Building a Sellable Business

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Ready to unlock the secrets of building a business you can actually sell. Join Kert Schmidt as he interviews Albert Banks, a seasoned agency founder, about growth, valuations and creating a sellable company. Hello everyone, and welcome to the show. I just want to take a moment to introduce my new friend, Albert Banks.

Albert, how are you doing today? I'm doing wonderful. Thank you. So tell me about the work that you do and who do you work with?

Yeah, so, I'm I guess a recovering agency owner. I own my own company for a little long or two decades. Start out as a computer engineer and then grew into running the business. For the most part of your sexy stuff, the finance, operations, it office, legal.

So learn a lot. Threw a merger about seven years ago and then ultimately a sale about three years ago, and now I'm out helping other service firms with their businesses rather than my own, So covering some of the same things around operational excellence, finance, how to have great employees experience, and then yeah, potentially look at an exit and what that might be, what that might be like. Typically small to mid sized businesses service based. Obviously, agencies are a key oftentime working with the founder or CEO, genalal leaderships.

That's really cool because in my experience with agency owners, usually this is the last job they ever want to have, right this is so they don't really have any plans to sell or the whole reason they're building the business is to sell it. If I feel like there's I rarely run into a middle ground there. Once you been your experience, Yeah, I. Think that's right, And I think you described to me like when we first started, we didn't even know we could sell such a thing that we were creating, right, That's how naivy are.

And so certainly you see people anywhere from that into the spectrum to those who are yeah, who are very much ready to exit, and so where I like to try to find people somewhere in between, right where if there's room to improve your business, whether you're going to sell it ultimately or you're going to continue to run it and you enjoy your time while you're doing that. Yeah, it's something I coach my agency clients on if we do broach that subject. I don't really spend as much time on the finance side as much as you do, but if it does come up, it's definitely something where you should run your business like you were going to sell it, because I think that's a healthy way to have this accountability towards excellence and towards building a safe space is in your experience, the idea of getting ready to sell your company or broaching the idea is that where you start?

Where do you start with people on do you start to immediately talking about EBITDA or what do we do? Absolutely not, look most people. Number one, it's a unique person who can be an entrepreneur often cause they say, right, they're unemployable. They're people who are the typically the ones that are successful or risk takers.

Right. So it's a unique type of person and they've built a a company sort of in their own image, and so I typically want to understand like what do they want right, because it is their business right, is they say, hey, you want to run this for twenty years, you want to bring home income, or hey you've got five years left in the tank and you do want to sell it. Right. Understanding the dynamics between partners if there are multiple, right, So, really understanding these individuals and what they're trying to get out of it is the starting point, right, because that's ultimately what's going to drive it at the the end of the day.

But also sure that it's it's a challenge, right, It's a there's low odds that you're going to sell, right, Like, it's not a one to two percent, but if you're if you're well organized and prepared, maybe that rises to twenty twenty five percent. So just being realistic about what you what it would take to ever even get to that point. Sometimes you'll see partners that are that are frustrated, like they're overloaded in one area, they're too involved in the business, or they're too separated from something.

But it's because it's been just sort of a lifestyle, it's been their baby. So getting them to look at it like an asset a little bit more like this is, hey, this is a real business, and you'll be ultimately happier if you run it that way, and so yeah, let's I agree with you run it like you're going to sell it, even even if you're you're not. Our early days, gosh, how much of it was the chasing revenue trying to make payroll right that led us to take bad clients or mis aligned projects.

But as we matured, we realize, like, hey, this has got to be a profitable business. If we're going to grow, we have to be able to grow profitably, right, So that change, We dropped clients, repositioned at different points in the in the agency, updated or ICP, and you're having that sort of discipline allowed us to have books that looked good regardless of whether we were selling it. But ultimately when we did sell, there wasn't a lot we had to do because we had a business we could sell.

I meet some of these agency owners sometimes very early in their journey, and they're very much all like running a business out of their parents' basement. That feels like even though they have Nike as like a client right like. So it's really interesting because there is a bit of imposter syndrome and I hate to overuse that term, where I see So many agencies have this fear of becoming corporate. It's like this invisible, this boogeyman that they've come up with that if they have too much process, or if they involve lawyers, or if they get a CFO or or god forbid, they get hr like they have become corporate.

And I again, nobody can describe to me what corporate means other than maybe like micromanagement. But what I do see is that as some of these owners mature and maybe they reach out and seek out help, some of these owners will join like a vistage or some other sort of leadership group. And once they're peered up with other business owners that are not maybe in theien and see business, and they see their concerns and the things that they owe those people are concerned about, I see a dramatic change happen there because they're like, oh, okay, you should really do this or do that.

What is it? What's the typical journey or is there a typical journey that you've seen? Yeah? I think there's on natural stages in particular for agencies that you see when they go some of that basement mentality.

We did it. I literally worked my first partner until they get sort of that point of Okay, we're sort of stable here, right, we're starting to grow, and then you reach a certain size and you need his time to scale so that each of these inflection points, there's a level of maturity that needs to happen. And I call it like operational hygiene. Right, it's about running a good business where how it leads to the sale is it's it's defensible, right, like you have evidence, you have the information needed when it comes time for that.

But I always look at it like security and protection, like as as the owners, we're responsible for all of our team members and our clients and rights, having things buttoned up, having contracts buttoned up, IP covered, clean financials right, and then this defensible and then when you get into sale, right, you get into due diligence. There's you're under a microscope and all of those things sort of come out. We sold. You're getting requests for hundreds of documents every one of your client MSA is that's sow's employee agreements leases.

They want all kinds of specific detail, measurement calculation going back years, right. And honestly, that wasn't that huge of a lift for me. It took a lot of time, but we already had these systems in place. We were already tracking those things, and maybe there's just tweaks to how we needed to present it, and so we were able to continue our growth and hit our margins while we're going through this really big distraction.

If we weren't buttoned up, gosh, it would have been very, very challenging, specifically for me and the team, but we could have taken a haircut on the on the value of the business. Right they could have seen were just disorganized and risky and therefore not being willing to pay ultimately what they did. Yeah, I think in the near term, if you're not selling, it's a responsible and kind of sort of growing up and reaching some of those middle stages of your organization. But ultimately the end of the day, it'll pay off if you ever do.

Hey, I want to talk about the elephant in the room. Evaluation. So because just like a homeowner selling a house, they always think it's worth more than it is. Business are no different, at least from my experience, because I've been able to buy and sell businesses in my career and they always overvalue what they have.

What is the process to go about understanding and maybe not exactly come up with that exact number, Albert, because maybe you don't know a number until somebody gives you one. But is there a process or things I could be doing to get an idea of what that might look like and what my expect how to set my own expectations. And I think some of it is fundamentally understanding the math behind how a service business is valued. Right, It's not based on revenue, It's based on EBIT.

I write so to run a profitable and scalable kind of system, And I didn't know that when I first started, Right, I'm thinking about revenue and the growth and not thinking about margin. But yeah, once you sort of understand that, that starts to change how you look at your business. So starting with your EBITA and then understanding that it's a multiple, right, and that multiple scales with your size, and so the larger you are, the larger that multiple can be. Not that that means you have to growth, that's not something you want to do, but you can run a very profitable company at the size that you feel comfortable.

It's sort of that simple math right there. And then it's avoiding any kind of risks, client concentration of employee attrition, any kind of risks within your contract. Do you have sticky clients, repeatable work or do you have a lot of turnover there? Are you more project based or time and materials versus retainer or ongoing relationships long term engagements.

Do you have a positioning that's that sort of defensible and helps you be unique in the market. Do you have a sort of a sales engine, so to speak, whether that's a external or inbound or whatever it may be, but something that's sustainable and can keep going. So yeah, I think once you start understanding literally how the math works and the factors that could sort of ting you or work in your favor, they're almost all the same things that are running a good business. Yeah, you have that sort of mindset, it can be beneficial.

I thought my company was worth way more when I first started out until I understood the math, and it was fairly straightforward after that. A little bit of subjectivity here and there, depending on the buyer and the demand, But but yeah, I get it actually could be pretty sure forward. Yeah. I remember a lot of the clients I work with.

One of the things I work with them is building a better outbound engine, right, Because a lot of agencies are built off of referrals, right, they don't really have a way to build an outbound engine. And that's something I helped them with a lot. And part of the conversation comes up is just like you said, it's to help stabilize and be able to forecast in order to start to understand those numbers better, plus to make them look more attractive. So in your experience, Albert, I've experienced a few different ways of why somebody wants to buy an agency.

I've seen people that want to buy because of the client list, so they want to roll your clients into my larger business. I've seen in the past where they've bought because of the employees. They're like, Wow, you do a lot of mobile work and we want to do more mobile work, so we want to buy you and roll you into our place. And then I've seen people where they want to get them for the revenue that's happening.

But it almost feels like that is almost more rare. Is that you've been your experience or not to say that revenue doesn't matter, it's just in my experience, it's not that somebody's coming in and buying it, saying, Wow, you've got a really profitable business here. I want to buy it and just run it the way you've been running it. Usually what I've seen is people have Wow, I see a real opportunity here, but it's a little dusty and could use some love.

If I roll it into my big process and system, I could really streamline this and make a bunch of money off of it. What's been your experience, Albert. Yeah, all of those scenarios you described are totally out there, and I see it's usually a multiple of those factors, and maybe the buyer has a priority of them, right, Like, maybe somebody is very much attracted to the type of services you provide because it's complementary to what they currently do, and they see an opportunity there maybe to diversify or maybe to gain additional clients and grow sort of with that collaboration.

But then at the same time they're going to want to see you have a new Busz engine and you have a good team as well. The flip side to that is what does the. Person who's selling look for, right, And that's kind of how I look at the buyers. Is you need to go look at these potential buyers and what is their motivation and does that jive with what you would want your end game to look like.

Right, You've got to find a match there between your priorities and their priorities. And if they're misaligned, if it's really a numbers thing and you're all about the numbers, great, maybe it's a good pairing and that's something you go for. Where whereas if you're more hey, I want my second of command to lead and have a career here, Well, you've got to think about what does the buyer want? Are they going to turn to run a sell again in three years and that future doesn't exist.

So again jiving the rationale and reasons and priorities for buying and those that are selling, that's how you have to have to consider what a good fit is ultimately through service businesses, right, you're buying the people. You can't forget that, and if your buyer doesn't understand that, there could be challenges. If you're creating a situation where your people don't want to stay, inevitably your clients will leave and that will be not a good purchase at the end of the day.

So finding folks that truly understand that as your buyer, I think is really really important. So let me ask you, Albert. While I was running my agency, I would get every couple of months somebody would be like, hey, are you interested in selling? You get an email or a LinkedIn DM or lots of different things.

How do you know if somebody serious or somebody you should be following up with? What sort of questions should I be asking? How do I know if some serious and whether this is worth my time? What sort of activities could I be doing on my end to validate that.

Either you're like, hey, I'm not interested in selling, take the meeting. Learn everything you can, right because you need to understand and go through this and experience and talk to people. Hear what the motivations are, Why are people attracted to your company? That's always helpful information.

If you're more in the other camp of oh, I actually might be interested in selling, then you need to be a little bit more deliberate about it. Right A You could sort of just vet them offline and see if they're a real thing. You could talk to peers if they're a large enough name, But really you need to understand, like we talked about the goals like why are they interested in you? What do they see as the attraction, what do they see as the strategy behind it?

One of the biggest thing is is do they have the money? Right? Like it is a transaction, it's literally a question, and you ask is how are you funding this right? Are they going out in an SBA loan?

Is it self funded? Are they going to is it proceeds from you over the earnout right? So that gives you an understanding of their maturity, their seriousness, and if it's a in a valid consideration. And so those are probably the top things I would I would have looked at when you start having real conversations, but take every meeting that seems legitimates so you can learn.

Yeah, and going back to what you tailed off on in the last question I had for you about where do you where? You were talking about what we have to think about where you want to end up because I know in some of these agencies in private equity, which is happening a lot more a lot of private equity stuff where they might be purchasing people or these big giant firms like Accenture or Deloitte or these other ones who have been gobbling up more agencies. You know a lot of those I've seen where they have contracts where the founder has to stay on for two or three years as part of that purchase price.

Are those things that you were kind of alluding to earlier. Yeah, for sure. We were fortunate enough that we made the decision to sell, and so we went to market, right. We saw somebody to bias rather than sort of just being responsive to those who may knock on the door, And with that became a really intimate conversation with myself and the partner and ultimately are sort of second command, about what would that future look like?

Right. In our case, it was our founder was very open and interested to see sort of what a next adventure might be, but he was sort of done operating the business. He didn't want to be number one again because I had done that and my prior agency before the merger, right, And so I knew what I wanted and didn't want, and I was focused on an integration and the operation side, whereas our next in command was interested in that leadership position, right, And so we were able to craft the story.

But literally, this is how things work and can work in the future, so that when we went to the buyers, it was more they could react to the future that we individually wanted versus them expecting something different or dictating something different. So we could eliminate folks. Right, if we had a buyer penser, a buyer that was private equity back, but they were going to bring in their own leadership, right, that just totally didn't fit with where we wanted to go, right, and so they sort of disqualified themselves in that case.

Yeah, understanding where you want to be and then you into earnouts, right, So how long do you want to be tied? If somebody's like, hey, I want to be out day one, well you're probably still going to have an earnout. You're going to have noncompete. So like the restrictions you're going to face, you really have to see if these things fit with your desired outcome.

And of course things are negotiable, but sometimes as finding the right buyer, we had a buyer who was cool with a really short turnout, right, there may be others that want to do that full three turnout. It truly is a matter of fit for what you want for your future. Yeah, the idea of what do you want for your future makes me think about also what do you want for the team's future, or what does the team want? Because if you've got a sizable organization, you've got a lot of people, there's a culture already pre built in there.

And I've seen a lot of times where people take two businesses to cultures and try to put them together, and it's like opposing magnets. They just bounce off, and that could be very disastrous. What was what's your advice for people? Like you said you got together with your partners in leadership and talked about what that looks like.

But at some point I'm sure you had to broach the subject with the rest of the organization that we are going to market or did you wait until there was an offer and then broach it. We did it in phases. There was a core group of leadership that we brought in when it was pretty much real, pretty much done, and then sort of a next senior layer that we brought in sort of right before the announcement, and so we kind of did it a little bit in phases. But I say where really helped us with culture is that it was a deliberate effort, right like Obviously, like buyers, they look at staff turnover and that's a flag, just like client turnover could be.

In fact, an our deal or out was around employee attention. But we had built again because we weren't building to sell it, but we were building a situation where we had career frameworks and salary bands and great and culture committees and all of these great initiatives to make it a great place to work. Because we wanted to keep the team, we wanted them to influence how we went about things. And so when it came time to sell, we had big enough like trust in us as the owners that they were like, okay, like these folks have been great to us, We've had a good experience.

We're going to give them the benefit of the doubt that this is a this is a good decision. And we didn't have really hardly any turnover. And I think some of that was because not a lot changed immediately, But I think a big credit is is that we had that foundation already established for a change like that that took place. Ultimately, when two cultures come together, that's challenging.

We had to admit to ourselves that that would work for some people and not for others, and some people would see it as an opportunity, some would want to move on, and that's just a reality of really change. I like that idea because I remember one kind of small private equity place had originally reached out to us about a project and it turned out like it was going to be a much larger integration with a lot of whole lot of companies that they were part of, and so they came to us and said, maybe we buy you and just make you part of a company and then you can work over the next them.

You can just work on all these things for all these companies we own. And I was very interested because it seemed like a good fit. But I was pretty clear with them. I was like, Okay, hire us for a project.

First, let's do one of those companies, and then let's see how that goes. And they just did not want to do that. They were like, why don't we just talk about the purchase and things, And that was a big red flag to me about their seriousness versus their cheapness, how serious they were about this working versus because I was very clear and I thought it would be pretty obvious that, like, you would you like to date before we got married, and they did not seem that interested in that, and that was a big red flag to me.

And yeah, that ended up not working because they just kept asking us for a number and I was like, I'm not I don't have a number for you. Sorry. One of my clients who I think has been tremendously successful with their acquisitions is yeah, they've worked with the other companies probably multiple times, perhaps even across multiple of their of their companies before it ever gets to that point. So there's already a clear culture connect and there's a there's an amount of trust or amount of understanding, makes integration even easier when it when it comes to that point.

So one hundred percent. In our case with the buyer, we if I recall, right, we were going to take over one of their clients, regardless of whether we actually close the transaction. So like they felt comfortable in us, with us as a partner that they were willing to hand off a client. I mean, I think that said a lot to what they see in the value ultimately of us.

So yeah, those kind of signals are pretty clear if someone is really transactional, like it really has to happen and the timing's got to be a certain way. Then would you decide whether that's a flag for you or not or if you really if you if you're ready to get out quickly, then okay, maybe you just got to go for it. But yeah, if you have the time and you have a well run business that you're comfortable staying in for a while longer, then yeah, going through that dating period and finding the right fit it was much preferable.

Yeah. And I would say, from my experience, to the faster you want those things that happen, probably the lower the price will end. Up being, right, right, Yeah. Okay, So last couple of questions here, Albert that I've got for you the idea of how how do you find somebody who wants to buy you?

So we just talked about it a lot of times. In my experience, for sure, it's been people at least within your inner circle network that maybe are not necessarily the ones that buy you, but maybe are the ones that introduce you to the ones that are interested in purchasing you. But let's say my network maybe isn't that strong or things like that, and I want to start going down this road, where do you start? How do you go to market with your business.

Yeah, and for us, we hired somebody I should say an advisor or somebody who is familiar with our space that he does have the network right and could guide us along the journey and it inform us, teach us how the process goes, help us along the way, and sort of make those connections and run us through a process as what they call it. Right, So if you're in that spot and it's not either fortuitous or you have sort of a network where you're sort of on the side seeking buyers, that's the way to kind of do it more more formally.

Of course they take a percentage of the deal, but it is it's one of those things where you you only do this probably one time in your life. So like when you sell your house, would you want to sell. It at yourself? For get a real estate agent.

There's certainly something to having a professional who's gone through this. I can educate you on that and then either provide you guidance or refer you to people that are focused on tax that are focused on the legal aspects of it. So having sort of a team when you go to sell his ideal even if you're approached right like having somebody like that to check in with, or some of those resources are helpful, so you're not doing it completely at your own. Yeah, well you have a professional help, don't.

You don't need cousin Eddi. Right. Sure, they've seen some people bringing cousin Eddi and it's like, yeah, that's not really going to work. Okay.

What's your final thoughts any parts that I didn't cover that maybe you want to impart to any of the business owners that are listening here that you want them to consider. Probably my last thought, which unfortunately as many people's last thought, is the integration. Right if when you're joining another organization or even if you're the acquirer, there's integration that needs to happen. There's so many and way too many examples of really the value that you're trying to create in an acquisition just completely falling apart because of integration not happening or not going well.

And there's a lot that's involved there. If you wait till like, hey, we've sold and we're done and to just start thinking about it, you're in for a world of hurt and planning for that well in advance and having those conversations with the buyer or you as the seller, about what that looks like and getting on the same page really really is important. And then again, if you're not going to sell, designing your organization and running things in a way where it's a little bit plug and play, right, like if you were to go from quick books to net suite, how dramatic would that be for your organization?

Right, It's just it's a tool. And so there's some mature sure that needs to happen there, but how big a lift would that be? So you can almost sort of practice integration if you're not going to sell, because you're going to go through these stages of maturity where maybe you're going to say, you know what, I'm ready for a help spot our salesforce. Now I'm done with pipe drive.

And so there's a change that needs to happen in your organization, think about how big a lift that actually is and is it something that you're prepared for. So essentially use those things as practice, right as you bring on new hires, as you form new departments and new service offerings. Almost use that as your your practice for the type of change management that integration will will require. Requires that planning that requires advocates it requires change management.

So yeah, I think that's the one thing that people maybe do in their business but don't like I and every like really use the term change management until integration. But I realize, gosh, for decades I've been doing this right just without calling it that. So getting the practice at that again will help you run your business and go through the growth. But also it's very very viable if you ever sell or make an acquisition and have to go through a contigress with another party.

Albert, you are a fountain of information, and I thank you so much for taking the time to If I want to reach out to you and learn more about how you're helping people do this every single day. Where do I go? Where do I find out more? You can find me on LinkedIn Albertbanks, you can check out the website appartus dot com.

I'll be happy to chat with people. I'm in the stage of life where I want to help people succeed and get over the hurdles that maybe I faced when I was younger. Is happy to connect with anybody, Yeah. I definitely anybody listening, even if you just are sort of sale curious.

Albert's a great guy, just to reach out to you with some initial questions. He's not gonna he's not a heavy sales tactic guy, and he's here to help out. Albert again, thanks for taking the time out of your busy schedule to join me. Thanks for having Kurt, Thanks for listening.

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