Introduction

Carl: Welcome to the Measure Success Podcast, where I talk with top leaders about effective strategies that inspire success. Thank you, listeners, for helping make this the fourth-best strategic planning podcast out there. We appreciate you.

We’re also on location. As you can see, it’s not the typical background behind me. We’re recording at Northwestern University in Evanston, Illinois, just outside Chicago.

Ironically, our guest grew up just a few miles from me. We have Gregory Kovsky, business broker and M&A professional. He’s the president and CEO of IBA, International Business Associates, the Pacific Northwest’s oldest and one of its largest business brokerage firms. He has personally helped sell over 300 companies across Washington, Oregon, Alaska, and many other states beyond the Northwest, and his firm has helped sell over 4,000 companies. So they know what they’re doing when it comes to business brokerage. Gregory, welcome to the Measure Success Podcast.

Greg: Thank you. It’s a pleasure to be here.

Why This Is the Strongest Seller’s Market in Decades

Carl: Let’s get right into it. We’re not going to talk about local sports the way we did before the podcast. You went to Sunset High School, and I went to Glencoe High School, in the Beaverton and Hillsboro areas of Oregon.

Let’s talk about business. One of the things you do is help create value by helping an owner who built a business get money out of it. People get stuck, and we have the silver tsunami right now. We’re at the peak of people turning 65, which means they’re at a point in life where they’re considering selling their business. What are you seeing today that’s different from a few years ago, in terms of people actually succeeding in selling their business?

Greg: Thank you. Excellent question. It is actually the most robust marketplace for selling privately held companies and family businesses that I’ve seen in my 31 years of facilitating transactions. And there are two sides of the equation. In any transaction, you need a buyer and a seller.

As you touched on, we have baby boomers who are approaching retirement or ready to retire. In many cases, they deferred a sale because of COVID. They may have been in their early to mid-60s in 2020. Now five years have passed. They stayed at the helm, navigated the storm, stabilized things, and are growing again, and now they want to sell and retire. Father Time doesn’t stop for anyone, and they have retirement aspirations: to travel, play golf, spend time with the grandkids, whatever it may be. For many of them, time is of the essence.

Who Is Buying Businesses Today

Greg: On the other side, buyer demand is very high for several reasons. Let’s start large and move smaller.

First, many companies, private and publicly held, want to grow by acquisition. It’s much easier to gain market share by acquiring another company and entering a marketplace with locations, staff, brand recognition, and so on.

Moving down from that, you have private equity and family offices. There’s over a trillion dollars on the sidelines right now looking to be deployed at returns higher than you can get in the stock market or real estate, and they’re looking at smaller businesses than they ever have before. Everyone knows Warren Buffett, but many individuals have built family offices, small conglomerates of different businesses that they manage at an executive level. I was just working with a company that has service trades, HVAC, electrical, and plumbing, all under one umbrella to provide those services throughout the Northwest.

Continuing down, you have high-net-worth individuals who have chosen entrepreneurship as a career path. One of my favorite stories is about a past client, the founder of Pyramid Brewery. Anyone in the Northwest has had a Pyramid beer. He grew the company and ended up on the board of directors, where he no longer had the control and influence he’d had running it. He came into my office, a gentleman named George Hancock, wanting to put his money into something he could manage directly. He had grown up in a coastal marine town in England, and he bought a marine electrical contracting company. He said, “I could put seven figures into Microsoft or Boeing, but I don’t control what they do, and I get a better return this way. Business is the ultimate competitive sport, and I want to get back in the game, lace up the boots, and get on the pitch.” So that’s the next level.

Then there’s a fascinating new group. We’re on a podcast today, and that’s relevant. When we graduated from college, we wanted to work for the biggest companies around. Today I have a 22-year-old son who listens to podcasts and influencers on founding companies, like the All-In podcast. There’s a whole demographic called search funders. They find people who will back them with investment, and they become the boots-on-the-ground executive management of the business. They want to run a company with an equity stake, not work for someone else. And we’ve both seen Microsoft, Amazon, and other big companies laying people off. You thought you had job security, and you may not. So those people tend to buy companies.

Finally, and not to be long-winded, many people have come to this country on visas. Up in the Bellevue and Seattle area where I am, the Indian community is very entrepreneurial. They came, they contributed to companies, they got their green cards, they became citizens, and they’re ready to stop working for someone else and run their own company.

So there’s a lot of buyer demand from different sectors pursuing the quality companies that come on the market.

Carl: Thank you for walking through both why so many owners need to sell and who’s buying, because if there isn’t someone on the other side, you can’t sell your business. That’s the challenge. I’ve heard various statistics, and you’re much more of an expert on the brokerage side, but I’ve heard the number of businesses sold per year can be as low as 50,000. It’s not as many as people think, even though there are millions of businesses out there.

Why Hire a Business Broker

Carl: So let’s talk about getting a business ready to sell, and why owners should consider a broker versus selling on their own. You and I both know one of the games private equity and family offices play is trying to buy direct, because they want a discount and don’t want to pay fees. Walk listeners through why a business broker adds value in the process of selling a business.

Greg: Great question. I’ll start by saying that nationally, 15% to 20% of businesses listed for sale actually sell. At IBA, 80% to 90% of our engagements sell each year.

One reason businesses don’t sell is that the business model may not have a future. Say you have a restaurant in a strip mall that’s being torn down and redeveloped. Without a lease, there’s nothing to sell. If you want to sell, you have to move and show that your customers will follow. The second reason is that owners are unrealistic or don’t know what their business is worth.

That brings me to why you might engage a broker. The first element is gaining market knowledge of what your business is worth. A broker is in the marketplace, and a sell-side broker is motivated to get you the highest price, because there’s a success fee. But they also need the business to actually sell for the transaction to work for their own business.

Here’s a local Northwest example. Say we’re working with a manufacturing company in Multnomah County. Oregon has a state income tax. Now say the same company, with the same revenue and profitability, is located in Clark County, still in the Portland metro area but on the other side of the Columbia River. Washington has no state income tax. If both companies have EBITDA of $2 million, what the owner nets is different once it runs through the tax process.

So logically, it’s no different than buying a stock with a dividend. Which should be worth more: the business where you net more in Clark County, or the one in Multnomah County? Which stock is worth more: one paying a 6% dividend or one paying 4%? And that’s before factoring in appreciation, which applies both to publicly traded stock and to a private company you buy.

Those are the market dynamics a broker knows. It’s no different than residential real estate. A view or waterfront property will sell at a different value than one without a view, even with the exact same square footage, bedrooms, and baths.

Carl: That’s very well said. A broker knows the differentiators. I can’t tell you how many times I’ve told people that just because you’re right next door and sell the same thing doesn’t mean you’re worth the same. You may have different strengths, a completely different customer base, different margins, or a different management structure. All of those pieces make a significant difference in value when someone goes to sell.

Worth More or Less Than Owners Think?

Carl: I’m curious about this, because my impression is that business owners often think their company is worth more than it is. In your first conversation with an owner, are they typically disappointed by how much their business is worth, or surprised that it’s worth more?

Greg: It runs the whole spectrum. Some people with a service company that has no tangible assets think in terms of tangible assets and assume the business is worth nothing, when it’s actually worth a substantial amount.

Conversely, someone may appear to have a lot of assets, but the return on investment from buying all that infrastructure, accumulated over many years, doesn’t justify the purchase. An orderly liquidation of the assets may be the highest value that business can achieve, because there’s no ROI to justify buying millions of dollars of vehicles and manufacturing equipment.

Carl: Isn’t that interesting? I’ve heard exactly that from someone in the same situation. They thought they had value in all their assets, and when they went through the selling process, they realized they were just trying to get out of their liabilities. You probably know what I’m about to say: an asset can also be a liability when you sell, if it isn’t truly creating future revenue and margin. It’s a cost, a burden you’re trying to get out from under.

Say you sell shoes and have a million dollars of shoes sitting there. You think you could turn that into $3 million in sales. There’s no guarantee you will, and given the cost and effort to actually sell it, the inventory may only be worth its cost. When owners run into the surprise that their business isn’t worth as much as they thought, how do you counsel them and ground them in the reality of what it’s worth?

Selling the Business Four Times

Greg: Great question. Taking a step back to what you just observed, I’ll touch on things that you, as an accountant, would recognize, and that a broker, a buyer, and the buyer’s advisors would recognize.

There may be deferred capital expenditures. One example I’ve seen is construction equipment rental companies with excavators, bulldozers, and so on. If they don’t replace equipment over time, it can be very profitable to ride that horse as long as you can. But if a buyer needs to replace everything shortly after acquiring the business because of the hours on the engines, that’s a whole other cost that has to be factored into the valuation.

When we sell a company and think about valuation, we’re thinking with the end zone in sight, because we have to sell the business four times.

The first sale is to the buyer. They have emotion, so they’re the easiest to sell.

Then it goes to their CPA or CFO, who will give the transaction a thumbs up or thumbs down after reviewing it. They’re not emotional. They’re like a doctor diagnosing a situation and saying, “You can play for the Seahawks on Sunday,” or, “You need another week or two on that hamstring.”

Then it goes to the attorneys. The attorneys aren’t necessarily worried about price. They’re worried about trailing liabilities. If we’re selling a restaurant, the trailing liability on food is maybe six hours. Once you’ve left, if you feel fine and you’re happy, it’s done. If we’re selling a company that manufactures pacemakers and they fail, that’s a pretty serious problem.

The final sale is to the money: the bank and investors. At the end of the day, he who has the gold makes the rules. So when we set our go-to-market price, we calculate: if a buyer puts in 10% to 20% of the purchase price and we’re seeking financing or investment for the rest, what debt service coverage will that loan need to get approved? For smaller businesses, below about $7 million, loans are commonly SBA-backed, and you’re looking at a debt service coverage ratio of 1.25 or higher.

A knowledgeable broker can play out that endgame and say, “I have to clear these four hurdles to get it sold.” If the valuation can’t get financed, what are you going to do? How are you going to succeed as a brokerage firm, and how will you achieve success for your client? Why start a game you can’t win?

How Many Businesses IBA Takes On

Carl: That raises an interesting question. Say 10 random people come to you thinking about selling their business. On average, how many are you willing to take on because you think the business is actually sellable?

Greg: IBA offers potential clients a complimentary valuation of their business, and it serves two purposes. On our side, we’re assessing whether we believe in the business model, whether we can work with this owner, and whether they’re realistic about value. On their side, we want them to assess our knowledge, experience, customer service, and the price they want to achieve.

It’s not uncommon for us to value a company, teach the owner how valuation works, and have them say, “Thank you. We’re going to improve some things and come back to you in a year or two.”

Valuation essentially comes down to profit, or EBITDA, times a multiple. Say an owner wants $4 million for their company, and we arrive at a four multiple as appropriate for the industry based on its risk. If their profit is $800,000, four times $800,000 is $3.2 million. It’s not impossible to grow profit by $200,000, to $1 million, and get to $4 million.

This is where they work with their wealth advisor. What do you need to retire? What are your goals after the sale? The annuity of the income stream will end, and you get an exit event instead. You need to think it through with your accountant, wealth advisor, and others. If I plan on living to 85, if I may need assisted living at the end, if I want to help my kids buy houses or my grandkids go to college, you need to do some calculations to arrive at the value you need.

And to answer your question, IBA generally takes on about one in three businesses that come to us. As I said, we sell 80% to 90% of our engagements. We play to win.

Carl: That’s interesting. If you run those numbers, you take roughly a third, and 80% to 90% of those sell. So somewhere around a quarter to 30% of the owners who are interested actually sell. I wanted to bring that up because some people will be surprised their business is worth more than they thought, and others think they can just go sell it and find it’s harder than they expected.

The Math Behind Hiring a Broker

Carl: I know our time is getting limited, but I want to touch on one more piece. And these are my friends I’m talking about, people I respect, because it’s something I might do too. Sometimes owners have the opportunity to sell without going to a competitive market, meaning without a broker who finds other buyers, which helps increase the value of the business just through that process. I was just at an event in Charleston where an owner talked about selling to the first private equity firm he spoke with, and he basically told us the horror story of what he ended up not getting as a result.

How do we make people aware that they need to consider a professional, just like when you sell your house? How do you give them confidence that it’s worth the money? They look at the cost and don’t realize that with a competitive process, five buyers instead of one, they’ll get a higher price. Do you show people data that helps them understand it’s worth going through that process?

Greg: Yes. Why do people hire IBA? For five reasons: knowledge, experience, skill, best practices, and integrity. You’re hiring a professional advisor to lead you through the process. Our business model is 100% paid on performance, so you don’t pay us a penny unless we deliver a transaction you’re happy with.

We also have resources. You could be in Baker City, Oregon, with a great accountant who has filed your tax returns forever, but who doesn’t understand tax allocation in a sale, or doesn’t know about deferred sales trusts or 1031 exchanges that can mitigate your tax liability. We may be able to introduce you to consultants who can help with that.

In very basic math, say my valuation of a company is that it should sell for between $9 million and $10 million. Remember, market conditions and different buyer demographics will produce different valuations. Say you sell it yourself to private equity and get the low end of the range, $9 million. Now say you hire a broker who takes 5% of the transaction, and they get you $10 million. Simple math: $10 million minus $500,000 is $9.5 million. At the end of the day, you’ve gotten someone for free who delivered another half million dollars of transaction value, and you had a trusted guide through the process. In my own case, I’ve been doing this for 31 years.

Whether you’re hiking, backpacking, or fixing a car, experience matters. If my car isn’t running well, I want to go to a trusted mechanic who will identify the problem and get it back on the road. I’m not necessarily going to pick the mechanic closest to my house.

Carl: Thank you for walking through that. It’s super valuable. It’s funny how people forget that half a million dollars is still a lot of money, and it makes sense to get more if you can. As you said, it’s essentially free, because they wouldn’t have gotten that money in the first place.

Deal Structure and Planning Ahead

Carl: We have just a few minutes left. There are many different ways to sell, and it’s not always 100% cash upfront. There may be seller financing, or rolling equity into the new company, with the promise or dream of a second bite of the apple. That happens. But sometimes people get less than 50% of the price in cash upfront, or they have earnouts that defer a significant part of it. That piece is often overlooked. If you had one minute of advice for someone considering selling, what should or shouldn’t they do when it comes to the different structures a buyer may propose that determine what they actually receive for their business?

Greg: Great question. The first thing to understand is that a business is not a highly liquid asset. It generally takes us three to 12 months to sell a company. Then you’ll likely have a tail where you work for the new owner or provide transition consulting for at least another three to 12 months. So if you’re thinking about selling, plan ahead, because it’s not something you can put on eBay and sell tomorrow.

Then you look at your risk tolerance and your upside potential. You’re right: there’s cash, a seller promissory note, an earnout, retained equity, and employment or consulting agreements. If you don’t sell the real estate, there could be passive income from the buyer as a tenant in the building you own. You need to assess those different pieces and calculate the taxes and the upside risk associated with each.

If you take a royalty, an earnout, or retained equity, and you truly bet on a great racehorse that triples the size of the company, I have seen situations where the second bite of the apple is bigger than the first. But if they get knocked off the bucking bronco and trampled, or new competition enters the market that wasn’t there before, it’s a different story.

We’re Northwest boys. There was a Fred Meyer near my home that just announced it’s closing. I never would have imagined a Fred Meyer going out of business. It was my staple for food, clothing, and school supplies growing up. But marketplaces change.

Carl: They do. That’s excellent.

Where to Find Gregory

Carl: We have to wrap up here, and I know we’ll have follow-up conversations. Gregory, how can people connect with you and learn more about what you’re doing?

Greg: I would recommend visiting our website, ibainc.com. One thing I’d point you to there is our blog, which has had close to 200 guest authors in its history. There’s wonderful content from accountants, attorneys, wealth advisors, bankers, and our firm, covering everything about buying and selling businesses. And if you want to reach me, you can call me at my corporate headquarters at 425-454-3052.

Carl: Thank you so much, Gregory. We’ll make sure all of that is in the show notes. We may need a follow-up conversation, and perhaps even a second podcast, because your content was so excellent. Thank you for being a guest on the Measure Success Podcast today.

Greg: My pleasure. Thank you.

Carl: And to our listeners, I hope you appreciated the information Gregory provided. He has a wealth of knowledge and experience, and these aren’t things you can just find on ChatGPT, as amazing as it is. You typically go through something like this once in your life, so you want a real, experienced professional to help you get through it and maximize the amount you need for retirement. As we always like to say, wishing you the very best at measuring your success.