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Hello and welcome to the trusted podcast. I’m your host, Blake Johnson. And today we’ve got Trent Lee with us and we’re going to be talking about what to do when you sell your business. Uh, what it’s like working with the business broker. And so let’s jump right in. Trent, thanks for joining us today. I’m glad to be here. All right. So, uh, why don’t you start off giving us a little bit of a background on, um, you know, what you do, how you got into business, broke being a business broker and, um, you know, kind of what makes you the expert in this field.
Yeah, absolutely. So I started off as a business owner. Uh, actually never really planned on being a business broker. Um, went to to did my accounting undergraduate, not because I ever wanted to be an accountant because I wanted to better understand the numbers in business Trust Attorney Las Vegas. And at the same time I was growing and I had started and was growing in business in it, uh, was going well. I ended up getting into Harvard to do my masters of finance and got bored with all the numbers. I missed the business side of things or transferred over to Texas a and M into the MBA program while I continued to run and operate the business. And um, that business as well as a number of other businesses over the years. Honestly, um, I can, I can’t really just do one business at a time, a little, little bit of an add entrepreneur.
I found that most entrepreneurs that way, if they do one, they do right. So I had so long story short, I’d sold a, an exited from a couple of businesses and I was intrigued by what the business brokers did. Um, I thought it was interesting. I liked learning and talking to them, but at the same time I wasn’t really all that impressed with them. It’s a, an old fogy gray hair industry. A lot of these guys are, you know, just slow to respond. They don’t use technology, you know, they’re running their business from sticky notes and, and I saw, I thought, you know what, I’m going to jump in. And that that was a years, couple of years ago. And, uh, it’s been a great, a great time since I’ve been really fun.
Great. All right. So, um, let’s start with the businesses itself first. So what makes a business, uh, more valuable to sell or, you know, what kinds of things should business owners be doing now? Um, you know, before they’re ready to actually exit the business and then maybe once they get to that exit point, what kind of, what kind of things should they be doing to help maximize their value?
Yeah, so we’ll, we’ll try and make this the condensed version cause we can talk about that for an hour or so. I’ll just highlight a couple of things that would make, you know, maybe, maybe some things in preparation for a business to do before they actually go in and, and think about selling their business. One of the most important things is to have clean financials and, you know, buy clean financials. I don’t necessarily separating personal expenses from business expenses, which we, uh, that’s certainly important. We’ll talk about that here in a minute. But there’s a lot of business owners I go into and they just, you know, they’re running their business based off of their bank account and balance. They’re not necessarily tracking really good profit and loss statements. They don’t know their numbers. So we need to get a good couple of years of good, clean financials so that we can do a valuation.
Um, so first and foremost, it’s, it’s get your financials in order. Next thing would be stop comingling as much as possible. Uh, honestly, from a business owner standpoint of, you know, I was there, you want to minimize your taxes and so you want to run as many personal expenses through the business. But there’s, you know, there’s, with all things, there’s a balance, right? You’ve got to make sure that you’re not using your business as a giant ATM machine, you know, for the family and, and, and not really tracking the revenue. So when we go into business owners, it’s called recasting the financials Trust Attorney Las Vegas. We’ll go in there and identify what the personal expenses are and add them back. They’re called add backs. We’ll add those back to the bottom line to calculate seller’s discretionary earnings. That’s one of the primary figure figures that drives a valuation.
And we have to be able to identify what those add backs are and we have to be able to, you know, you know, ver validate and justify what they are. If a business owners pulling cash out of the register and put, put in into their pocket, it can’t do anything with it. I can’t validate that. I can’t justify that. You know, the business owner got the benefit when they, you know, when they took the cash and they’re not going to get the benefit when they get the valuation. Um, same goes for other expenses. You know, just make sure if you are running personal expenses through the business, you really document it well so that we can validate and add those back to the bottom line and increase the valuation. Uh, so that’s, that’s an important aspect and there’s a difference between what I would accept as an add back from a valuation standpoint and what a bank would accept. They’re not going to be quite as, as liberal as I would be. And so making sure that your business is profitable for the last couple of years is really important because a bank is not going to finance a buyer if you’ve sucked out all the profits and we can’t justify the add backs. So that, that’s really important.
I want to interrupt you for a second just to let our listeners know, you know, from a liability standpoint, treating your business like a business is a big thing. So is a big thing because if you, if you use it as that personal ATM, uh, if you get sued, you know, there’s a chance that lawsuits is gonna come through and break the LLC or the, and it’s called piercing the corporate veil and come after you individually because you’re not treating it like a business. So that’s, you know, from day one you should be doing that. Obviously there’s stuff, you know, the add backs, like, you know, the, the owner’s vehicle and those kinds of things. That’s not the type of stuff we’re talking about. Um, you know, I’m talking about, you know, paying for the kids’ education or you know, stuff like that, that we don’t want to have it done to be treated that way. And I think the finances and keeping them clean from a tax standpoint, if you ever get audited, having those right there is going to be huge and making sure that audit doesn’t take months and you don’t owe a bunch in back taxes as well because you’ve kept your records clean Trust Attorney Las Vegas. So I think from day one you should be doing that anyway cause it’ll help make your life easier. But for the ones who haven’t, let’s let’s get caught up cause you know, you need that if you’re an exit. Yeah,
I agree. I agree. Um, any other comments on that?
No, I just wanted to make that one clear. So
a couple of other things that in preparation to selling, um, that’s important is having a transition plan in place. And, and you could certainly talk about that from a legal aspect, you know, transferring ownership and a transition plan. But from a standpoint of selling your business, if the, if the business is totally dependent on you, that becomes a little bit harder to sell because you’re selling more of a business, maybe call it a hobby. It’s dependent on on the one owner versus a manager that’s trained employees that are trained and try and find the right buyer that happens to have your exact same skillset versus someone that comes in that knows how to run a business and can manage the employees in the managers that that happened to be able to run the day to day Trust Attorney Las Vegas. So that’s important is to make sure and a really good test is to find out, you know, what would happen if you took a week off from your business?
You know, does it totally fall apart? Does the revenue stop? What would happen if you took a month off from your business? That’s a pretty good indication if the business totally comes to a grinding halt in a month, you know, don’t, don’t get me wrong, you can still sell it. It’s just going to hurt the valuation because you’re selling more of a hobby or a one man operation business, even though you might have employees that do some of this stuff, but it becomes a, it becomes hard to justify a higher valuation from that standpoint. So, um, maybe a couple other things to just chat about as having a realistic sales price. Uh, as well. Sometimes I’ll meet with business owners and they have no idea what their business is worth. And I come in and I’ll do a, a valuation and we’ll figure out what the fair market price is. And we’ll also talk about like the deal structures. We also will, you know, I’ll go into business owners and sometimes they think their business, you know, they’re, they’re paying their bills, they’re, you know, live, you know, taking home $80,000 a year and they think their businesses are worth 3 million bucks and they’re just not gonna sell it for anything less than. So having a realistic price range is an important, and you want to just talk generally about that for a few minutes?
Yeah. As I say, um, what’s, what’s a good way for them to kind of get a number in their head so that they have a good conservative number and they’re not gonna, you know, be blown away, you know, by when you come in and kind of dash their dreams.
Yeah. So this is, and I wish I would’ve known this prior to me, my, you know, my own experience exiting businesses. There’s a couple of different ways to do valuations and there’s a couple of different figures. And typically what we’ll do is we’ll look at the last three years financials, we’ll put, you know, we’ll take a weighted average over the last three years, but you know, more emphasis on last year than, than obviously the previous years. And we’ll look at three different, uh, numbers. One is the top line revenue, how much gross revenue most industries have kind of a standard, call it a rule of thumb where you could from a very quick, you know, really rough estimate, take a percentage of the top line Trust Attorney Las Vegas. You know, maybe that percentage is, you know, a a hundred, you know, maybe it’s 50%. Maybe it’s 120% that is one of the first things we look at.
The next thing we look at is what we talked about earlier, seller’s discretionary earnings, so you have to have a pretty good idea of how much re you know how much profit is there, not how much profits on the bottom line, but once we identify the add backs, how much is leftover. There’s a, again based on the industry and the individual characteristics of the business, there is a standard market multiple that we’ll use for the industry and then we’ll adjust that up and down based on that. Like I said, the individual characteristics of the business, you know if you want it to be safe, national average is somewhere between 2.2 to 2.4 if your seller’s discretionary earnings is $1 million at the end of the year, then you take that time somewhere between 2.2 to 2.4 that’s a pretty good quick way to value businesses. The other way is a purse is also a multiple of EBITDA.
So the difference between EBITDA and seller’s discretionary earnings is essentially EBITDA or seller’s discretionary earnings is basically EBITDA plus adding back the owner’s salary. And that usually is a, is a multiple that’s a little bit higher, you know, call that three, three and a half or whatever it happens to be. And so in theory, if we take a percentage of the top line, a multiple of EBITDA in a multiple of seller’s discretionary earnings, in theory, they should generally be in the same ballpark area. And, and that’s, that’s the quickest and easiest way to generally determine what your business is worth. Okay.
That’s great. I think that’s awesome. So, um, is there any things businesses do other than
the keeping the financials clean to help their business seller or close faster once they get in under contract? Yeah, good question. So two thoughts come to mind. Selling faster. It has to do often with the sales price and has to often do with the sales terms. So if a business owner is asking for a hundred percent all cash or nothing, that’s going to take longer to sell. If a business owner’s willing to do some sort of form of seller financing, they’ll sell it quicker. Maybe they’re asking for 60% cash down and willing to do the remaining on seller financing. Maybe there’s some type of an earnout structure involved that helps sell businesses quicker. Um, one of the other things that they can do to help increase the valuation is also look at, um, top law or I’m sorry, reoccurring revenue. Um, those that always helps businesses get a higher multiple if it’s not just a onetime, you know, one and done client comes in and pays.
But is there any type of contractual reoccurring revenue and there’s lots of forms of reoccurring revenue, um, you know, short term, longterm contracts. Um, you know, non contracts just have people coming back because it’s a service space and they need to, um, need to come in. Just depends if there’s any type of reoccurring revenue that really helps out, um, the, the valuation as well. Okay. All right. So let’s say we’ve got a business owner, they’re ready to, to do a transition or they’re thinking about it way, should they be involving you? Is it, you know, how, how far out should they planned it to start contacting a business broker? Well, ideally, and this rarely happens ideally, but at least a year out, it would be really nice to meet with someone, go through it, do a current valuation where they’re at now, point out where some short comings in what they could really focus on over the coming year and then, and then connect with them, you know, after they fix those, those, you know, we’ve got now 12 months of, of fixed or improved financials really kind of cleaning up the pitfalls that they might have.
Typically it doesn’t work that way. Um, usually they contact me when they’re ready to sell and at that point that’s okay. We just have to value what the business is at. Currently. We can’t really, you know, we don’t have a lot of time to, to fix any of the problems. Now on the flip side, sometimes that’s good. Um, because the new buyer can come in and fix those. Um, and, and, and that’s partly, in fact, it’s probably important to point out there’s a phrase I use a lot in talking with sellers and that is buyers will not pay for potential, but they’ll buy it for what you’ve actually done or what you’ve, you, you know, they’ll, they’ll, they’ll, that’s why they’ll a business is for potential, but they won’t pay for potential. So that kind of sounds similar, but I cannot value a business just because it has potential.
That’s why a buyer buys it because there’s potential, but they’re not paying for potential. So, and I hear this all the time, I go into a business and they tell me, Oh, there’s, you know, there’s this great, you know, if I had this time and that if I had this, you know, this and that, I really would increase the revenue, therefore my business should be worth it. It just doesn’t work that way. Right. Because it hasn’t been proven. It hasn’t been proven. So an example that is when you help me sell my business, I’m had a rental business and I just didn’t want to work Sundays. So we didn’t offer rentals on Sundays. Um, and so that right there, the buyer who ended up buying it, he saw that potential, look, if I just open it Sundays cause it was mostly a weekend, you know, recreational activity there that can be, you know, increase the sales by, you know, at least a 30% raise right there.
But he wasn’t going to pay for that. Um, so we had the price where it was based on what I was doing that did help sell the business in the end. Because when we put together the marketing material, the executive summary, we’re gonna focus on the unrealized potential. And we might even forecast out with the seller’s help what that unrealized potential could be a year from now, two years from now. But the valuation is not based on, on that unrealized potential. That’s for the buyer to come in, put in his elbow, you know, grease and, and sweat equity and, and realize that unrealized potential, but the valuation can only be based off of the financials that I’ve got to work with. Okay. So on this podcast, we like to help people understand what makes a good trusted advisor that they have. Um, you briefly just touched on one, you know, the executive summary that you guys do.
That’s where you can really add value as a broker to say, Hey, buyer, here’s some key points that could really make this business good that you could come in and do. So what kind of other things, uh, should people be looking for when they, they’re looking at a business broker on, you know, what’s gonna set them apart as a good broker versus just, you know, the average guy that’s doing its business off of sticky notes. Got it. So, yeah, good question. In fact, there’s four questions that I’d recommend someone ask first is, well, maybe, maybe there’ll be a, maybe it depends on how many I think of here as we go. Maybe it might be fine. Um, first is I w I w I would be asking what their background is, you know, have they personally been through this and it’s not the end of the world.
If they have, and it doesn’t mean they’re a bad business broker, but it certainly helps if they have the experience and have been through and sold their own business. A second is I would ask if they were a member of the IBBA stands for the international business broker association and then I would find out if they have the CBI certification or designation. It stands for certified business intermediary. That’s a really good indication because someone’s got to go through a couple of years of, of um, training a bunch of continuing education. I think if I remember it, it was like a 400, you know, four hour test that I took to get that designation. That’s going to be a really good indication if they’re a member of the IBBA and if they’re a CBI certified business intermediary, that’ll give you a really good indication of their level of expertise, their expertise, their training and um, what, what they can do individually.
Second or third, I guess would be the third question would be what is, what are their training? What are their qualifications, certifications for doing valuations? There’s typically two camps, business brokers and then separate camp for business valuations. Um, there’s a couple organizations. Um, I went through one called Knuck neck, the national association of certified valuation analyst to get certified to do valuations. Um, I, as far as I know, I’m the only one in the state that has both this CBI, uh, through the IBBA and, and they’ve gone through and been trained to do valuations. You know, for example, you could go to court and testify as an expert witness if someone’s going through a divorce or estate planning or IRS audit, that type of stuff. Getting a good idea of what their training is to do valuations is important. And then final question, I guess number four would be, um, how many deals have they closed either this year or last year? And depending on, you know, when you’re asking them, asking the question, most business brokers kind of on average do between, I dunno, six to eight deals a year, maybe 10. If, if they’re, you know, if they’re active. And so giving, getting a good indication of how many deals they’ve done and actually closed year to date, it gives you a really good indication of, you know, their, their activity level and, and so, um, yeah, that’s a good overview.
Yeah. And obviously if we have somebody who’s less experienced, you know, everybody’s got to start somewhere for even in business brokers or whatever the case may be, it’s just making sure that they have at least somebody there that can help advise them. If you do have somebody else who’s maybe not as experienced, do they have the resources to kind of go out and do that? I think is would be a good point as well. But still you want somebody who has those qualifications looking over the deal, I would say. Right. All right. Um, last thing is w is there anything post getting under contract and the deal sign, they’re getting the money. What, what kind of things have you seen, um, that people should do or even while they’re in it that they can do to help maybe reduce their taxes or help with their, or whatever the case may be is, or even issues that you’ve seen come up after, like, you know, do business, uh, business owners regret selling the business, you know, do they, should they have a plan for, to fill their time afterwards? It’d be seen any or have any stories about that?
Yeah, good question. Um, I don’t know if I have anyone that’s come back to me and really said they regret selling the business probably because most of it, one of the first questions I ask these guys is why are they selling? And usually they have a plan. They, you know, sometimes that plan isn’t necessarily by choice. You know, mom’s sick with cancer on the East coast or whatever it happens to be sometimes. You know, like today I met with a doctor that’s selling his medical practice and he’s just purchased a house in Mexico and, and spends half his week there on the beach and that’s what he wants. That’s his transition plan. He already knows he’s, you know, he can spend all day on the beach and not be bored. So I don’t know that I’ve had anyone say they regret it, but it’s probably because most people have something, you know, there, there’s a reason to sell it.
Well the plan, I wouldn’t a reason to sell the business. I wouldn’t necessarily sell your business unless you had some plan you were moving onto. Um, so yeah, that, that’s interesting. But, uh, I haven’t heard of that. Okay, well that’s good. I, I would hope that would be the case, but I just wanted to, to bring that up. So, um, anything else you want to add before we wrap it up here? Anything else that people need to know about the transition? I think the important part would be once someone, someone like me, if I came in and did a valuation, we market, we find a buyer. Um, what’s really important is the due diligence documents. They need to, that’s, that’s really when a buyer determines if they’re buying a business. It’s not so much when they make the offer. The offer is contingent upon due diligence and contingent upon, you know, sometimes a number of other aspects that are relevant.
But, um, you need, the business owner needs to have clean due diligence documents and need to, they need to be organized. So spend the time now to clean up documents, get organized, get structured right so that when a buyer comes in, they, we don’t make an offer only to find out the due diligence documents are a total mass in the deals, you know, dead and over before it hardly even began. All right. Well, uh, thank you Tran for being on here. Um, how can our listeners find you? And then also, um, I want to put a plug in for his book. He’s a Amazon number one seller, uh, with his book about these things. So tell us where to find or what the name of the book is and where they, how they can contact you. Yeah. Name of the book is the, um, seven-figure exit plan. Uh, best way to contact me is, uh, probably just directly to my cell phone. Seven zero two five zero five two seven, eight, nine. Um, my email is trent@fcbbstandsforfirstchoicebusinessbrokers.com.
So trent@fcbb.com. Right. Thanks again [inaudible] for joining us. Hopefully, uh, your listeners have got some great information on there. If you have a business, you know, the earlier you plan, the better. Um, you know, we try to do that with our clients. We want their, their estate plan include their business exit strategy Trust Attorney Las Vegas. And I can personally vouch for Trent, cause like I said before, he’s helped me sell one of my businesses and uh, he can be a great resource for you. So thank you for listening in today, Trent. Once again, thanks for being here and we’ll talk to you guys next time. Take care.
