In this episode of Anderson Business Advisors, Toby Mathis speaks with Trent Lee of First Choice Business Brokers (FCBB).
You’ll hear Toby and Trent discuss all the ways you can slice and dice the numbers to value a business. From EBITDA to discretionary earnings, normalizing value over the past few Covid years, using the SBA database, etc. Trent shares many stories from his experience both good and bad about how to value, run, and sell a business – from a small $70K pizzeria, to larger operations valued in the tens of millions, Trent is the expert in the business broker space.
- Trent’s the number one business broker in the country by volume
- The SBA database as a tool
- Seller’s discretionary earnings
- Recasting financials to normalize for Covid years
- Using multiples for valuation
- A few success stories from Trent’s experience
- Showing profit in your business for valuation vs. saving money immediately with tax write-offs
- The pizzeria story
- Matching business purchases to the background of the buyer
- Don’t touch anything on a profitable business for at least 6 months
- The mistakes – leaving value and profit on the table
- If you want to buy a business, call Trent
Full Episode Transcript:
Toby: Hey, guys. This is Toby Mathis with the Anderson Business Advisors Podcast. I’m joined today by Trent Lee. Welcome, Trent.... Read Full Transcript
Trent: Thanks for having me. I appreciate it.
Toby: This is going to be how to value a business in five minutes or less. Trent, are you the largest by volume business broker in the United States, or is that something that I just heard somewhere that’s not accurate?
Trent: You know what? I hope you heard it because it’s true. Good rumors, good gossip. Yeah, there’s a group called the IBBA (International Business Broker Association). They’re like the governing body for business brokers, like the realtor organization for real estate agents. They track what’s going on, what’s happening, who’s doing what out there. They are the guys who do a lot bigger deals than I do, guys in New York, LA.
There are some really big mergers and acquisitions guys. We’re coming up here at the end of this year, and no one’s even close. But the last four years in a row, I’ve been the number one business broker in the country for deal volume, number of close to transactions
Toby: I really want to hit on that because that sounds like you could go out there and do a billion dollar deal. You could get a whole bunch of smaller deals. It sounds like you spend your time doing a lot of the smaller deals.
Toby: Is it more rewarding to do that, by the way? Give me an idea of some of the businesses you’ve represented buying and selling.
Trent: In one sense, yeah, absolutely. It is rewarding. It depends on the dynamics of the buyer and seller. Sometimes, smaller deals are just easier. They go quicker, they’re cleaner. Sometimes if the dynamic between buyer and seller is difficult, then sometimes it’s like, man, that little deal was just as much work as the big deal.
I’ll give you an example of some of the transactions that we’ve done. In fact, let me just talk about some of the transactions maybe I’m doing now that are in escrow. Small deals, I’ve got a restaurant absentee owner. The guy lives in California. He comes in a couple of times a month just to check on things. Truly one of those absentee owner restaurants. There’s not a lot of them. Most can take a little bit more time.
That one’s in escrow right now for $240,000. There are deals plenty smaller than that as well. I’ve got a really great trampoline park, in fact, two trampoline parks. You would know them, Toby, here in Las Vegas, one of the bigger trampoline parks, non-franchise, in escrow right now for $5 million.
That general range is like my sweet spot. We do deals bigger than that, and then we do deals smaller than that. Anything from the little neighborhood pizzeria that might only sell for $60,000 or $70,000. I’ve sold plenty of those before.
Toby: Do those make money?
Trent: They do, yeah.
Toby: I wish I might be investing. The market’s crashing, everything else, inflation, this, that, and the other. There are certain things that are recession-proof. I remember Dairy Queen has always been like recession proof. But pizza shop, you make good money off a pizza shop?
Trent: Before I answer the question on that pizza shop, let me just tell you a funny story. We had a Dairy Queen for sale. The buyer and the seller agreed on the price. They finished, the buyer finished the due diligence. The buyer was satisfied with everything.
The buyer went to Dairy Queen franchise corporate and failed the training, and was not able to close the transaction. I thought to myself, you just pulled down the lever of ice cream. I do not know how they failed the training.
Toby: Oh, my God. It’s like the peanut buster parfait. They kept putting cashews in it or something. How the heck do you fit?
Trent: Yeah. I don’t know. We’ve laughed about it ever since. But to your question, on the little pizzerias, those make money. There’s no question about it. You get a small business like that. We’ll talk about this later on here in the next little bit. We’ll talk about market multiples.
They sell for pretty low market multiples. Yeah, they’re making money. If a pizzeria sells for $70,000–$80,000, it might be making $40,000 or $50,000 profit. But it’s primarily generating that profit from an owner who’s buying himself a job.
Toby: They’re going in there and working it. Really, maybe you didn’t take much of a salary. It pulls up $50,000 or $60,000.
Trent: Yeah, they might take it as distributions or however.
Toby: You’re your own boss. That’s the thing. That’s the American dream. You get a few of those and you’re doing all right.
Toby: The $10,000 question everybody wants to know is, how do you value a business? Do you have any rules of thumb in different industries or just in general that you use?
Trent: Yeah. Rules of thumb are high-level, just gut checks. You can get a general idea. We can talk about this in detail, but what you really want to do is look it up by industry. Most business brokers, business appraisers, anyone in the M&A space will have access to what’s called basically a done deals transaction database, where we can look up in the private market and also in the SBA market. And those multiples change a little bit.
If someone’s getting SBA financing, their tendency is to pay a little bit more than they could, because the bank is paying for it. On the private market, multiples come down a little bit, because someone’s using their own capital, and they’re a little bit more savvy with it.
Toby: An SBA is a Small Business Administration loan. They’re backing a loan of a regular bank saying, hey, we got this in case they fail, right?
Trent: Exactly. Most of these guys, myself included, can look up this database. We look it up by the NAICS code. Toby, you’ll notice on the tax return, the business has some industry standard code where we might look up.
For example, I’m working with a steel fabrication company right now going through a valuation. They’re probably at about a $10 million valuation. We haven’t taken them to market yet, but we’re just preparing them. We look at other steel fabrication companies, what they’ve sold for.
We also make sure to compare it to general size. We’re not comparing it to a $150 million steel fabrication company, but we’re also not comparing it to something too small. The goal is to find by industry, what that market multiple is by average, and then narrow it down by size and then geographic region if we can.
Toby: Just for people’s understanding, when you say market multiple, is that of the EBITDA, the net profit, something along those lines, or is it the gross revenue? What are you using when you’re talking about multiples?
Trent: Good question. If you don’t mind, let me talk a little bit for just a minute on the three general rules of thumb or three multiples that we’re looking at. We’re looking at the seller’s discretionary earnings. I’ll tell you what that is here in a minute because most business owners really are not overly familiar with that term.
Some are more familiar with the term EBITA, and that’s a multiple, different multiple than the SDE or the seller’s discretionary earnings multiple. Then we’re looking at, again, high level, the most inaccurate type of multiple or percentage if out of the gross revenue, how much, percentage wise, what are we looking at?
Toby: That’s what Shark Tank always does. You always see somebody sitting there saying, I want $100,000, 10%. They go, so your business is worth $1 million? Let me see what you’re making. You’re making $1 million, dah-dah-dah. They go down that path. They’re flexing.
Trent: Exactly. Let’s just talk a little bit about seller’s discretionary earnings, EBITDA, multiple, what it is, and how it works. First and foremost, when I get and I meet with the business owner, and I start talking with them about the valuation, I want to look at the last three- to five-year tax returns as well as three- to five-year profit and loss and balance sheet.
The reason I want to look at that is I’m trying to what’s called normalize the financials, the stability of that business, and look at trends. With Covid, obviously, it’s done and over with for the most part. What we’re trying to do is normalize that. Some businesses got killed and just did awful during Covid. Other businesses had a really significant positive bump for Covid. What we’re trying to do is normalize those outlying years.
The expectation is Covid doesn’t happen again, at least we hope it doesn’t happen again. We’re trying to normalize that over a period of 3–5 years. In order to do that, we’re going to look at 3–5 years financials, 3–5 years tax returns, and then it’s called recasting the financials. We’re going to make some adjustments or add-backs.
I’ll give you a couple of examples here. Add-backs would be owner’s wages that he’s paying himself, W-2 wages, not distributions. They can’t add-back the distributions. But whatever that owner might be paying himself in distributions, If they’re following, Toby, your great advice, maybe there are some family members that they’re paying on there from a tax standpoint that may or may not be active in the business, so we need to make some adjustments to those non-working family members that are paid through the business.
We need to add back depreciation, amortization, and any other expenses that would be considered discretionary to the business, or in other words, owner benefit expenses. The business might be paying for the owner’s life insurance. They might be paying for the owner’s health insurance, the whole family’s health insurance. The spouse might have a gas card that they’re running.
Toby: Or a car.
Trent: Or a car, yeah.
Toby: To lower my income last year. At the end of the year, they put it in the SERPs, 100% business.
Trent: Yeah. All of those things are recasted, added back, or adjusted to calculate the seller’s discretionary earnings. The easiest way to think about calculating seller’s discretionary earnings is, for example, Toby, if I own the business, and you bought that business from me, what expenses that I’m running through the business that are to my benefit would go away once I leave the business? In fact, when you come in, my wages go away. How I’m depreciating might be different from you. My benefits to the family would be different.
We’re trying to take those out and really value the free cash flow of that business. That’s what’s considered the seller’s discretionary earnings. That has a market multiple as well as EBITDA (earnings before interest, taxes, depreciation, amortization). Both of those have multiples, and they’re different. But in theory, they should be somewhat close.
Let me give you just a general example. Let’s say there’s a business—I’m just making this up—of $6 million gross revenue. Let’s say there’s a million dollars of seller’s discretionary earnings. There is $750,000 of EBITDA. Just a little side note there, seller’s discretionary earnings is always typically higher than EBITDA. The easiest way to think about it is the seller’s discretionary earnings is basically EBITDA plus one owner’s wages added back.
Let’s call it a million dollars seller’s discretionary earnings, $750,000 EBITDA, and we do some market research. We look at the multiples. Again, I’m just making this up. Let’s say the industry average for the size of business in this type of business is 3.5 multiple on seller’s discretionary earnings, which is a valuation of 3.5 million or call it five multiple of EBITDA, and that puts the valuation at 3.75.
Now we look up the market multiple, and let’s say on average, these businesses are selling for 58% of the top line revenue. The 58% of the top line revenue of $6 million is roughly $4 million. In theory, between these three ways to measure a business, we’re at $3.5 million, we’re at $3.75 million, and we’re at $4 million.
It’s a general gut check to say, yeah, you know what, these all match up to the same general range. Then we might take an average of those three valuations and come up with something right in the middle. It’s more of a sanity check to make sure that all of those multiples add up, and something’s not significantly off when we’re doing those valuations.
Toby: We’ve done three valuations. You have your ballparks. Is there a ballpark number that you use for a multiple, like on the EBITDA that you say, hey, you know what, most businesses are going to be six or seven. It sounds like a seven years profit, right? You’re basically getting back seven years, whatever that business is making, ahead of time if you’re the owner.
Trent: Yeah. Going back to the intro, how to value your business in five minutes or less, the real goal here is quickly calculate what that seller’s discretionary earnings is. Most business owners generally will have at least a back of the napkin idea of what that is.
If your business is under, call it a million dollars of net profit, your multiple is going to be somewhere in that 3–5 range. If your business is above that $1 million to, call it $3 or $4 million, you might be in that 5–8 range, depending on the industry. Then you get above that, that’s when you start to hear news articles, someone paid 10 multiple, 12 multiple.
It depends on the industry, and it depends on the size of the business. That gives you a general range to really quickly, in five minutes or less, calculate what your seller’s discretionary earnings is. Take us 3–5 multiple based on your revenue or somewhere like a 5–7 multiple, and you’ll get a pretty good indicator of what that value is worth.
Toby: You could do that even with publicly traded companies and stuff too, right? That’s the PE. They’re saying, hey, if we took your net profit without getting all the discretionary spending and adding it back in, but you can say, the stock market’s probably 20–23 times? I forget the number and what it is right now, but I’ve seen it 17 times. I’ve seen it get down into the 10 times. You see the market go through fluctuations.
Trent: Yeah. Those types of public companies that are doing a significantly higher amount of revenue, the multiples go up. We’re at 10 and above easily, and we’re also not really dealing with seller’s discretionary earnings anymore. They strictly are just driven off of EBITDA, because they’ve got very clean financials. There’s not a lot of owner’s benefits going through those types of companies.
On the flip side of it, maybe something of interest to someone who’s listening to this, let’s say, now that they understand how market multiples work to determine the value of their company, let’s say they come up with a valuation of their company, in this example, we said $3.5–$3.75 million, and let’s say, you know what? their goal is really to be at $5 million, they’re close, they’re not quite there.
Now that they understand how valuations work to calculate the multiple, all they have to do is do simple backwards math to then determine if their goal is to sell it for $5 million. Just simply instead of multiply seller’s discretionary earnings or EBITDA times the market multiple, take your goal price and simply divide it. That tells you how much you need to show in annual EBITDA or annual seller’s discretionary earnings to then justify a $5 million valuation.
That really gives the business owners a pretty good roadmap to say, okay, here’s my valuation now, I want to get here. Instead of blindly just hoping to grow the company, they can really quite simply back into that number and say, divide my ideal sales price by the market multiple. That’s exactly what I need to show from a net profit standpoint.
Toby: You see that actually happening, because people are always, gosh, I wish I had a nickel every time I have clients say, I don’t want to pay taxes. Or I want to get it down to zero. I was like, well, what’s your intent with it? My intent to sell something.
Obviously, that may not be in your best interest. But for what you just said, if you need to get some financing, obviously, that could be a buzzkill, too, if you have no income. There’s always a way. Here’s something that’s really important for these folks. They should understand this is my industry, here’s my multiple. Talk to somebody like yourself probably two or three years before they’re thinking of selling?
Trent: Yeah, because the goal is we want to get, like I mentioned before, 3–5 years financials. One good year doesn’t necessarily make or break a company, because we want to look at a weighted average over a three- to five-year period of time. One killer year doesn’t make up for a few bad years over here. We need to even that out and get an average over that three- to five-year period.
Toby: Would you be willing to share some of those success stories that you’ve seen people, hey, so and so, bought a business? First off, I’m making a huge assumption that you’ve probably had the same business that gets sold more than once.
Trent: Yes, I have. More than one.
Toby: Okay. Number two is, have you ever seen somebody build these things with the intent to sell them, sell them, build another one, sell it, build another one, sell it, and then almost like they’re a builder instead of building out?
Trent: Absolutely. I’ve got a couple of good stories on that. Before we touch on that, let me go back to just one thing that I think is relevant for buyers when they look at the valuation of their business, before I forget.
Now that they understand how market multiples work, and I deal with this again, small businesses, you see this often. I can’t tell you how many times I go into small business, I look at their financials and I started to educate them on on what seller’s discretionary earnings is, what we’re adding back, how we’re looking through their expenses to see what we can justify, and I come across the line item.
This is a true story, more than one true story. There is $10,000 of advertising, and they say, oh, you know what? On the P&L statement on the tax returns, it really says advertising, but that was our annual trip to Disneyland for the family that we took, and you need to add it back.
I’m like, oh, okay, let’s just talk about how that affects them, because there are certain things we can add back, and there are certain things if you’re going to push the limit a little bit, we can’t necessarily add back.
Let me just walk you through the math on this as to how the value that they lose when they do that. Let’s call it this $10,000 annual trip to Disneyland. If they’re paying for simple math at a 25% tax rate, they saved themselves $2500 on taxes, but think about what they did to the value of the business.
If we use that 5 multiple, yeah, they saved themselves $2500 on taxes, but they lost $50,000 in valuation for that company, for the business. There’s this dichotomy between minimizing expenses or maximizing expenses to minimize your taxes and maximizing the value. There’s got to be a little bit of a balance there.
Toby: They’re misbehaving no matter what at that point. They’re writing off their vacations and the expenses; let’s be real. We see the same thing with small businesses all the time. They’ll just be doing some weird stuff because they don’t really have an accountant. They don’t really have a bookkeeper. They’re just like, hey, if I type this into TurboTax or whatever they happen to be using, it’s like, look, the number lowered.
Trent: Yeah, and they might have gotten away with it because they didn’t get audited or whatever. You have to think long-term. If the goal really is to sell in a couple of years, to your point, Toby, a couple of years to get into this point, you want to show as much profit as you can because you’re going to make up for it 10 times over when it comes to the valuation.
Toby: If you’re somebody who’s setting up, and they’re buying a business to sell it, we look at it differently from a structure standpoint, because there are 1202 stock, and you’re like, hey, if you’re going to hold it 5 years just spending less than $10 million, we could avoid all the capital gains if we use the business.
If somebody is buying a business or selling a business, there’s asset sale versus this other. There’s always that stuff that leads it, but then they behave much differently when they’re going to sell it because now they’re not in a rush to try to write everything off.
They’re gladly putting it into salary, because like you said, most buyers are going to say that’s going to go away. Unless they’re negotiating a non-compete and you’re going to stay, maybe an employment agreement says you’re going to stay with the company for three years or something, then maybe it’s relevant. But otherwise, usually the small ones, maybe I’m mistaken, but a lot of these people, they’re not sticking around for any length accrued.
Trent: I was going to mention that. If you start selling a company for $2, $3, $4 million or more, the likelihood of you sticking around for some sort of an earn out or management-employment agreement is quite high. That is common. On small businesses, no. It’s traditionally hands washed after two or three weeks training, transitioning, post closing. Everyone parts ways.
To answer your question, before, Toby, you’d ask about selling multiple businesses a couple of times and some of these guys who buy these up, talking about pizzerias, there’s one pizzeria I literally, in the last three years, have sold it five times.
Toby: You got to tell me about it. Come on, you got to tell us about it.
Trent: One thing I’ve learned is buyers become sellers and sellers become buyers, especially entrepreneurs. They’re like you and I at heart. You go on vacation for five or six days, and all of a sudden, you’re bored, and you can’t sit around the beach, drink margaritas, and play golf forever. You’re itching to do something. They sell their business. They think they want to play golf all day, and then after a couple of months, six months later, they call me back and want to buy something.
Toby: What do you got, Trent? What do you got? I sold it, it was fun. Come on, I’m burning. I got to get back out there.
Trent: Yeah. In this case, that pizzeria that I sold a bunch of times, it was that exact example. As I mentioned before, it makes, depending on who’s running it and what they’re doing, $30,000–$40,000, $45,000 a year profit. It’s a profitable business. It’s owned, bought every single time by an owner that’s going to be working in it day to day. Sometimes people don’t realize how much work restaurants are and want to sell it after a year. In the case of two examples, health issues or family health issues.
The pizzeria was fine. They were happy with it. It was exactly what they wanted. But one of them unfortunately got sick, and then another one unfortunately had a child that got sick. It was too tough for them to manage.
It was a good little steady pizzeria. It’s proven itself year after year. It’s been there for, I think, 20 plus years. It changed hands a bunch of times and still has pretty consistent revenue. For a small business owner that’s looking for a little bit of a steady income, it was fine for them.
Toby: Are they buying the company, Trent, or they’re buying the shares of the company? Are they buying the assets, including the name or something like that?
Trent: Assets including trade name and all the intangible assets—the name, the reputation, the goodwill, the social media accounts. Very rarely do we do stock sales, unless there’s some type of an agreement.
I’ll give you an example. A couple of weeks ago, I sold a surgical center here in town, $2.1 million if I remember right. They had dozens of contracts with hospitals and insurance. In that case, something like that would be a stock sale just for the sake of ease of transition. Most of the time, 99% of the time, these are asset transactions, not stock transactions where the buyer and seller can limit their liability as well.
Then I was going to tell you, Toby as well, because you asked about people buying these companies, building them up, and selling them. There are two people I can think of that I’ve worked with over the years, and this is exactly what they do. It’s essentially the same as buying and flipping houses. It’s just a longer-term play.
I had one guy, he is in the Jiffy, Meineke lube. That industry, he knows it. He’ll buy these. I sold him a Meineke shop that was really struggling. But because he knew it well, he knew the location, he knew what problems they had. It’s been a couple of years.
If I remember right, I sold it to him for $70,000 or $80,000. He kept it for two years, turned it around, and built it into a nice, profitable business. We sold it for him for $430,000 a couple of years later. He completely turned that place around.
There’s one other gentleman here in town, he’s got to own 20 or 30 companies. He buys a company big enough in size to put a really good competent manager in place, and puts him on quarterly revenue share. He gets a nice salary, incentivizes them with quarterly revenue share, and he’s got these companies all over that just report to him. He identifies the operator before he goes and buys the company.
He’ll sometimes come to me and say, okay, I’ve identified my next operator, I need a company to place him in. Then he’ll put him in, and he’s got the right compensation, incentivization packet compensation plan for him, and it’s worked out well for him. There’s definitely an opportunity there, it’s just a longer-term play.
Toby: Have you seen families do that, where like, hey, mom and dad are really good at this, they have kids they’re trying to train, and they don’t want to just hand over the businesses to the kids? They’re like, hey, I’ll buy a business. This is the one you’re going to run. Kid two, hey, you can run this one, kid three, hey, you can run this one. Have you seen anybody do that?
Trent: I’ve seen parents buy one child a business. I have not come across parents buying each child a business. That’s the family I need to meet, because then I can find a business for each one of the kids.
Toby: If they have 10 kids, you’d be doing just great.
Trent: Yeah. I do see plenty of parents who have bought businesses for their kids. In fact, I had one probably been about a year that he basically gave the son the option, look, you can go and do your call, pay for your college education, and I’ll buy your business.
We sold him a business, and he’s quite happy with it. I don’t know if that was the right decision for him or not. It’s not my spot to say, but it worked out well for him at least that I’m aware of.
Toby: You remember the business it was, like what are these restaurants?
Trent: That one was a restaurant.
Toby: It’s interesting, you see the different skills as people, like all this fun stuff. Send them to college, where they’re paying, somebody to try to teach them and give them a credential, or buy them an actual business, where you know they’re going to learn the skill or they’re going to fail at it. In which case, then send them to college.
Trent: Yeah. Doing something like that, you really have to find some industry where someone without a lot of experience can slide into it without a high degree of failure. There are some other really great companies.
In fact, I’ll tell you another one. We’re closing on it this Friday. You know this, Toby. Here in Las Vegas, a lot of the neighborhoods have gates in front of them, and either a guard or most of them have some little box. You can look up and dial the person to get into the neighborhood. They manufacture the gates, and then they service that box.
A great company makes $600,000 profit per year. We’re in escrow to sell. Like I said, this Friday, we’ll close on it. That would be a harder business for someone to come into without any experience, because I’ll get people who call me all the time, like, hey, I have a little bit of money, I want to buy a business, what do you recommend? That’s a hard question to answer, because my first question to them is, well, what’s your background?
Some companies like that require contractor licenses. They require experience. I can’t, in good conscience, say, hey, let me tell you about this great company over here. If they have no experience in that industry, that one’s going to be tougher for them to really step in and be able to continue to grow without any major hiccups.
Toby: You have to have some favorites, though. You have to have some way. You’ve said like, oh, this person’s going to fail. There’s, oh, my God, how do they get up in the morning and figure out how to get out of their own house? And they buy something and you’re like, whoa, they’ve done very, very well with that.
Are there any businesses where you’re like, hey, anybody could do it or that you were surprised, somebody that you didn’t think would have been capable, and you’re like, wow, this person is killing it?
Trent: Both. Let me tell you on the positive side. I’ll tell you about a couple who bought a little eyelash extension business, the girls that go in and get the eyelash extensions.
Toby: I had a friend that had several of those, actually.
Trent: Yeah. That’s not contractual recurring revenue, but that is some recurring revenue, because once the girls go on those eyelash extensions, they’re hard to get off.
Toby: […] Trent. You’re hitting it in my heart.
Trent: These guys have, I believe, five or six locations now. In addition to that, they set up a program with Hyatt Hotels, where they have a partnership. They go all around the country, and they train these stay-at-home moms how to be eyelash artists. They teach them how to, from home, do the eyelash extensions. But guess where they buy all their products from? They got it into the manufacturing side.
They have the retail side, they have the education side, they have the manufacturing side. Let me tell you, those guys are killing it. Millions of dollars in profit, not revenue, in profit per year. I was blown away by how much volume was happening there.
Toby: Wow. I was in the Entrepreneurs Organization years ago. We had one of those. There was somebody who had a chain of them. She didn’t have to do a lot and be straight up. Everybody was going there and it was $100 a month or something like that. It wasn’t a small amount of money for these folks, when they get hooked into getting the eyelashes done. They sure do get enough.
Trent: Yeah, it was great. Unfortunately, I’ve seen the others. I’ve seen the flip side where I’m like, are you sure you want to be buying a business? Are you sure this is the right decision? Some of them have been okay, and some of them have not been okay.
In fact, I’ll give you another poor example. This company—I’m going blank on the term— water and care for all the indoor live plants in the malls, the libraries.
Toby: I use one. I have a live wall in our rainbow office and about 100 different separate plants, because we had 300 people there and I always believe in live plants. Yeah, an interior garden place. They service it. I know exactly what you’re talking about.
Trent: Exactly. I sold one. This was probably three years ago or so. It’s been long enough where I can see how it’s carried out. It wasn’t a huge company, but we sold it, if I remember right, for $450,000. It was one of those things, where it’s not my spot to tell her, hey, I don’t think you should be buying a business. But when they’re really struggling to fill out basic applications and SBA documents, are you going to be able to operate the business?
Unfortunately, it didn’t work out well. They call me usually two or three years later and say, hey, I need to sell it. I look at the financials and I’m like, what happened here? This used to be a business that was making some money. Now, it’s not.
Toby: You have to figure out what actually makes the money and do that. A lot of people get it, and they say, I’m going to change it. We see that all the time. I have great ideas, they’re doing it wrong. I’m like, well, they’re profitable doing it this way. Do you want to do wholesale changes? You might just change yourself out of having the profit, which is unfortunate.
Trent: That’s one of the first things that I tell these buyers. Unless you really have experience in this industry and you know exactly what you’re doing, just don’t touch anything for six months. Just get familiar with everything, get comfortable with everything. Build your culture.
Let everything stay, and then you can start making some adjustments and improvements, unless you really know you’ve got experience, and you know immediately where there are issues and where there are problems. There are certainly lots of opportunities for buyers to do that. But first time buyers, I usually tell them, don’t rock the boat too much. You can get to that later.
Toby: That’s your Meineke guy. He already knows what his numbers are when you run it right. He’s looking at it and going, here’s what they’re doing wrong. If you’re good enough where you can identify that, or if you’re a restaurateur and you’re like, here’s what your food cost should be compared to this or this, I was thinking big tapper going in, yelling at people that are running bars, and correctly says, this should be your ratio or this is how many drinks you should get out of each bar.
He had the numbers in the back of his head, so he could identify where there was bad management, bad inventory, or bad something. He knew enough. But otherwise, most of us, if I was trying to learn an industry, if I was trying to learn a business and I was buying, I wouldn’t have any idea.
Trent: There are lots of good educational companies out there for how to run businesses, how to grow them. That’s one thing I’ve learned over the years in all the transactions I’ve done. It’s very rare that I walk into a business, and the business might be good, profitable, and fine. But despite a decent-sized business or a decently profitable business, where I walk into business and I think to myself, the seller is on it, they really have the systems, the processes, the procedures, and they’re maximizing.
Most, again, small businesses, they just don’t know necessarily what average lifetime value is or how to begin to calculate it or maximize it. They don’t have a database of past customers. The carpet cleaner that’s just going from job to job to job, but has done 2000 jobs over the years, and doesn’t have any type of a program to return, maintenance, and referral program. It’s often where I see a lot of business owners that have a tremendous amount of profit that they’re leaving on the table. The E-Myth strategy of they get so caught up in working in the business that they’re not working on the business.
Toby: A hundred percent. I was just thinking that. Part of it is just grabbing them, but they’re happy. They may be in the pizza shop, and they’re making $30,000–$40,000. Yeah, they could be making $100,000, but they’re happy making pizzas, or I think in the E-Myth, it was a pie shop. They’re happy making pies and working it in their shop. They’re never going to make much money at it, but they love making pie.
Trent: And the same thing applies to some business owners making $300,000 or $400,000 profit. It’s still a good little business, that, honestly, if you started increasing your number of leads, your conversion, your cost per transaction, and your average lifetime value, you started increasing each of these by just 5% or 10%. All of a sudden, it doubles the size of the business, because these incremental changes just make a huge impact. But they’re not necessarily even tracking that stuff to begin to know how to measure it and what to do to increase it. There’s a lot of value and opportunity there.
Toby: There are groups that come in there and do that. I keep thinking like we have a Spartan that does self storage. I think Life Storage is what their brand is. They go out there and they put their technology right on. They find anybody that has a storage facility, and they look and say, hey, how much of your actual square footage are you using? How much is being used by the family, by the manager that’s living there? Let’s get rid of the managers living there. Let’s get rid of all the family stuff.
We’ll put the tech on it now, we just saved on personnel cost, and their net goes up, and then they sell it, because the net just went up and you get it multiple of five, six, seven times, whatever it is. They’re like, hey, two years later, we can double our money. Then let’s go find another one and do it again. It’s always a small mom and pop, where they’re doing things that they’re happy with, they’re comfortable with, but it’s not the most efficient method. Who’s the guy on TV? What is it?
Trent: Marcus Lemonis?
Trent: Yeah, the prophet. I love that one.
Toby: Yeah, because you just described him. He comes in and he goes, oh, we could do this. But if I’m going to invest, we’re going to do it my way.
Trent: I actually like that better than Shark Tank because you actually get to get in the business, see their operations, and see really what operational changes and efficiencies he’s putting in place. I do like that one a lot.
Toby: He’s just like, how do we scale? How do we scale? How do we increase our net? I think of everything that you said, but first off, thanks for coming in and just chit chatting. This is always enlightening.
I’ve known Trent for years. I can tell you, if you’re looking for a business, you don’t need to look any further, call Trent, and we’ll put your number on. He knows what he’s talking about, guys. I think it helps somebody identify where the actual value in their business is. When we’re looking at real estate, it’s the same thing, like trust your numbers.
I have a stupid saying I always say, there are only three rules in anything financial planning, which is calculate, calculate, calculate. I beat it into people. It’s like, the numbers don’t lie, everybody else does. Whenever I see those shows, I realize how annoying it is when you have somebody who’s a numbers denier. They don’t want to believe in numbers.
This is what it feels like. They always use a lot of touchy terms, and I’m like, man, but the numbers don’t care about your feelings. You’re going to need a guy like Trent. Trent is going to probably say the same thing, which is they’re going to buy it on a multiple.
Trent: Yeah, and they’re not going to pay for potential. I see that all the time. Seller comes in and says, man, if I put more time into my business, if I did this, it really could be something. I’m like, well, great. We’re going to market it for what it could be, but we’re not going to value it for what hypothetically could be. Someone’s going to buy it for potential, but they’re not going to pay for unrealized potential. They’re going to pay for historical performance.
Toby: Yeah. Why would they pay you for something that you haven’t done yet? But if I did, it’d be worth it. It’s fantastic. Do that for two years.
Trent: Yeah, and then call me.
Toby: That’s awesome. Speaking of calling you, how do people get a hold of you, Trent?
Trent: My email address is firstname.lastname@example.org. It stands for First Choice Business Brokers dot-com. Toby, as always, it’s been fun. It’s always fun to chat with you. I appreciate it.
Toby: I love enlightenment. Hopefully, there are some people out there that say, what should I be doing? Buy a business. I learned how to run a business. There are different levels that you go at.
I used to have a really good mentor. He said, businesses under $1 million are different from a million to a $10 million, which are different from $10 million to $100 million. You say, oh, how do you learn how to run them? He goes, you run them.
Sometimes just going out there, get yourself something. When I wanted to work with clients, I wanted to know what they’re doing. I opened up retail stores. I want to see what it’s like to run them. It was hard. Buy real estate when I deal with real estate investors. It’s hard. Lots of nuances, but you know how you learn to do it.
Trent: You do it. Yeah.
Toby: I think Trent could probably get you in right. Then if you build it up, you get tired, or you have second thoughts, he could probably get you out right, too. You probably have a line right now, because everybody’s like, what are we going to do with inflation? You got to get out there. You can’t just invest it in something that’s going to devalue, and businesses are one of the few places where you can increase your value.
Trent: Yeah, and that’s one thing that will beat inflation. A good business, properly run, will almost always beat out inflation.
Toby: Yup, and I think Warren Buffett would agree with you. All right. Thanks, Trent.
Trent: All right. Thanks. Have a good one.