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Selling my Business Using a Broker with Mike Metzger · Budget Your Business

• 0:00
  Scott: Hello, and welcome to Budget Your Business, the podcast for small business owners who want to learn how to financially plan for every aspect of their business.
• 0:10
  Scott: I'm your host, Scott Geller.
• 0:13
  Scott: Today I'm joined by Mike Metzger with Murphy Business Sales to talk about how to sell your business, but specifically how to sell it using a professional, which is called a broker like Mike.
• 0:25
  Scott: Welcome, Mike.
• 0:27
  SPEAKER_00: Thanks, Scott.
• 0:28
  SPEAKER_00: Glad to be here.
• 0:29
  Scott: Absolutely.
• 0:30
  Scott: So for folks who are meeting you for the first time, could you share a little bit about who you are and what you do?
• 0:37
  SPEAKER_00: Sure.
• 0:38
  SPEAKER_00: Yeah.
• 0:38
  SPEAKER_00: Like you said, my name is Mike Metzger, and I am a certified business intermediary, which is just a cool way to say I'm a business broker.
• 0:45
  SPEAKER_00: So I help owners of profitable, well-established, privately held companies determine the value of those companies, and then go to market confidentially to find the right buyer at the best price, help them negotiate the deal, and ideally put together kind of a win-win situation for both buyer and seller.
• 1:03
  Scott: Okay.
• 1:04
  Scott: Now I know you uh didn't start in the broker business.
• 1:08
  Scott: And if I'm not mistaken, you kind of started off in the Navy.
• 1:11
  Scott: So just kind of curious, how how'd you uh how'd you go that route?
• 1:15
  SPEAKER_00: Yeah, I uh like you said, I went to the Naval Academy and then I became a Navy pilot, did that for about uh almost 10 years and then stayed in the reserves afterwards, uh, but got into the business world, actually into the corporate sector.
• 1:28
  SPEAKER_00: And I spent about 16 years in Fortune 250 companies uh in in various roles, uh, mostly operational and risk management.
• 1:37
  SPEAKER_00: But I decided about 10 years ago that I wanted to get a little bit closer to the small business world.
• 1:43
  SPEAKER_00: So I left corporate America and um started doing business brokerage.
• 1:47
  SPEAKER_00: So Murphy is a uh a national brokerage firm based out of Clearwater, uh, but I own the Richmond Territory that I grew from scratch and uh have been helping those business owners for the last 10 years.
• 2:00
  SPEAKER_00: And I'll tell you, Scott, it's been uh it's so different from obviously different from uh being in Naval Aviator, but even very different from being uh in the corporate world.
• 2:08
  SPEAKER_00: Uh I just love working with uh business owners who have created something from scratch and they're ready to transition that value into the next phase of their life.
• 2:17
  SPEAKER_00: Usually, usually they're you know, often they're moving into retirement or some other opportunity.
• 2:21
  SPEAKER_00: But for me, it's it's such a privilege to help them do that.
• 2:24
  SPEAKER_00: And I I really am humbled by the trust they put in me to uh to help them accomplish those goals.
• 2:30
  Scott: I I I I can relate with that, Mike.
• 2:32
  Scott: I know you and I originally met at one of those Fortune 250 businesses back in the Genworth insurance days and and realized over the years that you know the the small business space is is where I needed to be.
• 2:47
  Scott: Uh and you know, with you, it's it's kind of a gift that they trust myself with their financial aspects and the health of their business.
• 2:57
  Scott: Um so yeah, I'm I'm right there with you.
• 3:00
  Scott: Uh loving love working that that small business space after spending just a few years in the the the corporate world.
• 3:08
  SPEAKER_01: Yeah.
• 3:10
  Scott: So tell me um tell me a little bit about the process, Mike, of of of going through selling your business.
• 3:19
  SPEAKER_00: Yeah, uh so for the business owner, really the first step in the process is understanding um, I guess this is a two-part uh step, if you will, understanding if your business is sellable and understanding what the value is of that business.
• 3:34
  SPEAKER_00: And those two things are not necessarily the same.
• 3:37
  SPEAKER_00: Um you may have a business that that we do evaluation on and we think it has some some inherent enterprise value, but it frankly is not sellable.
• 3:46
  SPEAKER_00: Um and and a good example of that is uh a super, super niche business that's uh the owner-operator is the only one who knows anything about the products, the processes, the relationships.
• 3:58
  SPEAKER_00: Um might not be sellable.
• 4:00
  SPEAKER_00: It might be, but it might not be as well.
• 4:02
  SPEAKER_00: So really understanding what you have well in advance of trying to sell it is critical for all business owners.
• 4:09
  SPEAKER_00: Um and then the the value is a little bit more obvious.
• 4:12
  SPEAKER_00: Uh you know, we we price businesses or we value businesses generally as some multiple of cash flow.
• 4:19
  SPEAKER_00: And I can get into the details on that a little bit later.
• 4:22
  SPEAKER_00: But that's the first step is really working with somebody who knows what they're talking about on how to value your business and determine if it's actually sellable and marketable.
• 4:35
  Scott: And Mike, is that something that the business owner needs to kind of figure out themselves before they come to you, or is that typically something you can help them out with?
• 4:46
  SPEAKER_00: Definitely the latter.
• 4:48
  SPEAKER_00: Um so I've worked with business owners who've come to me and said, Mike, um, I've had all kinds of scenarios.
• 4:53
  SPEAKER_00: I've had people who've been diagnosed with illnesses and say, I have to sell this business by the end of the year, uh, which is a terrible position to be in if they haven't given it any thought.
• 5:02
  SPEAKER_00: I'd much rather work with people who say, hey, I'm I'm still a year or two out, and I I want to start getting a feel for what my business is worth now, how sellable it is, and I've left myself a little bit of runway that if we need to do some fine-tuning and make some adjustments before we sell it, we can do so and hopefully optimize the value uh that they'll get during that sale.
• 5:25
  Scott: Okay.
• 5:26
  Scott: Um, you threw out kind of different reasons for selling.
• 5:30
  Scott: What are some of those that you've seen over the years of why do I why do I even need to think about selling that business?
• 5:37
  SPEAKER_00: Yeah.
• 5:38
  SPEAKER_00: Um, like you said, there's various reasons.
• 5:40
  SPEAKER_00: Probably the certainly the most common, I would say 75% of my clients are ready to retire.
• 5:45
  SPEAKER_00: You know, they've built a company, they've put 20 or 30 years into it into it, they've paid off their house, they put their kids through college, it's produced a nice living for them, and they're ready to go enjoy those uh golden years, as it were.
• 5:58
  SPEAKER_00: Um, but there are certainly other reasons as well.
• 6:00
  SPEAKER_00: Some of them are good reasons and some of them are bad reasons.
• 6:03
  SPEAKER_00: A bad reason that I see, and this was uh very common after the as the pandemic uh kind of raged and settled down, um, my business is not profitable.
• 6:13
  SPEAKER_00: I'm losing money every day, and I I want to sell it.
• 6:17
  SPEAKER_00: Um and while there are brokers who will specialize in distressed businesses, and there's even buyers out there sometimes for distressed businesses, that's not something that I do.
• 6:27
  SPEAKER_00: Uh I work with with companies that are profitable, they're going concerns, and it's something that somebody will absolutely or actually want to buy.
• 6:34
  SPEAKER_00: So that's an example of a bad reason.
• 6:37
  SPEAKER_00: Uh other reasons people sell, um, this is pretty common as well.
• 6:40
  SPEAKER_00: I see folks who are in their, let's say late 40s, early 50s, they've built a company, and they say, you know, I've enjoyed doing this for 20 years, but I feel like I've got one more shot at doing building something else.
• 6:51
  SPEAKER_00: So they want to sell that company and then maybe go pursue another passion and turn that into a profitable endeavor uh before they retire.
• 6:59
  SPEAKER_00: Um so that's that's fairly common as well.
• 7:02
  SPEAKER_00: Um I see people who are going through divorces and they need to liquidate their assets, and and the business is one of those assets, and they'll sometimes sell the company um rather than figure out how to you know divide it up between the spouses.
• 7:16
  SPEAKER_00: So there's any any number of reasons um uh to sell to sell a company, Scott.
• 7:22
  Scott: What I think a lot of people think about is the sell side, right?
• 7:26
  Scott: Um But there's no sell sale without a buyer.
• 7:29
  Scott: So who are the buyers out there for these companies that you see that you work with?
• 7:33
  SPEAKER_00: Yeah.
• 7:34
  SPEAKER_00: Um three main types of buyers that that we work with.
• 7:38
  SPEAKER_00: Um probably in in the main street world, I should kind of define my my space here.
• 7:43
  SPEAKER_00: So uh I work in kind of upper upper main street, lower middle market.
• 7:47
  SPEAKER_00: So ideally, we're looking at companies between, let's say, one and five or ten million in gross sales.
• 7:52
  SPEAKER_00: You start getting much bigger than that, you're really getting into a much broader MA space.
• 7:57
  SPEAKER_00: Um but that that's kind of the target company that I work for, uh clients that I work for.
• 8:02
  SPEAKER_00: Um the types of buyers that are looking for those kind of businesses come in three flavors.
• 8:08
  SPEAKER_00: The first and and probably the most common on the on the main street side, on the lower end of that, if you will, is the individual buyer.
• 8:15
  SPEAKER_00: The individual buyer could be coming out of corporate America, could be um a guy or a gal who has been a tech in a business for a while, and they decide they want to go out on their own.
• 8:25
  SPEAKER_00: So they want to buy a you know uh an auto mechanic shop.
• 8:29
  SPEAKER_00: Uh, they've been an acertified mechanic for 15 years, they want to buy their own shop and run their own show.
• 8:34
  SPEAKER_00: So that's very common as well.
• 8:36
  SPEAKER_00: Um, the second type of buyer is a strategic buyer.
• 8:40
  SPEAKER_00: A strategic buyer is generally a company that is already in the industry or a tangential or a related industry.
• 8:48
  SPEAKER_00: So, for instance, uh you've got an HVAC company that uh wants to grow uh but organic growth is too slow, so they want to grow through acquisition.
• 8:57
  SPEAKER_00: So they are they're looking to buy a smaller HVAC company and bring that on, add it to their portfolio, if you will.
• 9:03
  SPEAKER_00: Um, and there's any number of reasons that they they they strategies that they may be pursuing on that one as well.
• 9:09
  SPEAKER_00: So those are strategic buyers, and that's actually fairly common in certain sectors.
• 9:14
  SPEAKER_00: We're seeing a lot of consolidation where you got big players buying up some of the smaller mom and pops, if you will.
• 9:20
  SPEAKER_00: Uh, and then the third type of buyer is a financial buyer.
• 9:23
  SPEAKER_00: Financial buyers are typically looking a little bit on the uh higher end of that scale, if you will.
• 9:28
  SPEAKER_00: Um, so think of private equity groups, think of search funds, family offices.
• 9:34
  SPEAKER_00: Um, they're purchasing businesses.
• 9:36
  SPEAKER_00: They they all have different strategies as well, but they're purchasing businesses for the financial aspect of it.
• 9:42
  SPEAKER_00: Often they're rolling them up into a portfolio of similar companies.
• 9:45
  SPEAKER_00: Sometimes it's a buy and flip.
• 9:47
  SPEAKER_00: You know, they'll try to buy it, improve it, flip it, and sell it in a year or two, um, all kinds of different strategies.
• 9:53
  SPEAKER_00: But those are the three types of buyers that we look for, and it's a great question because as a business owner who's selling their business, you should think about the types of buyers.
• 10:03
  SPEAKER_00: Um what's the most viable buyer?
• 10:05
  SPEAKER_00: Uh, what are they looking for?
• 10:06
  SPEAKER_00: What are they thinking about so that you can be prepared to uh have that conversation with them.
• 10:14
  unknown: Okay.
• 10:15
  Scott: And as part of what you bring to the table, you're gonna help them find those buyers essentially, right?
• 10:21
  SPEAKER_02: So that they're not having to try to figure that side of the equation.
• 10:29
  SPEAKER_00: That's right.
• 10:29
  SPEAKER_00: That's right.
• 10:30
  SPEAKER_00: So you have to know how to reach the market.
• 10:32
  SPEAKER_00: You have to know how to find those buyers.
• 10:34
  SPEAKER_00: And there's various ways and strategies uh to to to to find them.
• 10:38
  SPEAKER_00: The challenge that uh that individual businesses, business owners have on their own, if they're trying to sell their own company, one of the challenges, is doing so anonymously.
• 10:49
  SPEAKER_00: Um it's tough if if I'm running, and I'll stick with the HVAC example.
• 10:53
  SPEAKER_00: If I'm running an HVAC company, it's hard for me to start putting out feelers and reaching out to other HVAC companies to say, hey, are you interested in buying me?
• 11:01
  SPEAKER_00: Uh, because now I've just kind of shown my hand, right?
• 11:04
  SPEAKER_00: And um quite often those are my competitors.
• 11:06
  SPEAKER_00: They now know that I'm selling the business, the word starts getting out.
• 11:10
  SPEAKER_00: So um in every business I've ever sold, confidentiality is absolutely critical and key.
• 11:17
  SPEAKER_00: I I've never met a business owner who says, I don't care who knows in my businesses for sale, just get it sold.
• 11:22
  SPEAKER_00: They always want to keep to protect the confidentiality because they don't want the employees to know yet.
• 11:28
  SPEAKER_00: They don't want their customers to know, often they don't want their suppliers to know as well.
• 11:32
  SPEAKER_00: So uh as a broker, my challenge is uh because I am a little distanced from the business, that's a good thing.
• 11:39
  SPEAKER_00: I'm able to go out there and somewhat anonymously say, I represent a client in this sector or this industry who is considering selling the business.
• 11:48
  SPEAKER_00: Uh, here's some of the high-level details.
• 11:51
  SPEAKER_00: If you're interested, let's talk.
• 11:52
  SPEAKER_00: And then we sign a non-disclosure agreement before any details are given to that prospective buyer.
• 11:58
  SPEAKER_00: That's something that's very difficult to do if you're the actual owner of the business.
• 12:03
  Scott: Right.
• 12:04
  Scott: And that brings up a question, Mike.
• 12:07
  Scott: I work with entrepreneurs, I talk to entrepreneurs all the time.
• 12:10
  Scott: You know, I I might myself, you know, I own my own business, you know, you run your own business as well.
• 12:16
  Scott: And one of the uh the strengths of going that route is you can figure things out.
• 12:22
  Scott: Now, to me, that can also be a fault if you go too far.
• 12:26
  Scott: And the caught the common question that uh I think small business owners ask themselves is, well, why can't I do that, right?
• 12:34
  Scott: So other than confidentiality and keeping it anonymous, what are some of the other reasons that as a business owner I'm telling myself, ah, why can't I sell the business myself?
• 12:44
  SPEAKER_00: Yeah, that that's uh that's a great question.
• 12:48
  SPEAKER_00: And um so, first of all, you're right.
• 12:50
  SPEAKER_00: Uh most small business owners, especially the ones who started it from scratch, are very entrepreneurial.
• 12:56
  SPEAKER_00: Um, and we're used to being the chief cook and bottle washer, right?
• 12:59
  SPEAKER_00: You're doing everything, you're bootstrapping the business.
• 13:02
  SPEAKER_00: Um I'll I'll I'll sidetrack just a little bit here.
• 13:06
  SPEAKER_00: One of the biggest challenges that I see uh in selling small business, sorry, not challenges, but maybe limitations is a better way to say this.
• 13:13
  SPEAKER_00: One of the biggest limitations that I see is that business owner who's never been able to step out of that role and start delegating to build the business.
• 13:22
  SPEAKER_00: So we've all heard the saying, work on your business, not in your business.
• 13:27
  SPEAKER_00: I've had so many clients that I've worked with who never were able to get out of the business.
• 13:31
  SPEAKER_00: So they built a nice little company, maybe it's worth a million dollars, but if they had learned how to step away, delegate, stop turning the wrenches and doing the, you know, doing the hands-on work, if they had done that 10 years ago, that business would probably be worth two or three million dollars right now.
• 13:47
  SPEAKER_00: So as a I guess as a side note to to your listeners and to the other small business owners out there, um, you may be the smartest guy in the room, but if you're really smart, you'll figure out how to delegate, how to step back from the business and scale your company in order to increase the value.
• 14:02
  SPEAKER_00: Uh so that's just a little mom and apple piece.
• 14:05
  SPEAKER_00: Yes, absolutely aside.
• 14:07
  SPEAKER_00: Um, other reasons that a an owner may want to, may not want to try to sell the business him or herself, uh, like I mentioned, the confidentiality piece, but there's frankly just the actual mechanics of it.
• 14:20
  SPEAKER_00: You know, are you a marketing expert?
• 14:21
  SPEAKER_00: Do you know how to market your business and make it attractive to buyers?
• 14:25
  SPEAKER_00: Um, do you know how to reach that market?
• 14:28
  SPEAKER_00: So I know how to reach private equity buyers, I know how to reach other strategic buyers and individual buyers.
• 14:33
  SPEAKER_00: Um, most business owners, they may be great HVAC technicians and great at running that business, but they don't know anything about trying to reach the market for business acquisitions.
• 14:45
  SPEAKER_00: And that's where a professional can help.
• 14:47
  SPEAKER_00: Just like they, you know, you don't know how to practice law, so you hire a lawyer, right?
• 14:50
  SPEAKER_00: Right.
• 14:51
  SPEAKER_00: It's the kind of the same concept there.
• 14:53
  SPEAKER_00: And then the the last piece that I'll add, uh, and and I've seen this before.
• 14:59
  SPEAKER_00: Um your job is to run the business.
• 15:01
  SPEAKER_00: Your job is not to sell the business.
• 15:04
  SPEAKER_00: Let somebody work on selling your company while you continue to run the business.
• 15:08
  SPEAKER_00: What I've seen before is uh uh business owners get into this, hey, I'm selling uh mindset, and they kind of take their foot off the gas.
• 15:17
  SPEAKER_00: Um and the business starts declining, sales start declining, they maybe let inventory kind of fall by the wayside, they maybe don't replace that general manager's thing.
• 15:26
  SPEAKER_00: Well, I'm selling, why am I going to do all that?
• 15:28
  SPEAKER_00: Well, the end result uh is that you've just lost value in the business, and I've actually had deals fall apart because uh during due diligence, the buyer digs in and says, Hey, you told me you made 1.5 million last year.
• 15:41
  SPEAKER_00: Looks like year to date, you're only uh you know, here we're halfway through the year, you're only at 300,000.
• 15:46
  SPEAKER_00: Well, yeah, I didn't I didn't replace uh my general manager, and it's it's just clear that they've taken their foot off the gas, not paid attention to the business, and guess what?
• 15:56
  SPEAKER_00: The buyer's not going to pay that asking price if the if the company's no longer worth that amount.
• 16:01
  SPEAKER_00: So my point is that a a hiring a professional to focus on selling the business allows you, the owner, to continue working on uh on the business, growing the business as if you're gonna continue to own it.
• 16:14
  Scott: Mike, I've seen that myself and even with some of my clients.
• 16:18
  Scott: Yeah, I have helped sell a business, and well, I didn't help sell it, but they were my client as they were going through the process.
• 16:25
  Scott: And and they told me, Scott, I don't know anything about this due diligence.
• 16:30
  Scott: I don't want to do the deal with this due diligence.
• 16:32
  Scott: Can you handle this?
• 16:32
  Scott: Can you work with all the other partners?
• 16:34
  Scott: So I kind of took that you know off there, off the owner's hands because they're running the business, right?
• 16:41
  Scott: And running the bit running a business is a full-time job for most of the most small businesses.
• 16:46
  Scott: So trying to find time to go through the due diligence and and you know, meeting with the lawyers and and a broker or multiple other parties, that gets tough.
• 16:58
  Scott: And that that really runs out of time.
• 16:59
  Scott: You run out of time quickly.
• 17:01
  SPEAKER_00: That's right.
• 17:02
  SPEAKER_00: That's right.
• 17:04
  Scott: Um, so you you touch on a few pieces of um you know, you you meant you mentioned at one point it's best, you know, if you're thinking of okay, one or two years ahead of time, you know, to have some runway.
• 17:18
  Scott: But and and this is a loaded question, Mike, and I know, so I'm gonna ask it anyways.
• 17:23
  Scott: But how long does it take to sell a business?
• 17:27
  SPEAKER_00: Yeah, no, every every business owner asks me that.
• 17:30
  SPEAKER_00: First meeting, how long is it gonna take me?
• 17:32
  SPEAKER_00: Um and and it's two months, right?
• 17:34
  Scott: Guaranteed two months, Mike.
• 17:36
  SPEAKER_00: That's right.
• 17:36
  SPEAKER_00: That's right.
• 17:37
  SPEAKER_00: Yeah, well, it's some some are hoping for that.
• 17:39
  SPEAKER_00: Um so if you look statistically across the entire spectrum of small business sales, um, that's regardless of geography, time, industry, etc., the the average, and I hate using averages, but the average is 10 months.
• 17:54
  SPEAKER_00: Um what in my experience, in my 10 years of doing this, um I've sold businesses in two months and I've sold businesses in three years.
• 18:02
  SPEAKER_00: It just depends on the the type of business, the market, the quality of the business, um, how much you're asking for it.
• 18:10
  SPEAKER_00: You know, if you really want to move it quickly, just like a house, right?
• 18:13
  SPEAKER_00: You can price price your house to move a little more quickly if you don't want top dollar.
• 18:17
  SPEAKER_00: Um and to some extent it can be the same with the business as well.
• 18:21
  SPEAKER_00: But I would say for planning purposes, um I tell my clients, you know, plan on 10 to 12 months.
• 18:28
  SPEAKER_00: Um if we get less than that, great.
• 18:30
  SPEAKER_00: If not, you know, we'll keep plugging away.
• 18:33
  Scott: Okay.
• 18:34
  Scott: And how much simply will will it cost to sell a business, to use a broker, to bring somebody in to help with this process?
• 18:41
  SPEAKER_00: Yeah, you know, it it varies uh from practice to practice uh a little bit.
• 18:46
  SPEAKER_00: Let me uh I'll step all the way to the front of that process and talk about the the valuation.
• 18:51
  SPEAKER_00: So depend yeah, depending on the size and nature of your company, it may be prudent to get an actual business appraisal or a valuation.
• 19:01
  SPEAKER_00: Uh those come in different flavors.
• 19:03
  SPEAKER_00: Uh some of them are very detailed, very intricate, and uh frankly are overkill for some some businesses.
• 19:11
  SPEAKER_00: But you know, your basic valuation, I'm talking about a certified appraisal, those start at about$4,000,$4,500.
• 19:19
  SPEAKER_00: They can go up to$10,000, again, depending on the size and complexity and the nature of the business.
• 19:24
  SPEAKER_00: If you're a multinational conglomerate, you've got different uh different embedded companies under a holding company, you've got different forms of ownership, uh, that gets a little more complex than just say the you know the straightforward uh S-Corp, uh single owner S-Corp.
• 19:40
  SPEAKER_00: Um I do find that in uh smaller businesses, so companies that are say one to two million in gross sales, I typically do what's called a broker's opinion of value.
• 19:50
  SPEAKER_00: It's not a certified appraisal, but it's a way for me to uh look at the financials of the business, look at comparable market sales.
• 19:58
  SPEAKER_00: This is a market-based approach.
• 20:00
  SPEAKER_00: So I look at comparable sales of those companies, determine kind of what multiple they're selling for, and then I do some analysis to say, listen, Mr.
• 20:08
  SPEAKER_00: Smith, I think your business is worth somewhere between 1.3 and$1.6 million.
• 20:14
  SPEAKER_00: Um, and it gives us a really good range that's a defensible argument that you can make when you start talking to buyers, as opposed to just arbitrarily pulling a number out of the air, which um frankly some brokers do.
• 20:26
  SPEAKER_00: Um, lesser brokers will just apply a 2.3 multiple, uh, which is again, I hate averages, uh, but the average multiple is 2.3 times discretionary earnings.
• 20:38
  SPEAKER_00: Okay.
• 20:39
  SPEAKER_00: Um so a lazy broker will say, ah, your cash flow is about$100,000, uh, so you're worth$230,000.
• 20:45
  SPEAKER_00: Well, they might be leaving a whole lot of money on the table, um, or they might just really not understand the financial.
• 20:51
  SPEAKER_00: So um I find that it it pays dividends to do that analysis up front, price the business properly, disarm the buyer when they start trying to haggle and lowball you, um, and it just makes for a better process altogether.
• 21:05
  SPEAKER_00: So my point is um plan to spend some money up front to do that analysis and do that evaluation of your business.
• 21:12
  SPEAKER_00: Um as far as uh the the actual brokerage fees, and again, this varies from broker to broker and firm to firm.
• 21:21
  SPEAKER_00: Some brokers will charge you an upfront retainer.
• 21:24
  SPEAKER_00: Um I do periodically, if it's uh depending on the size and the nature of the business and how long I think it's going to take to sell.
• 21:31
  SPEAKER_00: Um some brokers will apply that retainer to the final commission, some will not.
• 21:35
  SPEAKER_00: Um, some brokers charge monthly maintenance or listing fees on a listing.
• 21:40
  SPEAKER_00: Some do not.
• 21:41
  SPEAKER_00: I I do not.
• 21:42
  SPEAKER_00: Um most brokers or all brokers get some sort of a commission when the business sells, just like uh you know a real estate agent.
• 21:50
  SPEAKER_02: Right.
• 21:50
  SPEAKER_00: And and that commission um uh typically varies from eight to twelve percent of the final sale price of the business.
• 22:00
  SPEAKER_00: Um, I can tell you that we use what's called a double layman structure.
• 22:03
  SPEAKER_00: Um, so it steps down uh as you're getting into the second, third, fourth, fifth million dollars of the sales, we step down that commission rate.
• 22:12
  SPEAKER_00: So it's not a flat, you know, say 10% across the board.
• 22:16
  Scott: So you're you're let's say it's it's 10% for the first X million and then maybe 8% for next million, and maybe 5% for the next, or somewhere something along.
• 22:25
  Scott: Again, I'm making up these structures, and I'm not saying this is your price and your uh the numbers, but but that's the that's the the structure at least.
• 22:32
  SPEAKER_00: That's right.
• 22:33
  SPEAKER_00: That's right.
• 22:33
  SPEAKER_00: And that's called the double, a double layman um structure.
• 22:37
  Scott: Okay.
• 22:38
  Scott: Great.
• 22:39
  Scott: Um so you you've mentioned several several um you know things that a business owner can do ahead of time.
• 22:46
  Scott: Uh and I know there there's even more that that we probably don't even have time to get into.
• 22:50
  Scott: But being that this is a uh podcast about budgeting for small businesses, I have to ask, is a budget or at least forward-looking plan really that important when you go to sell your business?
• 23:08
  SPEAKER_00: Um only if you want to get top dollar for your business.
• 23:11
  SPEAKER_00: So if you don't care about how much you're gonna get for your company, just run it arbitrarily and just hope for the best.
• 23:18
  SPEAKER_00: If you really want to get top dollar for your company, think about it well in advance.
• 23:23
  SPEAKER_00: Um, be willing to admit that you're not always the sharpest guy in the room and bring in some experts.
• 23:28
  SPEAKER_00: Sometimes it makes sense to bring in business coaches.
• 23:31
  SPEAKER_00: Um, bring in a CPA.
• 23:32
  SPEAKER_00: Oh boy, we can talk about the financial messes that I've seen for companies that try to manage manage their own books.
• 23:39
  SPEAKER_00: Some people are very good at it, some people's books are an absolute.
• 23:42
  Scott: Most are not, Mike.
• 23:43
  Scott: My my first point is if you do your own books, find someone, just find an expert to do it.
• 23:48
  Scott: Please go ahead.
• 23:48
  Scott: Didn't mean to erupt.
• 23:49
  SPEAKER_00: No, but that that's exactly right.
• 23:51
  SPEAKER_00: Because I'll tell you, when it comes when it comes time to sell the company, uh, if your books are in good order, your finances all make sense, you know, you've optimized the business operationally, you're gonna get a lot more money on that sale.
• 24:06
  SPEAKER_00: Um but again, all too often I see business owners who say, you know, they either think they don't need that professional help, or they think they can't afford that special help, that professional help.
• 24:17
  SPEAKER_00: And the question comes down to, you know, can you afford not to?
• 24:20
  SPEAKER_00: So my my favorite uh type of business owner is the one who's thinking ahead.
• 24:25
  SPEAKER_00: There may be two or three years out.
• 24:27
  SPEAKER_00: Um they're humble enough to say, you know, maybe I should hire a business coach to help me kind of think through this, set some objectives and some goals, hope hold me accountable to those goals, um, and track it over time so that three years from now, uh, I've grown this from a million dollars in sales to three million dollars in sales.
• 24:46
  SPEAKER_00: Um by the way, I keep using sales as an example.
• 24:49
  SPEAKER_00: I should really talk about earnings because sales are almost irrelevant when it comes to pricing of a business.
• 24:54
  SPEAKER_00: We can get to that later.
• 24:55
  SPEAKER_00: Uh, grow those earnings and increase the value of that company.
• 25:00
  SPEAKER_00: Um, so that that's kind of my you know my advice to to business owners.
• 25:04
  Scott: And and when you refer to earnings versus sales, the the top line or the revenue that's coming in the door is the sales of earnings is what you're making after all your expenses, right?
• 25:15
  Scott: That's that's how you're approaching that.
• 25:16
  Scott: Yeah.
• 25:17
  unknown: Okay.
• 25:17
  Scott: And that earnings is usually the number that you're getting that valuation against, right?
• 25:22
  SPEAKER_00: That that's right.
• 25:22
  SPEAKER_00: And and think of it this way, and you know, this this may be obvious, but uh let's say you've got two companies, A and B, both making uh$2 million in gross sales.
• 25:32
  SPEAKER_00: Those companies are may not be worth the same amount.
• 25:36
  SPEAKER_00: Company A uh is making$2 million, but their net income is$500,000.
• 25:41
  SPEAKER_00: They've managed expenses well, they've got good uh margins, they they monitor their cost of goods.
• 25:48
  SPEAKER_00: Company B,$2 million in sales, but has not managed expenses well.
• 25:53
  SPEAKER_00: Their cost of goods are out of control, they have no margins, and their net income is uh$50,000.
• 25:59
  SPEAKER_00: So those are two very different companies, same top top line, very different bottom lines.
• 26:04
  SPEAKER_00: The valuation, again, in the main street space, is primarily based on as a multiple of what we call it discretionary earnings.
• 26:11
  SPEAKER_00: So it's the kind of adjusted net income of the business.
• 26:15
  SPEAKER_00: So as a business owner, your focus is yeah, keep growing that top line, but grow that bottom line.
• 26:20
  SPEAKER_00: That's really where the value of the company's coming in.
• 26:23
  SPEAKER_00: Right.
• 26:24
  Scott: And I I will say, or maybe I'll ask one other question by the hand.
• 26:27
  Scott: I feel like we could probably spend a whole nother show on this.
• 26:30
  Scott: Uh, but just because your financials say that you have, let's say,$500,000 in net income or earnings doesn't mean that the buyer is going to look at that$500 as well.
• 26:42
  Scott: If you're you know not paying yourself or you have a lot of maybe family on payroll that that's doing roles, and it it there's a lot of personal expenses that are intermingled.
• 26:54
  Scott: A buyer, in what I see, a buyer usually adjusts for all that for that for that earnings number when they when they're ready to uh make an offer.
• 27:06
  SPEAKER_00: Yeah, so um the the number that that I use when I value a business guide is called seller's discretionary earnings.
• 27:12
  SPEAKER_00: So I take that net income or EBADA, if you owe earnings before interest tax, depreciation, amortization, and I add back one single working owner's salary um plus any other benefits.
• 27:23
  SPEAKER_00: So let's say health insurance, life insurance, um uh personal expenses, um, they've been paying their kids college tuition through the business.
• 27:32
  SPEAKER_00: I'm gonna add that back to cash flow, which is gonna expand, it's gonna increase that amount of cash flow um and and increase the value of the business.
• 27:41
  SPEAKER_00: Um the uh there are some standard adbacks that buyers expect to see, like the ones I just mentioned.
• 27:48
  SPEAKER_00: Um, but then there's a lot of not so standard ones that are more difficult to justify.
• 27:54
  SPEAKER_00: So uh I've seen, you'd be amazed, I'm sure you've seen it too.
• 27:57
  SPEAKER_00: I've seen so so much stuff on books.
• 28:00
  SPEAKER_00: Some some business owners treat their uh their their company like their personal ATM machine.
• 28:05
  SPEAKER_00: You know, every meal they've ever eaten, you know, their their wife's Lexus payment, everything's charged to the business.
• 28:12
  SPEAKER_00: And uh at the end of the day, you're doing a disservice to yourself if you're really treating it like that.
• 28:18
  SPEAKER_00: So um, yeah, I can add that back when I value the business, uh, do evaluation on the business, but the buyer's gonna question it and the bank's gonna question it when they're underwriting uh for financing.
• 28:29
  SPEAKER_00: Um, I've seen the case where a business owner had uh so many personal expenses on the business.
• 28:36
  SPEAKER_00: Um, in order to make the deal work, to make the loan work, the bank made them go through and pull four years worth of credit card statements and highlight all the personal expenses on there in order to actually substantiate that you could add that income back to cash flow.
• 28:53
  SPEAKER_00: So again, my advice there is keep clean books, keep business as business, keep personal expenses as personal expenses, and just don't raise those questions or don't make those questions come up when you're uh talking to a buyer.
• 29:06
  Scott: Yeah.
• 29:08
  Scott: Well, Mike, this has been this has been great.
• 29:11
  Scott: And again, we we we could spend a whole lot more time talking about some of those adjustments.
• 29:15
  Scott: Uh but I I like to wrap up all the shows with one to three takeaways that our listeners could literally put into practice as soon as they turn out the podcast.
• 29:27
  Scott: Um, what is there any what can you share with us today?
• 29:30
  Scott: And and if it's something you've already mentioned, then that's fine as well.
• 29:32
  Scott: Just remind us.
• 29:35
  SPEAKER_00: Yeah, uh thanks, Scott.
• 29:37
  SPEAKER_00: I I'll just kind of summarize a couple um uh I guess key points that I've highlighted already.
• 29:42
  SPEAKER_00: The first one uh I actually think is one of the most critical because it's the number one reason that I won't list a business or won't be able to sell a business.
• 29:52
  SPEAKER_00: And it's again stepping away from the business.
• 29:55
  SPEAKER_00: If you're the owner operator, that's great, but figure out a way to step away from the value chain, let other people um kind of you know run some of the day-to-day operations of the business so that you are not the business is not solely dependent on you.
• 30:09
  SPEAKER_00: It's an easy thing to say, a hard thing to do sometimes.
• 30:12
  SPEAKER_00: But that would be my first um uh point or first word of advice, if you will.
• 30:17
  SPEAKER_00: Um the second one is to plan in advance.
• 30:20
  SPEAKER_00: So don't wait until six months before you know you're closing on the house in Bermuda to try to sell your business.
• 30:26
  SPEAKER_00: Start thinking about this and consulting with professionals um uh like me or like Scott two or three years in advance to make sure you understand the process and that you're you're set up to achieve that.
• 30:38
  SPEAKER_00: And then I guess the the third point is kind of a uh build off that second one is um build a team, a team of professionals when you're ready to sell your business.
• 30:49
  SPEAKER_00: And and I like to think of the team as the business broker, uh, the CPA or the bookkeeper, uh, and the attorney, uh, and sometimes the financial advisor will all work hand in hand to uh make sure that they uh optimize that sale.
• 31:04
  SPEAKER_00: Um quick side note on the on the CPA and the financial advisor, it's very important since this is a cost discussion uh on this podcast, it's important to understand the tax implications of the sale of a business.
• 31:16
  SPEAKER_00: Um that that that'll vary based on the the legal structure of the business, the ownership structure of the business.
• 31:24
  SPEAKER_00: I am not a tax professional, but it's important to engage that tax professional uh as you're going into this process because in in some cases, um Uncle Sam can take 40% of the proceeds of the sale of your business, and that that could hurt.
• 31:37
  SPEAKER_00: So just don't let that surprise you at the end.
• 31:40
  SPEAKER_00: That that's my three points, Scott.
• 31:42
  Scott: Okay, great.
• 31:42
  Scott: That's that's that's uh very helpful.
• 31:45
  Scott: And uh I I personally I enjoy a good podcast or a good a good book when I can uh find some time to read.
• 31:53
  Scott: So do you have any podcast or book recommendation uh for our listeners?
• 31:58
  SPEAKER_00: Um, you know, there's a number of good ones out there.
• 32:01
  SPEAKER_00: Uh I'll I'll cite my kind of my favorite book, and this goes back many years now, but I still think it's very relevant, and I think it applies to small business as well as uh big, you know, big corporations, is um Good to Great by James Collins.
• 32:15
  SPEAKER_00: If you've uh I'm sure you've probably read that, Scott.
• 32:18
  SPEAKER_00: But it talks about what it talks about what makes a uh what's the the the key differentiators between a good company and a great company.
• 32:27
  SPEAKER_00: Um so think of say Walgreens or CVS.
• 32:30
  SPEAKER_00: What's the difference between those between those companies?
• 32:33
  SPEAKER_00: And again, I think many of the points will apply to to small business owners as well.
• 32:37
  SPEAKER_00: So that's always been one of my favorite go-to books.
• 32:40
  Scott: That that is a that's a that's a a great one, Mike.
• 32:45
  Scott: That is.
• 32:46
  Scott: Uh well, thanks a lot, Mike.
• 32:48
  Scott: This this has been great.
• 32:49
  Scott: I appreciate you coming on here and and sharing with us how to go about thinking about selling the business.
• 32:55
  Scott: Where can people find out more about you if they want to reach out?
• 32:59
  SPEAKER_00: Yeah, um, thanks, Scott.
• 33:00
  SPEAKER_00: It's been really my pleasure.
• 33:01
  SPEAKER_00: I appreciate you inviting me.
• 33:03
  SPEAKER_00: Um you can go to um uh find me on the web.
• 33:06
  SPEAKER_00: Again, I'm a Richmond-based, Richmond, Virginia-based business broker.
• 33:09
  SPEAKER_00: I believe your listeners are all over.
• 33:11
  SPEAKER_00: Um, but you can always go to MurphyBusiness.com uh to find me specifically.
• 33:17
  SPEAKER_00: Um my phone number is 804-601-8928.
• 33:22
  SPEAKER_00: I'm happy to have a confidential conversation with anybody who's thinking about taking that step and uh just wants maybe a little uh little insight.
• 33:31
  Scott: Perfect.
• 33:32
  Scott: Well, thanks for joining me today, Mike.
• 33:34
  SPEAKER_00: Thank you, Scott.
• 33:35
  SPEAKER_00: It's been my pleasure.
• 33:37
  Scott: All right, folks, that's it for today.
• 33:40
  Scott: I'm Scott Geller, and I hope you join me next time for budget your business.