Why Don’t You Just Sell the Business?

Introduction:

This week, David Barnett, Mel Gravely, and Kate Morgan discuss a somewhat unusual approach to succession, which is to not sell the business. Basically, it’s about taking a step back from leadership while maintaining ownership, and both Kate and especially Mel are moving in this direction. The approach can pay off financially in part because businesses often are worth more to the owner than they would be to a buyer. Why is that? As David explains, the business that the buyer buys isn’t really the same business that the owner sells: “If you’ve owned the business for a long time,” he says, “the balance sheet is probably pretty strong. You’ve had time to earn money, pay down debts. You’ve got a good equity position. This makes the business strong, and it makes it better able to weather storms.” But, as David goes on, if he were to buy Mel’s business, he would probably have to borrow money to finance the acquisition. That would leave him with a much weaker balance sheet than Mel has today. And a significant portion of the cash flow that Mel currently generates would have to go to the bank. Which is part of the reason Mel’s keeping his business. Of course, this approach to succession does have some challenging elements, including the need to find someone to run the business. Plus: We also discuss whether it’s possible to sell a solopreneur business.

— Loren Feldman

Guests:

David Barnett helps people buy and sell businesses.

Mel Gravely is chairman of Triversity Construction.

And Kate Morgan is CEO of Boston Human Capital Partners.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome, David, Mel, and Kate. It’s great to have you here. Given the interesting times in which we live, I’d like to start by just checking in on how each of you are doing. Kate, maybe start with you. How’s it going?

Kate Morgan:
I mean, it’s always interesting. I think it’s going pretty well. It’s not thriving like it was four years ago. But that’s okay. I like the challenge, I guess.

Loren Feldman:
How about, compared to one year ago, how’s business?

Kate Morgan:
I think we’re doing a lot of interesting things. So we’re really going deeper into some of the markets that we had just had the tip of the iceberg in, so particularly when we start looking at biotech/life science devices. So I’m actually really enjoying that, and I think we’re starting to get a lot more play just because of the book launch and getting kind of promoted because of that.

Loren Feldman:
The last time you were on, which was actually the first time you were on, Paul Downs and Jay Goltz strongly encouraged you to raise your prices. I’m curious, did you give that any further thought?

Kate Morgan:
Yeah, so we played around with it a little bit, actually. You know, I am a big proponent of the adage—I think we talked about it—“Revenue is vanity, profit is sanity.” So I’ve always felt pretty good from a cash standpoint. But it was like, “Yeah, okay,” so I took that message back to my team, and I said, “We need to really focus on profitability and where we can increase our profit margins.” And so we’ve done some things. You know, I’m not going to be charging the accountant rate of $350 an hour. But we’re moving it here and there.

Loren Feldman:
David, how about you? How’s it going? Are people still buying and selling businesses?

David Barnett:
Well, my business is doing okay. We have year-over-year growth, and so I’m happy about that. It’s hard, though, to shake this apprehensive feeling that there’s something lurking. With all these people and all these headlines being negative or pointing out problems, you always kind of worry, “Is something going to change?” And so, over probably a year and a half ago, I started to think that maybe there were signs that things could not be so great in the economy, and I started to think more about how I might want to change my business, and I’ve been working on that since then. And some of the challenges I’ve been thinking about, actually, are things that we can talk about today.

But so far, it’s been a very good year. And I just came back from a small conference. Actually, I was in Michigan, just a few days apart from when you and the rest of the crew were there. And it was a very positive conference. I made lots of great new contacts that are going to be leading to more business for me. So, all things being equal, just looking internally at what we’re doing, it’s shaping up to be a good year.

Loren Feldman:
I’m glad to hear that. Mel, how about you? I think the last time you were on, you told us that your sense was that we were already in a recession—although it was too early for the numbers to show that, obviously. Are you still feeling that way? And how are your businesses doing?

Mel Gravely:
The businesses are doing well. The construction business is probably up more than they wanted to be up this year. We got kind of drug there by big consistent customers. So, you go with them, because they need you to go with them. But we probably grew in ’25 a little more than even they wanted to.

Loren Feldman:
Is that a problem?

Mel Gravely:
Yeah, it can be in our business, Loren, because it means you’re going to hire faster than you otherwise do, and that can strain culture. It will lead to higher turnover as that bubble ripples through. And so we’ll pay for that in 18-24 months. But again, the alternative is to tell ongoing customers, “No.” And, man, that’s just really—I’m not sure that’s the right thing to do either. So you do it the best you can, but they will likely see a ripple—“we.” I shouldn’t say, “they.”

You know, I’m not the CEO anymore, but they’re going to see this ripple roll through, is my guess, because we’re going to grow it a little over 20 percent. And we should be growing between eight and 12—because you can grow talent at that rate and and hire to create some of that growth. But for the most part, you’re kind of growing your talent. When you go faster than that, in our business, you run into some struggles. But the business is healthy and the fundamentals are good, and our customer satisfaction is high, our employee engagement is off the charts. I’m very, very pleased with our employee-engagement scores. The other business, as you know, has been a bit of a headache, bought in duress, or in distress.

Loren Feldman:
We should remind people, the first business you were talking about is a business you own. It’s a substantial construction business that you stepped back from being CEO of about a year ago?

Mel Gravely:
Correct. About 14 months, 15 months ago. Yes, that’s Triversity Construction. So, think construction, commercial construction.

Loren Feldman:
The other business is a business—

Mel Gravely:
Facilities management. So we manage the facilities of large, complex customers. And the business, when I bought it, was not profitable. We’ve worked really hard to get to profitability. We finished last year profitable and continue to deliver profitability through April—I don’t have my May numbers yet, but through April. So, I’m feeling really good about where we are from an execution and profitability standpoint. But man, it’s been a heavy lift for such a small business.

Loren Feldman:
I believe you’ve told us that you actually wanted your main business, Triversity, to buy this company, and they rejected the idea. So you went and bought it yourself.

Mel Gravely:
Yeah, well, they didn’t really understand a facilities-management business, and they’re busy. So in their defense, they’re busy. They’re growing faster than they really had planned to grow, and taking on another thing was something they decided they shouldn’t do, and they were probably right. I just wanted them to do it because I’m in love with the facilities-management business. I like the ongoing consistency of it.

And even the context of your question, this question of the context we live in today, this uncertain world, what’s certain is property owners will take care of their property. And in the facilities management business, you get to earn the right to come back the next day every single day, by the execution that you have. And so that’s why I like the business, and it’s turning out to be okay.

Loren Feldman:
I was also asking because you referred to it as having been bought under distress, I think you said.

Mel Gravely:
Well, the business, when I bought it, was under distress. I was giddy to get it. I wanted to be in the business. I was too giddy. I was too anxious to get it. I’m sure that David would have some cautions for me around buying a business that you’re just too excited to get.

David Barnett:
There’s a medical term for it. It’s called “buyer fever.” [Laughter]

Mel Gravely:
I had it bad, buddy. I don’t know how you test for it, but I had it bad.

Loren Feldman:
What do you prescribe for buyer fever, David?

David Barnett:
I don’t know. I don’t know. A cold plunge maybe, something like that? [Laughter]

Loren Feldman:
Mel, I believe you’ve been working on getting an evaluation for that business of late. What’s that about?

Mel Gravely:
Actually, we’ve been working on getting an evaluation for Triversity. So, as we separate leadership from ownership, we want to make sure we’ve got a way to incentivize executive leaders to grow long-term value in the business. So we’ve created a value-appreciation program that gives the executive team rights to a percentage of the growth in value from year to year.

So each year, you do a calculation against the change in value from the previous year to the current year, and you allocate rights to executives. In order to do that, you’ve got to have a value-evaluation approach and a consistent method and good rigor around that, or it’s not a very robust program. So we had never done a formal valuation on our business, and so we’re working through that process. Now, we’ve got the report. The struggle is the methodology and everyone having 17 opinions about how it should have been done.

Loren Feldman:
Can you give us a sense of what’s tricky about it? Why are there so many different opinions?

Mel Gravely:
Well, because there is science to valuations, but even the science has multiple scientific methods to use, right? Some are used primarily for when you’re buying something. Some approaches are used for the way we’re doing it now, for some kind of synthetic stock or something. So there’s all these different sciences to get a valuation. But then, every valuation process has art to it, because you’re doing comps out in the world, you’re picking discount rates, and there’s an art to doing that. And some people are very uncomfortable. They want to pick apart the art. Why did you pick that comparative set? Why did you pick that discount rate? And they’re just uncomfortable with the balance of the science and the art. And so I’ve got a bunch of opinions right now trying to tell me that this approach is—some people are actually using the word “wrong.”

Loren Feldman:
Did you hire someone to do it for you?

Mel Gravely:
Oh, for sure, absolutely.

Loren Feldman:
Is that an expensive process?

Mel Gravely:
Not too bad. That’s a great question. I should have been more prepared for that one. I think, total—I had to do two years. Because you gotta have one year to compare it to the other. So I had to do two years at once, and it’s more expensive when you initiate than when you do it annually, but the annual is less than $20,000 a year. The upfront one cost a little bit more, but all in all, not a horrible number. Listen, I wouldn’t do it if I didn’t need it. Because it’s money. It’s like doing an audit. I hate doing audits, you know, but if you need them, you’ve got to have them. But I didn’t find it to be cost-prohibitive for the reasons we’re using it.

Loren Feldman:
I believe a lot of people recommend that businesses should do valuations regularly, whether they need them or not, that it’s a good thing to know, and prompts good questions to be asked, and keeps you focused on your ultimate goals. You’re doing it for a different reason, though. Could you tell us more about the plan that you’re hoping to put in place?

Mel Gravely:
Yeah, what I hope is that we’re creating an infrastructure for professional leaders to want to be senior executives in our company, because they will get wealthy on growing the value of the company over time. And the owners will share that wealth with them, because we’re planning to keep ownership separate from the decision of who’s leading the business.

This is not a family business, so I’m not expecting my sons or my daughter to take over. And so we’ll be professionally run, but we need to have incentives in place for them to reap the benefits of leading a business that grew in value. And I agree with you, Loren, that this tool can be educational. Because you begin to learn what the value drivers are to create real value in the business and make it more valuable, whether you ever plan to sell it or not. And a more valuable business is usually a stronger business, a more resilient business, a business that can last over time.

Loren Feldman:
David, do you do valuations for businesses?

David Barnett:
Yeah, this is a big part of what we do. We do them specifically for people who might want to sell their business. And so, to Mel’s point about how there’s different methodologies based on what the purpose of the evaluation is for, he’s absolutely right. Because valuing a business as a family asset, or valuing it amongst a various group of shareholders, you could end up with methodologies that are going to give you one kind of value, with the idea being that the ultimate buyers of each other’s shares are probably going to be other insiders who have the same sort of attitude toward the value of the business. If you then said, “I want to sell this business to someone from the outside,” now you’ve got an outsider who lacks the same kind of internal knowledge of what’s going on in the business. And that outsider is probably going to see a lower value than the value that the insiders see. And so what you intend to do with the business and why you need the valuation is really important to understand before you engage in this process.

And what Mel was saying about how the formula can create a little bit of conflict, I’ve seen this many, many times, where two people will be talking about buying or selling a business, and the buyer will be steadfast in their insistence that their method is the correct one, and whatever the seller is doing is incorrect. And that doesn’t lead anyone to resolution. Usually, it just leads to conflict between the two people. And I often have this conversation with engineers who are involved in construction somewhat, and it’s almost like people with a certain background have the idea that there is a certain methodology or path to getting a solution. Like, if you asked an engineer, “How thick should the steel be on this bridge pier?”, they’re going to do some math, and they’ll come up with the correct answer. And just like Mel said, in business valuation, it’s not quite so clear cut, and some people get very uncomfortable with that.

I would also say that, whatever the ultimate methodology is for the ongoing valuation every year, you really have to think about the alignment of incentives. And I’ll give one simple idea: If you had EBITDA in your formula, or you had free cash flow or distributions in your formula, it would encourage or discourage certain attitudes or behaviors toward capital reinvestment and equipment. And so someone who’s more short-term focused might be focused on free cash flow. A manager might decide to not replace equipment to increase the free cash flow to boost the value of the business. And then, down the road, someone’s got a problem of a whole bunch of deferred capital investment. Now, they need to spend a bunch of money. And so the drivers of value, or the incentives you’re trying to create for management, are really key in these formulas.

Loren Feldman:
Mel, was that, in fact, part of what you were going through, trying to make sure that the method you use to value the business incentivizes the right behavior going forward?

Mel Gravely:
Absolutely. I actually saw it the more negative way. I was making sure it didn’t provide an opportunity to manipulate the numbers to get to a higher valuation. And it’s tricky, right? And that creates the debate. And sometimes I don’t know that you know for sure until you’ve done it a few years. And it’s a brand new program, and when you start giving people something, and then you change it later, it can create a problem. So, I’m just trying not to screw this up, if I can be honest with you guys.

Loren Feldman:
Kate, when you were on the last time you told us that there was a period, I think a couple years ago, where you thought about selling your business.

Kate Morgan:
I got right to the altar. Yeah, we were supposed to close April 10 of 2020. So we all know what happened in March of 2020. And so it was all dialed in. We had the date all signed and everything. And you know, when Covid hit, I just didn’t know what my company was going to look like at the end of it, and I really didn’t want to leave any money on the table with my earnout. And so I pulled back. I don’t know, it was just an amazing opportunity to get to the point of jumping off, and then just having some clarity. So when I pulled back, on some levels, I was like, “Well, it would have been fine.” I would have had my earnout. Everything was fantastic.

But in the bigger picture, I really did the math on it, and—Dave, I’d love to get your impression of this—but I’ve always been told, and this was kind of what the the numbers were aligning at, is you’re really at like, one- to one-and-a-half times EBITDA for a professional services company. And when I started thinking about it, I was like, “Well, okay, I’m on the wrong side of 50 now,” but at the time, I was still feeling like, “Okay, well, what am I going to do after this?” I was working on another company, and I was like, “Okay, well, I’ll exit that one and focus on this new company.” That new company had to roll up because of Covid.

So now I’m doing a little bit of what, Mel, you’re talking about. And I love how you phrased it, taking it from ownership to leadership. I’m actually grooming my senior team members because my exit now is, “Well, just hold on to it.” And then kind of move myself to chairman of the board and let it operate on its own, and just give them the opportunity to step into those shoes.

Mel Gravely:
I’m interested in the insight on that question, because I get a lot of people saying, “Why don’t you just exit?” You know, in our business, our multiple will be a little higher than one and a half times, but it probably won’t get to four times. People are pressing: “Why don’t you just sell?” And this business, if we can incent the executive team to lead it, I believe, even financially, it’s worth more to my family as an asset than it is to sell it. But I realize, David, you’re in the business of helping people buy and sell. What’s your take on that?

David Barnett:
So with respect to what Kate said about the multiple, one-and-a-half times EBITDA sounds like a low multiple, but I’m wondering if you really mean one-and-a-half-times seller’s discretionary earnings. And this is the kind of can of worms that people often get into when they’re in business, operating a business, and they’re kind of part-time engaged in this world. And they’ll read articles or listen to interviews, and they’ll be hearing conversations people are having about different aspects of businesses, or what they’re worth, or what they sell for. And one of the key pitfalls of this for entrepreneurs is really understanding what kind of businesses the conversations are about that you’re tuning into.

Larger businesses, sort of in the mid-market—what I would describe as businesses with tens of millions of sales, and EBITDAs over a million dollars—those businesses can easily sell for four or five or more times EBITDA. But small little businesses—you know, a service business heavily dependent on the owner, with very little in the way of a barrier to entry for new competitors—could easily sell for less than two times seller’s discretionary earnings. And those two numbers, EBITDA and SDE, are very different calculations, and when you confuse the multipliers with the actual cash flow level, that’s when people end up mispricing either too high or too low. And then, if they go to market that way, they get frustrated when they can’t meet someone who’s willing to come to do a deal with them. And so it can be very complex.

What I would say, as far as Mel’s comment about keeping the business, just imagine this: Right now—and I haven’t seen Mel’s financial statements, but—if you’ve owned the business for a long time, the balance sheet is probably pretty strong. You’ve had time to earn money, pay down debts. You’ve got a good equity position. This makes the business strong, and it makes it better able to weather storms. If I were to come along and buy Mel’s business, I would come together on a price, and I would pay Mel. But a good chunk of that money would probably be borrowed. Now, I would have a much weaker balance sheet than what Mel enjoys today. And a big chunk of the cash flow that he currently enjoys, I would end up giving to my bank. And so I would be in a more fragile position. And this is one of the reasons why a business may be worth more to its current owners than to a buyer, because the business they end up with after they buy is not the same business.

And so from Mel’s point of view, even if he steps back, and, let’s say, the business becomes less efficient because Mel’s not there every day running it, he may be able to withstand that decrease in efficiency and profitability and still end up further ahead than somebody who borrows money to buy the business. And so it creates a unique scenario or situation. Did something like that enter into your reasoning at all, Mel, when you were thinking about this, that sort of turning the business into an annuity that would just kind of pay you for being the owner, like owning stock in a big company?

Mel Gravely:
You made me sound really, really smart right there. [Laughter] So the business has 130 people and a solid management team. The new CEO is, quite frankly, better at this than I was. He knows our business better. And so they’re not just positioned to idle, they’re positioned to grow. And what was really going into my mind was the ability to have it as a family asset.

I saw it as a way to bring our family together, to educate our children on stewardship of an asset, how to be good philanthropists and also to be good, caring, loving people of the employees who work there—just a way to live out a family legacy. And we’re in the first two percent of going down that road. So part of it was financial, but the most part was not. The value was bigger than the dollar to me. The value was the legacy of what it could mean as a family asset.

Loren Feldman:
It wasn’t really an assessment of what you could sell the business for, compared to what you would perhaps earn if you maintain ownership?

Mel Gravely:
That wasn’t the reason for it, but as I’m talking to advisors, they’re saying to me, “Hey, this is worth more to you owning it, than selling it—unless you’re worried about its ability to be successful down the road. And if so, then you should absolutely sell it. If you’re not going to be able to sleep at night, if you can’t walk away and not be the person who runs it. If you’re worried about day-to-day management, you should sell it.”

But I was not worried about day-to-day management, at least, I haven’t been yet. And so they confirmed my thinking more than created my thinking, Loren, but it was the multi-generational legacy, family-wealth creation that drove it. And I bought this business later in life. I bought it in 2009, and so I didn’t own it for a super long time. And our family really hadn’t reaped the benefits of the growth of this business. I shouldn’t say that. We’ve reached some benefits, but not significant, and I just thought we needed a little more time.

Loren Feldman:
You know, I think the fact that a lot of people have been telling you that you should sell suggests that you’re doing something a little bit different here. And the fact that you’re doing the valuation with the goal of creating an incentive plan for the leaders who will carry the company forward clearly is a little bit different. Did you have a model? Is that something you came up with on your own? Or have you seen that done successfully elsewhere?

Mel Gravely:
Well, you know, I hang out with the folks at Tugboat. For those of you who don’t know the Tugboat Institute, it’s a group of privately held companies that, in essence, have pledged they’re going to stay private. And that group has so many ownership, leadership, governance models that it was there that helped clarify my thinking. And I remember it was over a drink, someone said, “You seem to be stressing because you’re holding leadership and ownership in the same bucket. If you separate them, does it get easier? Can you make one of those decisions?” And I said, “Well, I can make the leadership decision.” They said, “Make the leadership decision, and keep the ownership decision for another day.”

That began me down this road. And I like the governance role. I like being chairman of the board. We’ve got one son on the board. The other one is advisor to the board, so he can sit in the room and listen and learn. So I like that role, Loren, from a purpose kind of thing. So that’s been great. And so, that’s how I got there, and I’m still getting there, wherever there is.

Kate Morgan:
It’s interesting listening to you, Mel, because when I wanted to exit my company, my whole thing for a year before was shoring up my business so I wouldn’t have to stay on. And that was adamant, because I do not work well for other people. So I really dug in, and by the time we were going through the LOI and due diligence and all that, I was only working maybe five hours on my business. That was it.

Loren Feldman:
Five hours a day? Five hours a week?

Kate Morgan:
A week.

Mel Gravely:
Wow. I like that.

Kate Morgan:
Yeah, it was really going to be pretty turnkey. And that’s why I was like, “Okay, well, I could have just kept it.” And you know, hindsight is always 20/20, but again, I’m still very happy that I didn’t end up selling—although it was going to be an owner-operator. And he and I were definitely in lockstep on how we think about leadership and talent and all of that. We’ve actually still remained friends, but that’s exactly what I’m trying to rebuild, because between Covid and this market, it’s a very different company.

David Barnett:
Early in my YouTube channel, someone asked me the question, “You know, why are business owners selling their businesses? Why don’t they just hire managers and continue to enjoy the profit?” And my answer was that some people just can’t do that. And I see this example all the time in our consulting.

And I’ll tell a story. There’s a guy that I worked with who was an auto mechanic in his early 20s and decided he wanted to own his own shop, and so he went and opened up his own shop, and he was successful at running it. He eventually built his own building, and then he grew that shop. And then he sold the shop, but kept the building and became the landlord. And so he went through that evolution of employee to owner to investor in the building to becoming the landlord.

And I asked him, “Why didn’t you just keep the shop? Why couldn’t you get everything into a position where you could just be an absent owner?” And he just said, “I would be so worried every night, worrying that all those details I used to do as the manager weren’t being done properly. And I knew that I would never be able to let that go. So I sold it.” And it’s interesting, because I see this from people who come out of maybe middle management of big corporate enterprises, where, in their middle management role, they have no problem delegating authority and responsibility to their employees, but when they come into their own business, they suddenly do have a problem. And it’s because they are so much more connected to the outcomes.

When an employee makes a mistake and you work at the big corporation, well, the big corporation maybe lost some money, or had some problem they had to deal with. But when it’s your own business, and the employee makes a mistake, maybe it costs you $5,000. And you think, “That’s my money that just got lost, because I let this person do this thing, and they failed.” And some people just can’t let that go. They can’t grow beyond that point. And so then they become the business sellers.

Mel Gravely:
Yeah, and it’s more than a notion for a founder, especially a founder, but even the person who bought the business, to be willing to invest enough in someone who can really replace you. I mean, think about what that really means. That means that person’s talented enough, and you’re compensating them at a level that you can really step out. And the build up to that, at least in my experience, was suppressed earnings. Because I was building an executive team that really can continue our strategic-planning process and our annualized approach to things and our people development and the communication with the board and managing very complex customers without me having to be the relationship person.

It’s more than a notion, and I don’t think everybody’s up for that. Some people stay too long, and all their good talent has to leave. And then the business is something that they have to sell because they haven’t positioned it to keep it. And let’s face it, any business can fail, and so keeping it comes with this element of risk, and if you’re not there every day, that risk probably does go up a bit.

Loren Feldman:
So tell us, David, what are you doing with your business?

David Barnett:
So the main part of our business is, we do consulting and education for people who want to buy or sell a small business. And we work with people all over the world to do that. But a much smaller part of our business is also that we are certified machinery and equipment appraisers. And that business is really a regional one. It’s, you know, all within a few hours of where I happen to live.

Loren Feldman:
Which is?

David Barnett:
In Moncton, New Brunswick. So we’re on the east coast of Canada. And so across the province and into the neighboring provinces, this is the area that we cover. And a lot of this appraisal work is done on behalf of lenders who are going to be making loans. And a lot of it is driven by people doing acquisitions of businesses, and they need financing to get the deal done. And so it does relate to our overall business. It grew out of something that we were doing back when I used to run a traditional business brokerage office, and as I grew the consulting business, I just kind of kept this going with me, but it’s always been very passive. It’s always been driven by past clients that we worked with, or centers of influence that have been sending people to us for years, or people just looking up our website.

And a year and a half ago, I thought, “You know what, maybe I should actually do some work and try to grow that part of the business,” because it is not correlated with the big part of the business. So just this idea of diversifying your income streams a little bit. And so I targeted a neighboring region, which has a good number of businesses, and started to set about a plan to grow the business into that area. And so it’s almost like a sales and marketing kind of challenge that we’ve been doing over the last year and a half. And the things that I’ve done, for example: We’ve done direct mail, we’ve done outreach on LinkedIn, we’ve made efforts to do increasing engagement through LinkedIn groups that would have the centers of influence.

The tough thing is, it’s really hard to look out over the view of all the people in the public and say, “Who amongst these people is likely going to buy a business next year?” It’s almost impossible to identify potential or prospective business buyers. So what we do is, we focus our marketing and sales efforts on centers of influence: people who work in banks, people who would be meeting with these people, accountants, lawyers who advertise that they do small business transactions, people of that nature. Next month, I’m hosting a breakfast where I’m going to be doing a presentation and talking about some of our work and some of the stories where we’ve helped lenders avoid losses through our efforts and things of this nature.

And it’s been interesting, because it’s the first time in a long time that I’ve really had to sort of throw my shoulder into a sales effort to get back to doing sales, trying to create relationships, making phone calls, etc. And it’s just a little bit interesting to me, how it seems that things have evolved a little bit, that it seems to be harder to open up those new conversations than maybe, I think, it was 20 years ago when I was engaged in this all the time with the different things I was trying to sell over the years.

Kate Morgan:
I just had a conversation about this myself, that buyers in general, from a sales process, it feels very different than what I experienced over my career. It’s very, very different. I don’t know what it is. It’s just different.

Mel Gravely:
Well, I think the buying of things and services has been professionalized. And what I mean by that is, I can’t think of any of our customers that doesn’t have a procurement function, someone whose job it is to figure out who is the best solution—best in air quotes. And so they’re not the end user. They’re acting on behalf of the end user. And their incentives are to drive out every variance.

So all your differentiation we used to sell before is harder to get through, because they don’t provide the same avenues for that kind of differentiating conversation. I don’t want to use the word commoditized, but they want to commonize the comparison between one firm to another, so they can apply their professional procurement methodology so that they can drive up costs and drive up efficiency. I think that is, at least in every business I’m in right now, the significant change in how things are done. I’ve been a salesman all my life, and relationships still matter, but the percentage of their matter has to be calculated into a professional procurement model.

David Barnett:
It’s interesting that you say that, because by far the vast majority of the regular work that we do—so there’s a group of customers that keeps coming back, and these are lenders. And then there’s this sort of random group of people that find our website, for example, and they need us for one-off projects. And amongst the group that are consistent users of our service, I don’t think they shop anywhere. We’ve served them so well over the years that they just keep coming back and sending people to us. And so, part of my thesis is that other buyers in this new market I want to get into have similar kinds of relationships. And so, it’s: How do I work myself in there? How do I make myself known and present ourselves as an opportunity, get the opportunity to have them give us a shot and see how we might be different?

And I would agree with you about the commoditization, because back when I was in college, I spent a summer as a buyer for a big company. And these were some of the things that I was taught by the other buyers: the method of working out the supplier’s gross margin, working it down to the benefit of the buying entity, and how the whole professional purchasing process works.

Mel Gravely:
Yeah, I hope that the customer I’m pursuing has a long-term relationship with someone because that means that they’re a long-term relationship kind of customer. I’ve got to do enough that when they have a bad experience or something changes, that I am the person they call to say, “You know what, you’ve been talking to me for three years, and my current supplier either got overburdened, or they changed ownership and dropped their service level, or whatever the reason is.” What I don’t want is a client who will drop their current supplier willy-nilly, because I’m next. But you’ve got to be willing to stay around, keep doing the marketing things and the sales things, so that the opportunity you hope one day comes to you.

Loren Feldman:
David, can you tell us more about the target market you’re trying to reach? Who’s in the market for the appraisal services that you offer?

David Barnett:
Well, it can be people who fall broadly into different groups, but the biggest group are people who want to buy a business, and they want to use the assets in the business as collateral for a loan. And the big way that they find out about us is because their banker knows us. So when their banker says, “We’re approving your loan subject to an appraisal,” people say, “Well, who do I call for that?” The banker might say, “Well, we’ve always had great success with this firm.” They’ll direct them to us. So that’s why, I mean, we have a center of influence marketing problem or issue. It’s that we’re trying to create relationships where people direct people to us.

And then we also talk to accountants. There are companies that will convert from their accounting standard that they might be using today into something called IFRS, which is an international standard. And IFRS conversion allows people to make a one-time restatement of their assets value to fair-market value versus depreciated book value. So that’s part of the work that we do.

Then we get people who have some kind of a problem, or they’re trying to avoid a problem, so an inter-company transaction. They’re worried, maybe, that the tax authorities might think that they’re doing something wrong. So they get an appraisal done to say, “Look, here’s the value of what we’re moving between companies,” or sometimes legal disputes. Sometimes there’s a married couple and a business might be common property, and they’re getting a divorce. And so they want an evaluation of the assets of the business, and we do those from time to time as well.

Mel Gravely:
David, do your two companies or two divisions or two offerings have different names? Or are they named the same? And if so, what is the name?

David Barnett:
So, we actually have three different websites. So when we work with sellers, we direct people to howtosellmyownbusiness.com, and when we’re talking to buyers, it’s businessbuyeradvantage.com. And those are largely driven off me and my YouTube channel, my personal brand. The evaluation services, it’s on a different website called businessandassetvalues.com. And over there we go under ALP Limited Valuation Services, so it’s not as connected to my personal brand over there. And so we have a team.

One of the things that we’re working through right now is that when people watch my YouTube videos and they say, “Oh, I want to buy this business. I want David’s help,” it’s the problem in a lot of the spaces: They want to work with David, because David’s been on the internet. But David doesn’t have the capacity to work with everybody anymore. So it’s a team effort, supervised by me, with processes built by me, using tools that I’ve created, etc., etc. With the ALP Valuation Services, there’s less of a connection with me from the get-go, which is another one of the reasons why growing that part of things is attractive.

Kate Morgan:
I chair an accelerator program, and one of the things that I’m always stressing to the participants is really understanding all the pieces that you need in order to think about an exit. And maybe it is like what I’m talking about—stepping away from the business— but all of the holes have them all shored up. And to it, I just had an accelerator that was telling me about their business and how it was thriving and everything, but they’re a solopreneur, and they just wrap themselves with 1099 people. I’m like, “Well, you don’t actually have a company. There’s no way to give you a valuation, because you’re just basically taking a paycheck.”

Loren Feldman:
Is that true? The use of contractors has grown so substantially, the ability to build a business as a solopreneur has gotten, given technology, has gotten so much more prominent.

Kate Morgan:
Yeah, well, I agree with that. But if you don’t have a playbook, if you don’t have something to sell, if there’s no IP, and you’re just stringing extra talent, what really do you have?

Mel Gravely:
So what comes to my mind is sometimes the solo entrepreneur has a practice. Like, my wife’s a physician, so when my wife stops being a physician, that practice, it’s over. Because the value she brings of that service, although she’s surrounded by nurses and other things, that value is what she brings. I guess I have to think through the solo entrepreneur. Is it absolute that they don’t have any value? I don’t know, Kate. I’ve gotta think about it more, because what if they built a brand and a way of doing business that the 1099s love, because they don’t have to go feed themselves? But they’ve got an engine that can sell, and they keep pricing and do some back office stuff for them. Maybe it could work.

Kate Morgan:
I don’t know. I think it just feels like you’d have to have a playbook in order to say, “This is what I have. This is my IP,” that you could take and then go sell it. You could sell it and grow it and develop it. Without that, though, I just don’t quite see it.

Mel Gravely:
Well, I think what I just articulated, to myself, is: That would be the playbook. They’ve got a system in the back office that holds it together in a way, to market it and sell it and keep these 1099s busy and taking a portion of the proceeds.

Kate Morgan:
So, well, it’s like franchises, I guess. You’re selling an idea.

David Barnett:
You’re both talking about a little bit of a different scenario, with respect to sort of the doctor/medical practice kind of thing that we think about. You know, people are patients of the specific doctor. It’s funny, I’ve got a client right now in my coaching program for buying a business, and he’s actually looking at a deal to buy a business that is a solopreneur business. And so he’s been dealing with a lot of these challenges. Like, how do you do it? And the difficulty is that the seller has to be able to transfer the goodwill of the business: all the people. So, for example, in a medical practice, you’ve already got all these patients lined up. So is it valuable to a new doctor to take over the full book of patients versus building their own from scratch? I would argue it is. It’s like instant cash flow.

But the new doctor has to be convinced that all the patients are going to stay and want to do business with them. And the challenge is in the handover of the goodwill, so that the relationships carry on. And so the way that this is normally dealt with is through some kind of deal structure, which involves the continued participation of the selling party. And we see this a lot in different kinds of professional businesses where you have this transition period, which could be years long, where the clients meet the new person, but the older person is still around that they have the relationship with, and they get to have an opportunity to develop a relationship with the new person and have that stick.

And what business owners who have this kind of business often have trouble with is the idea that the value of their business is ultimately not in what they do or their cash flow; it’s in the willingness of the customers to transition to the new person. And so a lot of the time, these deals are structured in a way that it’s the future performance that ultimately determines how much is paid to the seller. Sellers have got to be actively involved in making sure that those clients really do transfer their loyalty to the new person. Because if that transfer doesn’t occur, then the buyer didn’t get what they were sold. And this is a bitter pill for a lot of people, especially if they start to talk about a multi-year transition. Because, of course, most people think, “Hey, I want to sell my business. Where’s my check? And next week, I’ll be in Costa Rica,” or something.

Now, in the case of the 1099 employees, you can have a systematized, operating going concern with different people in that business. And people use the term contractor, they use the term employee. And there’s various legal tests or definition tests to determine if someone’s an employee or contractor. But you could have an employee, for example, in another country, and that person could work for you full-time. And you could be telling them what to do, and you could be supplying them with a computer, etc., but legally, they’ll be a contractor, because you don’t have an entity in their country to legally fill the role of their employer.

And so a lot of this stuff is kind of being moved around like a shell game. In our modern world, you’ve got people who are contractors, and you’ve got people who are doing what I would call piecework employee compensation. So you’ve got a video editor who edits your video, and you pay them per video, right? And is that person an employee? Are they a contractor? Well, you know, legally, we would have to look at: Do they supply their own tools? Do they have other customers? Is it up to them when they do the work? All kinds of things go into it. I would say it depends upon the replaceability of the person.

So if you have your systems all mapped out in your playbook—as you put it, Kate—and that person left you, and you could replace them, whether it’s with an employee or another 1099 contractor, then you still have a business. Because you’re orchestrating workflows and you are attracting an audience of customers that are paying you for whatever product or services that you’re delivering. And if you can get that system to function, then you’ve got a cash flow, and that’s ultimately what people buy.

Mel Gravely:
Dave, let me ask you, when you’re transacting these businesses, is there any either anecdotal or statistical outcomes you have around success of an acquisition? Someone buys someone else’s business. Are they successful? And what percentage of them are not?

David Barnett:
It’s really tough, because they’re all private transactions. I know that about three years after I got out of business brokerage, I was cleaning out my closet, and I found this old plaque I used to put on my wall of my brokerage. One of those plaques with little plates, and each one represented a business that we sold. And I looked down the list, and every one of those businesses was still open. But that was three years after I shut down the office. I shut down the office in 2011. Today, I think more than half of them are closed. And it highlights the fact that small businesses are the riskiest asset class there is.

There’s all kinds of forces in the market that work against businesses, and most businesses don’t last for decades and decades. And so, this is one of the things that I bring to the attention of buyers when I talk about things like their return on investment. But people will bring, sometimes, these big company tools or ideas into the world of small business. And when you’re looking at stock market investing, you’re looking at valuing the shares of these big companies as though they live forever. And big companies do have very long lives.

Small companies do not. When you buy a small business, you have to be able to recapture your capital you put in. You have to be able to pay your debt. And what’s left after that is all yours. But how much longer into the future will what’s left be there? And that’s what introduces the risk to the element. This is why these businesses sell for cash flow multiples that are so small compared to when you look at publicly traded companies.

Mel Gravely:
There’s another show there, if you haven’t already done it, Loren. I wonder what those factors are that make them the riskiest. I’m not surprised. I just wonder what the factors are that make that small business—and even the definition is unclear to me. What makes small business the riskiest asset class?

David Barnett:
It’s dependence on the owner. And it’s just the fact that an economic unit that is relatively small is more likely to be affected by all kinds of other elements in the market. If a new brand of soft drink comes out and is really popular in one town, Coca Cola might lose some sales, but Coca Cola is going to weather that storm. Whereas, if you’re a microbrewery with one tap room in a town and you’re doing well and another one opens across the street from you, you are definitely going to be impacted in a big way. And it’s just because you are a smaller economic unit with less momentum and less options.

Loren Feldman:
Mel, you asked a couple of really good questions there. We all have seen statistics for the success rate for business starts, but I’ve never seen, that I can recall, a statistic for success rates for businesses that are purchased. If anybody listening to this knows those numbers, I would love to get an email and hear more about that. Unfortunately, we are out of time, though. This was a really interesting conversation. I appreciate all of you taking the time. My thanks to David Barnett, Mel Gravely and Kate Morgan.