I don't know that you know for sure until you've done it a few years and I it's a brand new program and when you start giving people something and then you change it later it can create a problem. So I'm just trying not to screw this up if if you if I could be honest with you guys just try not to screw it up. Kate, when you were on uh the last time you told us that there was a period uh I think a couple years ago where you thought about selling your business. I got right to the altar. Yeah, we were supposed to close April 10th and uh of April 10th of 2020. So, we all know what happened, you know, March of 2020. And so, it was all dialed in. We had the date all signed and everything. And uh, you know, when when COVID hit, I you know, I just didn't know what my company was going to look like at the end of it. and I really didn't want to leave any money on the table with my earnout and so I I pulled back. I don't know it was just an amazing opportunity to get to the point of jumping off and then you know like just having some clarity. So when I pulled back on some levels I was like oh okay well it would have been fine. I would have had my earnout. Everything was fantastic. But on in the bigger picture, I really did the math on it. And you know, Dave, I I'd love to get your impression of this, but I've always been told, and this was kind of what the the numbers were aligning at is you're really at like one to one and a half times EBIDA for a professional services company. And when I started thinking about it, well, okay, I'm on the wrong side of 50 now. But at the time, you know, I was still feeling like, okay, well, what am I going to do after this? And I did have a uh I I was working on another company and I was like, okay, well, I'll exit that one and focus on that this new company. That new company had to, you know, roll up because of COVID. So, uh, now I'm doing a little bit of what Mel you're talking about is I love how you phrased it, taking it from ownership to to leadership. I'm actually grooming my uh senior team members because my my exit now is well just hold on to it and then kind of move myself to chairman of the board, let it operate on its own and just give them the the opportunity to to step into those shoes. I I'm interested in the the the insight on that question because I get a lot of people saying why don't you just exit? you know in our business our our multiple will be a little higher than uh one and a half times but it it you know probably will get to four times and I I just people people are pressing why don't you just sell and um this business if we can incent the executive team to lead it I believe even financially is worth more to my family to as an asset than it is to sell it but I realized David you're in the business of helping people buy and sell. What's your take on that? So, with respect to, you know, what Kate said about the multiple, you know, one and a half times EBITDA sounds like a low multiple, but I'm I'm wondering if you really mean one and a half times sellers discretionary earnings. And and this is the kind of can of worms that people often get into when they're in business operating a business and they're kind of part-time engaged in this world and they'll read articles or listen to interviews and they'll be hearing conversations people are having about different aspects of businesses or what they're worth or what they sell for. And and one of the key pitfalls of this for entrepreneurs is really understanding what kind of businesses the conversations are about that you're tuning into. Larger businesses sort of in the mid-market, what I would describe as businesses with, you know, tens of millions of sales and EBITDA is over a million dollars. You know, those businesses can easily sell for four or five or more times EBITDA. But small little businesses might with uh you know a service business heavily dependent on the owner with very little in the way of a barrier to entry for new competitors uh could easily sell for less than two times sellers discretionary earnings. And those those two numbers IBIDA and SDE are very different calculations. And when you confuse the multipliers with the actual cash flow level that's when people end up mispricing either too high or too low. and then if they go to market that way, they get frustrated when they can't meet someone who's willing to to come to do a deal with them. So, it can be very complex. Uh what I would say, you know, as far as Mel's comment about keeping the business, just imagine this right now, and I haven't seen Mel's financial statements, but if you've owned the business for a long time, the balance sheet is probably pretty strong. Maybe had time to earn money, pay down debts, you've got a good equity position. This makes the business strong and it makes it better able to weather storms. If I were to come along and buy Mel's business, I would come together on a price and I would pay Mel, but a good chunk of that money would probably be borrowed. Now, I would have a much weaker balance sheet than what Mel enjoys today. And a big chunk of the cash flow that he currently enjoys, I would end up giving to my bank. And so, I would be in a more fragile position. And this is one of the reasons why a business may be worth more to its current owners than to a buyer because the the business they end up with after they buy is not the same business. And so from Mel's point of view, even if he steps back and let's say the business becomes less efficient because Mel's not there every day running it, he may be able to withstand that decrease in efficiency and profitability and still end up further ahead than somebody who borrows money to buy the business. And so it creates a unique scenario or situation. You know, I did something like that enter into your reasoning at all, Mel, when you were thinking about this that sort of turning the business into an annuity that would just kind of pay you for being the owner, like owning stock in a big company. Yeah, you made me sound really, really smart right there. Um, but just really, really smart. So, the business has 130 people and, you know, uh, a a solid management team that is the new CEO is quite frankly better at this than I was. he knows our business better. And so they're not just positioned to idle, they're positioned to grow. Um, and what was really going into my mind was the ability to have it as a family asset. I saw it as a way to bring our family together to um, educate our children on stewardship of an asset, how to be good philanthropists, and also to be good um, caring, loving people of the employees who work there. just a way to to live out a family legacy. And you know, we're in the first 2% of going down that road. So, part of it was was financial, but the most part was not. It was the value was bigger than the dollar to me. The value was the legacy of what it could mean as a family asset. It wasn't really an assessment of what you could sell the business for compared to what you would perhaps earn if you maintain ownership. That wasn't the reason for it. But as I'm talking to adviserss, they're saying to me, hey, this is worth more to you owning it than selling it. Unless you're worried about it ability to be successful down the road. And if so, then you should absolutely sell it. if it if you're not going to be to sleep at night, if you can't walk away and not be the person who runs it, if if you're worried about day-to-day management, you should sell it. But I was not worried about day-to-day management. At least I haven't been yet. So, they confirmed my thinking more than created my thinking, uh, Lauren, but uh, it was the multi-generational um, legacy uh, family wealth creation that drove it. And I bought this business later in life. So, I bought it in 2009 and so I didn't own it for a super long time and our family really hadn't reaped the benefits of the growth of this business. I shouldn't say that. We reaped some benefits but but not significant and um and I just thought we needed a little more time. You know, I think that the fact that a lot of people have been telling you that you should sell suggests that you're doing something uh a little bit different here. and the fact that you're doing the valuation with the goal of creating an incentive plan for the the leaders who will carry the company forward clearly is a little bit different. Did you have a model? Is that something you came up with on your own or have you seen that done successfully elsewhere? Well, you know, I hang out with the folks at Tugboat. Um, for those of you who don't know the Tugboat Institute, it's a group of privately held companies who in in essence have pledged they're going to stay private. And that group has so many ownership, leadership, governance models that um it was there that they that helped clarify my thinking. And I remember it was over a drink someone said, "You seem to be stressing because you're holding leadership and ownership in the same bucket. If you separate them, is it does it get easier? Can you make one of those decisions?" And I said, "Well, I can make the leadership decision." They said, "Make the leadership decision and keep the ownership decision for another day." that began me down this road and I like the governance role. I like being chairman of the board. I like we've got one son on the board and the other one as adviser to the board so he can sit in the room and listen and learn. So I like that role Lauren from a you know value my purpose kind of thing. So that's been great. So that's how I got there and I'm still getting there wherever there is. You know, it's it's interesting listening to you, Mel, because when I wanted to exit my company, my whole thing for a year before was shoring up my business so I wouldn't have to stay on. And I I that that was adamant because I I do not work well for other people. So, I really dug in and by the time, you know, we were going through the LOI and due diligence and all of that, I was only working maybe 5 hours on my business. Five hours a day, five hours a week. A week. A week. Wow. I like that. Yeah. Yeah. Everything Everything was It was really going to be pretty turnkey. And that's why I was like, "Okay, well, I could have just kept it." You know, hindsight is always 2020. But again, I I I'm still very happy that I didn't end up selling. Although the it was going to be an owner operator and he and I were in definitely in lock step on how we think about leadership and talent and all of that, we've actually still uh remained friends. But yeah, so that's that's exactly what I'm trying to rebuild because between COVID in this market, it's a very different company. Early in my YouTube channel, someone asked me the question. They said, you know, why are business owners selling their businesses? why don't they just hire managers and continue to enjoy the profit? And and my answer was that some people just can't do that. And uh I see this example all the time in my in my in our consulting. Uh and I'll I'll tell a story. You know, there's a a guy that I worked with who was an auto mechanic in his early 20s and decided he wanted to own his own shop. And so he went and opened up his own shop and he was successful at running it. He eventually built his own building and then he grew that shop and then he sold the shop but kept the building and became the landlord. And so he actually he went through that evolution of employee to owner to investor in the building becoming the landlord. And I asked him I said why didn't you just keep the shop? You know why couldn't you get everything into a position where you could just be an absent owner? and he just said, "I would be so worried every night at night worrying that all those details I used to do as the manager weren't being done properly." And I knew that I would never be able to let that go. So, I sold it. And it's it's interesting because I see this from people who come out of maybe middle management of big corporate enterprises where in their middle management role, they have no problem delegating authority and responsibility to their employees. But when they come into their own business, they suddenly do have a problem. And it's because they are so much more connected to the outcomes. When an employee makes a mistake and you work at the big corporation, well, the big corporation maybe lost some money or had, you know, some problem they had to deal with. But when it's your own business and the employee makes a mistake, maybe it cost you $5,000 and you think that's my money that just got lost because I let this person do this thing and they failed. And some people just can't let that go. They can't grow beyond that point. And so then they become the business sellers. Yeah. And it's it's uh more than a notion for a founder, especially a founder, but even the person who bought the business to um be willing to invest enough in someone who can really replace you. I mean, think about what that really means. That means that person's been they're talented enough and you're compensating them at a level that um you can really step out. And you know the buildup to that at least in my experience was suppressed earnings because you know I was building an executive team that really can continue our strategic planning process and our annualized approach to things and our people development and the communication with the board and um managing very complex customers without me having to be the relationship person. It's it's just more than a notion and I don't think everybody's up for that. Some people stay too long and all their good talent has to leave and then the business is something that they have to sell because they're not positioned to they haven't positioned it to to keep it. And let's face it, any business can fail. And so keeping it comes with a element of risk. And if you're not there every day, that risk probably does go up a bit. So tell us, David, what are you doing with your business? So the main part of our business is we do consulting and education for people that want to buy or sell a small business. and we work with people all over the world to do that. But a much smaller part of our business is also that we are certified machinery and equipment appraisers. And that business is really a regional one. It's, you know, all within a few hours of where I happen to live, which is uh in Monton, New Brunswick. So we're on the east coast of Canada. And so across the province and into the neighboring provinces, this is the area that we we we cover. And a lot of this appraisal work is done on the beha on behalf of lenders who are going to be making loans. And a lot of it is driven by people doing acquisitions of businesses and they need financing to get the deal done. And so so it does relate to our overall business. It it grew out of something that we were doing back when I used to run a traditional business brokerage office. And as I grew the consulting business, I just kind of kept this going with me. But it's always been very passive. It's always been driven by past uh you know clients that we worked with or centers of influence that have been sending people to us for years or people just looking up our website. And a year and a half ago I thought you know what maybe I should actually do some work and try to grow that part of the business because it it is not correlated with the big part of the business. Right? So just this idea of diversifying your income streams a little bit. And so I I targeted a neighboring region which you know has a good number of businesses and started to set about a plan to grow the business into that area. And so it's it's almost like a sales and marketing kind of challenge that we've been doing over the last year and a half. And um the things that I've done for example is we've done direct mail, we've done outreach on LinkedIn, we've made efforts to do increasing uh engagement through LinkedIn groups that would have the centers of influence. The tough thing is it's really hard to look out over the the view of all the people in the public and say who amongst these people is likely going to buy a business next year. it's almost impossible to identify potential or prospective business buyers. So, what we do is we focus our marketing and sales efforts on centers of influence. So, people that work in banks, you know, people that would be meeting with these people, uh, accountants, lawyers that advertise that they do, uh, small business transactions, people of that nature. Uh, next month I'm going to be there or I'm actually hosting a breakfast where I'm going to be doing a presentation and talking about some of our work and some of the the stories where we've helped lenders avoid losses uh through our efforts and things of this nature. And it's it's been interesting um because it's the first time in a long time that I've really had to sort of throw my shoulder into a sales effort to to get back to doing sales, you know, trying to create relationships, making phone calls, etc. And it it's just a little bit interesting to me how it seems that things have evolved a little bit. um that uh it seems to be harder to open up those new conversations than maybe I think it was 20 years ago when I was engaged in this all the time with the different things I was trying to sell over the years. I just had a conversation about this myself that buyers in general from a sales process it feels very different than what I experienced over my my you know career. It's very very different. I don't know what it is. It's just different. Well, I I think I think the buying of things and services has been professionalized. And what I mean by that is I can't think of any of our customers that doesn't have a procurement function. Someone whose job it is to figure out who is the best solution best in air quotes. So they're not the enduser. They're acting on behalf of the enduser and their incentives are to drive out var variance. So all your differentiation we used to sell before is harder to get through because they don't provide the same avenues for that kind of differentiating conversation. They want to I don't want to use the word commoditize but they want to commonize the comparison between one firm to another so they can apply their professional procurement methodologies so that they can drive out costs and drive up efficiency. I think that is at least in every business I'm in right now is the significant change in how things are done. I've been a salesman all my life and relationships still matter but the percentage of their matter has to be calculated into a professional procurement model. It's interesting that you say that because the by far the vast majority of the regular work that we do and so so there's a group of customers that keeps coming back and these are these are lenders. Uh, and then there's this sort of random group of people that find our website, for example, and they need us for one-off projects. And amongst the group that are consistent users of our service, I don't think they shop anywhere. Like like we've served them so well over the years that they just keep coming back and sending people to us. And so I'm my part of my thesis is that other buyers in this new market I want to get into uh have similar kinds of relationships. And so it's it's how do I work myself in there? You know, how do I make myself known, present ourselves as an opportunity, get the opportunity to, you know, have them give us a shot and see how we might be different? Uh and I would agree with you about the commoditization because back when I was in college I spent a summer as a buyer for a big company and uh these were some of the things that I was taught by the other buyers is you know the the method of sort of working out the supplers's gross margin you know working it down to the benefit of the buying entity um and how the whole professional purchasing process works. Yeah. I I hope that the customer I'm pursuing has a long-term relationship with someone because that means that they're a long-term relationship kind of customer. I've got to do enough to that when they have a bad experience or something changes that I am the person they call to say, you know what, you've been talking to me for 3 years and my current supplier either got overburdened or they changed ownership and dropped their service level or whatever the reason is. Um, what I don't want is a client who will drop their current supplier willy-nilly because I'm next, you know. Um, but you got to be willing to stay around, keep doing the marketing things and the sales things so that the opportunity you hope one day comes to you. David, can you tell us more about the target market you're trying to reach? Who who's in the market for the appraisal services that you offer? Well, it's it can be people that have they they fall broadly into different groups, but the the biggest group are people who want to buy a business and they want to use the assets in the business as collateral for a loan. And the the big way that they find out about us is because their banker knows us. So, when their banker says, "We're approving your loan subject to an appraisal," people say, "Well, who do I call for that?" The banker might say, "Well, we've always had great success with this firm." And they'll direct them to us. So that's why I mean we have a center of influence marketing problem or issue is that we're trying to create relationships where people direct people to us. Uh and then we also talk to accountants. Uh there are companies that will convert from their accounting standard that they might be using today into something called IFRS which is an international standard. And IFRS conversion allows people to make a one-time restatement of their assets value to fair market value versus uh depreciated, you know, book value. So that's part of the work that we do. And then we get people who have some kind of uh a problem or they're trying to avoid a problem. So an intercomp transaction, they're worried maybe that the tax authorities might think that they're doing something wrong. So they get an appraisal done to say, "Look, here's the value of what we're moving between companies." or um you know sometimes legal disputes. Uh sometimes there's a married couple and a business might be common property and they're getting a divorce and so they want an evaluation of the assets of the business and we do those from time to time as well. David, do your two companies or two divisions or two offerings have different names? Are they named the same? And if so, what is the name? So it's it's uh we actually have three different websites. So when we work with sellers, we direct people to how to sell my own business.com. And when we're talking to buyers, it's business buyeradvantage.com. And those are largely driven off me and my YouTube channel, my personal brand. The valuation services, it's on a different website called businessandassetvalues.com. And over there, we go under ALP limited valuation services. So it's it's not as connected to my personal brand over there. And so we have uh you know a team. Um one of the things that we work we're working through right now is that when people watch my YouTube videos and they say you know I want to buy this business I want David's help. You know it's that problem that a lot of us face is they they want to work with David because David's the person they've seen seen on on the internet right but David doesn't have the capacity to work with everybody anymore. So it's it's it's a team effort and uh you know supervised by me with processes built by me using tools that I've created etc etc. Um with the ALP valuation services there's less of a connection with me from the get-go which is another one of the reasons why growing that part of things is attractive. Yeah. So I I chair an accelerator program and one of the things that I'm always stressing to the the uh participants is really understanding all the pieces that you need in order to think about an exit and maybe it is like what I'm talking about stepping away from the business but all of the holes have them all shored up and you know to to it I just had a an accelerator who was telling me about their business and how it was thriving and everything, but it's really really they're a soloreneur and they just wrapped themselves with 1099 people. I'm like, well, you don't actually have a company. There's no way to give you a valuation because you're just basically taking a paycheck. Is that true? The use of contractors has grown so substantially. uh the ability to build a business as a soloreneur has gotten given technology has gotten so much more prominent. Well, yeah. Yeah. Well, I I agree with that. But if you don't have a playbook, if you don't have something to sell, if you there's no IP and you're just stringing extra talent, what what really do you have? So, what comes to my mind is sometimes the solo entrepreneur has a practice. Like my wife's a physician. So when my wife stops being a physician, she's like that practice is is over, right? Um because the value she brings of of that service, although she's surrounded by nurses and other things, that value is is what she brings. I guess I had to think through the solo entrepreneur. Is it absolute that they don't have any value? I don't I don't know, Kate. I got to think about it more because what if they've built a brand and a way of doing business that the 1099s love because they don't have to go feed themselves, but they've got an engine that can sell and that keeps pricing and does some back office stuff for them. I don't maybe it could work. I think I don't know. It just feels like you'd have to have a playbook in order to to say this is what I have. this is my IP that you could take this and then go sell, you know, you could sell it and grow it and develop it. Without that though, I I just don't quite see it. Well, I think what I just articulated to to myself is that would be the playbook, right? They've got a system in the back office that holds it together and a way to market and sell it and keep these 1099s, you know, busy and taking a portion of their proceeds. Well, it's like franchises, you know. I guess that's you're selling an idea. You're both talking about um a little bit of a different scenario, you know, with respect to sort of the the doctor medical practice kind of thing that we think about. You know, people are patients of the specific doctor. Uh it's funny. I've got a client right now in in my coaching program for buying a business and he's he's actually looking at a deal to buy uh a business which is a soloreneur business. And so he's been dealing with a lot of these challenges like how do you do it and it's the difficulty is that the seller has to be able to transfer the goodwill of the business all the you know people. So for example in a medical practice you've already got all these patients lined up. So, is it is it valuable to a new doctor to take over the full book of patients versus building their own from scratch? I would argue it is, right? It's like an instant cash flow, but the new doctor has to be convinced that all the patients are going to stay and want to do business with them. And that's the challenge is in the handover of the goodwill so that the relationships carry on. And so the way that this is normally dealt with is through some kind of deal structure which involves the continued participation of the selling party. Um and and we see this a lot in different kinds of professional businesses where you have this transition period which could be years long where the clients meet the new person but the the you know the older person is still around that they had the relationship with and they get have to have an opportunity to develop a relationship with the new person and have that stick. And what business owners who have this kind of business often have trouble with is the idea that the value of their business is ultimately not in what they do or their cash flow. It's in the willingness of the customers to transition to the new person. And so a lot of the times these deals are structured in a way that it's the future performance that ultimately determines how much is paid to the seller. and that seller's got to be actively involved in making sure that those clients really do transfer their loyalty to the new person because if that transfer doesn't occur, then the buyer didn't get what they were sold, right? And and this is a bitter pill for a lot of people, especially if they start to talk about a multi-year transition because of course most people think, "Hey, I want to sell my business. Where's my check? And next week I'll be in Costa Rica or something." Now in the case of the 1099 employees, you know, you can have a systematized operating going concern with different people in that business. And you know, people use the term contractor. They use the term employee. And there's various legal tests or or definition test to determine if someone's an employee or a contractor. But you could have an employee for example in another country and you could that person could work for you full-time and you could be telling them what to do and you could be supplying them with a computer etc. But legally they'll be a contractor because you don't have an entity in their country to legally fill the role of their employer. Right? And so a lot of this stuff is kind of being moved around like a shell game in our modern world. You've got people that are contractors and you've got people that are doing what I would call peacework employee compensation. So, you know, you've got a video editor that edits your video and you pay them per video, right? And is that person an employee? Are they contractor? Well, you know, legally we would have to look at do they supply their own tools? Do they have other customers? Is it up to them when they do the work? All kinds of things go into it. I would say it depends upon the replaceability of the person. So if you have your systems all mapped out and your playbook as you put it Kate and that person left you and you could replace them whether it's with an employee or another 1099 contractor then you still have a business because you're orchestrating workflows and you you are attracting an audience of customers that are paying you for whatever the product or service is that you're delivering. And if you can get that system to function, then you've got a cash flow and that's ultimately what people buy. Dave, let me ask you, when you're transacting these business, is there any any um either anecdotal or statistical outcomes you have around success of a per of an acquisition? Someone buys someone else's business. Are they successful? And what percentage of them are are not? Yeah, it's really tough because they're all private transactions. I know that about three years after I got out of business brokerage, I was cleaning out my closet and I found this old plaque I used to put on my wall of my brokerage, like one of those plaques with little plates and each one represented a business that we sold. And I looked down the list and every one of those businesses was still open. But that was three years after I I shut down the office. Today, you know, I shut down the office in 2011. Today, I think more than half of them are closed. And it highlights the fact that small businesses are the riskiest asset class there is. There's all kinds of forces in the market that work against businesses. And most businesses don't last for decades and decades. And so this is one of the things that uh that I bring to the attention of buyers when I talk about things like their return on investment. You know, people will will bring sometimes these uh these big company tools or ideas into the world of small business. And when you're looking at stock market investing, you're looking at valuing the shares of these big companies as though they lived forever. And you know, big companies do have very long lives. Small companies do not. When you when you buy a small business, you have to be able to recapture your capital you put in. You have to be able to pay your debt. And you know what's left after that is all yours, but how much longer into the future will what's left be there? And that that's what introduces the risk to the element. This is why these businesses sell for cash flow multiples that are so small compared to when you look at publicly traded companies. There's another show there. If you haven't already done it, Lauren, I wonder what those factors are that make them the riskiest. I'm not surprised. I just wonder what the what the the factors are that make that small business and even the definition is unclear to me but makes small business the riskiest asset class. It's dependence on the owner and it's you know just the fact that an economic unit that is relatively small is more likely to be affected by all kinds of other elements in the market. If a a new brand of uh you know soft drink comes out and is really popular in one town, you know, CocaCola might lose some sales, but Coca-Cola is going to weather that storm. Whereas, if you're a micro brewery with one tap room in a town and you're doing well and another one opens across the street from you, you are definitely going to be impacted in a big way. And it's just because you are a smaller economic unit with less momentum and less options. Mel, you asked a couple of really good questions there. We all have seen statistics for the success rate for business starts, but I've never seen uh that I can recall a statistic for success rates for businesses that are purchased. If anybody listening to this knows those numbers, I would I would love to get an email and hear more about that. Uh unfortunately, we are out of time though. This was a really interesting conversation. I appreciate all of you taking the time. My thanks to David Barnett, Mel Graveley, and Kate Morgan. [Music] One thing before you go, everything we do at 21 Hats is created by entrepreneurs for entrepreneurs to help us all learn together. If you get something out of listening to these podcast episodes, consider joining the conversation. You can do that by joining the 21 Hats sounding board, a Slack channel where you can tap the wisdom of a very smart crowd or by becoming a founding member and joining our monthly Zoom forum where you can be part of conversations much like the ones we have on the podcast. You can sign up for both by subscribing to the Morning Report. If you have any questions, you can email me at lauren21hats.com. And if you get something out of this podcast or out of the morning report, please tell a friend, tell an enemy, tell every business owner you know. Your word of mouth owner to owner will always be the most effective way to build this community for all of us. Thank you. It means a lot. This episode was produced by another entrepreneur, Jess Stubberon, founder of Blank Word Productions. Thanks for listening, everyone.