Buy Box for Business Sales: Why One Client Cost $900K | FBO2BO EP10

Jon: 00:01
Welcome to From Burnout to Bought Out, the podcast for business owners who are tired of being the hardest working, lowest paid employee in their own company. I’m John, joined as always by Ryan. And together, we’ve spent years inside owner led businesses helping founders go from running on fumes to running a business that actually runs without them. Every episode, we break down the real problems nobody talks about, the burnout, the bottlenecks, the blind spots, and show you what it looks like to build a business that’s profitable, sellable, and doesn’t need you in the building every day to survive. Whether you’re grinding through a plateau, thinking about an exit, or just trying to take a vacation without your phone blowing up, you’re in the right place.

Jon: 00:38
Let’s get into it. Okay. Ryan, hat on, key in hand. Let’s do this.

Ryan: 00:45
Oh, serious stuff, John. Serious stuff. Watch out fish.

Jon: 00:51
You you gotta have the you gotta have the tools

Ryan: 00:56
to get to catch those fish schools. Oh, that’s terrible. That’s terrible. It really was.

Jon: 01:03
You were just telling me you met one of our listeners, and he thought we were funny.

Ryan: 01:08
Hamza from Morocco. Thanks for calling. Gave us a shout out, and I was on his podcast, everyone. So, Hamza, you have to go into the comments, tell everybody what your podcast is. But, yeah, it was about fractional leadership, and I don’t know.

Ryan: 01:25
Was desperate enough to get me on there, John. So big shout out to Hamza in Morocco.

Jon: 01:31
Well, yeah, shout out. Great. Clearly, I’m doing my job well, which is to make you look good. He didn’t reach out to me, did he?

Ryan: 01:39
No. No. He did not. He’s like, I have no intention of doing that either. That I asked him point blank.

Jon: 01:45
So He also said we were funny. So, clearly, you know, I questions question Homs’s judgment here, but that’s okay.

Ryan: 01:53
That’s one great way to add to our listener base is by insulting them, John. So for for more marketing tips, aligned.ca.

Jon: 02:07
Yeah. Absolutely. Hamzah, let me know. I can I can hop on cohost with you, ask you the hard questions, insult you live on air?

Ryan: 02:16
That you know, that’s why I’ve noticed that our subscribers go up to, you know, 20 and then down to 15 and then 17 down to 13. It’s because you insult them.

Jon: 02:26
I’m trying to insult you. That that’s what I do this for. I get the most fun out of it.

Ryan: 02:32
Absolutely. There’s a lot to make fun of.

Jon: 02:35
Yep. Okay. This week’s subject, the buy box.

Ryan: 02:39
Yeah. So the buy box, this is how people judge you in your businesses. Right? So this is a potential buyers looking at you from afar saying, do you fit this box? Are you a round peg in a square hole or or not?

Ryan: 02:58
So this is a great topic for if you ever want to sell, this is how you get judged in the the Miss Universe pageant that is for business owners.

Jon: 03:10
Paints a different picture there, but yes. Yeah. Hey. I You

Ryan: 03:14
got a good looking listener crowd.

Jon: 03:16
Yeah. I’m imagining you in a sash now, unfortunately.

Ryan: 03:19
God. Please don’t.

Jon: 03:22
I love this subject, and I’m I I know you and I, with the businesses that we assess, are regularly meeting and discussing the buy box. I think, you know, there are so many things when you’re looking at businesses and you’re you’re engaging with them to try and understand value. When you really get into the numbers and crunch them down, you have a specific set of of criteria to assess them on. That’s when we’re gonna get into this. Then you really get a a solid picture.

Jon: 03:49
So I love this topic. I’m excited about it. That’s why I picked it for this episode.

Ryan: 03:56
This is John’s topic, everybody. John’s topic.

Jon: 04:00
But I don’t I don’t get to be the expert. I just get to ask the questions. So you mentioned that, you know, if you are considering selling one day, this is why you should care. But it’s it’s not just for people that are selling. Shouldn’t the average owner be aware of this, and should they care as well?

Ryan: 04:19
Oh, absolutely. I mean, when you get your business ready to sell, it’s just a good business planning. It’s good business practice. Everything we talk about. If you have a sellable business, you’re not on the treadmill.

Ryan: 04:32
It’s not owner dependent. There’s no customer concentration. Right? You can go to little league games and dance recitals and and have a life. Right?

Ryan: 04:41
That’s why this is important is that you can build up to the things that will get you there.

Jon: 04:48
Awesome. Walk through it. Like, what does a typical buy box look like? I mean, obviously, you you just talked about, you know, how your organization could benefit from it. But what are the numbers that are in there?

Jon: 05:00
What are people filtering on when buyers are looking at things? And I and I know we’re gonna bounce ideas back and forth here because we’re looking at these every day. Yeah. What what are they filtering on?

Ryan: 05:10
So we’re gonna get into who your buyer is, but every buyer, PE firm out there, they operate from a literal shopping list. Right? It’s not like we’re we’re looking for good businesses. There really is a hard checklist. So your your business is getting judged before you even know it.

Ryan: 05:31
There they use six filters. There’s a revenue range, and I know we have an episode on revenue. Is this a vanity number? And but they are looking for a revenue range, EBITDA floor. They’re looking for a margin profile, if there’s customer concentration, recurring revenue percentage, and also if you know, how you fit within your industry.

Ryan: 05:56
Right? Most owners think that selling works like this. A buyer shows up. They make you an offer. You negotiate like the old days, a little horse trading here and there.

Ryan: 06:07
Bada boom. Bada bing. You got a deal. And that is not how it works. It only works in Hollywood.

Jon: 06:14
They sound a bit Italian there. That’s

Ryan: 06:16
Hey. Forget about it.

Jon: 06:18
That’s your your mafioso restaurant there.

Ryan: 06:22
That’s right.

Jon: 06:22
About buying and selling.

Ryan: 06:24
That’s right. Buyers are going to shop. Right? They have analysts whose entire job is filtering out companies through that checklist before anyone and senior sees the deal. Right?

Ryan: 06:37
If you don’t fit in the box, some unknown random do person kills it before you even know the the deal was dead. You’ll never get the call, and you’ll never know why. Right? It’s kinda like when you open up your business the first time. Right?

Ryan: 06:52
You open up open sign, and there wasn’t a flood of customers that came in. Right? That’s the same thing with with selling your business that you just kinda sit there wondering when the offers are going to start showing up, and you won’t know why they aren’t. Right? So by knowing the box, it’s the difference between building a business and building an investment.

Ryan: 07:14
Right? Same thing when when you when you renovate a house, you buy a house, you renovate it. It can be a home, but it can also be an investment. Right? You can sell it for more money than you bought it for.

Ryan: 07:24
So that’s that’s the thing that we’re we’re gonna be discussing today is making you aware of the box and where you fit in and how you can do something about it.

Jon: 07:35
Awesome. Yeah. And we can we can shed more light. Being buyers of business businesses, we know exactly the numbers we’re looking at. Like, if if there are numbers that ping in a certain column, you know, the multiple the purchase multiple would be one that we look at on a regular basis.

Jon: 07:52
I think you mentioned that. You know, EBITDA and the price of the business. Understanding how much or how quickly you get your cash in and out of the business as well are the things that buyers are nailed or or wired into. And those things, we put it into our buy box and I can run through some of the columns. I’ve got it up here on another screen.

Jon: 08:13
I can run through some of the columns that flush out some of the metrics that you just mentioned. But when we see those numbers we go, Oh, okay. This looks like a really good opportunity. So, They shed a bit more light on the multiple because people and we’ve mentioned this before in previous podcasts. While I pull this up and pull up a couple of other different columns, you know, the the multiple is the number one.

Jon: 08:36
Right?

Ryan: 08:36
Well, John, there’s six filters that they go through, and the multiple is a derivative of all those six filters. The multiple is the end product. Okay? So what typically happens is buyers are looking for a revenue range. Right?

Ryan: 08:53
Is your revenue going up? Those kind of things. No. What they’re looking for is each specific buyer has their own range that they’re looking for. Institutional PEs who are lower middle market want something between 10 and $100,000,000 in revenue.

Ryan: 09:08
Right? Most funds won’t even look at you if you’re less than 25,000,000. Right? If you’re below 10,000,000 revenue, you’re not on most radars at all. Right?

Ryan: 09:20
Strategic acquirers, though, can kind of flex in that lower range if there’s a synergy story and it’s strong. Right? Pun intended. Right? And then they also look at the EBITDA floor.

Ryan: 09:33
So what you’re talking about, then that’s the real gate is, you know, PE institutional companies in in that lower market tend to want between 3 and 5,000,000. There are funds that want higher. Right? And then the higher your EBITDA, the higher the multiple can be. Okay?

Ryan: 09:51
If you’re under 2,000,000 EBITDA, you’re looking at three to six x, maybe seven x depending on what’s going on here. So when you’re looking at, you know, 1 or $2,000,000 EBITDA, your buyer selection is far less. Right? And then if it’s below 1,000,000, it’s more of an independent sponsor or a search fund, and it’s definitely not going to be in a PE range. Right?

Ryan: 10:15
And so diligence will cost the same on a $4,000,000 deal as it does on a $40,000,000 deals. Right? Same lawyers, same accountants, same operational partners, but the bigger deals win every time. They’re the ones that get the most love because there’s the more action there, and the payoff’s, you know, better. 1% of deal, 2% of deal, whatever that is, $40,000,000 versus 4,000,000, you do the math.

Ryan: 10:42
Third one is margin profile. Right? And they’re really looking at how you compare to your peers. Right? If your industry is 18%, but yours is at 8%, right, they’re thinking, well, what’s broken, or what are you hiding?

Ryan: 10:57
Right? So even profitable businesses get penalized for being below comp margins. So, again, revenue range, EBITDA floor, margin, all those play into also the, you know, the the multiple. Then we get into the last three, customer concentration. Right?

Ryan: 11:15
Nobody wants the 40% customer, the client. Right? Hey. My cousin Vinny, you know, he’s 40% of my revenue. Don’t worry.

Ryan: 11:22
He’s good for it, you know, for another couple years. That’s a big risk that they’re gonna take. So if you have a high customer concentration where a few people make most of your sales, the the buyer’s either gonna walk out or is gonna be a build a huge discount on that. And that could be a multiple or two, like you alluded to. And then we’re looking at recurring revenue.

Ryan: 11:44
So this is the gold standard. This is where we can put it to the bank. There’s contracts. Subscriptions. There’s all kinds of things.

Ryan: 11:53
So if it’s above 40%, you’re you’re really attracted to buyers, so you’re gonna have a big multiple versus a transactional, the company where you always have to get another project, always have to get another project, those kind of things, those also get discounted. And the last one is that they’re looking at your industry or sub vertical. So, you know, we’re rolling up commercial HVAC companies in the Southeast. If you’re not an HVAC company in the Southeast, you could be the the the bell of the ball. They’re not looking for it because it doesn’t match their thesis.

Ryan: 12:25
It doesn’t match their buy box.

Jon: 12:27
Gotcha. Awesome. Today’s episode is brought to you by NAPCO Painting Inc, based out of Napa, California area. Full service commercial and residential painting in the kind of place where the houses cost more than your business, and the paint had better be perfect.

Ryan: 12:42
Napa’s a real place with where real people live, John.

Jon: 12:46
Right. And most of these people, real people, own wineries. That’s exactly why NAPCO fits this episode perfectly. They’re the professionals you call when you actually want the job done right the first time, not the third time after you tried it yourself on a Saturday because YouTube told you it would be easy.

Ryan: 13:03
I’ve done that.

Jon: 13:04
Of course, you have. I think we all have. The shirt told me. Here’s why NAPCO fits the buyer side of this episode too. We’re about to spend the next forty minutes talking about what buyers actually want when they shop for a business.

Jon: 13:16
Recurring commercial contracts, repeatable crews, predictable margin, real equipment, and a customer list that doesn’t all live or die on one giant account. That’s exactly the profile of strategic acquirer or roll up sponsor circles on a list.

Ryan: 13:32
Genuinely, yes. Skilled trades have been one of the hottest m and a categories the last five years.

Jon: 13:39
But you shouldn’t call them because of any of that. You should call NAPCO because your office looks like it was painted in 2004 in the meeting with your investors on Tuesday. Napcopaintinginc.com. Tell them from bought out to burnt out. All the way around from burnt out to bought out sent you.

Jon: 13:56
Quick wardrobe change, Ryan.

Ryan: 13:59
That’s right, John. I’m blaming the dog. Right.

Jon: 14:05
So that’s why you went into Irish mode?

Ryan: 14:08
That’s right. Profit first. We we do what we preach here, John. But yep, that was the quickest thing I could do. By the way, if anybody wants to adopt a dog, I’m just kidding.

Jon: 14:20
They can they can have both of ours.

Ryan: 14:23
That’s right. That’s right.

Jon: 14:25
Yeah. Well, I’m I’m glad you’re at least wearing a shirt.

Ryan: 14:29
Yeah. Yeah. Well, I just came in from the beach, so I figured, you know.

Jon: 14:34
Tough life. It’s a tough life in in yeah. In Medellin. Well, I love that t shirt too. That that one is super comfortable.

Jon: 14:42
I wear it all the time. Yeah. Yours.

Ryan: 14:44
No. No. We don’t trade. We have our own, everybody. As much as John tries to pretend, we have our own.

Jon: 14:51
We’re not that close.

Ryan: 14:52
Yeah. And we’re separated by about 4,000 miles, so thank thank god for airline trackers.

Jon: 14:58
I think it’d I think it’d be dangerous if we were closer.

Ryan: 15:01
Probably. Yeah.

Jon: 15:02
Alright. So back on track. This sounds like the buy box sounds like, really, it’s only for big business. It’s not. We know that.

Jon: 15:09
But does any of this apply to the $2,000,000 owner sitting sitting and listening right now?

Ryan: 15:15
So let’s talk about who your buyers are. Right? There is not one buyer. There is four or five depending. And so, the biggest mistake owners make is that they’re assuming there’s one type of buyer out there but there are more.

Ryan: 15:31
So, strategic acquirers. So, those are competitors, suppliers, adjacent companies. You know, The box is more gonna be a synergy fit, pun intended, customers, geography, talent, capabilities. They often pay more than financial buyers because they can extract the synergies or economies of scale that a financial buyer can’t. Right?

Ryan: 15:55
A financial buyer, again, is somebody who just wants really a printing press, an ATM machine, a well run machine. Then we get into private equity. Oh, bad name, you know, out there now. Is those are the institutional buyers that everyone thinks about paying capital and the the lesser ones and there’s a market correction coming folks. Just to let you know but private equity isn’t all evil.

Ryan: 16:19
But they do have strict EBITDA floors. They want recurring revenue. They want scalability and they use that more than a verb, right? So, it’s an actual thing for them and they have the most rigorous filter. Typically, 3,000,000 EBITDA is a minimum for their platforms.

Ryan: 16:40
Sometimes, it’s more. If you’re up in the five, ten million EBITDA range, you are definitely got a bull’s eye on your back, right? And then we have the search funders and independent sponsors, which are namely searchers, right? They’re often MBA grads, they’re raising capital to buy one business and run it. Some of them will then try to get another independent sponsor to get another company to another company, maybe they grow it up into a platform, roll it up, turn it into a portfolio, whatever that is.

Ryan: 17:10
They’re more in the small box side, right? Because they’re raising capital maybe for mom and dad, rich uncle, some, you know, accredited investors. And so they’re getting between 1 and 3,000,000 EBITDA because there is a multiple like John talked about. So, you know, there’s amount of cash going out there. They’re looking for recurring cash flow.

Ryan: 17:30
So these are the professional buyers, financial buyers I was talking about, right? Where they want the owner willing to transition out to six to twenty four months. They’re looking for a company that runs itself that they don’t have to go in there and work eighty hours a week. That’s our hope. And then we have the new fad out there and we’ve been involved with some of these folks, great people by the way, I’m not knocking this but it is the main street buyers.

Ryan: 18:00
So you can see there a lot of their ads on Facebook and all that kind of stuff where it’s really individuals leaving corporate, they’ve got some money. There’s all, you know, other small owners doing like a bolt on, right? And so, you know, they might be really well in real estate and those kind of things and now they want to venture off and and write their own ticket and they’re looking for anywhere between $2.50, 0 to $2.3000000 of SD and up, right? And we’ll get to SD in a minute, John. I know this is one of your favorite talkers.

Ryan: 18:32
And the box is about transferability and lifestyle that less about scale. And these folks are willing to actually move geographically and they wanna be in there running the business. And they think of it as I’m gonna make $350,000 a year if I put my money in the stock market when I can own my own fate and maybe grow it up to millions of dollars. Okay, and then this one, this is gonna deserve its own episode at some point. This one is an ESOP and that’s selling to your employees through a stock ownership plan.

Ryan: 19:04
There’s real tax advantages for the seller. It’s a slower process but you stay involved and definitely it is worth its own episode for the fact that it can be a tremendous fantastic thing and it can be an absolute disaster. So, a $2,000,000 business with $400,000 of clean cash flow won’t attract the PE. It absolutely attracts a main street buyer, maybe a strategic competitor or a searcher, right? So a different buyer has a different box, but it’s still a box and it’s still a checklist you’d be on.

Jon: 19:41
Right. And so, I mean, basically, you’re saying that the $2,000,000 guy is not gonna get into a PE bidding war. He’s not gonna force his value up by having multiple PE companies come in and take a look. No. Crushing news.

Jon: 19:54
He had hope, Brian. The

Ryan: 19:57
I know. Hope

Jon: 19:58
hopes of untold wealth.

Ryan: 20:02
Hope is not a buyer, John, and hope has never written a check.

Jon: 20:06
Right. Yeah. Yeah. Bang on. And, yeah, the SDE reference, like, a SDE, that that’s what we’re all in it for, EBITDA SDE.

Jon: 20:15
So let let’s talk about EBITDA specifically. Why is it the floor everybody is obsessed about?

Ryan: 20:20
EBITDA, adjusted EBITDA, recasted EBITDA, and SP walk into a bar. Right? They’re the same thing. It’s just a different way of saying things.

Jon: 20:30
It’s just gonna be funny.

Ryan: 20:32
I doubt it. Right? Why the long face? So the first confession here is that there isn’t one number called EBITDA, right? I just named them all.

Ryan: 20:42
EBITDA though stands for earnings before interest, taxes, depreciation and amortization and I just bored myself saying that. Oh my god. I’m so glad I’m not an accountant anymore. What it does is it your PNL what’s that? I have

Jon: 20:58
the title doesn’t make a difference, Ryan.

Ryan: 21:01
It really doesn’t.

Jon: 21:04
CFO, accountant, nerd, numbers nerd. No. It’s all the same thing.

Ryan: 21:10
That’s all the

Jon: 21:10
same different green shirt.

Ryan: 21:12
That’s right. That’s absolutely right. What has my life become? Well, sorry to the all all the 15 listeners now. So what your P and L spits out before anybody normalizes it is what it calls.

Ryan: 21:25
What’s normalization? Essentially, they’re making a clean playing field for everybody. So some companies are they have a a lot of depreciations. Other ones don’t. So they normalize it.

Ryan: 21:36
So that they can see across the board what that looks like, right? It’s a raw number and almost nobody buys on this by the way. On your EBITDA because there are other things at stake. So what we do is we like to call that adjusted EBITDA, recasted EBITDA or STD. It’s the same thing, different name.

Ryan: 21:55
Your accountant strips out all the add backs. So all your owner perks, one time costs, non recurring expenses. So, hey, we built a building and $150,000 we paid for it. Okay, they take that out, right? I bought a truck, for my personal use, right?

Ryan: 22:12
They take that out. So this is one number you bring to the table. And if a buyer asks for your EBITDA, they almost always mean your adjusted EBITDA. And then there’s the quality of earnings adjusted EBITDA. And so that’s what the buyer decides is real after their QOV firm has gone through every ad back you submitted.

Ryan: 22:30
This is the number you actually get paid on. And if you haven’t gone through a quality of earnings before, it is a lot of fun, right? It’s a cost a lot of money to get this done just to really come into a number that I could probably get you into within about 5%, right? Like it’s it’s it’s silly but they want to make sure that there’s no funny business going on that you don’t have a rental property going and being deposited into your business account. So, it is necessary because you know, we just can’t take the numbers word for it because there are different accountants and and different things.

Ryan: 23:03
And then SCE sellers discretionary earnings a little bit different. I call them the same because they’re roughly the same. It’s the same concept but it’s for smaller deals to roughly below $1,000,000 of cash flow. Includes owner salary as part of that cash flow because if you’re lower on that part, we wanna make sure that, you know, what would it cost to replace you? If you’re paying yourself $600,000 a year, but really we could get somebody for 150, we wanna take that difference out, right?

Ryan: 23:32
Or if you’re paying yourself $60,000 a year, we wanna make sure that it’s actually put back in at 150, right? Because you’re taking a haircut. So for a $500,000 cash flow business, the owner’s paycheck is most of the cash flow. It really is. So just making sure that it’s an honest way to measure that.

Ryan: 23:49
So if the owner says I’m at a $1,500,000 EBITDA, buyers QV comes back at one. One adjusted, owners usually get offended, right? But the owner shouldn’t get offended. You shouldn’t, you you should have run the the strokes themselves before sitting at the table and that’s the thing and a lot of these these broker firms, seller broker firms, they don’t get it right. And that’s another episode in itself is dealing with these brokerage firms.

Ryan: 24:18
So the buyer adjusted EBITDA typically lands 15 to 30% below the seller reported in my experience and that’s because there’s a multiple of things of add backs and you know, so some of the add backs that typically are accepted is, you know, one time legal fees with documentation, one time relocation, you got COVID stuff, insurance settlements, and then owners compensation above market. What buyers usually reject is your spouse on payroll who doesn’t actually work, right? Personal vehicles and personal travel run through the business. Again, I am not the IRS. You do what you gotta do.

Ryan: 24:56
We just want to get to a real number when it comes to what the real value of your your business is or a family member that your uncle Joey has been there forever paying them $150.00 a year to to, you know, do scheduling, right? That kind of thing. So, that stuff is going to be excluded. So, you know, what we want to do is build a cushion and and make sure that the the number’s right.

Jon: 25:21
Right. Yeah. Because there there’s different numbers. Right? And his is right.

Jon: 25:25
Our our ours is wrong or the buyer’s is wrong. I mean, that that’s convenient. It’s convenient for the seller. Right?

Ryan: 25:32
Well, it’s not convenient. It’s math. Right? So if you wrote off your truck as a business expense, John, the the buyer’s gonna add it back.

Jon: 25:39
Right. But generally, the truck is a business expense. I mean, you’re running a business.

Ryan: 25:44
You drove it to your kid’s hockey game on Saturday. It’s not a

Jon: 25:47
business expense at that point. I I guess I guess so. I guess it’s also a limited truck as well versus just the the lower end model. Right?

Ryan: 25:55
That’s right.

Jon: 25:56
All depends on the hubs.

Ryan: 26:00
Yeah. I put a logo on it, so therefore it’s a business truck.

Jon: 26:05
Yeah. Exactly. It’s one inch by one inch. It’s in the top top left corner of the window.

Ryan: 26:09
That’s right. Right next to the knowledge.

Jon: 26:12
Yeah. Yeah. Yeah. Exactly. Customer concentration, you mentioned this before.

Jon: 26:17
You said 15 to 20% is generally the standard line. What happens if an owner is way past that?

Ryan: 26:23
So the honest answer is that they pay for it. And sometimes the buyer will walk. Right? So let’s say, you know, here’s a true story. Again, composite industries, everything’s changed names and all that kind of jazz.

Ryan: 26:36
Right? So $6,000,000 service company, solid revenue, nice margins, buyer asked for a customer concentration report. Owner says, well, I’ll get it to you. Three days later, the report comes up. Top client is 43% of the revenue.

Ryan: 26:51
Right? We’ll call him my cousin Vinny. Right?

Jon: 26:54
Hey. Hey. Hey.

Ryan: 26:59
I used to live in Brooklyn so I could say that. Right? And so so now picture the conversation. Right? So the buyer asks, what happens to revenue if my cousin Vinny leaves?

Ryan: 27:08
Owner says, he won’t leave. He’s my cousin Vinny. Buyer says, that is exactly the problem. Right? The relationship will die when the deal is done.

Ryan: 27:17
Right? So on that deal, the cousin cost the owner about $900,000 because they had to take a haircut. One client, 43% of the revenue costs almost a million dollars. They all got done, but it was, that’s what the customer concentration costs. So, you know, what a buyer looks at at a 30% concentration, right?

Ryan: 27:43
It’s a binary risk. So if that client leaves in year one, half the cash flow disappears. That’s a real risk to the buyer, right? And so on the seller’s perspective, well, they’ve got the relationship with you, not with a new buyer, right? So they can’t go ahead and bet on future fun returns.

Ryan: 28:03
They can’t go ahead and and bet that that relationship is gonna be there because if it’s personal, a college buddy, they cannot replace you in that relationship. Right? So buyer, you know, seller beware, you know, past 20% on any one client equals you have a value creation project. Right? So you need to diversify.

Ryan: 28:21
But the good news is, is that with disciplines and a disciplined approach, twelve to twenty four months and you can get that down past the 20%, right? And the other half of this, John, that people don’t talk about and here’s a bonus for this segment is vendor concentration is also half the problem. Right. IE COVID, right? We had all our vendors coming from China and China shuts down, we can’t produce goods anymore.

Ryan: 28:54
Right? So making sure that you’re not reliant on one vendor, even if they’re, you know, you have multiple vendors and some of them aren’t as cheap, that’s a great way to avoid this vendor concentration. So I think the takeaway from this one is, you know, you gotta start now. Make sure that in twelve to twenty four months when you are really actually looking to sell or even diversify, right? Or or get out of owner dependence.

Ryan: 29:20
Sorry, not diverse enough but get out of owner dependence is that, you know, you’re you won’t have to rely on one on one big contract. You have products going and all that kind stuff, you can go ahead and take a two week vacation.

Jon: 29:32
And it’s one of the first questions that a seller asks. And and when the SIM or the seller package comes through

Ryan: 29:38
The buyer. Yes. Yeah.

Jon: 29:40
Buyer. Yep. When when that package comes through, we know. We see it. Every time we we open up that package, we look at the customer concentration.

Jon: 29:47
And and people who people who know and are aware, you see it in the customer breakout. There is some sort of report which breaks out the the the levels of their customer and the spread. And so that that immediately tells you that they’re aware of how they should be running their business and arranging their their customer base so that it it makes maximum sense for somebody coming in to buy it. You can’t hide this stuff. Right?

Jon: 30:11
It it’s it’s gonna come up, you know, in one of the first conversations because it’s one of the first things that buyers look at.

Ryan: 30:18
You’re absolutely right. And then definitely, we’ll be coming out in due diligence.

Jon: 30:22
Right. Exactly. So get ahead of it. Plan it out. Winning based off projects as well.

Jon: 30:27
You know, if it’s all project worth that work that you’re putting annual bids in for, then that also is a risk. That’s a buyer looks at that and says, okay. Well, hang on. What if this is about a handshake and it’s about the owner and relationships? And I step in and suddenly we don’t win all those those projects and those bids, and revenue drops 25, 40% because of it.

Jon: 30:49
And you mentioned $900 900,000 lost. I mean, that that’s that’s not a rounding error. Right? That’s hey. That’s a lake house.

Ryan: 30:57
Well, that’s two lake houses if you don’t put in the dock.

Jon: 31:02
Cousin Vinny didn’t even know.

Ryan: 31:04
Cousin Vinny never knows. That’s why he ended up you know, his cousin ended up in jail and had to get bailed out.

Jon: 31:10
Hey, Vinny. I thought it was Jersey. I thought Vinny was Vinny was from Jersey.

Ryan: 31:17
Whatever.

Jon: 31:18
Quick break. And this one is a company that pays Ryan’s mortgage and based on his shirt today, apparently dresses him. Wow. Look. Half the people listening just heard us describe the buy box and went, cool.

Jon: 31:32
I have no idea why I’ve fallen any of that. That’s the call. Synergy hacked the SIPA certified exit planning, fractional CFO, CMO, COO, m and a advisory services, SOS integrated financial management, basically every acronym Ryan has ever made me look up mid conversation.

Ryan: 31:50
They’re real things, John.

Jon: 31:53
I know that. I googled them. If you’re a 2 to $20,000,000 business owner and you have no clue whose box you’re in or what your numbers actually look like to a buyer, that’s the call. We are Synergy Solutions dot com. Ryan and his team, including myself, work across North America and Latin America, which means his his calendar is generally a war genuinely a war crime.

Ryan: 32:14
It’s fine.

Jon: 32:15
It is not fine. You took a call at 4AM last week.

Ryan: 32:19
It was five central.

Jon: 32:23
Time zone. Yeah. It was a time zone. We are synergysolutions.com. Tell them John sent you.

Jon: 32:30
Recurring revenue keeps coming up. What and I think it relates very closely with what we’ve just been talking about. Right? Project based work, bid based work. These are not red flags, but they’re warning signs to to buyers coming in to dig deeper and make sure that there is a a a revenue source coming in.

Jon: 32:47
Why does recurring revenue matter so much, and how does that change the picture?

Ryan: 32:52
Well, buyers are paying for predictability in this chaotic world, John. Right? Recurring revenue is the closest thing in business to a written guarantee, right? So if I have two companies, one is five, they’re both $5,000,000 One is one time product revenue, right? And the question is, will the projects repeat?

Ryan: 33:18
Did the owner sell them? Like you just said, will customers come back? There’s a lot of question marks there, right? Or if I have to continue to get new projects to fill that $5,000,000 right? That was a relationship base, those are bid based, estimated based, but those relationship based.

Ryan: 33:34
Whereas think of it as a from the buying perspective, if I have $5,000,000 and it’s in the contract of recurring revenue for the next two years, whether it’s subscription, service contract, maintenance, whatever. There’s a there’s a contractual obligation there, a commitment that I can go ahead and bank on. Right? And I can literally go to the bank and say, I have $5,000,000 of recurring revenue coming out of here. Can I borrow some money?

Ryan: 33:59
Can I get a lot of credit? Can I? Nope. Take on this crane or you know, buy the screen or whatever it is, right? So.

Ryan: 34:05
Yep. The thing is is that transactional service businesses, they tend to trade at three to four times EBITDA and that’s hype by the way, a well run organization, right? Same business with 50% plus recurring revenue can can get between six and eight times. That’s double. Right.

Ryan: 34:27
Same EBITDA, double the multiple. Right? Yeah. And so let’s make a critical distinction. Recurring revenue is not the same as repeating.

Ryan: 34:37
Recurring revenue is contracted, signed paper, subscription, a retainer, right? Repeating revenue is customers always coming back, but they don’t have a contract, right? Buyers will pay double for the multiple for recurring, not repeating. Right? So one of the biggest things that you can do in your organization, the highest ROI value that you can create is get recurring revenue.

Jon: 35:07
Right. And there’s an upside with recurring revenue of being able to tack on upsell and and change the program to to increase the amount that you’re you’re charging and billing out with recurring revenue and

Ryan: 35:22
Oh, sure. Look look at your Amazon Prime account video. Right? For $14.99, you can watch the videos and TV shows and stuff like that with ads. For 1899, you can watch them without ads.

Ryan: 35:37
And I remember when you had Prime and you didn’t have ads at all. So they just changed the recurring revenue model, right? But what they did do is they just edged up just a little bit. Who’s gonna miss $50 a year to not have to watch a minute and a half of ads?

Jon: 35:52
Yeah. Or you can listen to us for free.

Ryan: 35:55
That’s right.

Jon: 35:56
We plan to increase our fees by 15% next year.

Ryan: 36:01
Yes. So zero times 15% folks, Still zero.

Jon: 36:05
Still still zero. The value that that people get from our conversations. That’s right. One more top tip because this is a thing. Transferable contracts.

Jon: 36:20
Because if you’re going to set up whether it’s project based or recurring revenue, one of the things that buyers look at is, are those contracts transferable? Buyers wanna come in, and I don’t wanna segue off this too deeply, but they wanna come in generally, they want an asset purchase because if you do a share purchase, you’ve got to buy all the litigation that potentially exists. You gotta buy the debt around that business as well, and it’s much, much cleaner to buy the business based around just an asset purchase. However, when you when you do that, those contracts need to be transferrable to the new organization. So it’s a very simple one line addition to any contract that this contract is transferable.

Jon: 37:01
People may look at that level of detail, but they they generally don’t have an issue with with it, and it makes the sale a heck of a lot smoother in in the future.

Ryan: 37:12
Well, I think we have a couple episode ideas here. John is walking people through the sell process from from listings, dealing with their brokers to LOI, to due diligence, to what asset versus equity sale is and and all that kind of stuff. So I think I think he hit something for future episodes.

Jon: 37:31
Did I did I sound smart for once?

Ryan: 37:35
At the surface.

Jon: 37:37
Bought borderline.

Ryan: 37:38
And then he kept talking.

Jon: 37:40
Yeah. Hey. Marketing service.

Ryan: 37:46
When I go like this, mean, stop talking.

Jon: 37:48
Yeah. You sounded great there, John. Just be quiet now. No. It it’s we know this.

Jon: 37:56
We do this all the time. So yeah. Let let’s move on. How does an owner figure out which buyer’s buck box they’re actually in?

Ryan: 38:03
So I think there’s three ways. There’s one trap and you have to be honest. Okay? So let’s do the trap first, right? Do not make a sell side M and A adviser your diagnostic, okay?

Ryan: 38:16
So, this is gonna be an episode in itself but essentially saying that, you know, when you go to a sell side broker, they’re gonna pump your number up because they’re gonna tell you that their fee is in there. They’re gonna give you numbers that look amazing to you, right? And they’re gonna pump you up because their whole thing is that they want your business so that they can sell your business and make a commission off of it, okay? They’re gonna help you through the process. So don’t get me wrong.

Ryan: 38:43
Sell side advisors are fantastic. We are a sell side advisor. We’re not a broker. There’s a difference there too. I think we should talk about at some point, but the higher the number they can get you, the higher the fee.

Ryan: 38:55
It’s kind of like your real estate broker, right? The more they can sell your house for, the higher the commission that they make. And so, yes, they’re on your side, but they also need to make some money there. So I think that it’s a very optimistic number. It’s not necessarily the truth.

Ryan: 39:11
And so when we look at some of these sims for on the sell side and the buy side, you know, we go and diagnose them and and dissect them and 90% of the time they are not within the ballpark at all. Right? And then you’re going, you know, the trap is that you’re being told your business is worth $2,000,000 when in reality a buyer will come in at about 1.5. That’s a big hit. Right?

Ryan: 39:37
And that’s a big emotional thing. So so that your baby’s not worth as much as you you’d like

Jon: 39:43
it to be. Okay?

Ryan: 39:44
So that’d be another episode.

Jon: 39:46
The the the the timing’s important on that though. Because if you’re if you’ve an inflated sense of value and, you know, the numbers come in, it hits people’s buy box, they’re interested, and your immediate reaction is disappointment, and you you are you’re already not interested in what the buyer’s offering, you miss that opportunity. Right? Like, people are people are looking for a long time before they they reach out to make a perk purchase. And so you might actually miss the opportunity right away because you’re you’re not interested and your your sights are set too high.

Jon: 40:17
So I think it’s an important point to make. This isn’t just being negative about brokers. It’s about creating the right opportunity at the right moment, and you you wanna have you wanna be level set right from the start.

Ryan: 40:28
Yes. Absolutely. So good point. Wait. That’s one for John this week.

Jon: 40:32
So That’s two. Two. I just made one earlier.

Ryan: 40:35
I know. Half a point on that one.

Jon: 40:37
Like, brownie points for the wife. It makes you so freaking long to earn your brownie points, and you lose them just by doing just what you forgot to close the door, and all your brownie points have gone. The same system with you.

Ryan: 40:50
Yeah. Well, know, hey, whatever you done for me later. All right, let’s get back into this.

Jon: 40:55
I’ll be quiet. That’s what I’ll do for you.

Ryan: 40:57
Thank you.

Jon: 40:57
Let’s go.

Ryan: 40:58
All right. So let’s talk about diagnostics, right? So one is you gotta talk to a certified exit planning advisor and hint, I’m a CEPA, right? That is the gold standard. They’re trained.

Ryan: 41:11
Some of us are trained in value acceleration methodology. Those are the fractional CFOs that have the CPET designation. The rest of them are wealth advisors and estate planners and attorneys and those kind of things, but they will help you get into the community is what I’m saying. So we want, you know, if you want to get that 1,500,000 to 2,000,000, right? Talk to a value acceleration person that is a certified exit planning advisor, right?

Ryan: 41:39
And a lot of them are not compensated on sale price, although there are some success fees as well. Can help you get tell you which box you’re in based upon multiple factors like we talked about and you know, even if you’re a five, ten, fifteen years out, it’s worth having the conversation because again, getting yourself into the right buy box is good business planning, okay? So, talk to somebody who knows. Second one is, look at the recent transactions in your sub vertical. So, you know, there’s a bunch of these.

Ryan: 42:13
The biz buy, Sell, Axial, PitchBook, there’s trade publications. Talk to talk to some of your friends who are in the same industries. But again, we talked about this in a in a previous episode as watch out for the person who sold for 6,000,006 X, right? That’s not might not be your reality right now and you know, note their revenue which is the vanity plate that we put on there but more importantly, the EBITDA, who they bought to bought, who bought them, you know, what their rough multiple was, those kind of things. So, you know, buy them a beer.

Ryan: 42:48
And I’m an M as in him or her, right? A beer and you know, and and talk reality, what happened? Three is I think you need to have a very honest assessment with your, you know, with your baby. You know, is it ugly with some more? Is it beautiful?

Ryan: 43:06
And there’s a couple things we gotta we gotta figure out. Right? So go ahead and do this exercise, right? What’s your revenue? What’s your adjusted EBITDA?

Ryan: 43:13
What’s your gross margin? What’s your customer concentration? Do you have recurring revenue? If so, what percentage? This is the most honest thing is how dependent is it on you, right?

Ryan: 43:24
Do you have a leadership team that can make the decisions without you and you can go away for two or three weeks? Or is it that you can’t even leave an afternoon, right? So, let’s be honest with that and then, bonus option is a fractional CFO with M and A experience can do this diagnostic for you, right? So, and if there’s Sipa, right? Even better.

Ryan: 43:45
So, you know, you get the same value, the sell, no sale price bias for you, same conversation, They might do an hourly billing. There’s no contingent on that and they can tell you where they’re at, where you’re at. So, you know, I think the worst thing you can do is assume that there’s going to be a bidding war when your numbers are are saying elsewise. Right? So let’s make sure that you’re not thinking about the wrong buyer and focus on the one that you are, and let’s make that attractive to him or her.

Jon: 44:17
Mhmm. And and start it. Start the process. Even if it’s doing some of the things yourself because it it it’s not that hard, right, to to at least get data on some of these points, but then reach out to professionals. For somebody who isn’t in looking at being in buy boxes yet, what’s a realistic time to get into one to get in front of the right buyers?

Ryan: 44:38
So this might sound shocking to everybody out there, but it takes three to seven years. Right? And the three to seven years is kind of like the exit planning standard, but really it comes down to a couple things, right? So let’s take an example. If you have customer concentration, right?

Ryan: 44:59
And you wanna drop Cousin Vinny from 40% to under 20%, it’s gonna take you one or two years, all right? If you don’t have a lot of recurring revenue and you wanna grow it from say single digits to 40%, that’s gonna take you two to three years to model it and to get it out there, right? Your owner dependency can materially reduce. But again, we talked about this in previous episodes, it’s about trust and making sure that people have the tools to be able to make the decisions so you don’t have to decide what’s up for lunch every single day, right? And that’s gonna take, you know, eighteen to twenty four months, right?

Ryan: 45:37
And then we have to look at your margins, right? And so where are you at in the industry? Where should you be? That’s not an everyday shift where we’re just gonna raise our prices by 25% and then we’re gonna fix our margins overnight. We would, we’d be out of business, right?

Ryan: 45:52
So, if we do it in a focused fashion, I think one to two years to get there to where we really wanna be and the more we work on it, the higher you are with the industry, right? We wanna make sure that your books are compiled and reviewed to be audited, right? And that takes a couple years to get there, to get the close process down pat and to get everything ready on time, right? We need to make sure that you have a leadership team and a management that’s built to get you there, right? So that they can make the decisions that you have a good marketing person, a good finance person, operations, the whole shebang.

Ryan: 46:26
That might take a couple years to find that talent and to to groom them and and to get them. And then, you know, and then we need to make sure that when all that stuff is happening at once, one thing will happen is that your EBITDA will grow, right? And so, sometimes, if you do all that stuff, it could grow to two to three times during that three to seven years depending on how quickly you can get these things on board. So now we’re not talking a $1,000,000 company, on the bottom line, we’re talking three. And now we’ve just gone from main street buyer to now peaking the interest of strategic buyers and PEs and institutional buyers.

Ryan: 47:06
Now, we’re talking a completely new multiple that John had brought up, right? And by the way, when you take away your own independency, you have a management team, all that kind of stuff, guess what? You can go spend three weeks in The Bahamas enjoying your family. And so now you have options if you wanna sell or not or whether you wanna continue to do this. So, if you stack three or four of those, it’ll take, you know, three to seven years to get there.

Ryan: 47:30
If you get all of those going, your multiple is gonna go through the roof. People are gonna be wanting and beating down your your door to to buy you.

Jon: 47:40
Yeah. Turns into a competition at that point. That’s that’s what everybody buyer wants.

Ryan: 47:45
And is it easy? No. Is it worthwhile? Yes.

Jon: 47:50
Yeah. Like $900,000 payout. That that would be great. Yes. Yeah.

Jon: 47:56
It’s your lake house with a with a dock.

Ryan: 47:58
That’s right.

Jon: 47:58
I’ll make it can make a dock in a weekend.

Ryan: 48:01
Well, think about that, John. If I get an extra couple million dollars, I can have two lake houses with a dock. Right?

Jon: 48:07
That’s great.

Ryan: 48:08
Yeah. Side by side. So your in laws can stay next to you all the time. Everybody’s dream.

Jon: 48:15
That’s that is well, actually, our our in laws are on the same lake. A suitable distance away.

Ryan: 48:23
Yes. That well, that’s the key. Suitable distance away.

Jon: 48:27
Yeah. Yeah. Exactly. What’s the biggest mistake owners can make around all this? Waiting.

Jon: 48:32
I know what you’re saying. Yeah. I knew you’re gonna say it.

Ryan: 48:34
Yeah. Waiting. Wait until they wanna sell. And then they’re like, oh, that’s all it’s worth? Right?

Ryan: 48:42
You’ve gotta give it time. You’ve gotta do a self evaluation now so that you can start planning on that. Well, I’m tired and, you know, I just wanna get out of this thing and, you know, two years max. Fantastic. Start working on it now because you’ll be better off in two years than you are now.

Ryan: 49:00
Right? And that’s the thing. So if every year that you build towards this, you can probably add high 6 figures, maybe 7 figures, depending on the size of your company. So is it worth waiting a couple years to bring home millions of dollars? Right?

Ryan: 49:19
That’s that’s the thing. So I think that it it takes time, you know, daily decisions to weekly decisions, to quarterly goals, to annual goals, to your three year, five year, seven year goal. They all go hand in hand, right? So, yeah. So, that’s the biggest mistake is that not giving yourself enough time, not making this a focused effort.

Ryan: 49:42
Right? Because when you make this a focused effort, your business is just gonna run better. You’re gonna be more profitable. You’re gonna be happier. Your your your life is gonna be better.

Ryan: 49:52
Your wife will drop off tea in the middle of an episode and you won’t even care.

Jon: 49:55
Yeah. No. You just you just kinda brawl with it. That’s great. Last question.

Jon: 50:00
What are what what should owners do this week? What are the first steps here?

Ryan: 50:05
I think three three moves gonna take you an hour each, so you’re gonna get some homework but I think it’s gonna be, you know, time and money well spent. One is, write down your actual numbers on one page, right? What’s your your trailing twelve months revenue, right? So, take the last twelve months, trailing twelve months adjusted EBITDA. So, you’ll have an EBITDA or you’ll have a net income, get into an EBITDA, and then, come on, we’re not the IRS, what’s the adjusted number there?

Ryan: 50:33
You know, what’s your golf club fee? What’s your, you know, fishing boat in there, that kind of stuff. Take those out and that’s all we really care about, right? Your gross margin, right? What is it?

Ryan: 50:43
So, your top customer at as a a percentage of revenue, what’s your recurring revenue as a percentage of revenue, right? Do your owner just this dependency score, get six numbers, one page that’s done in one hour. Two, Google three recent transactions in in in your industry, right? Note the revenue range and the buyer type. You know, that’s your comp set.

Ryan: 51:09
That’s where you live in or you don’t, right? And three is book a thirty minute call with a Sipa or a fractional CFA or a CFO or somebody that you know that’s in the M and A space that doesn’t have a vested interest in that. So, don’t go to a sell side broker, right? Because then, you’re on their radar. Go to somebody who maybe has been through it and kind of, you know, show them your numbers and ask, hey, which box am I in?

Ryan: 51:36
You know, which which box am I close to? What what do I need to do to fix this and to to get on more list because more demands means a higher price for you. When you have a bidding war, that’s when you can get a higher price. When you have one person in the market willing to buy you, you’re gonna get the low ball or their offer and and and that’s what you’re gonna take. So I think, without that, you’re building in the dark and, you’re hoping that someone will notice you.

Ryan: 52:01
So go ahead and do these things. You’ll be well worth it. And why don’t you, you know, give us a comment on how it went or send us an email and we’ll we’ll we’ll let you know.

Jon: 52:14
Yeah. We I mean, clearly, we love this stuff. This is almost a double length episode just because we really love the detail here. Like like to see how it goes because we’re we’re super interested. So, basically, six numbers, three Googles, a phone call, a cup of tea, and that’s the whole show.

Jon: 52:33
That’s it. Took us took us about forty minutes to forty to fifty minutes to say it.

Ryan: 52:38
Alright. So the takeaway, John. Takeaway. So just like when you open up your shop, I, buyers don’t accidentally find you, right? They’re gonna filter you.

Ryan: 52:50
They’re gonna look through their revenue range, EBITDA for margin profile, customer concentration, recurring revenue, and if you’re the industry fit, right? Six numbers decide whether your name is even makes it onto a list of some numbered employee financial analyst that will take it and they actually look into it a little bit more, right? It’s pretty scary. But we what we wanna do is build towards someone’s box on purpose. It’s gonna take three to seven years of focused hard work, smart work before you want to sell.

Ryan: 53:22
And when you when you do that, you’re gonna sell for a lot more than you will today. And and stop being the seller waiting for the call. If you build it, they will come. Awesome. That’s a wrap.

Ryan: 53:34
Excellent.

Jon: 53:35
That’ll do it for this episode of From Burnt Bought Out. If anything we talked about today hit home, do us a favor. Share this episode with another owner who needs to hear it. And if you’re sitting there thinking they’re talking about me, good. That’s the first step.

Jon: 53:49
Head to the show notes and book a free triage call with our team. No pitch. No pressure. Just a real conversation about where you are and what’s possible. You can also find us on LinkedIn and at wearesynergysolutions.com.

Jon: 54:02
New episodes drop every week. Until next time, stop running the treadmill and start building something you can actually sell.