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John Jantsch: Hello and welcome to another episode of the Duct Tape marketing agency Podcast. This is John Jantsch. And my guest today is Chad Peterson. He is the founder of Peterson Acquisitions and the author of Swinging Doors: A Guide to Selling Your Company. So, Chad, thanks for joining me.
Chad Peterson: Hey, thank you for having me, John.
John Jantsch: So, it’s not often I’ve speak to people… I interview people all over the world. My last guest was in Sydney, Australia. So, it’s kind of fun to interview somebody in Kansas City.
Chad Peterson: Yeah, we are local. We’re probably not 15 minutes away from one another but we’re broadcasting everywhere, and isn’t that phenomenal?
John Jantsch: It is pretty fun. So, let’s just get right to it. Should everybody who starts a company have the goal of selling it?
Chad Peterson: Absolutely. The problem is this. And I’ll be very concise with my answer. Absolutely, you should plan on selling it. Doesn’t mean you need to be working every day to make sure it’s sellable but you should have an exit strategy in mind because you’re not going to live there forever. There’s a chance you could but it’s a very small chance. It’s kind of like somebody buying a starter home. Are you really going to live in your starter home forever? Probably not. You’re probably going to move up. So, I think, yes, you’re going to move on. It happens all the time.
Chad Peterson: There are builders of businesses; and there are operators of businesses. I find that people that start businesses are more entrepreneurial; and I find that people that operate businesses are more managerial. And those that are looking to buy a business are more managerial, otherwise they would have started the business themselves to begin with.
John Jantsch: Great point. So, and you’ve probably seen, I know I have, people that toiled their whole life, maybe they paid for their house and they bought their food and stuff, but then they came to the end and it was just like, “Close the doors.” I mean, that’s pretty sad, isn’t it?
Chad Peterson: To me, it’s especially sad. I think it’s absolutely terrible if you’re not able to sell your business and walk away with a severance package, so to speak, as being self-employed. So yeah, it really puts a sour taste in my mouth whenever I see somebody’s business die on the vine and they just shut the doors. And really, I think most of the time, it’s because they had bad advice along the way because somebody could’ve stepped in and said, “Hey, this is how you do this,” and walked them to a strategy to get them out of their business with some compensation.
John Jantsch: So, I’m sure that most business owners think that their business is worth more than somebody will pay for it. How do you go about valuing a business? I mean, what are the just nuts and bolts in it?
Chad Peterson: Well, how you value a business, bottom line, is just the cash flow or what we call “seller’s discretionary earnings,” which is… Let’s just say there’s a river of money coming through the door of your business, and you stuck a net in that river. Whatever the owner can pull out of that river is seller’s discretionary earnings, and that comes in the way of salary or a pass-through earnings to the corporation, in distributions, your car, your car insurance, fuel, cell phone, meals, entertainment, 401(k), travel, things of that nature. Anything that your company does for you adds up to that seller’s discretionary earnings number. And we’re going to use that number to price it to make sure that it debt-services at the bank because there’s going to be a loan on it. And so, those numbers have to make sense from a banking perspective.
Chad Peterson: But more importantly, John, I would say whenever you want to go and sell your business, and I know you have a lot of business owners in your audience and many of them have probably built great businesses, but what I really try to drill into people is watch maybe less than the profitability of your company, watch the passion that you have for your business because when you start to lose passion is when it’s already over. The bell’s already been wrung and game’s over. It’s just you’re hanging around for no reason. So, when the passion’s gone, be quick to be ahead of that. So, if you think you might be losing passion for it, you probably already have. And a year from now is going to be more painful. And two years from now, it’ll be even more painful. And so, if your passion is waning, then it’s time to sell. Get out of your own way because without passion, there is no profit.
Chad Peterson: And if you wait too long, profits fade, the value of your business goes down. And so, that big payday, which is what you were talking about earlier, is whenever you just shut down the doors, is because the passion left the building three or four years ago. And now, your numbers are showing it. And now, nobody wants to buy it because the numbers aren’t there.
John Jantsch: How often do you find that businesses… It’s difficult to sell a business because the truth of the matter is the business is really the owner. I mean, that person’s relationships, their ability to sell. I mean, how big a problem is that when it comes time to sell?
Chad Peterson: You’re never going to hear [inaudible] answer [inaudible] another broker but I’ll tell you the answer. Anything above $120,000 in earnings, it doesn’t matter whether it’s owner-operated or not. And here’s the reason why. You can go get a job in corporate America, making 60, 70, $80,000 a year. You can’t, or you wouldn’t rather, go buy a business that’s only making $80,000 a year, and get a bank loan on that business to only go to work for yourself and make 80 grand a year and pay debt service on it.
Chad Peterson: The threshold that I see psychologically is $120,000. So, if you’re an owner-operator of your business and you’re making north of six figures, somebody will go buy that business. And what they’ll try to do is find the deficiencies in your business, thinking that they can, and most likely they can, build that business from there. In other words, if you’ve got a 12-rung ladder, if you’ve gotten it to the fourth or fifth rung, and you sell it, and let’s just say it’s [inaudible] 120 grand a year, you sell it, they’ll take it from there and they’ll try to make it to $250,000 a year. There are buyers out there like that. But if you’re an owner-operator and you’re making 80, $90,000 a year, it’s very hard to sell those types of companies.
John Jantsch: Sure, yeah. That makes sense. I’m sure a lot of people that you… business owners… I mean, is it just the balance sheet, the P&L, the tax returns? Or is there a way to get value out of, I don’t know, potential, or an asset like web traffic or something like that? Or is it really just come down to dollars and cents?
Chad Peterson: It really does come down to dollars and cents. The extenuating factor there would be if somebody’s really passionate about something and it brings them a lifestyle, then you can get more for it. The catch is always the bankability.
Chad Peterson: So, let’s just say, for instance, I’ve got a business that pays you $400,000 a year; you’ve got 23 employees; and you’re going to have to work it. And you’re going to own it but it’s going to own a piece of you too. Well, that’s worth X amount. But what if I said, “Hey, here’s $400,000 of income. Here’s a laptop. Here’s your login. And here’s your cell phone. And you can be in Australia or you can be a beach bum somewhere and you can run this business.” Well, that’s worth a different amount, right? So, those are both truths. I mean, they’re so far from one another, but really they’re bringing in the same value. But one has lifestyle potential and one doesn’t. Here’s the problem: The buck stops at the bank.
Chad Peterson: So, the bank is not going to put an exorbitant amount on lifestyle; they’re only going to put the amount that they will lend on the actual business, which sends us into a different stratosphere, “Well, we have to talk about, okay, if you want more for your business because it’s a lifestyle business, we have to find more of a cash buyer or somebody who has more money to put down on it.” Because a bank would say, “Well, okay, I see your value, but I’m only going to give 80% of that value.” Well, now we have to have a buyer that comes up with 20%, maybe even 30%, if the business is priced with a lifestyle component.
John Jantsch: Where do you see people who come to you and say, “I want to sell my business”? “I hear you’re a business broker.” I mean, where do you see that they… What are their challenges typically, when you… How do you have to get them in shape?
Chad Peterson: Well, are you talking about if they come to me and they’re just not really ready to sell yet? Like they’re not really ready for market [crosstalk 00:09:12]?
John Jantsch: Yeah, yeah. I mean, I’m sure a lot of people just think, “Oh, I just sell this thing. I’m done now.” I mean, and I’m sure you’ve learned that no, there’s some things you got to clean up. You’ve got to show, what, better cash flow, whatever it is.
Chad Peterson: Yeah. The biggest thing really… I’m going to go back to that passion subject because the main thing is that they wait too damn long to call me. And by the time they call me, they are so exhausted. They think it’s like a lemonade stand. “Oh hey, Chad, I’m ready to sell. Go ahead and get rid of it.” Okay, well that’s not how it works. You have to come to me; I have to put together a package; I have to understand your business; we have to market it to the right buyer, not just any buyer; I have to get that through a very rigorous process, called the SBA underwriting process, at a bank. I mean, this isn’t selling candy bars; this is selling a business. And so, that’s the first problem.
Chad Peterson: The second problem is they’re often not ready from a marketing agency and a management standpoint. I would say the three M’s, that everybody has a marketing agency problem, a messaging problem and a management problem. And those three things, marketing agency, message and management, within those three things, those three things have probably made them tired in the first place. And that’s probably why they’re calling me in the first place. If they had really strong, strategic marketing agency, they would probably be doing better. If they had a clear, bottled-up, concise message, a brand, that they could yell through a bullhorn and the market could hear them, they probably wouldn’t be getting tired. If they had a good management system in place where people were motivated rather than being managed, they probably wouldn’t be getting tired. So, it’s the three M’s. And that’s why they call me. So, I would say that number one is their passion and then the three M’s that I just mentioned.
John Jantsch: I’m sure different businesses, different industries are different, but are there kind of people… Should business owners be thinking about who they want to sell it to and maybe even start courting maybe existing employees or maybe a really good customer? Or are there things that business owners should be doing in that sense to kind of, before the thing is for sale even, start sort of courting or grooming somebody?
Chad Peterson: No, that’s the last thing they should do. An employee is never going to buy it. The reason is, most of the time, they don’t have the money. And people have their own dreams and passions. It kind of segways into another conversation, which is, “What about my son taking over? What about my daughter taking over?” That never happens either. Whatever a son or a daughter or, in this case you’ve mentioned an employee, they’ve seen the hell that you’ve had to go through to build that business and somehow, the sexiness has worn off of it. So, that doesn’t happen. As far as talking to competition, you don’t want to do that either. And all of those buyers are very unlikely.
Chad Peterson: What’s so counterintuitive about selling a business is that the most unlikely buyer is the one who’s going to buy it. Somebody who just walked out of corporate America; he’s got six or seven bosses; he’s miserable; he’s in a cubicle, that’s probably your buyer. And I have about 3,000 of them right now. And so, it would more than likely be somebody like that, much over competition or an in-house employee or a partner.
John Jantsch: So, let’s talk about the types of buyouts. I’m sure a lot of people just assume “somebody buys it from me, and they give me a check, and I go on my merry way.” But buyouts are not really structured that way, are they?
Chad Peterson: Well, are you talking about a buyout like a partner buyout? Or [crosstalk 00:12:54]?
John Jantsch: No, I just mean… not necessarily buyout. That’s probably the wrong term. But when somebody sells a business, are they sometimes on the hook to finance it? Are they sometimes on the hook to stay there and earn out what they’re going to buy? Or is it typically like I get a check and I go on my merry way?
Chad Peterson: Well, I would say maybe 10% of the time, maybe 15% of the time, somebody gets a check and they walk off into the sunset. But it’s very rare. The reason goes back to the subject of bankability. So, if the bank wants more security or collateral, then the bank can use that as human collateral. They can say, “Okay, We’ll do the deal but we want the seller to do a 10% seller carry.” So, let’s just say you were to sell your business for a million dollars, the bank might ask you to carry $100,000. In other words, at close, you’re not going to get 100 grand of your million. That’s a wonderful thing for all parties. It’s just that sellers clam up and get tight whenever they hear about that because they’re like, “Oh gosh, I’m not going to get my money.” But the truth of it is that it never fails. I’ve never seen one fail. Not only that, but it’s on a promissory note and it’s usually at a good interest rate.
Chad Peterson: Right now, if you were to do a seller carry, you’d get paid 8.5% on that money. And it’s mailbox money. So, you close the business and you’re getting mailbox money for the next 36 months. Every month, you get paid. So, it’s good for the seller. It’s good for the buyer because the buyer has a feel good on the whole deal because he knows that the seller is going to stick around and make sure it’s a smooth transition. And it’s good for the bank because they have the same mentality, that they want to have a good transition for success.
John Jantsch: How often is the seller contractually obligated to stay and run some aspect of a business? How often do you see that?
Chad Peterson: Well, everybody is required to stay for 90 days. And everybody is required to leave at 12 months. So, it’s mandatory 90 days transition. That’s standard. But with that being said, let’s just say it’s a business that doesn’t require a full 90 days. Then the language is written up, “Hey, for the first month, I need X amount of time; second month, this amount of time; and then for the last month, by phone, as needed.”
Chad Peterson: But let’s just say you sold the business and the seller is hanging around after the 12 months. After the 12th month, it’s actually a SBA violation because there’s a possible litigation matter there and the SBA can’t have it. So, everybody has to agree that after the 12 months, you got to be gone.
John Jantsch: All right, let’s flip the tables a little bit because you mentioned that you work with a lot of… you represent a lot of buyers of businesses. So, if a listener’s out there thinking, “Well, maybe I’ll just buy a business.” What should they be looking for?
Chad Peterson: Well, this is the truth of the matter. This is some real nitty-gritty stuff that nobody else is ever going to say to them. But I’m one of those brokers that’ll just hit you right between the eyes with it. I don’t have any time to give you any fluff. I want to give people the real deal. The truth of it is that if you want to be a buyer of a business, you have to get close to a broker. And you have to pay that broker.
Chad Peterson: Here’s an example. And John, this is good for your listeners because it’s so important and, like I said, they get wrong information. There’s a lot of misinformation out there. I’ve got 3,000 buyers right now. Let’s just say that a good business lands on my desk. Let’s just say that a business that’s making [inaudible] dollars a year. You can run it from a laptop and a phone, which I just got one of those today. As soon as I get it, as soon as I package this up and I send it out to 3,000 buyers, it’s like throwing a T-bone steak at a pack of walls. It’s going to be eaten up really quick. So, there’s a lot of people, and this is so important, there’s a lot of people that are out there calling brokers and saying, “Hey, what do you got?”
Chad Peterson: Buying a business is not like buying toothpaste. You can’t just see what’s on the shelf and go pick it out. If it were that easy, it would be that easy. And it’s not. So, this is the thing. If you wanted to come to me to buy a business, I’m going to evaluate how rare of an animal that you want me to go get for you. If it’s a rabbit, something that’s really common, I’m going to charge you $20,000. If it’s a deer, harder hunt but common, could be 40,000. If you want an elephant, I could charge you 75,000. If you want a elephant with pink feet and purple toenails, I could charge you 100,000.
Chad Peterson: It depends on what you’re going after because a lot of people will call me and they’ll say, “Chad, I want manufacturing and distribution. I want to be making $3 million a year. I want it to be in this region. I want this amount of employees. I want this amount of EBITDA. I want… ” It’s like, “Okay, great. Do you really think that I have that laying on my shelf right now?” Okay? And so, what they do is they waste their time. That would probably be like somebody calling you, John, and saying, “Hey John, get me to the top of Google. Can you do that tomorrow? Get me on the top of Google search rankings.” And you’re like, “Man, if it was that easy, it’d be that easy.”
John Jantsch: A lot of people do ask for that though. You’re absolutely right. So-
Chad Peterson: Right. And the truth of it is you have to pay.
John Jantsch: Is that the typical arrangement? The buyer pays your fee? Or is a typically a business broker compensated kind of like real estate agents? If you’re representing both parties or you’re representing one party, you get a commission? Or how is a business broker compensated?
Chad Peterson: Well, I represent the seller but… And in 95% of the case… and I don’t even want to give your audience that label. I don’t represent anybody, okay? I mean, that’s just the improper way to say it. But if we’re talking in legal terms, that’s how it’s positioned. But no, I get paid by the seller but I very much so hold the hands of the seller and the buyer, more so the buyer, and I get them to the bank. So, I’m working equally for both sides.
Chad Peterson: But in the scenario where somebody wants to go buy a particular type of business, I charge them to go hunt for that particular type of business. And then, that’s a different fee and it’s separate from the transaction. That’s simply a consulting fee. And then, I’ll arrange with the seller for the seller to pay me for the actual transaction for the seller.
John Jantsch: Got it. So, I get pitches every now and then from business brokers. And again, a lot of it’s just they’re just cold-calling. But if somebody’s listening and thinking, “You know, maybe I should go talk to a business broker,” are there certain things they should be looking for? And I realize you are a business broker, and a lot of the other business brokers out there don’t do some of the things you do, but if somebody’s considering, what’s kind of the checklist of things that they need to make sure that they check off?
Chad Peterson: Man, honestly… I know the question you’re asking and I’d like to answer it as you asked, but I’m going to answer it a little bit differently just because it’s the truth. You really don’t want to go with a business broker; you want to go with the owner of a brokerage. And the reason is because most brokerages… and I refuse to do it. By the way, I’ve employed over 1,000 people and there’s not enough Aspirin on the shelves for that much unemployment. So, I just don’t want the headaches. But a lot of these brokerages, what they do is they’re hiring people to simply call you. They’re hiring glorified telemarketers, so somebody else that actually knows what they’re doing inside those walls will then handle it.
Chad Peterson: So, if you’re getting cold-called by a broker or you’re searching for brokers to sell your business, I hate to be such a bad guest and bad-mouth my industry, but I don’t have the respect for the people in my industry. They don’t have the knowledge, the expertise, the intentionality. Most of these people in the brokerage business are just looking for a paycheck and you have to be careful with people that are in deals because they just need a paycheck. Now, I’m not saying that I don’t need to make money, because I’m not Jeff Bezos just yet, but I don’t need a paycheck. So, if you call me and you want to sell your business, I’m not doing it just to get paid; I’m doing it to do good work. And I can’t say that for a lot of people. Does that make sense to you?
John Jantsch: Absolutely. Great answer. So, Chad, tell me where people can find out more about you and maybe get a copy of Swinging Doors.
Chad Peterson: Oh yeah. Please contact me if you have any questions about selling your business. Please contact me at petersonacquisitions.com. And go to my site and get the free download of Swinging Doors. It explains step by step how to sell your business and any and all details of it. And my website has a lot of blogs too, full of information. But again, petersonacquisitions.com. I’m very responsive. And if you just leave your information there, I will get back to you.
John Jantsch: Yep. And we’ll have a link in the show notes, as we always do. So, Chad, it was great to visit with you and maybe we’ll bump into you here in town soon.
Chad Peterson: Okay. Thanks a lot for having me on, John.
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