Latest / Exit Algorithms / What Moves Your Multiple in the Final 18 Months | Matt Bradbury (#105)
Transcript
- Pete Vera, Exit Algorithms: Welcome to Exit Algorithms, the podcast where we decode what it really takes to unlock growth, streamline operations, and prepare your business for a high value exit. I'm your host, Pete Vera, and today I'm excited to bring on Matt Bradbury as my guest. Over more than two decades, Matt has led the sale of hundreds of companies and over $2 billion in transaction value. He's overseeing countless transactions, both operationally on the buy side. and as a sales side representative. Matt is the founder and managing director of Business Acquisition and Merger Associates. Matt, excited to have you here. Welcome to the podcast. Matt Bradbury: ⁓ I'm excited to be here too, Pete. Thank you so much for having me. Pete Vera, Exit Algorithms: Yeah, me too. I'm gett excited to get into this. Yeah. Do you mind starting off? Can you share a bit about your background and business journey? Maybe what you did before you got into MA. Matt Bradbury: Yeah, I think I'll start in the fitness industry because that's where I learned how to do MA. I joined a company to help with their sales, their national sales system. And as we did that, they said, you know, we want to grow. Can you start to help us on selling us and our service? And it was an ⁓ 11 ⁓ location fitness operation that eventually grew to about 75 locations. Some of those were commercial, some of those were amenity. But along the way, I had an opportunity to participate in both green fields, and acquisitions that. So a green field is where you're starting from the ground up, either a brand new facility or new leased facility, and you're doing ⁓ feasibility work around that. The ⁓ Turn turnaround experience. If you're a turnaround guy, is so valuable because that really helps you see that there you prioritize levers, which ones are going to have the biggest impact as quickly as possible to improve the operation of the business. And I can't tell you how often I use those same skills with my clients to say, here's where they are, if they've been flat for three years, real quick, hone in. ⁓ Are there two or three things that you can do that can move off of being flat, improving your margins, adding a little bit of growth to it? So really good experience there. Eventually moved up in a number of the roles with the same company, became the chief operating officer. Again, that's looking at a lot of data and information. And like to dig into the operations of our clients as well to see how can they improve their operations. Pete Vera, Exit Algorithms: Yeah, definitely. Yeah. How has that, you know, having that operators perspective it impacted how you approach, you helping business owners? s on the s on the sales side. We can start off there. Matt Bradbury: ⁓ a couple things. You will be surprised how often business owners don't have a really good handle on their operations. So I think you can have a consultative approach and help them find their way to ⁓ what are the real drivers. it's not uncommon. I I call it Groundhog Day, where they get up, they go fight the fires of the day, each day, every day, and they get stuck in that rut. versus really taking a step back and say if I'm here right now and I want to get to there in the next two or three years, how am how am I going to do it by really focusing on only two or three things? I'm not an advocate of, you know, here's 20 things to do. What are the the two or three that are going to really move the needle the next two years? Double down, get resources and focus on those things. That's typically what we see happen. I mean really get focused. Private equity guys, I will say this too, because I've partnered in some 25, 26 deals with private equity groups before. I've s sat on the board with private equity groups. And when we get in there, we're doing the same thing. You can't solve all your issues in one day, but what are the most important two to three, knock those out, add another two or three the next year, and then keep having stair step of improvement. Pete Vera, Exit Algorithms: Yeah, no, I I that makes sense. Focus, definitely. What what would you say are are the top two or three things that that have the highest impact on on exit multiple as a business owner prepares for a sale? Matt Bradbury: ⁓ growth. You want to be able to show growth. You know, can I get 18 months, two years growth? And it doesn't have to be a lot. You just don't want to be flat or declining. Okay. How can I get five to 10% growth a year and show it? The other thing is it's growth with expanding margins. You don't want to have growth because you're giving it away and you're driving sales. They'll that. We could see that. Real clearly in the financials, if your gross margin is going down. Getting back to gross margin. Oftentimes someone's accountant or CFO will set up the way that they present their financial information. And a common mistake or that we need to change in the process is to make sure we're looking at gross margin really as direct labor and materials. And the direct benefits of that labor and not burdened with all this other stuff that doesn't change. I want to be able to put stakes in the ground, Pete, that say the next hundred thousand dollars of incremental revenue, if you're at 40% gross margin, 36% of is gonna flow to the bottom line. If they have their gross margin all burdened with some allocation of rent and utilities and insurance, then it That's not a true reflection of the power of the next hundred thousand dollars of sales. So we really want to help set the table to show that incremental sales growth at great gross margins works. The other thing that we want to camp out at, and I would say this is one of the things that business owners say, and I say, let's see your gross margins as the truth teller. ⁓ we've got a great business, and we're the best business. But they have 22% gross margins in their, you know, a regular service business. They're not a distributor. A really good services business should have 40 or 50%, 40% to 50% gross margins, 38% to 50%. so you could tell right away: are you really only selling on cost? Or someone paying you more than anybody else in your industry? And that's going to be reflected in gross margins. given the product or service delivery that you have compared to your competitors within that space. Pete Vera, Exit Algorithms: Yeah, definitely. W what are maybe some some ways that they can can demonstrate that to to the buyer? Are there, you know, financials like strategies that they can do to you know to confidence that the business will car carry on when the the transaction consummates? Matt Bradbury: part of it is is it really dependent on them, the business owner, on how well or it will not carry on? one I wanna recommend recommend is that they don't make major overall changes less than year and go into market. Y if you're gonna change the president, if it's if it's a general manager who's been there for 10 years and he gets promoted to the president, that's different. Than bringing in a new person. ⁓ I think it's common that folks recognize they don't have the right people and the right seats and the bus ⁓ double the business. Here's the key question that I would ask your viewers to ask themselves. Is the team that is gonna double your business over the next three to four years? Okay, if you're 10 million, is this the group that's gonna take it to 20? If they're not, or where it where do you need to make a change that you're gonna fill in that group, honestly, that's gonna get you to $20 million if you're currently at 10. So you need to do that. I think there's more skepticism from buyers if there is a recent change of bringing someone in in the last three to six months before you go to market, unless they've been with the business for a long period of time and it's a natural. promotion and and you can really tell everybody really respects that individual as a leader and the business under their leadership has been having steady five, 10, 15% growth the last several years. I always call it seasoning. them get 12, 18 months under their belt. There was no hiccup. The team is behind them. You don't have turnover. That stuff takes about 12 months to kind of work itself out and prove prove that they really are gonna be able to be a reliable transition for that company. Pete Vera, Exit Algorithms: Yeah, that makes sense. far do you recommend ⁓ owners ⁓ about selling and you know, preparing ⁓ the sale? It you mentioned two to three years. Is that probably what you see is at at the minimum the you know, what it takes to to really get the most out of the sale? Matt Bradbury: Yeah. Yeah, here's the truth. If you're 40 to 50 years old, maybe 50 up to 55 and you want to sell, they don't have an issue really preparing two to five years out. If I have a business owner that's 65 to 70 years old, they are not gonna do it. They're not gonna do it. They're ready to go. getting back to the groundhog day comment, they've lived it. Day in, day out, they're worn out, their wife's ready to retire and have them retire and travel and do other stuff and they don't care. Hopefully they have a good business and it has plenty of value drivers to it, that they get a really good price on their business. it's shocking ⁓ variance. can take a business that may have some dingers on it and still get a great value for it. Okay, because it's got some value drivers that are so impressive it can overcome three years of flat revenue. Okay. we've seen ⁓ situations like that. I could show businesses that are not profitable, but they're growing like crazy and get a great price because they're plowing their profits into growth. And we could see that the gross margins are great. Okay, but they're putting a lot of money into really building out sales forces and marketing and winning customers. so there are dynamics that you know, change what I'm that it doesn't have to be absolutely perfect. You know, I'm sure you invest in the stock market, like I invest in the stock market, and these are businesses that are in the market, they're always for sale each day, every day, and they're always moving up and down, and there's always stuff that happens. To a business. I think that's one of the most common kind of misnomers that you think it has to be perfect. It'll never be perfect. Your business will never be perfect. You'll always have a way to add that next 20% or 30% ⁓ growth. So make that you can stand behind that you've got initiatives in play to help these growth drivers continue to happen. But just know when you are really ready to sell, if you've got ⁓ a half decent business, you're gonna be able to sell it. Pete Vera, Exit Algorithms: Hm. Yeah, ⁓ that's great. Matt Bradbury: If you've got time, if you're 40 to 50 and you've got the energy to hunker down and make some key provisions, go ahead and do that. So Pete Vera, Exit Algorithms: Yeah, makes sense. Yeah, but you know, we talked a lot about what to do. I I'm curious, you know, from your perspective, what's common mistakes you see? maybe some pitfalls that that cause transactions to go to go sideways and and not close. Matt Bradbury: Well, started to think of one thing when you said common mistakes, ⁓ I'm gonna break your question down into two parts. One is not close, and the other is common mistakes that we see in companies. And this gets back to the 40 to 50 year old versus the 65 year old. When you're 40 to 50 and you're growing your business, you're investing in your business. Okay. When you're harvesting, you're 65, and the management team comes in and they really want you to buy that million dollar piece of equipment, you think twice. And so you can have two to three years of really a light investment in your business. And that's the precursor to either flatlining or starting to decline or seeing your margins. not as competitive as other people in the market that are getting the benefit of the latest equipment. And what it can do. So that's one thing on like a common mistake is people stop investing in their business, especially as the risk profile changes. With regards to what happens that can derail the process, we every has stuff that happened to it with executives or managers or employees, or a issue or an environmental issue. Over the 30 or 40 years of that business, and we've seen kinds of stuff. If we can manage the message, I am such an advocate of disclose it and show through this whole process you're a trustworthy seller that I can trust you on your numbers, I can trust you on your representations. I I hate with a passion. In due diligence, something comes up, and my client did not disclose it to us, and we're on our back feet. And I'm and I'm like, why? Like, we that would not have been a big deal if we would have disclosed it. Now there's a perception. Hey, what else did they not tell us that we should have known about? I would rather know, the message at the right time, put it out there in the right way, than be. Trying to defend something that somebody really should have disclosed at up front. Buyers have a tremendous flexibility to continue to more move forward as long as they know they do not like surprises. Does that make sense? Pete Vera, Exit Algorithms: Yeah. Yeah, definitely. don't try to hide anything. It'll it'll come out, right? ⁓ Matt Bradbury: It will come out. If they're spending 20 or 30 or 50 million or 10 million or five million, they're gonna do due diligence. And there's so much information out there and resources that they have to find out skeletons in your closet. They will find it. So let's make sure that we understand what they are. Pete Vera, Exit Algorithms: Right. Yeah. And on the pre-show we talked a little bit about, you know, finding the right team that of advisors to help help the the seller you know have a successful sale. ⁓ do you recommend a business owner goes about doing that when they when they prep to to put it on the market? Matt Bradbury: Hey, it Pete, great great question there too. And it also ties back to how can a deal blow up? It can blow up if you have the wrong advisor, and the process is taking way too long. We look and we vet, we ask our client, who is your attorney? Who are your accountants? so much can happen before we're engaged to make sure, like if it's estate planning that you want to have done and move some ⁓ of Equity into a DAF or to a charitable trust or something for your kids. It's easier to do that before we actually go to market and we have a bona fide contract that's executed in hand. So don't lose that opportunity. Number two, make sure your attorney all they do each day, every day is MA work. I don't like generalists. I like guys that can. Completely understand the cadence that when they get a document from the other side, they need to look at it and respond to it within 24 to 48 hours and make that cadence happen. We've seen some of the worst situations, a litigator. A litigator doesn't know when their court time is gonna be, and it could be two weeks before they turn a document because they're in court and they don't have time to respond to stuff like that. Or somebody's divorce attorney, you know, they're the family attorney and they helped with the with the divorce or some other life issue. That is not your MA attorney. Make sure all they do is MA work because that is what the buyer's gonna have. The buyer's gonna have a great MA attorney. And we wanna make sure that what we negotiate, you keep and that we get it. Okay, at closing. And the right attorney really is critical to that. Pete Vera, Exit Algorithms: Yeah. ⁓ it makes sense. yeah, and you know, one of the things we talk about on the show a lot comes up a lot is is key man risk, one the key drivers in in value of a business. I'm curious, do you have any advice for business owners trying to to separate themselves from the business or or create redundancy? Maybe it's not them, but a a key employee that a you know prospective buyer will see as a res a risk. Matt Bradbury: it's a real risk. We to ask our client early on when was the last time you took a vacation, like a real vacation. Sometimes they haven't taken a vacation. And can you take two to four weeks off and challenge them to be able to take two to four weeks off on the process? That's the tell. And I would love to be able to tell a buyer, hey, they were just in Europe for 30 days. Obviously, he can check in, but the day-to-day operations are happening with the team that's there. That's a good thing to put into practice about a year before you go out to go out to market. Just say, can I really take a two to four week extended vacation and know that the team is there doing it? And if you can't, you need to get the right people on the bus or give them the people that you have the right authority to be able to do that and trust them to do it. Pete Vera, Exit Algorithms: And then like you said earlier, it it can take a while to train them and and you wanna have them on the team for a while, right? Before before you gear up to sell. Matt Bradbury: Yeah, so I'm not an advocate of a change in the president of your business from the outside three to six months before you sell. Okay. And neither are buyers. So they look at that and their antenna go up on the back of their neck. The guy's not really been there. We don't really know. That's an unknown. You want them seasoned ideally 18 months. ⁓ but I would go as short as 12 months that we can see that there was no blip. We can look at the monthly performance and financials within that 12 to 18 month period. That typically is the right time that they've got their team on the bus if they needed to make any other changes, if they had any issues that came up with any department heads or vice presidents make sure that happens. If it's a general manager who's been there for five or 10 years And then he gets promoted to president, you know, three months before closing. That's usually not a big deal. But we do like to see seasoned executives in their respective roles. Pete Vera, Exit Algorithms: That's great advice. yeah, an another major theme of the show is AI, how people are implementing it, ⁓ how it's affecting businesses and and industries. I'm curious, how are how are you leveraging it most at your firm and and where do you see it impacting some of the ⁓ the industries that you consult in the most? Matt Bradbury: we love AI. And I would say we're on the first and a half to two innings, ⁓ know, out of nine on our deployment of it, but we use it every single day. We use it on the buy side in identifying the best targets. We use it on the sell side in identifying the best strategic buyers and financial buyers that have experience in the space of our client. We use it to build an Outline around how can business that does X, Y, and Z, you know, what are the key selling premises of this? What are the key value drivers that I want to make sure we really hit home in our confidential information memorandum? we don't use it a lot in modeling yet, so we're not putting financials out there in AI. A lot of it is around strategy. it is important for our clients. I have a client right now, ⁓ they use AI just a little bit, but buyers are all having an AI due diligence component right now. Private equity buyers are. And know that in their toolbox, the operating guys have are building out big teams within the private equity group to support their platform companies and implementing AI. It is game changing. Where has it impacted the market? If you're a software as a service business today, you're on hold. And lot of the market has discounted the valuations of software as a service businesses. They think they're in other software companies, and they think they're or they want to evaluate how susceptible are they to some of their customers using AI for the same application. Software. as a service that implements a lot of AI is getting traction. So definitely lean into it, figure it out. It's here to, I think it's here to stay. it's changing. I mean it really can take something that would take us two days and knock it down to 10 or 15 minutes. You know, 16 hours down to 10 minutes. It's crazy ⁓ how it is for certain things in your per in your business. Pete Vera, Exit Algorithms: Yeah, definitely. And I saw a lot of businesses you work with are in the you know, manufacturing or in the service based, like services, like blue collar kind of jobs businesses. How do you see it, you know, them leveraging it more? You know, that they're not so software based. and do you see it affecting the their valuations when they go to exit? Matt Bradbury: So think they will have some positive impact, not to the same degree as other businesses that are highly administrative HR personnel, you know, business processing, ⁓ medical outsource, but stuff like that. I think that HVAC companies, they can use it for building better routes. ⁓ They can use it in marketing messages and cross-selling and improving the productivity of their guys when they're there evaluating what a potential issue might be, running through a much faster checklist to figure out what an issue might be at ⁓ at an HVAC unit. And obviously just the you know. If they've got a 10 person accounting team, they probably can have a two or three person accounting team. Like there's a whole bunch of facet of it, but those kind of businesses are not really GNA heavy. It's the technician. How can you provide tools to the technician and make them a lot more efficient so they can get more stops done within a given day? Pete Vera, Exit Algorithms: Awesome, Matt. You've given some some really good advice today. I I have one last question for you and you hit on it pretty good already, but if you had to ⁓ and leave the audience with one practical tip that moves the needle the most when they gear up to sell, to have a successful exit, what would that be? Matt Bradbury: I don't know if if I said this yet. When I go in, the very first thing that I look for is how can I put stakes in the ground that this is a highly recurring revenue business. Predictable, reliable revenue. Predictable, reliable. A great management team helps make it predictable. Great product and service, make it predictable. really good equipment, make it more predictable, and I can show expanding margins. That's that's like the base to your owner listener. They should ask themselves, how can I be more predictable, reliable? To quickly move the needle. Here's a secret we haven't talked about. If I can go to market and I have or two acquisition for my client that they've talked to, they will get credit even though they don't close them. Okay. ⁓ Really, it's probably worth ⁓ one and half turns of EBITDA, maybe two. If I'm a two to five million EBITDA, two to ten million EBITDA business. I will always ask them. Pete Vera, Exit Algorithms: Mm. Matt Bradbury: You know, you're well respected in your industry. Who do you know that might be wanting to think around the same thing that we can talk to to say we want a growth or acquisition? We're not saying that we're recapitalizing or selling the business. We're just saying, hey, I want a growth or acquisition, and we will have those calls before or during the process of going to market. Because when I do have management presentations with the buyer, the Contrary position and it gets no value is there's add-ons. We could do add-ons. That's part of how we can grow. And they always say, Well, have you talked to anybody? No. I want to say, ⁓ we've got two candidates. One is two of eBiddah, the other one's one of EBITDA. We've three conversations with them. We've exchanged information. They're interested in being part of what we built here. That is a it's a Pete Vera, Exit Algorithms: Mm. Matt Bradbury: It's a freebie. It doesn't take a lot of work. You'll get the biggest bang out of those conversations than anything else that you can do in your business in the short term. Pete Vera, Exit Algorithms: Love it. Smart. Yeah. No, great, great advice to leave it on. Thanks so much, Matt. It's been an incredible conversation. where can listeners find, you know, find more about your work and and all that you do? Matt Bradbury: our uncreative website is buysellyourbusiness.com. Buysellyourbusiness.com. And my email is matt at buy sellyourbusiness.com. And you can call me as well. 704-295-0102. 704-295-0102. We do business all over the country. So regardless of where your listener is. If they're five million to $150 million of revenue, we'd probably be a good person to talk to to give them some guidance on what their business is worth. Pete Vera, Exit Algorithms: Awesome. I'll leave that in the show notes. Thanks for your time today, Matt. Great conversation. Matt Bradbury: My pleasure. Thank you, Pete.