Introduction

Jared: You’re listening to Before You Buy or Sell a Business, hosted by Jared Johnson. On this show, we break down business acquisitions, talk to industry pros, and provide real-world advice for buyers and sellers.

Welcome back to Before You Buy or Sell a Business. Today I have Greg Kovsky on. Greg is a mergers and acquisitions intermediary with more than 20 years of experience helping business owners sell their companies. He’s a graduate of the University of Texas and leads IBA, International Business Associates, a business brokerage firm with a 50-year track record and more than 4,300 completed transactions. Greg represents privately held and family-owned companies valued between $500,000 and $30 million, and IBA recently won a Longhorn award.

Greg has personally facilitated over 300 transactions across Washington, Oregon, Alaska, California, North Carolina, and Massachusetts. He specializes in the sale of manufacturing, distribution, industrial service, education, and technology businesses in the Pacific Northwest. He’s known for his straightforward approach and commitment to confidentiality, and he focuses on maximizing value for his clients while guiding them through the sale process with professionalism and care. Quite the intro, Greg. We appreciate you coming on, and I’m looking forward to talking with you today.

Greg: Thank you. Honored to be on.

What’s Changed in the Last 12 to 18 Months

Jared: I thought we’d jump in with what’s going on in the market recently. You’ve been around a long time and done over 300 transactions. Could you let listeners know what you’ve seen in the last 12 to 18 months? Have there been any changes, or are you working on anything right now that you normally wouldn’t have in years past?

Greg: Certainly. Maybe I’ll take a step back first. IBA is the largest and oldest business brokerage firm in the Northwest. It was founded in 1975. I joined the firm in 1994, bought it from the founder in 2000, and have been president and CEO for 25 years now. I have 18 brokers in the field doing transactions and 10 offices spread throughout Oregon and Washington. The main hat I wear is executive sales management of the firm, but I still put my boots on and go out in the field to do transactions. As a firm, we generally close between five and 10 transactions a month.

The market, as you know, Jared, is very robust right now. We’re on the front end of the silver tsunami, with baby boomers retiring. They need help transitioning their business assets into passively managed assets, so they can retire in comfort and dignity, make legacy plans, and support the charities they care about. So it’s a wonderful world. I’ve been doing this for 31 years, and I’m happy to drill down into recent transactions or whatever you’d like.

The Rise of Buy-and-Build Entrepreneurs

Jared: Personally, over the last five years or so, I’ve noticed a new type of buyer coming into the market. Are you seeing that as well, with more search-based buyers?

Greg: I am. It’s actually the most robust buyer demand I’ve seen in 31 years. I believe that’s because a founder and entrepreneurial culture has developed through podcasts like yours, the All-In podcast, and other venues. The younger generations don’t want to work for someone else and get the gold watch. Today they want to either start a company or buy and build one, and that has really changed the market dynamics. When I graduated from the University of Texas in 1989, people wanted to go work for the biggest companies around. Not everyone wants that today, so it’s very different.

Jared: I completely agree. I feel like COVID accelerated that. With remote work, people suddenly had the ability to move instead of being stuck in one place. We noticed a large group of people saying, “Not only am I going to move, but maybe I should buy a business myself and run it.” Pair that with a large number of baby boomers retiring and needing to sell, and it definitely makes sense.

Forecasting the Next Five Years

Jared: If you had to forecast the next five years, what do you think will happen in the industry?

Greg: I think our marketplace will continue to be very active. The baby boomers were born between 1945 and 1965. So those at the tail end are just turning 60, and the oldest are 80, and most people are working into their 70s now.

It’s hard to give up a company when you’re executing your vision, doing what you love, and making a very nice income. What’s the motivation to sell? That’s our challenge in obtaining clients. We can’t order inventory. The clients we want have to want to sell. They don’t need to sell, because everything is dialed in and going well.

Jared: That makes sense. I was talking to someone the other day who said the silver tsunami, or whatever we want to call it, will eventually run out. I said, “If you think about it, it’s already been ramping up for seven to 10 years, and say we have another 10 or 15 years of it. By the time that’s done, the people who bought businesses 10 years ago will likely be looking at an exit as well.” So I think it will keep rolling. I don’t foresee an upcoming cliff where transactions suddenly slow down. Do you agree?

Greg: I agree 100%. People don’t take one job for the rest of their lives anymore. The average entrepreneur stays with a project seven to eight years, and I believe your SBA loan statistics support that. At what point are most 10-year SBA loans typically retired?

Jared: I believe seven years is the average payoff.

Greg: And a lot of those payoffs come through a sale, where the owner pays off the loan with the proceeds and moves on to something else. It’s a bit like houses. We sometimes see people buy a starter business, sell it, take the capital off the table, and then buy something bigger with a higher ceiling.

Immigrant Buyers and the Pacific Northwest Tech Corridor

Greg: Circling back, I listened to your podcast with the gentleman from Africa who bought a company. Another source of buyer demand is people who immigrated to this country and worked for companies, and now want to leave the corporate world and buy a business.

My corporate headquarters are in Bellevue, close to Amazon, Microsoft, and Boeing. We very frequently see people from, say, the Indian community, which is very entrepreneurial, who come to America, contribute to the betterment of a company, and get their green card. At that point, they want to launch or buy a business. That’s a very common demographic for IBA, given the tech influence in the Pacific Northwest.

Jared: I completely agree, and they’re often very good buyers. They’ve saved cash, and they’ve learned how to manage, or at least run part of a department, or they have very technical skills. Now they’re ready to apply those skills and grow a business for themselves. So they help corporate America, and then after they do their time, they’re ready to go buy something. A big influx of good buyers is something we’d all like to see. I’m assuming you always have more buyers than sellers, so buyers have to find a way to set themselves apart, and as more sellers come onto the market, it’s good to be able to match them with good buyers.

What Sellers Care About Beyond Price

Greg: 100%. We need to vet the buyers. Our clients on the sell side are transitioning out of something that is like their child. They care deeply about their employees, customers, and vendors. They get invited to their employees’ weddings and athletic events. It’s really an extended family. So yes, they want the bag of gold at the time of exit, but the last thing they want is to see their life’s work crash and burn.

Our clients frequently have choices, and one area I think is critical in selecting a buyer is relevant experience, which we both know is an SBA guideline. If you ran a chain of barbecue restaurants, you could be well suited to a hospitality business. But a SaaS company is probably not the best fit for you as an entrepreneur, even if its cash flow is highly attractive.

Jared: And vice versa. Someone running a SaaS company shouldn’t go buy a chain of barbecue restaurants. We see that quite a bit.

Paid on Performance vs. Upfront Fees

Jared: That’s a good transition. Let’s say you get a new listing. A seller calls, or you’re brought in to do a valuation and look at a seller’s business, to decide first whether you want to take the listing, and then what the value would be, whether you can add value, and whether you’d even be able to sell it. What are the first things you look for?

Greg: Certainly. IBA operates on a 100% paid-on-performance business model. Your listeners should know there are two dominant business models in the business brokerage industry. IBA’s is 100% paid on performance, meaning we don’t accept a penny from our clients until the transaction is completed. That actually benefits buyers, because we won’t engage unless a sale is possible.

The other business model, and I have friends whose firms use it, charges upfront valuation fees, retainers, and consulting fees. At the end of the day, the costs can be similar, and both processes start with a market opinion of the value of the business.

But IBA and firms with our business model have a vested interest in being honest, because honestly, I’d rather walk my two dogs with my wife than work on a project that isn’t going to sell. Unfortunately, some firms using the other model will give the potential client the answer they want to hear, so they have a happy client when that client is writing what is often a five-figure check to start the process. Then they leave the heavy lifting to the buyer, and even to you, Jared. We know that if someone is injecting, say, 10% to 20%, certain debt service coverage ratios have to be met to get the deal financed. If the price is off target, I can’t sell it, a buyer probably won’t buy it, and you won’t finance it.

Jared: Correct. I appreciate you saying that. I feel like I’ve been saying it for years. Whether they’re just learning the business or were taught incorrectly, a lot of agents and brokers take the approach of how many deals they can list, rather than realizing it actually costs you money to list a business and spend time and energy on it. You’re not making money until you sell. That approach of grabbing as many listings as you can and saying, “Look, I have 30 listings,” at the end of the day, who cares? You should be measured by how many you’ve actually sold. The more brokers who get comfortable saying, “No, I’m not taking this listing because I don’t think it can sell,” the better the whole industry will get. So I appreciate that, and I’m glad that’s how your firm works.

Why Overpricing Costs Sellers Years

Greg: I agree. It’s an issue for me in the industry, because I don’t think anyone is doing a seller a service by overpricing a listing.

Let’s say the owner is 72 and ready to retire. They trust a business broker to value the business, and nothing happens for a year. Then they move to another firm. Say that firm is successful six months later, and then there’s a transition period of three to six months. It could be two years until they exit. That’s likely a year of their retirement, and of their life, lost by not deploying resources intelligently on day one.

Jared: It reminds me of coaching football. I tell the running back, “You don’t get points for running back and forth. You get points for getting into the end zone. So run toward the end zone.”

Three Reasons IBA Turns Down a Listing

Greg: So IBA starts with the valuation, and we actually list only one out of three businesses that come to us. We’re very selective about who we represent. There are three reasons we don’t take a business.

First, the owner is unrealistic about value, which we’ve covered.

Second, we don’t believe in the business model. Say it’s a nursery selling plants and trees, and urban growth is moving into the area, so the nursery is no longer the highest and best use of the property. In that case, we’d tell the client they’re probably better off relocating the business or merging it into another operation, and selling the real estate to a developer or someone else who will pay for the highest and best use.

Third, we don’t trust the party selling. That happens. You have to pick who you work with. Are they going to have integrity through the process?

A Seller Who Moved Expenses Between Companies

Jared: You’re almost surprising me with what I’m hearing. We don’t always get the luxury of working with people who conduct themselves that way. Can you think of a time you took a listing with someone you thought you wanted to work with, and as you dug further, discovered they met one of those three criteria, or something else? And what can a seller do with that information to make sure it doesn’t happen to them?

Greg: I always say there’s a fine line between the genius mind and the criminal mind. If some of the most famous criminals in American history had used their brainpower for good, who knows what they could have achieved.

Here’s an example. I listed a very nice manufacturing company that had been around about 25 years. My client was very entrepreneurial and also owned a chain of retail stores. He wanted to sell the manufacturing business but not the retail stores at that time. Both were operated as S corporations.

What he did, and I was glad the buyer and their CPA caught it during due diligence, was move expenses out of the manufacturing company’s tax returns and into the retail chain. Unless you drilled into QuickBooks, you wouldn’t see it. For example, he paid only eight months of utilities out of the manufacturing company and paid the other four out of the retail chain. Both flowed through to his personal 1040, so he wasn’t defrauding the IRS. But he was providing me, buyers, and bankers with a misleading tax return. We all know valuation is a multiple. If you move $100,000 of expenses into the other company, and it’s a five multiple, that’s another half million on the sale price.

Jared: Wow, that’s wild. It goes to doing proper due diligence as a buyer. I’m starting to see more sellers and sellers’ brokers do a quality of earnings review and front-end due diligence, like you see in upper middle market transactions. Obviously, if the buyer hadn’t done that work, they wouldn’t have caught that those expenses had been moved off the books. If they had closed, they would have taken over and said, “Something’s wrong. My profit margin is drastically different from what the seller showed.” They might even have come after you for liability. So it’s a good thing you caught it. I’m sure you canceled the listing after that.

Follow the Money

Greg: We did. We walked away. I always recommend that buyers follow the money. If the seller and their broker won’t create an environment of full disclosure, you should walk away.

You want to look, for example, at the last couple of years of bank statements and confirm that the deposits they say are made monthly are actually being made. You want an accountant’s copy of QuickBooks so you can drill into things like utilities, evaluate cost of goods, and make sure you understand what you’re buying.

It’s always been my opinion that there’s enough risk in entrepreneurship without having to make decisions on incomplete knowledge. You talked about coaching football. If you’re going to coach successfully at a high level, you review film on your opponent. Imagine going into a game where one side reviewed film and the other didn’t.

Jared: Big difference.

Training Brokers the Right Way

Jared: Do you often find yourself teaching new brokers or agents that this is the right way to do things, when they feel like they’re leaving listings on the table? Are you having those conversations and teaching newer agents that this is the better way to take on listings and do business?

Greg: 100%. You won’t affiliate with IBA if you don’t follow best practices. Every one of my brokers has been individually mentored by me. It takes me about three years to get a broker to a solid B level.

At the end of the day, a good broker needs to have a 90 mph fastball as a salesperson. I’ve developed wonderful brokers who previously sold pharmaceuticals, construction components, and software. I even have a broker on my team who sold competitive cornhole equipment nationally. But all of them have the ability to get people to yes.

That’s critical in business brokerage, because first you have to reach agreement with the seller on the value of the business. Then you have to reach agreement on a letter of intent, and then on a purchase and sale agreement. At the same time, you have to navigate due diligence, financing, assignment of a lease or negotiation of a real estate sale, and tax allocation.

I always say there’s no barrier to entry in business brokerage, and I think that’s very wrong, because you need knowledge of legal, accounting, tax, finance, real estate, business, and psychology to do this successfully.

My mother was a schoolteacher, and my corporate culture is all about education and knowledge, both for my team and for buyers and sellers, so they make decisions from a position of knowledge. One resource available to your listeners, which I believe you’re putting in the show notes, is IBA’s blog. We’ve had almost 200 authors in its history, covering virtually every subject you’d encounter. It’s a knowledge base, and here’s how we use it. If someone asks me, “How do I handle gift cards and gift certificates in a sale?” I can send them a past blog article and say, “Why don’t you read this? It will give you a good basic background, and then let’s talk and you can ask questions.”

Gift cards are a liability the buyer has to assume, so we need to factor them into the legal documents. And we all know the Starbucks rule: not 100% of gift cards come back. A gift certificate issued 10 years ago is much less likely to show up than one given as a birthday gift this week.

Jared: That’s awesome. Anything you can do to provide more education and resources for buyers and sellers is great. That’s the whole reason I started this podcast. I’m the son of an educator too. My dad was a principal at a small private school, and growing up, there was never a moment that wasn’t a teaching moment. I was the kid who had to do schoolwork for the first two hours of summer break before I could go outside and play. I hated it growing up, but it sure made high school and college easier. I felt like I could show up 10 minutes before class, write a paper, and still get an A. You don’t forget how that works, and every moment becomes a teaching moment if you make it one.

Greg: What did your father teach you? Every teacher teaches it: what’s the only stupid question?

Jared: The one you don’t ask.

Greg: Exactly. In our deals, we want everyone to ask us anything. If I don’t have the answer, I likely know someone who can answer it. If you have an employment law question, ask me. A real estate law question, ask me. A tax law question, ask me. I may be able to give you a surface-level overview, but I’ll get you in front of someone who knows the topic intimately.

Jared: It’s funny. You hate it growing up, but then you get older and say thank you.

How Buyers Can Stand Out

Jared: That’s a good point to transition to the buyer side. A question I often get is, “How can I stand out when I’m looking at a listing, or get a broker or seller to pay attention to me and consider my offer?” How would you answer that? What can a buyer do to stand out and be taken seriously?

Greg: First of all, come prepared for seller engagement. By prepared, I mean have a resume or bio explaining why you’re a good successor to run the company.

Second, have a personal financial statement that shows your strength as a buyer, both in terms of the liquid capital you have to inject into the deal and run the company, and in terms of signature power to get a lease approved in your name so the seller doesn’t have to stay on as guarantor. And if you’re going to ask for some seller financing while the bank takes first position on the business assets, what comfort can you give the seller if you get on this bucking bronco and can’t ride it? The one thing we can’t sell is management ability. The buyer will be better or worse than the old owner, not exactly the same. So you need to convince someone to bet on you.

Third, I always like it when a buyer has built their team: an attorney, a CPA, a banker, and maybe a pre-qualification letter where a banker has already vetted them. Then it’s just add water. Just add the business. I can say, “You’re working with this banker? Great. Here are the last three years of tax returns and year-to-date financials. Run them by your banker, and let me know what else they need.” Then you’re in a position to negotiate in good faith.

Jared: I love that, and it’s a lot of what I tell buyers too. The other thing I tell them is that when you get the chance to talk to the seller, make sure you’re at least somewhat on the same page about how the seller has operated the business. There will always be some changes. As you said, you won’t be exactly the same as the seller. But find out what’s important to the seller. Whether it’s keeping the staff, continuing to grow, or slowing down, make sure you’re aligned. The seller will then be much more comfortable having conversations with you and transitioning the business, because they’ll feel confident you’ll pick up where they left off and take it in the right direction.

When the Right Buyer Fits the Business

Greg: And find a way to connect with them on a personal level. I just put a company into escrow where we had six offers. It was a manufacturer of quartz, granite, and marble countertops, and the winning party was preferred because of their experience and resume.

But it doesn’t always have to be that. I sold a company called LX Industries that manufactured items for the nuclear industry: single-use buckets and suits, and temporary shielding for the Navy and nuclear plants. The buyer had served in the Navy before starting a corporate career and had experience with nuclear vessels. He could relate both to the owner, who loved selling to a veteran, and to the customers. When you’re bidding on Navy contracts, knowing how the Navy thinks is an asset.

Jared: That’s great. I love it when you almost perfectly match a buyer with a business in a very niche industry. There’s a very small handful of people who could drop right into that business and be successful, and when you find one of them, it feels really good to bring them together. Compare that to buyers who have been looking so long that they’ll take the next business that comes along and try to force it to work, which doesn’t always work out. I love to see it when it fits.

Veterans as Business Owners

Greg: One of our favorite groups to work with is veterans. For those who don’t know, and maybe you can speak to this, Jared, there are wonderful SBA programs for veterans and their spouses that people often aren’t aware of, especially the spousal programs.

Jared: Definitely. There’s currently a waiver on the guarantee fee for SBA Express loans, and everyone is hoping it will grow into a larger program. You’re absolutely right. I love working with veterans. I work with a group called Owners and Honor. Its goal is to teach veterans how to operate a business and how to search for one, then help them buy a business and keep supporting them as they operate it.

What I’ve found personally is that most of the veterans I’ve worked with make excellent business owners, because much of what they learn in the military is systems, and businesses need systems. If you can put the same kind of systems in place, the business is typically going to succeed. So whenever I see a deal where the buyer or their family are veterans, I try a little harder to see if I can make it work, and I feel more comfortable that they’ll be successful moving forward.

Greg: We’ve seen some wonderful success stories with veterans buying businesses. They’re generally good managers of people, because they’ve had to lead people from different backgrounds toward a common goal. I like that group.

I also very much like first-generation immigrants, because often they can’t get hired at Boeing, Microsoft, or Nike, so they start or buy businesses, and IBA has always leaned into that. My firm is unique in that I have a number of bilingual people on my team who can support the Russian, Chinese, and Hispanic communities and answer questions in their first language. Explaining tax allocation, goodwill, and non-competes is really hard if the person isn’t familiar with those terms in English and you can’t explain them in words they understand. So it’s been a unique part of my company, and I’m delighted to have bilingual brokers who can help those buyers. Again, from an education standpoint, it’s about meeting the student at their level.

Jared: I love to hear that. To be fair, even people hearing about non-competes and tax liability in their own language often feel like it’s a foreign language if it’s not something they deal with regularly. So I can absolutely see your point. It’s hard enough to understand already, and trying to translate those terms into another language would be really challenging. It’s great that you have people who can help.

Greg: Following up on your point, even when a client already has an attorney or an accountant, we often bring in a specialist to help. We’ve all heard nightmare stories of someone using their divorce attorney to sell their business. It doesn’t work.

And if your accountant is a wonderful person in a small town who fills out forms well but doesn’t know tax mitigation strategies, you may need to bring in someone who can help you put a more effective strategy in place. It could be a 1031 exchange, a deferred sales trust, or something else. There are methods to keep more dollars at closing, but if no one introduces them to you, you obviously won’t use them.

Jared: Absolutely, and thank you for saying that. I completely agree.

AI and the Future of Business Brokerage

Jared: One final question. Do you think AI will be as big a deal as people are making it? Either way, what do you think the future is for business brokerage, or business in general, as it relates to AI?

Greg: I think AI has value in marketing, and maybe on the education front. But I think you need to be very careful using AI for business valuation.

Here’s an easy example. I represent companies in Washington and Oregon, and the two states have different tax environments. Washington has no state income tax, which is probably part of the reason Starbucks, Amazon, and Microsoft started here. Oregon has a state income tax. Say we have identical businesses doing $10 million in revenue with $1.5 million to the bottom line, 15%. In which state does the owner earn more? In this example, Washington, because no state income tax comes out of that income. So which business should sell for more? Again, the Washington one. But if you apply a national template, you’ll get a valuation that blends in states like California and New York, which have far tougher tax environments, with states that are much friendlier.

Market demand also plays a role. My father came from Youngstown, Ohio, a city with a tough reputation. If I were a business broker in Youngstown, it would be hard to make a compelling case for you to uproot your family and move there to buy a business. It’s very easy in the Northwest, where we have the mountains, the Pacific Ocean, and all the other attractions here. So take an identical company in Youngstown, Ohio, and in Everett, Washington. My bet is they don’t sell for the same price.

You need that localized knowledge to fine-tune the dial. I’m not saying AI can’t get you in the ballpark. But say the business should sell for $6 million. If AI says $6.5 million or $5.5 million, do you really want that 10% deviation when it’s your business you’re selling?

Jared: That’s a great point, and I agree. I think AI will continue to refine itself. It’s still relatively new for most people. There are certain aspects of a job it can cover or help with, but relying on it 100% for something major like valuing a business seems silly at this point.

Greg: And there are people who talk about selling a business themselves. In theory it may make sense, because you save the commission and costs, but you don’t know what you don’t know. If I have an illness, am I better off diagnosing it on the internet or going to see my trusted doctor?

Jared: Definitely. So you mean you’re not supposed to go on Reddit to figure out what’s wrong with yourself?

Mentors and Motivation

Jared: I really appreciate you coming on. I always ask two questions at the end. First, do you have a mentor, or have you ever had one?

Greg: Yes. The founder of IBA, Bill Osavski, was one of the great mentors in my life. Another comes from my Texas connections. I was blessed to work in the athletic department at the University of Texas when I was there, and DeLoss Dodds was one of the most impressive executive leaders I’ve ever had the pleasure of listening to and learning from.

Jared: That’s awesome. You’ve obviously been really successful, with over 300 transactions and a really good brokerage and team. What motivates you? What keeps you going?

Greg: I’m motivated by a couple of things. First, achievement. I’ve always gotten a thrill from victory, and getting a deal to the finish line is very rewarding. It’s a win-win situation. You have a seller achieving what is commonly a retirement sale and a buyer executing their vision of being an entrepreneur, and it’s wonderful. I’m also a big advocate for entrepreneurship. I believe it’s a wonderful career path that allows for creativity, independence, and financial prosperity.

Jared: I love it. When your motivation is intertwined with something you’re passionate about, it becomes much less about having to work and more about having fun while you do it.

I really appreciate you coming on, and I also appreciate you, in my opinion, running a brokerage the right way. Having done this a long time and worked with a lot of brokers, many of the gripes lenders, buyers, and even sellers have are the things we just addressed. I appreciate you continuing to push the ball up the hill the right way. Hopefully more brokers will listen to this, and anyone struggling with their broker will realize there are others out there doing it the right way. Together we can all help keep the industry moving in the right direction and clean up some of the frustrations out there.

Where to Find Greg

Jared: What’s the easiest way to find you? You mentioned the blog. Is there a website? How can people reach you?

Greg: Certainly. Our website is ibainc.com, and there’s a wealth of information there. You can see our blog, as well as previous webinars and podcasts our firm has done. You’re also welcome to call. My corporate number is 425-454-3052. And Jared, thank you very much for the opportunity. It’s nice to be virtually back in Texas. Hook ’em.

Jared: There you go. Thank you. And thank you all for listening to Before You Buy or Sell a Business. If you found value in this episode, please follow the show, leave a review, and share it with someone. We’ll see you all next time.