Today’s podcast features Chris Taylor from Allan Taylor and Co. Chris is going to help us think about what the secrets are to having a successful sale of your business. Even if you’re not interested in selling your business today, you need to understand how other people look at your business. When you make your business sale ready you are putting your company in a position of having the most value for you. This is true whether you plan to keep or sell your business.
Today you’ll get to learn some of the following things:
- What it takes for your business to be ready to go to market, even if you don’t want to do it.
- What market valuation is and how it’s different from fair market valuation.
- What salability means and how to evaluate whether your business fits the definition.
- Why operational irrelevance (my favorite term) for business owners is one of the keys for a successful transition.
- Why you need a recurring revenue theme and why systems allow buyers to feel confident their purchase will be successful.
Narrator: Welcome to the Sustainable Business Radio Show on podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. The Sustainable Business is all about creating great outcomes.
Here’s your host, certified financial planner, student, entrepreneur and private business expert, Josh Patrick.
Josh: Hi. Today, I’m going to welcome Chris Taylor into our podcast. He and his wife, Barbara, started and run the mergers and acquisition firm Allan Taylor and Co. Before starting Allan Taylor, they owned and operated a group of coffee shops in the Pacific Northwest. Allan Taylor is based in Bentonville, Arkansas where they specialize in working with privately held businesses who have created value and the owners are ready to move out of the business.
Today, we’re going to talk with Chris about what a business needs to be thinking about if they want to be sale-ready. In my world, sale-ready means your business is ready to sell even though you might not want to sell it. Let’s bring Chris in and find out what he looks for before he takes a business on as a client.
Hey, Chris. How are you doing today?
Chris: Good, Josh. How are you? Glad to be here.
Josh: I’m doing great.
So, tell me, what do you look for in a business that you guys want to take on as a client? What’s important to you? And more importantly, why is it important?
Chris: It’s extremely important that we get a business ready to go to market. Businesses that aren’t ready to go to market exponentially have a much greater possibility of not selling or getting the value that’s wrapped up within that company.
Josh: When you say, getting ready to go to market what exactly does that mean?
Chris: The very first thing that Barbara and I do, we get a lot of inquiries. Barbara is writing for Forbes. She used to write for the New York Times and her blogs are still up there, so we get a lot of inquiries and people thinking that ‘hey, I’d like to go to market.’ One of the things that we do is we do an assessment before we even think about that. A lot of businesses are just not ready to go to market and the first thing that we do is we always insist that we do a market-based valuation up your company. Barbara and I like to say that’s kind of our step into a light due diligence on our side because when we go through a valuation, we’re going to start asking the owner a lot of questions. We’re going to start uncovering a lot of things that we feel would be problematic if we went to market.
We’re a little bit different on the M&A side as opposed to a business broker model. The business broker model is they’re going to take anything to market. They’re going to slap it up there. They’ll have 40 or 50 engagements which I think is ridiculous. But what we do, we’re a lot more consultative, so we’re going to look at the business and say, “Hey, you know, you could go to market now but you might have some inherent problems which is going to affect your value. Here’s some things that we see. Let’s all take a step back. Let’s work on these. And then when we’re actually ready to go to market, it’s just going to be a much more favorable and pleasant experience for everybody.
Josh: Our listeners are not mergers and acquisitions professionals. Let’s go through some of the jargon that I just heard. What is a market valuation?
Chris: Market valuation, we will go out and we compare it against three or four databases that we have on business acquisitions that have actually happened within the last 6, 8, or 12 months, so we can compare like businesses and industries to find out what a current multiple is for that business as it was sold within the last few months. These are used. Buyers are really savvy nowadays and they’ll know exactly what multiple should be applied to a business that’s for sale. Retail businesses, again, those multiples are lower. We had a kind of a heavy manufacturer in the Gulf of Mexico we just finished. Their multiple was about 5 – 5-1/2 or even 6. When we talk about a multiple, we will derive – when we go through your valuation, and determine what your EBITDA is.
EBITDA is your earnings before interest, taxes, depreciation and amortization; or it can be referred as your net operating income. We’ll take that number and then we’ll apply a multiple to that. Let’s say we get to your net operating income, and I’m just using an arbitrary number of 1 million. We will go out and do a market-based comparison and find out what a multiple should be applied to that if you wanted to go to market. Let’s say you had $1 million in EBITDA or net operating income in a retail business. Again, I’m just throwing out arbitrary numbers; but let’s say that’s 3, then your business – the valuation that we would attribute to that would be a $3 million-market-based valuation.
Josh: When you’re doing this market valuation, what specifically are you looking at in a company to determine whether it’s 3, 4, 6, or 7 – besides comparables to other businesses in that industry?
Chris: That’s a great question. You can have two businesses in the same industry with the same net operating income, but one of the things that we really try to educate people on is there’s a difference between what your value is and then the other term that we use “is it sellable?” or the salability factor that we put into it. Things that will affect salability – and these are just some really obvious things that we look for – Are your books clean? Do you have really clear books that go back five or seven years? If your books are not ready, if your accountant has not even done a simple compilation report, if you have some back taxes or some things that haven’t been handled – we look at that, so you’ve got to have clean books. Your books need to stand up under heavy scrutiny is probably the first thing we look at.
The second thing we look at is customer concentration. People don’t understand that I have an enormous net operating income but if that’s derived from one or two clients, a potential buyer coming in is going to say ‘Look, if I lose one of these clients after I buy the business my net operating income is just going to go under the toilet.’ These are types of things that we advise people.
The third thing that we really look at is operational irrelevance. People look at me and say, ‘What is that?’ What we try to convey to people is the thought of, “Can you leave your business for 30 days and have it run the same way that it would if you were there?” And people say, ‘Well, I’m the business. If I’m not there, things don’t run right, problems happen, customers aren’t happy, employees aren’t happy.’ And we have them take a step back and say, “Okay, if you have to be there to run this business, then what is it really that you have to sell?” Operational irrelevance is start getting yourself in the process of delegating – finding a person that can step into your role. Because as a buyer, if I know that your business can run stand-alone without you there, it makes it much more attractive and it helps drive that multiple up.
Josh: I have a couple of questions around that for you.
Josh: If I was going to become operational irrelevant, what do I need to do?
Chris: This is extremely hard for a lot of entrepreneurs, people that have started companies. You need to learn how to delegate. And people say, ‘Well, no one can do what it is that I do.’ Well, if that’s really the case then I think your value of your company has just been diminished. We advise people, “Start finding the things that are really important in your business and start delegating them to the people within the organization.” If you don’t have somebody within the organization that you can delegate these really important tasks to, start finding somebody. Hire within. Start asking around your peer group and find somebody that can come in and help you to achieve this.
Josh: Where does systems fit in, when it comes to making yourself operationally irrelevant?
Chris: I think systems are really important. I think that you need to sit down. We always suggest to people, “Sit down with your accountant or an advisor that you have and start finding out what really drives the systems, what drives the revenue within your business.” And once you figure out what those systems are and how important you are within each one of these systems, then start to find somebody that can help you, step in and start developing that.
Josh: Do you recommend that clients document systems?
Chris: I think, to that question, it just depends on the business. It just depends on the business.
Josh: From my point, this is what I’ve learned over the years, that if I want to make my business sustainable, I better document what I’m doing because people leave.
Josh: That’s just something that as were thinking about business sustainability which is what we’re really talking about here.
Josh: And by the way, for folks who are listening, sustainability doesn’t mean that you’re going to own the business forever. It means your business is going to last for 100 years, so that’s what we’re asking the question around – not, are you going to own it or your family’s going to own it. They might, they might not but that’s not sustainability.
There’s another thing which if often think about when I think about sustainability or salability which is recurring revenue. Would you care to comment on that a little bit?
Chris: Recurring revenue – I think that comes down to the specific type of business. For an example, we’ve finished up with a heavy manufacturer in the oil and gas segment in the Gulf of Mexico. We had a $1-billion private equity group that was looking at it and they asked the same type of question. These people had been in business for 20 to 25 years. They ask the same thing, Josh, that you just alluded to about systems. “What type of systems do you have in place?” And they were alluding to the recurring revenue model. It’s difficult for this family who gets up every morning and just kind of reacts to the market, reacts to their customer and they said, “Do you have any customers that are going to give you repeat business?” They said, ‘I just don’t know that from day to day.’ I think that’s a difficult concept for most of the people that we work with – a recurring revenue model. For most entrepreneurs, it’s a concept they haven’t thought about.
We did have a client about 4 or 5 years back. He owned 10 or 15 AT&T stores. I don’t know if you understand that model, but when you sell these phones and these contracts to people, you get a residual income. I think their recurring revenue model was enormous. Basically, the way we valued that company was just a multiple of that residual income that they got every month from AT&T.
Josh: Did you have a valuation be higher as a result of the recurring revenue? Or did that not affect it?
Chris: If you can prove and document recurring revenue, that is really going to increase your multiple.
Josh: So again, for our listeners, here’s something you might want to think about with recurring revenue, at least in my world. Recurring revenue doesn’t only mean recurring revenue contracts, it could be how you create business. And if you have a system for doing that, that will increase the value of your business. By the way, it will dramatically increase the value while you operate it.
Josh: And buyers will pay more for it.
Josh: You have something down on our shown notes here about seeking out network or peer groups—
Josh: What do you mean by that, Chris?
Chris: We have worked with many, many business owners over the years and we find kind of a recurring theme with owners. These owners are really, really good at running their business. They’re great entrepreneurs but what they really lack is they don’t pop their head up every once in a while and they don’t go out and seek like-minded people. They don’t have discussions about what’s going on in their business.
I started, actually, kind of a peer-to-peer group or a mastermind group – I don’t know the correct terminology, but we started one about five years ago. We have about 15 or 16 business owners that get together twice a month. We sit down and we talk about problems and issues within our business. It’s just been a profound experience for some of these business owners because I’ll tell you, business owners who run successful businesses, they don’t talk to people. They don’t get out. Their lives are their business and their families and that’s it. These business owners have really intense issues – legal issues, employee issues, marketing issues, sales issues and we sit around a table and inevitably we’re very careful about the people that we bring into it. We want to make sure they have a lot of experience. But inevitably, every time that someone brings an issue into that group, there’s three people around that table that just went through that a year ago or two years ago and the advice and the camaraderie and the kind of circling the wagons around those people – it’s just been a profound experience for those people. So, that’s kind of what I said about going out and seeking other advice.
My other thing that we really find problematic within companies is they surround themselves with what we call “yes people.” If you have an accountant, or if you have an attorney, or if you have a financial planner, or some other advisor and they’re just there to tell you yes and agree with everything that you and say or want within your business, you need to find new advisors.
We meet with people that talk once a year with their CPA and it’s around their taxes. I really think that’s kind of a shortsighted approach. You need to find a CPA that’s really consultative, that you can pick up the phone and say, “Hey, I’m looking at buying a new piece of equipment, what do you think?” This financial advisor, the CPA, needs to come in and help you strategize.
We really feel strongly and we advise people, if you have more consultative people in your circle of influence that are going to tell you the honest truth in terms of “Hey, you know, that’s really a bonehead move. If you’re going to go out and spend $35,000 on a piece of equipment and you don’t need it. Let’s save that cash. Let’s invest it in other things.” Those are the people that you need to surround yourselves with.
Josh: That’s unbelievably good advice. And by the way, I’ve been involved in peer-to-peers myself for almost 35 years now, in various types. None of them lasted that long but I’ll tell you one thing. Here’s what I’ve learned from peer-to-peers which I think is probably the most valuable piece – nobody in your organization tells you the truth.
Chris: You’re exactly right.
Josh: These peer-to-peers, if it’s a good one, man, they’re going to tell you the truth because they don’t care what you think.
Chris: It’s this tough love. It’s like, I went through the same situation that you did three years ago, I ended up not having this advice and I made a ton of mistakes. Here’s the mistakes I made, I don’t want to see you go through that.
Josh: Yeah, I’m a huge fan of peer-to-peers. We actually did a session with Steve Wershing who was one of the experts in the country of setting up these things about client advisory boards which is a first cousin of peer-to-peer. We’re going to be doing a show on peer-to-peers in the near future.
Josh: You have down here, “address family issues now.”
Josh: Why is that important to build sustainability, so you can sell your business?
Chris: We work with companies. Inevitably, every time there’s family dynamics that are in these companies – I don’t want to get specific on companies if they hear this, but we worked with a company, the owners had some health issues and their daughter was under the impression that she was going to inherit this business. She worked in the business on a day-to-day basis. There wasn’t communication between the parents and the daughter. Subsequently, we went to market. We went through our checklist. Everything looked good. What we didn’t know is that the daughter didn’t want this sale to happen because if it happened then she might not have a job. She was kind of getting special treatment with her parents. She could come in when she wanted. She had an egregious compensation package that wasn’t based on market factors.
So, when we went to market she was an integral part of the day-to-day operations. What we found out as we went through the selling process, she was actually sabotaging this and saying things to potential buyers behind the scene. She was trying to sabotage vendor relationships. She was trying to sabotage internal employee relationships. She did a lot of damage to that process.
Fortunately, we were able to figure this out early enough. We got with the parents and the parents made some adjustments. But again, family dynamics – if the whole family isn’t aligned in terms of “Hey, this is what we want to do” and everybody understands the process to the best of their abilities going into this. If there’s not complete alignment, we advise people “We’re not ready to go out and do this process. It’s just getting end up badly for everybody.”
Josh: That’s a really good point for our listeners to think about.
We have time for one more question.
Josh: What I find really interesting is your comment about the need for business owners to look at their businesses as an investment.
Josh: Can you comment on that?
Chris: Inevitably, what we find is that most business owners – in our segment, we call them the “tweeners”. They’re too big for business brokers and they’re not big enough for investment banking – usually between $2 million and $50 million in sales, this is their retirement. They’ve put their whole lives into building this company. It is your investment. It’s the largest, most illiquid asset that you have. If you look at this as an investment, you’re going to look at that doing things differently.
When I look at investment, one of the things I try to ask myself is “What drives value within that investment?” If you don’t understand what drives value in an investment, I don’t think that investment is going to be worth all that it could be. If you don’t understand the term “Hey, what drives value in my business?” then you need to sit with your CPA and you need to ask him that question. And if your CPA doesn’t understand that or he’s not able to work with you through that process, you need to find a new CPA. So, if you understand what drives value in your business – whether it’s an internal function such as sales or marketing or if it’s an external function – market-driven forces or helping you understand what the industry is for gross margins or your net operating income – these are all the things that you need to understand. If you understand what drives value in your business then inevitably I think you’re going to understand your investment. If you understand your investment better, I think it’s going to be worth a heck of a lot more over the years.
Josh: We can do a whole show just on what drives value in a business community and we may do that in the future. So, Chris, I’m going to assume this. Some of the folks listening today will be interested in learning more. How do they contact you?
Chris: Well, they can jump on our website. Our website is allantaylor.co – not .com, people always try to put in the .com and they say ‘Hey, I can’t find you.’ Well, we’re the new up and coming .co’s is what we were told by our developer. And you can dial the office. The office number is (479) 254-7887 or feel free to call me directly on my cell phone. My cell phone number is (479) 644-6143. Shoot me an e-mail and it’s email@example.com.
Chris, thanks so much for time today.
You’ve been listening to the Sustainable Business Program with AskJoshPatrick. If you want to learn more about what a sustainable business means, you can visit us at www.askjoshpatrick.com. Thanks so much.
You’ve been listening to the Sustainable Business Podcast where we talk about what you need to do with your business if it was to be here 100 years from now. If you like what you heard and want more information, please contact me at 802‑846‑1264 ext 2 or visit us on our website at www.stage2solution.com or you can send me an e-mail at firstname.lastname@example.org.
This is Josh Patrick and thanks for listening. I hope to see you soon for another edition of The Sustainable Business.