Andy Cagnetta – How Business Brokers See the M&A World

Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.

Hood & Strong, LLP — Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected]. 

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at [email protected].

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(3:59) – Andy’s background and career before acquiring Transworld

(7:25) – What’s the business model of a business brokerage?

(9:24) – How do you find someone who is contemplating selling their business?

(10:28) – What is your thought process behind growing franchises?

(11:41) – What are some of the most common questions or concerns business owners have when you start working with them?

(15:08) – What’s gotten more challenging about evaluating and buying businesses?

(16:41) – Do you find that sellers are consistently overvaluing their business?

(19:33) – What types of listings have a tough time selling?

(22:24) – What are some unique or vanity-play businesses that are tough to sell?

(23:49) – What percent of listings never sell?

(24:20) – How do you identify a good broker?

(25:50) – What are some common miscommunications between buyers and brokers?

(30:59) – What’s the broad perspective of buyers from the eyes of brokers?

(34:15) – How have you seen buyers distinguish themselves from a seller?

(36:41) – What are some ways buyers derail the acquisition process?

(38:44) – How much influence does the broker have over who the seller chooses to go with?

(40:09) – How impactful is a track record of previous acquisitions when compared to a new buyer? How can new buyers make themselves stand out?

(43:30) – What are some helpful tips for sellers to prep their business to be sold?

(44:56) – What should sellers do after they step away from the business?

(45:54) – How have you built relationships in different markets and communities?

(48:43) – What college class would you teach if it could be about anything?

(49:21) – What strongly held belief have you changed your mind on?

(50:04) – What’s the best business you’ve ever seen?

Alex Bridgeman: I’ve wanted to have kind of a discussion with the business brokerage perspective of the search fund world and folks acquiring small businesses. We hear a lot from the folks who are acquiring, but we don’t hear as much from the brokerage side. And I think there’s enough not known about it that it’s valuable to bring that discussion to the show. So, I’m excited to have you and talk a little bit more about that. But you acquired Transworld, as we were just talking about, which is wild to hear that this business brokerage was acquired in much the same way as many of your clients are. Can you talk a little bit about your early life? You talked about selling guitars and doing a bunch of other side businesses and then acquiring Transworld. Can you walk us through that journey of yours?

Andy Cagnetta: Yeah, I graduated from college, and I was looking to do something. And at the time, the economy was a little tight, so I wound up selling cell phones on behalf, starting my own business, and I had done a few little startup things along the way, selling lighting, selling guitars. I wound up in the guitar industry where my family had come from, they manufactured guitars for a hundred years. And I wound up in that industry because I knew some people. But selling guitars was not a very profitable thing. And I wound up buying a business in Connecticut with my family, and we bought this small little- it was called the Pasta Shop, and it was a gourmet food store/we used to do some catering, things like that. And we were young people. We were 20 something years old, and we bought it, me and my cousins. And we ran it for a couple years, and we wound up selling it just because everybody had had enough of the food business, and they were moving on to different things in their lives. And the process of buying and selling a business was a lot easier than doing a startup. So, I had met my wife and she had grown up in south Florida, so we decided to move to south Florida. And in the process, I said, well, let me go out there and see what kind of businesses I could buy in south Florida. And I ran into a lot of brokers, and I had never run into a broker before. I didn’t know what one was, had bought and sold the business myself. And for the most part, I felt like I was in a used car sales room with a lot of these brokers until I ran into Transworld. And Transworld was run by a 30-year IBM executive and his wife. They’re just both very, very nice people. And we wound up talking a lot and they liked me, and they invited me to join the firm. I was 30 years old at the time. And I joined the company, and I did well in my first couple of years. I sold a bunch of businesses, about nine in my first nine months. And I was like, wow, this is a great business. You could sell like one thing a month and make a lot of money. I kind of like this. And I enjoyed the variety of it all, just different businesses. And I enjoyed talking to entrepreneurs and helping them realize their dreams of either selling or buying. And so, two years into my stint, Don and Bonnie decided to retire; his full retirement kicked in at IBM. And so, I bought the company. And we had one office at the time; we had about 10 people working for us. And we kind of started growing the business, and we took on some capital from what is now known as Newtech. And we grew the company to 10 offices in the state of Florida. And it took us about 13 years to do that. And we said, gee, how do we take the next step? How do we go to Charlotte? How do we go to Atlanta? And I do believe that you need to be a local. You need to be a trusted advisor in your community to be able to be good at business brokerage. So we decided to franchise, and that’s when we partnered with United Franchise Group and franchised Transworld a dozen years ago. And now we have 200 offices. So, it’s been a wild ride.

Alex Bridgeman: It’s a fascinating story. Can you walk through what the business of Transworld looks like? Like what’s the business model, customers, what’s your team look like? Just walk us through the business model of a business brokerage.

Andy Cagnetta: So, in many states and here in Florida, particularly, we are set up like a real estate office. We are actually licensed. And we have independent contractors, like a lot of real estate brokerages do. So, everybody who works here is on a hundred percent commission. And when they close the deal, they get a portion of that commission, except for we do have administrative staff that are doing things like marketing and bookkeeping and management and training. And we have all those facilities, and we have all those things. And we provide our agents a home and we provide them with marketing tools, and we provide them with advertising. We provide them with the forms and everything else. So, we hire a bunch of people. And they go out in their community and we advertise as well and give them leads. And we’re looking, most of the time, it starts on the sale side. It’s been a buyer’s market for, out of the 27 years that I’ve been doing this, it’s been a buyer market for 25 of those years. Perhaps after 9/11, there was a little time where people were scared to buy something, and you could have gotten a really good deal. Perhaps in 2009 and ’10 after the Great Recession, you could have gotten a good deal. And perhaps, if you were bold enough to buy something just as the pandemic was hitting, you could have gotten a good deal. But other than that, it has been a seller’s market. So, we usually start with looking for sellers who want to sell. We sit down with them. We understand what their goals are. We give them an idea of what they think their business would sell for. And then we would market and package it. And then, eventually when we sold it, we would get paid a commission, and the agents make commissions as well.

Alex Bridgeman: How do you find sellers who are considering selling? It sounds like a type of client that needs a lot of personal relationships, hence the franchise model of finding someone locally. But how do you find someone who’s contemplating that sale decision and usually doesn’t tell hardly anybody about that aside from maybe their accountant or someone?

Andy Cagnetta: You do have to be present. And this business is usually based on referrals. That’s our number one source of new clients. And that’s getting to know the accountants and the attorneys and the investment advisors and the bankers and the landlords. And those are the types of people that might get an indication first that their client needs to sell. Other than that, getting to the clients directly, certainly we’ve done things like radio advertising, direct mail, literally door to door sales where we’re walking around and introducing ourselves and right through networking groups like Network Lead Exchange or BNI or other groups like that.

Alex Bridgeman: And then what does growth look like? So, you have new franchise locations, but there’s a lot that goes into doing just that. So, if you’re going to add a couple locations, what needs to happen for those to come about?

Andy Cagnetta: Well, we do- that’s another advertising model where we go out to the world, and we advertise that we want to sell franchises. And again, we sometimes use radio. We go to a lot of franchise shows. We have salespeople around the world with United Franchise Group, and they have people on the ground who are looking to buy. And then of course, there’s the online world. There’re all these portals that are either finding leads on LinkedIn, or they’re finding leads through advertising, and they’re funneling those to franchisors, and they pay for them. So, you get paid leads, and you look for people that buy franchises. Plus, of course, you get referrals. Once you’re a successful franchisor, people seek you out because franchisees are doing very well. And so, we see franchisees referring their friends and their relatives, and we have a lot of families in the business.

Alex Bridgeman: No kidding. When you talk to a seller for the first time who’s contemplating selling their business, what are some of the most common concerns or questions that they have that you’ve worked through over the last few decades working with owners?

Andy Cagnetta: Yeah, I mean, I think it’s twofold. Number one, confidentiality. This is not selling a house. We’re not going to put a sign on the side of the business saying this business is for sale. That is not something you want to do. You do not want to tell anybody the business is for sale, even employees, which can be a sticky thing depending on who the employee is. But you’re best off trying to keep it to yourself. And what we tell sellers is, is we’re going to do this confidentially, so that everything’s confidential literally until the day of closing. Sometimes things can leak out and we have ways to work with that as well. But for the most part, we’re not going to tip off to vendors or suppliers or to customers or to landlords that this business might be for sale because perhaps they would lose confidence in the future of that business. Number two, their concern is how much am I going to get for this business? So, the first thing we usually do, and I have financials that are literally sitting on my desk all the time because I did go and get my valuation credentials, we do sit down with business owners and we say, let’s take a look at your financials. Let’s look at your historical financials. Let’s predict into the future what a buyer may expect to receive in compensation for owning this business, and then we can value it. And that’s based on multiples of earnings usually and usually their historicals come into play.

Alex Bridgeman: And how has that changed over the last couple of decades in terms of evaluations or process, confidentiality? How have some of those factors evolved or changed over time?

Andy Cagnetta: Well, there’s a few things that have changed. Number one, being able to find buyers changed because when I got into this business, the way we used to advertise is put ads in newspapers. So, to try to get the word out, even beyond the local area, was very, very difficult to do. Now with the internet and things like BizBuySell out there in the world, you can get the word out all kinds of places, Axial. There’s lots of platforms that are advertising businesses for sale, including ours. The number two thing that’s gotten better over time, I think, is trying to predict how much these businesses are going to make or prove how much these businesses are making. When I first got into this business, there might have been businesses that had a lot of cash sales or did a lot of things to make their tax burden be lowered by hiding income. And that has basically, for the most part, gone away. Now, I just saw a business yesterday where it happens to be a tire repair business, still has a significant portion of cash, but that’s not usual. What’s happening out there in the world is there’s credit cards, there’s things like Venmo, and there’s things like online payments and there’s things like point of sales systems, there’s inventory systems. So, for the most part, businesses have much better books and records and much more historical data to be able to predict what a buyer’s going to make in the future, which makes everyone’s lives a little bit easier.

Alex Bridgeman: What would you say has gotten harder?

Andy Cagnetta: There’s a few things that have gotten harder. Just in terms of predicting things, we just have gone through a two-year mess of a pandemic. And so, if you were to ask me at the beginning of 2019, how business was going to do, I’d say, well, ’17, ’18 and ’19 were just rocket ship rides, things are going great. And then all of a sudden, we have 2020 and everybody’s retracting trying to figure it out, get PPP money, try to bail themselves out. And then six months later, we’re back to the races. And 2021 was a historic year for many businesses or at least a recovering year. And 2022, we’re getting through the year, and people are looking much more toward exactly what a business is doing today. So, I think that’s hard. I mean, people are trying to predict what a business is going to do based on all kinds of things that are going on in the world. And it may be getting a little bit scarier. I think some of the harder things is real estate prices. So real estate prices have gone up, and that includes commercial real estate, and that’s in flux because maybe office space will be more available because people are working from home. But whatever it is, the value of real estate has gone up so much that it’s made it somewhat untenable for businesses to be able to afford that real estate if they had to buy it today. So, that becomes more difficult for us as well, to get deals done.

Alex Bridgeman: And on the seller expectations point that you made a little bit earlier, when a seller considers the value for their business, before you’ve done any valuation work on what it could be worth, do you find that sellers are consistently higher or lower than what you believe the fair value of their business is?

Andy Cagnetta: I think sellers always hope that their businesses are worth more, but I sometimes I find that sellers are pretty realistic. Again, good news in the world, there’s so much information out there in the world now where even on our own website, tworld.com, they could go on and they could figure out what their value is based on a range. Now it’s a very, very wide range. But there are tools out there for them to look at, deals that have happened in the past. I was just on the phone with Darren Mize from Gold Coast Valuations, GCF Valuation. And what he has is a thing called PeerComps, where it has taken all the SBA loans that have been sold and has the models and has the multiples for those industries, and he’s up around 14,000 transactions. This is stuff that didn’t exist a decade ago.

Alex Bridgeman: When you have a seller who thinks their business is worth much more than you believe it’s worth or the market says it’s worth, how do you manage expectations like that? Is that something that can be managed, or in a lot of cases, is that someone that is just not ready to sell yet?

Andy Cagnetta: Well, it could be someone not ready to sell, but what we found is we’re not going to be able to change their minds in one conversation. And certainly, they’re not going to believe us, perhaps because they’re going to think that the brokers are just trying to get a quick deal and make a commission. So, what we have to do is educate them to the marketplace. And we can pull those data from those databases. We can show them transactions that have happened in the past and/or simply put the business up for, and either it’ll get ignored if it’s too high, and we have statistics that basically say businesses that are 15% and higher from their eventual sale price do not sell, therefore businesses that are listed too high get ignored. Businesses that are within the range of selling sell much more often. And again, I think that’s just an education thing. People have the ability to compare deals now. They could go onto portals and see all kinds of businesses for sale. And they understand what they’re getting into. So, no one’s going to buy a ridiculously priced business. And so, once it starts getting into that range, it could be a lot more. Sellers eventually will get there. We just have to educate them to the process. They have to hear it from the buyers. They have to get offers. And we can help them do that.

Alex Bridgeman: What are some other types of data or listings that have a really hard time selling?

Andy Cagnetta: Well, I think exposure to marketplace is one. So if you sign up with a broker that doesn’t advertise everywhere or doesn’t spend enough on advertising to get you out there, I think that’s a problem. I think there are industries that are inherently harder to sell. And maybe a very specialized business that is personal in nature. But we’ve sold dental practices. We sell psychology practices. I mean, imagine you go to your psychologist and it’s someone new. And while those businesses don’t sell for a high multiple, most people are willing to buy them because it gives them a head start. Veterinary practices are very hot to sell, accounting practices. These are very personal things that people want to buy. One of the other hard things to sell is asset deals. So, where the asset value of the business is not justifiable by the earnings. So, for instance, I have a very well-known recording studio for sale in a very, very famous place for music. I won’t mention where it is – I don’t want to give it away. So, it’s a very nice recording studio, lots of gold albums, lots of platinum albums, top notch people that have been through there, very historic. The problem is it doesn’t make a lot of money. And it’s a sort of a- like, we were selling a vineyard. Again, beautiful piece of property, but the price of the property made it so hard to buy the vineyard because the vineyard really didn’t make a lot of money. And sometimes it’s like sports teams, it’s a vanity buy. Somebody buys it because they have lots of money and they just want something like that. So those are tough to sell though. It’s really hard. And we do pride ourselves of being able to find a needle in the haystack. We just sold a business, if you’ve ever seen the Human Body’s exhibit in museums, where you go and they have the actual human bodies that are preserved in a special way, we just sold that business. We sold it to a museum in the panhandle of Florida that has a dinosaur museum and is now going to have this human body exhibit. And who’s going to buy, literally, 20 dead humans that have been preserved and 200 body parts? But we were able to get it done.

Alex Bridgeman: I think that’s probably one of the wildest deals I’ve heard.

Andy Cagnetta: It is the wildest deal. And I took it on specifically for that reason because I said if we get this one done, we can sell just about anything.

Alex Bridgeman: What other businesses fall into that unique or vanity play type businesses?

Andy Cagnetta: I said the sports teams. Sometimes the boating businesses we see out there where people are being a charter boat. Again, the boat is very expensive, very tough to sell. We did sell the Mai-Kai, which is a very famous restaurant, Tiki restaurant. And I did not know this before we got into this, but the Tiki culture is a big thing. They have annual retreats and meetings for the Tiki culture, and the Mai-Kai, which is based here in Fort Lauderdale is a very famous place. We put it up for sale, and we got response from all over the world. Now, they didn’t care if it was confidential or not. They really wanted to save the brand. And we found someone who wanted to save the brand. We have a hamburger, a 50-year-old hamburger company for sale in another part of the United States. And it’s hard to find that someone who wants to buy it. Again, the real estate is worth a lot of money. The business, the original owner has passed away, and the business has not been run optimally. And so, therefore, the earnings do not justify the purchase price that you would need to buy the physical plant of these three locations.

Alex Bridgeman: What percent of listings never sell?

Andy Cagnetta: We’ve tracked that a lot over the years. Historically, business brokers, they say only one in five businesses that come to the market actually sell. I think it’s a lot higher than- I think it’s a lot lower than that. I think it’s somewhere around 50%. I think eventually about 70% of them sell. It’s just that that broker doesn’t sell it. And so, I think most things will eventually sell if they get to the right price.

Alex Bridgeman: Yeah, you mentioned depending on the broker. What would you say from a broker’s perspective, but also a buyer’s perspective, how do you identify a good broker?

Andy Cagnetta: I think a good broker is a good project manager. They’re not necessarily a great salesperson. I think people who come to buy or sell a business have in their mind that that’s what their ultimate goal is. They just need to be guided through the process. And it’s a jungle. I mean, it’s just a lot of things could go wrong through the process. So, you need someone that has the experience of going through that process. I don’t think you need someone that is experienced in selling a psychology practice. Sure, that helps, but the process of going through and selling a business is something that we do over and over again, and dealing with the landlords, dealing with the SBA lenders, dealing with the buyer, dealing with the seller, dealing with the accountants and due diligence. Those are the important things of knowing what’s customary in a business, so when a seller says, hey, I want the buyer to put up their house and I want all their kids to sign personally, that’s the stuff that’s outside the bounds. We have to look at them and say, no, no, no, check your reality. That’s not going to happen. So those are the kind of things that we have to kind of go through. So, a great business broker is someone that has a calm demeanor, is someone that can rationally think through, and is a good problem solver.

Alex Bridgeman: One thing I know we talked about earlier was there’s often a disconnect, especially with like sub average brokers with buyers where they just either don’t get along or there’s just some mismatch or miscommunications back and forth. A lot of our guests on this podcast have been on the buyer side, but I would love to hear what are some of those common miscommunications or things that buyers just don’t understand from the broker perspective that you think are most common in any sort of conflict or disagreement or miscommunication within that process?

Andy Cagnetta: Yeah, I think the hardest thing for buyers is it’s the tougher side of the deal right now. So, a lot of buyers are frustrated because the brokers don’t answer the phone. And I feel for them. I understand that. I have family members that have bought businesses in the past. And my advice to them is that it is a full-time job to go out there and buy a business. And one of the things you do is you have to prove to the business broker that’s going to spend time with you that you are serious about buying a business and that you are loyal to them because what brokers have experienced in the past is someone calls on their business. So they’ll call and they pick up the phone and they show them their business. They say, “Ah, I don’t like that one. Show me more.” Well, this is where the broker is taking a big risk. So are they going to spend the time trying to go to chase down other brokers and try to cut a deal to make sure that they’re going to get paid? Now, here in Florida, we have a standing deal where we co-broke all the time, but that’s not true everywhere, which is a frustration of mine. We could talk about it in a few minutes. But are they going to go and chase other deals for that buyer? Because sometimes the buyer calls back and says, after they’ve done six months of work with them, calls back and says, “Yeah, never mind. I found something,” or “I got a job and I’m just done.” So, most of the time, what the brokers are going to do is they’re going to sit back and they’re going to sit with their sellers, their files, and they’re going to work their files because what’s going to happen, and this is bad news for buyers, too, we just put out a deal yesterday, and it got 100 responses, and there’s already 30 NDAs out on this. And it’s possible that we’ll get half a dozen offers on this one business. And so, when a buyer calls me up and says, well, I want something that’s niche. I want something that has recurring revenue. I want something that somebody’s retiring. I want something that’s growing. I want something that has low employees. I want something that’s nine to five. And I look at them and say, if I find that business, I’m going to buy it. There’s no perfect business out there. You’re going to have to work hard. And so, I tell my own family members, I’m like, listen, all I ask is go out there in the world, go on BizBuySell, go on tworld.com, go on all the websites, copy down the ad number, send it to me. I’ll call the other broker and I’ll try to chase it down for you. Let me be your representative. And I’ll look for deals. And I’ll be honest with you – hey, listen, I’m not sure I like that Pack N Ship store, hasn’t made a lot of money over the years. I’m not quite sure how you’re going to grow your Pack N Ship store. By the way, Pack N Ship is doing great these days with the internet. But it used to be a tough business to buy. It didn’t make a lot of money, tough to grow. So, I would say, maybe you’re more talented at doing something else. It’s the way I feel about gas stations right now. How much extra business could you bring to a gas station? Are you going to start dragging cars off the street? For the most part, gas stations, you’re going to want to buy multiples of them because they make what they make. And so, I try to encourage people to try to go out there and get educated because what’s going to happen is there’s a low inventory right now, and they’re going to go out there in the world, look at all the inventory and come back to me and say, “Andy, I don’t see any good deals.” And I can agree with them. I’m like, there’s not that one business that’s perfect for someone who wants to build a team, build a brand, go out there. But what happens is that business will come up for sale. And they’re going to be one of the 100 people that respond, and they’re going to have to stand out. And how are they going to stand out? They’re going to take a meeting as quickly as possible. They’re going to get in front of the seller. They’re going to be organized and tell that seller why they’re going to make their baby a much better place and save their baby and make sure their baby lives on for a long time. Because these sales are the seller’s babies. And they’re going to put in a good offer at a good price. And they’re going to be ready to rock with their cash in place or their banks in place, and they’re going to be ready to buy. Because that’s what it takes.

Alex Bridgeman: Yeah, there’s a few factors there of businesses with recurring revenue that have low employee counts, which sound a lot like the filters that a lot of search funds use and independent sponsors use to acquire businesses. What’s the broad perspective of search funds, independent sponsors, individual buyers from brokers? How do they view those buyers?

Andy Cagnetta: Well, I mean, so the people who are “pledge funds,” that people will give them money if they find a good deal, those are tough. I mean, we look at them a little bit with scrutiny because there are sometimes better buyers out there. The strategic buyers that have a balance sheet that are ready to the deploy it if they find a good deal or sometimes the easier and more lucrative way for a seller to sell. So, the independent sponsors. Now, the independent sponsors can be a good deal. We had these two kids – I’ll call them kids, they were out of college – and they wound up buying a painting contractor that was earning about a million and a half dollars. Now, no private equity group wanted to look at a painting contractor. This is boots on the ground, getting crews out there to paint buildings, and doing estimates for customers and dealing with all the things that happen in a painting contractor’s life. But it made a million and a half dollars. And these two kids, they either both went to Harvard or one went to Harvard, so they were real kind of business school kind of geeks that were putting everything in a spreadsheet, and they came out, they wound up buying this thing for about three times earnings, which is a low multiple that was a very good cash flowing business. And they went out there and leveraged themselves and found the money. So, for us, we had a business that perhaps wasn’t sellable to a strategic, perhaps wasn’t sellable to an individual broker, because it’s outside an individual broker’s kind of scope to spend almost 5 million on a painting contractor. But these two kids saw something and said, wow, this is a way for us to make our mark and make money. So, I’m never going to turn away a buyer. We just want to know that they’re for real. So, I will give some buyers some advice. I mean, number one, you have to have a realistic LinkedIn profile. If I go looking for you on LinkedIn and you’re not there, that’s red flag number one. And then my second question to you is if you don’t appear anywhere on social media – I can’t find you in Graduate for school, I can’t find you in any charity events, I can’t find you anywhere, who are you partners with, or who’s your attorney or who’s your accountant. And if they tell us who their accountants are and who their bankers are and who their attorneys are, and none of those people are online, then we’ve got a problem. So, you really have to kind of build out your team, too, and have a real team as an independent sponsor. And if you can have, hey, my college buddy’s at Greenberg [inaudible [RD1] 33:50] and he’s going to be on the team, and I have someone at Ernst & Young on our team as well, and I have a local CPA practice that’s going to be doing our due diligence, and I have these two bankers that I have a letter from saying that we’re behind them on their first transactions. If it’s your first transaction, you’re going to have to do stuff like that.

Alex Bridgeman: Yeah. And you mentioned earlier that speed and promptness, offering a good price, and getting a meeting with a buyer or the seller as quickly as possible was a way to distinguish yourself as a buyer. But once you get in front of them, what are some ways that you’ve seen buyers distinguish themselves and make themselves a better buyer for someone’s business?

Andy Cagnetta: Well, I think the seller wants to know what’s going to happen to their business. And we did recently have a fairly large transaction where the seller knew that the buyer was a strategic buyer, and the whole business was just going to go away. They just knew that that’s what they were eventually going to do. And the buyers were like, no, we’re not going to do that, we’re not going to do that. And day two, after they bought it, they just closed the whole thing and absorbed it into their current facilities. So, if you’re an independent buyer and you want to go in there, show the sellers that you’re sincere about taking that business and preserving the legacy and preserving the employees. Because a lot of times, that’s what they want to see. And they want to see that you have a plan, and they want to see that you have resources and they want to see that you are excited. And you want to show up and look for real. I mean, I’ve had some people show up for some of these meetings and they’re in flip flops and they’re in a golf t-shirt, and they’re just look like they’re a mess, or they just came off the golf course. And I’ve had some billionaires show up looking like that, but so they’re billionaires, they can get away with it. But if you’re just a regular person and you’re a young person, you’ve got to show up and have a plan. And let the sellers do a lot of talking. They want their stories to be heard. And I always tell buyers, for six months, you buy that business, I don’t want you to do anything rash. Just sit there for six months. Just operate the business like the seller was operating the business. And then, you can start tweaking it. But coming in there day two and tweaking a lot of things is usually a recipe for disaster. And the sellers don’t want to hear that. The sellers don’t want to hear that you’re going to fire employees. They don’t want to hear that you’re going to move the facility because a lot of times they’re on the hook. Most businesses have some sort of seller note, earn out, something where the seller’s on the hook, and they want to make sure that the buyer’s going to do the right thing.

Alex Bridgeman: What are some other ways that you’ve seen buyers derail acquisition processes?

Andy Cagnetta: Well, they don’t tell the truth. One of the things we- and simple things like have you been arrested before? And if you have been, just tell us the story. I mean, there are stories out there where kids are 19 years old and they’re down at Mardi Gras. And this one guy literally went to punch a horse and it happened to be a police officer’s horse. And that’s called assault on a police officer. And he literally had a felony in his background. But he told us about it up front. And he said, “Listen, if they do any research on me, they’re going to see this story. This is the story.” That’s okay. Not telling us things like bankruptcies, not telling us bad things that have happened is a recipe for disaster. And I think the other thing buyers can do is try to focus on one deal. Don’t try to buy three businesses at the same time or decide I’m going to put three businesses under contract, run three mutual due diligences, and then make a choice. That’s another recipe kind of for disaster. So, I would just tell buyers to be truthful, upfront, if they don’t have the knowledge to buy the business, tell the seller that and tell the seller how important they are going to be to them afterwards. I will tell you that when we leave a buyer meeting with a seller and that buyer makes a good impression, I will get a phone call or the seller will run out in the parking lot after me and say, “That’s my person. I want that person to buy this business. I will do anything to make that happen. I’ll give more seller financing. I’ll lower the price. I’ll do an earn out. That’s the person I want running this business.” And so that’s what could happen if you make a good impression as a buyer.

Alex Bridgeman: How much influence does a broker have over who the buyer ends up- or the who this seller ends up choosing as their buyer, or at least choosing to go down the process with a certain buyer?

Andy Cagnetta: I think a lot. I mean, we’ve certainly been in competitive bidding situations before where we have to sit down with the seller. And so, we have to come up with a spreadsheet perhaps of what the proceeds will look like post-closing. So, money perhaps comes in. But a lot of times money’s not number one. Number one is the buyer’s going to close. So you go back to someone who’s a pledge fund or someone who’s a sponsored buyer, and if they don’t have access to that capital and they’re going to have to go through a lot of machinations to try to get it done, oftentimes sellers will take a deal that’s cash that will close much quicker if they’re ready, if it’s going to close faster or if it’s a more known quantity’s going to close the deal. So I think that’s- when we try to guide our sellers, we’re telling the sellers, listen, number one, who’s going to close, number two is who’s going to get through the process of closing, and perhaps number three is the eventual purchase price.

Alex Bridgeman: How impactful is a buyer’s previous closes on other businesses? So if you have two buyers you’re looking at, one’s never closed before, never bought anything, but one has bought maybe two or three businesses, maybe even in the same industry, how much more weight do you give that experienced buyer versus the new buyer?

Andy Cagnetta: I mean, I think a lot. A point to the Mai-Kai restaurant before, the person who bought the Mai-Kai brought back an old hundred year restaurant in Miami, in Calle Ocho. He had bought several other properties in Calle Ocho, brought them back, brought back a taco business and now is expanding that, brought back a breakfast concept that he’s now expanding, has dozens of locations. So, when we presented that buyer comparative to another buyer that was local who had plans to knock down the building, and again, all the sellers wanted was that legacy to continue, this guy was like, “No, no, no, I’m all about the history. I’m all about the old pictures.” They were actually cleaning out the place and he says, “Please don’t take anything out.” The old pictures, the plaques on the wall, the dollars taped to the wall, I mean, that’s the kind of stuff that he wanted, and that resonated with the sellers. So, I think it’s very important to show that the buyer has a track record.

Alex Bridgeman: And if you are a buyer for the first time and you have not acquired a business before, and you’re going up against a lot of experienced buyers in that type of deal you talked about where there’s a hundred people reaching out, how does someone stand out? Maybe they can’t stand out in the first deal, but over six months or a year of getting to know this potential buyer, are there ways for that potential buyer to distinguish themselves in a broker’s mind so that when that hundred inquiry deal comes up again, they’re a little bit higher up on the list?

Andy Cagnetta: I laugh, but I say bring your spouse, bring your dad, bring your mom, bring your family to the meeting, bring a business partner, an advisor. I had a very young advisor once upon a time, and he’s a very successful advisor, but he was 20 something years old, and I was, again, I had just turned 30 years old and to walk up to a 65-year-old and say “Trust me” is a tough thing. But what I was able to do and what a lot of- I’ve seen what happens when a seller will pick an inexperienced buyer because they have a young family, they’re willing to work harder, they’re going to put the time in and spend time at this business. Not like 60-year-old guy who’s bought 15 of these things and he’s just going to try to put a manager in and let the business run. A lot of business owners want that buyer to work their business. And so, if you’re a young person or someone that has never bought a business, just look at them and say, “I’m going to put more work in. I’m going to be interested in what you have to say. I’m going to help continue your vision.” And a lot of times that resonates with the sellers.

Alex Bridgeman: And on the seller side, what are some helpful things that sellers can do to prepare themselves and their business for being sold?

Andy Cagnetta: This is why I write books. I literally wrote a book about selling a business. And the reason is I want people to prepare. You’ve just got to think about it. And the number one thing you could do is just keep good books and records. I mean, if you just stop brutalizing your business to save on taxes and realize that you just have a partner in business and it’s called the federal government and have good books and records, have an inventory system that actually works, have a processes and policies in place, go out and read the E-Myth and understand how your business actually operates and document it. Those things will make your business much more sellable. And if you grow your business before you sell, instead of running it down, no one likes to buy a business that’s running down. The SBA actually will not lend money based on that. So, your business needs to be steady or on its way up. And if you just went through the pandemic and you had a rough 2020, and you’re recovering in 2021, and 2022 looks like it’s going to be as good or better than 2019, and you’re 70 something years old or 60 something years old, it is time to seriously think about selling your business.

Alex Bridgeman: What do you recommend sellers do after selling their business? Assume they’re not working in the business anymore, or they’ve already done their 3 to 6 months.

Andy Cagnetta: Yeah, if they’re not working in the business anymore, of course, everybody wants to take that time off and then usually people get bored. I just tell sellers, I mean, number one, selfishly, I would tell them think about joining Transworld, love to have you. Business owners who have sold their businesses turn out to be great intermediaries. I also encourage people to get involved in their community. The nonprofit world needs good people. It needs people that don’t necessarily work because they need money, they work because they need fulfillment in life. And I forget what the name of the book is, but it talks about the second half of your life. And that’s what it’s about. It’s about leaving a legacy. So, if you haven’t left a legacy in your business, maybe it’s time to leave a legacy in your community.

Alex Bridgeman: You’ve talked a lot about trying to establish good relationships in various regions and cities, and that’s part of the franchise model is having someone local, and a big part of building relationships in a city or location is giving back to that community in various ways. What are some ways that you’ve effectively built relationships in different cities and regions through either charity or giving back in some way? What does that look like?

Andy Cagnetta: Yeah, I think it is getting involved in your community. I happened to- one of my earlier involvements at the Chamber, trying to get involved in local community, was on a leads group. So, I thought networking was the thing to do at the Chamber. And I wound up getting involved with a charity locally that is a soup kitchen and emergency food pantry, and they had a broken air conditioner. I helped them fix it through some of the businesses that I had sold. And they invited me on the board. And I eventually became the Chairman of the Board, and we built a building, a $2 million facility to help feed people and clothe people and do social services. And I said to everybody on the board at that time, I said, “Hey, listen, everybody needs to raise money. I don’t care how you’re going to do it. Go out and raise money.” So I said, because of my pasta shop experience that I talked about earlier, I decided to cook dinner for everybody at the facility and have a Sunday dinner. And so, I did that, and four years into it, we were just jamming. We were sold out, couldn’t fit any more people inside of that facility. So, we moved it to the local catering hall. And now 20 years later, we just celebrated our 20th year, we raised $365,000 this year. We had 900 people present at the Andy’s Family Pasta Dinner. It’s been a great run. And I didn’t do it just to build my business, but it has absolutely helped my business. I just believe if you’re going to be part of the economy, part of that economy is giving back and supporting those who are less fortunate. And so, it has been incredible. Because of that, I’ve also been invited to be on other charitable boards, and I’ve been invited to be on the hundred CEOs of Broward County called the Broward Workshop. And I just rolled off being the chairman of the local United Way. And I’ve traveled the world with both Junior Achievement and the United Way, doing things for them. So, it’s just brought us so many opportunities and it’s just a great way to go out there. And it helps build yourself. I mean, going through strategic planning meetings and going through board trainings, all those things teach you how to be a better business owner.

Alex Bridgeman: Yeah, I definitely agree. Moving to some closing questions. What college class would you teach if it could be about any subject you wanted?

Andy Cagnetta: I do teach a little bit, and I teach about negotiations. I love that. I love the book Chris Voss wrote, Never Split the Difference. So negotiations.

Alex Bridgeman: How do you structure that class? Do you teach that or is that something you wish you could teach?

Andy Cagnetta: No, I do teach it. I do teach it. And I usually just talk about negotiations for, it’s about an hour, an hour and a half. I teach it to nonprofit executives. I just got done doing that. We talk about getting the big check at a nonprofit. So I do that every year.

Alex Bridgeman: That’s fantastic. What strongly held belief have you changed your mind on?

Andy Cagnetta: I mean, I don’t know whether to make it funny. Like my one strongly held belief was I didn’t like Broadway musicals, and my daughter loves Broadway musicals. She’s trying to make her way up in New York right now. And she brought me, or I got dragged to go see Wicked when she was a little girl, and I was like, wow, wait a second, this stuff is really good. So, I love Broadway. I actually wrote a play, a musical with her, and it’s been kind of a family project over the last five years. So, she has definitely changed my mind about musical theater.

Alex Bridgeman: What’s the best business you’ve ever seen?

Andy Cagnetta: There’s two that come to mind. And I’ll let you pick from when I’m done with that. So, one of the best businesses I ever saw was a distribution business in Miami that distributed nothing but wheels. It was a caster distribution business. And I was fascinated by it because it was in a small little warehouse, been around for 20 years. The owner had three staff members. He used to come in like two hours a week. And he used to have a golden goose on his license plate. And it was like his little motto. He had like things embroidered with a little golden goose on it because this business kept laying golden eggs for him. And it would make money year after year after year. And very low maintenance business, had three employees that basically took care of it, had long term clients like hotels and cruise ships and distribution companies that needed wheels, replacement wheels on things like dollies and all kinds of things. And it was a fascinating business. And I was like, wow, so simple, little warehouse that you would never pick out as that’s a business that’s making somebody half a million to almost a million dollars a year, year after year after year. So that was one of the best businesses I’ve ever seen.

Alex Bridgeman: That’s fantastic. Thanks so much, Andy, for coming on the podcast and talking about the business brokerage side of buying and selling businesses. It’s been great to have you and chat a little bit about it. Thank you.

Andy Cagnetta: No problem. Great talking to you. Thank you.