Latest / Exit Algorithms / The Sell Side Truth: How to Get Top Dollar When You Exit Your Business | Rob Kale (#63)
Transcript
- Peter: Welcome to exit algorithms, the podcast where we decode what it really takes to unlock growth, streamline operations, and prepare your business for high value exit. I'm your host, Pete Vera. And today I'm excited to bring on Rob Colley for this episode. He's an SMB investor, M &A advisor, partner at the number one rated business brokerage firm called Business Exits, co-founder of brokervault.ai. and Vetting Vault, an AI-powered due diligence platform. Robert, so excited to have you here. Welcome to the show. Rob, Business Exits: Thanks man, thanks for having me. Peter: Yeah, I can't wait to ⁓ get into this. love your background, so diverse, both on the buy side and the sell side of ⁓ &A. ⁓ Yeah, do you mind starting off? Can you share a bit about your background and business journey and what brought you to your current focus? I know it's a few different ventures going on. Rob, Business Exits: Yeah, how we got to this weird space of ⁓ &A. Yeah, so my career started in some startups in San Francisco. I, after my first job started and ran my own marketing company for about seven years, moved to Los Angeles and... In that journey of transitioning from startups, started playing poker with a guy here in Los Angeles, and he was the founder of Business Exits. We had semi-similar companies at the time in marketing, got the chatting, a couple more poker games, started helping on some of the deals in Business Exits, and here I am eight, nine years later, still working with Business Exits. So it's been a fun, long journey, and then out of sell-side advisory... invested in a couple deals on the buy side and now we've built some software products for the ⁓ &A space. Our flagship product is Vetting Vault, which is a virtual data room that has AI features. Basically the data room that we wanted for ourselves as brokers and we built it ⁓ and we love it. So that's a really fun new venture for us. Peter: Yeah, that's awesome. Exciting. It's great to be on both sides, I think, of the transaction there, like seeing what's important on the both from a buyer and seller perspective. ⁓ Man, yeah. How have you been able to focus on so many things going on at once? Rob, Business Exits: It's so funny. was just talking to a guy this morning about how entrepreneurs like myself, my partner, and this guy I was talking to, we're like, we have so many ideas and it's so fun to pursue them. And so I think all of us go in waves as entrepreneurs of like starting many things. And then especially with family, like all of us have kids now. So we're like, we need to, we need to hone it in and we kind of go in this expansion detraction stages, but how do I manage it? mean, I'm, I'm super disciplined on time, especially with kids again. I'm in the office by 8.30, but I have to be out at five and be dad again. So every minute, every hour is calculated. I guess that's the best way to answer that is how I manage it all is like diligent about time management. Peter: Yeah, for sure. And to try to fit it into basically a, you know, eight, nine hour work day. Very impressive. Do you do like time blocking or how do you, uh, Rob, Business Exits: sometimes, yeah, for particular tasks, I'll block it off of my calendar. If I know I need to focus on certain projects one day, certain projects, another, mean, to be clear, most of my day to day is sell side advisory. The buy side investing is here and there. It's not my main focus. The vetting vault is a primary focus. So it's really just sell side advisory and vetting vault for the most part, and then building other tools that we want to use ourselves internally. Peter: Sure. ⁓ Yeah, no, that's awesome. What kind of tools are, you know, or would you say are the biggest, most value add for brokers? Rob, Business Exits: that I mean, everything from small to large. So on the, on the small tool side, it's like tax return redaction. Like you can build that pretty easily, small little tool that we want for ourselves on the bigger side. It's like an ⁓ and a broker CRM and that's broker vault. And we're in the middle of a V two build with that. And that again, is going to have like, use granola AI for our call meeting notes. And we're going to build a knowledge base within broker vault so that ⁓ questions that come in from buyers, we can brain dump into the knowledge base and we can query against that to answer those questions. The offers that come in from buyers will get analyzed by AI and surface those to the seller and show a comparison of those offers and IOIs and what the terms actually mean and how the buyer actually worded it. And then we can discuss that with them in a more intelligent way. So we're not starting from scratch with every seller, every buyer. Like this will just make things more smooth. and give us better market terms to explain to sellers how this all works. A lot of them are first-time sellers. for brokers, it removes a lot of the friction. A lot of them have been doing this for eight or nine years. I've seen a lot of brokers hire some sort of assistant to manage data rooms, like do paper pushing type stuff. Peter: Mm. Rob, Business Exits: And if you have a really killer CRM, it can pretty much do it for you now. And that's what we're aiming for. Peter: Yeah, that's awesome. It's funny, it feels like the Wild West out there in the business selling world especially, you know, there's no formalized business broker training like there is in real estate. Rob, Business Exits: Yeah. There are, but a lot of people don't take them up on it. And I think a big problem is you kind of touched on being on both sides and that's really important because if you're only a self-side advisor, You don't understand the buyer economics and you don't understand the importance of working capital maybe until you've done it for five or 10 years as a sell-side advisor. Like you don't see it from the buyer perspective until, and for me, that was a big enlightening moment when I led a diligence on the buy side. It was an ⁓ eye-opening experience to really analyze the working capital. ⁓ it's over a million dollars of working capital? How's that possible? And the buyer economics, the bank terms and doing it in your cash flow model, see is it really gonna produce returns? If we don't grow this thing, is it gonna be a zombie and never distribute cash to LPs? Like that's a different analysis than you do on the sell side where you go, okay, four or five X, let's go YOLO. And that's what a lot of brokers do. So you have to make sure that, you know, it's a funny market because. Businesses are incredible and it's amazing what the seller has done to take it from zero to one. And so you want to be their cheerleader and say, I want to get you top dollar for this and get you a five X. But then you got to be that pragmatist on the buyer side and say, look as buyer perspective, as an investor, I know the market. Here's what buyer's offers would really look like. And so I just wanted to paint that picture of the duality really helps as a sales side advisor. Peter: 100 % yeah, you know, I've worked with a lot of different brokers ⁓ in my short time my short career and I've seen some that are just so good and so knowledgeable like taking care of the transaction and others it's like Here's the here's the seller. Here's the the business and like sorry the financials Like don't match the tax returns like sorry about it Rob, Business Exits: Yeah. Peter: I think your perspective a lot better. Rob, Business Exits: Yeah, some of them are just like, here it is. You want to buy it? Like, that's it. Peter: Yeah, and I think having a CRM, a tool that they can use to organize everything and make sure it's a product that buyers can look at and decide rather quickly if it's a right fit or not. I think that adds a ton of value. Rob, Business Exits: Yeah. the ability you can put behind a deal to the buyer is going to help. we're building a lot more ⁓ reasoning for the multiple data around it, financial backup from the business, stuff like that. It all helps. Peter: Yeah, that's awesome. Yeah, so when you take on a new client, a business owner trying to sell, what are some things you like to see that just make the transaction really smooth, make the business really sellable? Rob, Business Exits: To make a business sellable, first, you know, when I'm first talking to sellers, it's a personality fit too, right? Like if they're gonna be a good seller for me, they'll be a good seller for a buyer. So a lot of sellers we talk to are just not in the right mindset to sell. They might be really stubborn or I talked to someone yesterday who's just, they weren't saying a lot. And so I'm like carrying the conversation. I'm like, do you have any questions for me? Like if they're not gonna be, open and collaborative in the process, it's already a bad sign. But as far as a sellable business, the things I look for, how clean are the books? Obviously, a lot of people talk about this. I'm not gonna say too much about it, it's very obvious. If your books are messy or a lot of times the wife is doing it that's fine, but they may not be an accounting and CPA type person, so you might need someone else to clean up the books. ⁓ Owner dependency, a lot of people talk about that. The less owner dependent, the better. If you have a management bench, you have a team really working in the business. And we are selling businesses that have zero W2 employees. And sometimes that works, but obviously buyers prefer a team they can lean on. And then... Peter: Yeah. Rob, Business Exits: Risk mitigation, the normal things that buyers look for as far as risk are things like client concentration, vendor dependency, key man risk in the business. So identifying those early really helps me form my analysis of the business from, again, the buy side perspective so that I can serve as a sell side broker and match the realities. Cause in most cases, sellers want this price and buyers are willing to pay this price. So I need to match the seller and explain it to them. Peter: Hmm. Rob, Business Exits: as a buyer, as an investor, how they're gonna see it with the risks. Peter: Yeah, definitely. I think that is crucial, right, too, to get the seller to understand that, well, it kind of, can make sense operationally to go with more and more business with one client and maybe get better rates. Unfortunately, when they go to sell, buyers view that as a risk and it's going to decrease the value. Rob, Business Exits: Yeah, unless there's a contract or something, but if it's handshake deal, 95 % client concentration, and you're as the buyer risking your house and your life and your family on the deal, that's a tough pill to swallow. Peter: Definitely. Yeah, is there ⁓ maybe a timeline you think is appropriate for a business that wants to sell, ⁓ but if they could just do a couple of those things, right? Like make their books a little cleaner, maybe hire someone to mitigate owner dependence, customer concentration. How long do you recommend businesses start planning for that? Rob, Business Exits: depends on the case, of course, like if they're riding off everything on taxes and... They're showing breakeven for the last couple of years. If you want the buyer to be able to finance the acquisition, that's at least two years to get those tax returns to show profit, to get a bank to fund that with SBA or other financing for that. If it's a simple matter of diversifying a few clients or hiring a person or two, that can probably be done within a year. So I'll give them advice based on where they're at and I'll say, here's what it's worth today. Here's what it could be. worth in a year if you do XY and here's what's worth in two years if you do XYZ. Peter: Mmm. Yeah, nice. Yeah, playing it out and show them some forecasts. Rob, Business Exits: Yeah, yeah. There's a lot of consultants who will help sellers along the way and do that. you know, they don't, I don't think the sellers really see the value or why they have to do that until I really explain it to them to get the higher price in terms that they want. It's not like if you want to sell it for the best price, here's what you need to do, you know? Peter: Yeah, definitely. Yeah, and I wanted to also give you the floor, kind of talk a little bit more in depth about vetting vault. How does it help with the due diligence process and facilitate the deal? Rob, Business Exits: Sure, yeah, so the main differentiator for it that we've seen in the market is on the smaller side, you have the buyer giving a diligence list in Excel and please upload the files to Box or Dropbox or Google Drive or whatever. On the middle market side, you have a more sophisticated virtual data room where it's data side or something that. In our opinion has a very boring UI and some analyst is organizing the files and you've got the diligence list and you've got the file uploads. So it's kind of a more sophisticated spreadsheet and drive again. So we put them together where the request list is the data room. So you just click on the request. If they want tax returns, you upload it there. It's all in the same space. And then you can collaborate, see the status, what's outstanding, what, what is completed, submitted to the buyer. The buyer can check it off. Everybody's on the same page. Everybody's in the. the deal room. Now it has AI features, so it has an AI assistant. It's unlimited users still right now. So it's right now at this time of recording, it's $1.99 a month for the admin. Everybody else is free. Unlimited people, unlimited deals, and... Peter: Thanks Rob, Business Exits: AI features MCP servers. if you're using Claude or other AI, you can just chat with Claude and say, you know, running that analysis, do a tax bridge, whatever, whatever. And it'll spit it out based on the file data that it's analyzed. So again, we built it for ourselves to have something super cool. And we have customers that are using it loving it. So it's international. It's very cool to see like, you know, people in all different continents using it. Peter: Nice. Yeah, it's exciting for sure. And it's not your first AI ⁓ centric or AI incorporating business either, right? Rob, Business Exits: Yeah, mean, Broker Vault is the ⁓ &A CRM we built. had one previously called Broker Vault, it's like the new iteration of SimShare. I've always been obsessed with like, ⁓ you know, with my Sims over eight or nine years, gone through a lot of different iterations, ⁓ Google Docs to PDFs to, we have a really cool online website that we use internally. And now think it's going through another iteration that's gonna be. Peter: share. Rob, Business Exits: driven, a ⁓ customized site. I won't say too much now it's going to be in this V2 thing, but graphs that are generated from the financials, ⁓ overview of the business, preempting buyer concerns and addressing them and doing it in more intelligent way rather than usually the brokers are just whipping together a slide deck or a PDF based on what they know, but this is going to be more filled out. So yeah, we use AI internally. We use Granola for meeting notes. We use HubSpot, legacy for for CRM, but we're moving towards broker vault, AI, like a lot of people will say they use AI, but in a lot of cases that I've seen it makes them dumber. And so we're trying to use AI to make us smarter. I recognize our blind spots. A lot of people have AI slop they generate and I can tell as a broker, especially when buyers inundate us, I'm like, you're not really thinking. These questions are very dumb. So I actually wrote a policy for business exits on our website that I refer them to. say, here's our AI policy. If you can use AI, we're pro AI, but use it to be smarter. If I recognize AI slop, and I say that in a nicer way, but I'm like, if I recognize AI slop, I have the right to not answer your questions. We're going to move on. Like we're going to move on to the series buyers. So that's my, that's my spiel, my soapbox for that. Peter: Yeah, it makes sense. I definitely agree with that message. How do you recommend people use it in a smarter way? Rob, Business Exits: That's a question. think, you know, when you first play with it, you chat with it, but it's really cool what you can do as far as reverse prompting and pulling. information that is your blind spot from it or asking it for ideas. I think that's a major eye-opening unlock that people see with AI is, okay, yeah, you can chat and say, what's the analysis on profitability last year? That's like step one. But the real unlock is, I'm trying to think of an example like. you know, the broader vague one is what am I not thinking about here? What am I missing or ⁓ what would an expert in this domain be asking as a CPA or as a deal attorney? What risks could be flagged here? What questions should I ask the by side attorney? know, like asking it what you should ask is a good little hack. Peter: Yeah, I love that. And that's reverse prompting. Rob, Business Exits: I think that's what it's called, yeah, reverse prompting. It's intelligent enough now if you're using the top models where its reasoning is intelligent enough where you can use it as an expert or as a brain. And if you're intelligent, you can play off of it to level up versus just like give me this and it returns it. So that's a huge unlock. Peter: Yeah, love it. Definitely. Yeah, I think I was exposed to that idea first in ⁓ that book, AI Driven Leader, ⁓ Jeff Woods. But yeah, he talks about how he was able, I mean, he references a bunch of case studies, but through intelligent prompting, prompt engineering, and basically getting it to ask you questions so that you can give it even more granular context. That's how. you leverage AI to the fullest, think. Anyways. Rob, Business Exits: Yeah. And it's memory and cron jobs. Like personally, I played with open quality just as a personal tinkering thing, which is frustrating in its own right. But the power of Claude and open claw on these things, having memory and learning what you're working on. And then it can again, proactively reach out to you with things. can proactively build upon your knowledge base. now or very soon it's, it's going to be your smarter counterpart. ⁓ and work, which is I think really exciting and really cool. ⁓ right now I think people use it as an assistant, but again I think it's going to be, it should level you up, I guess is what I keep saying. I know we're diverting from SMB ⁓ &A to AI, but it's very exciting. Peter: Hmm. It's all good. It's a fun focus of the podcast too. So, and it ties in with also, you know, growing and scaling businesses, you know, with agents now, like I imagine you're experiencing this maybe a bit is what, do you have a kind of to decide whether you're going to hire a new employee or do you first go and see how can, how much of this can be automated with, with, with agents? Rob, Business Exits: ⁓ it hasn't impacted our people. It's, it's again, only augmented, which is good. So I haven't halted hiring because of it. I haven't fired because of it. In theory, I think it should level us up and, and avoid human mistakes and allow us to move faster and more intelligently. So for example, on one deal, on a cruel basis, his numbers are much higher than cash basis. Is that a timing thing? What is that attributed to? We can request trial balances and request more financials to do a more thorough analysis to bring an analysis back to the seller, but also prepare for buyer questions on that. you know, as you know, we're dumb brokers and we're not CPAs, but we can at least show, okay, this is due to timing. Here's when the checks came in, that type of stuff. So, Instead of being in the dark, we can have more knowledge around it, provide the data. The buyer still, you know, trusts but verifies, but they might be more impressed now from the brokers like us who are like, here's the data, here's the analysis, do your own research, but I'm pretty sure this is right. So stuff like that. ⁓ Obviously, the paper pushing stuff is a lot easier. ⁓ e-signatures that are saved to a folder, ⁓ collecting is everything with AI that moves faster is like data collection and synthesis to usability. And so that's what we're starting to do here. So as an effected personnel except for augmenting. Peter: Mm. Got it. Nice. Yeah, I think it definitely depends on the business, you know, which certain industries are hit harder by the AI way. Rob, Business Exits: Yeah, I just saw Coinbase had a big layoff, 14%. So I think it also depends, like, we were always lean anyway. We had historically less than 10 people. So if you got 50 people doing some paper pushing as management, you're probably like, can we use AI to replace that? Peter: Mm. Yeah, right. Man, that's awesome. It feels like you're one of the only players I think right now, at least the business selling space that's you know, fully in on AI or at least, I'm sure they're all trying to some extent, but. Rob, Business Exits: Yeah, there's like one that raised money that's posing themselves as AI forward investment bank. The other ones, the brokers will say they use AI and that's really chat GPT or asking a lot of question here and there, but we're definitely on the bleeding edge of sell side broker with AI. Peter: Yeah, it's exciting. What type of deals do you typically take on? ⁓ it, are there any industries you focus on or certain EBITDA size? Rob, Business Exits: The bulk of our deals are service-based businesses just by their nature. Our target market is two to 60 million in revenue. And so that's a pretty wide range and profitability-wise. Just by power law, most of our deals are under 15 million in size. A couple of months ago, we closed $130 million deal. We've closed 100 million plus deal each of the last three years, but those are outliers, right? So again, power law, most of them are sub 15 or 20 million in size. Then we got a 60 million, 80 million, a hundred million dollar deal. But we're pretty agnostic. We don't do any outbound, which is probably not a good thing, businesses all come to us and we just kind of filter for the best businesses. So all day we are talking with owners and really analyzing which ones are amazing businesses, well put together and everything, and then bringing them to market. And by nature, a lot of them are service like HVAC, roofing, plumbing, bread and butter, Main Street businesses. And then you have outliers like I'm talking to, ketamine business, and we're doing a lot of healthcare this year. So hormone business, a rheumatology clinic. What else do we have? Peter: Mm. Rob, Business Exits: Yeah, pain clinic, a lot of healthcare this year, which is very profitable and ⁓ private equity is attracted to so agnostic, but it keeps the job fresh too after eight or nine years. It's finding out a business owner makes money in the strangest ways. Peter: you Yeah, definitely. Yeah, that's exciting. you think, it like, you know, the bigger businesses, they tend to go towards investment banks or, you know, what's maybe what's the benefit of, of hiring a sell site advisor from a business owner's perspective? Rob, Business Exits: Yeah, so I mean, I think if they have this idea of a prestigious investment bank representing them to their network of private equity buyers, they'll try to seek out an investment bank and they're okay paying the six figure fees monthly. you know, the downsides of that is they punt it to the analysts who are, you know, 24 year olds doing spreadsheets. take a long time. They run a closed good process, but it's expensive. ⁓ On the sell side, you're even the hundred million dollar deals, like we're commission only, like we take it on. If we perform and are successful, we get paid our fee at closing. We're not charging you a hundred grand retainer every month and having the young person run the deal as point. Like we're going to run it start to finish and get you a sale to a private equity group. So just depends like your flavor of what you're looking for and who you trust as a seller. A lot of our clients, we are really close with them because we form this trust-based relationship that goes a really long way. And when stuff happens in deals as it does, they can trust us to guide them through the deal, right? So if the buyer doesn't retrade. The seller usually freaks out, right? And then by the time it's under all the Y, we play more therapist role in explaining from based on our expertise over the past decade plus on how this is supposed to play out and is that valid? Is that not? Do we wanna work through a deal here? Do we wanna move on? So it's one of the seller's biggest life decisions, right? And so you have to have someone that you trust in your corner inherently. And long after the deal closes, We're still very close with a lot of sellers and you can tell the entrepreneur mindset where a lot of them have other businesses and they, what am I trying to get out here? Is that they know it's a long process and they know that this is, it should be a win-win, right? No one, the buyer. I might interpret the buyers trying to screw them over. A lot of smaller deals, ironically, think the buyer is always trying to screw them over and they're defensive. The entrepreneurs on the bigger level, they just have a more mature mindset. And so it's nice to work with them where we're all trying to get a deal done here, right? And so what's logical and what's not, and let's work through this together type of thing. That's kind what we look forward to. Peter: Mm. Definitely. Yeah, I love what you said too about the psychology as well it being it being one of those You know potentially the biggest life event if they've had especially if they're the founder and they've spent those 80 hour weeks for four years ⁓ Do you some it's? Rob, Business Exits: If they're a baby, they describe it as their baby and it is family to them, you know, it's personal. Peter: Yeah, 100%. Do you have a system for kind of figuring that out towards the beginning of the relationship? Because the last thing you'd want to do is go through a sale process and then at the very end he or she just changes their mind to sites they can't let go. Rob, Business Exits: to see if they're like, fully committed to it. Yeah, I mean, one thing I talk through with someone is obviously know their reason for selling. Like, are they trying to retire? Are they moving on to a new project? Like, what's their why? And then... Understanding their personality what stresses them out what drives them you can you can get a good hand on a person and I did study psychology in college and maybe that lends itself a little bit I always joke that it was completely irrelevant to what I did But you can you can understand a person and throughout a couple months of working with them. You see how they react to things so I I have to get along great with my clients. I'm not taking on clients I don't get along with well and when they get stressed I can see why and I can you know be the Zen therapist and calm them down. So I definitely filter for the good personality fit and committed to selling. they're in the term, you can identify some terms if they're not and some of those terms on that first call, for example, are Peter: Hmm. Rob, Business Exits: you everybody's got a price or, ⁓ you know, if the offer is right, when I hear those words, I know their expectations are sky high and they're just kind of seeing what the market might pay them. And it's going to be a really hard reality conversation with them. So there are some terms I flag as potential problem clients. And the ones that are really good are give me a good reason why they're selling and what they're going to do after and asking really intelligent questions about it. Peter: Nice, ⁓ that's awesome. psychology degree ended up coming in handy. Rob, Business Exits: Maybe. I was also a business. I doubled in business. it probably helps to have both. Peter: Yeah, yeah, well, Steve Jobs studied calligraphy, Yeah. huh, exactly. Yeah, the psychology sometimes it seems like can be different depending on how big the deal is. I've heard some mentors have say, you know, that used to work on Wall Street. ⁓ It becomes more and more about the numbers as the deal. Rob, Business Exits: We know that. Okay, great. We got a design background, guess. Let's his design. Peter: gets bigger in size. Have you seen that phenomenon? Rob, Business Exits: What do you numbers, better than the numbers? Peter: Like less so than the seller's psychology and what he his ⁓ dream outcome is for the deal. Yeah. Rob, Business Exits: Yeah, but they can still pull out. you still got to make sure they're committed to the process and are going to sell. I mean, on these hundred million dollar deals, the drama is still never ending. Like I could tell you it's still there's still a lot of personalities on all sides. The numbers, I mean, Peter: Yeah, it keeps things interesting. Well, awesome Rob. I know we're up on time here. ⁓ Probably could keep on talking and talking, but I really appreciate it. I always leave the end of the show. If you could leave listeners with one tip to build their business, make it more sellable, what would it be? Love it. Well said Thank you so much Rob. I got a ton of value out of this conversation ⁓ Just being on the on side of things if listeners got some value to where's the best place they can find you reach out to you? Great, I'll leave that in the show notes. Thanks so much, Rob. decision.