Mastering the Art of Selling Your SME: Insights from M&A Expert Bill Snow

What can we learn from the guy who wrote the book on mergers and acquisitions? Well, in this episode of the Exit Insights podcast, I’m talking to Bill Snow, who wrote M&A for dummies. He shares his tips on explaining EBITDA, what business owners can do to make sure that their business can be sold, and a whole lot of tips from selling and buying hundreds of SME businesses. It’s a great episode. I enjoyed talking to Bill. It’s a good one for you.

Welcome to the podcast that’s dedicated to helping business owners to prepare for exit so you can maximise the valuation and then exit on your terms. This is the Exit Insights podcast presented by succession plus. I’m Darryl Bates-Brownsword, and today I’m joined by Bill Snow. Thanks for joining me, Bill.

My pleasure. Thank you for having me.

Good stuff. Now, the reason I invited Bill is because of a conversation I had with someone a little while ago when, when I was learning about M&A. And they said, look, there’s probably worse things you can do than read a book called M A for dummies.

So I thought, well, that’s always good advice. And the for dummies bit, that always sounds like a good thing for me. That sounds like it’s targeted exactly at me. So I read the book and it was, look, it was a really well written book. And at that education level, four first timers, which is a lot of the people we work with in getting them ready for an m and a as their first time deal.

So I thought, hey, instead of just reading the book, why don’t we go to the source and get the author on the show, on the podcast and tap into his experience. That’s Bill. Bill, how long ago did you write the book?

That the purple one. If you buy it, make sure you get the purple cover. That’s the second edition that came out about a year ago, almost exactly a year ago. In 23. The first edition came out in 2011. So I wrote in ten and I wrote the second edition in late 22, came out 23.

Okay. And has much changed in the M&A world over that period of time?

Yes and no. It’s. It was a great disappointment when I got the opportunity to write the book. I was very excited, kind of feather in the cap type of thing, but the terminology and the nomenclature and the steps and the processes and so forth don’t really change that much. So it really wasn’t much of a demand to do a regular update on the book. So I was really disappointed on twelve years to have enough changes. It doesn’t really change that much. There have been a few changes in the industry we’re seeing. Not to get too deep in the woods of everybody, but when you do a transaction, you have reps and warranties, the seller will make promises to the buyer and that those promises have usually been indemnified by leaving some money in escrow, usually 10% or so.

We’re seeing the use of insurance products a lot more. Instead of putting 10% or so in escrow, we’re seeing those devious little accountants. Have you heard about them? They keep coming up with stuff. We’ll do your tax returns, and then we have reviews.

And, hey, how about an audit? They keep coming up with stuff. And so now they have this thing called quality of earnings report. At least here in the States, it’s very prominent thing. And I do recommend sellers do a sell side Q of E, quality earnings report.

So, you know, we’re seeing some things like that, but the basic steps and contracts and so forth, those are all pretty much, pretty much the same.

Yeah. So in dummies terms and in, I guess, even simple language, what does a quality of earnings report cover? Because it’s not a term that’s used in the UK.

Sure, sure. It’s a great question. So we have typical accountants put together three types of reports, right? Compilations. Reviews. The compilation is, they’re just basically printing up the information they get from the company.

It’s not tested or anything like that. It just looks nice, nice presentation, which can be helpful. A review gets in there and starts testing what more of the inventory. If they have inventory, and then account area audit, rather, goes a lot deeper, tests the inventory, and we’ll be checking a lot of other things, you know, bank reconciliation and things like that. So a lot more detail.

So a review or an audit. And again, the focus there is on inventory. Inventory. If the accounts can observe the inventory at January 1 and December 31, they will know exactly what the cost of goods are for business. And that flows right down to the bottom line.

So that becomes an unqualified opinion. That’s what you want. So those audits or reviews sets up this fabulous thing called EBITDA. Right? Or as a client once called EBITDA bidu, earnings before interest, tax, depreciation, and amortisation. Right. Which is this horrendous thing that we use as a baseline to determine the value of a business. EBITDA. The quality of earnings report quantifies adjustments to EBITDA. Right.

So we’re seeing a lot more. You just don’t see if you get a document from a creature like me, an investment banker will have, we just don’t have EBITDA. It’s adjustments to EBITDA. Adjusted EBITDA. Right.

So we might make adjustments for owners compensation, one time only expenses, things like that. The quality of earnings report will go through and help quantify that. Those adjustments are legitimate. So the buyer, okay, you’ve got a million dollars in adjustments. We’re going to buy the company and those million dollars in expenses will go away.

The Q of E report, the quality earnings report will help quantify those adjustments for the benefit, frankly, of a buyer.

Yeah. Okay. So is it a case of saying, because this is when we’re preparing valuations, we’ll always have a look at the financials, and then we go, well, what we need to do is adjust them so that the profit will look like if someone else owned it. Because if you’re having that conference, and some of the things we talk about is if you’ve got that annual conference in Spain, nudge, nudge type of thing, will the new owner want to go to that conference in Spain every year, or is it just a bit of a perk?

How many cars are you running through the business? How many cars does the business really need? And as you said, if there’s any legal fees, salting fees that are one off, what are the extraordinary issues to the accounts that make them unusual? So what’s the real earnings? And then does it include extracting things like, well, EBITDA, I think, is it, I’ve heard it termed as nonsense profit or something even less friendly because it’s just gone. It‘s meaningless. I want a real number of going, what’s the real cash that’s available to me as an owner that I can spend or extract or reinvest in the business? Because before tax is not real helpful.

Yeah. And right. Those are great points. And EBITDA is just meant to compare apples to apples. Right. You strip away all the extraneous factors, the taxes and interest earned are paid, and having to spend money to buy equipment and depreciate that. If the business could operate in a vacuum and just crank out the product, what is the revenue?

What is, what would the profit be? And it’s a good exercise for that. But a big misnomer. I think a lot of people obviously think EBITDA is cash flow. I’ve dealt with people negotiating transactions and they think EBITDA’s cash flow, and it’s not.

Most people don’t know how to build a cash flow statement. Which they should, because especially if you’re growing business, you’re going to need cash well ahead of the actual sales. But one of the big issues, and you raise some good points, you know, the cars and the trips to Spain and things like that. I don’t know how you guys run your businesses overseas because certainly in America we don’t do that kind of stuff. Shame on you guys.

But in all seriousness, I call it a Frankenstein’s monster. Right. Adjusted EBITDA. And I’ve had clients do this. Oh, we can make adjustments, and they’re throwing everything in there.

Now, if it’s a legitimate one time only expense, okay, you had a severance or for somebody, and you gave that person $20,000 and you’ve never given anybody severance, and that’s just not normal course. Okay, we’ll add that 20,000 back. Or if you had a lawsuit and you had to pay $100,000 and it’s the, the only time you’ve ever had that you probably never have one again. Okay, that’s, that’s a legitimate ad back.

But what you see is people coming up with 2030, $40,000 of adjustments every month. Well, it’s a one time only thing. But if every single month you’re going to have 20,30, $40,000 in something, a buyer’s going to say I can’t add back. You’re asking me to add back, you know, half a million dollars, let’s say half a million dollars. I don’t know what it’s going to be next month, but it seems every single month you’ve got 20,30, 40,000.

I can’t do that. So those QV reports will help quantify that is legitimate and what is ongoing. And another big issue is owners will add back their full compensation. And maybe that’s legitimate if they’re not needed. But if someone is taking out, say, a million bucks a year running a business, and you could hire a capable general manager, president, whatever, for 300,000 all in person and so forth, well, then you can add back 700,000. That’s a bit of a massaging there between buyer and seller. So if you can have an accounting firm that’s going to be able to do some research and say this is a good number for replacement CEO, that adds a lot of weight and a lot of credence to the report.

Brilliant. And that’s really helpful for defining it because a lot of business owners and the business owners we’re working with and the business owners that I guess make up the bulk of the economy, are only ever going to sell one business for a lot of them. If you were talking to one of those business owners, Bill, and they said, yeah, I keep, my accountant’s been doing EBITDA all these years, but I’ve never really understood it. How would you define EBITDA to a business owner in terms that make sense to them?

It is good and bad things about it. It is used for, as we said before, valuation purposes. So you can compare companies to companies in terms of what profitability is if you strip away the taxes, because the taxes might vary here in the state, state to state, certainly from country to country, the taxes might, might differ quite a bit. It takes away the interest that you’re paying.

It takes away appreciating non cash things, but you’re still out the money if you’re depreciating. If you bought a piece of equipment and you’re depreciating it over ten years, you’re still out cash.

And so, yeah, and you got to replace equipment at some point as well.

Right. And so I think it’s a useful exercise to some, some extent, but it misses a lot of other things. And that’s why I, I always implore the business owners to pay attention to their cash flow statement. Most of them don’t know how to read it. They think it’s a bunch of gibberish. But it is the most important thing because it will separate how much money the company is generating from operations from, and then how much it’s spending on investing in the company. Right.

Buying equipment because you want to look at debt. So there’s a lot of capital expenditures. You’ll see that in the investment section of the cash flow statement. And financing is the business selling stock or borrowing money to prop itself up and even going back to the operations, how much is it really making from operations? When you look at the cash flow statement, you can see, okay, well, are we generating cash because we’re collecting receivables or because our payables are going up and we’re not paying our bills, or because we’re paying off or selling off inventory for pennies on dollar?

You know, what’s going on behind the scenes to create that operating cash flow? That, to me, is by far is the most important statement. EBITDA is good. I think it’s a good exercise, but that’s really for valuation purposes when you want to sell the business. I think business owners should pay very close attention every single month, every time they look at their books, at their cash flow statement.

Brilliant. And look, every CFO, finance director I’ve spoken to, they’ve reinforced that message around the cash flow is the first financial report that they look at because it shows the real position of the business today, not the money in the bank, because it’s not clear. And the other thing that we’ve taken out of this conversation so far is that EBITDA. Look, you don’t really need to know about EBITDA unless you’re selling the business.

And it’s a great comparative tool for effectively, buyers to compare one business with another when they’re evaluating businesses for acquisition. So there’s something on EBITDA. Okay, Bill, what are we talking to these business owners and we’re in this podcast and business owners are thinking that, hey, look, I need to exit my business at some point. I want to make sure that my business is attractive. What are some of the biggest misconceptions that you come across when they start thinking about selling a business? What are some of the things that they, I guess, take for granted to make wrong assumptions about that trip them up? Sure, sure. How much time do we have? Well, this could be episode one of.

It’s EBITDA. They calculate the EBITDA, which is good. It’s a starting point. EBITDA does not show. If you have just one or two vendors, buyers can say, wait a minute, that’s a risk. If that that vendor goes out of business, what happens to your business? So they don’t look at things like that quite often. They look at EBITDA in terms of a short sample size, and they want to get the maximum multiple off of a short sample size. And most buyers are going to look at multiple years of what’s going on.

So they get a sense of the trends of the business are their usual ups and downs. And most businesses might be, might have some cyclicality, right? Different parts of the year, they’re doing better, but you want to get an understanding of that. And so just, you don’t want to pick that high water mark and expect to get the most extreme multiple. They look at that as well.

I think a lot of sellers look at buyers as a black box and, oh, they’re just going to pay this. And you know, the guy at the golf course next to me at his locker, he got, you know, eight times, ten times, twelve times. They get these numbers that don’t mean anything. I want to get twelve times too. Well, you have totally different business.

Twelve times what? It doesn’t matter. So you’ll see a lot of mistakes and misunderstanding about that. Understanding the nature of the sales. I mean, does it take a long time for these sales to come in?

They might come in, but do they take a long time? Is there risk? How much inventory do you have to carry? Most business owners that I know, and I don’t blame them for doing this, they don’t use just in time, right? As if they read some sort of Ivy League handbook on how to run a business.

They do, just in case they want to make sure they have enough widgets or enough components. And that makes a lot of sense. But most botanical are going to come in and say, every deal I’ve ever worked at, well, they’ve got way too much inventory. So, you know, pay attention to the inventory. Working capital.

They don’t think about working capital because they’re running a business. The way that we value business and the techniques that we use when we’re selling a business are not necessarily what is used to run a business. And yet I think great value can be had for, for business owners if they pay attention to those things. So typically in a transaction, you’re going to convey as one of the assets of the business, something called working capital, which is typically accounts receivable plus inventory minus accounts payable. That’s kind of shorthand.

Maybe you got some prepaids, maybe you got some cruel rules in there, but it’s basically AR plus inventory minus ap. And if you can look at that and understand, especially over month by month for two, three, four years, what’s going on with that working capital calculation that can tell you something. You have enough working capital. Maybe you’ve got too much capital tied up, say, in inventory, maybe you can make some decisions. So I would, I would implore business owners who are thinking about a sale to do that sort of exercise or do what I would do.

It sounds like work. I would just have my controller CFO actually do the calculations, show who wants to do work. Your business owner, you got to go play golf, you know, have a champagne cocktail tonight. Network.

So what I’m hearing there, Bill, if I’m to summarise and extract the key points, is get yourself a finance team. You no longer want an accounting function or accounting department in your business. You want a finance team. And the finance team are looking forward with the numbers rather than looking back. And the most important thing they’re looking at is your cash flow and providing you with information about the trend of your revenue and the makeup of your revenue and the timing and what have you. So a bit of analysis about your revenue and a good tool for that.

But what I think you said is have a look at your working capital and you provided the formula there. You’re looking at the working capital and so that you can see what’s happening over time. It’s much better than just a snapshot of EBITDA today. That’s not what’s going to give you your business valuation. So that’s how we look at the revenue.

And management team who’s running the business that’s quite often overlooked. So if you’ve got a business and you’re doing well, some businesses are nice to own, but they’re not necessarily nice to sell. And so you will see this a lot. We have an entrepreneur, makes a really good living, does, has a great company and has a bunch of really good people, support people. But if the owner is the person who owns all those sales relationships and maybe oversees the design skill sets like that, handles all the contracts, all the bank relationships, does basically everything, has some really good people to support, maybe some, some administrative people, some Ara people, things like that, good people.

But if that business owner is the business and that business owner disappears, what does the buyer have? And so it’s a bitter pill times for the sellers to realise this. But if you are not needed to run the business, the business will be worth a lot more.

Yeah. Yeah. So we’ve got to really eliminate owner dependence. And a lot of people are saying, how do I. Because you hear a lot of talk about owner dependence. There’s not a lot of people saying, how do you eliminate it? So, yeah, if that’s something that’s caught the ears of listeners, we’ve got a document on how to do that and it gives you, it’s a nice little checklist.

Thanks for flagging that one for us, Bill. I don’t normally jump in there with a little advert.

So we’ve got keep advertising my book while you’re advertising your stuff. I mean, come on, man.

What, you mean this one? Yeah, the purple cover. That’s a fine book there. The purple cover, also available on audible because that’s where I had to listen to it. And look, it really is. I’m not going to keep blowing smoke.

If you’re interested in doing m and a, buy the book. It really is a good book and it’s easy to read because even I understood it. So we’ve got, we want to get a management team in the business. We want to understand our revenue. We want to make up the cash flow.

We want to have a look at where the money’s coming from and make sure that the trend is growing. We want to have a management team that are running the business and not have any of the owners in key roles, but we want them to be, I guess, flying the plane via remote control. They want that remote control. And I guess to get that remote control, they need the right reports and the right information coming back to them so that they can make informed choices. Sure.

Absolutely. Absolutely.

What else would you put for business owners out there? Because I’m loving this nice, simple, level conversation for business owners out there thinking about, right, I need to prepare my business. I’ve got the ear of Bill Snow, who’s bought a stack of businesses and sold a stack of businesses on behalf of others. What are some of the other gotchas or the main traps that you’re looking at, Bill?

Well, let’s jump ahead. When they retain one of these creatures called investment bankers, that’s what I am. What is an investment banker, by the way? We do nothing with investments, and we’re not a bank, so we call ourselves investment bankers. It’s a fancy term. We sell companies, we’ll buy companies, too. One of the, one of the big mistakes that I see, and I deal with this all the time with, with clients, is providing sufficient, not just sufficient, but all the materials we need. And I get this all the time. Well, if you’re so good, you don’t need this report or you don’t need that. That’s what we get. That’s a fool’s errand. We get this all the time. And I liken it to. You’re hiring me to build a house.

I have the labor. I have the blueprints. Okay. Your job is to provide all the materials. And if you refuse to give me all the materials, I get most of them, but you’re not giving me the windows and the doors and the bathroom fixtures. Okay. I can get the house mostly done, but it’s not a finished house until I get those final components. And it’s the same thing, putting materials together. When you’re selling a business, the business owner or that team, probably the CFO or the patrol or the business owner, will have to provide a lot of information to the investment bankers so they can do what? The materials together.

And if we don’t get everything, we can’t put the materials together. So if you’re going to go down that path, and I highly recommend hiring someone, if you’re thinking about selling your business, make sure that you provide what they need. So they can do their job and get the best offer, the best transaction for you.

Yeah. So to get an investment banker, an M&A advisor, a broker, whoever it is, they’re labeled in the country you’re at, to effectively sell the business. If you’re only ever going to sell one business, it’s a bit like, I guess, operating on a family member. If you’re a doctor, don’t do it. You’re emotionally attached to the outcome. You want to stay aware, clear of that. You want to keep your emotional attachment to the family member, and you don’t want to get involved in the operations.

It’s the same as getting an M&A person or an investment banker to sell the business on your behalf. If you want to be involved in the negotiations, you’re emotionally attached and you’re going to mess things up. That’s what you’re saying, isn’t it?

It’s easy because you’re in the middle of the business. Yeah. You can get emotionally attached and you hire somebody else. We’re an arm’s length away. We can act as a buffer. I’ve had clients upset. They yell at me, and then I can go back to the other side and camp down, deliver the same message, but maybe without as many expletive.

And, yeah, that’s, that’s a big part of our job. And we play a little bit the psychiatrist, too. A little bit of handholding.

Good cop, bad cop.

Yeah. And that’s not to the little business owners, because you’re right. This is the biggest transaction they’re probably gonna have. It’s been their baby. It’s what they’ve been working on for whatever, you know, 10,20, 30, 40 years, you know, it’s been their life. And it’s tough to let go. And now all these people gonna start poking around and they’re just gonna start criticising every little decision. Why’d you do this instead of that? And what business owners have to realise is nobody has ever run a business and been perfect. Everybody makes mistakes. Every buyer, every reasonable buyer realises that it’s never going to be perfect.

Let’s try and understand that, okay? Hey, you hired someone for a sales job and it didn’t work out. My goodness. Everybody’s done that. Don’t beat yourself up. And a lot of business owners won’t beat themselves up if they make mistakes, because everybody makes mistakes.

Yeah. And you’ve touched on something there. Like when someone’s going to buy your business, they’re going to spend a whole lot of money on the business. We’re talking millions normally at the SME, mid market businesses, if they’re going to spend millions of dollars, pounds on something, they want to be really clear on what they’re getting.

They want to assess all of the risks, they want to avoid any skeletons or gotchas coming out later. They’ll put some legal terms in to protect themselves if they need to and as they need to. But when they’re doing due diligence, they just want to understand what they’re buying, don’t they? It’s not about being personal and picking on you and trying to make you feel bad about the mistakes you’ve made. It’s just they’re looking to understand what they’re acquiring and where the risks are and if they’re acceptable risk to them.

And that’s why someone like an investment banker can. They’re not going to take all the questions personally, they’re just going to understand them for the information they’re seeking and help the owners and actors that intermediately for the owners who are more likely to take it as a judgment and attack or pointing the finger personally. And someone who’s done it a million times before knows the ins and outs and can make sure you get the best outcome you’re looking for.

Yeah, absolutely. And you touch on something there too. And this is something I talk about with prospects and clients, is you want to transfer value, not risk. And so a lot of people, yeah, we know we have a problem and they want to offload risk to somebody else and they want to get the full valuation. Well, you’re never going to get that because flip it around. If you were buying something and someone was trying to, some smarty pants is trying to offload all kinds of risk onto you and asking for full credit and a big valuation, would you take that deal? Of course not.

So don’t offer a deal that you would not be willing to accept. So if you can focus on creating the value and reducing risk for yourself, guess what? You’re transferring the value to the other side. You’re reducing the risk of the other side. If you can do that, that will have a big impact on the valuation of the business.

So given that we want to, but it’s a really good point, we need to understand it. And a lot of buyers, and I guess if it’s their first time buyers, it’s almost as if they think, or, sorry, first time sellers, it’s almost as if they think the buyers are inexperienced in this process as they are.

Yeah.

And you’ve got to remind them, whoever’s buying your business is likely to be have a bit, you know, has bought a few and sold a fewer than the time before. They’re likely to be bigger than you. We want to make sure that they’re not going to. If you’re well prepared, you got less chance of being bullied and pushed around in this process.

Absolutely. That’s what I tell business owners or the possible sellers is the buyers. They’re not new to this and they’re certainly not going to be inexperienced in terms of business. They’re going to be sharp, inexperienced and savvy, just like you. So you’re not going to be able to find the greater fool in this kind of game. Another mistake I think that sellers make sometimes is okay. They want to sell, they want to retire and cash out, and they deserve to do so. The best deal, the fairest deal, of course.

But sometimes they will look at the buyers that they’re negotiating with as if the buyer must do a deal. You have to understand the buyers can walk away. It’s probably easier for the buyer to walk away than the seller to walk away. So if you push too hard, I’m all for negotiating hard and getting the best deal and being creative, but if you push too hard, the buyer doesn’t have to do the deal, they just walk away. It’s not like someone is putting a gun to their head.

You must get a transaction done and you put the screws to someone. No, if you get irrational, if you’re asking too much, the other side will simply walk away. So that’s a big part of what we do as well as investment banking. Point is, read the room. I liken it to a poker game where the big thing that whenever I say that people think bluffing, they think poker is about bluffing.

No, for me, a game like poker is about understanding the strength of your hand and then reading the other table and trying to determine the strength of their hand and acting accordingly. So if you have a weak hand, what do you have to do? You have to figure out how you can get out as cheaply and quickly as possible. If you have a strong hand, that’s great. But I think the biggest mistake a lot of business owners make is they have that strong hand and they overplay that strong hand.

So if you’re playing poker and you get dealt with great hand and you start betting really high numbers, the maximum bet or whatever it is, what, what’s everyone going to do? You’re going to signal to everybody that you’ve got a great hand. They’re all going to fold. And instead of being able to milk the pot and get a nice hand, you’ve won the ante. So you’ve had a strong hand, you’ve misplayed it.

The same thing goes for business owners. You have a strong business. You don’t want to overplay a strong hand, you’ll end up with nothing.

Yeah. So. And we want to let out, not be led by our egos, I guess, in the, in this scenario.

Absolutely. Absolutely.

Okay. So if we touch on that and some of the things we need to do and get under control, what are some of the factors that can help or hurt, I guess a valuation from, from what you’ve seen there, Bill, I think we’ve sort of alluded to a couple, but let’s spell it out.

Sure, sure. Yeah. So some of the things that can hurt a business. Well, a business owner who is desperate, motivated. The motivated seller.

Right. I got to get out of this thing. I’m tired. What’s that going to do when you’re willing to take a deal, any deal that’s going to tend to put the price down. Companies that are declining revenue, declining profits, those can be really challenging to sell.

Most buyers just sit on the sidelines and wait until things bottom out and then start coming back up for the value of the business. We said have a lot of capital expenditures. We talked about EBITDA. EBITDA do as that former client of mine once called it. And Capex is not part of EBITDA. And so if a company has a lot of capital expenditure needs, that can have a dampening effect on valuation. Customer concentrations, vendor concentrations, long sales cycle, a product or a service that has very limited barrier to entry, anybody can do it. So things like that can have a negative impact. If you have a business that has a high amount of reoccurring revenue, especially if it’s contractual reoccurring revenue, those tend to be valued very highly. So if a business doesn’t have reoccurring revenue every single month, you start at zero and you’ve got to fill up again. That business has value, but it’s not going to have as much value because that’s added risk that you got to get out there every single month, every single day and make sales. So those are some of the things that can impact business. Little things, too. A messy, unkempt facility. We had a client a number of years ago, nice business, really high margins in the business, but it was really messy.

It was an old building, and the owners, they were cutting corrugated cardboard and stuff like that. And it was dusty and there was just stuff all over the place. And the place looked like hell. And it scared off a lot of buyers. We ended up getting a good deal done, but I know just the physical plant scared off a lot of buyers.

So tidy up things, make it neat and clean. That, that can have a big impact. Change of light bulbs. If you’ve got stains in the ceiling tiles from a waterloo, fix the water leak and replace the tiles. Little things like that can have an impact on evaluation.

Yeah. If you’ve, if you’ve got messy bits and it looks untidy there. Where else is it untidy?

Exactly. Exactly. Yeah. Okay. It’s, it’s that old analogy of Van Halen, the band. And they take that brown M and M’s out of our. And the brown ones out of the M and M’s. Right. And a bunch of rock stars. Well, apparently they did that. We’ll take their, their word for it. They would put that in their rider and they would check the M and Ms.

And if they saw Brown M and M’s, well, what else did the promoter miss? And if all the brown M’s were out, maybe they actually followed the rider. So it might sound silly, but little things like that. Yeah. Can be a tip off to bigger problems when you have little issues.

Yeah. Well, it shows the attention to detail, and that applies everywhere. So, Bill, you’ve operated on both sides. In your experience, is it easier to buy or sell a business?

They’re both. They’re brain damage work. And I tell everybody, don’t do it. You don’t want to do this kind of life. Go do something else. Go fall down a flight of stairs. You’ll have more fun. Selling a business is quote unquote, easier. It’s not necessarily easy, but it’s easier selling a business. Everybody thinks finding the buyer is the hard part. Finding a buyer is easy. I don’t get retained to find buyers. That’s easy. Getting a transaction done that makes sense for the seller. That’s where I make my money. And that’s why you hire somebody like me.

Buying businesses is a lot more difficult. And everybody thinks that’s going to be the easy part. Right. We’re used to going to the grocery store. We’re out of, you know, dog food or milk or bread or whatever. You go to the store and you pick what you want, you come home, no big deal. We’re used to that, being able to select what we want. Roles are reversed when you’re trying to buy businesses. You’re basically selling yourself, you’re selling the basic, most commodity, the biggest commodity in the world, which is money. And so it is really hard for sellers to get the attention of buyers because most business owners don’t want to sell.

And the business owner, especially if the business is a good business and growing and no concentrations and all the positive things that we talked about, that business is going to trade probably for a strong price. It’s going to have multiple suitors. That business can be only sold one time. And so it is hard for the buyers to get the attention, put something together. It is really hard. I call it brain damage work. So don’t go to it. Don’t, don’t try and buy. Sell your business. Everybody should sell their business.

So selling is easier. So what do you do? We’ve talked about all the businesses that actually get to you and get to the point where you go, yeah, we can sell this. What do you do there? Because we’ve heard the stats that four out of five businesses that go to market just don’t end up getting a deal.

What do you do when a business owner comes to you and they say, Bill, I want you to sell my business for me, and you have a look at it and you go, there’s no way I can sell this business. So a two part question. What do you see when you go that says this business is unsellable? And B, what advice do you give to the owners in that scenario?

If I look at a business that’s been brought to me and I say, there’s no way I can sell it, I’ll tell the business owner, there’s no way we can sell this.

But do you give them a reason why it’s unsellable? You can touch on that.

We’ll say, look, this isn’t going to be right for us. We don’t know. It’s usually a matter of earnings. And so here in the States, we used to want to see at least a million dollars in that fabulous thing EBITDA do. Those deals are getting difficult to place. So now, well make exceptions, of course, but ideally want to see at least 2 million in EBITDA. So if the business is not growing, if it’s shrinking, if the earnings are negligible, those are really difficult. Well, we’ll tell them that’s really difficult.

If you’ve got a business in pretty much any industry and you’ve got good revenues and your earnings are over 2 million, you’ll probably be able to trade that. You’re going to get that where people have trouble selling, I think are smaller deals, the smaller transactions can take longer than the big transactions. They are just, there’s a lot more pounding of the table and trying to get them across the finish line because there’s not as much meat on the bone as a bigger company with management, with earnings balance sheet and so forth. So if we can’t sell the business, we’ll tell that it’s not sellable. Those are usually businesses that are having some sort of financial issue, some sort of negative financial issue.

Yeah. And are there any other factors, Bill, other than the financial factors that you look at and you go, yeah, I don’t think this business is going to attract too much attention.

It’s mainly, it’s mainly the financial, and if they’ve got the financial performance, there’s probably going to be a buyer out there. Now, you look at other things, too, and can I work with these people? I’ve had clients backlines like everybody else. I can’t say I’ve passed on anybody. Oh, great company. There’s 100 million in revenue, 30 million in EBITDA. The owner’s a jerk. No, I’ll figure out a way to work for that person.

It’s primarily a function of the size of the business vis a vis the profits of the business. Now, we’ll pass on a lot of stuff. People will reach out to us. Even though I say I don’t want to see anything. That’s early stage. I don’t do with venture capital anymore. People will still come up with these, great, we need $15 million seed capital. Well, good luck. You’re not going to find that I don’t know those people. I can’t do that. So I’ll turn down a lot of those opportunities, but it’s going to be primarily a matter of the financial performance of the company.

Okay, so is it a case of from your perspective? First, we’ve got to see that the business is sellable and the fact that looking at the numbers is the biggest indicator of whether it’s sellable or not. And ideally, we would want at least a mil in EBITDA to identify the size and scale of the business and looking more towards two mil now for a decent deal and then anything after that. Are we saying that what you can do as an owner is to make your business even more attractive?

So part of it is the profit, and then we’re talking about what’s effectively known as the multiple, but we can start to maximise the valuation you’ll get for your business. But you need to meet those profit threshold size or scale thresholds first.

Right, exactly. And also, you look at the margins, too. So if it’s a really big company, it did 250 million in revenue. That sounds great. And it has $2 million in EBITDA. That’s really thin. That might be something we’d have to pass up at that size, particularly the balance sheet. You know, somebody, it depends.

Somebody might look at that. But if it’s, you know, if it’s the business doing a million six in revenue and the EBITDA is 250,000, you know, it’s a nice business, but there’s, there’s nothing that I can do with it. I mean, we need to get paid. We need to get a fee, and basically our fee would be the total proceeds of the sale. That just is unethical. That wouldn’t make sense.

Right. All right, so we’ve heard it from the authority. We’ve heard about what can make a business sellable. Bill, we’ve talked about the factors that can affect valuation. We’ve talked about EBITDA. We’ve talked about what EBITDA means. We’ve talked about getting the right sort of scale. Is there anything that we need to talk about that we haven’t covered yet that can really influence the sellability of a business for that mid market, small to medium business owner size?

Well, there’s always more things, but I think we’ve covered, I think the big things, the profitability of the business, capital expenditures, management team concentrations, things like that. Again, if they’ve got recurring revenue, that’s always extremely valuable and very helpful as well.

Okay. The only thing that’s outstanding for me is in terms of setting the expectation for the business owner. They’re going through the process. They’re in negotiation stage. They’re working with an investment banker such as yourself. What expectation do they need to set aside of how much of their time, in terms of how much, I guess, weekly input they need to make and duration it’s going to take to get a deal done before they can walk away, before they’re sitting on the beach drinking pinacolatos.

They’re not doing that already. If they’re not on the beach already, we don’t want to hire them.

Back to that management team point.

Yeah, and I’m sorry, I’ve lost my train of thought. What was the question again?

What is the expectation in terms of weekly input to get the deal done and over the line, whether it’s them or their CFO, for example, and how long. So the duration of how long it’s going to take is it to get a deal done?

Yeah, it should take somewhere around eight, nine months. People will tell you less it can happen, but I haven’t seen it. Just because you got to remember, you’re trying to find buyers, you’re going to talk to a bunch of them. They have schedules, and the schedule we have might not line up with the ultimate buyers. Maybe I have to wait a little bit. Okay. A couple weeks or months or something like that. When somebody like me gets retained, we will provide a list of information that we need from the company to put all the materials together. And that can be a bit of a time consuming thing. And it might involve a couple phone calls where, yeah, they’ll send us a lot of documents, but maybe some of the company history and how we started it and, you know, some other things.

Sometimes that is a lot easier just to talk that through. So we can make a lot of. We’ll record it, make a lot of notes. We’ll put the materials together. So when we first get retained, the business owner will need to give us some time.

What does that mean? I mean, that means more than ten minutes. That means that you’re going to have to give us a. A few hours, probably five to 10 hours over the next week or two to provide us with the information. Combination of talking to us, getting the information, and then we’re putting the materials together.

We’ll get the materials to the business owner for approval. Now, there might be some editing back and forth, so there’s kind of peaks and valleys, a lot of, lot of work beginning, and then we kind of disappear for a little bit, and then we pop up again. Here, take a look at this. And then we go to market, and that might take a couple weeks. So it’s a little quiet.

We’ll have some occasional conversations. I like to have a weekly phone call. I think that’s a good thing to pick a time that it’s good for everybody. We’ll get on the horn. We’ll see where we are, what we need, and how things are coming along.

I think that communication is important. We’ll get offers and then sitting down and going over the offers, that’s going to take a little bit of time. And then you want to set up management meetings. And so that’s usually a bunch of meetings that we’ll set up over the course of a week or two weeks. That’s not necessarily nine to five for two straight weeks, but you want to have five, six meetings, seven meetings, something like that over the course of a week or two weeks.

The meetings are usually, you know, you do one in the morning, one in the afternoon type of thing, and then we negotiate. The investment bankers negotiate. We’ll have regular communication with the business owner. So selling a business is a full time job, but you’ll have a little spike when we get first retained, another spike when we’re doing the management presentations, and then maybe a little spike at the end as we’re working on the purchase agreement.

Okay. And in terms of the business side, how many people from the business should the owner include in these conversations?

I like to keep it as close to the vest as possible. Include certainly the key people. Any other owner of the business should be included and certainly should know that this is going on. CFO or the controller, that person is usually in on meetings.

Any other key people, especially if there are key people that are going to stay and help the new owner run the business, they should probably be involved in the business and get a chance, when we do management meetings, for that team to meet the prospective buyers, maybe they don’t have to sit in for the full presentation, but maybe a few minutes here and there so they can talk a little bit about what, what they do that’s important. So who gets invited? You know, that’s really, you kind of know it when you see it. As far as all the other employees, you probably don’t need to. And I would not recommend telling everybody that a transaction is going on until the transaction is done. So they need to know, include them. If they don’t need to know, I would not include them.

Yeah. Otherwise we’re just risking anxiety and yeah. And the deal might not proceed.

Right. And that can happen. And maybe it’s a problem with the market. The company’s doing fine, but the buyer and buyers maybe have bowed out or whatever, those things happen. And so if you tell everybody, tell your staff, hey, we’re going to sell the business. I had a guy do this. I said, don’t tell people you’re selling the business till the deal’s done. We didn’t even have an LOI, we had a piece of paper. We had an indication. So to set up the first meeting with a prospective buyer, and what does he do? He goes through his office with this piece of paper. Our problems are solved. I’m solving the company. And of course, it was a struggling company, and we didn’t get a deal done. It was a lot of issues with it. But the problem there is, even in a good company, that company I’m talking about was a struggling company, but even in a good company if the transaction doesn’t get done. Wait a minute. Didn’t the owner tell us six months ago, a year ago we were going to sell the business? Should I be dusting off my resume? Are we having problems? He hasn’t told us. How come this thing hasn’t sold? So you want to be very careful with this.

It’s just like any client, you haven’t won a new client or sold to a new client until the money’s in the bank.

Exactly. Exactly. Totally agree.

Bill. We’ve covered a lot of ground today and I really appreciate you sharing your knowledge so freely. Have you got any thoughts? Are there any summary comments that you want want business owners to walk away and go, hey, look, here’s the number one thing that you really need to hear when, when you’re thinking about getting to the stage of exiting and selling your business.

Absolutely. One thing we didn’t talk about, maybe this is a good way to end, is the financial planning and tax planning. Talk to tax people. Okay. And make sure you understand what sort of structure is best for you from a tax point of view so we can communicate that. Buyers, here’s what we’re looking for. We’re not going to say we’re looking for a certain amount of money, but we need to sell the assets. We need to sell the stock. The owner wants to sell 75% of the business or something like that, and retain a piece and work for a few more years and then sell the rest.

Wants to sell the whole thing and retire. Happy to stick around for transition period, whatever that is, the market response. So let’s have a very specific idea what you want to do so we can communicate that to the buyer. And again, taxes. Talk to your tax people. I. Yeah, yeah. Yes. Because I’ve done this enough. Where you talk to the accountant? Well, we’re going to sell the business. What should we do? Yeah, yeah, yeah. You’ll be fine. Do a stock deal. They kind of do this. Yeah, yeah, yeah. They wave their hand and quite often the stock deal is better for the seller. But you know what? If you do the, the numbers and actually crunch whatever that tax Bill might be, understand the basis of the stock.

Understand the basis of the assets being sold. Maybe it’s a wash. Maybe doesn’t make much difference. Maybe an asset transaction is better. So have your accountant don’t do the.

Yeah, yeah. Yes. Have your accountant sit down, put pen to paper and do some actual calculations as if you were actually selling the business. And that might be very enlightening for you if you do there. Yeah, I have.

Yeah. You’re confirming what we hear over here. The tax accountants are saying to us, if only my client told me before they were planning to sell their business before the deal, I could have saved them a lot of tax, and they need to know before. So get your tax planning done. It’s a great way to end it and summarise the overall thoughts.

If you’re going to exit your business, you got to plan it from end to end before you start negotiating is how I’d pull it all together. Bill Snow. So thanks for sharing your exit insights with us today.

My pleasure. Thank you.

He has written articles for online sources, as well as books about mergers and acquisitions (Mergers & Acquisitions For Dummies), early stage capital (Venture Capital 101) and personal marketing (Networking Is A Curable Condition). He has presented at universities including Northwestern University, DePaul University, IIT-Kent, and Harvard Business School, as well as the Thomson Reuters Midwestern M&A/Private Equity Forum, Chase Bank, Huntington Bank, Ice Miller, the Illinois CPA Society, and the University Club of Chicago.

Bill is a Vistage speaker and has presented to groups in Chicago, New Orleans, Louisville, and Cincinnati. He has lectured internationally in Malaysia, Thailand, the United Arab Emirates, and somewhere off the coast of Norway. He has an MBA and a BS in finance, both from DePaul University, and he’s a FINRA-registered Investment Banking Representative (series 62, 63, and 79).

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