Introduction

Todd: Hello, and welcome to Pillars of Wealth Creation, where we talk about creating financial success with a special focus on business and real estate. I’m your host, Todd Dexheimer. Now, let’s get to it.

Welcome back to the show. I’m excited to have Gregory Kovsky with me. Gregory, how are you doing today?

Greg: I am wonderful. Thank you.

Todd: We appreciate you joining us. Gregory is the president and CEO of International Business Associates, IBA, the Pacific Northwest’s oldest and largest business brokerage firm, established in 1975. With 30 years of experience as a mergers and acquisitions intermediary, Gregory has facilitated over 300 transactions with private companies and family businesses across many states. That’s a lot of business, 300 transactions. I want to dive in, see what you’ve found to be successful, and get into some of the weeds. Gregory, welcome to the show. Is there anything else you want to make sure our listeners know about you and your company?

Greg: It’s my pleasure to be on your show today, Todd, and I welcome the opportunity to share my knowledge and experience. My mother was a schoolteacher, and I’ve always believed the best decisions are made from a foundation of knowledge.

Todd: I definitely agree.

Know Your Market and Your Trends

Todd: You have a lot of knowledge, having helped over 300 businesses sell. Give me a few lessons you’ve learned about entrepreneurship and business ownership through these transactions.

Greg: Sure, my pleasure. I’m an entrepreneur myself. A little history on the company might be a helpful starting point.

I grew up in Portland, Oregon. My father was a veterinarian, and IBA sold his veterinary hospital and the associated real estate. I didn’t think much of it at the time. I just didn’t have to clean runs and cages for him anymore, which was a plus.

I left and earned a degree in investment finance and accounting from the University of Texas, pursued my first career, and came back to the Pacific Northwest in 1994, not knowing what I wanted to do next. My father introduced me to the founder of IBA, Bill Osavski. It intrigued me, so I joined the firm and emerged as one of its top salespeople over the next six years before buying it in 2000 and becoming its second owner.

When I was a broker working for Bill, I had success selling two business models that don’t exist today. So in response to your question, I’d start with this: you have to know market demographics and trends, because what’s successful today may not be successful tomorrow, and you need to assess that.

The first of those two industries, which people my age will know, was travel agencies. There used to be large chains of travel agencies, and they received 10% of every airline ticket they booked. It could be very lucrative to have corporate customers flying first class or flying around the United States, and just handle their airfare. With Expedia and Travelocity, that part of the business went away. Some travel agencies still exist, but today they mainly focus on tours and complete travel packages, where they plan your flight, hotel, tours, and so on. If you didn’t evolve with that industry, you were destined for failure.

Todd: Which most did.

Greg: The other industry was ISPs, the old dial-up internet service providers, which used to have networks of 2,500 to 10,000 users. Today we know it’s basically your phone, Comcast, or a few other options. But for a while it was a very robust space for entrepreneurship, where people did quite well, and I did well as a broker, because it was a classic big-fish-eats-small-fish marketplace.

Todd: So know your demographics, know your trends, and understand what’s going on in the market. I think that’s super important. Look at Blockbuster.

Frozen Desserts, Sears, and Blockbuster

Greg: I can give you a simple example. We were talking about our kids before we came on the air today. Think about frozen desserts. I have a 20-year-old and a 22-year-old, and in my life and theirs, I’ve seen ice cream rise and fall, then frozen yogurt rise and decline, and then ice cream come back. I’ve watched that happen multiple times. It’s still just a frozen dessert, but for a while, with that important demographic of kids, they wanted Menchie’s or Yogurtland, putting toppings on frozen yogurt. Now in the Northwest, the focus is on uniquely flavored ice cream.

Todd: Interesting. It’s funny, because in the Midwest we’re seeing these frozen yogurt places where they put the sprinkles, the fruit, and all the crazy toppings on, and I don’t remember that being a thing even 10 years ago. So maybe we’re just a few years behind you. The next thing will be all the crazy ice cream flavors here.

Greg: Right. And if you ask your children whether they want to go to Baskin-Robbins or the yogurt place with the toppings, which are they choosing today?

Todd: They’re choosing the yogurt place for sure.

Greg: That’s how trends change. That’s the difficulty of being an entrepreneur: if you don’t evolve, you fail. You have to recognize what’s going on in your marketplace.

Todd: That’s a very good point. It’s easy to ignore that and think you just need to keep doing what you’re doing, double down, keep marketing, and keep pushing. But a lot of things are very trend-driven, and if you’re not evolving, you’re dying.

Greg: Exactly. I was driving with my son past a former Sears location that was being torn down, and we had an interesting conversation about how Sears was Amazon before Amazon, with its catalogs. If they had put that catalog online in the 1990s, think where Sears would be today.

Todd: There would still be a Sears everywhere you go. What a great point. It’s the same with Blockbuster. It was the movie store, and it got replaced by Redbox and Netflix because it didn’t evolve with what was going on. Can you imagine if Sears had said, “Let’s take this catalog we have, put it on the internet, and see what happens”? It wouldn’t have been hard for them to do. It’s like Kodak inventing the digital camera and still trying to sell us film. History is full of companies that tried to ride their horses too long.

Greg: And that’s why I say that whether a company is family-owned or publicly traded, if you’re not keeping up with the marketplace and evolving, you’re going to fail. That’s why you have to emphasize education and know your space, because it will pass you by. As I said, it could be ice cream, it could be Sears. Anyone can get passed by if they don’t respond.

Where the Opportunities Are

Todd: Do you see any niches right now that are heading in a great direction? Not necessarily specific businesses, but trends where people can do very well. What are the most exciting industries or niches that you feel are the wave of the future?

Greg: I like businesses with an online component that lets them expand beyond their geography. Let me give you two examples of companies we recently sold.

The first is a sort of FedEx and UPS play on Amazon: a company that fulfilled subscriptions for online companies. For example, say someone offers a cat toy of the month subscription. The company that produces and organizes the cat toys ships pallets to this fulfillment center, which takes the customer names, boxes the product, and ships it out on schedule. It was an interesting company, because we’re seeing continued growth in e-commerce, and the opportunity isn’t just in companies that sell products. It can also be in companies that provide an ancillary service.

Another interesting one we recently sold came out of COVID, when this model blew up: online telehealth psychiatric care. Maybe your kids aren’t integrating socially at school because they missed a period of time, like preschool, when kids start building social skills, and you want to talk about how to get them back up to speed. Rather than spending windshield time driving to see a psychologist to discuss the issues you’re having, you can schedule a half-hour appointment with a psychiatrist from your home, just like the virtual conversation we’re having now. Models like those reach consumers where they are.

I’m also a big fan of demographics, and I study them a lot. Everyone knows about the baby boomer demographic, and elder care could be a very hot space over the next 20 years, whether it’s in-home care or building care facilities for mom and dad. My mom is in a care facility right now. It got to be too much for my dad to provide for all her needs. So there’s a definite need in society in that space.

The other group I’m watching: my generation, born between about 1965 and 1985, is fairly small, but the one behind us, born between about 1985 and 2005, is large again. We’re going to see needs for them: home improvement, buying their first houses, and everything related to supporting children throughout their lives, from youth sports to tutoring centers to what prom dress they’re going to wear.

There are some fascinating books on companies that successfully rode the baby boomers. When they were hippies, Levi’s blue jeans surged. As they moved to Dockers, Levi’s declined. For a while they were on Harleys, and now they’re not. It’s interesting to watch these demographic groups, because a rising tide lifts all boats.

Service Businesses vs. Destination Businesses

Todd: One of the hotter business types around us, at least among people I talk to, is service-based businesses. Are you seeing that too? Everybody wants to buy service-based businesses.

Greg: Yes. The nice thing about service-based businesses is that you can do proactive marketing and grow the business. You may need to drive a distance to serve a customer, but the problem with a retail business is that it’s a destination business. There are old paradigms in real estate about this. Think about going to a gas station or a movie theater. How many of the same offering do you drive past to seek out something else?

Todd: And you’re only stopping at what’s convenient. A lot of times I’m not going to go out of my way to get to my favorite gas station. If I need gas, I stop at the one that’s there.

Greg: Exactly. I think most people probably fill up at the exact same gas station 60% to 70% of the time.

Buyer Demand vs. Seller Supply

Todd: Are you seeing high demand from buyers or from sellers? I hear a lot about the baby boomer generation wanting to sell their businesses and exit, and that this is a great time to buy. But are there more buyers than deals, or more deals than buyers?

Greg: Great question. I’ll start by saying buyer demand is currently the highest I’ve seen in my 31 years of doing this. The problem is a scarcity of businesses, in the sense that the clients we represent are executing their vision, doing what they enjoy, and making money. So what’s the urgency to sell?

Father Time can create urgency. Sixty-eight becomes 72, and your spouse says, “I want to be in Arizona or Florida for the winter. I don’t want to be in Minnesota.” In my world, happy wife, happy life, so I’ll probably let her drive my retirement a little. That’s one side of the equation.

On the other side, I do think there are more buyers in the marketplace, and there are a couple of demographic groups you may not realize. I’ll touch on three.

The first: with podcasts and influencers, there’s a whole culture right now of people wanting to be founders or own their own business. When I graduated from college in 1989, people wanted to work for the biggest companies around. My 22-year-old is working for Oracle right now. He got a great job, but in the back of his mind, he wants to do his own thing. It’s a debate within that generation, and it’s an interesting development, because it’s a cultural shift.

The second group we deal with a fair amount in Seattle because of the tech influence of Amazon, Microsoft, and similar companies. There are entrepreneurial cultures, like the Indian community, whose members have come to this country on visas, worked for Microsoft, contributed to the company, gotten their green cards, become citizens, and brought their families here. But they don’t want to work for someone else. They want to be creators and builders. There’s a real push in society now to buy and then build.

The buyer of the third-party logistics company I mentioned, the one handling subscriptions, was a Nike executive who left Nike and said, “I’m ready in this chapter of my life to do my own thing. I want the helm of the ship. I have great experience and knowledge, and I have ideas. Rather than going through a hierarchy of executives to get them approved, I want to be able to change direction and navigate.”

And the last group: there’s about a trillion dollars on the sidelines. Many family offices and private equity firms want to deploy capital, because buying a business can get you over a 20% return on investment, which you can’t get in many places. There’s risk, but if you manage it well, the returns are quite good. It’s essentially what Warren Buffett did on a large scale.

Can You Own a Business Passively?

Todd: You’re seeing a lot more of that right now, whether it’s private equity or smaller groups trying to get into buying businesses. There are many people like Alex Hormozi out there, and I don’t know if you follow him.

I’m in the commercial real estate world. We own a lot of multifamily buildings and some assisted living, which is a business. What I see a lot is real estate investors saying, “My returns are low. We’re not finding deals, and it’s really hard to get real estate deals done. So where else can I go?” A lot of people are talking about buying or building their own business, so we’re seeing many people transition from real estate to business ownership.

One of the biggest risks I see is that real estate is more passive. What do you say to someone who wants to buy a business, or several businesses, maybe five or six? Can you do that passively, the way you can with real estate?

Greg: Passive ownership generally doesn’t work. You get it dialed in, and I’ve seen people do that, and then your general manager wins the Powerball, or their spouse gets sick, or something happens and they need to leave. Then who fills that void? So it’s difficult.

Buying the Real Estate With the Business

Greg: But you mentioned real estate, and I think that’s an interesting topic. There’s a real estate play in buying owner-occupied real estate along with a business. Beyond generating rental income, generally through a separate LLC, the advantage is that you control your occupancy cost, which can be a competitive advantage.

Right near our office is a legendary tavern and lunch spot called the Pumphouse. I believe it’s been around since the 1950s. It makes a great burger, and it’s where the old boys’ network had lunch in Bellevue for many years. They own their real estate, and now there’s a light rail station right next to them. The real estate has soared in value, and the tavern may no longer be its highest and best use. I’m sure they could sell it. But from a business operating standpoint, they’re on the 50-yard line, and their building has been paid off for years. That makes the business much more profitable, because occupancy costs are generally 6% to 10% of a company’s revenue.

Todd: Six to 10% of revenue. Got it. Are you seeing a lot of owners sell both the business and the real estate as one package, or as two separate transactions with two buyers?

Greg: We frequently sell them as a package. For example, we just sold an auto service center that had a tire shop, a quick lube, a car wash, and a gas station all on one property, and it sold as a whole package.

There are other situations. Staying in the auto space, there was an auto repair business near the University of Washington that had been there forever. The business was probably worth about $700,000, but the real estate was worth several million to a developer. We actually referred it to another commercial real estate firm, and they sold the real estate for its highest and best use.

Todd: Did they sell the business too?

Greg: No, the business closed in that case. If a buyer got an SBA loan to finance it, it’s a 10-year loan, and the lease needs to match the term of the loan. If you right-size the lease, the business dies.

Todd: So it made much more sense to sell that piece of real estate and just let the business shut down.

Greg: Yes. It was a retirement situation, and we told the owner we could sell the business, but it wasn’t in their best interest. They had more than enough money to retire. The real estate sale would likely go to their descendants or a favorite charity. So we said, “Just do this, and don’t make your kids deal with a tenant who, as we all know, may not be successful, may fall behind on rent, or whatever else may happen, leaving you with an asset you can’t sell.”

How to Think About Business Valuation

Todd: What about business valuation? I know that as a business broker, you represent sellers, correct?

Greg: Correct.

Todd: But say I’m a buyer coming to you because I want to buy a business. How do you look at a business valuation and decide whether it makes sense for you as a buyer to get into the deal?

Greg: Excellent question. Business valuation is a subjective science. Ten educated people can value the same business and come up with 10 different values.

On one side, it’s an investment decision. On the other, it’s like selling art, because these businesses are frequently one of a kind in their geographic area.

So first, look at it like an investment. We all know the investment scale: you start with CDs and bonds, move to real estate, then mutual funds, large-cap stocks, small-cap stocks, and then you get to where I live, which is privately held companies and family-owned businesses. Those generally offer a 15% to 50% return on investment, depending on the industry and risk. So you first assess that based on the historical financial data.

The next thing to look at, just like with a company going public, is the appreciation potential of the investment. Those items go into your stew, and you arrive at the classic definition of what something is worth: what a willing buyer and seller agree to.

I just put into escrow a company that manufactures granite, quartz, and marble surface materials for construction. We had six offers across a spectrum of values, and my client didn’t pick the highest offer. They picked one slightly below the highest, because they thought that buyer was better for their customers, employees, and vendors. They didn’t want to hurt the lives of their employees or customers. To them, it would be horrible to run into a former employee at a restaurant who says, “I got laid off a month after you sold the company. You must be doing well out on your boat, but I’m struggling to pay my bills.” I was blessed to have a client with some heart.

What a Buyer Is Really Buying

Todd: That’s an interesting aspect of selling and buying a business. Real estate is very transactional and not very emotional by comparison. In real estate, you’d never think, “I’ll go with this buyer because I think they’ll take care of the staff and the residents.” Unless you think they’re a scumbag, you just sell. In this case, there are a lot more feelings involved. Do you want the right person to take over the company? It’s your baby. You’ve been growing it for who knows how long. It may have been passed down from your parents. You want to make sure it gets into the right hands. So as a buyer, being aware of that is probably extremely important. You’re buying more than a business. You’re buying someone’s history and, basically, their family.

Greg: You get owners who have owned a business 25 years or longer. They’ve watched their employees build families and send kids to college.

Todd: And now the kids come work for you.

Greg: Yes. I’ve seen multiple generations work for the same roofing or HVAC company because it’s been good, dependable income. A staff like that has value to a buyer. It’s one of the things you’re buying.

But you have to embrace the corporate culture. Unfortunately, I’ve seen Harvard MBAs manage a business to death from the back office. It’s really sad, because they look at it purely from an income standpoint, without realizing that the Thanksgiving turkey everyone received was important to the staff.

Todd: As a buyer, how can you make sure you’re taking over the right business and doing the right things? How do you even know that going in?

Greg: We walk down the path in a process. I recommend multiple meetings with the seller, drilling into what they do and what the company does. Anyone can fall in love with a P&L. But at the end of the day, can you ride this bronco? That’s a really important question.

Your relevant experience is also very important. What are you adding to the company?

I live in Redmond, not far from Microsoft. Microsoft was static under Steve Ballmer for many years. Satya Nadella took the helm and took the company to a much better place. Leadership matters, at every level. That’s why I gave the Microsoft example. Microsoft has more money than God, but its stock was going nowhere. It wasn’t a place people wanted to work anymore. I had friends who left for startups because it wasn’t fun. Satya has done a good job re-energizing the company, and its stock price has reflected that.

Todd: That’s a good point.

Financing: SBA Loans, Down Payments, and Seller Notes

Todd: Shifting gears a little: what do you typically see for down payments? Is there a lot of seller financing happening? I know SBA loans are a pretty big thing. Is that typical, and is seller financing common?

Greg: Yes. For transactions up to about $7 million, you can generally get it done with an SBA product, which is a great product. Some banks will supplement with their own loans above the $5 million SBA cap, which is why I mention $7 million as a possibility.

It’s common for a buyer to put in 10% to 15% of the purchase price. They should have some skin in the game. And often a seller will finance about 10%.

As a buyer, you want the seller to finance a portion, because it gives you leverage to address trailing liabilities. Say it’s a plumbing business, and the week before the sale, the seller made an error that caused a leak and damaged a house. You need the seller to take ownership of that error, because they were paid for the work. If they don’t step up, a right of offset in the promissory note can make you whole.

Other issues it can address are non-competition agreements, making sure the seller honors them, and transition training or consulting. If the seller says they’ll be there for three months to hand things off smoothly, and in the first week after the sale they say, “I’m going deer hunting,” that’s not giving you the support they promised. There should be a leverage point to make them do what they agreed to in the legal documents.

Todd: Good points. It’s probably easy enough to set some of that up, but making sure there are checks and balances is super important.

Lessons From Hiring the Wrong People

Todd: Gregory, what’s a mistake you’ve made, or one you’ve seen made consistently, and how can our listeners learn from it?

Greg: A mistake I’ve made in the past, and have seen others make, is hiring the wrong people. Integrity is a very important value to me. I had a top-producing broker who was crossing the line, relative to what I considered best practices and integrity, to get deals done. I had to make the hard decision that he couldn’t be part of my brand going forward. That was over a decade ago.

Sometimes you’re penny-wise and pound-foolish and don’t hire the person you need for the job based on knowledge and experience. Or someone is a wolf in sheep’s clothing and isn’t right for your corporate culture. It’s hard to let someone go. But many athletic teams have decided that a player isn’t good for the clubhouse and needs to be moved on because they’re not buying into what the team is trying to do.

Todd: You have to let them go quickly, and that’s hard. There are people who are really good at what they do, but if they’re a cancer to the organization, those are the really hard ones to let go, because they’re efficient and performing well, except they disrupt the whole culture of the company.

Greg: And admitting you’re wrong is hard. We all have egos. But if you can be humble and realize none of us is perfect, you’ll do better. I’ve thrown money at marketing programs that didn’t pay off. Rather than feeding the fire and insisting it has to be right, it’s better to say, “Maybe it wasn’t the right venue. Let’s step back and redeploy in a different direction.”

Why Deals Fall Through

Todd: One more question that just came to mind. If I have a business under contract, why would the deal fall through? Why would it fail to sell?

Greg: That’s a deep question, but I’ll try to answer with a couple of the most common reasons.

I believe a successful deal starts with a comprehensive letter of intent, where all the business terms are clearly laid out, from the price to the non-competition agreement. What’s the geographic area and time frame? How long will the seller stay on for transition training? Those are all elements the buyer and seller should agree on before getting further down the line.

The next tier is having reasonable expectations. Take the legal documents. Attorneys sell fear and can create confrontation. A broker who has been in this pond for a long time should know where the middle of the fairway is and advise both parties when they’re probably not going to get the deal done at a given position. It may sound great in a perfect world, but it’s not the real world. We can all tell our kids bedtime is 9:00, but how often does 9:00 actually happen?

Then there’s making sure the buyer has the financial strength to complete the deal, both the capital injection to close and the working capital to run the company after the sale. Inevitably, you buy a service company and an engine blows up, and now you need to replace a vehicle. Can you do that, or have you spent your last dime?

And finally, and you’re a landlord, will the buyer get past the landlord? The seller doesn’t want to keep personally guaranteeing the lease going forward, because they’re retiring.

Todd: Good point. And the landlord doesn’t really care whether the deal happens or not. They already have a good tenant who’s been paying rent on time.

Greg: Right. So does the buyer have the signature power and experience to sell themselves to the landlord, so that with an SBA loan they can get a five-year lease with a five-year option? If they can’t, the deal fails at the 11th hour.

Todd: I never thought about that. That’s a really good point.

Broker as Salesperson and Facilitator

Todd: There’s a lot to think about there. So to me, your job is less salesperson and more communicator and navigator. You’re communicating with both parties, getting them both to say, “Okay, I can see that point. I understand that.” And then you’re getting everything organized so everyone knows what they’re doing and what they’re getting into. Am I accurate? You’re not a salesperson so much as a communicator and organizer?

Greg: Well, we are salespeople in the sense that we have to get people to yes. But to a large extent, we play a facilitation role. One of the overarching concepts at my firm is the golden rule: do unto others as you would have them do unto you. I’m frequently asking, “Can you walk to the other side of the table and look at this from their perspective? If you were buying this, would it be reasonable? Would you do that?” If the answer is, “I would do that,” we’re probably in the sweet spot. If the answer is, “I would never do that in a million years, but let’s get them to do it,” you’re asking me for a heavy lift as a salesperson.

Todd: That’s a totally different deal. Good stuff.

Book Recommendation and Three Pillars of Wealth Creation

Todd: Gregory, I have a couple of last questions before we wrap. What’s a favorite book you’d recommend to our listeners?

Greg: For entrepreneurs, one of my favorites is Shoe Dog, the story of Phil Knight and the birth of Nike. One of the most fascinating parts of that book for me was how many times Nike was on the razor’s edge because Knight didn’t have the money to buy the shoes coming into the country, even though he had already sold them.

Todd: That was a fascinating book. Both of my kids listened to it too, and they loved it. What are your three pillars of wealth creation?

Greg: I believe the three pillars of wealth creation are knowledge, experience, and skill. If you have those three things, you’ll be successful. My mother told me growing up, “If you’re good at what you do, money will follow. Focus on being good. Don’t focus on the money.” You could be the best chef in the world, and people will line up. You could be the best baseball player, and you’ll get paid well. Or you could be a real estate broker, or whatever you choose.

Todd: I agree. Don’t focus on the money. Focus on knowledge, experience, and skill, and the money will come. And quite frankly, satisfaction too. We all want to be happy and satisfied with what we’re doing, and if you’re just focused on the money, you’re probably not too happy.

Greg: What’s the famous saying? If you do what you enjoy, you’ll never work a day in your life.

Where to Find Gregory

Todd: Absolutely. Gregory, I really appreciate your time. How can our listeners get in touch with you?

Greg: The first place I’d send you is our website, ibainc.com. We have a very robust blog that has had close to 200 authors, covering everything about buying and selling a business and entrepreneurship. If you’re inclined to read, there’s great information there. You can also reach me at our corporate headquarters in Bellevue, Washington, at 425-454-3052.

Todd: Awesome. Gregory, again, I really appreciate you and the time on the show. Have a fantastic rest of the day.

Greg: Thank you, Todd.