[00:00:00] Speaker A: Welcome to the Independence by Design podcast where we discuss what it means to be a business owner and ways to get unstuck from the day to day so we can design a business that gives us a life of independence.
There's this gaping hole for investment banking firms in the lower market for the five to $50 million company range, where they're actually doing a controlled auction, where you're actually selling a company with the investment banking process and not just slapping a logo on a website as a business broker often does. And so I've got John Bartlett on the show. He is a longtime listener and has become a friend over this last couple years. And he started Brentwood Capital after multiple of his own growth and exits. One of his companies, he took from 10 million to over a hundred million bucks, had all of the challenges of growth and scaling. A company has been through multiple exits his own and his company does dozens of deals every year. And he walks us through all of the lessons that he's learned over the decades and the ownership mindset, all the challenges that we see in the lower middle market. Why this big gaping hole of the lower market of the, call it 5 to $10 million to $50 million value range? Why is there an issue there? What are the things that these owners and we can do to actually grow value? And then he talks about the, he breaks down a very detailed explanation of what the process is of selling a company.
If what you have decided is the right approach is to sell to a third party, not an internal transfer, not an esop, but if a third party sale is the right approach, he's got a list of 3,000 buyers. He has a machine that he has built to the point where I trust him, where I've referred him a handful of clients. And I was so impressed on one of the calls, I was like, you know what, let's get you on a call and I get you on the podcast and let's have you walk through your mindset, your history and your approach to selling a company. So that's where you're in store for today. I hope you enjoy it. Here's John Bartlett with Brentwood Capital.
[00:01:57] Speaker B: The longer that I've been doing this, the, the, the thing that I've realized is it, to me, to me, the real significance is how many people can I come in contact with and how many people can I positively help them navigate through this journey of their life? And you know, I mean, we have, we have so many leads that are coming in the pipeline. I mean, dude, literally we have 600 owners a month that are raising their hands and saying they want to have a conversation about the business. And then we'll talk to 75 to 100amonth, and we'll do valuations on 20amonth, and we'll bring maybe two deals a month to market.
So when you hear those numbers, the vast majority of the conversations we're having, we're not bringing those deals to market, and they're not coming to market because either the owner's really not ready to sell the business or the value of the business is really not where he needs or she needs for it to be or wants it to be, or there are other characteristics that are in the business that prevent the business from coming to market right now. And so, you know, it's. It's not just about helping.
[00:03:21] Speaker A: Where does your desire for impact come from now? Like, you know, in your stage, John, you and I talked like, you want. Because you. You've made financial freedom. It's like, why are you doing this? You know, you and I talked when we first met. Like, you've been listening to the podcast for a long time, and it sounds like. And you're like, I just. You're like, I just want to have fun. And you said the.
[00:03:41] Speaker B: I have been listening to your podcast for five to six years now.
[00:03:44] Speaker A: That's so cool.
[00:03:46] Speaker B: Literally. Yeah.
[00:03:46] Speaker A: And you're still here.
[00:03:48] Speaker B: I'm still here. What's the talking?
[00:03:50] Speaker A: And you said retirement meant nothing to you at that point because you're having fun.
[00:03:54] Speaker B: I. I laughingly say that I'm not fully evolved as a human because I don't have enough outside interest. And I'm. I needed. I. I needed this to give me purpose, you know, I mean, I've got five kids and starting to have some grandkids, and I've got that. But, you know, don't play. I mean, I play golf, but I, you know, so.
[00:04:15] Speaker A: So then you and I talked to me, like, sports and all this other stuff. Like, we were talking about who we follow and what's interesting to us.
Do you feel like a lot of the owners that you meet are similar? Because, like, you and I have talked about Bo Burlingham and this identity, and you run a book process with, like, the sheer volume of people. Like, what is your definition of, like, this. The second or third act of, like, how, like, how you view it?
[00:04:38] Speaker B: What.
[00:04:39] Speaker A: What does equal happiness to you at this point?
[00:04:45] Speaker B: Well, for me, it's. It's making a difference in people's lives.
And, you know, you can. You can.
You can call it sort of a spiritual contribution that I'm making, but it's, you know, there, there's so many people out there, good people that have built good, successful businesses, and they're trying to figure out what next, and they don't know where to turn.
And they're, they're looking, they're. If they're ready to sell the business, they're. They're looking for someone that they can trust that can help them figure out how to get a transaction done.
And, you know, everybody is motivated a little bit differently in terms of how they want that transaction to look like and what's important to them. It's, you know, is it, is it just the price?
Is it just the deal structure under the price?
How concerned are they about who buys the business?
How concerned are they about what they're going to do with the business? How concerned are they about the legacy that they've built? How concerned are they about how the buyer is going to take care of their employees, take care of their customers? And so when we begin this conversation, because so many of these sellers have never been through this before. They've never thought that stuff through.
And you know, they, they come to us.
You know, you get, you get owners in their 60s or 70s that are just burned out and they're tired and the kids don't want to take over the business and they need to sell the business because, you know, 80% of their net worth is equity that they have in the business. And so they need to sell the business to free up the capital, reinvest the capital to give them the income so. So that they can retire. And they've got to free up their time. And so they're, they're at one stage, okay, and then, then you've got sellers in their 50s, let's call it, and you know, they've still got some gas in the tank. You know, they've got, you know, two to five years, call it, but they're wanting to pull some cash out of the business, de risk their balance sheet, put some cash in the bank, give them a little bit of breathing space, stay involved in the business, continue to run the business, have some additional capital and some additional structure to support them, allow them to become part of something larger. And, you know, everyone wants to throw the concept of rollover equity and second bite of the apple. And you know, all those are good sound bites in their real. But, but where the rubber hits the road is, you know, you get these guys in their 50s that are not. They, they haven't figured out what they're going to do as the next chapter. And so they're not there yet, but they're wanting to begin to put a plan in place to give themselves time to figure that out and to know that they have an offer.
Okay.
[00:08:01] Speaker A: So that, so, so they find out that they're. What did you say? An unfunctioning human being like you.
[00:08:06] Speaker B: That's me. That's me.
[00:08:10] Speaker A: I think there's probably a significant percentage of those people like, like us though.
[00:08:14] Speaker B: Yeah, yeah. And then, and then there's the third group. And the third group are, you know, owners in their 30s or 40s.
You know, they started the business and they've, they, they've scaled the business as far as they feel like they can scale it on their own. And they, they, they know they need help taking the business to the next level. They, they need help into their systems, they need help in their processes, they need help understanding the, the financials the right way.
They need help in building the leadership team out. They need help in getting the KPIs and the metrics. And so they're self aware enough to realize that on their own they were able to take the business to a certain level.
And in order to take it to the next level, they need someone to help them do that. And so they're looking for an investor, a partner, a mentor.
Maybe it's a private equity firm, maybe it's a strategic, maybe it's some sort of partner that can help them scale the business further.
And so that's sort of the third category is they're not really thinking about the end game because they're not there yet in their life.
But they're realizing they need help to be able to scale the business beyond where they're able to take it on their own. And so all these conversations that we have, quite frankly, everyone sort of fits into one of those three categories. They're in their 30s and 40s and they're here, or they're in their 50s to early 60s and they're here or they're in their 60s, early 70s and they're here.
And what their objective is is a little bit different because where they are in life is a little bit different.
And I, you know, I, I tell guys all the gals all the time, I say, listen, life is like a jigsaw puzzle and you've got a bunch of pieces on the table that are moving around all the time. You've got, you've got the financial side of your life that's all about numbers. It's you know, how much money do I have in the bank and what's the income off of that?
And if I sold my business today after I'd pay taxes, after I pay fees, what would that give me? And how does that fit into my overall investment strategy? And do I have enough passive investment income to cover my burn? And so you've got, you've got all the financial side of life, which is all about numbers. And then you've got the lifestyle of life, which has nothing to do with numbers.
It's, do I still enjoy what I do? Do I still have gas in the tank? Do I look forward to coming to work every day?
Am I burned out? Am I stressed out?
Is my work life balance all out of whack? Is, is, you know, is my marriage suffering?
Am I being a jerk as a parent? Are there other interests that I have in, in life? And so all of these life side of the things have nothing to do with numbers at all. It's. It's totally separate.
And so, look, I mean, I say this all the time. I'm not, I'm, I'm not a marital counselor, and I'm not a therapist, and I'm not a life coach. I can't help you figure all that stuff out. You got to go figure all that stuff out on your own. I'm not a wealth advisor. I'm not a financial planner. I can't figure all that stuff out.
I mean, I can tell you what your business is worth. I can tell you what your business could be worth if, if you're ready to pull the trigger and you want to get a deal done, we can have that conversation. If you want to figure out how to help you scale the business further and have the conversation down the road, we can have that conversation. And so I, I say I'm a little bit like Liam Neeson in the movie Taken. I've got a very specific skill set, and I can, I can do this thing right here. I can't do other stuff.
I can't do all that other stuff.
[00:12:40] Speaker A: That's fantastic. And, well, what I have enjoyed about our conversations this last year getting to know you is you and I had lots of conversations of all of the different pieces of the jigsaw puzzle that we all these. Because you have your own ownership journey that you, I'd love you to kind of just touch on a little bit because the, this doesn't come from. John's been an investment banker for his whole life.
[00:13:04] Speaker B: Right.
[00:13:05] Speaker A: And so I wanted to give you, I want you to give some context on that before it's like all these jigsaw puzzles. John, your and I, I think we share this passion of there's a lot of propaganda, misaligned incentives that make everything that you just said even more difficult.
And so when I got to know you, it was like, it's just so nice because like how you framed all that up, it's like you, I think you and I are both almost trained to, we have to give all the context, so that way we say we do this.
And so where did your passion from all of the complexities of what you just said and all the different providers and the different things that happen, like why is this the passion that you've landed on, even though you don't need to be doing this and that this, this becomes your way of impact? What's your personal passion behind this topic?
[00:13:54] Speaker B: Well, this has all been part of the journey that I've been on. I'm 68, so I mean, I've been doing this for, for 40 years. And so my, my story, I, I was a serial entrepreneur.
I've bought, run and sold a handful of businesses. And you know, I went to college. I was a history major at Vanderbilt. And so I don't know if I knew that. That's awesome. I mean, I mean, I, you know, I mean, balance sheets and financial statements and all that stuff, I didn't, I didn't know any of that stuff. And so I, I got into finance out of school and I sort of learned it working for a bank.
I ended up buying a business in my early 30s, moved to New York. What kind of business was, was in the financial services business.
It did regulatory support for publicly traded companies and mutual funds that had a lot to do with the SEC filing requirements that they had. And so it was very niche focused.
[00:15:01] Speaker A: For professional services business model.
[00:15:03] Speaker B: Yeah, essentially. Yeah, yeah. Now, I mean, one of the businesses that I bought, when I bought it, we, we were doing around 10 million and had about 25 employees. And then over a seven, eight year period, we grew it from 10 million to 100 million and from 15 to 20 employees to 300 employees. Now, now it was, it was through the growth of that business that I learned so much about running a business. And you know, one of the things that I learned is, you know, businesses go through phases based upon the size of the business, based upon the number of employees, based upon what the complexity of the business is, based upon what the leadership team looks like, based upon what the owner's role and responsibility is.
And if you go to my website now, you'll, you'll see this condensed in this concept that I've come up with that I call the seven levels of growth.
And I talk about businesses falling into seven different categories based upon the size of the business.
You've got a business that's doing 500,000 of less and it's going to look and feel a certain way. You've got a business that's doing a million and it's going to look and feel a certain way. You've got a business doing two and a half million, a business doing 7.5 million, a business doing 15 million, a business doing 50 million, a business doing more than, than 50 million. And so that, that th. Those seven levels of growth and how the owner needs to think about the business. That whole concept came from the experience that I had, growing that business from 10 million to 100 million and not understanding until I went through it.
You go from 20 employees to 50 employees to 100 employees to 200 employees to three.
And the business and the complexity of the business changes and.
No, it's not. It's not.
And what your management team looks like, what your leadership team looks like, what your KPIs are, what your role as the founder owner, how it continues to evolve as the complexity of the business changes. And so, so much of what I learned about what I practice today, I learned through that experience, through growing the business at that very rapid pace, selling the business and then buying and selling another three or four businesses, applying similar processes in, in logic to that. Now I tried to retire.
I wasn't good at it.
I wanted to go find something to do.
And when I, when I looked around and said, okay, what, what, what is it that, that I can do where I feel like I can add value to the world and I feel like it would be something that, that I would enjoy doing, I decided that being a baby boomer, working with baby boomers that were wanting to sell their businesses would be something that I would enjoy doing. And so that, that, that's how I came to start Brentwood.
And I, I started Brentwood six or seven years ago.
And then when, when Brentwood got up and going and I began to have all these conversations with all these business owners, what I, what I didn't realize at the time when, when, when I started it was how many of these owners the value that they need to sell the business for and what the value of the business is. There's a gap there and how much of a need there was to help these Owners figure out how to close that value gap that would allow them to have a successful exit. And so it was through all these conversations that I realized, well, I think there's a.
And you've come to the same conclusion.
Business owners need help figuring this stuff out. And so that's where the whole consulting part of our business that complements the M and A side of our business sort of came together. And so my, I mean, I gotta tell you, dude, I don't have to set the alarm in the morning because at 5:30 in and I feel really, I'm going to use the word blessed and it sounds like a hokey word, but I feel very fortunate that at this stage of my life I found something that I enjoy doing as much as I, as, as much as of this, that I do that, that I feel like I can help impact people. And dude, I, I just can't wait to get out of bed every morning.
[00:20:23] Speaker A: I love it, John. And you know, do you think that it's possible for owners to get the experience that you're having while they own the company?
[00:20:37] Speaker B: Absolutely.
Absolutely.
[00:20:39] Speaker A: What do you think you could have done differently? Or what do you think are parts of the ingredients to do that?
[00:20:49] Speaker B: I think you've got to get your ego out of the way.
You've got to, you've got to be able to put processes in place.
You've got to be able to hire the right people.
You've got to be able to put the right reporting structure in place.
You've got to be sure that the culture in the businesses is, is right. Look, look, look, I, I, I'm a huge fan of, of Warren Buffett, okay?
And I mean, freaking Buffett just retired and he was 92 years old.
[00:21:26] Speaker A: Charlie Munger did a, you and I talked when we first met.
A board meeting six months before he died.
[00:21:31] Speaker B: Right? Yeah, yeah, yeah, yeah. And so, and so don't, don't tell me that it can't be done.
Don't tell me that it can't be done.
[00:21:38] Speaker A: I, I, because that you got 30 years, man.
[00:21:44] Speaker B: I, I just, I, I went to a conference this past September. Have you ever read any of Jack Stack stuff? The Great Game Business.
[00:21:51] Speaker A: He's been on the podcast a couple times.
[00:21:52] Speaker B: Oh, oh, oh, Jack has. Oh, yeah. Oh, I didn't realize.
[00:21:55] Speaker A: So, so he was like out like episode, like 100 and some, something like that.
[00:21:59] Speaker B: How old is Jack now? I mean, Jack's got to be in his 80s.
[00:22:03] Speaker A: He's like 82, I think.
[00:22:04] Speaker B: 82. I went to a con, I went to the Great Game of Business conference that they had in Dallas in Arlington past September, and Jack was there. And you know What I mean?
82 years old, Jack's still together, man.
And so my point is absolutely, it can be done. Absolutely it can be done.
[00:22:26] Speaker A: So I want to pull this thread for two reasons.
Because you've been listening and you've been hearing me think through and organize my thoughts and ideas over the last five years.
But also I think we can tie this ownership versus operator idea together for people. Because what I want to frame up also is I think that you have solved a very specific problem in the marketplace. Think you have Liam Neeson. I'm going to call you Liam from now on for the rest of the episode is your ability to help these people that are in the lower middle market where it's all this broker bs, where you are doing investment banking style approach to some mutual clients that you and I have been working with, where I literally said, okay, I want us to like recreate that whole conversation because I watched how, how helpful you were to her, walking her through all of the implications of the process of selling the business. The implications and the milestones. And John, I think the context, what I, what I'm excited about with, I'll see if I can get to the answer or the question here is like, when I got on that call with you two, there was total clarity of why selling to a third party was the route. So I think I did my job of like, okay, what are all the goals? What's the difference between operator and owner? What are all the possibilities? Because the question I just asked you, could you do this while you own the company?
It's like that question should be answered within the context of what are the goals.
But it's like layering this idea of there's a job and then there's an asset. Because I think Charlie Munger and Warren Buffett and you or I, like, we can do this forever because we're not sucked in the middle of the vortex of all the bullshit in the company. And I personally want people to be able to see that possibility before they raise their hand, say, okay, I see that possibility, but I still would like John to sell my company. And then you did a great job saying, here's exactly all the implications. So kind of two parts to this is, I'll wrap or summarize. It is kind of the owner operator thought process and how someone could design a business and keep the business without being destroyed personally.
And then we can go on to kind of the train of, like, if you decided to sell, here's, like, the process that it would have to go through and the things to think about. But first, like, what do you think about that owner operator bifurcation that I've made over the last couple years?
[00:24:57] Speaker B: See, I think what people are in.
And you and I have had this conversation. See, I think what people are really, what owners.
If you take the age component out of the equation for a moment, what everyone really is trying to accomplish is they want work, life, balance.
That. That's. That's really what they want. They want.
They. They want to be able to.
They want to be able to prioritize their life on their terms and not feel like they're beholden to something where they feel like they have no control of their life.
And I think where a lot of business owners get stuck is the business consumes them and they get to the point where they're working 60, 70 hours a week and everything flows through them, and they can't.
They feel like they've lost control of everything.
Their finances might be a mess because the business finances might be a mess.
They're.
They're not running the business properly. And so their employees, you know, there might be dysfunction or tension there.
Their home life is a bit of a wreck because they're not able to spend time. And so.
[00:26:32] Speaker A: And so, like, this spiral down.
[00:26:35] Speaker B: Yeah, yeah. No, no. And. And I. I have so many of these conversations every day where I can just hear it in people's voices.
And so they can't figure out how to get. How to get out of that death spiral.
And so the only thing they can figure out to do is just screw it, let me sell the damn thing and start over.
You know, literally.
[00:27:01] Speaker A: You literally just summed up my Dad's strategy in 2014 when we sold the business.
[00:27:07] Speaker B: Yeah, it's like. It's like punk. And you know what. What they don't understand, and maybe they're too far deep into the abyss to ever properly see this, is they don't understand and appreciate the power of the economic engine that they're sitting on.
The power of the economic engine that they're sitting on.
If they can get the right leadership team in place, if they can get the right reporting structure in place, if they can get the business at the right profit levels, if they can get the cash flow and the profitability of the business right. If they. If they can get all that right, and instead of them working 70 hours a week, getting crushed, making no money where they could be working 10 to 20 hours a week in the business and have the right work life balance and get a fair salary compensation out of the business and get tremendous distributions that are coming out from the profits of the business.
If they were able to structure that properly, where it's 10 to 20 hours a week, you're drawing a salary of whatever, 2 to 300, whatever.
You're getting distributions of 500, 750amillion, whatever.
You're. You're freaking working 10 to 20 hours a week making seven figures.
[00:28:42] Speaker A: Next thing you know you're Jack Stack and having fun.
[00:28:44] Speaker B: Yes. Yeah, yeah, yeah. People don't realize that, that life is possible.
[00:28:52] Speaker A: This is why you and I need to do more work together. Because so what, John, like, like what you just said, like as you have told me and after our conversations, because I get so passionate about the weeds, but I also try, I, I'm trying my best always to go from the zoom out, zoom in, zoom out and have that throughline. But I think what you just said could not have summarized my belief in my mission either any better. And when I think about the implications of why that is and what I have learned over the last eight years is the inability for most people to see their cash flow into the future becomes the Achilles heel. So like there's been this un. Or unnecessary. There's been an overweight of my dialogue for years on the financials only because I want to be more in the other visionary, you know, the life stuff. But it's like, well, you know how many EOs, integrators or asset managers are going just insert the ridiculous Dr. Phil advice after seven minutes and it's like, well, I want to know. Or like let's take one of. I have a client, John.
They were not making, they weren't even pulling a salary 18 months ago. It's about a $40 million business. You know, it had a big, you know, very lumpy cash flow. Like 30 year old business, like this is a good business, right? It just happened to be very challenging for that year. No salary, no distributions, bank covenants. I mean all the bullshit of all the stuff that we know.
Fast forward to today has a CEO taking 30 grand a month in ownership distributions after taxes, after debt, after working capital, after everything has complete visibility for five years. How they can continue to make essentially three to five hundred grand in distributions without a job. The CEOs running the company.
All of the metrics tie together and they're going like, they literally got on the call and like I'm on these calls because I I don't know what else I'm supposed to do at the business. And I just had. So it's interesting because like that, it's that cash flow, like every single decision, it's like, well, when's the through line and they can't see it. So then it becomes hope because they're just looking at an income statement. And I don't know what your thoughts are on this, but that's just kind of, it's like the Achilles heel.
So there's a lot of conversations around it, but it's not all about that. It's like once you have it in place, then you can forget about it because you can do other stuff.
[00:31:25] Speaker B: Yeah. And you know, I, I don't, I don't, I don't mean to crap on, on the, you know, business consultants out there.
[00:31:36] Speaker A: And they're, come on, it's okay.
[00:31:38] Speaker B: They're, they're, they're. There are a lot of good ones. There are a lot of good ones. The, the problem that, that I have with, with them is, you know, and, and I'll talk to tons and tons of these guys, you know, Eos guys and Vistas guys and, and Scaling up guys and Pinnacle guys and, and all these coaching consulting groups, wealth managers, bankers.
[00:32:01] Speaker A: I mean like it's just, but it's every advisor and consultant. Right?
[00:32:03] Speaker B: 100. 100. So, so my thing is, is if, if you're, you could talk about all of the friggin operating systems that are out there and if your operating system is not being grounded in the financial performance of the business and all of the strategy that you're putting in place, if that's not being additionally grounded in.
Are you building shareholder value? Are you building enterprise value?
If you're not tying all three of those legs of the stool together, then.
[00:32:46] Speaker A: Realistically not having a complete conversation like a hundred percent. And yes, you and I both know too. And it's not just from like some random consultant's Venn diagram or pyramid. It's like actual financials and like John's gonna sell the company and someone write a check for $20 million because the discounted cash flow. Well, sure. And, and it's like, it's like John, it's like you've heard me on the podcast talk a thousand times like it's the healthcare system.
[00:33:14] Speaker B: It's like you.
[00:33:14] Speaker A: No one's like, hey John, you healthy?
[00:33:16] Speaker B: It is, it is, yeah.
[00:33:18] Speaker A: And it's wild like to, and all of the ownership then goes on to the person to be the advocate for themselves and you and I, I think hear it, everybody's voice, they're exhausted with this.
[00:33:30] Speaker B: Yeah, yeah. No, no, and, and I've, I've, I've heard you talk about, you're comparing it to the health care system and I think you're absolutely right. I think, I'm not saying it's in, it's, it's intentionally being managed this way.
[00:33:47] Speaker A: Right.
[00:33:47] Speaker B: But, but I just feel, I, I feel like people are not having real conversations.
You gotta, you've got to, you've got to look at the financials, you got to look at the P and L, you got to look at the cash flow statement, you got to look at the balance sheet, you got to be sure that, that you're running a financially healthy business.
You got to look at your strategy, you got to look at your leadership team, you got to look at your 90 day rocks. You've got to be sure that, that you're working on the right stuff. Everything needs to be grounded in what's the objective that, that, that the owners, the shareholders want to have with the business.
Short, short term, medium term, long term. And everything you're doing from a financial standpoint and from a strategic standpoint needs to be grounded in, in terms of what your long term objectives with the business are, is.
[00:34:41] Speaker A: Then we can have that complete conversation.
[00:34:44] Speaker B: Which I percent 100%.
[00:34:46] Speaker A: Yeah. Then it's like, and like it's, it's, this is why I, I got along with you so well when we first met because it's like I have felt like a part of me has just been insane for years and like, and it, and I have like, and if you've been listening to me long enough, you know that I've struggled with like being cynical, to being like crabby about it, to being like laughing about it and it's like these different probably stages of grief going like, like. Because I just want to have meaningful conversations that are complete with people.
[00:35:18] Speaker B: And look, part, part of what we tried to do is okay, let, let's determine what the value of the business today is. And, and let's agree with the method, with the methodology that we, that we're using to determine the value of the business. Okay. And so, okay, do you want to roll this?
[00:35:39] Speaker A: Sorry to interrupt, but do you want to like, take this into your process of like, okay, like how you go through or do you want to.
[00:35:46] Speaker B: And it's like the very first conversations that we have with people, I will listen to them. They'll explain the business, they'll explain their model, they'll Explain the management team. And then I'll say, what are you wanting to do with the business short, medium and long term? And then some of them will be able to articulate that, others will not, because it's almost like they're afraid to throw something out there because they don't even know what's possible.
And so I'll say, okay, cool, let's do evaluation as to what the business is worth today, and let's put some projections together with some reasonable assumptions as to what the business could be worth two years from now, five years from now, seven years from now, ten years from now, whatever.
And then I think when we sit down and look at the value of the business today and how we arrived at that value and look at the projections and assumptions that we've made from a growth standpoint, from a margin improvement standpoint, from an EBITDA standpoint, from a multiple expansion standpoint, when you look at those assumptions, you'll see what the potential value of the business could be at some point down the road. Okay? And they'll say, fine. And so we'll get an NDA in place and we'll get the financials and we'll do the valuation and da, da, da, da. And then I'll come back and say, look, the value of your business today is X.
And this is how we arrived at X. This is what the adjusted EBITDA is, this is what the multiple range is. This is what the value is. Now, if, if the business grows at this rate and if your margins improve and if your adjusted EBITDA goes up and we do all these other things, that's going to expand what the multiple is, this is what the business could be worth in five years, seven years, 10 years, whatever.
And so all of a sudden they're like, wait a minute, you're telling me the business is worth 5 million today and you're telling me if I do these things that the business could be worth 15 million in five years?
I said, yeah, that's what I'm telling you.
And they see how that's accomplished from a financial standpoint, we're going to grow the top line at 20%. We're going to get the margin improvement here. We're going to work internally on the infrastructure of the business where to get the multiple up. All of a sudden they, they see what the value of it could be.
And then you can start having the conversation of do you, do you want to build the business to that value over this period of time in, and you want to sell it or do you want to build your management team up and then you pull back from the business and, and you can see how the profitability and how the distributions of the business could be at a much higher level. Two or three years, all of a sudden it makes sense to them and they see it.
[00:39:09] Speaker A: And now, you know, I think it's answering the question, John, is without that point B, that's grounded in reality, the person. Because I'm seeing the same reactions as people. They can look at that and go, is that worth it to me? And we can't answer that question without that framework to say, okay, John, well, you just told me. I'll give you two examples of two opposite reactions to that that I think are both.
Okay. One of my clients, they said, oh my God, that's all. Now I've got the path forward and I can go from that to that. And that's economic wealth. And now I have meaning to all of the hard work every day instead of just hoping so someone gets gravitated to sign me up.
The other person, I had two clients actually, as we walked through that, they went, no effing way do I want to go through that misery over five years. Because it's going to go, it's going to take from 25 employees to 50 employees and all the headaches. And instead if I just save 400 grand a year in my assets and then not overwork myself, I still get to the same net worth in five years. And like, neither are wrong, right?
[00:40:34] Speaker B: No, no. And, and I, I, I couldn't agree more. And, and, and we're not here to be, to, to, to be judgmental. And, and we're not here to force our value system on them. We're, we're not, we're here to help them see what alternative paths are, to be sure that, that they feel like they're headed down the right path and they've got a plan to get there.
[00:40:59] Speaker A: It's visible because, like, I mean, and that's where I think it's, it's so synonymous to the health space.
You go, okay, like, you come to me and you're like, let's say you're £400. You say you want to run an ironman tomorrow? I'm going to go like, hey, we got some serious conversations that we're going to have to have. Or, but we're just trying to map expectations, reality. Say, like, what level of effort do you want to put into your goals? We can change the goal, we can change the timeline, we can change the effort but, like, we're. We're, like, it's seeing clearly for the first time what is it going to take to get the outcome that's meaningful. And that's where I think you and I have synced up on.
All of the other consultants and advisors are not grounding this conversation in cash flow and valuation, which means it's all just correct.
[00:41:49] Speaker B: Yeah.
[00:41:49] Speaker A: Based on what?
[00:41:52] Speaker B: I couldn't agree with you more, Ryan. I couldn't agree more.
[00:41:54] Speaker A: Yeah, so my audience, as you've probably gathered, have heard a lot about the ownership operating system, the cash flow, like, thinking about the numbers and all that stuff. Like, if we.
If we said for a moment, hey, someone went through their goal setting and all that stuff and says, you know what? I actually want to sell my company through third party. I don't want to do an esop. I don't want to do an internal transfer. I don't want to sit in the boardroom for the next five years. But, John, sign me up for a sale in 12 to 18 months.
I want to, in the next half hour, 40 minutes to unpack for the listeners their ability to map what the level of effort is. So if we kind of use that, is it worth it or not?
Because it's not just the, hey, John, you said it's worth 15 million.
That's not enterprise. It's not how much goes into your pocketbook. You have the role. You have all of these decision trees. Like, when you and I were on that call with my client, you did such a good job where, like, at the end of the call, I think she was able to go. I can see what the next 18 months would look like. I can see how much money would go into my bank account. I can see what level of effort's gonna have to be applied. And it was.
[00:43:04] Speaker B: You were.
[00:43:04] Speaker A: You just did such a good job from that first moment all the way to.
Well, even like the, the. The last 18 months of the urinal.
[00:43:12] Speaker B: Yeah, yeah, yeah.
So that's.
[00:43:15] Speaker A: Is that helpful?
[00:43:16] Speaker B: Yeah.
[00:43:17] Speaker A: Frame.
[00:43:17] Speaker B: Yeah, totally. Let's first talk about valuation, and then let's talk about deal structure, and then let's talk about timeline.
[00:43:25] Speaker A: I love it so much.
[00:43:26] Speaker B: And let's. Let's sort of put everything together here. So. So first.
[00:43:32] Speaker A: Sorry to interrupt. Before you do that, maybe framing up the size client. Why there's a gaping hole in your marketplace that you and I are also working on. So before you kind of go into that whole series of. Because I think it's like, who is this appropriate for? And the size and why is it a unique thing of what you're doing?
[00:43:49] Speaker B: Yeah, so the market that, that we really focus on is companies that have enterprise value roughly between 5 and 50 million.
Now, does that mean that we can sell companies below 5 million?
In some instances, yes. That means we can sell companies greater than 50 million. In some instances, yes.
But when I started this business, that was the market that, the size of the market in terms of enterprise value of the business that I really wanted to focus on because I felt like it was undercovered and underserved.
You know, you go below 5 million, a lot of business brokers are sort of in that space, and that's where they are. You get above 50 million, investment banks begin to crawl into that space.
You know, some of the larger New York and Chicago banks are sort of there.
But there was this sort of, you know, underbelly, if you would, where I felt like the businesses had some significance and they had some complexity, but they were above where brokers could handle and.
[00:44:59] Speaker A: Below where it's really the backbone of America, actually.
[00:45:02] Speaker B: I mean, to me, that's America. To me, that's America. Anyway, so that's the market that we focus on now from a valuation standpoint.
And I know that there are a lot of different ways that valuations can be done.
But to boil it down in its most simplistic fashion, it comes down to two numbers. It's what is the adjusted EBITDA cash flow of the business that a buyer could realize if they own the business, and what multiple of that cash flow are they willing to pay? It comes down to those two numbers.
Buyers are buying businesses, ability to produce free cash flow profits.
And I don't care if you're talking about Amazon or Google or Facebook.
[00:45:58] Speaker A: That's how the world works.
[00:46:00] Speaker B: Yeah, yeah.
And you know, PE multiples and multiples of privately held businesses, they're measuring the same thing.
It's buyers or investors are buying the business's ability to produce cash flow and they manage their risk of that cash flow changing by the multiple that they're willing to pay. Smaller businesses with more risky cash flow, they're going to pay a lower multiple for those businesses. Larger businesses with more consistent, predictable cash flow, they're going to pay a higher multiple for those businesses. And so it comes down to two numbers. What's the adjusted cash flow, profit, EBITDA of the business, and what multiple is a buyer willing to pay? Now, you know, I mean, you go to conferences and you, and you go to the country club and everybody will say, I sold my business. For eight times. Or I'll sold my business for 10 times. Or Fred sold his business for 14 times. Everybody loves to talk about the multiple and the multiple matters a lot. It matters a lot.
What, what no one wants to talk about is what was the, what, what was the deal structure under that headline number that a buyer was willing to pay for the business?
And, and when you first throw this out, people say what the hell are you talking about?
And I mean if someone's going to pay $10 million for the business or $20 million for the business, I mean whatever the number is, that doesn't mean they're going to pay $10 million of cash.
I mean they, they might, but, but there might be some structure.
[00:47:43] Speaker A: I'm going to give you $10 million for your business, John, and it's going to be a hundred year note at 1%.
[00:47:47] Speaker B: Yeah, yeah, yeah.
I mean there's a chance there's going to be some structure in, in that sell price. And, and when I say structure, what I mean is how much of the $10 million is cash?
How much of it is a note that the seller might take back?
How much of it might be in the form of an earn out, meaning if the business performs at these certain levels over this period of time will pay you additional cash bonuses.
How much of it might be in the form of rollover equity, which means if you're selling the business for $10 million, you might only be selling 80% of the business and you might continue to own 20% of the business business. And that 20% might go into a larger holding company and that larger holding company might sell in three, five, seven years. And so you're hoping that the 20% that you left in the business when that holding company goes to sell the second time, that that 2 million ends up being 6 million or 8 million or 10 million or a much bigger number. And so one of the things that, that, that every seller needs to think through when, when they're, when they're thinking about going to market is it's, it's not just what is a buyer willing to pay for the business, but, but what, what is the underlying structure of that acquisition going to look like?
And what am I willing to live with and what am I not willing to live with?
And so, and so taking the time to understand the structure, it's, it, it matters a lot.
[00:49:45] Speaker A: It's paramount.
[00:49:47] Speaker B: Yeah, yeah, yeah.
Because, because you've got you, you as a seller have to be clear.
And if you're, if you're dealing with a Banker, or you're dealing with an M and a group, or you're dealing with a broker, or you're even selling the business on your own. You've got to be clear in your mind when you go to market, what you're willing to accept in terms of sale price and in terms of structure and what you're not willing to accept.
[00:50:20] Speaker A: And I want to lay around too, then also how that impacts what you're willing to do and not do as a operator inside of that structure. Right. Because like if, if they're trying to get out of their job, but all of that is hinging on them still working. And so you know one thing, because it is. And then net proceeds.
[00:50:41] Speaker B: Yeah, I'm going to get to that net.
[00:50:43] Speaker A: Okay, when do you just to spot check you for a second of.
You did a great job of talking about adjustments in normalized ebitda. Do you want to talk about that now or do you have a trick?
[00:50:56] Speaker B: No. And so. Yeah. And so I tell people all the time, when you know, the value of the business comes down to two numbers, it's the adjusted EBITDA number and it's the multiple that the business is going to trade for. And so we get back to what's the adjusted EBITDA number?
And so everyone says, oh, I'll send you my tax return. And I said, okay, you can send me your tax return.
[00:51:24] Speaker A: But is that, do you hear it that much too?
[00:51:28] Speaker B: Oh yeah, yeah.
And I'll say, okay, send me the tax return because that's a good starting place. But we all do the same thing.
We hate to pay taxes and we want the business to pay for as much as we can.
And so the tax return's not showing the, it's not showing the real story.
And they'll say, oh, I guess you're right.
[00:51:49] Speaker A: Nor is.
[00:51:50] Speaker B: Yeah, yeah, okay, so I will send you my QuickBooks files. Okay. And I'll say that that's great. Send them to me. And so, you know, they'll send me the files, they'll download into Excel spreadsheet or give me access to QuickBooks and we'll download everything. And we've got, we got revenue, we've got all the chart of accounts, we've got cost of goods, we've got gross margin, we've got OpEx, we got SGNA. And then we've, we've got operating income.
And so I'll start looking at that, that operating income. And, and I'll say are there any personal expenses in here? Absolutely.
Are there any non Reoccurring charges in here? Absolutely.
Do you have family members? Are there, are there other, are you overpaying people? Are you underpaying people?
Absolutely. And so what, what we have to do is we've got to get that operating income number that, that comes out of QuickBooks and we've got to make add backs and adjustments as to the way a seller's going to run the business, pulling out all the non reoccurring and non, non critical expenses and one time charges to show the seller what the true adjusted EBITDA cash flow is. And so you've got to make all those adjustments because you, because you want to get that number up as high.
[00:53:26] Speaker A: As you can and realistically, right, that's.
[00:53:29] Speaker B: What you do realistically.
I mean you can't lie and you can't cheat and it's going to have to go through a quality of earnings and we got to be able to verify everything so you know, you can't bullshit stuff. But we want to try to show, you know, in Ryan, this happens all the time. I get the tax return and it shows that the business is making $200,000. I get the QuickBooks files and the net income in the QuickBooks files is maybe $700,000. We start doing all these add backs and adjustments and we come up, we find out that the real adjusted cash flow of the business with all these add backs and adjustments might be a million dollars. Now remember, the tax return showed 100,000.
The QuickBooks files showed 6 or 700,000. The real number's a million. We got to get to that, we got to get to that million dollar number because that's the starting place that the multiple is going to be based off of. That's going to determine what the value of the business is.
So all those add backs and adjustments help us determine what, what the, what the real number is.
And we, when we multiply that against what the reasonable multiple range is, that gives us the value of the business.
Now let me talk about multiple range for a moment because multiples are not static multiples.
They, they remember what a multiple is. A multiple is the number of, of future cash flow years that a buyer is willing to pay for for a business. And so a high risk business that they're willing to pay a multiple of three times means they're taking that cash flow number of a million dollars, let's say, and they only have confidence that that cash flow number is going to stay at that level for a three year period. And so they're willing to pay you A multiple of three times.
If it's a more stable business with more consistent cash flow that they're willing to pay you a multiple of five to six times. Let's say what they're saying is the risk of that cash flow is much, much less. I'm willing to forward pay six times cash flow for that business. And so in order to get the multiple up, we've got to do everything we can to internally de risk the business from that perspective so that they're willing to pay a higher multiple for it. We've got to change what the revenue mix is.
We've got to change what the client concentration is. We've got to change what the leadership team is. We've got to change.
We got to get out of project based work over to reoccurring or recurring base work. We've got to reduce what the owner dependency is.
All of these internal strategic things that, that we're doing in the business while, while the EBITDA is growing because we're growing the business, we are de risking the business.
And as a result of that, the multiple is going up also. And so you've got two things working here. You got a higher cash flow number and you've got a higher multiple. And when you multiply those together you get a compounding effect in terms of the impact that that has on, on the value.
[00:57:07] Speaker A: John, with one of the, the case studies that I've been working on building out for my owner's Academy, going from 1.5 million in normalized EBITDA to 3 million over the course of five years and going from a 4.5 multiple to a 6.7 ends up being a 25 or 29% CAGR. Because, because you, you're getting both that growth and, and it literally is, it goes from a five and a half million dollar company to, to 21 million dollars in five years. I mean it's just, and it's, and it ends up being only like 14 normalized EBITDA growth or something like that. Yeah, so it's just, and I think everything that you had talked about and I, we both said about the consultants and the projects and the advisors should be through this lens.
[00:57:53] Speaker B: I, I agree with complete. Let me, let me tell you the, the other thing that happens to, is as the business gets larger, the buyer.
[00:58:06] Speaker A: Pool changes and deal structure as well.
[00:58:11] Speaker B: Yeah, yeah.
And the deal structure changes. And so you know, there is so much institutional capital out there chasing deals and you know, we can hate on private equity all we want to because of what they do what, what some, some private equity firms do with businesses and, and how they destroy the value and the culture of the business. Because private equity firms are so financially driven in terms of the way that they look at, at these businesses, not all institutional capital is the same. And, and you know, I'm not saying that, that, I'm not saying private equity firms are.
[00:59:00] Speaker A: Let's do this for both, for both your. And I say, because you're doing a very good job at I think, dancing around like here, here's how I would word it, John, is you know, there's the whole like stock tip. Like the moment you hear your grandma or your Uber driver talking about it, you know that the returns are gone.
And private equity and venture capital and all of these have very specific reasons to exist. But when you have your grandma and the Uber driver talking about private equity, it's gotten too big as a percentage of the whole. So that then brings in the bad actors that crowd everything else out. So I think it's just, I'm just saying this on behalf of both you and I like, I know really good private equity firms, you do too. And if they're smart people with good intentions and they're deploying capital the right way, there's just a shitload of bad actors because of the cheap debt. For the last.
[00:59:45] Speaker B: Yeah, look, we, we've got, I've got close to 3,000 buyers in our buyer network that, that we've had conversations with. And you know, it's private equity firms, it's independent sponsors, it's family offices, it's strategic buyers, I've got search funders. And so I mean it's a hodgepodge of, of everything out there. And you know, when, when I think about all these conversations that, that I've had, you know, there, there's some really good people that I've talked to and some really awful people that I've talked to as well. It's like in life.
So the way, the way we run a process and I can't speak to anybody else, but when we agree to take a deal on, it takes us about 30 days to get the marketing material put together that we're going to market the business with. And it sort of falls into two components. There's a one page summary that's called a teaser and then there's a 20 to 25 page, much more detailed presentation that's called a SIM, a confidential information memorandum. And so it takes us about 30 days to get both of those documents prepared.
The teaser does not have the Name of the business, it goes out to a much wider group.
That detailed 25 page report has a lot of information, a lot of very specific information about the business. It has the name of the business.
And so no potential buyer gets the SIM until they sign an NDA. And so that goes to a much smaller subset of potential buyers.
The way we run a process is we'll, we'll send the SIM out. Well, I'm sorry, we'll, we'll send the, the teaser out. The, the one page summary to, you know, depends on the type of deal. It, you know, it might be 100 different buyers, it might be a thousand different buyers based upon the type of deal that, that it is.
Once the teaser goes out, we'll get somewhere between 50 and 100 potential buyers that want to see the SIM.
And then we'll send the NDA and the SIM out to, you know, 50, 75, 100 potential buyers.
And then we'll have conversations with probably 30 to 50 of those.
And then from the 30 to 50 that we'll have conversations with, we'll get preliminary offers from maybe 10 to 15.
And this is where it gets interesting. So before we bring a deal to market, we've done a valuation and we've had conversations with the seller as to where we think valuations are going to come back within.
Mm.
Now, when, when we get these 10 to 15 offers in, have you also.
[01:02:58] Speaker A: Asked them or have you ever also made a guess on deal structures and percentages of that enterprise value, like where it's going to be allocated?
[01:03:04] Speaker B: Yeah, yeah, yeah. And we'll say, you know, we think, well, we think the value is going to be in the 10 to 12 million million range. And we think somewhere between 50 and 70% of it's going to be in cash and 20% of it is going to be in rollover equity. I mean in an earn out and maybe 10% in rollover equity. And so we'll begin to frame what the structure is. And so when we get these offers in, probably 60% of the offers that we get fall within the targeted valuation range.
If we did our job right, if they, they fall within that range and then they're going to be 20% that are above that range and 20% that are, that are under that range. And so we'll take these 10 to 15 offers and we'll skinny the list down to maybe five to 10.
And then the seller and these five to 10 buyers will have management calls and they'll get a chance.
[01:04:08] Speaker A: Question before you be sorry, have you Validated, where they're getting their capital, whether they have the money, can do the deal. Because I think it's an important to note.
[01:04:16] Speaker B: Yeah. And so when, when we skinny the list down from the 10 to 15 that we get offers from and maybe more to the, to the 5 to 10, we have vetted these buyers to be sure that, that, that we have confidence that they've got the capital and they can close within a reasonable period of time. And so we've done our best to vet that list down. And so it's a qualified vetted list at this point. And so we have the management calls, the seller and the buyer get a chance to talk to one another, the buyer gets to ask them questions, the seller gets to ask the buyer questions. Everybody gets to know one another.
We'll do this with, with all of these five to 10. And so the seller gets a very good feel as to who, who's out there and who's interested in the business, what their background is, what their experience is. Similar deals like this that they've done, what their value system is, what their culture is, what their strategic plans with the business are. I mean, it's everybody right there.
[01:05:26] Speaker A: Let me, let's touch on that for a second. Because I think that this is so important, John. We're like, why? I've.
Why someone in your role is so freaking important? Because by the time that they get to those five get togethers, the meet and greets, like, let me see if I can regurgitate this correctly. There's an expectation set on valuation.
You got the bell curve, their expectation set on the deal structure. So it's been milestone one, milestone two, then there's conversations that you've had. So when you skinny down that buyer list, it was if the seller told you what their desires were for the legacy, the culture.
I'm thinking about the person that you and I are talking to, like there are specific intentions of how long they're willing to work and not work. And obviously the word, it depends, depends on the person that they meet. But there's like this whole like working strategy that has to be nested within the deal structure, nested within the valuation. So because I know how intuitive and emotionally intelligent you are, you've gone through those. And I just see so many people that don't do that, where they. So like, by the time those meetings happen, it's not like, oh, I love John and John and we're great. And then it's like, well, I'm planning on firing these people. They got the Wrong deal structure. And so that's all that wasted time. So I just. Is that a. Yeah. No appropriate way of saying that.
[01:06:52] Speaker B: Yeah. And, and I mean, you've got to remember the group that's buying the business, they're buying the business's ability to continue to produce that cash flow profit and their ability to grow that cash flow profit. And so, I mean, we come back and talk about owner dependency and the risk of owner dependency. I mean, one of the things that a bottom that one of the things that can harm a business from a valuation standpoint is if there's so much of the business that's dependent upon the owner, then, I mean, think about it from the buyer's perspective. If the buyer is buying this business and the business is, is so dependent upon the owner and the owner plans on walking away from the business 90 days after it closes, then how does the buyer have any confidence that, that, you know, the revenue, the, the customers, the employees, anything's going to stick around. He doesn't. He doesn't. And so I mean, if they're going to buy the business, they've got to manage their risk. Of course they're going to beat you up from a multiple standpoint and the.
[01:08:06] Speaker A: Deal structure standpoint and the whole freaking thing.
[01:08:08] Speaker B: The whole freaking thing. Yeah, absolutely.
[01:08:10] Speaker A: And John, this is where like what I.
Sometimes I feel like I'm the bearer of bad news. And I don't know if you feel that way sometimes too. We're like, there's no easy button like what you just said. Because like if you think about back to the beginning part of the conversation, it was people are tired.
[01:08:26] Speaker B: Yes.
[01:08:26] Speaker A: The death spiral. So they want to hit this punch out number. But then like it's either going to be impacted on the enterprise value or it's going to be impacted on the deal structure or it's going to be impacted on their job. So like at every one of those gates, the realistic expectations are going to snap back into reality saying, john, there is no easy button, dude. Like, I don't know, there could be potentially. But.
[01:08:49] Speaker B: Have you ever run a marathon?
[01:08:52] Speaker A: No. For so many reasons.
[01:08:54] Speaker B: Yeah.
[01:08:55] Speaker A: So, so I run four miles and then I stop and then I'm done.
[01:08:58] Speaker B: I ran one. I ran one.
Yeah. And I swear I'd never do it again.
But, but, but the thing that I remember, and there are a lot of things I remember about that marathon, but there were. Hydration when you're running a marathon is like so important. And the, the, the guy that I was training with, he, he had run A bunch of them. He said, john, you got to keep drinking water even when you're not thirsty. You got to keep drinking water even when you're, when, when you're not thirsty. Because if you wait until you're thirsty, it's too late at that point. Right.
[01:09:32] Speaker A: I like that a lot.
[01:09:33] Speaker B: Okay, well, you know, when, when so many owners of businesses come to us, it's almost like it's a ball game and, and it's in the eighth inning and they're, they're, you know, the game's about to be over and they start coming to us wanting to talk about the business and like, I mean, from a valuation standpoint, from a deal structure standpoint, whatever, whatever, whatever.
We, we can help them. But, but there's not enough time and they don't have enough.
[01:10:10] Speaker A: The gas in the tank, like you said. And it's probably all three of those buckets too. It could be the 35 year old and the 7 year old.
[01:10:15] Speaker B: Yeah, yeah. And so, and so what, what, what they really should do is, is they should come see us 10 years before they're even ready to sell so that we've got time to work with them where they've got energy to do the right stuff so that they can have the right outcome. You know what I'm saying?
[01:10:36] Speaker A: Yeah, I do.
[01:10:37] Speaker B: Yeah.
[01:10:37] Speaker A: So it's because, because like.
[01:10:41] Speaker B: And then.
[01:10:42] Speaker A: We can go back to the, continuing your, your process. But like, I think of like, it's, they're coming to you at the 80th inning, but they don't know what sport they're playing because they're not, they're not following the valuation, the cash flow.
[01:10:55] Speaker B: Right.
[01:10:55] Speaker A: Paradigm shift of what we were talking about, which is shareholder value. So it's like they come to you and say, hey John, I kind of want to be done with this sport. And it's like, hey, dude, it's at the second inning. You actually have eight innings and you thought you were done after two.
[01:11:08] Speaker B: Right, right, right. Okay, so let's, so let, so let's go back to the process.
[01:11:11] Speaker A: We got the five meetings.
[01:11:12] Speaker B: Yeah, yeah, so, so we've got the five to 10. We get final offers.
We play these offers off against one another and then we, we sit down with the seller and we lay all the offers on the table. So, so you know, you've got, you've got these six final offers.
Here's option A. This is what they're willing to pay for it. This is what the deal structure is. You remember talking to these guys? Yes, I remember. Talking to these guys, this is option B. This is what they're willing to pay for the business.
This is the deal structure. Do you remember talking to these guys? Yes, I remember talking to these guys. And then, and then go through, go through the list. And so, you know, at this point we're probably three to four months into the process. We've run a market clearing process.
We've, we've sent the teaser out to over, you know, several hundred people. We've sent the sim out to 50 to 100.
We've had conversations with 35 to 50.
We've gotten Iowas from 10 to 15. We've had management calls with 5 to 10.
And now we've got final offers from, from these 6.
And the seller has to select the offer that they want to go with.
And it's going to be, it's going to be price, it's going to be deal structure, it's going to be culture, value, system, vision, operator role. Operator role.
It's going to be a bunch of things. Going to be a bunch of things. And so at that point you're four months in your three months in select the offer.
Now we've got to get through quality of earnings, we've got to get through the rest of due diligence and we got to get through all the legal review and that process is a hard 90 day period to get through. I mean, I mean there's, there's a lot involved.
Quality of earnings. You know, all the financial information that the buyer has seen has been information that we have, we, the seller have supplied to them. And so they've got to hire forensic accounting team that's called the quality of earnings team that, that they've got to go through and they've got to do an audit to verify that all the numbers that they've seen from us are verifiable numbers that, that they can support and that, and that's, that's a very laborious process.
[01:13:44] Speaker A: It's a cavity search.
[01:13:45] Speaker B: It is and can take 30 to 45 days to get through that process. And it's tough because, you know, they're going to go back three years, they're going to drill through all the P Ls, they're going to drill through all the cash flow statements, the balance sheets, they're going to look at credit card statements, they're going to look at bank statements, they're going to, they're going to look at receipts, they're going to verify. You know, we've, they even went through.
[01:14:09] Speaker A: Like we had 3,000 contracts. So they went through contract audits. I mean it was everything.
[01:14:13] Speaker B: It's a dude, it's a bitch.
[01:14:15] Speaker A: That's exactly right.
[01:14:17] Speaker B: You gotta, you gotta get through that and then you gotta get through the rest of, of the diligence. And then you've got purchase agreements and you've got consulting agreements and you've got employment agreements and you got to get through all the legal stuff.
And so getting through all the quality of earnings, the diligence, the legal stuff, I mean that can take another 90 days.
And so from when we take an engagement on till when the deal actually closes and money gets wired can take six to nine months.
Now.
[01:14:58] Speaker A: 20% more than that, 20% less than that kind of thing.
[01:15:00] Speaker B: Yeah, yeah, yeah. Now, you know, we're, we're very picky on the deals that we take and you hear all these crazy numbers about, you know, 80% of the deals that go to market never get sold. And they, and, and I would say that's true. And they don't get sold because they probably shouldn't have been brought to market.
[01:15:23] Speaker A: Is it, is it mainly, do you think, if you were to actually double click on that, do you think it's mainly brokers because they just list the thing on the website?
Because like, because if it's an investment banker like you or any of the, like Prairie Capital or any of these people that I know that are on the low or larger end of the market, you're not, you're not going to waste your time with something you can't sell.
[01:15:40] Speaker B: No, no, I, I, so we, we don't charge a retainer, we don't charge any money up front. We only get paid if a deal gets done and prom, and, and I would say 80 to 85% of the deals we bring to market get closed within that six to nine month period of time. And so, and, and, and part of that is, is we're so damn picky on the deals that, that we take on. We don't want to, we don't want to.
[01:16:05] Speaker A: Valuation expectations, all that stuff, it's just not worth it.
[01:16:08] Speaker B: It's not worth it. I mean we, we, we've got to be crystal clear that the seller's expectation is reasonable, there's going to be good demand for the deal in the market. We understand exactly what structure that they're willing to do, we understand exactly what they're doing.
Transition timeline on is there industries that.
[01:16:27] Speaker A: You, you gravitate towards.
[01:16:30] Speaker B: We do a lot of blue collar trade work, you know, H vac plumbing, Electrical roofing, garage door, blah, blah, blah. We do a lot of manufacturing stuff, we do a lot of industrial stuff. We do a lot of logistics, distribution stuff. I, I would, I would say the stuff that we don't do, we don't do technology stuff. We, we don't do healthcare stuff. I mean some of the, you know.
[01:16:53] Speaker A: Like really, I call it real things for real people in the real economy.
[01:16:56] Speaker B: Yeah, no, no, that, who, I mean what, what, what's the guy's name? Mike. Who's the, who's the.
Yeah, yeah, yeah, yeah. I mean think of those businesses. That's us. That's.
[01:17:08] Speaker A: Yeah, yeah, yeah.
[01:17:09] Speaker B: It's just, it's just, you know, it's, it's, it's America. I mean that's, that's, that's what, what we do.
[01:17:16] Speaker A: Because like what happens is, and what I, it's the cash flowing companies that like are doing real things for real people in the real economy. Because like when I think about all of the distractions that I've seen John over the last seven years is like I, because I mean we still have copiers and we fixed them like it was real shit. And I got, yeah, basic stuff and like I, Amazon, FBA companies and then the SaaS and you. All this stuff where like the money and the cheap money chased all this stuff and all the valuation expectations were so distorted that it, like I think everything's kind of, kind of going back into the normal stuff.
[01:17:55] Speaker B: But let me, let me, let me finish the journey because there, there are a couple of last pieces here and so the deal gets closed. And if there, if there is an earnout component there, meaning if the business hits certain financial thresholds over the next year or two, a piece of the sale proceeds will, will come in the form of bonuses that are paid as those earnouts are achieved.
If those earn outs are there, then the seller is going to want to stick around long enough to be sure that the business hits those operating thresholds to be sure that those earn out.
[01:18:38] Speaker A: Do you think an earn out is, is it simple enough to say an earn out as a bonus? Yeah, because like, like a rolled equity is your equity tied in with the future holding company. A seller's note is a guaranteed note contract for D with a promissory note. But an earn out is, hey, it's.
[01:18:56] Speaker B: A bonus, it's a right.
[01:18:57] Speaker A: I wanted to pay you 5x but I'm paying you 3x. And like we're not doing rolled equity, not doing the seller's note. It's going to be we can pay you that if the company does all these things.
[01:19:07] Speaker B: Yeah, yeah. I'm going to pay you 10 million for the business. I'm going to give you 6 in cash and I'm going to give you 2 million in an earn out.
And if the business hits a certain revenue target next year, I'll give you a bonus of a million. If it hits another revenue target in the second year, I'll give you another bonus of a million. And so they're, they're just, they're, they're structuring a piece of the payout predicated on the business hitting certain financial thresholds. It's just a bonus. It's just a bonus. The, the, the final piece is even if you're getting all cash for the business, and even if there's a good management team in place, the buyer is probably going to want the seller to stick around for a period of time to help with the transition.
It might be a three month transition, it might be a six month transition, it might be a 12 month transition. And, and they're going to pay you for that. But, but they just want to be sure that, that you're around to ensure that everything gets transitioned over properly.
I remember in, in the conversation that we had with, with your client several months ago, they, they were very specific in terms of she wanted the business sold within a certain period of time and she was willing to stick around for a transition within another period of time.
[01:20:39] Speaker A: Like another year. Yeah. So it ended up being two years.
[01:20:41] Speaker B: Yeah. But, but when you add all those up together, she was very specific on January 31st of this date. She wants out of here.
And so, and so you've got to be sure as you're, as you're thinking through the timelines that, that you're backing that entire calendar all the way back.
[01:21:00] Speaker A: Up, which ends up being two to three years.
[01:21:04] Speaker B: I know it does. I know.
[01:21:06] Speaker A: And like, and God forbid, I mean like, I got a client that called me this year. He sold his company for 50 million bucks to a PE firm. Four years ago, he finally quit. He's like, I was chief of staff enough in this for 300 grand for three years. And then we couldn't get anything done. He still got millions of dollars of rolled equity and it's stuck there.
[01:21:26] Speaker B: He's just gonna pay off one day.
[01:21:28] Speaker A: Well, and like the thing is, but you know, he did. I mean, I worked with him six years ago. He got all of his, all of his needs met at closing and he just is like, this is just annoying. I Have to talk to you guys. But like, I think to your point, it's just like there's a lingering effect that like, you know, John, what I want for people, and you do such a good job at explaining this process to people that, you know, I think about the 500 podcast interviews that I've done about all this stuff is I want people to be able to go through every one of these milestones with eyes wide open, where they are intentionally choosing what they're going to do next. Instead of being pushed, they're like again, going back to the health care system. I mean, my dad was getting surgeries that he never needed because the Mayo, even the Mayo Clinic was just piling on insurance codes. And like, you're a good person.
And like, like what I have kind of the thing that the mission that I, or the belief that I've had is education can hopefully level set this. And I like, I think about Andrew Huberman, it's like, yeah, he talks about really complicated health stuff. And the way I think about it is like, what I'm trying to do and I think you're doing the same thing, is here's how it all works.
So that way you can see like, hey, it sucks to elevate your level of education when you were a plumber and you're like talking about this shit and you don't want to, but it's like, if it's $15 million in your life, livelihood, you might be worth learning about some of this stuff. But then when I think about like when I.
What gave me joy is like when I hand off the baton of my client to you, it's like I watched them go, okay, I went through all my goal setting, I did all the hard work. I kind of looked, I, they had that visibility of the is it worth it Conversation to look at the next five years. And they go, but now they could, they can just like set. Sit back in the drive in the passenger seat to say, okay, John, guide me instead of having to be like me. I get so crabby, John, when I watch no people get screwed over it.
[01:23:30] Speaker B: Just, you know, the end analogy that, that I use is, you know, going back to a football analogy sort of being the, the M and A advisor. I'm, I'm the guy that, that picks the ball up at the 20 yard line or the 15 yard line after they've, they've worked with guys like you for years and years and years. And I'm the guy that's, that's got to punch it over the goal line and score the touchdown. And so, and so I'm, I'm taking all the work that the owner has done for all of these years and, and all the work that, that you have done with the owner for, for all of these years. And then we're, we're the ones that, that are turning all that work into, into reality, which is this transaction that everyone's been talking about for years and years and years making that transaction real.
And so, and so I've, I've got to carry that ball over the goal line and manage everyone's expectation all the way to the end.
[01:24:33] Speaker A: Yeah. And it's, yeah, it's, it's, it's so fun to hear what you're doing. I appreciate it so much and I'm trying to think there's anything else that we haven't covered. I mean, you did a great job, man. Like I.
[01:24:46] Speaker B: The last thing. Yeah, gross. Sale proceeds and after tax. Yeah, yeah, proceeds. It ain't the same number, dude.
[01:24:55] Speaker A: I'm aware it ain't the same number.
[01:24:59] Speaker B: Remember, uncle's there and uncle wants his.
[01:25:03] Speaker A: Yeah. And it's, it's about backing. You know, I think what's working so well as I, like, as I watch some of my clients go and say, okay, I do want to sell to a third party party right now.
What gets me comfortable about the handing them off to you is your protecting them and guiding them, managing the expectations of the legal team, the tax team. So that way, like, you know, and I don't, I'm trying to say this without being too rude. It's like you don't, you don't need opinions from the CPA or the attorney necessarily.
And like, and that's kind of where, like, it's like, we don't need any McCook more cooks in the kitchen here. It's like there's very specific, like the ideas have all been set and we're always like, in here we just need things to be collaborative, discussed, architected in the way that we're trying to drive it forward. And too many people want to be the king of the ideas to provide their value and their fee. And it just, it as they go down that route to say, okay, like here they. I just feel like they're going to be taken care of. And so they're thinking about all this stuff and the, And I think it's just interesting, John, because like, I am spending a lot of time with. When I think about my clients, it's probably now like 60, 60 to 75%.
They don't want to sell the business to a third party. And I have engineered a couple recent of like internal buyouts where it's like this multi stage internal buyout. They sit in the boardroom and then there's either a target ESAP or a full buyout. And like and it's just interesting because I did, I think we all did a lot of work to say like are you sure this is the right approach? But it's so different how different approaches those are and like that's why I want to figure out how to collaborate with you more because like as people raise their hand like with this one client of mine, it's like the game because the next 12 month game becomes wildly different if you're planning on going to market to a third party than if you are going to do if you're going to keep it. And that's where I literally like and I want to hear your reactions on this. I think that when you run a business, 90% of it is the same game of just creating shareholder value and cash flow until you see a line of sight of there will be a transaction in 12 months and then things start becoming different. Like I have examples of like whether you should or shouldn't do like a whole new ERP implementation or buy a company or do a big leadership management change. Any, any comments like once that line of sight becomes visible, like how to start thinking about this?
[01:27:37] Speaker B: I think within 12 months you don't need to do anything significant. Significant, you need to lock the business down.
I agree with you.
Yeah.
[01:27:47] Speaker A: That becomes because all of a sudden.
[01:27:49] Speaker B: Like I had a client moving pieces and it creates uncertainty in the buyer's mind.
[01:27:54] Speaker A: Yep, yep.
[01:27:55] Speaker B: Yeah.
Remember, remember, buyers are buying businesses ability to produce cash flow and they measure their risk by the multiple that they're willing to pay. If you're, if you're doing anything that's putting additional stress or risk within the business, a buyer's going to pick up on that and he's going to beat you up in the multiple that they're willing to pay for it.
[01:28:17] Speaker A: And the deal structure.
[01:28:18] Speaker B: And the deal structure. And the deal structure. Yep, yep, yep.
[01:28:21] Speaker A: This is so fun man.
Thank you for coming on.
[01:28:24] Speaker B: Thank you.
[01:28:25] Speaker A: Yeah, this is so fun. They can reach you at what's what.
[01:28:28] Speaker B: Yeah, then go to brentwoodgrowth.com they can hit me up on LinkedIn. LinkedIn, John Bartlett. Then call me 908-377-7807 or email me J Bartlett B A R T L E t
[email protected] and as. As. I hope you can tell, I love talking about this stuff, and I love talking to business owners and just helping them explore options.
[01:28:52] Speaker A: Thanks, John.
[01:28:53] Speaker B: Okay, brother. Good. Talk to you later, man.
