EP100 The 7 Questions Every Business Owner Asks About Selling - Answered

Speaker A: Hey there, it's Simon Bedard here. If you're brand new to the Buy Grow Sell podcast, then welcome. It's great to have you on this journey. Since its launch, I've interviewed many entrepreneurs that have bought, grown or sold a business, and in some cases, they've completed all three steps and started all over again. Our goal is to share the stories of business owners that have traveled at least part of this cycle so that we can learn from their experience. Whether it's the dizzying heights of success or the hard lessons learned through adversity, we get to the heart of what drives success and how to apply these lessons on your journey. So join us for the best insights, interviews, and inside information on how to buy, grow and sell a business straight from the entrepreneurs who've lived and breathed it. Hi there and welcome to the Buy Grow Sell podcast. If you're listening to this show, it probably means that a couple of things are true. One, you're likely to be a business owner. Two, you've probably come to terms with the fact that you will exit your company one day whether you like it or not. And while that sounds like a really obvious statement, it's something that so many of us like to kind of bury in the back of our minds and almost try to ignore, and often until it's too late. So recognizing that we're all going to exit one day, uh, is really the basis for you exploring this stage of your journey, wherever you're at at the moment, and seeking more information on how to do that. Well, because, let's be honest, there's lots of information and guidance out there on how to get into a business. There's lots of people who can tell you how to grow a business, but there's not many people telling you how to exit and how to exit properly. And if I know one thing, it is that whatever got you to where you are today, that won't get you over the finish line and allow you to exit on your own terms. So, welcome to the Buy Grow Sell podcast. If you're listening to this episode, then you are taking the first step on this journey to educate yourself, to learn, to help you get a bit of a framework and an idea of how to tackle this next stage. So congratulations on being here. Uh, I'm really excited to be able to talk to you and hopefully share some insights that, uh, will help you along the way. I'm also really excited because today and this episode is our hundredth episode for the podcast. You know, ah, it's a milestone, I think in creating this kind of content. And I think we've always tried to stay true to what we believe is the core of this show. And that is that we are a group of business owners passionately trying to help other business owners. And we do that by interviewing our fellow business owners who have been on this journey. You know, they've walked the path that you are likely to be walking at some stage. They're sharing the ups, the downs, the good, the bad and the ugly so that you can take those learnings and hopefully craft a fantastic story for yourself. With this 100th episode, what I'm going to try to do is get to some of the core questions that I just, I know that you and many of our other audience and business owners are consistently asking. You know, it comes off a lot of the episodes, um, that we've already run and um, all of the other various discussions that we continually have. You know, we're just trying to condense this down. And really what we've landed with is seven questions that tend to come up the most. Um, and of course now I've said that I bet you you'll have a couple of questions we won't cover. And of course feel free to reach out if you, if you want to talk about those. But, um, the seven core questions we want to cover here are what is my business worth? Um, you know, great question. Something we all need to know and is really a starting point for any kind of exit to start discussion for you. The second question is can I sell my business without a broker? Um, a really valid question and something you might have already asked yourself. So hopefully we'll cover that. Well, third is can I use AI to sell my business? We wouldn't have even asked this question two years ago, but I love that this has popped up. Um, and it's something that's going to continue evolving over time. The fourth is how long will it take to sell my business? The fifth is how to find a buyer for my business. And sort of included in that is what do buyers look for in a business? So I think we're sort of going to grab those two and tell a little bit of a story around that. Uh, the sixth is how do I know it's the right time to sell my business? Um, certainly a multi layered question, uh, which we get a lot and finally, and maybe a little bit more of a technical one. But what is an earn out and should I accept one? Um, so these have all been really, really, um, interesting and meaty questions which I'm really Looking forward to answering. Okay, so the number one question I get asked is what's my business worth? And of course we've all heard the old adage, your business is only worth what the market is willing to pay. And look, there is a lot of truth to that, but that's a massive oversimplification. Um, and primarily because every single buyer is different. You know, we could line up six different buyers who will look at your business and they will all have a different perspective on what it's worth to them. So I think as a business owner you need to sort of step back from some of the uh, rules of thumb and the jargon and look at this logically. There are key valuation methodologies, um, that you can use. And I don't want to turn this into a big technical valuation lesson. Um, a lot of people talk about, uh, industry multiples for your particular sector and that there's ranges and they're risk adjusted and stuff like that. Very true. A lot of businesses sell on that methodology. Um, other businesses work off what they call the income approach, which is things like discounted cash flows and other financial models like that. Um, a third is the sort of value of the assets and doing a bit of a build up. You know, what are all my fixed assets worth? Vehicles, machinery, et cetera. And should there be a goodwill payment over the top? The point of this is that there are lots of different ways of valuing a company. And for somebody who's, whether you're selling today or not, it's important to just understand that you can use multiple different methodologies to help you in some ways triangulate what your value might be. Because uh, rather than you trying to guess what a particular buyer is going to pay, what you want to do is think about the kind of methodologies they are going to use so you understand their thinking, you understand the process they're going to go through. Um, so my suggestion always is take a broad approach to this. Recognize the different methodologies, apply them. If you're not evaluations expert, then probably get some professional advice, um, so that you can start to zero in on the different angles, different lenses, different methods of, of coming up with this number. And by the way, it might not be just a number, it could be a range and it could be a bunch of variables and dependencies around that range. So um, if you're looking for a quick answer on I just need to do X +Y and I'll get a number. I'm sorry, that's probably going to be a bit disappointing for you, um, but suffice to say, multiple methodologies, multiple approaches, different buyers looking for different value. You know, you need to, somewhere in all of this, sift through it and come up with the right mix of those models for you. Before I kind of move off from this topic, uh, beyond sort of what is my business worth? I think the question you really need to ask yourself is, what do I need my business to be worth? And I think as business, and particularly busy business owners, uh, it's easy to fall in the trap of, you know, a kind of back of the envelope number or, you know, thumb to the wind. Ooh, I think, you know, 5 million would be a great number because then I don't have to work anymore. And it's kind of just a very vague, loose, uh, kind of projection, um, what I would be saying to any business owner, um, unless you are so wealthy that this particular business makes not a lot of difference to your life. Um, and look at, I've got clients who have been like that. But for the most part, business owners, this business is a material asset. It's a really important sale for them. You need to put some more science behind this. And you know, we talk about this in the book. And one of the resources that comes with the book is, uh, um, a tool we call the what's my number? Calculator, which will take you through a little bit more of the science behind this process, actually coming up with, um, some metrics and thinking about your life, what you need to kind of get from this asset, and then reverse engineering it all so you've got something that is a little bit more logical than the proverbial guess. Sure, Work out, what's my business worth today? It's probably a range based on a few variables, but what do I need it to be worth? And then you can start getting into the real questions about what you do next. So let's move on to the next question, which is, can I sell my business without a broker? And look, a great question. And I think a lot of it comes too from, uh, one, can I potentially save some money? Two, do I really need somebody? Like, what does a broker do? And it's actually not an uncommon question. I have so many people I meet at barbecues and they, uh, go, what exactly does a business broker do? How do they work? I think that selling a business is a highly complex process. Too many people relate it to, or use the analogy of it's like selling a property. And it's, I guess in some ways an easy analogy because particularly in Australia. Home ownership is such a big deal. There's a really big focus in, uh, society and many, many people own a home or have been through that process. So, you know, they're trying to, we're all trying to look for mental anchors we can hang on. But other than the fact that you're selling an asset and it's usually a very large asset in your personal portfolio, the differences kind of then disappear. Um, nobody ever walks into your business and says, oh, geez, I really love the floor plan of your office and the local public transport is really nice. Let's just pay a bit more money for this business. That just does not happen. If you're going to sell your business, I think you need to recognize that there's is going to be a set of skills and requirements that will get you from where you are to where you need to be. And what you've learned in your business to date is probably not going to equip you very well. Um, another analogy I like to use is if you needed to go and have brain surgery, you wouldn't pop along to your GP just because he's a doctor and he knows where your brain is. He might be better qualified than you to operate on your brain, but, but probably not the guy you want to handle such a sensitive and delicate topic. Now, having said that, do transactions go through without advisors? Look, they do, but I think the big question you've got to ask is a, what risks am I not seeing because I'm just not aware they exist, and B, what kind of money could I be leaving on the table because I just don't know how to work around and negotiate some of these delicate topics. So in theory, yes, everything can be done and you can work it all out yourself. And you could probably operate on your own brain if you really wanted to, but yeah, not the sort of thing that I would go down and try myself. So let's cover off the key elements that a good broker will bring to the party for you. First of all, it is experience, right? Um, if you were going to go for a hike through a jungle, you know, wouldn't you feel, uh, a lot more confident if you've had somebody who has walked through that jungle before, you know, they've walked that path, they know the environment, they know the things to look for. You know, that, that kind of leading experience, we, we understand that in almost every other aspect of our life. But because selling businesses is quite a foreign concept for most people, you know, they, they don't necessarily draw that parallel with, uh, with this phase. Um, so it is experience. And that experience doesn't just help you find more buyers, although a good broker will bring quality buyers. Um, it's also providing some of the advice along the way that impacts business owners in an emotional way. Right. Um, one of my favourites is that nobody likes being told they've got an ugly child. And it's a bit of a harsh expression. But sometimes a buyer comes in and they'll make comments about your business purely as a part of the negotiating game. And then of course it's quite offensive. And I've seen business owners become quite irate, you know, hands hitting table. I'm not dealing with this guy anymore. And just not recognizing that this is par for the course. It is quite normal and a good broker or advisor knows how to hold your hand, walk you through it, deflect some of this stuff that you probably don't even need to hear, um, and just shelter you from the back and forth that uh, a negotiation will typically sort of, or how a typical negotiation will play out. Um, you know, and I think that the, the add on to that is that, you know, as the owner and the seller of this business, there's a good chance you might end up hanging around for a while. Right? You know, the deal gets done, you get asked to, maybe you're doing an earn out, maybe you're not. You're just doing a transition for a period of time. Well, let's say that period of time was 12 months. You now need to work with this buyer very closely. You might even be reporting to them. And so this arm's length negotiation piece is actually really important so that a good broker can not only ask the difficult questions of the buyer, they can also handle some of the difficult questions from the buyer. And you get to preserve your relationship and put you in a good position for a working relationship into the future. So let me give you a really good example. I've um, got a client that's in the civil construction space. They build roads, they do a range of different things. Great business, very profitable. Um, when we first started talking about a sale process, they were looking for a price of around $40 million. Um, having done some background work, we felt that that price was quite reasonable and there was maybe even some more upside to it. Somewhere within between that conversation and us actually going to market, their expectations move, which is also a dangerous thing to happen. But they decided somewhere in that, uh, phase that they actually wanted $50 million for the business. Now we ended up actually with three buyers on this business. All putting in different offers, but the first one that came in was an international group that put an offer of $52 million. Now, one of the things we talk a lot about is that money and terms go hand in hand. And so while the money was quite attractive, some of the terms were a little bit more challenging. Not unreasonable, but just a little bit more challenging for the owner. And when we shared that offer with the clients, we ended up jumping on a call to debrief. I was sort of taken aback because the clients got on the call and they were hostile and angry and outraged about various things. And, you know, I almost had to actually stop with them and say, look, I need you to explain to me how somebody offering you $52 million for your business is so insulting. You might not like all the terms, but it's an offer and it's a negotiating point and it's not designed to insult you. And so I guess having somebody who acts as an intermediary not only helps shape some of this stuff, but also just protects you, uh, from a lot of the challenges and difficult conversations that are going to come with this journey. Now, the feed on or the flow on, I guess from can I sell my business without a broker is can I use AI to help me sell my business? You know, or in other words, you know, can I use AI as my MA advisor? Um, you know, I think we're all using ChatGPT and other LLMs these days. You know, everybody likes to put the prompt, you know, I need you to act like a world class M and A advisor, um, and hoping that it will then give you all the answers to your particular situation. So let me just say at the outset, like, AI is amazing, right? Ah, and there are functions within AI that can be very, very effective for analysis and things like that. But for the average punter, we're all using large language models, LLMs, right? ChatGPT, etc. And those models, um, first of all, aren't necessarily equipped with all the detail of some of the more technical processes that get run. B, they don't actually have all of the inputs and answers from your scenario. Like, they'll have your perspective, but they're not going to have the perspective of the other side of the transaction. They're not going to have the perspective of all the intermediaries that are involved, that have an enormous amount of experience, even the language they use and the knowledge that they apply to it. So first of all, you're setting that, uh, AI up for failure because you're giving it limited information and expecting it to give you an answer that's accurate. Um, but the second part to this is, and this is the really hazardous part is that AI is always trying to tell you what you want to hear. It tries to flatter you. And even when you call it out and say, well, that's actually not true, and you give the evidence, what does it do? It says, oh, thanks for pulling me up on that, and let's just keep moving as if that never happened. Well, unfortunately, you might have already taken moves or made moves or taken steps, um, on the back of that advice, and it could either ruin your deal or you could end up doing a deal that just is not right. Um, in fact, I was chatting to a guy recently who was saying to me, you know, I got approached by a buyer, and I've been using ChatGPT as my advisor, and I was naturally curious, and I started exploring it with him. And he was talking about warranties and indemnities and things like that, and saying that chatgpt had told him to throw this up front and get this clear before you take another step. And it was all this sort of stuff that was putting the cart before the horse. It was just a completely inappropriate conversation to be having at that point in the process. And, uh, I couldn't help but thinking, this guy's just not going to get a deal done. He's going to go round and round the circles. He's going to waste an enormous amount of time. He's going to share a huge amount of confidential data. And then somewhere along the line here, like a lot of our clients do, they kind of look up and it's been six or nine or 12 months later, and they realize they've been peeled like an onion. They've given over all this information, and they're no closer to getting a deal done. So can AI help you? Of course it can help you, but don't expect it to deliver something to you that it's not equipped to do. So let's move on. Um, another great question we get all the time is, how long will it take to sell my business? You know, how long is a piece of string? Right. That if you ask that question to 20 different people who sell businesses, they're probably all going to give you a slightly different answer. Of course, there are averages and there are kind of typical processes that get run. Um, at one extreme, though, I've had guests on our podcast here who tell you, um, we had a discussion, got an offer, and we sold the business and wrapped it all up within six weeks. And, um, I can tell you at the outset that's not the norm. Um, you know, I've got other people who say it took years to actually sell their business. I think for yourself, if you're watching this, you need to recognize that there is what I would call a good framework and a good process to run. And that has typical time frames, um, attached to it. And you might be a little bit quicker or you might take a little bit longer. But recognize that this is a significant journey. And if nothing else, I want you to understand you need to plan for this to take some time, because there's nothing worse than thinking it's going to take six months and it takes ten. Right? You're tired, you're worn out, you're frustrated, you're probably going to start making decisions and saying things you shouldn't say because you're not in the right frame of mind. Whereas if you plan for this journey to take 12 months and it only took 10 months, well, you're probably going to be quite pleased. You're going to be calm, you're going to be relaxed, you're going to be, you know, you're going to have still some fuel in the tank. Um, should anything pop up. Um, how do I run a process? Typically pretty straightforward. You know, let's assume we've all agreed to work together. There are three core stages. Prepare for sale, there's buyer engagement, and then we move into due diligence and completion is the final stage. I always say to our clients, prep for sale is all about getting you ready. It's not changing the business, it's just building the assets you need, building out information, memorandums, executive summaries, comms, plans, buyer lists, data rooms, getting a team coordinated and organised so that by the time we pull that trigger and we start engaging the market, buyer engagement, there's nothing on our end that's going to slow us down or stop us proceeding into a deal where with a buyer who might be ready to go, okay, so about six weeks to get you ready. And that's frankly, like, I'll have about six people typically working that process. So, you know, if you're doing it on your own, without a broker, without an advisor, without a team, um, or quite frankly even one broker on their own, they're going to be doing one thing at a time as opposed to lots of things in tandem. So I say about six weeks to prep buyer engagement, three to six months to get your offers, and then, of course, due diligence. Really, I always say Allow about three months to get due diligence done and of course, somewhere in there you're bringing in lawyers to draft the contracts and get that part as well. So personally, allow up to 12 months to get a deal done. It might happen a little bit quicker, might even be a little bit slower in some cases, but just recognise this is a journey. You need to plan for the longer term. You need to pace yourself, manage your energy and really manage your emotion, because that's the thing that's going to completely destabilize you and upset the whole process. If you're a regular listener of this podcast, then you know that we're all about straight talk. So here's something straightforward for you. This show is built on decades of actually doing this kind of work. And our book, Exit like an Expert is the actual guide and framework this entire show is built on. You know, we talk about how do you value a business, what are buyers really thinking and what does a sale process actually look like? This is not some kind of motivational book or technical journal. It's a practical guide that's designed to help business owners get real results. To get a copy of the book, go, uh, to exitadvisory.com or you can click a link in the show notes. So the next question is one of the most important ones. Uh, I think business owners want to know, and that is how to find a buyer for my business. So the first thing we need to recognize is that there are different types of buyers and then you need to work out which are the best buyers for your business and then you need to work out where to go and find them. So there are three core buyer types. Lifestyle buyers, financial buyers and strategic acquirers, or strategic buyers. Um, super simple lifestyle buyers love the lifestyle. That's what they're trying to buy. Sometimes it's called buying a job, sometimes the businesses are bigger than that. But fundamentally they love the lifestyle, they like what you do and want to do it. Financial acquirers are looking for a financial return. Uh, it's pretty straightforward. And of course strategic acquirers are, uh, businesses who, if they buy your business, they are, ah, likely to be able to make more money with your business than you do. And the reason for that is that it's this beautiful old equation of one plus one equals three or more. In other words, they have leverage, they have some kind of thing that when they bring your business together with theirs, it creates a synergistic style investment. So I guess a couple quick points around this and I think we all can probably agree that strategic acquirers is where we want to be, right? That's where the value sits and where you're more likely to get, uh, a better deal. Now I will say, and this is a really, really important point, strategic acquirers have the ability to pay you more, but not necessarily the willingness. All right? Like you may think the synergies are obvious and it's just a no brainer. And they can make so much money out of buying you, but they may not agree with you or they just may not be willing to pay the premium that you're asking for. So there's a difference between recognizing that they are strategic versus they become a strategic acquirer. Um, I'm going to touch on in a minute how we're going to find some strategic acquirers for you. Um, and I will say it is all outlined in great detail in the book. I've even got graphs in there showing you how to segment your market. So, you know, we won't be able to go into that sort of detail now, but you know, it is out there and it's available. Um, the first thing I do want to touch on before we get to strategics and how we define them, etcetera, is just understanding financial bias. Because often I think business owners as a general rule tend to value their business more than maybe the market does. And you know, we talk a lot about this in other podcasts. Um, I had a guest, Greg Alexander, who came on and I think he coined the phrase quite well and that he said there's always two values on your business. What it's worth to you and what it's worth to the market. Right. And so understanding those two variables is really, really important. Um, but let's just say if you had a business doing a million bucks profit and you know, you wanted um, 6M, you know, let's say $5 million for it, that actually implies a 20% return per annum. Right. It would take five years for the person acquiring your business to pay that business off. And I think for a business owner it's good to ask yourself this question, right? Hey, if I was the buyer of my own business, if I was looking at this and thinking about acquiring it, how many years would I be willing to wait to get my money back? And I think for a lot of business owners, when you use that lens, you know, and I've actually asked that question to, uh, plenty of, uh, clients in the past, many times they'll be saying I want a five time multiple, but I only want to wait three years to get my money back if I was buying it. And so there's a natural disconnect between their expectations and what they actually think the market's going to pay. So, um, there needs to be a sense of realism about this stuff right? Now, of course, a 5, um, multiple implies a 20% return per annum. A 3 multiple implies a 33% return per annum. Without getting more technical than that, I want you to be able to take that little model away and think about what kind of financial return does an investor get if they're paying X versus Y. Okay? If you can get that dynamic right in your own mind, then you're going to be thinking like an acquirer and you're probably going to either save yourself a lot of time or you're going to be able to get to a deal a lot quicker. Now let's get on to the strategic acquirers, right? Because that's the place we all want to be. Now the best way I can sort of, um, suggest to you to find strategic acquirers is to understand your market and start to map it. Okay? Now we all know the old XY diagram that we did in year eight math at school, right? Now let's just imagine you're in the middle of that little crosshairs there, um, on that vertical Y axis, that's your vertical industry chain. So if you're in the middle, everyone upstream is a supplier and everyone downstream is some form of a customer. If you're a manufacturer, you've got raw materials, they probably go get refined and they go to a different manufacturer. Eventually you get your parts and build everything. You might sell to a wholesaler who sells to a retailer who sells to a customer. That's how a vertical industry chain works, right? Now if you think horizontally on that X axis, they're all your competitors. Out to your left might be certain types of competitors and out to the right might be different styles of competitors. But either way, whether they're in your vertical industry chain or they're a competitor, they have a point of leverage. Uh, if they acquire your business, one plus one could highly likely might equal three or more. Now, I want you to think three dimensionally for a moment on that Z axis, right? That Z axis is what I call all of your complementary buyers. This is your classic cross sell. To give you an example, hey, uh, we're an engineering firm. We give a lot of business to architects, right? Um, buying an architect business doesn't compete with us. They're not in our supply chain necessarily, but you know, it just makes sense, right? They're Complementary to our. To, uh, what we do as a core business. Uh, an even more simple example, let's say for a moment, you have a company that sells tables and I have a company that sells chairs. We don't buy and sell from each other. We don't compete. But pretty obvious, right? If we bring those businesses together, one plus one is likely to equal three or more. So what you need to do is think about your own business. You think about these different axes, think about the type of buyers or different businesses that are out there, also known as trade players. Right? The type of buyers that are out there where they might sit on your axes. And then, by the way, the further you push out from your core, it tends to be the geographic overlay. Right? Are they in Australia or are they global? So now you've got a kind of working 3D model to understand your universe, right? Who out there has a strategic lever or a reason that if you bring the businesses together, it's going to be a win for all of you. So that's our model. That's what we've refined and developed over many, many years on how to define your strategic acquirers. Of course, then you need to go out and use that model and then identify all the various businesses out there who fit onto that market map. And look, frankly, that's where a professional team and researchers and all the rest of it come into play for our company. Um, and probably another reason why you might need some external support if you want to get a very specific and targeted buyer list like that. Um, it's a funny little thing. I deal with a lot of business owners and I'm going to say, most of them will say to me, listen, I know who the buyer is going to be. Here's A list of 6 companies, 10 companies, 20 companies, insert number here, Right. But they will mostly have a short list of names. And they say to me, the buyer is going to come from that list because these are just the obvious ones. And I'm going to say too, that probably in 90% of the cases, not only are they wrong, but it's often a buyer who they've never heard of before, because when they've got a list of what they think might be 10 or 20 companies that fit broadly on their market map, they may not define it like that, but that's how they see some synergies. By the time I've handed over that to our research team and they're using this framework and they're scaling that and using technology, that list might go from 10 to 2 or 300 companies. So all of a sudden you now have a buyer pool that is diverse and robust. And given the fact that timing plays such an important part in all this, you might find a buyer that is just a brilliant fit for you, but just the timing's wrong. They're just not in a position to acquire you. So if you're hedging your bets on a very small handful of buyers, uh, and the timing just happens not to be right for them, then you're going to find yourself in trouble. So my belief is you need to have a model, but you need to be able to go broad and you need to be able to scale that if you need to, so that you can, um, smooth out some of the anomalies in the market that you can't control, which is the things like timing and broader market perception. Um, so that's a working example about if you're selling your company, about how to go and find a buyer. And certainly for you, hopefully, to think about the different types of buyers that do exist, I know many of you are going to be saying, well, how about. What about employees within the business? And yes, management buyouts and employee share programs and things like that do exist. But I also think you need to ask yourself what kind of exit you're looking for, because I will say that I, uh, believe in, and I'd be making up a percentage, but it is an extraordinarily high percentage of cases that we've seen that employees, even the managers of those companies, don't really have the capital to buy you out. So setting up complex trust structures and all these different things to try to use that as your exit, um, often don't deliver the kind of outcomes that you're probably looking for. And then you end up being a minority shareholder in your own company with no control and an enormous amount of shareholders and a lot of complexity that you probably didn't want in the first place. So I caution this idea of management buyouts. I think it's often seen as this lovely kind of silver bullet on how to exit and manage succession. Um, but just the reality of it is that it just doesn't work great that way in most cases. So I'm not saying they don't work, but there's just. I'm putting some serious caveats around it because you need to know what you're getting into and whether it's going to likely deliver the outcome you want. M so that's how you go and find buyers. And, you know, I think almost as an Adjunct to that question is understanding what buyers are looking for. And I think if you take the lens of the buyer types that I've just sort of explained, um, including a management buyout, even you can start to understand where they're coming from. What are they thinking, what are they looking for? Is going to come down to, well, is it financial metrics? Ah, is there a synergy play here? Is it a bit of both? We're in a world where, um, and this is a bit of a new thing that's evolved over the last 10 years. But search funders or entrepreneurship through acquisition ETAs have become a very, very common thing. And so you might even find that there's an overlap between buyer types where maybe somebody is a little bit strategic, they own another company, but maybe they're also a bit of a private or financial buyer in that they're using private money and a group of investors to come and acquire you. So at the risk of overcomplicating this all too much, you know, hopefully you're seeing that this, you know, it's not as black and white as it might have been 20 years ago. The landscape is changing and you know, this is not just changing, you know, over long periods of time. It's moving quickly. And really that's why you need to have your finger on the pulse and understanding how these shifts are taking place and what it's likely to mean for you in an actual transaction. All right, let's move on to the next question, which is how do I know if it's the right time to sell my business? Now, once again, this is a bit of a multi layered question which, um, I could spend a long time on, but I'm going to try and keep this nice and sharp for you. I see timing as a multi headed beast. I want you to think about this in terms of layers. There is three core areas of timing. The first being the macroeconomic space. What's going on in the world? Um, is the economy a good time? Is it giving you a good window? I think I've given the analogy before that we're all small boats on a very big ocean and whichever way the current or the waves are going, we're going to go with it. Um, and certainly if you try to fight against it, you're probably going to find yourself in a struggling sort of battle. So you do want to look at the broader macroeconomic picture and understand whether it's a good time to sell. What's the credit environment look like? What are interest rates doing? Is money freely available? Are banks lending? Is the private credit space looking healthy? Um, and there's lots of data out there which I'm not going to kind of get into that today because you can do your research, Google it. You know, you're going to find things around there that will help you form a picture. Um, there's some very great economists out there who also be able to provide some uh, insight into that. So macro picture, does that make sense for you at the moment? Then there's your industry sector. Now what's going on? Are you in healthcare? Are you in manufacturing? Are you a SaaS company? Are you an IT services company? We deal with all these types of different businesses and they all sort of in some ways march to their own tune, you know, you know they're impacted by the macro environment, but there's always sector based, um, whether it's regulations or uh, norms, things that are going on that will impact you. So um, a great example recently has just been the changes to the NDIS system. Um, healthcare companies are having to make shifts. Some of them are selling and getting out because of the changes coming. Others are doubling down in investing. Um, but it impacts the way businesses are going to be sold and it's probably going to impact them over the next couple of years. So you need to have a view on this stuff, right? I mean you will be the expert for your sector, so you should have a view anyway on what's likely to be going on and how you can leverage that timing for your own benefit. Of course, the third timing is going to be what's going on with you, the business owner and you, your actual company. Like if you're in a time where things are challenging, profits are down, trends are down, you know, that's probably not a great time for you to be selling. Um, now having said that, if that was, uh, I'm a big believer, you know, I've talked the three layers of timing here. I think you kind of need at least two of those factors in your favor to want to consider selling. You know, if your business is not performing and your industry's in the doldrums. Well, you know, even if it's a good macro environment, you're probably not going to get the kind of valuation or the kind of outcomes you want. Um, having said that, if the macro environment was booming and your industry sector was booming, but you had a challenging time over the last couple of years, you may actually still find that there are buyers for your business, um, and they'll come up with a number that's not Driven by traditional profit metrics. Um, so these kind of deals do happen. And I guess the simple summary of this is that timing is one of the most critical components that, that will impact your life, your business sale, and nobody's ever going to get it perfect, Right? That's why we often talk about not trying to pick the top of a market, but you kind of need to understand how these mechanics work so you can go with the flow, catch that wave to the shore, and not be washed up on the rocks. Now, I want to say one final little thing around timing, and that is just when it comes to your own personal timing, there's some real elements to this, right? Like your personal business. Your business might be performing well, but you personally can impact things in a huge way. Um, uh, I've had a numerous guests on this podcast who will talk about how things in their personal life, um, really kind of tipped over the apple cart and changed their trajectory. Um, Sandy, one of our guests, her husband passed away. Um, he's just suddenly died. And that changed the way they viewed that business and how they wanted to sell. Um, so health factors are always going to be a big one, whether it's your health or your health of a personal loved one, a family member, whatever it might be. Because I think when health issues happen, your priorities change and the way you view an exit will radically change. Um, but there are other things too, right? I mean, maybe people are easing in towards retirement, and so they know that this exit is coming sooner rather than later. Um, there can be a myriad of other things. The point of it is, one, recognize that you're going to exit your business one day whether you like it or not. Two, recognize that unexpected stuff happens. And, you know, the whole thing of if something happened to you and you walked out of your business tomorrow, you just literally could not work anymore. Well, what would happen to your business if that occurred? Would your business crumble, or would it continue to thrive and benefit without you operationally driving the outcomes? Um, these are all things that you need to ask yourself. And look, if the business is going to face critical issues with you stepping out tomorrow, then you've got a succession issue. You've got another set of challenges that you need to think about if you're going to maximize some kind of an exit. Hopefully you can see here, you know, timing, it is such an important issue, but it's a really complicated issue, too. And there's so many variables here that are not in your control. You know, we all understand the sphere of control and we've Got a sphere of influence, things you can have some influence over, but you're not necessarily going to have full control over. And then there's the rest of the world. So recognize, uh, that the world is unpredictable. Try to build in some robust elements to your business to manage things that are going to pop up, because they always do. The next little question I've got is interesting. It's a bit more of a technical one, uh, but it sort of leads into a broader context. So the question is, what is an earn out and should I accept one? So an earn out is part of really a deal structure. So before I kind of get right into whether you should accept this thing, let's take a little step back and just give you an overarching concept of deal structures. So when you sell your business, you get paid a sum of money, right? Like, the consideration that you get paid is typically going to be allocated in one or more of four different buckets. And I just, I'm going to go through and just explain these buckets. So you get a bit of a concept because an earn out is one of those buckets. The first bucket is the one we all want. It's cash, and it's cash up front. You know, you sign a contract, you either get paid on that day, you sign the contract, or there's a small settlement period that might be 10 working days, it could be a month. Um, but typically there's a little short period and you get the money, right? Huh. And once that money's in your hands, well, you know. Well, I know I'd much prefer it in my hands than somebody else's hands if I'm, you know, selling my company. So cash upfront, it's the thing we all want the most in. Um, and it's nice and clean. The second bucket is what I will call, it's deferred but not at risk. Okay. Another name for that is vendor finance. So you're the business owner, you're the seller, you're the vendor, right? So effectively, vendor finance is you're loaning some money to the buyer so they can acquire your company. Now, a lot of people hearing this might go, why on earth would I want to lend money to the buyer? I, I don't even know who they are. And that's a fair question. But look, vendor finance is a, uh, very common mechanism in small to medium businesses. And it's not like, um, you're just lending them money and you've got no coverage or no security. There's usually a general security agreement in Place, it's written through the contracts, and if they didn't pay you as and when you are due, then you can in many cases take the business back. Or there are other ways for you to get protection for the money you're owed. And that's a real distinction here. Right? Uh, it is a debt obligation. It's not sort of, ah, an equity kind of convertible note or some other fancy financial, um, instrument. It's just a debt. They owe you the money. And so that's um, often a nice, uh, tool or mechanism within a deal structure that will help facilitate deals that otherwise won't get done. Right. And I think that's an important distinction here. If you're a business owner saying, I will only ever accept cash upfront, well, maybe you will get a deal, but you've probably limited that buyer pool significantly. And I guess the other aspect to that too is, um, by allowing some of these other structures, you actually might get more for the deal as well. So let's keep moving. Um, so cash up front, you've got vendor finance. The third one is an earn out. So in other words, the money is deferred, but it is also at risk. And by that I mean typically there are some performance metrics that you will need to meet for you to get paid all or some of that money that is part of the valuation. Um, a great example of this might be, uh, and I'm going to walk through and give you an overarching example, but some of those metrics might be you need to hit a certain profit number or a certain revenue number, or it might be a combination of those kind of metrics. Um, an important thing to note here too is that certainly in the deals we negotiate, rarely is that earn out an all or nothing number. Right? It's never just black and white. You've hit it or you've not hit it. Um, typically there are ranges, there are thresholds. Um, we put a range of options around that. So once again, I don't want to get too sort of tight technical with this, but you know, there could be ceilings, uh, and floors and caps, collars, those sort of stuff where we say, okay, well if you hit the number we all agreed on, then you get 100% of the number. If you don't hit that full number, you know, you'll still get paid something. It might be proportionate. Um, but also with earn out, sometimes you can actually earn more than what you initially thought if you actually outperform the performance criteria that's been put in front of you. So earn outs, um, are they common? Absolutely. They're very, very common in small to medium transactions. Um, are they always present in every deal? Absolutely not. Um, but I think it's important to understand that they are common and it is, um, I would expect in many cases that a buyer will include that in the mix, um, of deal structures they might put forward in an offer. Now the fourth and final bucket is scrip, which is another way of saying that is shares in the company that's buying you. So you might swap some of your shares for some of their shares. Um, I put this last because it's less common. It doesn't happen a lot. Um, a little more common when you're um, coming along for the journey and helping them grow for the next number of years. Or if you're being acquired by a listed company and they've got, obviously as a listed company their shares are actively traded on an open market. So you have a lot more liquidity. Um, and so it makes a little more sense to be able to offer you shares, uh, as part of that total consideration. So now a lot of that might be sounding a little bit technical here. Four, um, core buckets. But let's just work, walk uh, through a really, really simple example for you. Um, let's just say for a moment that you sold a business for $5 million. And I'm just using a nice easy number so the math will make sense. A buyer in that example might say, look, we'll give you $3 million in cash up front. Bucket one ticked. We'll put a million dollars in vendor finance so it's not at risk. You just need to turn up and do what you said you were going to do and it's a debt obligation. And they might actually say with that million dollars, we'll pay half a million bucks at the end of the first year and a half a million bucks at the end of the second year. So it's effectively a two year loan. Um, now by the way, those loans sometimes do attract interest, sometimes they don't. This is all part of the negotiation. They might with the final million dollars. So we had three in cash, one in vendor finance. There might be a million dollars on an earn out and that earn out period would typically in a lot of cases reflect the same period for the vendor finance. So it might go over two years and you might need to hit certain revenue or profit targets each year. So half a million year one, half a million year two. Um, now I'm not saying that's how all deals are structured. I'm just trying to give a simple example of how these buckets might be utilized in a way that is fairly sort of common. Um, so, um, what is an earn out? Hopefully that's explained it. Should you accept an earn out? Look, the answer, like most of these things, is it depends, right? It depends on what the terms are. It depends on how much of the deal is on the earn out. It depends on how much risk you're taking. What I will say is that earn outs are, uh, a mechanism to minimize or manage. Manage risk. Um, that's the only reason a buyer should even be suggesting an earn out is because it's mitigating a certain risk that can't be mitigated in other ways. And so you need to ask yourself a, can we mitigate those risks without that sort of type of structure? Um, and if not, well, what's a reasonable amount of earn out and what are the reasonable terms around that to mitigate the risk without you taking on more risk than you need to? So little bit technical there. Hopefully that's answered it, at least a broad concept. Um, of course, if you've got more questions about that, and I imagine many of you will, um, feel free to reach out and I can get a little more specific for you. So there you go. We've answered the seven most common questions we're getting. Um, hopefully that's been helpful to you and added a little bit of value and context. Um, as you can probably see by some of my answers, these are complex issues. There's so much involved. And I think when you take your business, your unique environment scenario, the people in your business, the people in your world, throw in timing, throw in market conditions, you can see how these things can be quite hard to navigate. Um, so all I can really say is I hope that's added value. If you've got some more questions, feel free to reach out. We'd be very happy to talk through some of the specifics of your scenario and see if we can add even more context. You. But hopefully this has been helpful. I think the most valuable stories we share on this show are not the ones where everything went right and it's a, uh, beautifully well scripted story. It's the one where they're honest, open, things went wrong and founders faced challenges and dealt with failures. They're the ones that we can all relate to. So if you'd like to know more and you want to make sure that you're not missing any important stories, please click the subscribe link below and make sure you hit like and leave a comment around any topics you'd like to hear about or other guests you'd like us to interview. There are going to be many, many more stories that we know will relate to you and your business, and we hope you get a lot of value out of them. Thanks for listening. The ultimate freedom is to own a company that is valuable, scalable and salable. Wherever you are on your business journey, it's worth understanding what is driving value into your business and what could be holding you back. For more information, speak to the team at Exit Advisory Group by going to exitadvisory.com or send an email to askxitadvisory ah.com thank you for listening to the Buy Grow Sell podcast with Simon Bedard. For complete show notes with links to additional resources, visit buygrow sell.com episodes Simon is the founder and CEO of Exit Advisory Group and you can follow him on, uh, LinkedIn.