Podcast: Buying And Selling Companies With Brian Loring
This post originally appeared on the Business Leader Podcast.
RainCatcher is a Denver-based national business and brokerage firm that helps entrepreneurs buy and sell their companies. In this episode, Brian Loring who is one of its senior brokers talks to us about the company and how he ended up working there. As a real estate expert, he offers advice to those who are starting out in the buy and sell businesses and shares some of the things that he does to help business owners readily sell their business. Learn more from Brian as he discusses further how they go about acquiring and helping clients and the typical mistakes business owners make.
Transcript: Buying And Selling Companies With Brian Loring
We have a guest from the West Coast, Brian Loring. He is a senior broker with RainCatcher. RainCatcher is a national brokerage firm based in Denver. Even though Brian is in their LA office, he’s holding down the West Coast version or location for RainCatcher. He joined the company a few months ago, but he’s been a broker since 2005. He has completed more than $150 million in business sales and commercial transactions during that time. Selling businesses is actually a second career for Brian. He spent many years in a very different line of work. He’s going to tell us more about that and how he got to this point. Brian, welcome to the show.
Thank you, Bob. I sure appreciate it. Thank you for having me on.
Thanks for taking time out.
Give us a quick snapshot of your background and how you got to this point.
I actually am a two-career person. I completely had nothing to do with transactions, brokerage or anything to do with real estate or business for many years. I started out as a journalist. I was a reporter and a television news anchor. I worked as an on-air reporter for many years. I also worked as a television anchor for a while. I’ve been lifelong in California. I worked in Santa Barbara, San Jose, San Francisco, Oakland, Sacramento and all the major cities of California for many years. I started as a newspaper reporter, television reporter and I eventually got into television production here in the Los Angeles area. I worked for a bunch of syndicated television shows back in the ’90s and the 2000s. I worked for NBC, Fox, CBS, numerous television networks on the national level. I covered all the national news. I won several Emmy Awards, Golden Mike Awards and produced several documentaries, hour-long pieces. I did a lot of production. I was mostly a writer and producer for many years. I got to my early 40s or late 30s and I was running ragged. I was getting on a plane at a moment’s notice to go run to a news story that had happened and it gets tiring. It got to a point where I needed something else and I wanted to serve in a way that I wasn’t serving before.
I wanted to feel like I was making a contribution and helping people in a way that I wasn’t. I completely left the television production realm behind. I had been an executive producer. I was promoted to a divisional manager of an IT department at CBS and at Fox where I was doing a lot of IT work, a lot of systems work and network administration. I decided to try something else. That was back in the early 2000s. I went into brokerage. I’ve been a broker since 2005 and done a lot of deals both in the commercial real estate side as well as the business brokerage side.
For most of my life, I’ve done both side-by-side. I started out with several mainstream business or real estate brokerages; CB Richard Ellis, Grubb & Ellis, NAI Capital here in the greater LA area. It was just in deals, but at the same time also did business deals. I found that after a while I got more not only accustomed to and used to doing the business side, but I enjoyed them more. I liked working on the business side. I like working in the financials. I like a lot of the people who were involved. I eventually sold a few gas stations, a few car washes, liquor stores and so on. Eventually, I made that transition from commercial real estate into business brokerage full-time many years ago. I have been doing that for many years now.
I think about your obvious communication skills from being in media prior to getting into commercial real estate in business brokerage and then you look at the business brokerage side of the house. Do you find many business transactions where there’s not a real estate component involved?
Occasionally, but when I was working for my own firm doing digital businesses at IBIS Advisors, there were a lot of deals that were not eCommerce deals, digital deals, online deals, lead generation websites. A lot of those will not have a tangible space. There are some of those components, but a lot of times the lease and the real estate is a big part of the deal. You have to be ready for either.
I think about that as a value-add I’m bringing to the table when you’re talking to a prospective seller of a business. If they’re predominantly real estate heavy in their facility and so on, I would think that would be a valuable add on to the discussion.
Absolutely, particularly on the leasing side. There are so many cases where the landlord becomes an obstacle or the discussions with the seller and the landlord become something that you need a little bit of experience with. That has helped me tremendously. Having come from a leasing background has paid off extremely well. The clients appreciate it. The sellers appreciate the fact that I can get into a discussion with a landlord or with the management group representing the landlord and feel comfortable, get through the language, get through the legal and have a sense of how to best represent the seller. They do appreciate that.
For the business owner that’s in a lease arrangement now with their business and considering selling at some point, let’s say their lease terms are coming up and they’re thinking, “We’re going to exit the business in the next three to five years,” is there a piece of advice about leasing you might offer?
I generally give the advice of not to do anything different based on the perception or the idea that you’re going to sell any time, whatever the timeframe is. A lot of people will come to us with the idea of selling their business at a time anywhere from six months to a year out from having to do a lease renewal. It comes up a lot. It gets them to thinking, “Maybe I don’t want to go another three or five-year term. Maybe this is the time to start thinking about selling the business.” We do get small businesses that are in that category where they’re saying, “Should I or shouldn’t I or whatnot?” We usually have a discussion. We’ll find out if there is a month to month possibility in their tenancy so that when their term comes up, they don’t have to roll to another three years, another two years, and another five years. When you get to retail spaces, sometimes they want another ten years, if it’s restaurant space or something like that.
I think about the components when a potential buyer is getting ready to look at a business, are there things in the lease agreement that may make the transaction easier, harder, more expensive, less valuable and that kind of thing? I don’t have a good feel for that.
The relationships often have something to do with that. It’s not totally what’s on paper. If the seller has been able to maintain a good relationship with that landlord or with the property management or both, it does go a long way to being able to craft something that may be in a short-term solution would be a short-term solution. There have been many cases where I’ve recommended that they try to find a short-term solution and be honest and upfront with the landlords. There’s a natural hesitation towards a business owner who wants to sell their business to want to let the landlord know that they might want to sell.
I usually generally like to talk to the landlord at the very beginning of our listing and engagement period. There’s a bit of dynamics of people having different opinions on this as to whether it’s better to wait till much later in the process, wait until you have a buyer or wait until you’re under contract. I’m of the belief that you should do it in the beginning because I can’t tell you how many times I’ve gone to a landlord at the very beginning of the listing process after the seller has had that discussion with the landlord. At least prime them to let them know that we’re going to put it on the market pretty soon as a business sale and that it could have implications for our leasing situation.
There are so many times when we will find out information from the landlord that we didn’t know before. I can’t tell you how many times when I’ve been told by a seller of a business, “I have a great relationship with the landlord. He’ll be fine with it; no problem.” All of a sudden, we find out about nine different details that we didn’t know anything about, sometimes obstructions to being able to even execute some a lease assumption. I would definitely encourage in the vast majority cases to talk to your landlord at a time because landlords can be deal killers. I have had so many deals killed by landlords who are not agreeable to the new buyer coming in, their financials, their experience, their background, you name it. Landlords can throw a wrench into a deal. It’s good to massage that process from the very get-go as far as I’m concerned.
I appreciate that insight and thinking about it, how did you find RainCatcher and what was your decision process like that caused you to select RainCatcher as a place to do business brokerage through?
It’s mostly because of the CEO, Marla DiCarlo. She’s wonderful. I had met her actually through a couple of webinars that I first sat in on and I was blown away with the amount of passion that she has for small business. She really comes from a place of wanting to help people. It’s not transactionally-based, it’s not about commissions and fees. She does have a purpose in life about helping people and helping small businesses. It was very obvious from the very first webinar that I saw. Eventually, I sat in on about three or four of her webinars and wound up meeting her at a conference in Dallas. She blew me away. I said, “This is a great place. Their model is fantastic, their people are great.” It was not a hard fit for me to want to get on the RainCatcher train. It’s been a good one, a great train ride.
I’ve had the privilege of having her on as a guest and she’s a real big fan of the business owner. I’m obviously a fan of the business owner and I think about what you guys do to help business owners take and transition their business to the next generation for lack of a better term. That’s an extremely valuable and misunderstood skill.
Marla is this super sophisticated business person on her own. She’s an accountant and CFO. She started her own business at Kaizen. She understands the Sturm und Drang of business ownership and what that feels like and what an owner is going through. When you can feel that and have a sense of empathy with someone, it really goes a long way to not only building a good client relationship, but actually getting the deals. You can show and portray that you have a sense of what it means to make payroll and to have to figure out where your next $5,000 is coming from because you don’t know where it is. That helps.
It gives you a perspective.
The sellers really appreciate that.
For you, when you’re talking to that business owner that’s thinking about selling, what’s the most important thing you do to help them get ready to sell their business?
The greatest value we provide is context. Context through information. There are so many business owners, they come to us and they freely admit, “I have no idea how to sell a business. I have done this for 10 years or 20 years or 30 years, and I know my business. I know my industry. I know everybody in this industry, but I don’t have a clue on how to sell my business as a commodity to another person.” What I think is the best thing that we can do is provide context and provide them with an understanding, a sense of dimension. We get a lot of initial calls from people. Let’s use numbers and say there’ll be a $2 million revenue business and they net $200,000 in profits each year. They’ll call us up and they’ll want to get information about what the process is like. They’ll ask me, “Do you think I could get $3 million for my business?” I know absolutely that they’re not going to get $3 million for that business. There is no way that they’re going to get $3 million for that business. Instead of me saying that, it’s better for me to have some facts and figures to be able to back that up.
Most of the time when I do an evaluation call or when I first meet someone, I like to have some facts about what previous deals have sold for in the past. I will talk to that business owner and say, “Before our call, we have several services that we can go back and look at previous deals in your industry and in your geography and in your recent timeframe. I went back and looked at 60 and 70 deals in the past ten years and here’s what they traded for. What they traded for is somewhere in this narrow range of 2.5 to 3 times your profits. If you take that 2.5 or 3 times your profits and you’re telling me that you think you have $200,000 in profit, you have a ballpark right there as to what this business probably will sell for.” If you tell them that from the standpoint of providing dimension, providing information and providing some context, they really appreciate that. It’s not just me having an opinion that I’m spewing onto them. They really understand that, “This is a marketplace. We are selling a business and you have to have to take it a little bit like a commodity because we are selling something. That does have a price and I’d have to put a price on it.”
That context is what I think is the most fun part. We were talking about my history as a reporter. One of the reasons why I like this job so much is because I get to meet people and interview people. That’s what I miss about journalism. There’s a lot I don’t miss, but that’s the part that I miss the most. I like to interview people and get into their lives and understand what they’re doing because we get to meet so many incredibly talented people who have done tremendous things with their businesses. That information gathering, they also appreciate the fact that I’m curious and I want to know how we can help them and move forward.
When the business owner reaches out to you guys and says, “I’m considering selling my business.” If you were going to characterize the first call with that business owner, what are the types of information or questions that you asked that potential business owner?
I want to get a little bit better sense of their motivation. What’s driving them to call us? What’s driving them to ultimately want to figure out what their business is worth? What do they think is going to happen once they do sell? What’s going to happen with their own families of their own day in and day out workspace, their own employees? A lot of people don’t have a sense of that. It’s not flushed out. They know that they’re tired of what they’re doing. They’ve been doing it for 15 or 30 years and they want something else, but they don’t have a sense of context. They don’t know what it’s going to look like. We try to help them with that and we try to give them a better understanding of that. We have a couple of proprietary tools at RainCatcher that are fantastic. One is that is called a sellability assessment where we’re able to put numbers and put scores on their business.
The greatest value that can be provided is context through information.
Another one that we have that is an incredibly valuable tool is called the pre-score assessment. That one is relatively new that we rolled out within the last few months. That is a fantastic tool that doesn’t necessarily deal with the business. It deals with the owner and it deals with the motivation of the owner and the background and the goals of the owner. I have found that to be as equally or more phenomenal in understanding and getting into the meat of what’s driving this deal. Those questions relate to what’s going to happen with their employees when the deal is done. It’s a wonderful tool that takes only ten minutes to do online, but it really provides a tremendous amount of insight as to how we can proceed.
I think about some of the statistics behind that. There was this statistic that said about 75% of business owners within the first twelve months of selling their business have remorse. That’s that group of people that haven’t really planned for step three after post-sale, what am I going to do with myself?
That is an amazing statistic. I don’t doubt it. We try to work really hard to not contribute to that 75%.
That pre-score thing that you’re talking about, it would absolutely contribute to that not happening.
It’s because that tool asks a lot of questions that don’t really come up in the course of a regular conversation. It really gets into what’s in their minds. We’ve had people who took this free score assessment and came back to us and said, “Maybe selling is not exactly what I want to do,” and it gets them thinking in a way that is incredibly valuable.
I think about as you guys are serving the business community and in conversations with Marla, she says, “We want to serve the business owner and do what’s best for them.” That permeates your organization and it’s really important for the business owner. You go on Monday morning when you don’t have to go to work on Monday morning, what’s your plan? What are you going to do? If you’re a pillar of the community and you don’t own the business anymore, what’s your identity? There are a lot of things.
I had to sit down for coffee with a husband and wife, a client who has a terrific manufacturing business here in the Los Angeles area. She started out our conversation by saying, “I have talked to five people in the last couple of weeks about the idea of selling the business and every single one of them came back to me and said that they were disappointed in how it came out and they didn’t like the results.” I said, “That’s interesting.” In my experience, that is not the case. I have to presume from my experience that it’s relatively normal. The deals that I’ve done, if I made a bunch of calls right now and went back to them, the majority of the ones that I have dealt with have been generally happy by the time they’ve closed the deal and they moved on.
That speaks to your process. In talking with folks within your organization, it’s clear that you guys are very interested in the business owner, not just the transaction. As you talk to these folks, here are some things to consider. There’s the presale, there’s the going through the sale period. There’s the post-sale. Is the proceed going to support your lifestyle? What are you going to do? What did your family think? What do your kids think? What your spouse thinking? All of those things are extremely valuable as business owners trying to frame the next step. They really do.
A lot of the problem areas come with deals where there are obligations on the part of the seller to stay with the business for the long term. Most deals will have some element of an earn-out, a carve-out, a seller carry a note, an employment contract or a consulting agreement. Some function where the seller who thought that they were going to sell a business and within a span of a short transition to be done with it. A lot of times it doesn’t work out that way. A lot of times they’re in it for a lot longer than they thought. Sometimes they’re not getting all the money upfront that they thought. One of the common misperceptions out there is that most people think that they’re going to get an all-cash deal. One of the things we do in our initial call is to let them know that the chances are pretty good that you’re not going to get all cash upfront, especially as businesses get larger. Most people want to use leverage.
Even the guy who has $50 million or $100 million in the bank, he wants to use leverage and whatever he can afford, he’s still going to be able to want to use some element of debt or equity financing in order to get the deal done and not have to come out of pocket 100%. Most people don’t quite get that. They’re selling a business for $500,000 or $250,000 or $2 million or whatever that number is. For some reason, think that it’s going to be an all-cash buyer who is going to walk in and want 30 days’ worth of consulting and I’m out the door completely. It doesn’t work that way very often.
Typically for the business owner, they’ve transacted real estate before, which is you don’t want them to stick around the house after you buy it. A lot of sellers don’t view the transaction from the buyer’s eyes.
You’ve hit the nail on the head. That’s one of the things we try to imbue upon somebody when they begin this process as the seller of a business. That is to get your mind starting to think and recycle and turn the axis around it. Start thinking like a buyer. Would you buy your own business? What would be the terms of that? What does that look like for you? What would be the risk points? A lot of it is about risk, assessing risk, making sure that the risk is mitigated, making sure that you’re letting the buyer have as much information and quality information as they possibly can. When somebody is assessing risk, if they have doubt, that doubt leads to walking away. You have to eliminate doubt after doubt, after worry to get to a point where they’re comfortable. That’d because otherwise the deal won’t happen. What we try to do is take every step of the way. We try to make sure that people have their doubts alleviated as a buyer in order to warm them up to the seller’s process that they need to be able to have a meeting of the minds in the middle and get a deal done.
We started to touch on that. Let’s dig into some of the challenges that you guys face when you’re trying to get the businesses sold. I’m sure from many of the owners, there’s a checkered experience where some business owners have a better experience when they sell their business. Some don’t have such a good experience when they sold their business due to some of the behaviors, some of the people in the industry.
There are a lot of mistakes that are made that we brokers and intermediaries try not to replicate. The failure rate in this business is very high. It’s unfortunate, but most people don’t realize that state associations track the success and failure rate of these listings as they come and go. Here in California, the California Association of Business Brokers comes out with a number on a regular basis. The failure rate can be anywhere from 70% to 75% of businesses that hit the market don’t sell. I see different numbers fluctuate back and forth, but the vast majority there are far more deals that don’t sell than do sell. I’ve seen that number go anywhere from 60% up to 80% of failure rate. That is a lot of disappointment for people who are out there who want to sell their business. What we tried to do is try to mitigate the possibility that it will happen. We’ve actually done very well in turning that coin upside down because the vast majority of our businesses do sell and we’re super selective about who we were able to choose as a client and to work with them and to nurture the listing along and nurture the engagement along so that we will succeed. We don’t want to have somebody spend six months or a year in this process and do a lot of the work and come away with nothing.
We don’t want that to be a failure rate. There’s a bunch of mistakes that are very common that I see. One is that business owners wait too long to sell their business. It’s a very common but natural tendency, a human nature to have a business that they’ve had for ten years or fifteen years and all of a sudden, revenues go down one year and then they go down a little more the next year. Pretty soon you have a pretty consistent downward trend. That’s when they start thinking about selling because they have lost their passion. They’ve lost pieces of business, they’ve lost whatever. That’s the wrong time to sell.
That is unfortunately when a lot of people come to us. We’re always looking for business owners who are ahead of that curve and are actually selling it at least when they’re flat, but hopefully when they’re on an upward trend. That upward trend is what a lot of buyers are looking for because at the end of the day the buyer is interested in the past and they want to know about the present, but ultimately what they’re buying in the future. They want to know what’s going to happen in the future, whether they can scale this, whether it’s a scalable business or not. When they’re looking at that is a lot of what they’re looking at in the future. The other big mistake that most owners make is overpricing.
It’s probably the number one reason why a listing that goes to the market doesn’t sell. That it’s simply overpriced. That is where we come in. We have to make a really good effort to let them have realistic information and realistic expectations about what their business really can sell for. It’s very easy for us. There’s a lot of business brokers out there who do this because they want to get a lot of listings and they think that listings beget listings and the more listings they have, the more money they’ll make. They go to a client and they will give them all kinds of pie in the sky that is not reasonable. A business that is going to sell for $500,000, some business brokers will tell them it’s going to sell for $1 million or $1.5 million or something that’s completely unreasonable in order to get that listing. We don’t do that. We’re never going to do that. We want to give real-world honest information so that the business owner can make an informed decision about their future. If the market doesn’t support the price that we think it will go for, then we’ll tell them that. It does happen all the time. We routinely have to deal with owners who don’t want to go forward either with us or with anybody because the business is not in the position where they were hoping to get to at a sale price.
There’s value even in that part. Let’s say you’re back to the business owner and you tell them, “The market suggests your business is worth $500,000 you go and you wanted to sell it for $2 million,” it gives them an idea. If you want that type of price, here’s the path you’re going to have to take. You’re going to have to grow these things, this way and start setting your company up to get that price. Here’s what the market will demand you to get that pricing.
This is one thing that Marla always talks about. Marla always talks about how the business is their baby, and there’s no ugly baby out there. That’s right. It’s true. You look at your financials and you say, “This is a fantastic business and I should get X dollars for it. I don’t see why anybody shouldn’t pay that.” That’s why our role is to provide context through information so that they understand that if I tell them I’ve looked at 80 listings in your industry, in your general geography and there isn’t one deal out of 80 that I can point to that is the same price as you think you should get. That’s not me telling them that. That’s the market information telling them that and that’s important.
We’ve talked about the qualities of your company and you have been recognized by Inc. Magazine as well. It’s not just us talking about the company.
Buyers are interested in the past and they want to know about the present, but ultimately what they're buying is the future.
That’s right. We’re ahead of Goldman Sachs, I forget who else we were ahead of, but we ranked number one. That’s not an accident. We actually are a fantastic company, not only in how we find clients, but how we market the listings and to give buyers to our clients. It’s a fantastic company. I joined a few months ago. I haven’t even been here for a year, but I’ve been at numerous other business brokerages and this one is clearly so much better at finding quality buyers out there who are qualified and who are targeted, who’ve been vetted already and are ready to go. We take the attitude that we’re redefining business brokerage. We tend not to think of ourselves as an M&A firm, which is an investment bank doing $200 million deals because we don’t do $500 million deals.
We do business brokerage deals that are smaller than that, but generally our deals are anywhere from $1 million to $20 million. That’s generally the ballpark we’re in. We do get higher than that on occasion, but at the end of the day, we’re trying to make sure that the business owner is teed up and ready to go. They have to be prepared. They have to have their financials in order. They have to have reconciliations that make sense. The paperwork, the accounting and bookkeeping is an extremely important part of the process. We help them to get ready and that preparation can take a little while.
One of the things that we haven’t talked about is for the business owner that’s going, “I’m considering selling my business,” what should they expect as far as the range of fees to liquidate a business or not liquidate but to sell a business?
There are a variety of different fee structures out there. The vast majority of business brokers that you find out there, I would guess probably 80%, 90% is probably going to charge a success fee equal to 10% of the total consideration of the sale of the business. 10% is the most common number that is used as a success fee at the end. You’re not paying that fee until the business sells and you’re getting through closing and an escrow with either an attorney’s office or an escrow company and the deal is done. There are proceeds coming from the buyer. There are other business brokerages that will go up to 12.5%. I’ve worked for them. 15% is also not that uncommon, but 10% is typical. By the time you get below 10%. I should preface this by saying as deals get larger, that number does tend to come down. We’re not going to charge 10% on a $30 million or $50 million deal, but as the number gets larger and you will find houses that charge 8% or 6% or something like that. Those tend to be real estate agents who are trying to do business deals or accountants or other intermediaries who are not professional. I tend to tell people that if somebody wants to charge less than that, be careful because maybe they’re not in the brokerage business.
For the business owners in the industries that you guys represent, do you specialize or do you guys cover multiple industries?
We’re industry-agnostic, but we do tend to see there’s probably anywhere from five to ten industries that we see more of than others. We do a lot of manufacturing. We do eCommerce and digital businesses. We do property management companies and vacation rental companies. We will do a lot of service businesses. We’re in all industries we don’t have any particular specialization. That said, because of my background before I came to RainCatcher, I do tend to do a lot of digital and tech-based businesses. Because of my IT background and my networking background, I do tend to do more tech data and IT type related businesses than others. Other staff members do have a little bit of specialization within their own backgrounds. That said, it doesn’t terribly affect what we do. We are industry agnostic and we cover everybody.
From the folks that are in RainCatcher, you guys have covered so many different industries where you may specialize in IT and somebody else may specialize in one other area from their background. That’s a wealth of people to go talk to within your firm to get perspective and maybe fine-tune.
That is very often how we will apportion clients to different specialties and to different backgrounds because it makes sense. Ultimately, at the end of the day, we’re trying to help the client in any way we can. A lot of times, we help them by doing something that is completely antithetical to what is in our own best interests. I had three calls where I was referring people out that are not going to make RainCatcher a dime, but we’re trying to provide service and we’re trying to do the best thing that we can to get those people the information and the service that they need to move on and meet their goals.
As you know, my brother-in-law sold his business for X and a neighbor down the street sold his business for Y and typically they don’t have any idea what the true value of their business is. What might they do or what can they do to try to get an idea so they’re not disappointed with an unrealistic expectation?
They certainly can call us or call someone like us to begin with. That’s not uncommon. You totally ballpark tree top numbers. That is that the majority of businesses that are going to sell for say under $1 million to $2 million, the vast majority of them are going to be somewhere as a sale price, achieve a price somewhere in the neighborhood of 2 to 3 times their net profit. We use a seller’s discretionary earnings number as a net profit number. A lot of people call it cashflow. A lot of people call it profit. The revenues are important, but at the end of the day, the deals are done on a basis of a multiple of earnings. That multiple of earnings uses a multiplier against their net income. That earnings number, that income number is what you can multiply generally by 2 or 3 times for the vast majority of businesses that are small. There are a lot of things that drive it above three or below two. I have sold business that sold for 0.5, not even one-time profit. I’ve sold other businesses that were twelve times. Those are anomalies. Those are not typical. If I look back on my career, I would say the vast majority, probably 80% to 90% sold somewhere in that range of two to three times net income.
From the business owner’s perspective, it’s really hard for that business owner to appreciate the risks that the buyer’s taking on. What are the types of risks when you’re talking to the buyers are they considering when they’re looking at a business?
There are so many risks involved for the buyer. They have to place capital. They have to get employees and people in place. They have a tremendous amount of risks that a lot of sellers don’t necessarily give enough attention to and enough understanding to. There’s a customer concentration risk, there are supplier risks, there are financing risks, there’s key man risk. Key man risk is one of the biggest that we deal with. That is when a key man risk is a term that we use for the key man being the owner or owner for wife and husband or something like that. If they’re now gone from the business, what’s going to happen in the business? Is that business really the guy who leaving? That key man risk is a huge part of most business deals we have. Even if you have some degree of a management structure, even if you’re a fifteen-employee company or a 30-employee company, that owner has built that business and he’s probably a rather significant component to the sales cycle, the marketing cycle. They have to make a very accurate judgment as to how important the elimination of his disappearance is going to be when that business gets sold.
That goes into the multiple of earnings that go into the multiplier. I haven’t touched on one of the tools that we use, the saleability assessment that I mentioned. The eight key drivers of value that are the main component of that score that we put together, these factors are a part of what goes into that equation. You can have two businesses with the exact same numbers. Two businesses that are making $5 million in revenue and $500,000 in net profit and they can be in the same industry in the same location, yet those two businesses can have very different values. That goes to what the eight key drivers of value get to, how the internal operating mechanism of the business is able to be so different for those two businesses.
In the business owners that you’ve worked with and others, do you think they’re aware of those eight key drivers?
Some are. They understand key man risk. They all understand that if they leave the business that’s going to have an impact. They’re very familiar with that. They’re not as familiar with some of the other things. A lot of times they’re not that familiar with the fact that the trend line is such a huge part of the sale process and the desirability of a business. They’re not aware of that at all, that if you have flat earnings and flat revenue, it’s very different from a very escalating high growth company. Consequently, a down-trending company, they don’t understand that it has a very negative impact and it takes that multiplier way down. There’s a lot of other components to it. That the eight key drivers are a very valuable tool that ultimately we wind up giving a score to the business. They can understand in each of those categories what that score is and how to try to improve it.
They can check the gaps. We’ve talked selling so far and for a business owner, you guys have a fairly good relationship with a quantity of buyers that are out in the marketplace. Let’s talk about the buyers that you guys could show business to and how that works.
It is fantastic. One of the reasons why I came to RainCatcher is to have a curated pool of national buyers on a nationwide basis that is much targeted and very specific. We key our buyer pool to a geography, to size, to industry and all the way down to many different factors so that when we have a particular seller that has come to us and wants to sell his business or her business, we can go right to that group right there who have said in the past that this is what they’re looking for. We have found that there are many instances where the buyer has not come from putting it on a website or any other way. They’ve actually come from within our system. The majority of our deals actually come from people who are already in our system. That is a very valuable tool.
I think about the seller. In the real estate world, a listing goes out on MLS and there you go. I’m sure there are business listing services, but to develop and have an inventory of specific buyers in specific niches is incredibly valuable for the person looking to sell a business.
It also helps us to allay some of the fears that the buyers have. We put all buyers in two different pools, strategic buyers versus financial buyers. The financial buyers are typically private equity groups, family offices and people who are looking for the financial details of a good investment. Those are very different from strategic buyers. Strategic buyers, somebody who’s already in the industry, already in that geography and may want to get into that geography. Maybe there’s a market that they want to get into that they’re not in right now. Maybe there’s a product line or a brand that they would like to inherit that they don’t have right now. The strategic buyer typically is somebody we highly desire because they tend to pay a little bit higher price to the seller. They also tend to have a little bit more determination to get a deal done.
We find that a strategic buyer will push harder than a financial buyer. What we do at RainCatcher and one of the things we’re good at is developing a strategic strategy to try to find those buyers out there who really are the best fit for this business. We do represent a lot of businesses that have a very specific niche. A lot of times we go into a listing knowing that there are probably less than 50 buyers out there for this business. There are cases for that where if you take away all the financial buyers and you look at the strategics alone, there are not very many. This happens a lot in very niche manufacturing and very niche software, a bunch of different industries where you don’t have that many strategics who would look at this business opportunity as a strap on or as some other form of investment for them.
Not having an intermediary makes all the difference between keeping the deal together and not keeping it together.
As you think about exposing the seller and the buyer as you’re representing that seller, what are the types of things or factors that you might tell the seller they need to focus on that would take in and be like the lever to either drive the value of their company up or drive the value of their company down?
There are several. One is preparation. There is no better way to make your business more sellable than to be prepared and to be positioned to properly. One of the things we do with them is we work through their financials. We work through their operating. We prepare a confidential information memorandum that explains the story and the history. Ultimately, storytelling is a part of the business of getting your business sold. People respond to a story. People respond to a through-line of a plot. What we have to try to do is portray that story in a way that is appealing to the buyers and make sense. It eliminates a lot of the doubts that they may have. That preparation is one of the things that is a big component in getting ready. There are businesses that we work with for months and sometimes years to be able to get ready because they’re not ready when they come to us.
I’ve read that there’s a large interest in businesses that have recurring revenue streams, which sounds somewhat redundant to say, but I understand maybe why. When you talk about your recurring revenue, contracts and that kind of thing, what type of advice do you talk to the seller of their business with respect to those items?
Recurring revenue is one of the hot buttons for buyers. They love recurring revenue, whether it’s subscription-based, monthly based revenues or regular contract revenues that are contractually obligated. Those recurring revenues are one of the first things that a lot of buyers will ask us about. One of the things we try to do when we begin with a seller is to figure out if there are any one-time revenue sources or any other components of their business that maybe could be transferred into some form of a recurring or subscription revenue model. Sometimes it can be. There are businesses that are conducive to that. Some are not, a lot of retail is not, but there are other ways that some retail is. We try to see if there’s a way to do that and a way to build their revenues and build their sellability that way.
I was at a car wash and they say, “Do you want a car wash or do you want to take your monthly pass?” You go, “There it is right there.”
Car washes are a great example.
If you’re a business owner and you look at your length of contracts with your recurring revenue stream, let’s say that all of them have an average length of time of six months or whatever. If you’re that business owner and they all came due in June and you knew you were going to sell at some point down the road, would you start trying to attack that single renewal or extend the length of that contract to help your company?
I would continue to try to keep that business in house and keep it going as though the business wasn’t sold or wasn’t going to sell. At the end of the day, you don’t know if you’re going to sell and you certainly don’t want to do anything that’s going to jeopardize your revenue stream. I would continue to fight as hard as I could to keep that going because at the end of the day, if you find a good buyer, they’re going to want that business already in place anyway. There’s not a lot of downside to halting business. One of the things we do find is that a lot of businesses and owners take their foot off the gas. Once we begin the sale process, they figure, “We’re going to get sold pretty soon so I won’t renew this contract. Maybe I’ll let this employee go or maybe I’ll not hire those two guys that I was thinking about.” That’s a bad strategy.
It’s one of the mistakes that a lot of sellers make. They think that this business is going to sell and they’re not going to be in it the next three months or six months or a year or something. That is the wrong attitude to take because that is when you need to be full-throttle on the gas. The buyer is going to see how the business is operating and if there’s any sense that there’s something diminishing rather than expanding, they’re not going to like that. You have to be very mindful of the fact that you need to be pushing to make sure that everything is operating as it can be.
It’s interesting, I was looking and there was somebody talking about a moat business, barrier to entry business. You think about for some of the business valuations, some of the companies you run across, how important is it to a potential buyer that it’s hard to replicate that business model or there’s a barrier to entry?
BLP Loring | Handling Real Estate Buyers
Handling Real Estate Buyers: Tax consequences are something that is very commonly not understood by small business owners.
It can be a substantial factor. It’s the buy versus build strategy. When you do have a strong barrier to entry where you have contracts in place that couldn’t get replaced otherwise, when you have a lot of it has to do with marketing. When you have a social media that you have millions of followers on social media, you have marketing streams that are in place. One of the things I learned early on is that probably nine out of ten sellers, when you ask them, “How could you improve your business? What would a new guy come in to look at your business? How would they improve it?” I would say 99 out of 100 business owners tell me marketing. They know their core business. They don’t know how to do the marketing of today. Marketing becomes the be-all end-all means by which sales and marketing in general.
A lot of companies are not very good at their sales process and their marketing process. That barrier to entry question that you had though is very significant because if somebody could build it, you find this in eCommerce, for instance. A lot of eCommerce businesses and a lot of buyers of eCommerce, a lot of them say, “I’ll start it on my own. I don’t need this.” You find it in trades, contractors, medical offices if they have the skills, if they have the licensing, if they have the background, why are they going to go buy someone else’s business if they could start it on their own? That does become a significant factor.
As you look back over your career in selling businesses, if there was a handful of mistakes that you typically see the business owner make when they want to sell, what would those be?
A couple, one is tax consequences. A lot of sellers don’t grasp that if they sell their business and they put a lot of money in their pockets, Uncle Sam wants some of that. I have to spend a lot of time in really urging them to consult with their accountant or their wealth manager or financial planner or whoever can really give them context about their tax consequences. When I was first in this business, I had several deals that blew up because we got into escrow and we were within a week of closing. At the time, I should have given them better advice to be able to not have this happen so late in the process. They didn’t realize that how much money was going to Uncle Sam at the end of the day and deals blew up because of it. It’s very important for them to understand the difference between ordinary tax liabilities versus long-term or short-term capital gains versus all different things that can happen when you start looking at it.
Most people don’t have any idea what depreciation recapture is, which is a nasty little thing that you have to sometimes introduce to people to let them know what that means. The tax consequences are something that is very commonly not understood by small business owners. We try to walk them through that a little bit. Also, one of the things I think they make the mistake of is not understanding their own motivations. A lot of people are sick and tired of the job. They’re sick and tired of management hassles. They’re sick and tired of the day in, day out. You can’t give two weeks’ notice so you’ll want to sell. They don’t really understand what the deeper drivers of that motivation are. We try to work with them to really understand that and try to give them a little bit more context about how they might be able to solve that problem about maybe they can assign tasks differently. Maybe get an assistant, maybe get a manager in place, put processes in places they don’t have right now. Maybe it involves not selling the business, but actually rearranging their operations so that they don’t have to do what they don’t like to do. That’s a very common thing.
A lot of that goes into the whole idea of understanding what you want out of this sometimes they don’t. We become a sounding board. One of the things that we really are is not only a sounding board but we’re the glue that holds the deal together. Even when you have a buyer and even one year under contract and in escrow, there are so many deal details that come up that very easily can derail the whole process. Sometimes it’s very small, very insignificant. Without an intermediary or somebody who is staying calm, not letting any of the shouting get to them and getting through the process and trying to find common ground, it can make all the difference between keeping the deal together and not keeping it deal together.
As you look back over all the businesses you’ve worked with and as you go through the process, maybe there’s a technique or a trick that you’ve learned along the way that helps a business owner sell their business. Do you have a couple of those in mind?
It’s not a trick but a lot of patients. We’ve had a couple of cases. I’ll give you one trick that I’ve done. I’ve had over the course of years of doing this, I’ve had several listings that were not getting much activity. There are not that many buyer calls on it, not much interest either because the numbers weren’t good or the location wasn’t good or something. One trick we’ve used and I’ve actually had success with it, is to take that listing and raise the prices on it substantially. Which you would think would be completely counter-intuitive. I was actually able to sell a Mexican restaurant here in the LA area in my early days. We couldn’t get any activity for $200,000. We had several buyers who are coming forward and they were interested, but it wasn’t happening.
It’s a combination of raising the price and then putting a bid deadline on it where we had a bid process where there was a time urgency involved. We doubled the price. I took it from $200,000 to $400,000, and it sold. There is a lot to be said for us putting a sense of urgency into it. That’s what we do at RainCatcher. We do have bid deadlines for a lot of our deals to make sure that the bidding goes from a certain time to a certain time and there’s a deadline. When buyers know that, they do respond to that. Sometimes if a listing is out there and it’s out there forever and there’s not any timeframe to it, that sense of urgency can put a big help into the process of getting sold.
Brian, what are some of the best advice you think that you’ve received through the years about selling business?
One of my very first brokerage managers was a wonderful guy named Pat Hall in commercial real estate. It was the first week I was in commercial real estate. He said, “Be ready, all deals will die three times before they live.” It’s true. Most deals reach a point and then die or have some death. Maybe it’s not a total death, but his point has been very well-taken. It’s been proven to be quite accurate that there are a lot of cases where a deal has stopped. There’s something in the way and then it gets going again. It requires a lot of patience, but also understanding of that. It served me very well actually. Another good one is a gentleman who I used to work with in CBS television who said, “Stop thinking that it’s easier for everybody else.” It’s not easier for everybody else. “Do the work, pound, get through it and work with your client and work with your people to have a purpose and to make that happen for people.” One of the best parts of this job is to be able to serve others and to be able to accomplish something that helps them. That’s why I got into this business to be able to provide service to people who need it. We provide a very valuable service. These business owners do not know how to sell their business. When we can help them, achieve that, make them happy and satisfied to move on to a new course in their lives, that’s a great place to be. It’s a good service to be able to provide.
It’s always good to help. Brian, speaking of which, we didn’t talk about how people can find you on social media. How do they find you?
I would point you to RainCatcher, RainCatcher.com is probably the best place to go. We have individual links there that can get you to individual brokers, social media and that’s probably the best way to go.
Brian, I can’t tell you how much I appreciate you sharing your story and wisdom, all the help that you’ve been providing the business owners and for the audience and business owners that are going like, “I don’t know whether I’m going to or want to.” I would encourage you to reach out to Brian and at least have a conversation if it’s on your mind to sell at some point in the future.
I appreciate you taking the time. This is very helpful and I appreciate you doing that. Thank you.