The Challenges of Buying (and Selling) a Business

A month or so after a business buy-sell transaction the buyer said he had found some challenges but was making his way through them. Finding a business to buy is much different than finding a house to buy. There’s no MLS, the seller doesn’t want anybody to know the business is for sale, there’s a lot more information to verify, and comparable sales information is limited.

Similarly, moving into a house is easy, especially compared to taking over a business. The house is clean, it’s been inspected so you know what to fix or upgrade, and it’s really about unpacking and getting settled. 

When taking over a business you have to deal with customers, employees, operations, culture, cashflow, and more. Here are three things owners should do to make it smoother for buyers (and increase the ease of selling and the price).

Run it as a business, not a lifestyle. Run it as if you’re not selling but are in it maximize growth and profit. Realize the little things you know how to do in your sleep from 37 years as an owner (as an unconscious competent) aren’t second nature to the buyer. There not second nature to your staff, which is why a business plan, job descriptions, and delegation are so important.

As I’ve written many times before, the buyer is buying your people as much, or more, than they are buying your “company.” Employees are the lifeblood of any business so treat them well, pay them well, let them grow, and trust them.

Financial people will tell you to measure everything. Those numbers are the buyer’s (and the bank’s) insight into your business. The abovementioned buyer bought a good business that didn’t follow normal accounting practices (not even GAAP, just normal). This is a project-based business and work in process was not being recorded on the balance sheet. How do you know how profitable a project was if you don’t track things correctly? This means have a good accounting system and pay attention to it.

I could go on but you get the point. Take the little extra time it takes to do things right, not just run from project to project.

“If the highest aim of a captain were to preserve his ship, he would keep it in port forever.” Thomas Aquinas

Hobbies of any kind are boring, except to people who have the same hobby.” Dave Barry

Why Buy and Own a Business?

The March 1, 2021 comic Non Sequitur by Wiley gives us a great answer (to the headline). You can see the comic here* and in the second panel one of the characters answers the question, “If you could go back knowing what you know now, what would you do differently?” with:

“I wouldn’t be so self-conscious in high school and I’d work toward the career I really wanted instead of settling for a job I can’t wait to retire from…”

Something you want to do as a career verus “just a job” is what it should be about, right? This is why people leave their corporate jobs to own a business, whether by starting one, buying one, or getting a franchise. But this is not a rah-rah for ownership, because that’s not needed for those serious about it. Rather, here are a few things out of the news that all business buyers should watch out for and sellers should correct, if it’s an issue with their company.

  • Greensill Depended On a Few For Much Revenue,” Wall Street Journal, March 8, 2021. Customer concentration can be a killer. Greensill had 90% of its revenue from five clients in 2019. There’s a reason buyers and banks get nervous about concentration. Often the seller (and sometimes the broker) will dismiss this by saying things like, “They’ve been a customer for years.” Yes, a customer of the seller and what happens when there’s a new owner? Or a change in the customer’s management, or how a problem is handled?
  • UPS’s new CEO is focusing on the bottom line by weeding out less-profitable customers (Wall Street Journal, March 6, 2021). This is where good job-cost accounting comes into play, so you know your customers profitability. An owner I know was approached by his top (30%) customer about buying his business. For a variety of reasons, he turned down the offer, said he realizes he will lose the customer at some point, and pointed out the 30% of revenue was only 10% of gross profit so it won’t be that big a hit (and he works daily to diversify the customer base). If you’d like a slide deck on customer loyalty and due diligence from a ACG webinar send us an email.
  • Boeing has been in the news again as a couple Pratt & Whitney engines lost parts while flying. Note to buyers, inspect the equipment, the inventory, and the technology. Owners thinking of selling in the near future are notorious for not investing in assets as they did in prior years. Owners should invest in the business as if there’s no plan to sell. The price can only go down if anticipated capital expenditures are higher than normal.
  • Microsoft Exchange customers, at least 60,000, were hit by an aggressive hacking operation that saw stolen emails and malware installation. A client of ours was recently hit by ransomware. Owners need to keep the technology up to date, have protections, and really pay attention to all aspects of cybersecurity. Our podcast series features (separate) discussions with Jennifer Hill and David Henderson on cybersecurity and Dan Weedin on crisis management. Spoiler alert, cybercrime is one of the top two risks businesses face.
  • Trust is the currency that is most valuable in this uncertain moment” is on the front page of the March 5, 2021 Puget Sound Business Journal and it’s a quote from KD Hall. I disagree. Trust is most valuable at all times, especially in a buy-sell situation. No trust, no deal. What seller or buyer would sell to or buy from someone they don’t like or trust? Who would make or accept a job offer to or from someone they don’t like? Not a sane person, that’s for sure.

Business ownership, especially via buying a mature, profitable, and fairly priced business, is the best thing for a lot of people. Just make sure you buy the right business the right way and you pay attention to the above (and all other details of the business).

* Due to copyright laws, I can’t publish the comic’s panel.

Business – It’s Not Rocket Science

I have never worked with a business buyer who didn’t want to grow (aka scale) the business they buy. I don’t know if I’ve ever met a buyer who only wanted to keep it where it is. So I found a Bloomberg article in the February 14, 2021 Seattle Times interesting when they quoted Pierre Poignant who is running Branded, a VC back firm that has acquired 20 houseware and leisure brands. He said:

“We want to be a multi-billion-dollar company” and acknowledged, “buying businesses is one thing. Scaling them is another.”

My initial takeaways from this are:

  • It takes more than energy to grow a business. It takes a plan, the skills, and the resources. When buying one, a little luck is often involved. Luck often being defined as finding a company whose owner is “coasting” while making a great living. Some may say the seller is “leaving money on the table” by not fully exploiting their competitive advantage.
  • Sellers really need to up their game to show how the business can grow. This means grow the darn thing instead of keeping it stable and saying something like, “You can easily grow it, I just don’t want more employees.”
  • It takes a team. That’s why owners/sellers need to show they can attract and retain great people and let those people flourish. This is really what any buyer is buying.

Some may say about growing a business, “It’s not rocket science” and maybe they’re right. Given how many business failures and struggling businesses there are it might be tougher.

“The greatest and most important problems of life cannot be solved. They can only be outgrown.” (Novelist) Frank Herbert

“You want me to do something – tell me I can’t do it.” Maya Angelou

When the Corporate World Attacks You

By Jessica Martinka

Horror stories abound! Both parents working from home, kids taking virtual classes, and bandwidths stretched thin, both internet and personal.

The virtual work world makes it much more difficult to know what’s going on. Unlike the schmoozing, collaboration, and gossip we used to do in person. 

Not knowing what changes and/or decisions are being made that could affect your employment and life can bring the fear of the unknown, and I can surely relate to that.

I was working at Online Trading Academy when corporate bought out the local owner and started “taking over.” The next day corporate employees swarmed the place and we were left in the dark wondering if we would still have our jobs.

Every night I went home worried sick. Soon after the takeover, everyone was gone except for me. They had brought in a new GM and my job was to get her up to speed. Once I did, they let me go. I had convinced myself they were going to keep me, not realizing I was training my replacement. Pretty naïve.

We see this corporate maneuvering all the time and it’s why executives choose to escape the corporate world and buy a business. They are fed up and want to be more in control of their future.

So, what makes a qualified buyer?

  • Experience – To buy a mature profitable business, a buyer must have the appropriate experience and skills in managing people, processes, money, and enthusiasm.
  • A good personality – A person will never buy from or sell a business from someone they don’t like. The buyer and seller must trust and feel comfortable with each other. Business buying and selling is a life-changing decision for both parties. Relationships rule.
  • Capital – the cash needed is tied to the size of the business and the fair market salary for the job of running the business. For an individual buyer, figure at least two times that fair market salary from the buyer.

A smart buyer will hire a great team of advisors and make sure they have experience in buy-sell transactions of the size and type he or she seeks. This will give you a better chance of getting the deal done, which happens to be the title of our new book.

Owning your own business puts your future in your own hands.

Your chances of success are clearly best when you buy an existing, profitable business for many reasons.” Richard Parker

“Owning a business is risky but if you buy a mature, profitable, and fairly priced business your leap of faith is off a chair not the roof.” John Martinka

Getting Your Deal Done

Originally published on ibainc.com blog in February 202!

I was honored to have IBA team members Gregory Kovsky and Curt Maier contribute a chapter to my latest book, Getting the Deal Done. The book is 61 short chapters, 50 of them written by me and 11 by other deal pros like Gregory and Curt. The title is the theme of the book with each chapter being a deal tip or strategy (and it’s available on Amazon).

This post is an abbreviated overview of the book, broken into three sections:

  1. Preparation 
  2. Deal making
  3. Due diligence

Preparation starts with thinking through what you want to do, when you want to do it, and why. Business buyers need to do the following (among other things):

  1. Get our spouse on board if you’re married. This is so important. In 2020 I was introduced to a very qualified guy who said he wanted to buy a business. On our first call I asked what his wife thought about it and was told they hadn’t discussed it. On our second call I asked again and got the same answer. I told him we would not meet in person until he talked to his wife about it. Guess what? We never met.
  2. Know how much money you can put into a deal and how much you’re comfortable putting in, as your share of the down payment. These are often different numbers. How much of your investments will you use? Will you use qualified plan funds (you can use them without tax or penalty and your new 401k plan will own shares of your company)?
  3. Determine your criteria. Know what you don’t want and be open. It’s important you know what you want to do on a daily, weekly, monthly basis. I’ll know it when I see it doesn’t work. You may think it sexy to make something but if you’re a sales type with no manufacturing experience it’s probably a road to disaster.
  4. Have a search plan and implement the darn thing. This is a contact sport; the more contacts you make the greater your chance of success and in a shorter period of time.

Business sellers please make it easy on your buyer, the bank, and your intermediary. Concentrate on the following (and there’s a lot more but I have space limitations):

  1. Clean up the books. Show profit, no matter what your CPA says. Have a strong balance sheet. Have accurate and consistent financial statements (this often means don’t blend your business and personal checkbooks). For example, a client of mine had, over three years, four expense items I determined were owner compensation (officer salary, owner salary, management wage, and shareholder wages). 
  2. Don’t just say the business can grow, grow it.
  3. Reduce dependencies like customer concentration, supplier concentration, a uber-key employee, and especially any dependency on you, the owner. I recently saw a business for sale and on the surface it looked great, with $1 million of earnings. However, they designed and installed very complicated systems and guess who was the only person on staff who could do the bids? Yep, the seller.
  4. Show you can attract and retain good people. Pay them a fair wage, have a good culture, and keep productivity high.

Getting to a deal is similar for both buyer and seller.

  1. Both have to be active searchers. Buyers want to see as many opportunities as possible and sellers need to find the right buyer to preserve their legacy (and pay any seller note). A couple years ago I asked a buyer if he was calling the brokers every month. He said, “No, they know I’m out here.” No, if they hear from you once they figure you’re one of 70% of (supposed) buyers kicking tires.
  2. Make a great first impression. 
  3. Do a thorough analysis without getting analysis paralysis.
  4. Use deal pros to determine a fair price, buyers, make an offer, and sellers, if it’s the right buyer, get it done.

Due diligence is a time for confirmation not surprises. Sellers, do some background checking on your buyer, get a financial statement, don’t be afraid to ask for references, and realize your gut feel is very important (as it is for buyers).

  1. For buyers, the financial statements are the starting point but they’re a long way from the end. Look for abnormalities year-to-year. Your accountant or CFO can help and depending on the size of the deal you may want a quality of earnings report, which is a fancy name for a mini-audit and proof of cash (flow).
  2. Put a lot of time in on the non-financial factors. The customers, suppliers, employees, market conditions, competition, the lease, and anything else that influences the numbers. 
  3. As I write this it’s early 2021 so don’t forget the Covid non-financial factors. Can the business be shut down (it wasn’t just restaurants it was wide reaching, so were many factories, which is why if you order a hot tub now, you’ll probably get it in 2022), can your customers be shut down, do your employees feel safe, what precautions does the business have to take, and what’s the liability.
  4. Realize there are no perfect businesses and no perfect deals.
  5. Don’t forget the transition plan. You don’t want to be like one buyer and seller who, because they ignored this, went back and forth the day after closing with, “Tell me what I need to know” followed by, “Tell me what you want to know.” It took a phone call and a lecture to get them on the same page.

There’s, obviously, a lot more to it than what’s in these 1000 or so words. Let me finish with the three key factors to getting a deal done and they’re not price, terms, and conditions. They are motivation, relationship, and education. Both buyer and seller must be motivated. It can’t be, “I’ll sell if you grossly overpay me and it’s all cash at closing” and it can’t be, “I’ll give you a little cash, a note, and an earnout so if I’m as good as I say I am you get full price.”

Relationship is the key though. Buyer and seller must get along, must trust each other, and must have confidence in each other. As one client, who had started, sold, and then bought two businesses, said, “I would never buy from or sell to someone I don’t like.” Finally, you must educate yourself (your advisors will help) on what businesses of your type and size sell for, that it is a process, you will get frustrated, and it’s tough to find a match so when you do, make it happen. Have an experienced guide, pay attention to the details, and stay on track. 

When the Union Wins

The teacher’s unions won, at least in the Puget Sound area; most districts are not returning to the classroom in any material way. Based on the teachers I know, I’d say the union protected the 20% (it’s always the 80-20 rule, isn’t it) of teachers who took advantage of the situation. All the teachers I know are working harder than ever teaching remotely.

I am not anti-union. My wife was in a union for 10 years. My son is a project manager with a union construction company. But there’s a reason almost every business buyer I’ve ever met tells me they want a non-union business. They want to be in control. In most cases, they want the flexibility to treat their people better than what the union would. And to reward those who excel. The teachers I know the best would make a lot more money if there was merit pay. Just like in business, do well and you’re rewarded.

When Football, Covid, Protocols, and Systems Collide

The NFL is down to the final four teams. On at least one of the games this past weekend the announcers talked about how successful the season has been. They said, and I paraphrase, back in July when training camps started nobody knew if they’d get the season in, but they did, with no cancelled games and only a few rescheduled games. They did much better than college football, which was a mess.

This newsletter is not about Covid, but it’s Covid that sets the tone for the business message below. The NFL did it by implementing some protocols we all can follow. They state high-risk close contact as:

  • Less than six feet of proximity.
  • For five minutes or longer in duration.
  • Indoors.
  • Unmasked.

Things we all can’t do are:

  • Daily testing.
  • Having players wear trackers and then investigating any potential close contacts.
  • Using surveillance video.

What it shows to me is diligence can suppress Covid. And before you think I’m in agreement with the Governor of Washington (New York, California, and others) on all the shutdowns, I’m not. My friend Pete McDowell sent me a University of Oregon study saying people don’t catch Covid in (reduced capacity) gyms (I agree based on my going to the gym last fall). I’ve followed contact tracing results a bit and there’s no way people get the virus in (reduced capacity) restaurants.

It makes me think that following the right protocols and having proper systems works, with Covid and other areas in our lives, including:

  • Business buyers who have a plan, set up systems, and follow their protocols will do better at locating, analyzing, and closing a deal on the right business at the right price.
  • Business sellers who take the time to think about what they’ll do if they sell and also get professional input on if the net price of the business is enough for their next great adventure in life will have less seller remorse.
  • Employees who follow the proven plan will advance quicker and be more productive. And if they show how to add value to the current plan all the better (instead of thinking they know more than anybody else and get disengaged).
  • Owners who are willing to listen, act, and delegate have better businesses with more value. It’s not how important the owner is to the day-to-day, it’s how little are they needed in the day-to-day.

It really is pretty simple. If you have a plan that works, and you follow the plan, you’ll be successful. In business, health, and life.

“We are pathetically eager to believe that, if human affairs are managed right, nothing unpleasant need befall anyone.” (Journalist) Max Hastings

Business Buy-Sell and 2021

It’s 2021 and I sense a lot of optimism, or at least hoped-for optimism. Of course the vaccines are a huge factor in this and there’s good and bad news on this subject.

Good news: Reports are while two doses give 95% protection one dose gives protection in the 80-85% range (and arguing about it among experts takes off), meaning the same amount of vaccine can treat a lot more people. And the hospitalization rate of those vaccinated is near zero and the AstraZeneca product was at zero for the first 30,000 recipients.

Bad news: The government is in charge of the distribution and it’s another case of the left hand not knowing what the right hand is doing. Bottom line, both Democrats and Republicans are really good at self-promotion and really ineffective at getting anything done.

So what do I see in the buy-sell world? Here are three thoughts:

I expect it to be busy at all levels. From micro-businesses like deli’s, dry cleaners, and other small retail to businesses where the owner can actually work “on” the business versus “in” the business to middle market firms.  

Why? It’s still a demographic thing. There’s still a disproportionate share of (non-tech) companies owned by people 55-75 (as regular readers know, I believe most owners still working at 80 or close to it want to die at their desk). Things happen as we get older, health issues, burnout, death, etc.

I’m interested in seeing the deal stats for 2020 from bizbuysell.com, Pitchbook, and others. I don’t know what to expect but guess the numbers will be a bit lower than in 2019. That’s one reason I think 2021 will be busy. And that leads me to two sub-points. 

First, buyers are going to be fussy (fussier than before) and really digging deep (or at least should be). Banks will be more inquisitive than ever, and both should be concerned with the Covid non-financial factors as much as the standard non-financial factors.

To put up with the increased scrutiny sellers really need to be prepared. I wrote recently about one client who said he realized his firm was not ready for the diligence requirements demanded by the buyer. It starts with the financial systems and statements (get an outsourced CFO if you need to up your game in this area) and move on to all aspects of the business, especially the people.

Bottom line, while it will overall be busy it will be busier for those who are pro-active.

“I feel that it is healthier to look out at the world through a window than through a mirror. Otherwise, all you see is yourself and whatever is behind you.” Bill Withers

The Advantages of Two Broker Negotiations

By Gregory Kovsky with IBA

My firm, IBA, has a long history of welcoming “buy side” business brokers into the transactions we facilitate as a “sell side” business brokerage firm serving Washington, Oregon, & Alaska.  The guiding philosophical principle at IBA is the “Golden Rule” of do unto others as you would want them to do unto you.  Applying this principle to our clients, our mission statement goals for each of our engagements is to facilitate a “win-win” transaction in a timely manner while maintaining an environment of confidentiality where a communication atmosphere of full disclosure and the utilization of “best practices” exist between the parties. 

One fairly common business brokerage practice at peer firms that has always seemed counterproductive and not in a “sell side” client’s best interest is discouragement of the participation of a “buy side” broker in the transaction.  The reason for an anti-collaboration attitude is frequently financial, as “buy side” brokers commonly request the ability to share commission, as is common in real estate, something that is financially detrimental to a listing broker.  This position makes sense from the listing broker’s position, if they can potentially sell the business at the same price to another buyer, but is the position in the “best interest” of the seller and the mergers & acquisitions industry.  The position at IBA is “NO”.  The reason for the negative response is multifold.  First, at a superficial level a business broker should be ambivalent to who the buyer is and whether they are represented.  Their goal should be to deliver the best buyer in terms of price, terms, and ability to their client.  Personal self interest should not be a component to the decision process.  

Self-serving financial motivation aside the following are the five primary reasons why it is beneficial to have business brokers on both sides of the table.

  1.  Knowledge – Plain & simply many buyers, “Don’t Know What They Don’t Know”.  There is no substitute for relevant, specific knowledge at an appropriate place and time. A common place where buyer’s brokers add value from a knowledge perspective involves knowing what questions to ask and documentation to review when assessing a company for acquisition.
  2. Experience – Knowledge is beneficial if you have time to comprehend and apply it.  However, in a dynamic marketplace where buyers are competing for a specific company, the ability to make decisions in a timely manner through application of negotiating strategies can be the difference between obtaining a mutually executed letter of intent and being the buyer who needs to find another company to acquire. Experience is the key to being able to act with confidence in a timely manner.
  3. Ability – The end goal or a middle ground compromise can be self-evident in negotiations, however the ability to get there can be problematic, if the pathway in terms of communication and persuasion are not able to be navigated.  There is a reason that significant training is provided to military pilots before they are asked to land on an aircraft carrier or fly a combat mission. The skill they possess is significantly greater than that of a private pilot flying fixed landing gear small planes. Skill takes time and repetition to develop to excellence.  Mergers & Acquisitions intermediaries are the fighter pilots of business negotiations.  It is not recommended to enter a dogfight with a party of greater acumen in the sky or a negotiation without equal skill on both sides.
  4. Resources – The purchase and sale of a privately held company is a team process.  Both sides commonly will have attorneys, accountants, and other professional advisors.  Assembling a team of knowledgeable, experienced, highly skilled transaction team members can be the difference between completing an acquisition or not.  A business broker can be a great source for names of “deal making” professionals to interview as potential support professionals.  Another important member of the “buy side” team is commonly a SBA or commercial banker.  An experienced, knowledgeable business broker can be a great source for banking community referrals, as they will have current knowledge of present credit approval underwriting standards and the appetite for loans at specific banks in the community.
  5. Communication – Anyone who has studied negotiations knows that often the greatest achievements are made through secondary parties or back channel communication.  In a business purchase and sale negotiation, it is common for parties to mentally & emotionally to dig into positions.  Losing face can become an issue that prevents agreement.  I have witnessed many times where intermediaries and/or attorneys get a transaction “out of the mud” and moving forward by continuing communication and based on familiarity for parties that had “stomped off” thinking the deal was lost.  

In my twenty-eight years as a mergers & acquisitions intermediary, I can recall numerous successful transactions where business brokers on both sides of the table played critical roles in getting the deal done.  One of the best “buy side” brokers in the Puget Sound area is John Martinka.  Mr. Martinka has successfully completed deals with IBA representing buyers since the 1990’s.   Our team often recommends him to buyers desiring professional representation and view his participation as a value adding benefit to the deal. Few possess his knowledge, experience, skill, resources, and communication ability.  I look forward to the next time I walk into a conference room and see John sitting on the other side of the table with a buyer who is prepared and ready to purchase a company.    

Gregory Kovsky, the President & CEO of IBA, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, and estate planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  Professionally, as an intermediary, Mr. Kovsky specializes in the sale of manufacturing, distribution, technology, industrial, marine, and horticulture businesses. Mr. Kovsky can be reached directly at (425) 454-3052 or .  Additional information on IBA, the Pacific Northwest’s oldest business brokerage firm, can be found at www.ibainc.com.  

Covid Entrepreneurs

The November 19, 2020 Wall Street Journal had a front-page article titled, “New Entrepreneurs Emerge From Wreck of Covid Economy.” Some of the highlights from the article are:

  • A lot of people are turning their skills into a business and it’s their job “in” the business. Skills like personal training, hair styling, freelance chefs, and more.
  • New business licenses are up 32% over the first nine months of the year compared to 2019.
  • Between 10% and 11.2% of workers are self-employed.
  • People are realizing the new normal will be much different than the old normal.

But what about those people who don’t have a “job” skill? These are the people who know how to manage people, processes, money, and enthusiasm. For them, it’s buying a mature, profitable, and fairly priced business.

Why? The most common answers audiences have given me on this include:

  • To take control of their life, career, and finances.
  • To benefit themselves not shareholders from their smart and hard work.
  • Having fun!
  • Letting their creativity shine.
  • Flexibility – if they want to go to their kid’s game or recital they can.

But it’s more than the above. There’s an inner satisfaction to not be beholding to a corporation, a boss, or a boss’ boss. Yes, you have to take care of customers and employees, which is important, and that brings us back to the reasons – to do it your way. Whether it’s a job or your own business happiness and having fun is crucial. It’s like the character Michael Burnham on Star Trek Discovery who states how much she loves what she does and doesn’t want to anything else.

We’re going to see more and more of this. And, for owners whose companies have been hurt by Covid, these buyers aren’t your answer because they want a non-distressed company, but other firms looking to grow by acquisition are your exit. 

“Reality is that which, when you stop believing in it, doesn’t go away.” Phillip K. Dick