The Exchanges

Q What else have you seen that is something that would cause someone to not get the deal done?

A The first thing we see most frequently Uh, is that, uh, when someone calls us and they want to say, Hey, it's time for me to sell my company. My kids don't want to buy the business. They don't want to be in the business. And it's tough for me to get out. Um, the first thing we see that is going to make the company unsellable or take a really long time is they have terrible accounting. If they have any accounting at all, it's amazing, uh, how large your company can be. And they don't do any budgeting. They don't do any regular monthly, uh, financial reporting. They essentially do what's called checkbook accounting, where they look at their checkbook. If they've got enough cash in there, then they pay their bills. And that's, uh, frequently, I did a, a, uh, turnaround on a sixty million dollar fiber on C three that made five million dollars a year for the charity. And, uh, they really had no idea what their, Uh, cashflow was what they're forecasting was. They've never set a budget in 30 years. So that's a fairly common thing. The second thing that we see most frequently is a business where, uh, the company is either completely or almost solely dependent on the owner of that company for its ongoing operations and success. And, uh, most times those companies don't get sold or if they do, the buyer's going to require the, Owner to stay on board for probably an extended period of tim…

AI assessment note: “the first thing we see that is going to make the company unsellable”

Q What should someone do if they want to prepare their business to be sellable?

A Well, the best thing to do is not to just wake up one morning and say, that's it. I'm done. I'm selling. Because they usually need, uh, ideally they need a runway of a minimum of a year and two to three years is usually the case. As we talked about, there's a lot of issues around owner dependency. Uh, if they can identify and have a succession plan in place where they have a number two individual that they can make sure they're trained, they could step into their job. That's going to make the company more, more sellable. If they work with accounting professionals, Uh, in this day and age, you can hire a fractional CFO for very little money who has tremendous ROI for, uh, in value creation for getting the accounting in shape. Uh, many companies have, uh, one of the other key criteria that we see that's, uh, debilitating for company sales is customer concentration. If you have, uh, more than 20% of your business is dependent on one customer, That's, uh, for, for private equity buyers in particular, if the company is big enough to be acquired by a financial buyer, that's one of the first questions we get asked when they call us about a company we're representing and they're automatically out if it's over 20%, or if they have two clients that maybe represent 40 or 50%, that's a tremendous risk factor for them. So if you can evolve the company, make sure you're maintaining your gros…

AI assessment note: “ideally they need a runway of a minimum of a year and two to three”

Q margin is lower because the founder is taking money from the business. So should, is this something that's understood and like, don't worry about it or. Is this something that the founder has to be very careful to manage so that as they're approaching the sale date, they take less money so that the profit margins look higher. I mean, what is, what, how does that kind of thought of?

A We see a lot of business owners that don't really understand that. So the majority of companies in the U S today, smaller companies in particular are structured as either S corporations or LLCs. Being taxed as an S corporation. So, uh, the business owners generally take a market based salary. So if they're in an industry where just hypothetically, uh, 200,000 dollars for the size of company and industry would be, uh, a normalized, uh, compensation for a CEO or owner of a company, then that's what they take. But at the end of the year, Because they're a pass through entity, they take a distribution for the remainder of what is considered the profit of the business. So that doesn't really impact their income statement or delete their profitability. Uh, where they run into problems is when they need to bring in a manager or promote someone to be their number two for succession planning purposes, they have to pay that individual more money. And that, by definition, reduces the amount of profit available for a distribution to them that you're in, which means effectively they are reinvesting in the business and reinvesting in their future in terms of what value creation and how sellable their business is. So the ROI in a longer term is much better for them than it is to not make the investment in a succession plan.

AI assessment note: “take a distribution for the remainder... doesn't really impact their income statement”

Q Have you heard anyone talk about automating workflows and processes in the process of preparing to sell so that they can cut down on staff to increase profitability?

A Business owners spend about 95% or more of their time Working in the business and five percent or less of their time working on the business. So the, uh, introduction of things that you just described in terms of process improvements or efficiencies, et cetera, that's, that would occur when you're working on the business versus in the business. And, uh, a lot of times that requires additional investment. And unless they're really motivated to do so for other reasons, like they're seeing deteriorating, uh, profit margins because costs have risen faster than they could, uh, introduce price increases and they're forced to make some of those decisions. Uh, yeah, we don't see that a lot. And it does vary some by industry as well. For example, in a, in construction industry, uh, you know, you're dealing with, uh, hourly labor force, whether they're union or non-union is irrelevant, uh, and you're still gonna have a lot of heavy equipment and machinery because it's essential to execute the work. Uh, that's where your real costs are, so there's not a lot of efficiencies that can be extracted there.

AI assessment note: “we don't see that a lot. And it does vary some by industry”

Q What other things have I not asked about that you feel like I'm missing out on not knowing if I don't ask?

A Yeah. One of the other, one of the other key, uh, key drivers for business owners to look at besides we talked about their customer dependency. Uh, there's also a case of vendor dependency. So I had a Canadian client a couple of years ago. Uh, it was a fascinating business. Uh, it was a money machine. The guy was just printing money, and he provided a service that required a specific and fairly unique product that was used in extremely large volumes, and there was only one provider of that product, and, uh, buyers looked at the business and said, wow, if, If this vendor for this product says, I'm not going to sell to you anymore or jacks the price way up. Uh, that's, that's a business that's got a very high risk factor and virtually every interested buyer who was interested for every other reason about the company, uh, they walked away from it. We eventually weren't able to get a buyer for that business for that very reason, because of that singular dependency. That one vendor. So that's another key criteria that business owners need to look at.

AI assessment note: “there's also a case of vendor dependency. So I had a Canadian client”

Q What percentage of the people that come to you with this problem of, I can't find the right person, have actually engineered the problem by not offering someone something good enough?

A I would say that the vast majority of them, either A, have never considered that, or B, don't really know how to find someone. They don't know what they would actually want. And most business owners, you know, they've, They eat, sleep and breathe their company. It's their, it's their primary source of value, of legal validation. Uh, it's, it's their baby. And a lot of them would have a very difficult time turning over their business to somebody else to run because it's, it's their baby and they know how they want it done and they're not going to Have a high tolerance level for somebody else doing some of the things they did in a different way and heaven forbid if they did it better.

AI assessment note: “I would say that the vast majority of them, either A, have never considered that”