March 29, 2023

EP 77: Frequently Asked Questions - Volume 4

EP 77: Frequently Asked Questions - Volume 4

Every quarter Ed answers the listener's questions. This quarter's questions: Questions/Topics: Know what you are selling How are non competes useful in business sales What are books I recommend about building value? Checklist of things sellers need...

Every quarter Ed answers the listener's questions. This quarter's questions:


  1. Know what you are selling
  2. How are non competes useful in business sales
  3. What are books I recommend about building value?
  4. Checklist of things sellers need to think about in due diligence


Ed Mysogland, Host of How To Sell a Business Podcast

The How To Sell a Business Podcast combines 30 years of exit planning, valuation, and exit execution working with business owners. Ed Mysogland has a mission and vision to help business owners understand the value of their business and what makes it salable. Most of the small business owner’s net worth is locked in the company; to unlock it, a business owner has to sell it. Unfortunately, the odds are against business owners that they won’t be able to sell their companies because they don’t know what creates a saleable asset.

Ed interviews battle-tested experts who help business owners prepare, build, preserve, and one-day transfer value with the sale of the business for maximum value.

Ed is the Managing Partner of Indiana Business Advisors. He guides the development of the organization, its knowledge strategy, and the IBA initiative, which is to continue to be Indiana’s premier business brokerage by bringing investment-banker-caliber of transactional advisory services to small and mid-sized businesses. Over the last 31 years, Ed has been appraising and providing pre-sale consulting services for small and medium-size privately-held businesses as part of the brokerage process. He has worked with entrepreneurs of every pedigree and offers a unique insight into consulting with them toward a successful outcome.

Connect with Ed: LinkedIn | Twitter | Facebook



Ed Mysogland  00:00


Hey, everyone, thanks for tuning in. So welcome to another episode of how to sell a business podcast. This is a show where I interview buyers, sellers and other professional advisors on what makes a business saleable and maximum value. So I'm your host, my name is Ed Mysogland. And I have over 30 years of experience in business sales, business valuation and Exit Planning. So on today's show, we're going to do frequently asked questions I get I compile, I compile a list. And once we get to critical mass, I start looking at, you know, are there some consistent themes. And then I compile them and we make an episode.


So So today, like I said, is going to be about frequently asked questions, and we'll get started here in a second. But if you want more tips about how to maximize the value of your business, you can follow me at Twitter for the podcast, handle at cellar business pod, S E ll a bi Z pod, or you can follow my personal Twitter account which is at Ed miso m y. So and as always, you can you can certainly sign up for the newsletter. And that's at how to sell a business And we'll have a link in the show notes. So okay, we'll get started with our first question. So this first question is, is kind of a horror story. But it's a it's a challenge for a buyer that was working with the seller, and at the 11th hour, They're retreating as a result of pulling, pulling assets out of what is being sold.


So so the question is, more so to the sellers, of being clear on what you're selling. And most of the time, we need to establish what types of assets are going to be sold with the business. And so there's two types of sales, there's a stock sale, and there's an asset sale, when you have a stock sale, everything, everything on the balance sheet goes right 100%, all the cash, everything, everything goes. And there's not a whole lot of discussion other than the integrity of the of, of what is being transferred from buyer to seller. And then you have an asset sale. So in an asset sale, you'll remember that, and I've talked about it before that the buyer has to sign or pay two checks. All right, two checks are written. The first one is to buy the business. And what does that mean? That means that under an asset sale, it's buying the tangible and intangible assets.


So the tangible assets are the the equipment, machinery, furniture, fixtures and equipment, inventory, what creates, you know, all the tangible stuff. The intangibles are just the the things like the goodwill, the customer list, the reputation, the phone number, the domains. You know, the internet presence, the social media handles, those are all intangible assets that go with the tangible and intangible assets under an asset sale. And the second check that the buyer writes is for working capital. So that those are the two types of transactions how they work. But now let's, let's look at it from the standpoint of an asset sale and you start pulling out assets that are material to operating the business. Recently, we had a similar situation where the guy's like, you know, I'm taking my pickup truck with me. Well, the pickup truck is the one that does the estimating. So he drives around does the estimating for for the business. And at the end of the day, the whoever comes in is going to need Some sort of transportation in order to fulfill that person's role, or the owners role in this case. And so if you're going to take that asset off of the balance sheet, then you're going to have to have the, the seller is going to have to concede on value, because the buyer is going to have to pay in order to, in order to have, in this case, another vehicle for that person or himself to estimate those jobs. Same thing, we see this a lot in manufacturing, where there's a either there's a dye, or there's some sort of some sort of piece of equipment that is jet that has been developed, and they want to take it with them. But you know, they say, Well, look, I'm not going to be I'm not going to, I'm going to I'm not competing with gonna compete with you. Well, you know, if I'm the buyer buyer is sitting there saying, Yeah, I'm not really certain I buy, I buy that, but but for for the sake of this conversation, you know, that particular asset is what generated the revenue, which subsequently generated the profit, which subsequently generated the value. And when you put all of that together, and you start removing those things, there's a value penalty. And so, so as I'm talking to specifically sellers here, you can't just pick and choose assets that come off of the off of the balance sheet, without adjusting value. And in this case, I would first adjust the income, like if you're going to take, if you're going to take a piece of equipment off of the balance sheet, you need to take off the revenue and the related expense from the income statement.


So you're comparing apples and apples, anything can be done. The issue that is always the problem is transparency. You can't wait till the 11th hour to say, look, I'm going to, you know, take X, Y and Z with me. And then the buyer, all of a sudden is like, Well, what else is this guy taking with him? And how is that going to affect the business. And just so you're aware, the buyer, a confused buyers not going to buy, if you start if you at the 11th hour, you start pulling things off of the asset list that's been acquired, you chances are you are going to get in a situation where the buyer is going to retrain and rightfully so they wait waiting till the end to to come up with the conclusion of this is not going with the businesses is in its poor form. So if you are going to start taking things off of the balance sheet, or they're not going to be included in the sale beyond, you know, your personal assets, of course those go you need to disclose that upfront. And in doing so, you'll be miles ahead. All right, the second or Yeah, the second question that that was asked had to do with noncompetes. And whether or not this person had had heard that non, there's going to be no more non competes. And so that is that's a considerable issue when selling a business. So anyway that I dug a little bit. And let me share what I found. And I'm not an attorney, I'm only playing one here on the internet.


Please seek your own advice as it relates to this kind of thing. So from the March 2023 General, or today's General Counsel article about the FTC banning non compete agreements. So the FTC defines a non compete agreement as contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person or operating a business. After the conclusion of the workers employment with the employer. The proposed rule exempts any non compete agreements that are entered into a person who is selling the business or ownership interest in a business when the person restricted is substantive, who is a substantial owner or member of the business sold? And so that pretty much rules out just about every type of small business being excluded from the provisions of non competes. So let's talk a little bit about the non competes what would what do you what should you anticipate? Well, the first thing is you got to define what the non compete is about Alright, so you need to know what what are you being prevented from doing is it soliciting customers is geographic area is it, you know, you can't talk to anybody in the industry that might want to utilize a, you know, a service or product that that that the business that you're selling, has or does. The next thing is, you do want to be in a position that, you know, if you're not ready to retire, perhaps, you know, we see a lot of business owners that go into consulting. Again, it's back to transparency, you know, what is it that you're going to do, you know, if you're going to serve, serve on the Board of another company that's competing with the company you're selling, naturally, it's going to create some heartburn from the buyers, that that does not, if you're going to lend your your history and your experience to somebody that can adversely affect the company you're selling, it's probably not going to go very well. The number of years, it tends to be it tends to be a two to three years. And then we've seen some five years, but the majority of time most people are pushing back, and you'll see the noncompete for, like I said, two to three years within a particular timeframe, or between a geographic area.


But we're not seeing much, much greater than that. And then, you know, the last thing I think, is defining who who are we competing? Who are we preventing you from competing with? And when I say that you have a customer list, you have a supplier list, you have people that you've done service for? Are you carving out those particular people? Or you are again, back to are you carving out an entire industry or the entire, you know, what are you what are you doing? Most of the time, we're seeing that the buyer, the buyer that's pushing back and saying, Look, I'm not, I'm not willing to let the seller compete against me on any in any way, shape, or form. Most of the time we see sellers, they're running from their business, they are they are done, and they want to retire and they want to move on. But in the case where we have buyers that are I'm sorry, sellers that that perhaps aren't totally done. It's like said, it's a matter of transparency on what you plan to do next. And if you'll remember, when we talk about transitions, I mean, it depending on the business, you should anticipate, you know, following the sale, you're going to be with that business from three months to perhaps a year, perhaps a year, in helping that business transition from point A to point B. During that time, you can you can, you know, you'll have a non compete in place, certainly. And if that the provisions of that non compete need to be changed, you know, once you collectively you and the buyer collectively know what your next steps are. You might be surprised at what somebody's willing to do. Once they understand that, you know, you're not interested in in building, you know, going out and building a separate business to compete against them. It's interesting, I won't I won't say that. We we haven't seen that in the past. We have you know, unfortunately, if, you know, there's some bad bad actors out there, chances are we'll end up getting dragged in, or at least our information that we that we use to sell the business will get subpoenaed. And, you know, there are bad actors. And and it behooves you to have an attorney that puts together if I'm a buyer, it behooves them to put together a, a, a, you know, a non compete, that's tight, and that you that that you as the seller aren't going to compete against them. And if you do, and if that buyer does, or the seller, the outgoing seller does, indeed compete, they should expect to be sued. Now I can tell you does it doesn't happen very often most of the time. If if the buyer smells that the seller is going to perhaps not subscribed The integrity that is expected, a buyer is not going to buy and the seller just needs to understand that that if that's the game you're playing, chances are someone's going to structure a deal that either is going to prevent you from doing so. Or they're, they're going to be in a position following the sale to sue the pants off. Alright, that's question number two. So, I often get asked different books, or podcasts, or different things that a seller or a buyer can use in their acquisition, search or preparing their business for sale.


All right, so here are my three. My three books, I'm gonna do books this time. First one is built to sell. This is a this is a great book from John Warrillow. About how to build a saleable company? And you would think that, yeah, let me back up. I think John Warrillow has done more for the value community, then any business appraiser, I mean, I stack him up in the category with Shannon Pratt, who is the godfather of business valuation, and I'm telling you the work that John does, with the value builder system, and it, it helps business owners understand what they have, and what a buyer is going is looking at, and how these different eight drivers of value can affect business value. And it the funny thing is, it's, I don't want to say it's not hard, everything's hard as it relates to working on your business, but what, but what is really telling is that you can understand what creates value in your business, and then choose to work on different drivers that can influence the value. And I can, I'll give you, you know, the short, the short version, and everybody every seller has probably heard this 100 times, is that if you are the business, you know, there's there's somewhat of a value penalty. If there's not, and there's nothing wrong with it. By the way, there is absolutely nothing wrong with you being you being the owner operator of your business, it's creating a great lifestyle for you. And that is not a problem. If you want to increase the value far beyond what where you're at, you make it into a business that can operate without you. Simple as that. And then there's like said there's seven other drivers that that you can turn those levers and increase the value and what I what it distills down to is predictability. A business that is predictable will be worth more because the risk is less and when risk is less value is more so Yeah, John Warrillow Yeah, built so Gino Wickman traction.


Traction is another great book, um, you know, the EOS system and systems like that. Anytime you're you're you're you're creating an environment where there's accountability and processes and and various different means for an outsider to come in and understand the business that the here are goals here are things that we're going to achieve and we're taking step by step by step on how to achieve them. And then there's accountability markers in order to achieve them and, and Gino Wickman with traction has done a great job in introducing that to that to the to the masses. And I think, I think when you to my knowledge, there's not any empirical evidence on this, but boy, I would sure love to know the how much more valuable an EOS driven business is than one without. And so anyway if you know anybody that has done any of those kinds of studies, let me know I would love to include that in in a future episode. The last thing is more buyer specific but you know, good. Good defenses. And was it a good offense is a is a are good defense. A debate favors Strike that. So the next business sorry, strike that again. The next book is predominantly about buyers, and that's the Harvard Business Review Guide to Buying a small business. And I share that I know this is how to sell a business.


But part of what I wanted to share is that this is you see this, this is on colleges, this isn't, you know, and all of the entrepreneurship through acquisition meetups and, and, and books that are being purchased on Amazon, if you look at how many of these books have been purchased, I mean, it's crazy just to see, you know, how many people are using this as their guide to, you know, to, to buy a business. And so it is, if I'm a seller, this is a great book to, to know, what the buyer is looking for, and what is expected for me as the seller for to give to that buyer or to share with the buyer. And so, I refer to this book a lot to a number of different people, I guess, lecturer at one of the local universities, and this is one of their required readings. And it's, it is, it is a great book. And so if you're buying a business, that is that is it, I will have links to those three books in the show notes. And we'll move on to our next question. So the next question is about some legal issues. And like I told him, I'm not an attorney. And I would always tell you confer with an attorney about some of the finer points of anything legal, whether you're on the buy side or the sell side. Everyone needs representation. Always, always, always. So but I did make kind of a checklist of things that you need to as a seller, the things you need to keep in mind. So the first thing is, you got to leave? And again, these are legal matters, how are you going to, to control your confidential information? Whether that's if you're using a full service brokerage, like ours, or you're doing it yourself? How are you going to control? Or how is that person going to control the the release of the information? You know, are they going to have a, you know, certainly they're going to have a confidentiality agreement, what kind of qualifications are being done? You know, before the release of that information, if it's a competitor, you are you reviewing who that competitor is, and what potential damage that can be, can be done. From our standpoint, you know, we spend just a ton of time educating buyers on the damage that can be done. If they're idiots. And I, when I say it is that they choose to be they choose to breach confidentiality, they don't know, the especially first time buyers, we talk a lot of first time buyers out of business, just simply because they don't understand what they don't understand being head head, you know, being CEO and head janitor at the same time, you know, that they just think it magic things magically happen, and it's just not the case. And so like I said, we talk a lot of people out of it. So you want to control that information.


Second, you need to understand the type of sale that is, you know, that you're going to have, your accountant will tell you you want to stock sale, I the buyers side is gonna say you need an asset sale. And you know what is right, it just kind of depends on the business, but you need to keep in mind that there, there are different types of sales and one may be advantageous to you than more advantageous to you than the other. And so you just need to get your arms around, you know, what, what is best for you. And what's the what is likely that the buyer is going to agree to the next thing and I touched on this earlier is you know, what are you selling? You know, these are the tangible and intangible assets that are going to be sold in my business. And you just need to to a detailed list to share with the buyer but you have to have some sort of clear understanding of of what you're what you're selling and certainly don't wait till the last minute In order to do so if you have any kind of intellectual property, you probably need to, I don't want to say, get a separate appraisal, but you know, there's people that do IP work, it's certainly expensive, if you need a referral, I'm happy to do so. But if you do have some, some bigger, if your business is, is comprised of all intellectual property, pens and different uses, like that, we need to probably get our arms around what you have, and, and probably engage an additional party to make sure that we're we all understand value and, and next steps on how we're going to, to sell it. Now, next, we, when you do sell a business, and well, we'll talk about like installment sales and earnouts and different techniques that that buyers use in order to sell the business, but you have to be in a position to you know, I always say if you're going to be the bank, you you, you deserve all the rights and privileges of a bank.


Now, if there's the SBA or other other entities, other banks, you know, they're going to take a senior position to yours, but nevertheless, you need to be in a position to, to size up how if you are going to be carrying any kind of seller financing in any form, what's the likelihood you're going to be able to collect that. The next thing is, and we talked about this, too, is the non competes. Alright, so what is it you want to do? I mean, if you're really going to retire shouldn't be an issue if you're not quite ready to retire. Yeah, you have a, especially if you have like, like me, I've got 30 years in, in the business brokerage? What if I left, you know, this is all I really have done. So I know a lot of a lot of things about this industry, that probably are pretty valuable to somebody else. So what's the likelihood you, you could stop me from doing so. But my point is, that's the, but I'm not ready to retire by any means. But my point is that, you just need to be clear on, you know, some idea of what you're going to be doing. And certainly understand that plans change, and transparency always wins. And the all parties certainly understand that. The next thing is, you know, we will have an attorney on talking about representations and warranties. You know, for for the short version, you know, representations and warranties are basically what you are saying the business has done, right. So books and records taxes have been paid, all these different things have been done. You know, I've only listed a couple of them. But, but nevertheless, you're representing a warranty, that, you know, essentially all the things that have been shared are true and accurate. All right, and in the event that, that it's not, you know, there's recourse and I can tell you, from a small as a small business person, you know, when I say small, you know, sub 10 million purchase price, you know, you're talking about a buyer, who is going to, to use even if they have all the money in the world, they're still going to put some level of seller financing out there. If for no other reason, that they have your attention, if something in your reps and warranties does not check out post sale. So So my point is, when you're going through, in from a legal standpoint, you need to be sensitive to what, you know what those reps and warranties are saying. And, you know, are you are you? Are you in compliance with them? So, pay attention to reps and warranties. And then lastly, you know, you know, we see, you know, especially, you know business owners that have been been in the business for a long time. You know, they this is how we've done it. And the funny thing is that sometimes yeah, there's some, some laws and some ordinances that have changed over the years that they don't know about, and it only and it only comes to light when we start doing and due diligence that oh, you know, I didn't know.


So it would behoove you to be in a position to understand, you know, some of the, you know, are you in compliance with OSHA? Are you in compliance with the the local and state state compliance laws? Those of you that would those would be real helpful to know, before you get into due diligence. So that's kind of my short list of of legal items that you should kind of get your arms around. I hope that one helped. All right, next question. Okay, this last question for today is about who, who are the buyers for my business. And they kind of gave a specific, this is the type of company I am, this is my size. And I thought it would be more helpful if I kind of tailor this to to the broader audience. So what types of buyers let's start with the first kind, under a half million dollars, and this by the way, this is this is from the m&a source. And I can tell from I can tell you from our practice, we got 2200 deals under our belt, and this holds true but they've done a study from across the country. So let me just share with you a little bit about, you know, who's buying.


So under a half a million dollars, it's first time buyers 50% first time buyers, 28% are serial entrepreneurs, and then the bounce are our existing companies, most of them are looking to buy themselves a job. And that Billy, this is something that's really telling is that 61% of those people are within 20 miles of the business that they bought. So between a half million and a million in purchase price 39% We're, we're first time buyers, 33% were existing companies, and then the balance, we're in serial entrepreneurs, most 35% were motivated to buy a job, and then the balance, we're looking to grow through acquisition. Once again, you know, it's just about the same as far as where they come from is within 20 miles, you know, 56% of the buyers came within 20 miles of the existing location and 25% 50 miles and over and then the balance over that. And I should I should make a point that the larger the business, the more likely someone is willing to move to buy it. So back to, to our, our analysis. So now between one and 2 million. All right, the buyers, it decreases again. So first time buyers are now only 34% existing companies that are buying. So they're growing through Mark chairs 31%. And then the balance is real entrepreneurs. They're motivated by buying it 37% are motivated to buy a job and 23% are looking at growing through, you know, as a horizontal add on. Once again, we drop we drop again by roughly 25 30% where the buyer is coming 20 miles, you know, within 20 miles, so 40% of the buyers are coming from within 20 miles. And then the balance is coming over 100 miles in the two to 5 million range in purchase price. We the first time buyers just fall off. So it's existing companies buying you know, private offices, serial entrepreneurs is 24%. And then private equity now enters the picture at the at 20% also. So they're looking the reason that people are buying at this level is for a horizontal add on at 44% and a vertical add on at 20%.


They're generally located more than 100 miles away. That's you know 53% And then the the balance, believe it or not is is less than 20 miles away. And then from your five to $50 million range. Yeah, the existing companies are at 40% and private equity is at 60% I'm certainly they're all motivated to acquire through horizontal add ons. And they're all well, the majority, I should say, 80% are located further than, then 100 miles away. So, so to answer your question, as far as the type of buyer, it's, it really depends on the size, I wouldn't discount anybody. You know, who might be your buyer, it might be your customers, you know, it might be your employees. It might be friends and family. There's a podcast to back that, that I did, where where we were talking about where to find buyers for, for a health club. And one of the one of the tricks of the trade was, you put out a notice to your, to your, your, your most active members, that you're looking at growing through acquisition, you're looking at growth, and you're looking for investors, and those that shook the bushes, and then they found the buyer, and then you, you slowly determined whether or not they are your candidate to to succeed you and ownership. And so there's different ways of doing it. You know, certainly I'm happy to share with you what, what, what we've what we have found effective. So, that concludes question number five. So, that's our frequently asked questions today. So I do want to thank you for listening to the podcast.


You know, we, I certainly hope that you found the information helpful. And in your journey to sell your business or gaining a better understanding of the process of selling your business. You know, I always encourage you to seek out people that can help you so as a call to action, you know, I encourage you to seek out whether it be investment bankers, Business Brokers, accountants, attorneys, people, anybody in that deal space, can have a conversation have an exploratory conversation of what you're getting into. Because, you know, they provide valuable guidance. Yeah, because they've done it before they we we have seen deal after deal. So we're going where you want to go and so we know the landmines and so I hope you would you'll take me up on either if you want, you know, it's certainly no obligation to talk to us we're happy to visit but what we found is an educated seller is the best seller not because you are a an easier client that's that's a sidebar. But when you understand the process and you understand what the buyer is preparing to go through in buying your business, you're pretty close to it. So when you when you do understand and you talk to your the advisors that you have about the business and about what what the buyer is looking for in your business, it will make your life so much easier, you will sell your business and you will sell it for maximum value. So again, thank you so much for tuning in. And we look forward to visiting with you again next week on the how to sell a business podcast. Bye for now.