In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Nate Lind, an entrepreneur, the author of Maximum Exit: The Definitive Guide for Internet & Technology-Focused Business Founders, and a business broker at Website Closers, the largest marketplace of $1 million to $150 million dollar internet, technology and e-commerce businesses.
In this episode, you will learn:
- The primary three reasons why business owners decide to sell their company.
- How to calculate what your business is worth, and strategies you can use to increase the value.
- The types of business buyers.
- How to determine the best time to sell your business.
- The different types of deal structures.
- And more!
Resources:
[email protected] | Website Closers | Maximum Exit: The Definitive Guide for Internet & Technology-Focused Business Founders | Schedule an Introductory Call | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. On today’s show, I brought on a special guest, Nate Lind. Nate is an entrepreneur, the author of Maximum Exit: The Definitive Guide for Internet & Technology-Focused Business Founders, and a business broker at Website Closures, the largest marketplace of $1 million to $150 million internet technology and E-commerce businesses. Nate’s here to share his expertise with our entrepreneurial listeners today. Nate, welcome to the show.
Thanks, Marc. I appreciate you having me.
So we have a lot of business owners as listeners, and I think they spend most of their time trying to figure out how to build up their business and grow revenue. But they probably don’t spend much time thinking about selling the business until that time comes. By then, it’s probably a whirlwind. So, I’m looking forward to talking about the approach you take to selling businesses. But before we get into that, can you share how you got started as a business broker?
I’d been very entrepreneurial my entire life, but I was introduced to the idea of buying a business from a friend. Originally, we were thinking about building a supplement company, but this colleague of mine suggested that we buy an existing supplement company instead. I thought it sounded like a smart idea, so we began to shop around.
We found a supplement company that we were interested in buying – they sold a brain focus/mental clarity supplement directly to consumers – so we gathered materials (the financials and offering memorandum) and started doing due diligence on the business.
But it didn’t look like this specific business would be easy to transfer, because the owner was very much front and center. They are an author and had a lot of intellectual property around their acumen. So, we ended up not going through with it.
Instead, I went ahead and started a supplement company. I did that for almost a decade. Through that process, I built technology that helped me analyze the profit of E-commerce businesses. I kind of took some mortgage servicing technology – because I came from the real estate and mortgage servicing space – and applied it to E-commerce. And actually, that’s what ended up selling.
I had met a strategic buyer at a trade show. After they made an acquisition in the niche that I was in – around internet shopping cart technology and CRMs – they approached me about buying my technology. So I ended up selling it to them.
By then, I had a taste of buying a business and selling a business.
I went on to meet the founders of Website Closers, Jason and Ron. I actually met a number of the principals of the internet brokerages that I surf in. But I found that Jason and Ron had a ton of knowledge about this. I ended up buying a franchise, and now I help entrepreneurs sell their businesses.
Almost across the board, business owners will get to the point where they’re either bored, burnt out, or have a passion for something else, and they usually don’t know what the market is for their business. So I love sharing how many buyers there are that are looking for internet niche businesses – including internet technology, E-commerce, digital marketing, etc. Being able to have an internet business and a remote business is really hot in the market right now.
Is that usually the trigger, that burnout?
Reasons Why Business Owners Decide to Sell Their Company
Usually, when business owners reach out to me, they are bored, burnt out, or have another burning passion. We call those the Three B’s:
- Bored.
- Burnout.
- Burning passion for something new.
And somewhere, somehow they have heard that they can sell their business. Instead of shutting down or moving on, they want to see what their business is worth.
The very first thing I do is a free consultation. In it, I talk with business owners about their business, which allows me to give them a valuation (how much their business is worth) and inform them of the type of buyers that might be interested in purchasing it.
So how do you determine what their company is worth?
How to Calculate What Your Business is Worth
There’s two big pieces to a business valuation.
The first is what’s its cash flow over the last 12 months – that’s all revenue minus all expenses, but we add back any of the owner’s discretionary expenses. An example of discretionary expense is a flight or car that the owner charged to the business.
I’ll go through and look at the financials of my potential clients, and put everything together into what’s called a seller discretionary earnings worksheet. That shows how much cash flow a buyer would be taking on after the sale of a business.
The second piece is the multiple. There’s about 27 factors that go into resolving what the multiple of the business is, and all of that is typically discussed in our call. I can usually ferret that out in about 45 to 60 minutes of conversation with a business owner.
Then, the earnings multiplied by the multiple, is the middle of the trading range.
That’s when I ask the potential client: Is this what you’re looking for? If it is, we move on to listing the business. If it’s not, then I’ve usually given some suggestions as to what the business owner can do to make improvements. And we might talk again in six or 12 months.
Okay, makes sense.
The Types of Business Buyers
Who do you find is typically buying these businesses? Is it a first-time buyer? Or is it a larger company that’s looking to make acquisitions?
It’s both. But those two groups are looking for different sizes of businesses.
Usually, at this point, I have enough information from the business owner to inform them of the type of buyer they can expect.
Typically, if the company is under a million dollars in trailing 12 months earnings, the buyer will be an accredited investor or an individual looking to purchase a business to replace their day-to-day work. They’re probably going to be someone who is more motivated to be an owner-operator.
We sell a ton of one-man show, owner-operated businesses. That’s probably the majority of what we sell. And I think there’s a myth out there that if a business doesn’t have a big team, or if it doesn’t have standard operating procedures and KPIs, they won’t sell. This is just not true, at all. We have a ton of individual buyers that are looking to purchase a business with under a million dollars worth of cash flow.
On the Website Closers marketplace, businesses need to have a minimum of $250,000 of trailing 12 months earnings and up. From that, we can get to around a million dollars in enterprise value. So that’s the first group.
For businesses earning between $1 and $2 million in trailing 12 months earnings, individuals, large companies and financial/strategic buyers can be interested in purchasing it.
Then, businesses that have $2 million or more in earnings are typically ideal for private equity funds, family offices or private equity sponsors (individuals who raise money from capital markets to fund the deal).
Earlier you mentioned that you check in with the business owner to see if they’re pleased with the business valuation. Is there a fine line between trying to improve the value of a business, but not waiting too long to sell? When is the best time to sell?
When is the Best Time to Sell Your Business?
The best time to sell your business is when you don’t really want to. It’s when your business is growing, and the operation is effortless. In times like this, it feels like the world is ripe for the taking… That’s the best time, because you can walk away from any offer – you don’t have this dire need. But also, that’s the type of business that buyers really want. Effortless, growing, risk-free businesses.
If you look at the last 12 months compared to the previous fiscal year, and compared to the fiscal year prior to that, if there’s a trend of it going up into the right, that is the best time to get the maximum value. That’s the whole topic of my book, Maximum Exit: The Definitive Guide for Internet & Technology-Focused Business Founders.
What are some examples of things business owners can do to increase the value of their company?
How to Increase the Value of Your Business
Well, profitability is really the primary driver.
We have over 100 businesses listed for sale on the Website Closers marketplace at any point in time. We sell between 200 to 300 businesses a year. But for the businesses that are declining in profitability, our close rate is less than 5%. They’re really difficult to sell, especially to the types of buyers we have.
The second issue business owners have is some are not able to communicate the value of their business because they have complicated, sloppy or unpolished financial documents. If you aren’t using an accounting system like QuickBooks or Xero, and you don’t have an industry standard income statement and balance sheet, you will run into issues. It’s important for business owners to report the numbers – either monthly or annually – and show trends year over year and month over month.
Frankly, it’s whether or not the business is making money and that you can prove it.
Yeah, definitely. Now, does the business owner have to go as far as putting a pitch deck together?
If they’re going to self-list, absolutely. If you’re doing that… I feel for you. It is so much work.
Because Website Closers is a full-service brokerage, we have teams of writers that handle all of that for our clients. I don’t know if I mentioned it, but we’re the largest marketplace for these types of businesses. So I literally have a team of writers that are researching industry metrics and creating a market overview for the specific business niche.
What makes E-commerce or a digital business more valuable than say, a law firm or car dealership? Why focus on internet, technology and E-commerce businesses?
Geographic availability is number one. Because of the nature of an internet-based business or technology-focused business, it can be operated from anywhere. Which opens up the buyer pool. I think we have over 167,000 buyers on our email list, and that’s growing anywhere from 500-800 a week.
If you’re listing a law firm, or other business that’s geographically localized, your pool of buyers is limited. Even if the business location is in a massive metropolitan area, the pool of buyers is still a fraction of what we see for internet and technology businesses. We actually have a lot of international buyers at Website Closers as well.
That makes sense. Now, let’s talk a bit about the deal structure.
What Are the Deal Structures Like?
The deal structure depends on how transferrable the business is. For example, if the owner-operator is working 40-60 hours a week and is integral to running the business, then he’s going to have to stick around for a little while after the sale. It could be up to two years, but usually at least 90 days. It all depends on how integral he or she is to the business.
If the owner-operator has delegated the work efforts… for example, if they have a management team and staff that manage the business, there’s much less involvement required. These passive income types of businesses tend to be bigger.
It’s really a case-by-case scenario, so it’s difficult to give a broad answer. I’d say, if your business is running effortlessly and you’re not spending a whole lot of time in it, you’re in a really good position to sell it without having to invest more time into it.
Right.
Cash vs. Earnout
For the structure of the business, again these are some pieces that kind of come in on a one-on-one basis.
Typically the businesses that get higher cash at closing are really growing and they appear to be risk-free.
Mergers and acquisitions in the lower middle-market range kind of work like real estate did before 100% financing became available. I’m usually pushing for well over 50% of the transaction in cash – usually about 80%. My average is about 70% of a deal in cash at closing.
Then, the other 30% tends to be something like seller financing, rev share or holding some equity. Maybe the owner holds 30%, they sell 70%, get cash, and they hold 30% and keep and ride along for three to five more years with this new buyer with a whole lot of extra fire in their belly that’s going to 10X it. That happens a lot too.
More rarely now are we seeing earnouts. Most of my buyers and sellers don’t want to have anything to do with earnouts. I mean, they want to lower the risk and they want the seller to have some skin in the game after the transaction. And there needs to be a mutual commitment by seller and buyer for the business to have long-term success. Otherwise, the transaction will just simply won’t happen. Someone will feel like there’s something malicious or nefarious going on and the deal blows up.
How are the current market conditions affecting sales? Interest rates have gone up a lot over the past year – does that impact valuations at all? There’s also this idea of a recession looming… are business owners trying to sell their company before something else happens in the economy, or vice versa, are they waiting it out?
We have both. We have sellers that are pushing to get deals done faster and they recognize that time is not helping them right now for a variety of factors. Maybe their business has a chance of suffering some potential decline in the future and they’re kind of pushing to get it listed and get it sold.
Again, when somebody’s bored or burnt out or they’ve got a burning passion for something else, often mentally, they’re not in the best place to grow the business. I tend to find my clients that are in that mode, they kind of feel like the window is now, like I want to get this thing sold, and they’ll move through.
Regarding the valuations right now, definitely we’ve had an increase in capital, interest costs. So when a buyer is buying a business, they have to add this additional interest to the carrying cost of the business, the debt service coverage of the business. And that does have an effect, I think, not helping business multiples in this exact moment. See, we’re Q1 of 2023 for someone who’s listening to this. But it is not changing the number of buyers that’s looking for the business. So there can still be a lot of competition for really good businesses, and then that kind of has a converse effect helping multiples as well.
So I’m always encouraging folks to, and I’ve got a client right now that they were just notified about something outside of their control with their manufacturer. Okay, so it’s just one thing that can knock a company out. Businesses that are reliant on any of the search engines or any marketplaces or any single manufacturer, you’re one phone call away from possible shutdown. And I encourage my potential clients to look at what is truly meaningful for you? Where are you headed? What are your passions? And timing-wise, if you’re thinking about selling, more than likely emotionally, mentally, spiritually, physically, you may be headed that direction, and it could be time to take a look at where you want to go and not worry so much about the immediacy of multiples and valuations because they’re not going to fluctuate massively.
We saw a little bit of an uptick maybe a year and a half or so ago. Things are not down terribly versus that. And of course, I’ll assess with all of my clients what’s your exit desire? What’s your exit strategy and your outcome? And I won’t bother listing somebody that if the industry and the market and the trends and stuff right now aren’t going to meet their expectations. I only get paid if the deal closes, so I’d be wasting my and their time. And I simply just don’t have the time to do that.
One of the concerns I see with business owners thinking about going down this path of selling their business is that they’re not sure if they want to do it, yet they’re worried about if they start marketing it, listing it, it may have a negative competitive advantage. Is there a way to market a business, maybe not anonymously, but without it being easily told who this business is?
Yeah. That’s exactly what we do. So our marketplaces that shield between our sellers and our buyers, we create what’s called a blind teaser. We’ll list what the industry, the business is in, some financial details about its size, its age, its profitability. We’ll have a very vague summary about it, enough to wet the whistle of our buyers and they’ll reach out and express interest. And even on that initial non-disclosure agreement, they still don’t see the name of the company. It’s not until they sign the non-disclosure agreement and then I countersign it. And I have to do this with every buyer for every business I list because our agreement with our sellers are that we’re only compensated on prospective buyers that we bring.
Now, we’re also an exclusive marketplace as well. I won’t list a business that’s splattered everywhere. I bless you, good luck. I’m going to be the coach of a football team that I’m going to take from the beginning of the season all the way to the Super Bowl. I can’t freelance as a coach.
That’s what we do is we protect our clients. We list using our address in Tampa. It looks like Tampa, Florida is the mecca of online business, because we are selling 200 to 300 of them every year.
But yeah, we shield our clients from that. I’m also doing a tremendous amount of vetting buyers before they ever get a chance to talk with my client as well. A lot of my clients will ask, “How can I divulge enough to get buyers but not divulge too much that I’m revealing any secret sauce?” That’s a conversation that I have with each of my clients to make sure that we’re not sharing anything that’s sensitive upfront.
There’s stages where we release a little bit more and then a bit more. And the first stage is when we’re reaching out to the public, they have no idea what the name of the business is, where it’s located. The second phase is they’ve signed a non-disclosure. So we have a contractual agreement that they can’t disclose, they can’t reveal any of this anywhere, they can’t use it competitively. And then we share the financials, we’ll share the offer memo, and then we don’t share anything more until they present a letter of intent.
Right.
At that point, they need to do due diligence. So we share bank statements, tax records, that sort of stuff. And then if there’s even still very specific and sensitive information, maybe about manufacturing or about marketing, we won’t share that until the asset purchase agreement is drafted. And that’s basically the signing of the deed of a house. When that’s signed, the deal is done, so then we have to reveal everything.
Great. Well, we’re just about out of time. Nate, thank you for being on The Agent of Wealth Podcast. You gave some great information on buying and selling businesses. How best can someone reach out to you, find out more about what you do?
I’m best by email, [email protected].
Perfect. We’ll link to that in the show notes. Thanks again. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
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