Podcast: How To Exit Your Business And Successfully Start Over
This post originally appeared on the Business Leader Podcast.
Things are not always sunny when it comes to running a business. There will be days where it seems like one disaster is pouring after another. Sweeping in just like her company’s name, Raincatcher, to help businesses is Marla DiCarlo. With her experience, Marla can fully empathize with the owners, especially with exiting their business. She shares her story of transitioning from a CFO role to becoming the CEO of Raincatcher, and imparts valuable advice on selling your business or building one. She also gives valuable insights on attracting buyers through digital marketing and generating leads. Learn what makes a good leader and how to navigate the business world and more in this episode with host Bob Roark and Marla DiCarlo.
Transcript: How to Exit Your Business and Successfully Start Over
We’re in the world headquarters of Raincatcher with Marla DiCarlo. She is the CEO of Raincatcher. Marla, thanks so much for taking the time.
Thanks. I’m happy to be here.
Tell us a bit about your business and who you serve.
The name of our company is Raincatcher. We choose this name purposely because we always talk about that it’s hard to make it rain but easy to catch the rain. That’s what we’re doing. We’re trying to catch these business owners who are out there who need help. They want to make this once-in-a-lifetime event decision and they’re not prepared. We come alongside them and help them to not only market their business, find the right buyer and get the right price but also to spend time with them to help them prepare to sell. We do that by doing some tests, looking at the overall score of their business and figuring out how we can improve it. It’s like staging the house. I tell people often that you can have a nice house and a great area, but if you haven’t taken the time to clean it and remove the junk and some of the personal stuff, somebody is going to go in and go, “This place is a mess. I want to drop this down to $10,000, $20,000.” The same applies to business. There are certain things that they need to do to stage the business before they go and sell the business. That’s what we’re good at and what we’re all about at Raincatcher.
Before Raincatcher, you had quite a bit of experience going out and working with companies. You did a bunch of due diligence work. Let’s talk about the experience when you got to look inside companies and how you bring that forward to helping the companies now.
I love talking about this. This is where the passion for small business comes out. First off, I have to back up all the way. I originally went to school to become a social worker. I tell people that because it’s important. It talks about who I am as a person. What’s important to me is helping others. It’s something that’s in my core, something I care about. When I was in school, the problem was I thought differently. I realized among my peers I thought differently and my director of human services brought up that I didn’t quite think like everyone else. I have a very analytical side. I understood math. I’m very geeky that way, which served me well in my career. I became an accountant. The people component helped me in my career. I always cared about making a difference and wanting to change things and make them better. I became a corporate controller at a very young age. I was only 27 years old. I moved on with the founder of the company I was working with who created a fund. It was a $500 million fund that we could pull from. We worked with business owners to either help them exit their business, sell or maybe merge with another company.
We were doing this back at the beginning of the 2000s. My job was to fly out and perform due diligence on the small business owner, create the CIM (a Confidential Information Memorandum – It’s the marketing package for your business and the information about your business.), take that back to our group and figure out how we could help them. What I saw over and over again when I met with the owner and the staff and looking at the company is how underserved they were. That’s cliché but it was true. It was incredible how many times I would go into a business owner’s office, look at their financials and they would say, “We’re operating at a 45% gross profit margin.”, but once would start digging in I would mention, “You’ve got this overhead associated with a product, or you don’t have cost of goods allocated properly.” It was small changes that would have made a difference in the decision that the CEO would make about the company had they known. They didn’t have good numbers. Also, they didn’t understand their numbers most of the time. This was coming towards 2007. I realized, “I can change this.” As a controller, as a CFO for a company, I do look at things differently. There are certain things that I see in my job to communicate that to the CEO and the staff and be a part at that decision-making of how we were going to handle the use of historical information to handle the future, then make proactive decisions.
I was looking with the buyer’s eyes as I was looking for these companies.
That gave me credibility that I would not have had I come in telling them, “These are the things that you need to change in your company.” I was coming in as a potential buyer or someone that could help them to find a buyer, they gave me credibility that maybe others wouldn’t. They listened. What I learned very quickly was this is very personal to this owner. Everybody thinks their baby is pretty. It’s true. My daughter is gorgeous, just ask me. It’s hard to tell the business owner, “You have a beautiful baby, but they need to grow up. They are not ready yet.” I learned how to communicate with that owner in a way where it wasn’t coming across as, “Here are the things you’ve done wrong. This is what you need to do differently.” I learned how to work with them and get them to see things in a different way to make a different decision. I left the portfolio and the work that we were doing. I started Kaizen Business Results. We provided CFO and Controller services. This was before CFO became the “it” word, which is what I call it now, which is very important. I’m not downplaying it. I’m glad it has become something that people embrace. When I started, I had to explain to business owners what a CFO was.
Was that your first business start?
It was my first business start-up.
There’s a moment. You’re doing all this stuff and flying all over the place. You go home and say, “I think I’m going to do this.” Take us to that story. For many business owners, there is a moment where you decide to leave whatever security you might have thought you had to go out on this business venture of your own.
There’s so much to that. At the same time that I had this idea of Kaizen, I had a company that I was interviewing with for a development controller position. It was the VP position of a prestigious development company in Denver. I was on my sixth interview with this company. It was great money but I turned down the position. There are lots of reasons why I turned down this opportunity. I knew this was something I had to do, and I was going to help small business owners. There was a faith component behind it as well that mattered to me. I had some guidance from my faith as well. I called the VP of Finance and withdrew my name from the interview process. I remember the VP of Finance saying, “Are you sure?” I paused for a minute thinking, “This is life-changing,” you see your life spiraling in front of you. I knew this was something I had to do. It went back to who I am and my core. I was never satisfied with doing the mediocre thing that everybody does. I needed to make a difference. I needed to feel and see it. I knew I could do this with Kaizen. So, with the support of my husband and family, I started with five clients. I was able to grow that business to 48 clients in six months.
You were the CFO for 48 companies.
Yes, but I did have staff. I realized quickly when I started the company that I would need to provide accounting and bookkeeping. I realized in the first month, “We need to have this.” Garbage in, garbage out. I needed to have control over the output to provide the right advice. I was the CFO for 48 companies. I realized I needed to hire people and have processes in place. A year later, it was right below 200 clients. I had 50 subs and 50 employees. I grew too fast. I didn’t have time to hire the right people. I was looking for a warm body. The vision I had for Kaizen was not what the company had become. Owner fatigue sets in. I’m no different than any owner making those bad decisions. Everything came back to me, every decision. On top of that, I felt responsible for these owners and companies. I needed to make some changes. I learned the power of documenting processes and process mapping. That’s so important. I learned how to hire the right people, why culture is so important, how to say no to a customer that I just knew was not a good fit. That is important too, the power of interviewing the customer. I wanted to make a good impression and I wanted them to hire me, but I turned away quite a few customers because I knew that they weren’t willing to listen and make changes that were necessary for them to be successful.
It fits in nicely to what you’re doing now.
I moved on. I sold the company to a national company, but it didn’t work out. It wasn’t what I thought it was going to be.
How dissimilar is that from many of the stories you hear from business owners? I started out here and ended up there. What I thought I was going to do isn’t what I ended up doing.
I can empathize with the owners are getting ready to sell their business and going into that panic mode. This is my child. I’m turning my child over to a new person. I can remember sitting in a room and having this moment of panic like, “What am I doing?” It was hard. It was very emotional. There are so many things I would have done differently now. I would have written contracts differently. I would have asked different questions. I would have brought somebody in as a third party to manage. Even though I knew what I was doing as a CFO, when you are the owner of a company that you have built, you are too close to it.
You still have to run the company and do this sale thing part-time. I think about the emotional response to large life events. You see a time where somebody says, “If I had to do it over again, I would get past that emotional time frame and make a better decision.” You’ve been down the track of building a business, working for an M&A firm effectively, looking at lots of businesses from buyers’ eyes. It’s extremely critical to develop that buyer’s eye mentality.
Everybody has an agenda when you’re buying and selling the business. The seller wants to maximize the value and get the best terms that they can get. The buyer is going to look at it from a risk position, mitigate that risk and discount things that they’re not unsure about. If they feel like, “This guy doesn’t have things buttoned up. I’m not sure what it’s going to look like when we do the transition, what will happen to the revenue.” Don’t think that’s not going to be the terms in that purchase agreement. They are going to cover their risk. It’s all about mitigating risks.
The problem is the business owner may not see that as a risk, “This is how we’ve done business and we’re good at it.”
I was talking to an owner about this. He is a sophisticated businessman. This guy is polished. He’s selling his business and chose us. He was talking about maybe they should come in and help with some of the negotiations because there are some little issues about their business that’s different. I said, “Here’s the deal. Here’s one competitor that I talked to. This was the feedback that they gave me about your company. I knew it would be a dagger. I know that’s hard to hear.” He said, “That is hard to hear.” I said, “I know. It’s because you’re too close to it.” “When that competitor said that to me about your business, I’m not close to it. I saw it for what it was. They were using it as a way to discount your business and get the terms that they wanted. I didn’t get emotional. I was able to use what he said and counter back. Had you been a part of that conversation it could have gotten very emotional and very ugly.” It’s hard to hear. It’s hard for somebody to tell your baby is not pretty.
I think about that as a business owner. If you can step back from the emotional moment and listen to the feedback. My next question would be, what do we do to mitigate that challenge or problem, what the buyer sees as a risk? What do I need to change? What’s my timeframe?
That’s one of the things that we do at Raincatcher that makes us unique from competitors in the market. We will spend time on sell-side risk assessment as part of our initial marketing package, working with a customer. We’re 100% success-based, meaning we believe that there needs to be skin in the game from us. The same way that the seller trusts us, we need to trust them. We work together. We put together the marketing package. All of the costs are upfront on Raincatcher’s end. Part of that package is doing the risk assessment of the business. We look for those skeletons in the closet, those red flags. If we know about it ahead of time, especially before we’re in due diligence, there are things we can do to change it and also ways that we can be forefront and honest about these things to be prepared on how to answer some of those harder questions.
We did it on purpose. We recognize the benefit of owning a small business. We accounted for it this way and we recognize it.
What happens a lot of times, especially in due diligence, is for a lot of people this is the first time they’re going through something like this. They weren’t even aware that this was an issue. We’re in due diligence and there are all kinds of things. We try to ask the right questions but there are so many things that can come up. We had a company where we had their tax returns. It was signed off by a CPA. Normally, a CPA won’t sign off on a tax return without them being the ones to file. It’s a weird situation. For whatever reason, the CPA allowed the customer mail in the tax returns. The guy didn’t realize his wife hadn’t done it. We get into due diligence. We’re an underwriting, two weeks away from closing. All of a sudden, the IRS says that they never got their tax returns. For four years, they had not been filed. The seller had no idea this happened. That causes doubt for the buyer. They think, if the seller does not know this, what else don’t they know? What else is there? I do want to see those other contracts.
It’s like the cockroach theory. There’s no such thing as one cockroach.
Most of the time, that’s true. When an owner is disconnected from their business, there are a lot of skeletons in that closet. It’s not because they were lying or dishonest. They just didn’t know.
I think about sitting across the table and everything is going. All of a sudden, the owner gets hit flatfooted with something he plainly didn’t know. It hit the confidence factor and negotiating point and all of those things, which would have been so much better in that de-risking stress test pre-sale.
You’ve got the situation where you’re trying to play damage control before the whole deal blows up. It’s hard. I remember that owner saying, “I’m an honest individual.” The buyer is taking him at his word, but it got heated. It’s being able to do that risk assessment ahead of time, verifying top twenty things that are important when you’re going into underwriting when you’re performing due diligence. We can’t fix everything but if we know about it, there are ways that we can handle having those conversations with buyers.
If you think it’s worth X, but you’ve got these things going on here, that’s going to affect X.
Yes, especially financials. This comes up all the time. This goes back to my Kaizen days. I don’t think that business owners spend the time and energy that they should, understanding their financials and the importance of those numbers and making them useful.
If this is that and we’re winning a bid, do we push our margins? What did we do? If we bought this company over here, but it created everything else, I don’t think they know. Most business owners start on passion and end up with business. A lot of them start out buying businesses to be a business owner.
Oftentimes, what I see is an owner who was successful in spite of themselves. I’ve probably worked with well-over 500 businesses in my career. I can’t tell you how much I love hearing how they created their business and thinking as I talking to them, “You can sell this and make money off of this. This is incredible.”
It’s the reason for this show. I’m a fan of business owners. I’m a business owner. You watch what they do and you go, “You did what? Did they pay for it?” We see this all the time. The reason we do is memorialize that journey. You got apprenticed in an M&A firm.
I had an amazing mentor. He was incredible.
You think about how hard that is to find an ethical mentor, which is even better. You go through it and go, “I’m going to be a CFO.” You get this fire hose effect of all of these businesses with all of these different things. It all boils down to similar concepts, numbers, procedures, policies, process and all that stuff. I’m going somewhere with this. You decide then at some point that you’re going to get involved with Raincatcher. What was the transition like when you went from CFO for the masses to go into Raincatcher?
It was exciting because I had already worked with Robert Hirsch. He was the founder of Raincatcher. I’d been a CFO for quite a while. I was honored to be invited into Raincatcher. I loved what they were doing. I get to help hundreds of business owners with making sure that they’re not leaving money on the table and being taken advantage of. We can educate them before they make this important decision. I was excited about it. Robert had a different idea with Raincatcher. He wanted to bring in leads through digital marketing, which in 2016 was out of the box. I would go to an event with a bunch of old-school business brokers. They would shake my hand and ask me how I find my leads. I would tell them, “Through digital marketing.” They give you that look like, “You can’t do that.” There is a lot involved when you’re talking to someone over the phone about this important event. My job was to come in and figure out how we handle these leads coming in. I had to help with creating the funnel so that we were getting in touch with them right away.
Some people may not understand funnel.
Exiting Your Business: When you’re ready to sell and pass your business off to someone else, make sure that you align yourself with someone who understands the work you’ve put in.
I see this all the time with business owners. We can bring in about 150 leads. At that time, it was 250 leads per month. I know business owners who do this as well, but if you don’t have a process in place to first get in touch with that new lead right away you will lose that lead, because those people are shopping, you’ve got about five minutes to get a hold of them. There are statistics that show that even after an hour, it reduces by 50% of the probability of them even answering your call, after one hour. Imagine that many leads coming in. Ten of them come in at one time. It’s getting back to them timely, making sure that you’ve trained your staff so that they know the right questions to ask. These are busy business owners. They don’t have time to mess around.
A lot of times, we’re talking high Ds too. I’m going into the DISC profile, a high driver, somebody that wants bullet points, “I want to get through this, ask your questions and let me move on.” How do you engage that person over the phone and also communicate to them why they would even want to continue to talk with us? That process is part of the marketing and sales funnel. You have your marketing side where you’re educating the customer through the process. You’re telling them what you do. You’re hopefully helping them to understand if they are a fit for the service or product that you offer. By the time that they fill out that form and answer the call to action of filling out their name and their email, they pretty much have decided, “I think this is a company that I would like to learn more about. I’m pretty sure that I am a good fit for what they do.” So when that lead comes in it’s a matter of getting to them right away and starting to develop that trust, and also determining if we do have a solution for their needs. That’s hard to do. A lot of companies fail.
I was thinking about your job as a CFO and your job on the buy-side. All of a sudden, you’re now creating a marketing funnel that works for an industry that’s not supposed to be able to create leads from digital marketing. Where did your wisdom on the digital marketing side come from?
It’s 100% from Robert. I would never take credit for that. Robert knows the digital marketing side and how to create nurturing, how to communicate right to that new lead, why we care and why we want to work with them. That was what he did, it was his role. With my background on processes, understanding the dynamics of that small business owner and also the culture we created where we care, it worked. The first thing I ask when I’m interviewing brokers is, “What’s your background with small business? Why does that matter to you?” If they say something about it’s the lifeblood of this country or this is why people come to America, because they want to start a small business, I’m like, “Right answer.” That is it. It doesn’t matter if you’re a foreigner or even a citizen of the United States. What makes our country so great is we have this amazing opportunity through a small business. It’s what runs our country. A lot of these owners have put their blood, sweat and tears. It is the truth. A lot of times, they have put everything, the kids’ college fund, their mortgage, retirement and everything into this business.
When you make the important decision that you’re ready to sell and pass that off to someone else, you want to make sure that you’ve aligned yourself with someone who cares, understands the work you’ve put in and is going to come alongside you and not just find the first buyer that comes in. I’m working with a couple of owners where when we were talking about selling their business, they want to make some money, but the thing that I keep hearing over and over again is, “We have put a lot into our culture and our employees. That is important to us. It’s keeping me up at night. I don’t want our employees to lose their job.” I know that our job with these owners is we would need to find the right strategic buyer, find the right cultural fit and someone that cared deeply about the efforts that owner put into building their company.
You are responsible not only to your customers but also to the families of your employees. Until you own a business, you don’t understand that your decision affects whether their kids go to school or not. It’s the truth. For the folks who are going like, “I would like to own a business so that I can have my own schedule,” tell me how that worked for you. I think about all those things when you’re matching them up. You end up as the CEO of Raincatcher. How was that as a shift mentally from the other things that you’ve done in the past?
It was different. I found it easy to fit into the CFO role because I’ve always served a role as a CFO. I’ve always had to manage up. I’ve always had to collaborate with the owner and CEO and get my point across, I’m not a bobblehead. I used to tell business owners if you want someone who will just say “yes” I am not the right fit. I was used to being able to push back and help them and being part of the decision-making process. That wasn’t something that was foreign to me. It was something I was very comfortable doing. What was different as the CEO, though I had an excellent team around me, I had to remember that my decisions affect them. I am the final decision maker. When I first started as CEO I spent too much time collaborating because it’s who I am as a person. I love people. I love surrounding myself with smart people and finding the best decision. Sometimes a leader just has to make a decision without collaborating. At the same time, you’ve got to make sure that your people understand why you’ve made that decision and that they’ll follow you. That was probably the hardest transition for me, from a CFO to a CEO. It’s owning that role and being comfortable. I’m not always going to make the right decision, but I think through everything. I’ve taken everybody’s opinion into account. It’s being comfortable with saying, “I thought about this. This is what we’re going to do.”
I think about the decision process, giving the facts at hand. With all the analysis and input, we’re going to go this way. In the future, if it works out differently, you go, “There was something we didn’t know and we didn’t see or I could have made a mistake.”
It’s owning that mistake.
You go, “Here’s what we’re going to do to fix it.” When I think about that, that makes us all less than perfect, which is what we are. Sometimes good enough is good enough.
That’s a good point to bring up too, being a small business owner. I see this often with the business owner’s that I work with. They feel like they need to wear every hat. Everything does come back to you as a small business owner. However, there is so much power in surrounding yourself with people that are often smarter than you are in certain areas and being able to take that information and create something with it. A good leader is somebody that motivates those around them to be the best they can be and knowing when’s the right time to put the brakes on and put the gas on. Just like driving a race car. I use that analogy oftentimes when I’m talking to owners because a race car is cool. Maybe you’re driving a race car. That’s something fun. It’s not a minivan. However, you need to know how to control the race car otherwise it can get scary and dangerous.
You think about a very precision tool that’s good for what it does. It’s not a great family car. I was thinking as you were talking about running a business and interfacing with the business owners. It’s a recognition factor that you have from seeing so many businesses. If you’ve worked as a CFO for over 500 businesses, this may not be unique to you but it’s unique. When you look at the various businesses that you’re talking to, if there were the top two to four things that you always see that if a business owner is reading this, if I go and look at number one or two, I can change the trajectory of my business. What would you say those are?
First is financials.
What does that mean?
It means if you do not have someone who’s reconciling your books, who knows what they’re doing and you’re not accounting in a way that you have good information in front of you broken down where you know your gross profit margin by services, products, labor burden. If you don’t know percentages of revenue of your expenses, if you don’t have KPIs set up that are specific for your industry, if you’re not aware of how you perform with competitors in your industry, you are missing out. I call it understanding the power of your financials.
Most business owners say, “I have what the bank requires I’ve got my tax return. What do you want?”
Those financials tell you a story. It is the language of business. If you understand what your numbers are telling you. How you do that is you need to make sure the information is correct, garbage in, garbage out. You need to make sure that you’re taking care of recording your business transactions properly, reconciling your financials and those numbers are accurate.
Is that something a CPA can do if you ask them?
Yes, but I don’t feel that’s a good use of their time unless they have employees on staff that do that for them. You want someone who understands the detail behind the numbers. When you have a CFO and a CPA you have a great team. A CPA understands how to minimize your tax burden and sometimes can also serve the role of the CFO. As a CFO, I’m looking at your financials from a high level, not on a micro-level. There are individuals who are gifted at the micro details who will spend the time to make sure that things are being allocated in the right places. Those are typically accountants and bookkeepers.
For the business owner who’s reading, if they don’t know how to find that person, they should reach out and call you and go, “How can I find that person?”
I’ve got a long list of gifted bookkeepers. I would love to share that information with them. It would make me so happy to help them find someone who understands how to properly record their numbers.
How do they find you?
They can go to our website, Raincatcher.com. My contact information is on there. They can also email me directly at [email protected] I would be happy to answer any questions and to help them in anyway. I have such a passion for helping small business owners. I want to spend time with them to help them understand how they can improve and maximize the value of their business. That’s what we do.
For any business owners, who say, I’m not going to sell my business for a long time. The concepts that we’re talking about here are just good business. If your business is always running well then, it’s almost always ready to be sold, but there are almost always ways to make it better. Your banks, if you’re working with them, will be thrilled. I think about that excellence in practice. You guys were recognized in a magazine as well.
Yes, as one of the top business brokers to work with by Inc. Magazine. They listed nine brokers. We were above Murphy and Sunbelt, and even Goldman Sacs, which was quite an honor.
You were thrown in with those “small guys” like Goldman Sachs. How did that come about?
When we first started, because we were so out of the box, we are getting such great feedback from professionals that we work with and also the owners and sellers we were working with. We got a call from the author that wrote the article for us with Inc Magazine. He wanted to know more about our business. We told them about what we do and how we do it. This was the article that came out based on his research. We were blown away when it came out. That was a huge honor to be able to say that we are one of the top business brokers in the US, which is what the article is written about, including Goldman Sachs and some very large brokerage/M&A companies. The reason why that came about is we are focused on small business. We do have an M&A division. I’ve got that background. I’ve got several senior brokers that have closed hundred-million-dollar companies. We love those businesses and we can help them. However, we like to focus on that small business owner, anywhere from $1 million to about $25 million in revenue. That is our sweet spot. Those are our people. That’s who we love to help. That came across in that article because it is an underserved market. There are a lot of brokers out there that say they understand small business but they don’t.
There’s an abundance of money to buy businesses. There is a shortage of businesses that are ready to be bought by these people. They start getting deal fatigue. That sounds counterintuitive that there’s a lot of money looking for businesses to buy. The business owners are like, “I’d like to sell my business.” They want to have it ready to be like, “I want to be taller,” but that is not happening. I think about that niche. We discussed their financials. What would be one other thing that you might think of that they could do?
Owner dependency is another and very typical. That means the owner has not created a company but more of a job because they haven’t thought to bring on staff that can transition with the business. That matters to a buyer. If that owner hasn’t set up an executive staff or at least has a couple of managers that want to continue with the business, that owner is going to have to continue with the business. That’s hard to do. When you’ve been the decision-maker and parent of that company. Now you have someone else coming in and telling you who your company is and how you’re going to do things. Some owners do okay with that. We try to talk owners out of doing that longer than one, no more than two years because it’s too difficult.
I call it from driving to riding.
That’s a good way to put that because that is so true. It happens all the time. It’s not that difficult to help that owner to figure out what positions are needed first and foremost and create and tailor a hiring process to find that right person and to document the processes so the onboarding is easier. Also, how to work with that individual and give the buyer comfort that the person is going to continue with a business. There’s so much we can do with bonus plans.
There are folks out there going, “My business is in pretty good shape.” You have a rather robust diagnostic tool. Let’s talk about that a little bit. Once you get the numbers, what do you derive from the numbers you get?
It’s called the Sellability Score. They take a 30-minute assessment. They can log in on Raincatcher.com. Click FREE Valuation. They’re going to fill out their name and email. The next step is a thirteen-minute assessment. It takes some twenty minutes but if you’ve got all your information in front of you and you know your business, it’s quick. When you’re done, what it does is produce a 27-page report, most importantly the summary report that gives the overall score of the business and the eight drivers or attributes that buyers look for when they’re buying a business. It gives them a score in each one of those drivers.
The owner typically knows the areas that they need to improve upon or the areas that they’re very strong in, but the report validates that. We use that for calculating the multiple and also preparing our marketing package for that business. It’s such a great report. It’s something that we provide for free. We hope when we talk to you that we show our value. Hopefully we figure out we can work together. We believe in helping the small business owner. That’s a great first step. That assessment will go through financials, owner dependency. Customer concentration is another area that often comes up. A lot of owners will have maybe one or two very large customers. I love to hear that a business owner landed a big customer, or they have a customer that’s been with them for ten years. But if that customer makes up more than 25% of your revenue, that can be concerning to a buyer. What happens if that customers leaves? What happens to the business?
There’s a typical score level. On the multiples for low scoring versus multiples for high scoring, what do you see typically is the spread between those two?
A small business below, let’s say, $2 million in revenue, very rarely are we going to see multiples above 3x. It’s normally between a 2 or 3x multiple. That’s a rule of thumb. Anyone above $2 million in revenue, there can be quite a spread. It’s anywhere from 2x all the way up to 7x or even 8x. People will say, “How can that be?” It depends on your industry and if you are in an industy the buyers are looking for, if it’s a hot market. At the beginning of 2019, there were some industries out there that we could pretty much find a buyer within a couple of days. They were looking for these specific markets to be able to either add on or go ahead and invest in. Depending on several different variables, the eight drivers being a big part of that, the multiple can be quite high. If you have what I call a turnkey business, a business where the seller can quickly transition the business over to the buyer. If the risk is low and the buyer sees growth you have a business that will have a higher multiple. If you’ve set up a business that continues to scale, historical financials will show that to a buyer. If you’ve set up a team that the buyer can’t duplicate. We often talk with buyers about build versus buy. If you have a business that a buyer can’t just go start-up and build what you’ve done, it makes more sense for them to buy it and continue to scale. These are all factors that contribute to a buyer paying a higher multiple.
You can apply those principles throughout their organizations as the SE process. Sometimes the business owners are like, “I have a great business that supported my life. My children are educated. I’ve done all this. I’m a pillar of the community.” It’s hard for them in many cases to see what happens next after they sell.
That’s an important topic too, post-closing. We spend a lot of time talking with our seller about the reason why they want to sell. There were some numbers that came out. Business brokers tend to shy away from it, but I’ll tell you why I don’t mind sharing it. The survey said that 75% of business owners often regret selling their business. People apply that it must be the numbers. It’s not. Only 5% regretted the terms or the purchase price they received. It’s what do you do after you sell. Kaizen was my identity. We pretty much had signs around the house following the principles of the Kaizen method. When it was gone, it’s like, “Who am I? What do I do?” That’s a big thing. Raincatcher also has an assessment that our owners can take called pre-score that will give them a personal readiness score of whether they are ready to sell and what they want to do after they sell.
“How much golf can you play?” For some people, it’s a lot. For others, you go, “How much fishing can you do? How much traveling can you do?” I’ve had a number of business owners myself that have sold. A number of them said, “It’s the single worst thing I ever did. I’m now lost.” I think they miss the interaction with their employees. It’s their identity. When they go somewhere, they’re known as the business owner. There’s very little or a diminished amount of attention played in that phase three.
The statistics tell us that. 75% is huge. Business brokers often in my circle will say, “Don’t talk about that.” We should be talking about that, it’s important.
It’s a service. It’s a differentiator. Somewhere in there, somebody in the family is thinking about that. There are things we can do. There are even counselors and psychologists that work in that field. Talk about what you can do if you’re going to spend all life, energy and money that you did birthing this thing and bring it to close on a sale, you should be able to enjoy the proceeds and not feel regret.
One of the things we do too is setting them up for success after the sale, making sure that they have a personal financial advisor because that is so important. You know that. You’ve got story after story. When I go to hire a broker, one of the things I want to make sure is that they believe in our culture. I tell a prospective broker “I already know that you know what you’re doing because otherwise, I wouldn’t be interviewing you. I know that you can get the yes on getting the engagement, but we’re more than that.” We spend time making sure that the seller is truly ready to sell. They’re ready and prepared for what comes next. They’ve thought about what’s going to happen afterward. We set them up with personal financial advisors. We make sure we bring in their attorney and their CPA. We bring the team, the professional advisors that will be supporting them through this process. We want to engage those people in the beginning because we’re looking for raving fans. When they sell their business, that should be one of the best moments in their lives. They should be happy, celebrate and have something else to look forward to and move on to.
Most of the professional athletes throughout their career have multiple coaches. In the golf world, which I know nothing about, there’s a swing coach and the caddy functions. You might have had somebody in their college career past that have coached them along the way. The notion that a business owner doesn’t need professional coaches, I don’t understand why that’s not been transmitted better. If I don’t do surgery on the weekends, there’s a reason. I think about the business and the benefit of what you guys bring to the table. How many business owners you have worked with, over 500 businesses either as a CFO or as the CEO of Raincatcher, and for most this is a onetime event for them. For the readers out there, everybody’s going to exit their business one way or another. There are 64,000 generations and not a single survivor. They’re going to leave. For the business owner, the right answer says, “I’m still building my business. I’m still forming my business.” If they can adopt these principles that you’re talking about, it will make their business better. Is there anything that I should have talked to you about that I didn’t?
If you think that you will be selling your business in the next few years, you should align yourself with some type of advisor who knows what improvements need to be made in your business. You should be doing that now. If you do that, you will be prepared to sell. You won’t be surprised. You’ll get the purchase price and terms you want. You’ll have multiple buyers. You’ll get the type of buyer you want. You’re more in control versus those owners that wait too long.
You’ll be surprised.
Listen, I get it. I am one of those owners. I understand. When you’re a business owner, you’re busy. You’ve got these blinders on. You’re thinking about, “I need to get payroll done. I need to get this contract signed.” It’s not that you’re doing anything wrong, but I hope that they hear me now. Remove the blinders. Look outside of the tunnel vision. Think, prepare and be proactive because it will be such a better experience. You will be so happy you made that decision when it comes time to exit your business.
If you’re not calling, you’re making a mistake. If you’re shy about calling, there are online resources you could take. I did the survey on my business. You start looking at the value drivers. If they weren’t hitting you in the face, you can say, “These are the areas I should take care of and focus on, and who’s responsible for each area, and how much am I going to carve out.” Move the needle because it’s probably one of the better investments of your time that you’ll make. Marla, I can’t tell you how much I appreciate you taking time.
Thanks. I’ve enjoyed this. You’ve been great.
Thanks so much.
About Marla DiCarlo
Marla DiCarlo is an accomplished business consultant with more than 28 years of professional accounting experience. As co-owner and CEO of Raincatcher, she helps business owners get their business ready to sell so they find the best buyer and get paid the maximum value for their business. Marla has a Bachelor of Science in Accounting and is a member of several professional organizations. Originally from Arizona, Marla, her husband, and three children relocated to Colorado in 2007. From 2000 to 2008, Marla worked as Director of Accounting for an M&A and Investment group that specialized in purchase, capitalization, and management of real estate and businesses in various sectors. While there, she was responsible for new business deals, investments, and financing. She worked with groups such as Credit Suisse First Boston, ISS Group, Venture West Group, and Madison Dearborn Partners. In 2012, she started Kaizen Business Results, a fractional CFO, accounting and bookkeeping firm, to help small business owners understand the story behind their numbers and get to the next level. Using her experience in cash management, strategic planning, operations, and budgeting, she was able to help the small business owner scale, working with owners between $100k to $15mm in revenue.
Marla’s prior industry experience includes real estate, commercial development, and investments. She also has formal training and practical knowledge in computer implementation and consulting. Marla has a background in strategic planning and projecting, calculating valuations, forecasting, and budgeting. She also has extensive experience in accounting software such as Great Plains Dynamics and SAP, and as a QuickBooks ProAdvisor for more than 15 years, she has the knowledge and ability to handle a multitude of accounting projects.
Marla is an accomplished speaker and has taught classes with her local SBDC and SBA, plus various lenders and banking institutions. She is a certified Value Builder Advisor and has several years working in management accounting with an emphasis in taxes.
As a serial entrepreneur and small business owner, Marla has the heart and passion to help the owner get to that next level preparing them to make their final exit.