Introduction

John: Welcome to the Agent of Wealth podcast with Marc Bautis of Bautis Financial. In this podcast, Marc helps guide you toward financial freedom, ensures you never run out of money, and helps you create a balance in life that prioritizes what’s most important to you.

Welcome back to the Agent of Wealth podcast. This is your co-host, John Williams. Today I’m joined by Gregory Kovsky, president and CEO of International Business Associates, the Pacific Northwest’s oldest and largest business brokerage firm, founded in 1975. With over 30 years of experience in mergers and acquisitions, Gregory has personally facilitated more than 300 transactions for privately held and family-owned businesses, among many other things. I could talk for a while. I was on his LinkedIn page, and there’s a lot going on there. I’m really excited about the conversation today.

Beyond his transactional expertise, Gregory is also a published author, a seminar speaker, and an advocate for entrepreneurship, and he follows a unique work-life balance philosophy that we’ll touch on later in the conversation. Gregory, welcome to the show.

Greg: Thank you. It’s an honor to be here.

From College Basketball to Owning IBA

John: I’m really excited about this conversation. We have a lot of clients who are small business owners. There’s an aura in the marketplace around being a business owner, and I don’t think it’s always as glamorous as it looks. But in a lot of cases, the dream is to build the business, grow it, and sell it someday. So I’m really interested in diving in. To get started, I’d love for the audience to learn a little about you: your journey, what led you to M&A, and eventually to purchasing IBA in 2000.

Greg: Certainly. I’ll give you a thumbnail sketch. I grew up in the Pacific Northwest. I’m a Portland boy. I was tired of the rain and ready to spread my wings, so I went to the University of Texas in Austin and earned a business degree in investment finance and accounting.

With my father’s encouragement, I chose to pursue my childhood passion, and I spent four years as a college basketball coach and national recruiter. After four years, I decided I was ready to return to the Pacific Northwest and explore the next chapter.

IBA had sold my father’s veterinary hospital and real estate, and he had been impressed with them. He introduced me to the founder of IBA, Bill Osavski. It intrigued me, so I joined the firm in 1994 and emerged as one of its top salespeople between 1994 and 2000.

I was selected as Bill’s successor and reached an agreement with him to purchase the company. We had an old guard of brokers, many approaching retirement, some with kids in college, and so on. A brokerage is somewhat like a real estate firm in that way, and Bill didn’t want to disrupt their worlds. Many of them had mentored me and liked me, and Bill knew I wouldn’t micromanage them. So I took the helm of the company in 2000.

We did wonderfully until 2008 and 2009. Then came the Great Recession. When the banks shut down and people stopped buying products and services, they also stopped buying businesses. We went from 15 brokers in the field down to six, including me. Many retired, and some went on to other professions. Only one broker from before the Great Recession is still with the firm. But since then, we’ve grown steadily. We now have 18 brokers in the field besides me facilitating transactions, and 10 offices in the Pacific Northwest.

We’re also commercial real estate brokers, so we can sell both assets for a client: the business and the real estate. Think of a winery that has vineyards along with its production facility. We can represent the owners on the whole package, from valuation to closing.

Industries and Deal Size

John: Excellent. Is your clientele niche right now? You mentioned real estate. Has it evolved? Are there types of businesses you like to work with?

Greg: Certainly. We represent businesses in 20 different industry sectors, from manufacturing to technology to education. It’s quite a spectrum, and they’re all listed on our website. We’re fairly industry-agnostic, as long as it’s a good, solid business. We work with businesses from about a quarter million up to $5 million in EBITDA, and we’ll apply a multiple of two to seven to that, depending on risk, industry, and other dynamics.

John: That’s a wide array.

Where the Sale Process Starts

John: I’d like to step back and look at this from the business owner’s perspective. We have a lot of business owners who say, “I don’t know if I could ever sell this business, or if it’s even sellable.” If they do get to that point, I’m curious what the beginning looks like from your angle. Say I’m a business owner looking to retire and sell. When I come to you, what does that typically look like?

Greg: My mother was a schoolteacher, and I believe a good relationship starts with communication and education. So we’ll sit down with the owner and understand why they want to sell, what they’ve built, and how they’d describe their company.

The first step is a valuation of the business. At IBA, the valuation serves two purposes. On the seller’s side, you get to sample our knowledge, experience, and customer service, and learn the estimated value of the business.

Valuing companies is a sophisticated, nuanced, subjective science. On one side, we look at return on investment and historical financials. On the other side, we look at the business like art: it’s one of a kind.

We were talking before we came on the air about you growing up in Philadelphia. Say you want a Philly cheesesteak. There’s a spectrum of quality and demand for different products. So when you value a business, the reputation, the staff, and the location are where we start turning the dial to arrive at a valuation. And you can comment on this, but not all Philly cheesesteaks are equal, are they, John?

John: Well, first of all, Philadelphia isn’t just cheesesteaks. But I appreciate you using that as the example. And you’re absolutely right. One of the funniest things about growing up there, and even now, is that everyone has an opinion about which one is best, and the opinions are always different. There are obviously some common favorites, but between the bread, the cheese, and everything else, they’re definitely not all created equal.

Greg: Now think of it from a valuation standpoint. If you had a child who wanted to own that business, which one would you feel best about them buying, based on systems and processes, location, and reputation? It all comes down to mitigating risk. That’s where valuation starts.

On our side, we’re evaluating whether we believe in the business model, whether we trust the owner and can work with them collaboratively, and whether they’re realistic about value.

We’ve done over 4,400 transactions in our history, and we have market knowledge we can share. We just put an education business into escrow that I believe had 17 offers in the end. I also just put into escrow a company that manufactures porcelain, granite, quartz, and other countertops for the construction industry, and we had six offers. Each of those offers reflects an opinion on value. We establish a go-to-market price that we need to justify, but then the buyer has their say, and our job is to get people to shake hands. The definition of a fair deal is what a willing buyer and a willing seller agree to. And because no business has an exact duplicate, market conditions ultimately determine where the valuation ends up.

Finding Buyers

John: Speaking of market conditions, how involved are you on the buyer side in tracking down buyers? Is there a network you tap into to find a good fit, or are you out pounding the pavement for buyers as well?

Greg: We are. As part of our representation, we create a robust marketplace of buyers. I’ll tell you, finding buyers is much easier than bringing product to market, because our clients are traditionally executing their vision, doing what they enjoy, and making money. So what’s the urgency to sell?

On the buyer side, we’ve sold companies to publicly traded companies, privately held companies, private equity firms, family offices, and solopreneurs. There’s high demand. Right now there’s actually a founder and creator ethos in our culture, where people don’t want to work for someone else. They want their own company.

I have a 22-year-old son who comes from an entrepreneurial family. It’s in his DNA. He has a great job right now in the tech industry, but in the back of his mind, he wants to be an entrepreneur.

I caution anyone who wants to be an entrepreneur: don’t go into it undercapitalized. That’s the most common reason people fail. You may have ideas, but as Elon Musk says, creating the prototype is the easy part. Doing it at scale is where it gets hard.

John: He knows that. Reading his biography, you don’t realize some of the trials and tribulations he went through. That makes a lot of sense.

Getting Sellers Comfortable Sharing Information

John: You mentioned that owners are often deeply involved in the business and a big part of it, and they’re trying to keep growing it. What struggles do you see in this valuation process as the owner comes to you? What are some of the hang-ups, and where do things get more complicated in your relationship with the owner?

Greg: First of all, owners aren’t comfortable sharing information. Many times, even their own families don’t know how much money they’re making or what they’re doing. They just know they’re successful, and maybe generous beyond that.

So it’s about opening up and sharing information. Just like buying a publicly traded stock, a buyer is going to want to go through the historical financials. They may do a quality of earnings assessment. They’ll look at leases, equipment, and customer concentration. So it’s about getting comfortable sharing information and understanding the value of doing so.

Right now we’re selling a company that does business with the U.S. Navy. How do you facilitate the assignment of that contract? And how do you overcome fear about customer concentration? If that contract doesn’t continue, there aren’t many willing and able replacements for the U.S. Navy as a customer.

The Emotional Side of Selling

John: That’s really interesting, because the owner has often been in the business for a long time, 30-plus years in many cases. There’s so much emotion involved in just taking that first step and getting to the point where they’re ready to sell. And they’ve put so much time and effort into the business that they may have an idea of what it should be worth based on it being their baby. I can only imagine what you’ve come across on the emotional side of the transaction.

Greg: It’s very emotional. It’s often like selling a child, and beyond that. Everyone thinks about price, but there’s the extended family. If you’ve owned a company for 30 years, you know all your employees intimately. You probably know their kids. You don’t want to go to a restaurant in town during retirement and face John or Jane, whom you know well, and hear that they’ve been laid off and don’t have money for preschool or whatever it may be.

Then there are the customers. It’s very sad when customer service and product quality decline, because the owner’s name is tied to them. The same goes for vendors. Say it’s a roofing company that bought plywood from a certain supplier, and the new owner moves that business elsewhere. That revenue stream disappears for a supplier the seller was close to for years. Maybe they golfed together. And you no longer have control.

So you’re correct: selling a business has a very nuanced emotional element. And there are other layers. Say your spouse retires and wants to move to Florida because they don’t want to be in the cold anymore, but you still own the business and you’re not ready to sell and retire. That can cause stress in the household.

It can also happen in partnerships, where objectives change between partners who worked well together. Maybe they’re in different age groups, or one wants to double down and invest in growing the company while the other wants to take chips off the table.

So we wear many hats in the process, and one of them is psychiatrist, walking people through all of this. We need to have these discussions before we’re in negotiations, because it’s a waste of everyone’s time if we get to the threshold and, instead of going into the church and getting married, one party hops on a Harley and rides away.

Why the Buyer Matters to the Seller

John: I hadn’t really thought about that part, but it makes a lot of sense: the relationships, and making sure everyone involved is happy. It also makes me think of your analogy of giving away a child. It shows how important the new buyer is to the seller, not just for the money they’re paying, but for who they are as a person and how the seller feels about how the buyer will carry on their legacy.

Greg: Most certainly. We do business with people we know, like, and trust, and we work to build that rapport. We look at the buyer’s relevant experience. Sellers aren’t just focused on the P&L and profitability. Does the buyer have the ability to run this company? Are they the right match for the culture?

I have brokers on my team who are native speakers of Russian and Chinese, and we serve those entrepreneurial communities. If employees and staff communicate bilingually, you need to be aware of that dynamic in the company.

For as long as America has been around, the greatest ladder of opportunity has been to come to America, start a business, grow it, and generate wealth. It doesn’t matter which century you look at. There have always been entrepreneurs. Ben Franklin was a big entrepreneur who created many things. We’ve seen it throughout history, and it continues today.

When Business Is Your Identity

John: Do you see any patterns among owners who struggle with the transition of selling their business compared with others? Does anything jump out at you?

Greg: It’s often people’s identity. I had a client who found a statistic that people die, on average, seven years after they retire. His joke was, “Well, if I never sell, I’ll never die.”

But it’s true that it’s people’s identity. Maybe someone loves to play golf, but part of what they enjoyed was going golfing on the weekend and talking about business. If it’s just golf without the conversation, without complaining about a customer or an employee or sharing with friends how they successfully solved a problem, it’s diminished.

I always say business is the ultimate competitive sport, and it’s hard to replace the game of business. Every day, you have to lace up your sneakers, get out on the court, and compete against others selling similar products and services. And if you snooze, you lose.

One of my favorite stories is Sears. Sears was Amazon before Amazon. They sent everyone in the United States a catalog from which you could buy everything you ever needed. Imagine if Sears had put its whole catalog online in the 1990s and evolved into the technology age. Would we even have Amazon today? Sears was there first. They had the brick-and-mortar stores, the distribution, and the tallest building in the United States in Chicago. They were in a wonderful position, but they didn’t recognize that consumer habits were changing and that they needed to adjust.

John: There are so many examples of that in business. Blockbuster just popped into my mind. And Sears, man. I remember going through the Sears catalog around Christmas and circling everything. That was my Christmas list.

Reducing Key-Person Risk

John: I’d like to step back and talk about something that comes up in conversations with our small business owner clients. One of the biggest issues is the key person. The owner is such a big part of the business, and such a big part of its value. Do you have any general thoughts on that? If the owner is doing a lot of the selling and is a big part of the business, have you been able to facilitate those sales and get over that hump?

Greg: Most certainly. We need to acknowledge that people matter. The Kansas City Chiefs aren’t the Kansas City Chiefs without Patrick Mahomes. I think anyone would recognize that the value of that team and organization would be diminished if he weren’t secured long term as an employee.

So then you get into staging that element. The first thing I always tell my clients is that we need to identify the key employees. We’ll likely need to engage with them during the sale, with the buyer involved, but let’s do it late. Let’s make sure the books and records get a thumbs up during due diligence. Let’s make sure we can reach agreement on the legal documents. And let’s make sure financing or investors are secured for the transaction before we pull back the curtain.

Then it’s about controlling the narrative when approaching that employee or those employees. Maybe it’s golden handcuffs, where the owner says, “I value you. You were very instrumental in getting this company where it is. I need your help with the transition. I’m going to leave a certain amount in escrow for you in recognition of your contribution, but I need your help transitioning ownership.” Be honest and communicate clearly.

Then, at the right stage, usually close to the sale, maybe two weeks or less before the transaction is completed, introduce the buyer. The buyer will want to make a good impression. They won’t want turnover, so they’ll be careful in how they engage, and they’ll offer everyone continued employment.

It also helps to convey that there’s usually a transition period for the retiring owner. The previous owner can say, “I’m joining you as an employee, and I’ll be here for a while after the sale. Nothing is going to change. Just give this person a chance.” And since I mentioned multiple offers, they can say, “I had choices, and this is the one I selected. I knew we needed the right person at the helm.”

There are also situations like a manufacturing company we’re working with right now, where the owners have taken it as far as their skills allow. They don’t have an MBA, and they don’t have the resources to ramp up manufacturing for national distribution. They’re regionally distributed. So they’re on the market saying, “Let’s acknowledge that it needs someone else to take this child to college and beyond. I’ve prepared them well. They made varsity in high school. We shot hoops together in the driveway, and I threw them passes on the playground. But I’m not the coach who can get them a college scholarship.”

John: That’s great insight. Combine that with the idea that the business owner is married to the business, and I can totally understand why it’s important to have someone like you facilitate the process.

Common Mistakes Before a Sale

John: Given all the transactions you’ve been through, what are some common mistakes you see business owners make leading up to a sale, or even five or 10 years before they actually sell?

Greg: Great question. The first is being the hub of everything at the company. An owner should work on the business. There’s more value in a business the owner manages at an executive level than in being the head chef at a Michelin-star restaurant who touches every meal. That’s a really hard business to sell.

So think ahead: create redundancy and develop people so you can go on vacation. A great question from the buyer’s side is, “When was your last vacation, and how long were you gone?” If the owner says, “We went wine tasting in France for three weeks. It was wonderful, and the business didn’t miss a beat,” that’s much better than, “I’m selling because I haven’t had a vacation in 15 years.” That’s a really important piece.

Customer concentration is a big one. Don’t put all your eggs in one basket, because that creates fear and diminishes value.

And have established systems and processes. “That’s the way we’ve always done it” isn’t a great answer if you’re not there to train and mentor someone. It’s much better to be able to hand over a sales manual someone can read, with scripts and approaches for engaging customers, sample emails, and frequently asked questions. You commonly see FAQs on websites. We have them on ours for both buyers and sellers. That’s how you begin to standardize processes and information.

John: So, standard operating procedures and resources someone can turn to when they’ve never done something before, because it’s written down somewhere.

Advice for Entrepreneurs

John: As we come to the end, is there anything you’d like to say to the aspiring entrepreneur, whether they’re a seller or just in the business? Any high-level wisdom you’ve picked up along the way?

Greg: First of all, know that you’re going to have failures. Entrepreneurship is the big-time game. You can read the books of any entrepreneur, and they’ve had successes and failures. So go in saying, “I’m comfortable with failure, and I know there will be turbulence.” If you psychologically can’t handle that, or your spouse can’t, then you shouldn’t do this.

Make sure you have relevant knowledge and experience you can draw on, or mentors and support systems. If you’re a rainmaker as a salesperson, focus on that piece of the company, and hire a great CFO if you’re not the numbers person.

And have the capital to weather storms and to grow. It’s very frustrating as an entrepreneur to see a window of opportunity but not have the chips to put on the table and play the hand, and then watch someone else move into that space.

But manage your growth. Don’t bite off more than you can chew. Growing too rapidly can also be a failure point. Make sure you’re growing intelligently.

Your Business May Be Worth More Than You Think

John: Makes sense. In closing, you mentioned earlier that it’s harder to find sellers than buyers. Is there something you’d like to say to the business owner sitting there thinking, “I don’t think my business is worth anything”? Is there value in just seeing what happens? Is it going to cost a lot of money? Is there any reason they shouldn’t reach out to someone like you, since you never know how someone might help them with that next step?

Greg: I always recommend seeking knowledge and talking to brokers. Not all brokers are the same. Our business model is 100% paid on performance, so whether a business sells for six, seven, or eight figures, people don’t pay us unless we perform and complete a transaction. Not every firm is that willing to take on risk. Many charge retainers, administrative fees, and so on.

Here’s an example of a business I sold that, at face value, the owner and many others would have thought wasn’t valuable. It was a floor covering store. All they had were carpet samples, hardwood samples, tile samples, and so on. They had no real assets. They ordered carpet for specific projects. But they had been around for decades. They were trusted for installation and trusted to be fair on pricing. They had a great, well-known brand in the marketplace.

A business like that is all blue sky and goodwill. There wasn’t much in the way of assets, just a few vans, some equipment, and office materials. But it was very profitable for the owner, and the niche wasn’t going away. We sold it for a strong market value, and the buyer has thrived.

John: That’s great to hear, and I’m sure some listeners on the fence will appreciate hearing it as well.

Where to Find Gregory

John: That’s all I have for you today. I’m sure we could go on all day. This has been amazing. Congratulations on a successful business and an illustrious career, and thank you for joining me on the Agent of Wealth podcast. Before we go, I’d like to share with our listeners where they can learn more about you and get in touch.

Greg: Certainly. I would direct people first to our website, ibainc.com. Specifically, I’d point you to our blog. It was developed as a library resource for the entrepreneurial community and has had almost 200 authors in its history, so many questions about buying and selling a business are covered there.

I just wrote an article on how to handle gift cards and gift certificates in a transaction. It may seem like a tiny detail, but it’s a big issue, because the seller received money for them and the buyer assumes the liability for delivering those items. So legally, we have to address it.

If you’d like to talk with me, you can call me at our corporate headquarters at 425-454-3052.

John: Excellent. We’ll share all of that information in the resources section of the show notes. Gregory, I can’t thank you enough for being here today, and thank you to everyone who tuned in to today’s episode.