Latest / The Action Catalyst / Think Big, Buy Small, with Richard Ruback and Royce Yudkoff (Business, Entrepreneurship, Risk, Education)

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Think Big, Buy Small, with Richard Ruback and Royce Yudkoff (Business, Entrepreneurship, Risk, Education) · The Action Catalyst

0:00
Adam Outland: Today's guests are Richard Ruback and Royce
0:03
Yudkoff, Harvard Business School professors and co-hosts of the
0:06
Think, Big Buy Small podcast from Harvard Business School,
0:10
which explores a growing trend in business leadership, which is
0:13
entrepreneurship through acquisition. Richard, Royce,
0:17
great meeting both of you. I really enjoyed your book.
0:20
Royce Yudkoff: Thank you. Well, it's a pleasure to meet you, and
0:21
it's fun for Rick and me to be here.
0:23
Adam Outland: You know, I know there's so much to unpack in
0:25
your recent work I would love from both of you just a quick
0:29
quip on the early years.
0:32
Richard Ruback: My dad was a caterpillar mechanic. Worked on
0:35
heavy machinery. He worked with his hands a lot. I worked at a
0:39
fruit stand from junior high on, and didn't want it to be my
0:44
life's work, and so I discovered economics, actually, by
0:49
happenstance. I discovered it in high school, we had a teacher
0:54
mentor who was big on getting our students, her students to go
0:59
to National Science Foundation summer camps. So I was not very
1:04
good at natural sciences. I took a two week summer camp because
1:09
it was so much better than working in the fruit store. And
1:12
it was an economics department, and when it came time to come to
1:16
college, you know, we didn't have a lot of money as a family.
1:19
And St Olaf, as you might get a sense of, is not a Jewish
1:23
school. I am Jewish, and so they invited me to come there and
1:30
gave me a great financial package, I think because I was
1:35
one of the five Jews on campus. And so I went to St Olaf college
1:39
and studied economics because it was so interesting. And so I
1:44
decided that maybe I should go get an MBA, and as fate would
1:49
have it, got my PhD in Business Administration instead of
1:52
economics, and then went to MIT, and then Harvard. So that's,
1:55
that is my backstory.
1:57
Adam Outland: And Royce, you kind of took a little bit of a
2:00
different path.
2:01
Royce Yudkoff: Sure, I did. Yes, you're right. I grew up in New
2:03
York City. My mom was a full time mom. My dad was actually a
2:08
writer and a filmmaker. He was a very independent, professionally
2:13
independent person, and he loved his independence. He was
2:16
determined to do work that he found interesting. And also he
2:20
was in a field where, you know, while we were like Rick, while
2:22
we were never poor, you know, the economic vicissitudes were a
2:26
little scary to a kid. Nothing bad happened. But, you know, it
2:29
definitely had my attention. And these three factors sort of
2:32
shaped my life. I think I came away from that upbringing with a
2:37
desire to sort of be my own boss, to have work that I found
2:41
truly interesting and that I wanted to sort of insulate
2:44
myself against some of the sort of economic faci tubes that life
2:48
just naturally brings. Went to college, worked a couple of
2:51
years for a large bank in New York City, and then came to
2:54
Harvard Business School, which I found a transformative
2:56
experience in my life. The school really I joined a
2:59
consulting firm called bait and company. I ended up staying
3:02
longer than I ever thought, because it always in my mind was
3:05
to be an entrepreneur. I just didn't know how. I didn't feel
3:07
quite ready. Became a partner co heading their media and telecom
3:11
group, and then my co head and I left to form a private equity
3:15
fund which focused on that space. And for the next quarter
3:18
century, we ran that. And after 25 years, you know, we actually,
3:22
my co founder and I looked at each other and felt like, this
3:25
is great. We're really happy, but, but as we look ahead, do we
3:27
really want to do this for the next 15 years? And the answer
3:31
was that feels like a lot. We stepped aside in a very
3:34
carefully coordinated plan, and I came back to Harvard Business
3:37
School to work with Rick, who had we had known each other
3:41
through some case writing Rick had done, and Rick had
3:43
originated an idea of doing something in small firms, and
3:46
wanted a partner to build this out. And together, the last 15
3:50
years have been spent building a small firms program at HBS and
3:54
beyond, and it's been a joyous experience in my life, both
3:58
working together and doing what we've done.
4:00
Richard Ruback: At the time, it seemed something where we could
4:03
make some headway. We could learn something about the
4:05
market. We could learn something about the opportunities.
4:08
Royce Yudkoff: This didn't exist when we started. There was
4:11
Richard Ruback: When we started. I went to my then unit head and
4:11
nothing.
4:15
said, I want to teach this course on small business. I want
4:20
Royce to come join me. And he looked at me, and he said,
4:23
there's going to be no student at the Harvard Business School
4:26
wants to take that class. You're going to have to give that up
4:29
and go back and probably teach in the first year, because you
4:32
got to meet productivity requirements. And I said, Well,
4:35
I'm willing to take that risk. But it turned out that we had,
4:39
what did we have, 17 students in our first class, and then by the
4:43
next year, we were sold out of one section, had offer two. And
4:48
since then, I believe we've basically sold out every seat
4:52
we've offered for the last 13 years. What is interesting? And
4:56
so at HBS standard room, a. That I teach in, that we teach in,
5:01
has about 102 seats. So you need to have two seats for the
5:04
instructors couple seats for gas. So that says the maximum
5:08
number of people you can have by fire code in the room is 98, 97
5:14
students. That's the maximum number. If it's 90 or 85 it's
5:19
viewed as full in our classes, we've had literally 97 or 98
5:26
every year, and students who don't get in our courses sit in
5:30
for a week or two in the back. Waiting for somebody to drop out
5:35
is quite remarkable.
5:37
Royce Yudkoff: Yeah, we get people contacting us from beyond
5:39
Harvard Business School who have either read the book or heard
5:43
about us through their friends, and it's one reason why, you
5:48
know Rick and I have launched the podcast, think big, buy
5:51
small, because, you know, the school's mission isn't just to
5:54
teach people who are on our campus, but to reach out to lots
5:58
and lots of people who are not MBAs, but maybe mid career
6:01
executives and want to be entrepreneurs, but don't know
6:04
how So, and that has further increased the number of people
6:08
we meet.
6:09
Richard Ruback: You know, a funny story that I find just
6:11
emblematic of this is, my oldest son went to high school with a
6:16
guy and who's on our podcast, Jeff Duckworth, and about four
6:23
years ago, five years ago, just soon after the book came out, my
6:26
son and Jeff happened to be at some gathering, you know, they
6:31
said, What are you doing? And Sam said, you know, I'm a
6:33
salesman, and what are you doing? Jeff? And he said, Well,
6:35
I read this really great book from two guys at Harvard, and
6:38
it's really changed my career. I've decided to buy a business,
6:41
and I just bought I just finished closing on this
6:44
business. And Jeff said to Sam, my son usually should read the
6:48
book. And Sam said, you know who wrote it? And of course, Jeff
6:52
says, I don't remember what the guy's last name was.
6:57
Royce Yudkoff: Really hilarious, full circle, isn't it? Full
7:00
circle.
7:00
Adam Outland: So how do you determine who's right to take
7:03
the risk of entrepreneurship and what's your what's your take on
7:06
the risk of getting into this small business acquisition part
7:09
of entrepreneurship?
7:11
Royce Yudkoff: Both Rick and I, after careful examination, feel
7:14
that entrepreneurship through acquisition is dramatically
7:17
different from entrepreneurship through startup with respect to
7:21
risk, and the reason that is is because when you buy a small
7:26
firm, you're buying a company that has been around for 1020,
7:29
30 years. You can look at its historic financials and see what
7:33
its revenues are, its profits. It has a team of people that
7:36
know how to do the work. It has a collection of satisfied
7:39
customers. You can measure their pattern of recurringly buying
7:43
the company's product, and so you know a great deal about the
7:47
business, not only how it operates, but how stable and
7:52
predictable it is. And this is just a complete world of
7:56
difference from starting a business up where you know
8:00
almost none of those facts. And so even though they're both
8:04
linked together as entrepreneurship, this type of
8:07
entrepreneurship, while it's surely not without risk, is
8:11
dramatically lower risk than starting starting a small
8:15
business. And almost always, when you buy these companies,
8:18
part of the purchase is a transition agreement with the
8:21
seller so that you sort of have a smooth onboarding. So, you
8:25
know, when Rick and I look at this, we do think there are a
8:28
couple of risks. You know, one risk is, you could spend some
8:30
time looking for a business to buy and not succeeding. That's a
8:34
risk. But to us, it's a very controlled risk, right? It's,
8:37
you're missing out on some salary. You're delaying career
8:40
alternatives for a while, but it's, it's a, hardly a dramatic
8:42
risk. And the other risk is that you buy a company that's been
8:45
successful in the past and ceases to be successful under
8:48
your management and while that is certainly a risk that happens
8:51
very few times in entrepreneurship through
8:54
acquisition, and we can talk about that in more detail. So
8:56
the first thing I'd say is the risks are really very controlled
9:00
in this space.
9:01
Richard Ruback: You know, those people who get a lot of social
9:06
value out of their careers, you know, they want to be able to
9:10
meet interesting co workers. Maybe they're single and they're
9:13
interested in having a life mate, and they're going to find
9:16
that by somebody who they're going to meet through a work
9:20
experience. You know, the social side of work. They want to work
9:24
with people who are like them. They want to work in highly
9:27
resourced organizations. Those combinations of people probably
9:31
are not terrific, at least when they're coming right out of
9:34
school for this path. But if you tend to get your social
9:39
interests elsewhere, your work can be separate from your social
9:43
you don't feel that you need some affiliation to feel
9:47
fulfilled, and you love the idea of having executive control,
9:52
taking this blank page every morning and figuring out what's
9:55
important to do for those people. This is a great path,
9:58
and by the way, that's what. I think draws a lot of our
10:01
veterans into this path. Veterans, particularly as an
10:05
officer, you're given, you're given lots of control over how
10:09
you execute your mission, whatever that mission happens to
10:12
be. In big companies, that's not the case, and so they miss that
10:16
autonomy. They miss that that's what I meant by executive
10:19
control.
10:20
Adam Outland: Yeah, that does make a lot of sense, yeah. And
10:23
so you're not the one making the pie. If that's your business,
10:27
you know you're, you're the one building the business that makes
10:30
a lot of pies. And you've got to be really interested in the
10:33
widgets, the behind the scenes, and the systems and the people
10:37
more, almost more than the product that's delivered itself
10:40
in some ways. I mean, is that a fair.....
10:42
Royce Yudkoff: That's a very good insight that you've just
10:44
communicated because you're right. People who are drawn to
10:48
entrepreneurship through acquisition are drawn by that
10:51
challenge of being a manager, managing people and creating
10:55
marketing strategies and overseeing product. They're less
10:58
focused on what the particular product or service is they're a
11:01
little bit more agnostic and more interested in managing, and
11:04
that can be a dividing line between people who choose
11:06
startup and people who choose entrepreneurship through
11:09
acquisition.
11:09
Richard Ruback: To use your analogy, most people, most
11:13
people who start bakeries, are really good at baking and are
11:17
fascinated by the idea of, you know, cutting up apples and how
11:21
to make the right crust and making that delicious apple pie,
11:24
they may not have that skill at actually making the pie in a
11:30
cost effective way, and pricing it properly, and distributing it
11:34
properly and alike, and marketing it properly. So those
11:37
are, those are the skills that are often required to take that
11:41
bakery the next level, I think about entrepreneurship. You
11:45
know, startup is, you know, you might not have ever seen a pie
11:49
before, and you're now inventing this idea that you could put
11:53
these interesting ingredients with some crispy crust on top
11:57
and and you don't have a recipe, and you don't have pricing, and
12:01
you don't have a model, and you don't know if it's going to
12:03
work. And so for most of these you finally do the equivalent of
12:08
baking a pie, and you're very excited about your prototype
12:12
pie. You don't know how to price it, and you don't know what the
12:14
competition's like. You don't know what other pies are out
12:17
there. So this is a lot easier you buy a business that people
12:21
have proven that it has an effective model. You can improve
12:26
the model, but it begins with a with a starting point where you
12:29
know that that the company under its previous management can
12:34
produce the product and sell the product at a profit.
12:37
Royce Yudkoff: That happens all the time. It's one of the sort
12:39
of catalysts of success in entrepreneurship through
12:43
acquisition, which is that Baker, to keep using this
12:45
analogy, that knowledge of baking was hugely important when
12:49
he, he or she started the business 20 years later, when
12:52
they have 35 people in the plant, that person has become a
12:55
manager. They're not baking pies anymore. They're dealing with
12:58
payroll and staffing and regulation and customers, and so
13:03
maybe what the business really needs is someone who's been
13:05
trained as a manager, not trained as a baker. And the
13:09
second thing is that that person who founded the company has been
13:12
really successful, and now at age 65 they have more money than
13:15
time, and they're acting accordingly, and they don't want
13:18
to work on Fridays to figure out how to expand into a neighboring
13:22
territory, but that hungry young entrepreneur, they're willing to
13:25
work on Fridays and Saturdays to figure out how to expand the
13:28
territory. And those are catalysts. What are the reasons
13:31
we see so much success in this.
13:33
Adam Outland: So just as a little bit of a switching gears,
13:35
once you've decided that you're right for this approach of
13:39
acquiring small business, you begin to search and find them.
13:43
And I know there's brokers and websites, and how would you
13:47
advise someone go about finding the companies that might be
13:52
worth acquiring?
13:54
Royce Yudkoff: A number of paths, but I think a good
13:57
starter path is to reach out to the brokers who deal in small
14:01
firms. There are about 3000 of them, just in the United States,
14:05
who broker a large chunk of the roughly 250 300,000 companies
14:10
that come up for sale every year and start to get in the flow of
14:14
just looking at small businesses for sale, you're going to learn
14:19
a lot about what small companies look like. And then Rick and I
14:23
teach our students a set of criteria that they ought to be
14:26
filtering for that tend to tend to lead to high returns and
14:30
safety of principal and but that allows you to sort of screen
14:33
through this and look at a population of companies that
14:36
have good prospects. That would be the way I would suggest
14:39
starting.
14:40
Adam Outland: Let me just... a question occurred to me here.
14:42
I've something I toy around with is what do people optimize for
14:46
in life? You know, in this Instagram world of business
14:49
acquisition, you know, it can seem that the optimization a lot
14:53
of people have is like, how do I just get reoccurring revenue?
14:56
And, you know, sit on the beach, let all my businesses do the
14:58
work for me. Maybe. That's what someone wants to optimize for by
15:01
buying businesses others might want to optimize for purpose or
15:06
optimize for impact. Do you kind of factor that in, I guess?
15:10
Richard Ruback: I think that couldn't be more wrong. I don't
15:13
know anybody who works 40 hours a week. I am waiting for the
15:16
person who is 40 years old, successful, and hanging out in
15:22
the ski slope or the beach or the golf course or the weight
15:24
room, but I don't think they really exist, because I think
15:28
it's always a lot of hard, hard work. It is not the case that if
15:33
you have a business with lots of recurring revenue that you can
15:36
go hang out in the beach, because the reason you have that
15:38
recurring revenue is because you have some kind of barrier, and
15:42
usually that barrier is that the company delivers this service
15:46
really, really well, and that as soon as customers get unhappy
15:51
with the service, they're going to move on. We often hear
15:55
stories where sellers say, I'm unhappy with the price I can
16:00
sell my business for. I've been getting a million dollars of
16:05
cash flow out of my business a year in which I'm working 60 or
16:08
70 hours a week on I'm gonna take my number two, who I'm
16:13
paying 75 or 80 or $100,000 a year, and I'm gonna make them
16:18
CEO, and I'm gonna move to wherever they go to retire, and
16:23
what they see is that their million dollar business very
16:26
quickly becomes a $500,000 business, and very quickly
16:29
becomes a $200,000 business, and then it's really not saleable
16:34
because it's had three bad years. It really does take the
16:38
energy and creativity of an entrepreneur, of a CEO, to keep
16:43
the business successful.
16:45
Royce Yudkoff: This is not a career to go into because you
16:47
don't want to work. It's a career you should go into for
16:50
professional independence, for the opportunity to build wealth,
16:53
because you like making decisions, even though some of
16:56
them can be anxiety provoking. You like being at the center of
16:59
a team. Those are reasons to go into this.
17:02
Richard Ruback: One of the great things about entrepreneurship
17:05
through acquisition is that you the entrepreneur, are going to
17:08
pick the company you're going to acquire. If you're allergic to
17:11
fur, don't buy a pet shop. Don't buy handguns. If you're a gun
17:16
control don't buy a handgun manufactured and similarly, if
17:20
you really want to live in a particular part of the world,
17:23
only search in that part of the world and buy a business in that
17:26
part of the world.
17:27
Adam Outland: Yeah. Understood, yeah. Talk to me about focus
17:30
too, because there's another thing that I think is maybe,
17:32
maybe a myth that's propagated, but maybe not, is the idea that
17:36
the acquisition of many companies is always a wonderful
17:39
thing, that you're not just buying one small business. You
17:41
know, your your goal is to have 20 small businesses.
17:45
Royce Yudkoff: Over the 15 years, Rick and I have been
17:47
doing this. We've seen all sorts of experiments by, uh,
17:51
entrepreneurs through acquisition in different ways of
17:54
using this field. You know, if you go back a decade, virtually
17:58
everyone who went down this path, their vision was to buy a
18:01
business and run it as the full time CEO and the major owner of
18:05
the business, I would say, Rick. Over the last half decade,
18:09
there's been a stream of people in the group who really want to
18:14
assemble a portfolio of companies, not be the person
18:18
running them every day, but sort of be supervising and guiding
18:22
that person. So you can almost think of them as a little more
18:25
investorly in their careers. They raise capital, they find
18:29
the company, they diligence it, they buy it, they recruit in a
18:32
CEO, or promote someone the CEO, and guide that person. And while
18:36
that's a minority of the population, we see it's another
18:39
interesting way of of utilizing entrepreneurship through
18:42
acquisition to fulfill their lives. And the two things I'd
18:46
say about that are one that's like so many other ways of using
18:50
this to fit your life, like having a geographic focus or an
18:53
Industry Focus, as opposed to being having a generalist focus
18:56
on your acquisitions, things that Rick was talking about
18:59
earlier. But the other is it's not just sort of spreading your
19:02
opportunity or spreading your risk across multiple companies.
19:05
If you choose that sub path of entrepreneurship through
19:08
acquisition, you're leading a very different life from what a
19:11
CEO does. Right? You're not really the center of a team.
19:14
You're not really making lots of decisions every day. You're not
19:17
dealing with all different kinds of people, like customers and
19:20
regulators and lenders and employees. It's a good life, but
19:25
when you closely examine the career, it's a very different
19:27
type of work you're doing every day. And I think, I think it's
19:30
what Rick and I try to do, is sort of hold up a microscope to
19:34
that and say, Your days look very different. It's not better
19:37
or worse, it's just who are you? It's an important thing to
19:41
remember about small companies is good. Small companies aren't
19:45
small because no one wants to buy their product, or because
19:48
their customers keep getting snatched away by competitors.
19:51
Good. Small companies are small because the market niche they
19:55
focus on is small, but within that niche they are devastating
19:59
effects. Competitors or for some reason or another, customers are
20:03
reluctant to switch. They see value in sticking to this
20:07
supplier, and perhaps their costs to switching. And so you
20:11
can have a great business that's still a small business. I think
20:16
one of the early moments of realization for Rick and me was
20:20
a trip we took to Dallas Fort Worth in the early years of our
20:23
teaching. And we met these two sisters who were selling their
20:26
business. It was a high rise window washing business, and
20:30
they were taking down about two and a half million dollars a
20:32
year, which they split between them, year in and year out,
20:36
serving these highly recurring tall businesses operating out of
20:40
a sort of inconspicuous warehouse in Dallas, Fort Worth.
20:43
And we kind of looked at each other and said, Here's this sort
20:45
of obscure small company out of many possible industries in one
20:50
city, out of many possible cities. Do you realize how many
20:53
opportunities must abound? Because we see this, and that's
20:58
what the world of attractive small businesses is comprised
21:01
of.
21:01
Richard Ruback: And note how much money they were making.
21:03
Royce Yudkoff: Yeah, note that.
21:05
Richard Ruback: They were making over a million dollars a year.
21:07
Each one of the things, I think, is very interesting is in the
21:12
small business space, you can find a lot of businesses that
21:16
are capable of generating that kind of annual income, like, a
21:20
million dollars a year to their owners. That's a lot of money.
21:24
That's nothing to say. Oh, yeah. Well, what would you do if you
21:27
were successful, right? That is successful.
21:30
Adam Outland: So do you two feel like you suffer from, like, this
21:33
disease, where, everywhere you go, you're always assessing the
21:37
business model, like you're at a gas station, or you're....
21:40
Richard Ruback: That's such a funny question. So this drives
21:42
my wife crazy. Every time somebody comes to do a service,
21:48
I want to engage in a conversation of like, how does
21:51
their business model work? So just a couple weeks ago,
21:55
somebody knocked on my door and said, Hey, see you have apple
21:58
trees. Would you like us to start taking care of your apple
22:01
trees, and, you know, revealing perhaps too much about myself,
22:05
but I hate heights, and I also hate failure, and I've had these
22:11
apple trees for about 15 years, and they've grown so that I now
22:15
have to deal with heights, and they almost never produce
22:17
apples. So I hire these guys, and then I can't help but
22:22
wonder, so how many people? How come they have two schedulers?
22:26
So I can call to schedule the appointment in there, somebody
22:29
else is saying, How come that work? And seems like, it seems
22:33
like it says that it's one of, you know, such and such company,
22:36
like, it's part of a funeral home, you know, it's like a roll
22:39
up. Could you do an apple tree maintenance? Roll up? How could
22:43
that possibly be possible? And I spent hours and hours and hours,
22:48
and my wife is always Rick, would you just let them do their
22:51
job?
22:54
Royce Yudkoff: I agree with Rick. I do this too, all the
22:55
time. I actually never thought of it as a disease, though. I
22:58
thought of it as a superpower. Like, you know, every time we
23:01
encounter some service, we're thinking, Well, how many can you
23:03
process in a day? And what's your average charge, and what's
23:06
your cost, and what might you be making? So yes, we confess. We
23:09
do that all the time.
23:10
Adam Outland: Shifting gears for just a second, negotiating a
23:12
potential deal with a seller, right? There is such a
23:15
psychological small business world, you know, they're they
23:18
put their livelihood in this thing. They're emotionally
23:20
attached. I mean, some of it's not uncommon for a small
23:23
business owner to refer to their business as their child, right?
23:26
Because of the blood, sweat and tears that went into it. How do
23:29
you account for the psychological element when
23:31
you're navigating a deal?
23:32
Royce Yudkoff: You've raised a very important point, because
23:35
the actual buying from a seller is a is a challenging experience
23:38
and hard work, and there are at least two reasons for it. One is
23:42
almost every seller you deal with is a first time seller, so
23:46
they're embarking on a intricate transaction of something that's
23:49
very important to them for all the reasons you've said, plus
23:53
their family wealth is concentrated there, and they've
23:56
never done it before, including never picked the advisors like
23:59
lawyers and accountants that they need, so you have to sort
24:03
of help them through the process. But the second piece
24:06
is, do they really want to sell? And you know, Rick likes to say
24:09
that finding a committed seller is actually harder than finding
24:13
a great small business, and I think that's really true. Part
24:17
of your early diligence when you're looking at the company,
24:20
is not just the numbers or sales recurring. Does it have any
24:23
customer concentration, those sort of hard skill assessments,
24:27
but making sure that you understand? Does this seller
24:30
have a compelling motivation to sell? Now they're getting older
24:34
and they really want to move to a retirement community. They
24:37
don't have a natural successor inside the firm. They don't have
24:41
partners where they have to get alignment of three or four
24:44
people on selling. There are a bunch of clues that you can look
24:47
at that say, Yes, this, this seller probably doesn't have to
24:51
sell, but they have a strong propensity to sell. By the way,
24:54
hiring a broker is a is a good clue on that too, particularly
24:58
if the broker charges. A retainer, and not just a success
25:01
based fee. So there are a set of clues you should be looking at
25:05
early on to determine to borrow Rick's words, is this a
25:08
committed seller?
25:09
Richard Ruback: One of the things that's challenging is
25:11
first time sellers are first time sellers. And so there are
25:15
standard parts of any negotiation, like working
25:18
capital, that almost invariably create conflict and hassle if
25:22
they use a broker. The brokerage community is, you know, it's
25:25
really important to get a broker who's really good at getting
25:29
deals done. Suppose you're selling your house, so
25:32
everybody's going to come in and say, Oh, your house is really
25:36
special. We really love what you've done with it. It's just
25:40
It couldn't be better? No, no, no, let's not paint the walls or
25:44
anything like that. I'm going to get you a high price for your
25:47
house. And people get enamored by this idea of a high price,
25:51
but they don't ask questions like, how often does this broker
25:55
find a buyer in a reasonable amount of time, how much
25:58
discount off the asking price normally occurs. Or even worse,
26:02
how much premium above the asking price normally occurs,
26:05
right? Because that just says they're not doing their pricing
26:09
job well, how much delay, how much hassle? People don't ask
26:13
those questions and they should, probably should. How often is
26:17
this broker able to bring the firm to sale in an orderly way.
26:20
How many deals get busted? How good are they at managing
26:24
buyers? How right there are all these questions about what a
26:27
good broker does, and a good broker does a lot more than
26:31
sweet talk the seller. A good broker has to understand the
26:34
business has to market. The business has to be able to
26:38
anticipate the kinds of questions that a buyer is going
26:41
to have. Is this really recurring revenue? Can we talk
26:45
about revenue quality? What's going to happen when I hire the
26:48
Q of E firm? Are they going to find out the accountings not as
26:52
it's represented? All those things, all those things a good
26:56
broker can help you with most first time sellers don't know
26:59
the questions to ask, and similarly, is when it comes time
27:03
to get legal advice, they often hire their estate attorney to
27:07
help sell their business, and so they don't have any
27:10
understanding of what terms and conditions are in a reasonable,
27:14
small firm sale, and the estate attorney feels like they've got
27:18
to earn their keep by being obstructionist. Oh no. We can't
27:21
do it that way. We have to do it this way. We need to have a
27:25
personal guarantee in the selling out. We need to do this.
27:29
We need to do that. We're not paying any working capital,
27:32
crazy stuff that are just not market terms. And all those lead
27:36
to bad outcomes.
27:37
Adam Outland: Wonderful and well said, knowing the knowledge that
27:40
you have now, what is an 18 year old version of yourself get in
27:45
advice from who you are now?
27:47
Royce Yudkoff: Adam, that's a that's a very provocative
27:49
question you're asking, because what you can't possibly know is
27:53
that both one of Rick's sons and my son both have elected to
27:57
become entrepreneurs through acquisition, without any
28:01
solicitation on our parts at all. And so the idea of giving a
28:05
young person advice is not only our profession, but is very
28:09
personal. I think I would say that if you're a capable person,
28:13
this field is definitely accessible to you. You can do
28:17
what the people who are running small firms, does it takes grit
28:21
and energy, and you have to hang in there, even, you know when
28:25
you get bad news, but it is definitely achievable, and if
28:29
you have a taste for professional independence and
28:32
making decisions and having a lot of control over your life
28:36
and potentially building significant wealth, this is a
28:39
path you should examine very carefully.
28:42
Richard Ruback: A simpler way of saying that is that I would tell
28:45
my 18 year old self to hang out with some 40 year olds and see
28:49
how happy they are in their jobs and their families and have
28:53
dinner with them. And one of the things I think they're going to
28:57
discover is the 40 year olds and 50 year olds who own small
29:01
business are a lot happier.
29:03
Adam Outland: Wow. Thank you for ending on that note. Thank
29:05
you both for your time. Please chime in. Chime into their
29:08
podcast. I know I will.
29:09
Royce Yudkoff: Thank you. Adam, it's been a pleasure.
29:11
Richard Ruback: Thank you.