[00:00:01] Thank you for joining us today for our Tuesday talks today. I have a really special guest.His name is Matt Gilbert. And if you joined this studio three weeks ago, he actually did a webinar. But I wanted to have him back today to discuss what exactly he does day to day. And when I talked to him a few months ago, I was just really interested in why he did so. This way I can bring the knowledge he gave me to all of our members. Once again, I am Christiane Graczyk. I'm your CFO. Oh, yeah. I love serving you members. And this is one of my local projects where I get to do Q&A on various people in our community and within our membership. So I'm going to plug if you want to be on this Tuesday talk, please send me email. Otherwise we will get started and I'm going to ask some really hard questions. My first one is who are you and why are you so special in the business transaction world?
[00:01:04] Yeah, well, it's not me, it's the firm. So my name's Matt Gilbert, my partner Brett Pardue and I founded Gap Transaction Advisors and we're sell-side and buy-side transaction specialists. We primarily are in the lower middle market. We define that from about five million in revenue, up to 70 or 80 million in revenue. So our clients fall in that space.
[00:01:33] Our clients are typically privately held businesses where the owner is the founder. The owner has been there for a long time and and they are ready to transition.
[00:01:47] Sometimes that transition is to family. Sometimes it involves us going out and running a process where we find the best fitting third party yet to be identified successor for that founder, for those shareholders that are exiting. And that's primarily where we we spend most of our time is running these processes and helping those business owners exit. Well, it's not hard to do, but we're told time and again, that it is the most complex thing that these business owners have ever been through in their whole life.
[00:02:31] And I had a guy tell me one time it was hard and he's been divorced three times. It was harder than all three of those divorces combined.
[00:02:39] I had another guy say a few years ago, he went through a really nasty IRS audit and the sale process was much more intricate and strenuous and tougher than that. And so through those little anecdotal points, you can surmise that most business owners aren't going to be successful unless they surround themselves with a great team of specialists that spend their time in this world from a tax standpoint, from an advisory standpoint, certainly from a legal standpoint and then marketing storytelling. I mean, there's all kinds of soft variables in the process. So that's the firm. That's what we do. We love it. We love our space. People often ask when we're going to move up market and start doing a hundred and two hundred million, three hundred million dollar deals. And the answer is we just don't want to be in that space. We love the type of people that we work with in the lower middle market, not necessarily specifically our customers, but also the CPAs and the lawyers and the supporting cast that would help these business owners be successful. We just really enjoy that crowd. And so we've made a very conscious effort that we're going to stay right here in this space and be the best we can be here.
[00:04:11] Well, you talked about the guy who said this, the selling was harder, three divorces, an IRS audit. What makes the selling process hard? Is it the psychology of it? Is that all the details that come together?
[00:04:28] There's a couple of variables that pop up consistently in our transactions. One variable is a business owner who thinks that they're mentally ready to move on. And as we go through the selling process, a lot of times they fall back in love with their company. A lot of times they discover that they didn't really know how to prepare to move on. And so, you know, there's two things that happen when we sell a business. One, we have to make sure that the individuals who were in the shareholder group or the owner is going to go all the way through the process and actually sign the paperwork in the end. And so a lot of times we'll spot early on a business owner who thinks they're ready, but we can really tell that they're not. And so there's a lot of psychology involved there and helping them understand that life changes as you can imagine. A lot of our business owners are supporting local sports teams, or involved with the rodeo and they're going to Vegas for conventions and it becomes their lifestyle. They're taking their customers fishing and all that, and then they sell - all of that changes. And so the closer they get, it begins to set in. "Oh my gosh! my life is really going to dramatically change." And that can be scary if they're not prepared. So there's that aspect of it. And then certainly the business has to be in shape for selling. So there's a myriad of issues to deal with. But, you know, one of the easy places to go is can the buyer of this business convince a lender to loan them money so that they can complete the transaction.
[00:06:26] So the first thing you might ask yourself is the business in shape to sell? Could it get through the lender's criteria so that the funds will be available for the transaction? So really, those two components go hand in hand and there's a psychological component for the owner. And then there's the tangible stuff of the business practices and the business processes and results and concentrations and debt ratios and profitability and all that stuff that goes in with making sure, you know, the business can transact. And then why is it so hard? I will ask you, you know. If you were going to sit down and write somebody a seven or eight figure check. Wouldn't you want to make sure that every single thing was in order, or at least you understood all of the components of that? So the investigation, the diligence that the buyer goes through. The bigger the check, the higher the diligence is typically the case. And then really small business transactions too when the SBA is involved. There's a significant amount of due diligence to satisfy that group. And so a lot of businesses just don't keep records in the way that lenders or the diligence providers want to see them. And so there's just a lot of discovery and explaining the CPAs and the lawyers do. We all get involved. We roll up our sleeves and we we try to help with that part of it. So hopefully that answers your question.
[00:08:16] It does. I think, you know, it seems like when we talk to business owners they are not accountants, they didn't go to school to be business owners, and once they start a business, they have to know things like accounting and taxes, and probably the only time they get all the records together is they put them into a shoe box and take it to the tax accountant. Here you go. Do my taxes. Thank you. So when it comes to selling, I'm sure you have some stories of how you've had to hold the owner's hand and get them ready for sale with all these. Their financials are not really in great shape.
[00:09:00] Well, let me take you back in time. So when we started the firm and were initially trying to get our first couple of clients and get engagements, we kept running around in our former life. We were business founders, owners. We built and sold several of them. So we were in the shoes of our clients. So when we started the firm, we would go out, we would look at these businesses, we would ask for a copy of the financials, the tax returns, etc. and they were always messy. And I just put that hat on, if I were going to buy this business, what I would be interested in. And that's kind of where we started. And it didn't take us six months to pivot our business model when we started the firm to create a group of internal accounting professionals. So at that time, we created a group. We had four former CFOs, two of them were CPAs and the first thing we did with any client was get in and really dig into their bookkeeping practices. I Know you have it's surprising you'll run into a 20, 30 million dollar revenue business with 40 or 50 employees.
[00:10:22] And they're not in cash accounting and they're not in accrual accounting, and they've made some hybrid up. You know, patching a couple of systems together and then their tax accountant, they think is got their back. But that person doesn't even really know what they're doing because all they're doing is compiling what's given to them in April. And so we found that literally one hundred percent of the time since we started the business all the way to this morning when we started an engagement with a new client. We want to start with the books and we have a step by step process. And the first step in our process is to do a fair market value study, come up with a valuation range that we can defend and that we can support if we go to market. And and that is a huge accounting assignment, probably six weeks worth of accounting grind for us to come up with the valuation and then be able to defend it to the business owner and their partners and senior management. And then that gives them the data that they can trust and rely on to the to decide whether or not they really want to go forward and sell the business at that time or not.
[00:11:50] A lot of times, most of the time, business owners think they know what their company's worth, but they're way off. The smaller the business, the more emotionally tied to it they are. They think the value is really high. We come in and do a valuation. We have to give them the news that in the fair market, your business is worth probably less than what you thought. We'll have this happen in a little bit larger companies, more than smaller ones. We'll have business owners underestimate the value of their company. And so that valuation as a first step is really, really important to setting the stage for what can be expected when we go out to the market and we go find buyers. There's no sense in going through all the pain and all the processes and, you know, creating marketing materials and everything. If there's not an alignment at the very beginning of the process in what the value of the business is and whether or not the owner would sell for that. So day one is an accounting assignment for us for about six weeks when we take on a new client.
[00:13:07] Well, and you found out early in the firm's history and you talked about when we talked before you guys approached things differently, and that is, you know what? It's goingt o push the start of how you treat your clients, helping them get ready. So can you give me the story again about why you guys, your process is different than the traditional?
[00:13:37] Yeah, we're going to start soon. Brad and I, he's 10 years older than I am. I'm in my 50s. Wayback when I was a teenager, we started a little business together and quickly found success. We sold that business to a public company.
[00:13:54] So that was our first taste. We went on individually and together to found, and grow and sell several other businesses to public companies, to private companies, to strategics and to his private equity firms to build those businesses bigger. We acquired some of our smaller competitors and some of our vendors, and things like that. So we've been in the chair of the founder cellar. We've been in the chair of buying businesses. And through that experience over twenty-nine years, I found out that I was involved in forty-one transactions that didn't close. Either I wasn't the high bidder, we got down the road and saw something we didn't like, and we walked away or whatever. But there were forty one transactions that I was involved in that didn't close when I was running a business as an operator. Doing a little assessment of that, you know, we discovered there were four different models the business brokerage and transaction advisory community was operating in. Brett and I kind of, you know, once we had those models in front of us and we'd analyzed those transactions a little bit, we realized that for guys like us who are running a 20, 30, 50 million dollar company, really five to seventy-five hour range, those four business models didn't serve a client like us very well. So we started looking at national statistics, and those statistics will tell you that somewhere between 12 and 17 percent of businesses that get listed to be sold to a third party actually transact.
[00:15:50] So that's somewhere in the neighborhood of eighty-five percent failure rate. And so, you know, we were started to take these feelings that we had and researched them and turned them into data. And what we decided is there was a void in the marketplace for a firm like ours. There are a few firms out there that do things similar. But we were very intentional when we built the company to say, OK, we're going to create a different set of processes. We're going to go to the place in the M&A community that has the most success - way where we're never going to play and we're going to look at their best practices. We're going to see if we can bring some of those down here to this community. We're going to look at some of the self-serving practices of the four business models that existed. We're going to throw those out. We're not going to allow those to be part of our DNA as a company. And so the first year we were in business, we kept pivoting as we learned these things. And by the time we had gotten through the first nine months or so, we had a process that we run that was a hybrid of a bunch of other stuff that had never really been put together the way we put it together. And then we went out, we were all proud, and we said, well, we want to charge differently than others charge.
[00:17:16] It doesn't feel right the way we had been charged in the past. It doesn't feel like a business transaction broker, and their clients are aligned in how they get paid. And we really wanted to align ourselves with our clients so that we achieve a goal together. So we figured that out. And then we went out in the market. I was all proud. We had this new mousetrap. We were ready to go and nobody wanted to go first or lawyer one, let them go first. If they wanted to go first, their CPA would tell them, you know, this is an unproven process, don't be their guinea pig. Right. And so we we had a little slow start. But in the first couple of real transactions that we were involved in, we had big accounting firms and big CPA firms on the other side of the table, and they took notice very quickly. I won't say the names, because that might not be cool on the show, but both the big accounting firm and the big CPA firm, out of the first two transactions we did began to refer clients to us. We got close to their people. They respected our processes, and they kind of understood it. And from that, it just kind of snowballed into we've been busy ever since, and our practice has been growing ever since. One of the key things that we do that is different than all of our peers is, we surround a business owner with several people.
[00:18:50] We think it takes a village to get them to where they want to go. So, we surround them with an accounting professional that helps translate whatever's going on in the business and the outside accounting person that's doing the tax advisory. We have a middle person and that person is very involved with spreadsheets and works daily on their behalf to help the people - who are probably listening to this call - when they get the call and say "hey, run a couple of models and tell me about my tax tax liability from this." We have a legal person, we have data analysts, we have market researchers and marketing people. And then we put that team together internally with what we call a deal team leader. That's normally my business partner, Brett, but we have a couple, and that's somebody who's been through this process time and time again and really knows the road that we're trying to travel and how to coordinate all these resources. So we're very different. Those are kind of our humble beginnings and and we're very proud of the fact that that we're different. If you fast forward from then to today, even through the Covid period, we have a greater than 90 percent success rate. When we take a client on to be a sale candidate, we generally reach the finish line for them.
[00:20:17] Well, and I think having that unique background for you and your business partner of being in the shoes as a seller, having experiences that you had makes a huge difference. And the one thing that you said is that you get referrals, you won't get referrals if you want that, especially from the CPA firms and big accounting firms who are doing this. I mean, they're trusting you. And so it's the building of relationships. And I think that's what I was like. Oh, my goodness, I met this guy because it emphasizes how important relationships are. It's something I keep saying, I believe the examples prove it. We talk about you have a 90 percent plus success rate. For those who are thinking. Well, 90 percent oh, that could be me. What about the 10 percent rule about those who can't get to the finish line? Is there a common element of why they aren't finishing this process?
[00:21:27] Yeah, and in our case, I'm going to back up on your question just a little bit. We have kind of stage gates that a business or the owner have to clear before we'll take them on as a sales client.
[00:21:43] There's five of them, and they are designed to stop the process if it's not going to be successful, and we identify why it won't be successful. Let's talk to the business owner about the issue. And maybe we have to put the brakes on and we have to take a six month or 12 month or an 18 month hiatus on the sale process. We need to go work on whatever that obstacle is. It could be a legal issue. It could be a customer concentration issue. It could be in Covid's case, we had four sales that were near the end of closing in March of last year. And then Covid came along. Everybody's revenue went to zero for a few weeks. The whole world got scared. Our buyers ran for the hills, their lenders ran for the hills. And so that was nobody's fault. But we had to deal with it. We had to pick up the pieces. We had to ascertain where we were, create a plan to move forward, help those businesses get back on their feet. Once we achieved the kind of equilibrium we enjoyed in 2019, then decide whether or not we want to restart the sale process. And we've done that with all four of those that happened in that march, specifically a couple of them. We're still saying you're not ready to transact - your business hasn't made it back to those pre nineteen levels. So the number that you want in order to exit, right, isn't achievable when business is down because of covid. So we've kind of got those guys on the shelf and we're helping them understand the metrics they need to achieve to get back in the race.
[00:23:44] One of our clients was reviewing an offer from Schlumberger and passed away. So weird things happen in life and in business. And his name was Wine and wine was one of my favorites. But he wasn't there to accept the offer. And a few years later, his company ended up selling to a family office that has really been good for them, and have taken it to the next level. But those five stage gates exist to run. The process is hard. It's time consuming, probably takes on average seven to nine months to do well. And you've got to run the business during those seven to nine months. The accounting folks, and us, and the legal people. We're running the process, and there's a lot of interaction. And so if it's not going to be successful, we want to stop and discover why. So often we'll put a business owner who can't make it through those gates we'll put in with a coach or some sort of business acceleration outfit to help them shore up whatever that weakness is. And then we'll monitor them on a quarterly basis, meet with them, talk to them about where they're at, where they're at. We've got some free tools to help them gauge their progress. And when they've got the momentum coming back to be where they need to be to exit, then we'll allow them to re-enter the process. What happens with most of our peers is it's a numbers game. And so, you know, where we would rather have eight or ten clients a year, where we knock it out of the park and we do a great job.
[00:25:41] We close all those deals. Our community of business advisors, the way things are done in North America is just give me everything I can get, let listed on the Internet. I'll wait for the phone to ring. Hopefully, we'll sell something right. And that's how those other four business models go in just and we just we feel like, you know, if you took 20 years to build your company, we can take six or eight months and really focus on determining who the perfect fitting buyer is and then we'll go out and find them for you. And so we run what we call a confidential process where it's invitation only. So we're not advertising out on the Internet. We're not putting a for sale sign out front of the business. Your employees aren't going to know. Your vendors aren't going to know. Your customers aren't going to know that you're actually for sale. Because we've got a team of people over in our firm who are running an invitation only process. We'll have them sign confidentiality agreements, non-disclosure agreements, not circumvent agreements, all this kind of stuff before they even know what the company's name is. And so, you know, that is a rare thing in the lower middle market. But we found that it sets us apart and really helps us when we look somebody in the eye and say we can get you to the finish line, we're going to get you there.
[00:27:18] But just us all talking today and the one thing that keeps coming across, and I hope the people watching this, whatever they get is how much you care and how much you are there to serve these owners. That you care that they have this business of 20 years and you understand that it's hard to give that up, and you're working through that with them. You know, you're giving them the tools if they're not ready. And I guess when I say not ready, it's not just the their financials aren't in that aspect is mentally ready. Because when you talked about the coach, you know, I know through my own coaching, it's psychology, it's the mindset. And so hearing you say that, it just really confirms that building relationships and serving your clients will get you further ahead. And I think you guys are experiencing that and you're a perfect model for that, so thank you for doing that for the small businesses you have there.
[00:28:31] Yeah, it's crazy. But, you know, most of our clients have their spouse, or their kids, or their cousins, or you know, some family unit working with them. Right. And a lot of those people aren't in a position in the company to even have knowledge that the owners thinking about selling. But then, you know, that's weighing on that owner. OK, well, if I sell this company and they don't want to employ my kids now I've got that issue or my cousin or my wife's brother, and we have to deal with that on a regular basis. And, you know, it's one thing if that's a professional person and they can hold their own, they've got a resume, they can get through an interview, they'll get an employment agreement with the new owner because they're valuable to the business. It's another thing when they're not right. And so then the owners got this burden of, well, I know this person's not carrying their weight. They work here because I'm the owner and, you know, so there's a lot of stuff that has nothing to do with blocking and tackling, of running the company that we have to help them cross and figure out a solution to.
[00:30:00] If I can't figure out a solution to what happens to my client's brother in law we don't get to sell his business, right? He doesn't agree to achieve what he wants to do. And so many of these owners don't know where to turn, and so they hang on a little too long. They get a little tired, maybe somebody gets ill, but the business kind of peaks and then it starts doing this. Selling the business on the decline is not the best way to maximize your exit, you know. And so we've learned that most of our referrals come from the accounting community because most business owners will confide in their CPA or their accounting professional before they'll confide in anybody else, that they're tired and they want to sell, or somebody is ill and they want to sell, or they're just ready to do something different and they don't know where to turn right. And it's not because they don't know where to turn from all the business aspects, but it's like they need a counselor. Right. Well, let's think about if you can't go off every single day in retirement. That's not going to work. And a lot of people who say, well, you know, my spouse and I can't be together three hundred sixty-five days a year. That's why this company is here, I'm seventy-two and I still go to work every day.
[00:31:25] And so, you know, it's getting over those those soft issues that aren't on a spread sheet somewhere that really help a business owner kind of frame this thing where it'll work for them. You know, the numbers are the numbers and if you don't like the number, well then we can manipulate some variables down here that will change the number. And then we go look at those variables and we say, OK, how do we implement this into the business so that 12 months from now we have to change the numbers. So you could sell for what you want. Not a lot of people can do that. But the intangible and the right space is not here. But you can see it in his face, the intangible is not great. It is that kind of empathizing with the owner, figuring out what those obstacles are to cashing out, and helping them devise solutions. And then the last thing is, it's not what you sell for. It's what you keep. Right. And we've got a new administration this weekend. There was a big announcement that taxes are definitely going up. We've all been speculating that. But now there was an announcement and what I heard is something along the lines of the biggest hikes since 1993.
[00:32:49] So, you know, if a business owner wants to keep a bunch of money that they sell for, they should probably do it before the tax hikes come into play. And so for a lot of folks, there's now a sense of urgency. Right. And that may be the catalyst that allows them to start having these conversations. But you will learn that they normally confide with their accounting person first. And it's normally not a business issue, but it's a lifestyle issue or a lot of times it's a status issue. They're known around town as the guy who owns that company. They're driving and they see the trucks with their name on it all over the place. And they have a hard time seeing the world without that in it. But now there's this taxation issue. So there's three or four fronts that are part of the numbers that accounting folks, I think, should be in tune with their clients at this stage in the game. You have somebody in their 40s or 50s, it's different, but by the time they hit 60 and up and they're still at the helm of the business, this is on their mind, all of them.
[00:34:11] Well, you talked about that when we did the webinar a couple of weeks ago, what steps need to be asking their clients in? So I think that's really important. And that little niche that you have or the special marketing piece I would say that you guys have is that you're going after the intangibles. You're finding out the why, you're finding out the road blocks of why they're hesitating to sell in Asia because they're at retirement age. Everyone's expecting them to, even the workers, even if the employees don't say, they're expecting that. They're expecting the announcement any day now. But there's something holding them back in the confines of their CPA and is like, oh, you want to sell? Oh, well, you know, and we talked about that before. You know, it's really a five year process from what we talked about before, is that you got to prepare your taxes and you've got to be prepared for this. And now that we're going into the tax hike and people, you know, they always want to lower their taxes. And so they're afraid of this. And my next question is, do you think people will be hurrying to sell having that urgency? And is that really the healthy mind set they should have?
[00:35:30] You know, there's a couple of ways to look at that. One is. We're not really out of Covid yet, and so the M&A community hasn't fully figured out how to deal with this period in business performance. We're still getting a pass from the buying community and the lending community on what's happening during Covid for our business sale. So we're still selling stuff at the top of the value range and at some point that's going to get looked at differently. So right now, what's happened over the last 12 months through this Covid thing is we are still successfully getting buyers and lenders to not count that period, and in most cases, it's either dramatically up or dramatically down. If it is dramatically up we argue that they need to count it. It's the new reality. If it is dramatically down they don't need to count it. Things will come back. And so, you know, there's there's that component. Where I think a sense of urgency is healthy because. The way we're positioning this period of time and the impact that it has on the business is such that we're still getting the highest valuations we've ever seen. Taxes coming and change in what somebody gets to keep at the end of the day when they sell an asset is a train that's you know, you're not going to win that war. And so you want to get across the tracks before the train comes. And so I do think that's healthy.
[00:37:25] I had a business owner back around Christmas. We'd been talking a lot. And he finally decided over the holidays that he wanted to work three or four more years and sell at that point because he knew his business would be more valuable. And my comment was, well, in the last three or four years, your growth rate has been about 12 percent a year. So if we apply that going forward. Your business can be about this value in three or four years,and then if we apply probable tax rates at that time, you're going to lose money, you know, and because of the chunk that the government's going to pull out of the sale, nothing that you did, nothing they had an impact on. So ifyou're going to work three or four more years, you need to have a twenty two percent growth rate in order to come out ahead when we factor in the new tax environment that we believe will be in effect at that time. So there's a lot of modeling that we do for business owners. And most business owners don't even realize that a profession like ours is out here where we can sit down and listen to what you're trying to achieve and say, OK, either we can or can't build a road map to achieve that. And if we can, you know, it's a six, eight, nine month staircase of layering on top of layering. We can't skip a step. And then we can turn around at several points in the process and we can model a couple of what ifs for you.
[00:38:59] That brings a lot of confidence. It brings a lot of confidence, you can just see it wash over them, their demeanor that, OK, now all this stuff I worry about when I lay my head on the pillow at night or taking a shower and I'm all alone or I'm driving in, I'm all by myself. . That's where my mind is worried. You can see all those things just kind of fall in place when we put the models together. But it takes a lot of effort on our part. We'll have fourteen or fifteen hundred hours invested in a company getting to the point where we can take that business owner to this process. But, you know, at the end of the day, I tell every business owner on the day I meet them and the day we close, this is one hundred percent in your control. We're here to help you achieve your goal. Right? So if you're not comfortable or you're not feeling right, don't sign your name right there. Let's keep working until we get it to where you're comfortable. And a lot of times there's something that's not achievable. And through a process, a business owner will understand, OK, I've got seven offers for my company and none of them are giving me what I asked for. You tell me one, too. Well, now the market's telling me it wasn't achievable. I've got to adjust my thinking. But all those things come with the softer side of the business, which is we can't ever take our eye off of our goal, which is understanding our client's goal and building a pathway to achieve it.
[00:40:33] So I don't havethat question, but yeah, I did, because I think it brings me to anotherquestion, which is good, because that's what we can improve, because I'mthinking you're talking about the client's goals. And you know me, I'm justbeing simple of all the clients goal is to sell the business at the highestamount. But you brought up a few things so far, including you do want to get ahigh price. But it's also the employees, it's also with the owner, that's theowner's name. He's taking away the branding of what he or she is. And I'm justthinking, when you're looking at the goals of the cell with the owners. Do yougo through all that with them? Like, you know, what is your goal financially,your employees and yourself? How do you see yourself after this?
[00:41:32] Yeah, we have to.It's the first before we even ever ask them for a dime. It's those are theearly conversations and what it really is to you know, I'm doing this withsomebody right now. He's sixty four years old.
[00:41:47] And in everybusiness owner tells me this. I don't want a reduction in quality of life.After I sell my business, and that's why I'm hanging on, and so then it becomesa math equation, right? Well, what is your quality of life? And this particularguy's case between Distribution's company credit card and his salary? It'sabout four hundred thousand dollars a year. That's his quality of life. And andso what he's telling me is I'm sixty four years old. I want to live till I diewithout a reduction in quality of life. OK, simple. When are you going to die?We go out to the actuary tables.
[00:42:27] We ran all of hisnumbers that those tables say he's going to live to be ninety one. Right. So 70for 80 for this guy's got to have twenty six years of four hundred grand. Andby the way, inflation, right? So we're going to have to adjust along the way.It's just a math problem and we can model that. And so then I can back intothat and I can and I'm making this up on the fly. So but, you know, OK, well,you have to clear thirteen point two million dollars in your sale after taxesand fees in order to put that money to work at a four percent annual interestand then withdraw at a four hundred thousand dollar a year. We can do all ofthat math and help somebody understand that either. And then you turn aroundand go, OK, is the company worth thirteen point two million dollars after allthese fees and taxes at closing, which means, you know, it's probably going tosell for 16 or 18 or something. And and then if if if it looks close.
[00:43:33] Then we say, OK,well, let's let's do an engagement where we study this and really define it formost business owners don't know that that discipline, that profession exists.And and and lawyers and CPAs for M&A guys go. We all do that. You know, I thoughtthat only happened in a billion dollar transactions. Now we do it because thoseare the things that that are important to our clients. Right.
[00:44:02] And that's whatmakes you different. It's what it really is, what makes you different. I hope thosewho are listening to this, you catch that. And if you hear a small businessowner saying that, you know, make sure you remember that, you know, I'm not youknow, it's not just because we're friends and all, but I just I really feelthat that is missing the intangibles, the caring, because it's coming throughhere to me is that.
[00:44:32] That is yourclient's well-being is what drives you to be successful.
[00:44:39] Absolutely. It'sthat in his health care, which is going to be really hard to model and predict.So. So we we. Keep up with all the latest statistics and trends and we putthose things into the models, but those are the two variables, you know, howlong you're going to live and how healthy you're going to be during that life.
[00:44:59] And and honestly,until a business owner can get their head around that. They're they're justlike a mule, they're not moving forward and thinking about selling theircompany, and so what happens is they don't know where to turn, they internalizeit. It kind of eats at them for years. And as that's happening, you know,they're losing less and less interest in the business and the business stopsgrowing or key people I've seen this many times keep people will we'll say, youknow, I don't know when you're going to fall over dead or retire.
[00:45:35] So that.
[00:45:39] Makes me nervousas an employee, I'm going to go somewhere where the ownership doesn't make menervous and they're key people start leaving the company, right. And so veryoften we'll have a company who did phenomenal two, three or four years ago. Andthey've been on kind of this slide and we start looking into it. And a few goodpeople have left and they haven't backfilled. And now they're asking me to sellsomething on the slide with or without good employees, you know, managingthings and the owners are going to be gone. That's just not very viable. And soto catch it earlier, you know, you really. Doing your your client a service, itdoesn't take a lot of time and money. To do evaluation, it takes six weeks.
[00:46:28] You've got to paya little bit for it, but to get a fair market valuation from somebody like us.Men, I know I'm biased, but I think people should be doing that every three,four or five years to see where they're at and gauge where they're at. Look attheir options. Very often we always almost we surprise the owners with what wecome up with in those valuations to the good and the bad. But quite often herein the last few years, the surprise has been to the upside because the marketis just. At the top and people are paying more than they've ever paid multipleearnings wise for businesses, lenders are allowing higher multiple of earningsto be borrowed against than they ever have before. And so it's been a seller'senvironment for the last few years and we believe it will be here for the nextlittle while. Government regulation, tax code, things like that are going tochip away at this and turn it back to a buyer's market. Right now, if yourclient is a business owner, the market's in their favor. So it doesn't take alot of effort, doesn't take a lot of money to go out and just analyze what youroptions are. And we do that a lot for folks. And and sometimes they'll comeback three or four years later and they'll say, hey, now I'm ready. But it allstarted with that kind of valuation exercise.
[00:47:58] I guess itdepends on where you are in your business. Like, I would think that you wouldwant someone to come in and do a review, a business valuation you just becausethat can help you with your strategic plan. You know, of where where do youwant to go, when do you want to get there? I think you need to have a baselineand then you have to have evaluations on whether you're getting there or not.So I think that's great advice for space to be given to their clients withbusinesses and say, you know, the return on this course will be further downthe road when you sell your business.
[00:48:36] Because, youknow, we talked about the webinar. You also look at the culture, you look attheir code of conduct, you look at their tone at the top because that goes intothe business sell for the ICA as intangibles and the emotion of a businesslike.
[00:48:56] And people areleaving, that's a red flag. When I was in industry and talking to others, like,did any key people leave, that was one of the questions I would get asked andlike, well, yes, I'm leaving. Thank you very much. That you're not a keyperson.
[00:49:14] But, you know,it's one of those things you've got little as a business owner and as if youare a CPA or you're not, you know, talk to your business owners, let them knowthis is so important.
[00:49:30] Yeah, you saidtwo things. I want to I want to make sure I clarify. One is the return on theinvestment is almost instant, because what we're going to do in that valuationis we're going to say these things. You're really doing great at. The market'sgoing to see and give you a plus a. Minus a. These things over here is wherethe market's going to give you lower grades, and so these are the things thatyou should take away from this exercise and go work on.
[00:50:01] You can movethese up even a point or two, then you're bringing your valuation up. So thereturn on that investment is literally in most cases, it happens within aquarter or two also because it's not very expensive. And that's the secondpoint is if you're going to be advising that your client gets a valuation forthis purpose, well, that's a different type of valuation than you're going todo for IRS defense. It's different than what you're going to do in a divorce.It's different than what you're going to do in wealth planning. And so don't.Make the mistake of saying all valuations are equal and going out and grab onefor wealth planning or tax planning and thinking that it's going to apply wellfor M&A, the valuation that we do out of all those, the one we do is thecheapest. So that should help. But, you know, it's one that's very forwardlooking. It's a buyer doesn't buy the past. The buyers buy in the future andthey're buying a future cash flow stream is what they're looking for. So, youknow, it takes into account comps. It takes into account that I've got abusiness right now that that we're doing a valuation on for their five topemployees are over the age of sixty seven. That's great for the currentbusiness owner because he doesn't have to manage those people at all, right?They are self managed, doing a great job, but a buyer walks in and says, arethese people going to transition with me or are they going to retire? And ifthey do transition with me, how long are they going to work there at the upperend of that range that becomes a liability in your valuation.
[00:51:54] So I'm not sayinganything about old people. I'll be one of those pretty soon. But, you know,it's they're just facts of life. And and so, you know, all that stuff happens.One of the things that we've discovered on a few occasions for a business ownerin evaluation is that their top customer or their second or third top customeris on the verge of filing bankruptcy.
[00:52:25] And quit givingthem credit, quit, and they had no idea because they've been doing businesswith them for twenty five years and, you know, and in one case that I'mthinking of the guy that was extended a couple hundred thousand dollars to acustomer who was in the news saying they're on the verge of bankruptcy. Bringthat credit down, get those receivables tighter and you're going to getpregnant. And by the way, the buyer is going to find that and they're going tosay, well, you know, we got to look at the business without this customer justin case. Now, what's it worth? So, you know, all that kind of stuff. And whatwe do just kind of naturally comes out. We bring that to the conversation sothere's a lot of value there. But you don't get the wrong valuation.
[00:53:15] Yeah. So I'm justgoing to plug our we have a forensic evaluation services committee and they'reactually doing webinars on the various evaluations, the divorce valuation, theif your partner's leaving the business valuation or if you are selling. We havea committee that that's all that's a day job type thing. So look for thoseseminars coming up. So we are almost to the end of our time so that I want tothank you so much for coming on.
[00:53:49] I hope peoplefound value in this because what you're doing for the small and midsizebusinesses is so important, because I feel like it is a numbers game for a lotof those who are looking to sell. And when you find someone who is the rightfit and cares, it, I believe, just makes everything better. And so hopefullyCPAs will seek you out and develop a relationship with you, because I feel thatthat's the first step between you and the accountants. And CPA world isestablishing that relationship, which I know you've done with several andthey're probably members of his or not. Please be one and. Yeah, exactly. Yougot it. But I just thank you for coming on here telling us about your uniquestrategies, because I think that's just taking you to stardom and that's justwhat I like to share with our community.
[00:54:49] Yeah. Thank youfor for having me and having the firm. We got word of mouth. This is how wesurvive and where it goes both ways. We refer a lot of quality of earnings outand people who have accounting issues and whatnot, we love to to be a goodreferral partner. So I can't thank you enough for having us on. We barelyscratched the surface of all of this in these conversations. So if anybodywants to talk deeper, Scott and I and others at my firm where we're available,you're welcome to post my email address and phone number.
[00:55:29] And I will yep. Iwill be putting that underneath our live video today so people can contact you.And Scott, I appreciate it. And I hope everyone has a wonderful Tuesday orwhatever day of watching this on you.
[00:55:47] Thanks. Takecare, buddy.
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