Introduction

John: Welcome to the Getting the Deal Done podcast series. I’m John Martinka, and my very special guest today is my friend Gregory Kovsky of IBA in Bellevue, Washington. Welcome, Gregory.

Greg: Thank you.

How We Got Into the Business

John: Gregory, since we’re both in the same business, the buy-sell world of small and mid-sized companies, let’s start with how you got started.

Greg: Thank you for asking. It’s a family story. IBA sold my father’s veterinary hospital and real estate in Portland, Oregon, and he was impressed with IBA during the sale process.

I didn’t think much of it at the time. I left for the University of Texas McCombs School of Business and pursued my first career. When I returned to the Northwest in 1994, I was talking with my father about my next step in life, and he said, “You’re a salesman by personality, and you have an academic background in accounting and finance. You should consider this as a career path.” It’s an interesting, dynamic world. I like change and variety, and almost 30 years later, it seems to have been a good fit.

John: It’s very similar to my story, from about the same time period and for the same reasons. For me it was a friend, not family: Ted Leverett. We were back-to-back presidents of a Rotary club in Kirkland, and one day after a meeting, he said something I remember clearly: “I’ve always thought you’d be good in this business.” And like you, I liked the variety and the interaction with people. It’s been a good career for both of us.

What We Love About It

John: So let’s talk about being in the business. What do you like most about it?

Greg: I think we’re cut from the same fabric, and I’m guessing it’s one of the reasons you like doing this too: I love sharing knowledge and teaching. One of my greatest joys in this work is the people I get to work with, people who have lived the American dream. First-generation immigrants. Women who hit the glass ceiling in the corporate world in the ’80s and ’90s and started their own companies to have freedom. Gay and lesbian individuals who didn’t like corporate culture and used the freedom of entrepreneurship to create their own world. People who started at their kitchen tables and in their garages with ideas and grew them into seven- and eight-figure companies. One of my greatest joys is hearing their stories and helping them convert their hard work and vision into an equity event. What’s your favorite reason for doing this?

John: I have three. We’ve both talked about the variety. Education, like you mentioned, is one. My mother was quite the educator, and I’ve written four books now.

Another is, let’s face it, the thrill of the deal. It’s hard to get a buy-sell deal done. There are so many pitfalls and speed bumps along the way, and getting it done is a thrill.

And the third reason is that you’re helping people. I see the results when someone sells their business. I see the results when a buyer takes control of their life and leaves the corporate world. They’re not the startup person. As our old friend Bill Pearsall used to say, they’re a “re-entrepreneur,” and they’ve made a big leap of faith to do that.

Greg: As you know, my first career after leaving the University of Texas was as a college basketball coach, and I agree with you. One of the joys of this work is the challenge of achievement. I personally love being paid 100% on performance, where I’m only paid by happy customers when the deal is completed. In today’s world, there aren’t many people who will put their chips on the table that way. At its core, this is a sales profession. It’s big-ticket, very sophisticated, nuanced sales.

John: You’re right.

What Makes a Business Sellable

John: At IBA, what makes a business sellable, and what do you look for when you decide to take on a client? Other than earnings, what do you look at in a company and its owner?

Greg: Sure. At IBA, we have a very high-touch, old-school process, with in-person meetings, phone conversations, and Zoom calls as we decide whether to take on a project. Our business model doesn’t work if we’re not performing, because we’re paid 100% on performance.

I’d say the first thing is: do I trust the individual? I want someone I can work with collaboratively, with open and honest communication. That’s important.

The second is: is there a compelling reason to buy this product or service? I don’t like representing companies that simply sell a commodity, where it’s a price competition. I do like companies where knowledge, experience, or maybe intellectual property sets the company apart. We look at where they stand in the competitive marketplace, their online reviews, their market share. All of that goes into the selection process.

And I’d guess one of the big things is why they’re selling. I don’t want to represent a company that’s selling because the owner sees storm clouds on the horizon and knows the business model won’t be successful. One thing we strive for in a sale is that our clients get a fair price, but we also want the buyer to be successful. As you know, the average buyer stays with an entrepreneurial project seven or eight years. We’ve been around almost 50 years, and I’ve personally sold one company four times. I want buyers who bought through us to return to us when they choose to sell. How about you? What do you use as your selection criteria?

John: You mentioned many of the things I look at. I usually sum it up, whether I’m talking to a buyer or a seller, this way: in a company, you’re looking for a competitive advantage, and it can’t be price. There’s an old adage that you can have quality, service, or price, but only two of the three. The ones who compete on price are not the ones we want to work with.

And like you said, there’s trust. There has to be a relationship, including between buyer and seller. If either one’s gut says, “I don’t know if I want to do business with this person,” there won’t be a deal, no matter how good the company or the buyer.

The Pet Rock Lesson

Greg: I believe we’re coming up on the 10th anniversary of your book about pet rocks. What differentiated the Pet Rock, and why did you use it in that book?

John: That’s an interesting question, because a lot of people laugh when they hear that someone sold pet rocks, and it just shows what a great marketing campaign can do. Is there any reason to have a pet rock? No. I can go into my backyard and pick up a thousand little rocks. But people paid money for them. So if they can sell that, why can’t you sell your business? And let’s face it, sometimes it’s not the business. It’s the owner. The owner just can’t let go.

Greg: Certainly. And you touched on how it’s often the marketing. When we choose to buy a hamburger for a meal, as consumers, we have a full spectrum of choices. Quality could be a driving factor, but it’s also the ambiance, the marketing, and maybe the special that drives you there. At the end of the day, how much difference is there between one hamburger joint and another?

John: Right. Marketing is always important, whether you’re marketing your business for sale, or buyers are marketing themselves to be taken seriously.

What Makes a Good Buyer

John: Speaking of buyers, what makes a good buyer to you?

Greg: I think the best deals come from open and honest communication in an environment of full disclosure. If buyers are open and honest about their background, their skills, how much capital they’re bringing to the deal, their signature power, and so on, I believe you can get traction.

One of my biggest frustrations is buyers who are really guarded about, say, their net worth. I’m not asking to be critical or to limit their opportunities. But as you and I know, there are often decision makers in a sale beyond the seller, maybe a landlord or a key vendor, who need to know that the buyer is strong enough to succeed in the future, and they’re not invested in whether the deal happens or not. I find that people who communicate and solve problems collaboratively make the best buyers. How about you?

John: I tell buyers there are three things that qualify them for what they’re targeting. One is enough money. You have to have the capital, just like you said: what’s your net worth, and do you have the liquidity? Two, do you have the skills and experience to buy and run that business? And three, do you have a good personality? Those things qualify you to go into the market.

Greg: I think it all comes down to this, whether you’re an entrepreneur, a buyer, a seller, or a broker like us: people do business with people they know, like, and trust.

John: That’s right.

Greg: And I think people often overlook building the know and the like, and you can’t get to trust without those first two steps.

John: This is very different from buying a piece of real estate, where the buyer and seller may never meet, whether it’s a house or commercial property. That’s a commodity. These businesses aren’t commodities. They’re something special. They’re someone’s baby, and 98% or 99% of the time, the owner wants to make sure it goes to the right person.

Choosing the Right Bank and Banker

John: You mentioned the personal financial statement and others who want to see it. Let’s go to the big one that wants to see it: the bank. What do you look for when you suggest a bank or a particular banker?

Greg: Obviously I want knowledge and experience. I don’t want someone for whom it’s their first rodeo.

I’m probably unique in this on the sell side, but I want success for all three invested parties. I want the buyer to buy the business and be successful, not undercapitalized. I want the bank to make a good loan and the banker to be proud of the deal, because then they’ll want to do business with you and me again if we give them good projects. And obviously, I want the seller to get as much cash as they can and to mitigate risk.

I’ll share an area of personal belief. I think one of the issues in the SBA world right now is bankers encouraging people to come into a deal with 5% or 10% down. My belief is that if a buyer comes in with 15% to 20%, it makes for a better loan and allows for more favorable debt service coverage.

And honestly, the buyer needs to plan for contingencies that have nothing to do with the business itself, whether it’s economic conditions or new competition entering the market. The one element that wasn’t there before is the buyer’s own executive management ability. They’ll be better or worse than the previous owner, and I’ve seen both.

It’s no different than at Microsoft, a big local company. I believe the company improved substantially when Satya Nadella took the helm. That’s not to say Steve Ballmer didn’t do great for many years, but anyone who looks at it analytically can recognize that a positive evolution occurred at Microsoft with the change. If leadership can have an impact on a behemoth the size of Microsoft, it can definitely have an impact on a company doing $7 million or $8 million.

John: I say this very often, though you have to be careful saying it to someone who’s selling their business: the buyer is almost always perceived as a breath of fresh air.

And you talked about people getting into deals skinny. I can’t believe that, with the new SBA rules on how little a buyer can put in, some bankers are saying they’ll go that low. I see banks that will go to a 1.1 to 1.15 debt coverage ratio, and that won’t even cover the taxes on the principal payments. Cash flow is king.

You talked about all the changes that can hit a business, but people rarely talk about the flip side of the good news: growth sucks cash. If you don’t have a cash reserve and the cash flow, you may have to pass on growth opportunities, or pay outrageous fees and interest rates to fund that growth.

There are almost 2,000 banks lending in this space nationally, plus national matchmakers, who don’t like to be called loan brokers. It’s more important than ever to have that relationship you talked about with a bank and a banker you know can do these kinds of deals and do them the right way.

Why Equity at the Start Matters at the Exit

Greg: And I think, psychologically, a buyer having more skin in the game is just good for the deal. The more invested you are in the project, the better.

Many times I’ve sold a business, and maybe you can share a story like this too, where three or four years later, for whatever reason, the buyer comes back to us and says, “I want to sell.” Maybe a spouse gets relocated, or a parent gets sick and they want to move closer. Maybe it’s not the right fit for them. I’ve had people leave the corporate world, find they don’t like the helm or miss the corporate infrastructure, and sell so they can go back as a talented employee.

If you have more equity, you have more options. Say you bought a business for $5 million and ran it for four years, and it performed close to what you expected. At the time of sale, for whatever reason, it’s now worth $4.5 million. It hasn’t declined significantly, but it’s worth 10% less. If you don’t have a good equity stake, it can be a problem to exit. I believe that going into any investment, you should think ahead about how and when you plan to exit.

John: I do have stories. I had one deal where, after three or four years, the buyer just wasn’t happy. It’s different when you’re the guy or gal who gets all the complaints and signs all the checks. It’s your money.

But my best story goes back quite a few years. Two guys went into a partnership to buy a manufacturing business that did some Department of Defense work. One was a marketing guy. The other said he was an operations guy, but he was really an administrative guy. The lead was the marketing guy. He had the most money and the biggest share. After a year and a half, he said, “I’ve done everything I can do here to grow this business.” It was doing great. They got an offer from an Australian company that wanted to take over their Department of Defense work, and they sold after a year and a half. So you’re right: when the price holds up and they’ve done okay, there’s nothing stopping them from making that life change again.

Greg: Exactly. It’s an investment purchase, and like any investment, it could go up, down, or stay flat. Returning to where we started, if you have a good equity position at the start, it gives you more flexibility to exit.

We’re in conversations right now with someone who bought a quality manufacturing company, and it’s not the right fit for them. They want to exit, but they would have to bring money to closing to sell the business. That’s the obstacle. As you described, they aren’t happy and want to sell, but can they sell if they have to bring six figures to closing? And you have to sell that to your spouse, whose arm you may have twisted to get into this in the first place.

John: That’s very true. I’ll finish this subject with something similar: you have to know what you’re getting into. Too many people say, “It would be really cool to make something.” Do you have any manufacturing experience? “Well, no.” Have you ever been on a shop floor? “No, but it would be fun to make something.” And then there’s the spouse. One of my first questions to a buyer, and to sellers, is: what does your spouse think about this?

What We’re Seeing in the Market

John: Let’s finish up, Gregory. We’ve had a good discussion. Let’s talk about what we’re seeing in the market. I’ll start. PitchBook just had an article asking how much slower PE firms can get. I’m seeing a general slowness in how things are moving, not in all cases, but in many. More attention goes into signing a letter of intent, due diligence moves at a slower pace, and some banks, depending on the situation, are taking a little more time. I’m also seeing that smaller deals, which I define as under about $1 million to $1.5 million, move a little quicker. What are your thoughts?

Greg: I think it is taking a little longer, and I’ll touch on one reason I think that is. Coming out of COVID, with the baby boomer generation retiring, we’ve started to lose some talent from this industry, people with knowledge, experience, and problem-solving skills. In our marketplace, we’ve lost icons. You mentioned Bill Pearsall. Pete McDowell retired. Dan Gibson retired. Kirk Edwards passed away. These were people with decades of experience doing this right.

I think, as in many industries, a transition is happening from one generation to the next. Without good mentorship, good systems, and support, people are having to learn through a baptism by fire, and I think that creates less success and slower progress on some deals.

John: I can’t argue with that. I’ve also seen a plethora of franchise business brokers. It seems to go in waves. There are some really good ones, and some who probably shouldn’t be in a business that relies on them selling themselves. It sounds good, the franchisors collect their franchise fees, and they don’t train people as much as you would if you, or Bill, had brought someone in.

How to Reach Gregory

John: Gregory, thank you for this. Why don’t you share how people can get hold of you?

Greg: Sure, and I appreciate our collaboration and friendship. You can reach us at our website, ibainc.com. We have offices in Bellevue, Portland, Spokane, and Bend, with 16 intermediaries, and we’re happy to meet with people anywhere in the Pacific Northwest. Our corporate headquarters phone number is 425-454-3052.

John: Great. Gregory, thank you again, as always. It was a good conversation, and I’m sure listeners and viewers will get a lot out of this on what’s going on in the buy-sell world. More importantly, I think the most important thing we talked about was the value of honesty, trust, and relationships. I wish you well, my friend.

Greg: Thank you. Have a great summer.