A lot of small business owners don’t know what to do when selling their business. It’s important to note that business is a lifetime event, and selling is not just about the transaction but the people’s identity too. Vice President of Brokerage and Co-owner of Raincatcher, Jason Thomas, believes in that idea. In this episode, Jason talks about how you can sell your business the right way and reap the benefits of your hard work. He shares some of the things that affect selling your business and what you could do to improve its value. Understanding the other side, Jason then lets us in on the types of buyers out there, and what they are looking for that the sellers don’t recognize. Learn more about the business brokerage space and find ways to prepare yourself and your business when the time comes that you knock on their door.
Watch the episode here:
Listen to the podcast here:
Selling Your Business And Reaping The Benefits Of Your Hard Work With Jason Thomas
Our guest is Jason Thomas. Jason is the Vice President of Brokerage and Co-owner of Raincatcher, a business brokerage and M&A firm, which partners with entrepreneurs and business owners to help source the best win-win deal for all parties. After spending nearly a decade in the real estate sales and development industry, Jason knows what it truly takes to get a large transaction through to the finish line, hard work, communication, and the ability to connect with your clients. Jason is a licensed business intermediary and real estate broker. As an owner in multiple businesses, Jason knows the challenges that small business owners face on the day-to-day and cherishes the ability to help them reap the benefits of all their hard work through the sale of their company. Jason, welcome to the show.
Thanks, Bob. I appreciate you having me.
Jason, give us a little background or a snapshot of how you got here.
It’s a long journey but I started my career in real estate. More importantly, I come from an entrepreneurial family. My dad was a small business owner, my mom was a small business owner and that’s ingrained in my roots. I remember the first experience I had in a small business was in Hilton Head, South Carolina as a young child. I sold golf balls back to golfers. I would go in the ponds and fish them out and set up a little table on the side of the golf course and sell these golf balls back to these guys for $0.50 a piece or $1 apiece. I remember that clearly and that’s transported through my life to where I am now. I thought my career was going to be in real estate for a long time until I went back to get my Master’s degree in Business Administration. During that process, I started to think about the opportunities that were out there for me and in my experience in sales and real estate and how I could help small business owners. During that same time, my dad was in the process of selling his insurance company to this investment bank. In that process, he realized that it wasn’t the right fit and he ended up buying his business back from the bank a couple of years later. The world aligned at that point. That was right around the time that I was introduced to Raincatcher and decided that this was the career and path that I wanted to go down.
We’re the fabric of our past and what we bring to the table. My first question is getting golf balls. There weren’t gators from South Carolina at that time, were there?
There were gators. That was a part of it. We would wait and dive into these ponds. We definitely had some encounters with some alligators, not too big ones but they were there for sure.
That puts the risk premium on the golf ball price, I’m thinking.
That’s why it was one for $1 or three for $5.
I think about that and I think there’s a whole industry around that now getting the golf balls out. When you watched your dad and talked to your dad post-sale and he left that business and then he went on to whatever was next. What did you remember or note after that departure?
He started the business many years ago. It’s an insurance business in South Carolina. He was the CEO and founder of the company. He sold to this bank and part of the requirement of sale was for him to stay on post-closing which is similar to a lot of our business owners. He said it was the day that he needed staples. He asked the secretary, “I need some more staples. Can we order some more?” She’s said, “I can’t order staples. You have to fill out an expense report.” He’s been running this business for 30+ years and now he has to fill out an expense report. This is one small example. He has to fill out expense reports to justify why he needs to have staples. It’s a need that a small business has. This was a successful insurance company. That was one example of the waterfall of expectations that he had that didn’t come to fruition like he wanted and how they were driving the future of the business. For him, he wanted his company to go in a different direction and he lost that control once he sold. That was ultimately what drove him to buy it back.
You’ve got this tapestry of experience in the entrepreneurial game for lack of a better term. For you, when you were looking at it, how did you find Raincatcher? What was it in the Raincatcher culture that drew you in?Selling businesses is not about getting the deal done, it’s figuring out when is the right time to sell a business. Click To Tweet
It’s interesting how fate aligned sometimes. I thought that real estate development was my career path. This was shortly after I finished up my MBA. I was introduced to the original founder of Raincatcher and now my partner Marla DiCarlo through a fly-fishing expo. I’m an avid fly-fisherman. In my early twenties, I used to be a fly-fishing guide. Marla and the original founder of Raincatcher owned another business called Boulder Boat Works, which is a drift boat manufacturing company here in Colorado. I had been introduced to them through an associate, through a friend and he said, “You should go talk to these guys. They’ve got a great fishing company. It’d be great for you to learn more about it.” I went to this expo to talk about fishing which I can easily do. I started talking to them and this conversation quickly shifted to the other business that they were just launching, which was a business brokerage company.
Not that they just wanted to sell businesses, it was around the fabric of why they had chosen to be in the business brokerage space and why they were trying to be there. I started to fall in love with the concept and what that was to them was that truly at the heart of the culture of the business, they want to help small business owners. They believe that small business owners deserve better representation with the industry as a whole, lacks professionalism. There’s a good opportunity to bring niche processes and best practices to this market and you leverage that through digital technology. I heard this and this light went off in my head and literally within 30 days I quit my current job. I was doing real estate in Denver and joined Raincatcher. From there, it’s history. It’s been a great ride so far.
I do have a really interesting question. You’re from South Carolina. How is it that you’re not a bass fisherman? How did you get wrapped around fly fishing as opposed to bass fishing?
I am a bass fisherman. I learned how to fly fish for bass in Hilton Head, South Carolina. It’s grown to trout and to permit tarpon and saltwater species as well. If it swims, I’ll fish for it. I’m not a purist but I do love fly fishing.
I grew up in the Deep South bass fishing. In fact, I got off the Rodman Impoundment down in Florida. I fly fish down in the south of Cancun as well. I’m much more dangerous. As the guy says, you’re a good monkey hunter. Fly fishing is not something I think I could make a living doing. As you look at Raincatcher and their culture, you had the original nucleus of you and Marla. The business starts to grow. You guys have six brokers and associate brokers. Did it grow to eight?
We’re at eight brokers now including me.
I think about the culture of a smaller firm. As you start to expand the firm, how do you guys take and teach or transfer the culture that you envision because you have a distributed group of folks. How do you transmit that culture?
One of the first things we ask the people that we’re bringing onto our team is, “Why do you want to join Raincatcher? Why do you want to be a business broker? Why do you want to be in this industry?” There are all sorts of answers, “I want to make money. I want to have flexibility.” At the core of what we’re looking for is for someone to say, “I want to help small business owners.” That is fundamentally what we do. Everything else falls into place. I would say there are a lot of hard work and process and stuff that’s put behind it. If you have that core mission that you want to help a small business owner and it’s not just about the transaction, that’s why we bring people into our team. That’s what Marla and I stress over and over again. It shows with our messaging, it shows with the way that we interact with clients. You can see it as the business grows that people are receptive to that message.
I think out in the space of the small business owner. For me, I serve a lot of business owners in the business I have and I’m also a small business owner outside of this current business. All small business owners don’t know what they don’t know when it comes to selling their business. When you think about your past experience with your dad not only selling his company but going in, buying it back and then being in the commercial real estate. Do you think that gives you a particular insight that you bring forward when you’re working with other business owners?
It does not only in my past experience but my current experience as an owner of Raincatcher and the previous businesses that I’ve owned. I understand what it means to try to figure out how to pay payroll. The stress that the actual people that you’re paying payroll to don’t understand, where’s that next check going to come from? Those are real challenges that unless you’re in the trenches as a business owner, you don’t quite understand. I can relate in that way. I’ve been through what it means to try and build and grow a business. I’ve made a lot of sacrifices and I’ve seen a lot of sacrifices from my parents as they’ve grown their businesses. Those are challenging decisions that you have to make. I can relate to a lot of business owners because of that.
I think about empathy and the emotional response in talking to a business owner that’s getting ready like your father. He probably spent more time with his business than he did with his family.
Yes, unfortunately. That was definitely the case.
You’re selling one of your children effectively.
He did want to do that at one time or another with me. It’s true. What’s important to know for us at Raincatcher, 95% of the businesses that we work with are original owners, original founders, first-time business sellers and this is a lifetime event. It’s not just a business transaction, not like you’re going out and selling a house, this is people’s identity in a lot of regards. This is their life. Respecting that, being empathetic to that and understanding what they’re going through is one of our largest responsibilities as a broker. For us, it’s not just about getting the deal done. It’s figuring out, “Is now the right time to sell it?” Realistically, I know you want to sell and I know you want to exit, but is now the right time? What are your goals afterward? What are you going to do once you do get that check and once you are out of business? Are you ready for that? You can only play so much golf. People say that but I could fish for the rest of my life. I hear a lot of people that in post-sale, you can only do so many hobbies and you need something to be involved in. That’s genuine. I think people, especially successful entrepreneurs, need that next thing or need to be involved in something. There’s also an emotional side post-sale that people struggle with. For us, that’s navigating those waters and trying to provide guidance, put in the right team together to help them be successful prior to sale and also post-sale.
When you’re working with a business owner, what do you think is the most important thing that you do that helps that business owner looking to sell?
Our role is to help them be level-headed. It’s one, to help them prepare and two, to be level-headed about the transaction. Help them understand what to expect and understand what their expectations are. There’s a lot of misinformation out there and sometimes the expectations are set that may not be realistic. We have to work hard with the sellers to give them a clear roadmap of what this process looks like from A to Z and guide them along the way and ground them in that process so that they don’t get distracted and/or disappointed when they have an expectation that may not be delivered in the process.
I think about that entire sales process and pre-framing the challenges. You can say the buyer’s going to either one type or another buyer and the buyer could be coming in and going like, “Your kid is not nearly as attractive as you think your kid is.” The business owner in many cases would be highly offended if you call their business in the slightest bit ugly.
Everyone’s baby is the prettiest for sure.
Having seen some, they’ll grow into it. As you drill down and look at the challenges and you have a number of sellers out there that have talked about the process that goes less than fun. Some of the advisors and brokers were not exactly helpful. What are some of the things that affect the track record of selling or your reputation as a business broker and a business owner?
One of the most important things that a business owner can do is prepare. Business owners have spent so much time growing their business and they don’t spend a lot of time preparing to exit their business. Oftentimes, we’ll get a seller that will come to us and say, “I’m ready to sell. I want to sell now.” We’re like, “Okay.” They have certain expectations and it’s not always the best time right now to sell. There are a lot of things that business owners can do to prepare their company for sale. That’s one of the biggest risks is to go rushing the process. One of the things that a lot of sellers don’t think about and don’t do. They think that they’re ready and now’s the time, where a business owner can prepare their business or make their business more presentable is doing some work ahead of time. That can be all sorts of things and that’s one of the things that we do as a company is we analyze a company when they come to us and we start having those initial conversations.
Fundamentally is now the best time or are there other items that we can work on to help improve the likelihood of your business selling or the likelihood of a buyer saying, “This is a great business.” Instead of trying to beat it up or telling you that it’s not pretty. When you rush the process, sometimes those red flags become a little bit more prevalent because you didn’t think through it, prepare and get it ready. It’s like staging a home before you go to the market. Even putting a fresh coat of paint on the walls goes a long way.
One of the questions I always think, if I could have talked to you a few years ago before you got to here now, were you ready to sell the company? If you had the opportunity to offer advice to the business owner five years before they arrive at your door, what are the top 1 or 2 things you would suggest to them that they might do to improve the value?Business owners have spent so much time growing their business, they don't spend a lot of time preparing to exit their business. Click To Tweet
One of the biggest things that a small business owner can do is to separate themselves from the business. The natural inclination for small business owners is they need to have their hands in everything and that they’re important to the vitality of the business, that without them it would fail. That’s the truth. If you’re that entrenched in the business, it’s difficult to pass that on to the buyer. Working hard to separate yourself, put key management and key processes in place to where you’re not important. That’s hard for a business owner to accept that they’re not in control anymore. Strategically, you can be in control and you can guide the direction of the business but you don’t need to be in the trenches and you don’t need to be on the day-to-day involvement in the decision-making of a company. That’s one of the biggest things that I could recommend. Secondly, your financials have to be clean. You need to spend the time and to have clean and reconciled financials. We have a saying, “The way that you put financials in the system or input data, garbage in, garbage out.” You want to make sure that the financials are clean and the numbers that you’re representing and you’re selling your business are true and verifiable. Sometimes, small business owners get a little sloppy on how books are done. That’s something that can be detrimental in the sale process.
I’m the business owner sitting out there and going like, “What do you mean not clean financials?” What are some of the more egregious things that you see in financials that would raise a flag for a buyer?
Part of what we do on business transactions is we look at what we call the seller’s discretionary income. What is the true income of the business when you look at add backs? Add backs are typically personal or discretionary expenses that are run through the company. We understand that small business owners run a lot of discretionary expenses through their business but that would be one area where a business owner could clean that up, stop running your personal expenses through your company. Most people do it to shelter tax obligations. To make your business more sellable, that’s something that you want to limit. Another area where we see that there are challenges both on reconciliations, not reconciling your books every month. Maybe they do it once a year, maybe they don’t do it at all. That can be hard to sell a company that doesn’t have reconciled financials. Sometimes you get a mass discrepancy between say your QuickBooks accounts and your tax returns. People always say, “I beat up my tax returns so I don’t have to pay money to Uncle Sam.” That’s great but it limits your ability for the buyer to get financing. It limits what the true financials for the business are. That would be another area that I would add caution or let it as clean as possible.
As you have dealt with in Raincatcher history, God knows how many companies that you guys have talked with or sold. If you looked across that inventory and there are some where the sale failed for one reason or another. What would you say, outside of Raincatcher, the failure rate on sales might be out there when a business is thinking about selling?
Somewhere around a quarter to a third of the businesses, that go onto the market to sell. We’re talking 25% to 33% of businesses that go out to market aren’t going to close. It’s a high failure rate.
For me, that’s a stunning number. There was a statistic I saw that said two-thirds of all jobs created in the United States after the crash of ‘08 were by small business owners. You think about if the small business owner goes to sell the company and three out of four don’t sell, what happens to the families and employees that depend on their business?
Either the business doesn’t sell and they have to close the doors, which is the worst thing ever. It absolutely gives me heartburn when I drive through areas and I see going out of business signs on storefronts. Retail is hard enough but then you see storefront’s closing. I think about it and I I think, “Did they have the opportunity to sell that business? Did they have the right representation? Did they even know how to sell a business? Were there any resources available to that business owner? That hurts to see that someone must sell their inventory and close the doors.
I think about all the years of all the years, the struggle and all those triumphs and challenges of a business owner. You come to the tail end where it’s 80% of your net worth and it doesn’t transact. That’s the statistic. Small business owners, about 80% of the net worth is in their business. There’s the viewpoint, you’ve got the seller’s viewpoint of his business and then you’ve got the buyer’s viewpoint. What are the types of buyers out there? What types of things do you find that sellers don’t recognize from a buyer’s perspective?
To answer your question about buyers, there are all sorts of buyers out there. You can break them down in a few categories. You have your financial buyers. People that look on straight cashflow that want to buy a good business, don’t care too much about industry but they want a steady cashflow and a good management team. They go buy it more as an investment. You’re going to look at institutional buyers. Look at private equity, banks or more structured firms that buy businesses for their investors. You have strategic buyers. Buyers that are in the same industry that buy a good business as an add-on to their existing business line. Sometimes, sellers don’t acknowledge the risk that buyers are taking by buying their business. A business is a living, breathing organism. It’s not just a house. There are many different moving parts.
There are so many different things that can go wrong. A key employee leaves, there’s a rise in the cost of goods. The relationships that the owner had don’t transfer over to the buyer. There’s a tariff that’s instituted. It’s interesting enough. You look at the manufacturing at the beginning of 2019, it was one of the hottest industries and within a quick period of time, manufacturing has slowed down in this country and there’s a lot of headwinds based in that industry. Deals that may have been worth $30 million or $3 million, whatever the number is at the beginning of 2019, we are having a hard time selling to that same multiple. Things can change quickly. Sometimes, sellers don’t acknowledge that there are those risks out there and the buyer is taking the full brunt of those risks.
In your experience in working with sellers, many of them arrive with a thought process of, “I think my business is worth X.” In your experience, where do you think those buyers get that valuation judgment from? Where do you guys get your valuation estimates from?
I hope that we’re pulling some of the same resources. That’s one thing that we do well as a company. We look at a multiple of different resources to try and understand what the true value of a company is. From our standpoint, we will look at the earnings of a company. We’ll try and benchmark the business against other businesses within that industry. You’ll look at what are businesses and this size range and this industry sold for historically. We use comp sources much like you would see in real estate. We apply a multiple to the earnings and that gives you evaluation range because there’s always a high and a low multiple. Where you fall in that multiple ranges depends on the nuances of your business. How much customer concentration is there? How much owner dependence is there? There are different levers that you look at to determine where that multiple falls.
My sense in talking to a number of business owners, I’ll say, “What are you going to do next after this?” You go, “I’m not sure.” I say, “What’s your business worth?” They go, “I don’t know.” I said, “Have you looked at any trade journals? Have you gathered any information of any kind to try this?” “I think it’s worth X.” You go, “How did you arrive at that number?” For me, I have a challenge when I talk to the business owner to try to figure out what frame of reference they’re using. For you, you have the resources, you have the experience. One of the things we haven’t talked about that Raincatcher has is they have a good inventory of buyers.
We’ve worked hard. We work on the sell-side so we represent sellers and that’s our core business. One of the values that we bring is our buyer database. We are representing sellers but we’re also out there nurturing buyers. What I mean by that is we set up buyer calls. We vet buyers, we add them to our database, we have conversations and trying to understand what they’re looking for, what industries are attractive to buyers at this time. We segment out our database that way. We know when we make a deal on the market. We have 500 buyers looking for a manufacturing company between $500,000 and $1 million. That’s important because those buyers have committed capital, they’re ready to move. If you have a good group of buyers ready and willing, you can often get multiple offers for a deal at one time.
You have been recognized too nationally for the skillset that you bring to the table.
We have. I’m thrilled with the success we’ve had so far and where we’re going. We were recognized by Inc. Magazine as the best business broker in the US. We were recognized in Denver as the best business broker of 2019. Our core goal is to disrupt the business brokerage space. We want to redefine what it means to be a business broker. We want to bring the best practices that you see that these fortune 500 companies get with representation. We want to bring those best practices down to the small business market. There’s no reason that a business selling for $3 million shouldn’t get the same representation as a business selling for $100 million. Our true goal is to try and bring that down to the space.
I think about the effort and the transmission of culture recognition that you guys have. When you talk to a new business owner, there’s some level of pushback that you get on either the fees or their perception of the value that the fees represent.
It’s a challenging process and part of it is educating the business owner of everything that we do and all the value that we add. Our fees are success-based. We make our money when the business owner makes their money. We align our objectives completely with the business owner. I look at it as a partnership, we’re going side by side. We’re on the same side of the table and we’re driving to the same goal. That is to sell your business for the most amount of money possible in the quickest amount of time. That’s easy to say but there are all sorts of challenges along the way. The reason why our fees are what they are is that we take the risk with the business owner and we think that their rewards should commensurate with the risks that we take. We front-load costs, we spend hours and months of time on the deal only to get paid when they get paid.
In a number of discussions and if you’re looking at a particular business and they say, “We’re looking for this sale price,” you go, “We don’t think you’re there after you go through the due diligence process.” You guys are also in the world of making recommendations to the business owners but if you do A, B, C and D or recommend a group and postpone that, the business may get closer to the target you’re looking for. Do you do that as well?
We do. A business owner talking to me or Raincatcher or anyone else, you need to figure out, “Is now the right time to sell?” We start talking to business owners, we take a holistic view. We’re not a volume brokerage, we’re not just trying to list a company. We truly believe in what’s best for the business owner. We’ll talk to someone and we’ll typically have them take an assessment. It gives you eight key drivers to be able to sell your company. It gives us a score. It’s a rating system and based on where that score falls, it gives us a good idea if now is the right time to sell your company? If it’s not, we’d have that discussion with them. If there are things that we identify they can do to improve the value of their company, we have a great affiliate program and we’ll recommend that they work with one of our advisors to work on those issues. I mentioned a couple of times that could be over-dependence on the owner. How do you separate yourself from the daily grind of the business? There are ways to do that. We’ve worked with a great group that works on a system called EOS. Maybe your financials need to be cleaned up and you needed a part-time CFO. We work with the new business owners to do that too. The way that we look at it, it may take longer to get them on the market but it’s going to be a much better business and our success rate is going to be much higher.
There could be one industry, business for sale in an industry and it could sell from one end of the multiple ranges to the other. My assumption in the assessment tool is that you have a lower number and a higher number. The higher the number, the more likely your multiple expansion will occur.
The closer you are to 100, the more likely you’re going to get a higher multiple for the business.A business is a living, breathing organism. It's not just a house. There's so many different moving parts. Click To Tweet
I think about the perception of the potential buyer. I don’t have to fix this. I don’t have to fix that. There are no surprises in the process.
You bring up a good point. There’s a lot of information out there that businesses trade for three times earnings but is it three times earnings? That multiple could be two times earnings based on the risks that are associated with the business. A lot of business owners get expectations in their heads by the information that’s readily available online but it’s not just about your financial performance. It’s not just about how much profit you’re generating. There are all these other risks associated with the business that play in the minds of a buyer. Are all your sales to a few customers? Do you have a customer concentration issue? Those are the things that we need to think about before you take a business with the market.
About your background, you’ve got the business side then you’ve got the real estate side, a great number of the businesses aren’t a simple business only transaction. It’s the business and real estate. You guys bring that to the table as well.
We do, depending on the state. For Colorado, I’m the managing broker for our firm. We have our real estate license. I’ve got commercial real estate experience. We will do the commercial real estate transaction along with the business. I’ll say that but sometimes we get into a transaction where there’s an overly complex real estate situation. That’s one thing that we’re good at. Any business broker should be acknowledge where their expertise is. Sometimes we’ll bring in a purely commercial real estate advisor that can recommend and help us transact that real estate part of the deal because we can’t be everything to everyone. You’ve got to be good at one thing. For us, that’s selling businesses. If there’s a simple real estate transaction involved, we’ll handle that as well.
I think about that business owner that’s like, “I’m smart. I’ve got a successful business and I’ve done typical entrepreneurial persona. I can do this by myself.” When you see the business owner that decides to go down the path by himself and there’s the potential buyer that’s having multiple requests, what do you see occur for both the business owner and their underlying business when they’re entertaining buyers?
It’s a couple of things. Typically, they’ll leave money on the table. Oftentimes in that situation, the business owner gets distracted and they focus more on the prize and less on the business. You start seeing the detrimental impact on the business, sales going down, profit goes down. I’ve seen this strategy before, a buyer will make a statement, “We’re interested in your business.” They keep dragging it out. There’s no one there controlling the process and there’s no one there being that advocate. Those transactions are for less, not that they can’t get done. There are a lot of transactions that can get done but they’re for less. They take longer and it’s way more frustrating for the business owner because he’s not in control. That’s one role of the business broker does play is you’ve got to control the transaction and it’s better to have the control of the sell-side than on the buy-side.
I’ve heard it a number of times from folks and they’ll say the business deal between here and there dies a number of times along the way. For the business owner, highs and lows through the process. You guys see hundreds of transactions go by and the business owner may have seen there’s one only.
Lifetime event, most of the time this is the first business that a lot of these business owner will sell. One or two transactions, you don’t see the full gamut of what can happen. That’s a great point that you bring up there, it’s important for the business owner to consider the whole team and we’re a part of that. It’s not just about the broker, it’s about having the right attorney. It’s about having the right CPA, about having the right wealth advisor, financial advisor post-close. What are you going to do with your money? Are you going to put it in a bank account? There are these types of things that sometimes are overlooked and one of our roles and we do a good job is forming that right team and making sure that the right advisors telling the owner the right message are on the team.
I talk to business owners frequently that have sold their company and I’ll say, “On the Monday following the close, what did you do?” A former military guy like me, you’d see a general officer retire and he went from stepping fetch to carry his own luggage. You think about the business owner on Monday goes, “I’ve got nowhere to go.” You bring up a valid point is the post-sale planning side gets little attention from business owners without it being drawn to their attention.
That’s one thing we’re trying to do ahead of time by making recommendations for these business owners. What are you going to do with this money? What are your plans emotionally after-sale? We do an assessment prior to taking on a client. It’s called PREScore done by Value Builder and it’s an emotional assessment. Are you ready to sell your company? Are you mentally ready to take that next step? That’s a big part of it. We want to make sure that business owners are committed to the process and they do have good plans post-close.
For me, I’ve gone through my designation for exit planning. I was driven there by an event that happened to be a friend of mine. His business didn’t transact and it was an unfortunate event. In looking at the folks that are getting ready to sell their business, they think the exit is a thing in and of itself. Having a business to be ready for purchase at any time is frankly good business. You don’t have customer concentration, you don’t have owner dependency, you have policies and procedures, you have intellectual property protected. That’s something to comment on. When you look at the value of the company, intellectual property, the special sauce the company has. Do the owners understand that they should protect that?
Oftentimes no, I don’t think that they take the steps necessary to protect their IP. That’s definitely an area that business owners can improve. It’s a topic that’s not discussed as much as financials, It’s one that I think we will get into more of the time as security breaches and the internet become more prevalent. It’s something that is definitely going to need to be protected more.
Let’s say they have a very proprietary process that is the mechanism or discipline that has propelled their company and they go, “What’s to take?” What’s to prohibit one of their key employees from walking off with all the secret sauce on how they do things and forming a competitor? I don’t think that’s well covered or protected for many of the business owners.
No, I don’t think so either. That’s something that if you’re entrenched in the business on the day-to-day and you’re the guy out selling product or you’re the guy out there helping on the line or whatever facet of the business that you’re entrenched in. You can’t step back and work on the business and work from a strategic level and pay attention to things like is there a risk for IP? Is there a risk for someone spinning off of the same product that we’re working on? When you’re in it and you’re working in the business, you can’t be working on the business.
I was talking with another peer of yours that’s in Raincatcher. You always think about the customer as concentration risk and he brought up, “What about supplier risk? If you have a sole supplier and that’s interrupted, what’s that doing to your business valuation?”
It’s detrimental. The best time to sell a business is on the up and profits and revenue are increasing. The natural inclination is always to try and get to that next level but you’re always going to have something ahead of you. If you can sell a company as it’s growing and a buyer sees future growth and future potential, that’s the best time to sell. If you have a supplier risk and you’re on that trajectory, you lose your supplier and things start to decline, it’s going to be hard to sell your business on a negative trajectory. You cannot run fast enough. We see this all the time. We see business owners that come to us. Everything looks great. We’re excited about selling the business and we start the process and then something happens, they take their eye off the ball. Maybe they didn’t identify this problem upfront and there’s a negative impact on the business. It’s amazing how quickly the buyers dry up when you start to have a negative path on a business relative to revenue or profit.
We talk on many different parts of the business. For you guys, you’ll see a business owner that’s electively coming to the table to sell. How frequently did you see the business owner that shows up that’s had a health event that no longer has a choice and has to sell? What are your thoughts when you run across that client?
It’s challenging. We were working with a client that ran into an issue like that. It makes it a difficult one to sell back to the comment about a negative path and a negative trajectory on income or revenue but then you lose all leverage. If you have to sell, you’re going to lose the leverage and the transaction. Our process is built around creating leverage in a transaction and creating buyer traction and multiple buyers at the table. When your desperate and the seller has to sell. You can’t create that leverage. An outcome is not too desirable.
The business owner that’s reading, “I think I’m bulletproof and I’m obviously not but I think I am.” You go, “I’ve got the time and I’ll put off doing the strategic look. I’ll put off looking at all these issues that you talk about are value creators for a business.” If you’re a business owner reading, we don’t know what the future holds but everybody’s going to exit their business one way or another, either voluntarily or at death. Hopefully, this episode will be the spark that will cause you to step back from your business and look at those key drivers and start doing it now. If you have it unannounced by other shows up, you get a call and go, “Somebody wants to buy your business.” That would be a good thing. I’m a business owner and I got a call unsolicited by a firm that wants to buy my business. What might you recommend?
That happens all the time. There are firms out there that all they do is cold call and try and source deals. There are buyers and we’ve talked to them. They’re calling us as well to help them source deals. It’s not rare at all for a business owner to get a call from someone who’s looking to buy their business, whether it’s a financial buyer or a strategic buyer. I go back to your comment about everyone’s going to exit a business one way or another, whether it’s by choice or by death. An unfortunate truth that what happens if you can’t sell your business, you continue to work and work and unfortunately that does happen. Quality of life and good balance is obviously important. Having someone find that exit is even more important. My recommendation to a business owner, if they do get a call out of the blue is to make sure that they verify who they’re speaking with. Make sure that it is a legitimate group. Unfortunately, there are people out there that try and take advantage of the information that they get. Whether it’s through a business broker or whether it’s through an attorney, make sure that you’re protected, sign a nondisclosure agreement before you have conversations with someone. Make sure that they are sincere or capitalized to be able to make a purchase before you start sharing information with them.
That sounds like a good offer and my answer would be compared to what?
We’ve got a client that we’d been working with that they got a great offer. Someone called them up and they said, “We love your business, we’ll give you $8 million for your business.” They were like, “This is everything we’ve ever wanted.” They started down the path and they stopped and started thinking about it. They’re thought, “What if we had someone on our team that was out there and we had multiple people looking at this business and we went out to the market, couldn’t we get more?” We’re going down the path with him and I absolutely think we can get more. This is a great business and we can probably get 50% more. They’re going to net after tax what they would sell to this other group.The trick to getting the deal done is having a very refined process to where you're cast in a very wide net. Click To Tweet
It’s the first time and the buyer may have done this multiple times. You’re doing it as an owner maybe one time. It’s one of those things for a business owner reading, I said, “What’s the harm in calling?” There isn’t harm for them to call and say I have an unsolicited offer for my business. That also plays into the part. If you’ve got all the levers in place and you’re doing all the things correctly. You’ve de-risked your business and then you go, “You have some general notion of where you stand in the market if you’ve done all that properly.”
It’s important for business owners to surround themselves with the right advisors. They may have an attorney, or they may have a CPA, those may not be the best advisors. There are industry specialists, there are people that focused on transactions that know the levers to pull and know the value of certain things that may be a generalist does not. That’s an important part for business owners to take into consideration.
I think about the analogy, we all see it in the healthcare field. You’re going to your family practitioner and says, “You need a valve replaced in your heart.” You go, “Do you do that on Saturdays?” You go, “No.” “Did you send them to the cardiovascular surgeon?” “Yes, that’s my first time?” “No.” That’s not the guy you want. That’s not the lady that you want. You want somebody that that’s what they do. People stumble over what they perceive as the cost. Where down the road, if they step back and look post-sale, it’s an expense that it costs them at the end.
That applies to a broker, that applies to an attorney, it’s across the board. I say this to a lot of our clients and when we get kick back on our costs and our fees, they’re in par with the industry but we look at what we do as a revenue generator. We’re driving more value than we are an expense. If someone can go out with a broker or do it on their own or they can sell it for $1, we’re going to be able to go out and leverage our process and our buyer pool and sell it for $1.25. We’re going to get 25% more and pay for ourselves.
I think about the auction bid or an auction process. I’ve got three buyers that want to buy your company and the other buyer is no way. Are they going to bring their sharp pencils or not?
Yes, you definitely leverage multiple people looking at a business at one time. It is not just the price. One thing we haven’t talked about and a lot of business owners don’t realize is that most buyers are not going to come to the table and write you a check for 100% of the purchase price. It doesn’t happen and it’s getting less and less common. What does that mean? What are the contingencies of the rest of your money? You may have three buyers at the table and they may be all offering the same price but the deal terms are going to be better, one over the other. You can leverage that when you have multiple people at the table.
One of the things that I understand about Raincatcher is you are storytellers too because for the business owner, you can have the numbers. When you put the offering memorandum and stuff together and that you guys tell the story of the business. You do that from what I understand well.
Our roots as a company, we were founded as a digital marketing company that does business brokerage. We’ve evolved into a refined business brokerage company but our foundation is the way that we market. The way that we go out and tell the story, tell our brand, tell our message is one part of it. The other part is telling the story about the business and the reasons why this is a wonderful business and the reasons why you should be buying it. When we work with a client, we put together a comprehensive CIM, Confidential Information Memorandum. We put that together and it’s robust. It tells the story about the history of the business, about the buying motives. We don’t shy away from the risk. We talk about the risk of buying the business. That’s something that’s real and the buyers are going to do the research on their own. We put that into our packages, talk about industry and financials and we have interviews with the owner. Sometimes we’ll do videos that we attach. Those are all the ways that you present the business and you only get one opportunity at this. First impressions are important. We never rush a business to the market. We try and move quickly but we do a lot of prep work and we do a lot of research so that we would know when we go to the market. We have that one shot to make a good first impression and it is the best one.
I’ve been wearing you out for quite some time and I’m a fan of business owners. I love talking to them and I’m always amazed as you go, “You did what?” I made a living doing, “What?” I’m always fascinated by the business owner. The show is all about business owners and the folks that serve that marketplace. For you and looking over at the time that you’ve been working in this industry. What are the tricks or techniques that you use that help get businesses sold?
It’s important to create leverage in the process. It’s important to control the process. You don’t want to throw business out in the market and wait and see what happens. The trick to getting the deal done is to have a refined process to where you’re casting a wide net. You’re getting very good exposure and that can be a multiple prong attack from your own database to different listing platforms to co-oping with other brokers and investment partners but driving that process to a certain point, a decision point for buyers that you attract. The mistake often made is that brokers say, “Let’s throw it out to the market and see what happens.” We don’t work that way. For all the deals that we work on, we have a specific deadline for all offers. We’ll put it on the market in our different marketing channels and we’ll tell all the buyers that, “Here’s the deadline. If you want to be involved in the process of buying this business, here’s the deadline that you have to submit an offer to us. Here’s the expectation of what that offer looks like.” We tell them what we want. If you don’t make an offer under these terms, you’re not conforming to our process and that’ll be looked upon negatively. It definitely works to help control the process, set very specific deadlines so we can move the process along. That’s one of the things that helps and you don’t see it a lot in this size range the types of businesses we’re working with.
For the business owner that’s out there and goes, “I’m in a particular industry. I don’t know if Raincatcher works in my industry.” Is there a specific industry you guys concentrate on?
We’re fairly agnostic on specific industries that we work with that we know what we don’t like. We know what we do like and we have some good experience in property management, vacation rental businesses, construction niche-type businesses, manufacturing, B2B services. For me,. It’s specific to the process. It’s how do you take that process? How do you take that business and move it from A to Z and control it all the way through and all the techniques that you use to get that deal closed? If you don’t have a process, if you recommend this to a business owner, if you’re talking to a broker, ask them what is your process? How do you handle diligence? How do you handle the information, the data that we give you? How do you handle the closing? If someone can’t clearly articulate exactly what their process is, they don’t have one and they’re winging it. That’s something that we do. We have a process for everything and we know how to move business through that cycle. It transcends industry in my opinion because we do enough research upfront to understand that industry and know how to get the deal to that closing line.
As I understand it, there are some rather unique tools on your website that’s available to the business owner that’s considering selling.
We talked a little bit about the Value Builder Score, the PREScore, which is the emotional score. Those are complimentary. We work with business owners to earn their trust in their business. We do free evaluations. They can take the assessment, get that 27-page report from Value Builder. They can take the PREScore and get that report as well. Those are intro tools that we use to set the basis for conversation. If you want to sell tomorrow, we’re not the broker’s firm that you would like. We’re not going to throw a deal on the market. We try and understand that this is the right time, the right fit and the right opportunity for both sides.
For the business owners that’s like, “I need to reach out to Jason,” how do they find you on social media?
LinkedIn is a great way to find me, Jason Thomas Denver. Through our website, there’s a way, it’s Raincatcher.com. A great way is to go to our About Us team page. You can see my smiling face and you reach out to me directly from there.
With all this being said, we’ll close with the best advice that you ever received or advice you might offer to the business owner that’s thinking about selling.
My father-in-law is a contractor. He’s ingrained this in my brain, “Measure twice, cut once.” That applies to a lot of different things. It’s not just carpentry or cutting wood. You need to think about what you’re doing before you act. You need to take the time to talk to the right people, formulate the right plan before you jump into selling your business. Measure it twice, talk to multiple brokers, talk to multiple attorneys, think about the different levers that are in your business that can drive value or detract value before you move forward with selling your company. That’s the biggest advice. We are in the business of selling businesses but we don’t want business owners to fail in that process. There’s a lot of work that can be done upfront. Give us a call and we can talk about it. There are a lot of options out there.
Jason, I appreciate you taking the time and sharing your experience, knowledge and your philosophy about helping the business owner. I sincerely appreciate your time.
Thanks, Bob. It’s been a great time. I appreciate it.
- Jason Thomas Denver – LinkedIn
- About Us tab – Raincatcher
About Jason Thomas
Jason Thomas is the Vice President of Brokerage and Co-Owner of Raincatcher, LLC, a business brokerage and M&A firm who partners with entrepreneurs and business owners to help source the best win-win deal for all parties. After spending nearly a decade in the real estate sales and development industry, Jason knows know what it truly takes to get a large transaction through the finish line; hard work, communication, and the ability to connect with your clients.
Jason is a licensed business intermediary and real estate broker. As an owner in multiple businesses, Jason knows the challenges that small business owners face on the day to day and cherishes the ability to help them reap the benefits of all their hard work through the sale of their company.
Jason holds a Masters in Business Administration from the University of Colorado and a Bachelors in Science from the University of North Carolina Wilmington and is an active volunteer with the Leukemia and Lymphoma Society and the Guys Who Give organization.
Love the show? Subscribe, rate, review, and share!