This episode is unique and is a joint episode with Karen Spencer from Searchfunder, Walker Deibel, and myself, and is something I’m calling “Author’s Chat.” I recently sent out a survey to see what content listeners and readers might enjoy hearing most and many of them said that conversations with authors of books relevant to micro PE would be interesting to them. This is one conversation along those lines.
Karen and I’s guest, Walker Deibel, is an acquirer of 7 businesses, author of the book and site Buy Then Build, and is an active investor and advocate for entrepreneurship through acquisition. This conversation focuses on his book and lessons and stories from his investing and operating experience. I hope you enjoy our conversation and if you want more episodes with authors, please let me know!
Karen Spencer: We learned that you have acquired seven businesses across a broad spectrum of fields, are there any acquisitions you regret that you weren’t able to make happen?
Walker Deibel: Wow, what a great question, Karen. Kicking it off with a good one. I think it’s one of these where like any funnel there’s always a lot that you look at. And then there’s a lot that move through and for whatever reason they might fall out along the way. I would say, at every stage, there’s going to be opportunities that I haven’t been able to capitalize on. So for example, there was one that got pretty far and deep into the funnel, to the point where I made an offer, I was the only potential buyer. But it was a start up company that had fallen on hard times. It was a tech company, and I was trying to leverage my existing customer base with the technology that they had. And it was more affordable for me to buy than to start it up. And it was one where we just couldn’t come to terms with the valuation. Very future looking, and I couldn’t get that done.
The biggest one though, is probably, or I should say the most common is one where I’m looking at a business, it’s one that I really want to buy, I make an offer, and I’m just outbid for whatever reason. That’s probably only happened about three times, but each one of those times is very clearly memorable. And you find yourself in this position where you’re kind of reacting to it. Like you’re calling the broker, going, “Hey listen, I mean if I increase the bid 5% does that just get this done? Or where are we?” And it’s kind of you’re on your heels, it’s an act of desperation, but yes, at every stage.
And there was one where I really wanted to buy, but the timing was wrong for me. And then that seller ended up not wanting to sell anyway. So again, just at varying points in the funnel in terms of what actually hit, yeah. And I think that’s going to be pretty common for people that buy.
Karen Spencer: Are there any acquisitions you made that you regret having made?
Walker Deibel: I don’t want to go into detail, because of course there’s other people involved. But I would say that it was a smaller acquisition. It was maybe the smallest I’ve ever done. It was kind of what I just described. It was a little bit of a growth through acquisition. And in B school, they kind of talk about listen, a lot of the M&A activity doesn’t actually capitalize on the value that they think you’re going to get from the acquisition. And let me explain why that is. Culture or whatever. And then it’s like yeah, yeah, yeah, whatever.
Well, I would say that I didn’t really gain the value that we thought we were going to. More than anything, I could probably anchor that on, seven is a lot of acquisitions from one perspective. By another perspective, it’s not a lot at all. In a way, its very rookie. I’ve done it. I’ve been around the block. But I’m operating more of an individual acquisition entrepreneur as opposed to someone with a professional team that has this process.
In that one, I would do it again. It all was logical and made sense, but I think it just didn’t capture the value that was anticipated. Probably because of integration, failure on my part to integrate more effectively.
Karen Spencer: Were there any, kind of warning signs heading into that, that you might have dismissed or ignored or was it something where it kind of popped up later for you on the integration side?
Walker Deibel: If I really dove into why I think I didn’t capture that value. I think, what I would say is that we didn’t have a written plan. A lot of times, when you’re putting together a purchase agreement for example, there’s always negotiation back and forth. I don’t care how much everyone has the same goal, and thinks they’re doing the same thing. Even if it’s just like this, there’s always some, as you write things down, people want more clarification and you start to all get on the same page. We didn’t do that, in terms of an integration plan. And there was really, me and a few other people involved in this integration and it was about thirty days after the closing that I came to terms with okay we’re all on different pages, we all had different goals, we all had different assumptions on who was doing what.
So in a way, very 101 level stuff. At the same time, it was a great learning experience, because now every time I buy a business, I’ve got the next 90 days at minimum planned out with names by whoever’s doing what, and have learned from that mistake. And it wasn’t something where we didn’t capture enough value. It’s not like I bought a company, I know of people who have bought companies and things just don’t work out, and it’s a total disaster. It certainly wasn’t that, I don’t want to paint the wrong picture. It was just something where it was just lame and in retrospect you say, “Okay, was that worth it?”
Karen Spencer: I want to harken back to something that you said a few moments ago, which you talk about in your book. Which is, buying a company and valuing it based on its past performance while you’re looking towards the future. And you just mentioned how VCs are looking at the valuation towards the future, which is two different numbers. Right?
Walker Deibel: Yes.
Karen Spencer: My question is how do you persuade sellers that your valuation is the appropriate one?
Walker Deibel: Sure, great question. Can I answer this question in two parts, there’s a foundation I want to talk about and then I want to go there.
I think a lot that you have to look at the underlying reasons why startups are valued where they are. If you look at why that is, what I’ve decided, what I’ve come to terms with, is that what start-ups are trying to do is raise money and with that money, they’re trying to build an infrastructure that then will generate revenue that is then profitable. So they’re trying to build the infrastructure. And what they’re saying is, “Look, I can build this infrastructure for a hundred and if I build that infrastructure and it really works, it’s going to go to a thousand. So instead of charging you a hundred. I’m only going to charge you eighty, because I can build it for this amount or whatever. So I’m going to give you extra value, and build it, and later you’re going to get all of the upside, or a huge percentage of the upside because you’re taking a risk on me.”
So if we base it on, I can build this vehicle that can generate one hundred million dollars, so I’m going to give you a valuation of eighty million dollars. They’re like, “That sounds great.” Reduce zeros, increase zeros, whatever makes you more interested.
With buying an existing business, what you’re doing is you’re saying, I’m looking for a profitable infrastructure to begin with. Then I’m going to start my entrepreneurial journey from there.
That’s not entirely true. You’re obviously bringing ideas and experience and whatever to it. But the point is that you’re looking for that infrastructure and matching your own skillset or your own vision to it.
The benefit of having that existing infrastructure is that one, it already has a track record. Two, there is a private market with a valuation of a business like that.
So, I think that the first couple of times I tried to buy a business. The first two or three times, I tried to go directly to a potential seller, and kind of was along the lines of, “Look, I don’t want to be too forward. I don’t want to make any assumptions, but I would be interested in acquiring your company if you’re open to it. Both times, they were interested, “Okay let’s talk.” But it is the equivalent of someone walking up to your house, knocking on your door and saying, “Hey I’d like to live here. Can I make you an offer for you to move out?” They’re like, “oh yeah, this sounds great. We’re going to way overcharge you.”
The other thing is that it’s also not, the private capital markets are not competently understood, so I also do some M&A advisory work right now. The biggest learning curve is just talking to sellers that are ready to sell and educating them on the private market and how valuations work, and what their company’s going to be like, what it’s going to be valued at. So I basically say, “Here’s the range, but once we start working together, we’re going to be able to fine tune that.” But they start to, by taking their company to market, they mentally prepare themselves. That sometimes can take months or years, but they start to understand how it works. They start to understand the valuation of their company and when someone, when a potential buyer approaches a company that is actively listed for sale, then it’s a lot easier because that seller’s already been through the learning curve.
Both times when I approached someone who hadn’t been through that and I wanted to buy their company. Both times, they wanted twenty times EBITDA, without fail. And it’s was like, “Okay, that’s not how this works.”
Both of those companies were under ten million in revenue. So twenty times EBITDA was not the valuation I would’ve given them.
Karen Spencer: Yeah I’m not even sure I would move out of my own home for twenty times the valuation.
Walker Deibel: Right. Entrepreneurs are proud, man. These are their babies. We start these companies from scratch. The few that get there, they know what it takes to put into it and they value that pretty highly. So you can’t blame them. At the same time, it’s not market value.
Karen Spencer: In your book, you talk about ferreting out when a seller is trying to scam you. Particularly about their reasons of why they want to sell their business. Do you have a specific instance that you recall of that happening in your conversation where you’re sensing that that’s not the whole story coming from the fellow?
Walker Deibel: Great question. I want to go a different way with this. I want to say that, especially first time buyers, the number one question they have is, “okay, why are they selling.” And all I’m trying to say in the book is that, everyone is always worried that the seller is some kind of situation where they know that certain death is right around the corner and they are just trying to just “unload it” real quick right before. It has been said that before a transaction, sellers have all the information and none of the money. And the buyers have all of the money, and none of the information. Then after the transaction, the seller has all the knowledge and all the money, and the buyer has no knowledge and no money.
It’s an important question, why are they selling. It is an important question. All that I was trying to get at in Buy then Build is that it’s really overrated. In other words, there are only a couple of answers that are going to be 100% transparent true. And it’s not even at the fault of the seller. In other words, my spouse was running the company and now they’re dead. That’s a good answer. I love that answer. Or, I’m just running the company and I have cancer. We all love these answers, it’s like, “Got it. No problem.”
Karen Spencer: We feel sorry for the person.
Walker Deibel: Yeah, exactly, It’s like, “Oh I’m so sorry, I’m so sorry, but at least I know the answer.”
Any other answer short of that, it’s not true. And let me explain why. It’s because what happens in a sellers mind is a couple of things. More often than not, it kind of goes like this. “I got a business. It grew 100%. Then the next year it grew 100%. Then the next year grew 70%. Then the next year it grew 50%. Then the next year it grew 20%.”
All of the sudden, me, as the entrepreneur am like, ” I can’t get these 100% returns anymore. So it starts to calm down.” They just go, “I’m ready to move on. I’m burnt out. I want something else. I’m not really sure.” And they don’t say, “I was growing at 100%, and not its only growing at 20% so I’m over it. Because they also don’t understand that themselves, number one. Number two, as a buyer a 20% growth even going to 10% growth, if you’re using leverage, the ROI is insane. You’re still going to get the same return as that seller. So they don’t think about it in terms of economics, nor do they need to. It is an emotional decision.
The other side is something like, “I’ve been doing this my whole life, and even though I’m not quite ready for retirement.” Which is a good answer that people like, “I’m going to retire.” Entrepreneurs tend to have shiny object syndrome. They want to move on to the next thing. We are no longer at the time where people graduate from college or high school, go to work somewhere, then work their entire career and retire. That doesn’t happen anymore. We want cycles in our life. If we are running a middle market, privately held firm for five years and want to exit because we build something of value, there’s nothing wrong with that.
I got into this, I built it, I’m ready to sell, take some money off the table. There’s nothing wrong with that answer, but very few sellers are going to say that. That period of time could be five years, seven years, three, twenty, whatever it is. A lot of times the business owner is just emotionally ready to move on for whatever reason. So what I’m saying is, buyers go in thinking they’re getting scammed, thinking that the seller knows something that they don’t know. What I’m saying is 90% of the time, I just don’t believe that’s true. Based on my experience, that’s not what’s happening.
It’s the responsibility of the buyer to identify what the business risks are and then get comfortable with those risks before they move forwards. The seller isn’t going to be able to communicate all of that to you.
Karen Spencer: So the stuff that you talked about a few minutes ago is how, which is a theme in your book, is that when you’re buying an existing business, you’re buying infrastructure rather than creating it from scratch. One of the examples you give is buying the digital print business when you’d already bought your dad’s book printing business, being able to go about that. Just for our listeners, why don’t you talk a little bit about that transaction and the impetus behind it.
Walker Deibel: So here’s what happened. In 2008, I bought a book printing company from my father. And let me backup a little bit. While I was getting my MBA at Washington University. I started a business with a couple of guys and the month of graduation it completely failed. We were deep in conversations with Walmart, we were getting nationwide roll-out. We were trying to figure out, “How do we get this production done?” We were raising capital, and then it completely fell apart.
I then went out into the world and was like, “Okay, I’m an entrepreneur, but I don’t have a business. And I don’t have an idea. What am I supposed to do? I’m out of cycle.”
So I knew you could buy an existing company and I went out to look for one. I completely failed to do it. What I found was the private market was opaque, it was fragmented. The quality of interference was huge. What am I dealing with? I ended up going corporate for a while. I started looking for a business again probably twelve to eighteen months after I went corporate. And it was about that time that my father approached me and said, “Hey, do you want to come to work at the printing company?” I said, “Well, why would I want to do that?” He said, “Well let’s just see if you show up for work on time.”
There was no hand-outs here. So then, in 2008, I ended up buying the company from him. This was an important lesson for me and I don’t want to skim over it. I learned a couple of things. One, I was on the same side of the table as the seller. He was my father, I completely trusted him. But there were also no favors that were going to be given. Everything was going to be fair market. We were doing it the right way. So, we went out together. We met with CPAs. We met with generational transfer people. We met with legal teams. We met with everybody who could help with this and we came up with a twenty-one step plan that we would execute.
The first step was, I was getting a loan. And the second step was I was writing him a big check. Within a week, he was no longer in the office, just gone. His team was in place, the company had been around for decades, eighty years I think. In 2008, “print is dead” was a headline. More people buying e-books than regular books. Shortly thereafter, the bookstores were going out of business. Newspapers were going out of business, etc, etc.
No-one in our generation was going into the book printing industry. They were running as fast away as possible. Here’s what I saw, what I saw was that this company was started in 1929. It had been around for whatever that, I can’t do that math in my head. Help me, Karen, what is that? Seventy-nine years? Whatever it is.
Karen Spencer: Yes.
Walker Deibel: For about two decades, it had been a flat, mature business. What I saw was because of the disruption in the industry, this company had the infrastructure of standard operating procedures. It had hundreds of publishers as customers. It had knowledgeable workforce throughout the organization. What they didn’t have was any of the technology that was actually growing. So at the time when offset printing started to go past maturity and begin to decline. What I saw was, this is the biggest opportunity since the birth of this company to jump on a growth wave and actually grow the company to a level bigger than it had been in its entire existence.
So looking at the underlying trends and saying this is a great opportunity. When I bought the company, within a couple of years, I knocked down a few walls. I used the cash flow of the business to put in a digital book printing facility, sold it to existing customers as a “just in time” inventory management system.
We put in warehousing and fulfillment capabilities and all the rest of it. Within eighteen months, it was about a quarter of revenue. What I found was just like that entrepreneur, I just described. We went from zero to twenty-five percent of revenue. Then we couldn’t quite get past it. So I started to figure out, how am I going to expand this?
I am selling digital book printing solutions to traditional publishers. What I need to do is change the game and have an infrastructure that can sell to, let’s just say digital publishers. I realized that, if I built the IT infrastructure that I wanted, it was going to cost me about seven figures. One, I didn’t have that kind of money, at least I didn’t have it to put for risk. The only guarantee was I was going to spend a million dollars. No marketing, no extra sales, we don’t know. So I’m not going to do that. Rewind, and when I started looking for companies, I knew that I could buy a company at a million dollars in revenue, who I could bring their infrastructure in and leverage it better than what they were already doing for a fraction of the cost of the build out.
So I started looking for companies to buy. I actually engaged a business broker in Missouri, to help me to proactive outreach. Because I was like, “Look, I’ve learned that if I approach entrepreneurs and say, “I’m interested in talking about buying your company, it doesn’t work.” I have everything to gain by explaining how private valuations work.
I hired a broker to go out and essentially find the company. So I came up with about twenty-five to thirty firms over two and a half years. So it was like, “Okay, let’s call this guy. Let’s call these people. Let’s call her. Let’s go through this list.” It was everything from these startup oriented companies to very mature, structured companies. Over two and a half years the twenty-seventh company was all of the sudden the perfect fit. It just couldn’t get any better. They had 50,000 square feet in St. Louis, 10,000 in Chicago, 5-10,000 in Kentucky. We approached them and said, “Look, this needs to happen. We’ve got this piece, you’ve got this piece. We want to buy you.” He said, “Okay.”
We talked for four months, he said, “I love your vision. We’ve got to do it. I just want to change one thing. I want to buy you instead.” And I was like, “Hey, that’s fine. I’m thirty five years old, It’s time for an exit. Let’s go.” So that’s when I learned that actually having a growth through acquisition strategy can double as an exit strategy. It was about seven years, eight years after I owned it. The day that I exited, all of the debt had been paid off. So it was actually the perfect time to exit.
Karen Spencer: What did your dad say when you told him that you were going to sell the baby that he just gave you, that he sold to you?
Walker Deibel: What I learned though, is that when I started looking at the dynamics of people that were buying companies. Almost 100% of the time, it was males buying companies from their dads. So these were the people on the inside, that knew how this worked, how to do it, and all the rest of it. If more people understood how to do this, they would do it. And it’s actually a much better model in most cases than start-up entrepreneurship. So that was kind of how all this came to fruition and the creation of the book and all the rest of it.
When I told my dad that I was going to sell the business, let me go back a little bit. This company was actually started by my great-grandfather on my mom’s side. He sold it to his four kids, which at one point was your traditional family business, where one kid wanted to grow it, one just wanted dividends, one didn’t want to come to work, one was drunk or something. So my grandfather ended up spending his whole life trying to buy out all of his siblings, which he finally did the year before he died.
Then none of his kids worked in it. The company left the family altogether. And the only one even remotely related, was that one guy in the sales department, who ended up marrying the former owner’s daughter. That was my dad. So he worked his way up, and his partner ended up having a heart attack. My dad ended up with the business and ran it for about a decade. So when I first bought it, I joked with all the employees that it was finally back in the family for the first time in three generations. Sorry for the rabbit hole there, but the point is, he was okay with it. It wasn’t necessarily the outcome that he would’ve chosen. But he understood what I was trying to do and he was okay with it. He had sold the business to me, so he was okay. I think it was more of a shock and more of a surprise to a lot of the employees, which of course is very sensitive.
One of the things that I’ll say I’m proud of was, one of the things that was critically important to me was that every single employee in the business had a job at fair wage the day after closing and that happened. A few people left, it was almost exclusively their own doing. In other words, they chose to leave. But that was something that was critically important to me, that that was able to work just in terms.
Karen Spencer: That’s great. I have so many questions for you but I want to switch topics now. In your book, you talk about the need for future CEOs to have a sense of urgency about the process if they are going to go out and buy and then build their business. You talk about how with absolute commitment a prospective CEO can find and acquire a business within six months if they have the right mindset. What was your fastest acquisition?
Walker Deibel: I had seen businesses on Friday and been under LOI by Monday on two occasions. That’s pretty fast. Because if you already know what you’re looking for, you are waiting for it to hit. But at the same time, let me be clear Karen, that overnight success story that took twenty years to get to that one overnight. There’s a lot that goes into it, so I’ve read that 90% of acquisition entrepreneurs, or said another way nine out of ten potential buyers for an existing business never actually end up closing a deal.
I think there’s a couple of reasons why this happens and the most common that I see is that a lot of would-be buyers, they’re tire-kickers by nature. They are almost expecting the seller to come in their like an entrepreneur with a slide deck pitching them on why they should buy their business. But they have this very laissez-faire, I’ll know when I see it kind of attitude and it’s, “No that’s not how this works. You’re not actually going to get anything done.” And I think that part of the reason why, and I’ll speak from my own experience. Probably the reason why I’ve been able to buy a number of companies is simply because I work with a sense of urgency. I’m trying to get it done and whenever I get to a certain milestone, it’s real yes, real no, real next steps.
The thing I always ask myself is, “What would need to be true in order for me to move forward?” And that paints for me, so clearly exactly what I need to get answered so that I force myself to move to the next step. So all of us have this, “I don’t want to make the biggest investment of my entire life, kind of thing.” We all have this, there’s a lot at risk. If I get one criticism, it’s that I’m promoting people to take on debt. Yes, and no. There’s a lot that goes into that, but the point is that I think that a lot of people aren’t really committed. They’re not committed. They don’t have a process that they’re working with. They don’t have a sense of urgency. And they don’t have a timeline. And if you are committed to buying a company in six months, you can get it done. Don’t make a bad decision, just so you can get it done is six months, but what I’m saying is a lot of times, you will sell more than you would’ve if you have a higher goal than if you have a lower goal.
In other words, let’s say you close in nine months, well you maybe closed in nine months because you were targeting six. If you were targeting twelve, then there’s no way you’re ever going to buy in nine. It just isn’t going to happen.
Karen Spencer: So actually you just mentioned mindset, and that was a large part of the book that, I really enjoyed that. And you talk the law of the three As. I think our listeners would be really interested in hearing your perspective.
Walker Deibel: Yeah, so attitude, aptitude, and action. I put together a prep funnel, because when I sat down and tried to unpack how I think about and how does it go? So much goes into the preparation and knowing what it is that you’re looking for.
I was hired by some clients to help them find the right business. This was before the book came out. We got together and I started asking them, “What’s your skill set, what are you limiters, what are the things that you’re looking for?” It got to the point where, I said, “Okay, you’re looking for a business with this growth opportunity.” And they looked at each other and then they looked at me and they said, “We should have bought that business, but we just didn’t know.” They were standing in the right business. It was biting them. It was theirs to close and they didn’t know it was the right thing and so much of it comes back to preparation and understanding the three As.
Attitude. What makes a successful entrepreneur and do I have that kind of makeup. I’ll go talk to rooms of people about this and often I’ll say, “What are you questions? Why did you come here?” Especially if it’s an elective and I’m not walking into a class. All of you came here for a reason, what do you want to learn. Every time, someone stands up and says, “I’m an MD. I don’t know that I have the skillset. Do I even have what it takes to do this?”
That’s where attitude comes in. So I worked very heavily with David Weller, Leadership Alliance, to just figure out what does the suggest. What do we know about successful entrepreneurs? What makes them successful?
There’s a couple of things. If you really were to boil it down, it is a driven entrepreneur around a good opportunity who has a growth oriented mindset. Growth being, I’m going to learn from my mistakes. I am the right person to solve this problem. As opposed to, print is dead, we’re going down the tube, got to get out quick. I’m smart, or I’m dumb. Whatever these kinds of on-off switch concepts kind of are. That’s what the attitude portion is all about.
Aptitude is, what is your skillset? Are you skilled at B2B sales? Are you skilled at operational efficiency, financial engineering, online marketing, what? We all have so many different things. Searchfunder, building online communities, whatever it might be. The point is, you’ve got the risk is not in the business. It’s in the entrepreneur plus the business because those two together are going to be the future. So the business needs the entrepreneur that can trigger the growth opportunity of that business. So the entrepreneur needs to know what their skillset is and apply it to a growth opportunity and then find a target that matches that. That’s what the aptitude is all about.
Action is simply what do you want to spend your days doing? What do you want your days to look like? Let’s go back to the B2B sales rep. This person wants nothing but windshield time. They want to be in their car, driving around, everybody at the facility sees nothing but taillights and they are just out making it happen. That’s great, but you better have an operational guy, an operator back at the facility to make sure that that can sustain that. Maybe you’re an internet entrepreneur and you just want a four hour work week lifestyle business. Those are for sale. You just need to understand what you want your days to look like and be able to weave that into your target statement and what you’re looking for.
Karen Spencer: For me for instance, I would never do well with an outdoor business like landscaping. I’m an office gal.
Walker Deibel: My wife actually started a landscaping business after college and I think she did it for twelve months. All of the sudden she was like, “I’m twenty-four and my back hurts. This isn’t going to work for me.” She’s a science teacher now.
Karen Spencer: Let’s talk a little bit about the transition process. We’ve talked a lot about getting the business. Let’s talk about the transition process. I know you’ve got a ton of lessons learned distilled in your book, but is there one thing that you would advise somebody who’s just getting the keys to their new kingdom to think about as they enter their new business.
Walker Deibel: I’ll tell you the biggest surprise. This is totally, I feel like it’s totally anecdotal even though over and over it’s my experience. It’s a surprise, I think, to most buyers, and that’s that as buyers, I don’t know if I should share this, but I will. I think as buyers, we overestimate the importance of the seller after the closing. They’re really important for a very short amount of time, and every buyer, and again, now that I’m doing advisory work, I see it over and over again. We as buyers, all we have is, “okay I need to eliminate all of these concerns that I might have on the other side of closing.” So I’m going to lock in the seller for some time, and so on and so forth.
What I find is that over and over again. Having that seller around is often more problematic than it is helpful. You want to try to get as much information from the seller as possible, in a really short amount of time and then set the sun on them. They don’t want to be there. You won’t believe how fast they lose interest. The whole thing for them has been an emotional roller coaster. This has been their baby. They’ve built it. They’ve done all of this stuff. And then the minute they sell it, it’s like, “Wow, all of my incentive for being here is totally gone.” Even if they have a salary, they are operating at half mast. And their employees, their former employees will still go to them and it will actually hinder your working relationships with your new employees. So I see it over and over again, where I really want to lock in the seller for a short amount of time and then get rid of them. Get them out of there. That’s where they want to be. That’s where I want them to be. That’s where the employees need to be to truly move forward. So I think that out of all the things, that’s something that I’ve seen over and over again that surprised myself and others.
Karen Spencer: Thinking about exiting, since you’ve had successful exits. What are some lessons learned in the exiting process? So we’re looking at it from the flip-side.
Walker Deibel: Let me think. I work with a lot of sellers right now. Let me draw some of the lessons that I’m learning recently. I think that there are six things you really want to look at as the seller to understand how you’re going to either increase the speed of exit or maximize the price. I think that those two things, you can’t achieve both simultaneously. I do believe that. I think you have to pick one and wait.
The fundamental drivers of value are growth and earnings. Earnings simply, is this business making fifty thousand? Is it making five million? Is it fifty million? How much is it making, because that puts you in different ballpark. Then, what is the growth trend. Look at your trailing twelve months in year over year. Basically the whole thing is, if you have one million dollars in EBITDA, but you were two million last year, that’s not necessarily any better than having half a million in EBITDA. So what’s the growth trend and what’s going to happen with this business?
Then you’ve got to have, you’ve got to clearly identify, what are the business risks that a buyer is going to be taking on when they buy your business. And try to minimize those as much as possible. Then you’ve got transition. So do you have all those SOPs, can you get yourself out of the business so you don’t have to move your knowledge. Verifiability, third-party verification, good books, and growth opportunities. Probably the biggest lesson I’ve learned with exiting is the bigger the growth opportunity you leave on the table for a buyer, the more you’re going to sell your business for.
You want to take that first step, then you want to sell. Because you show the buyer that they’re going to have a good future and that they have something immediately that they can jump on and grow. You kind of opened the gates for them. So that they can not only see it, also see a little bit of proof as well.
One exit I had, well I’ll tell you. It was the first exit I had, I ended up staying on board as an employee after the exit. I went to get my haircut and the stylist was cutting my hair and she’s like, “Oh you sold your business, tell me about it.” I’m like, “Yeah now I’m working at the company.” And she stopped and she looked at me and she said, “That never works.”
We were in the basement of a hotel and even she knew that. So it was just like, you’re not an employee for years and then you all of the sudden are one. It just isn’t going to work out, you need to know that up front. I think I lasted about thirty two days.
Alex Bridgeman: Is there a part of the process that for you even after you experience in all these different deals you’ve done that never really gets easier even with experience?
Walker Deibel: I think I would say probably just the closing process can be grueling if you get a SBA loan. I’ve done it a few different ways and I know that sounds super lame, but it’s almost like, that’s exactly the point. It’s this really bureaucratic process. You need all these boxes checked that for real life purposes don’t need to be. Yet it’s like there’s always a team of people and someone comes out at the eleventh hour and they need this one document from this one other person. It’s like, every single time, if you get an SBA loan, you’re done with diligence, the asset purchase agreement is signed, everyone’s done, everyone’s chomping at the bit to get going, and you’re sitting around twiddling your thumbs for three weeks waiting for the bank.
The closing process is something that is very detail oriented. You can never anticipate everything that they want and it’s boring. And it comes right at the wrong time, you just want to get started. You’re thinking business strategy, customers, product improvement, marketing. They’re like, “Hey, I don’t have form 52-B filled out.” Let me get that, let me get that, what else do you need. It seems like there’s a never ending list of new items.
Alex Bridgeman: Are there, along those lines, are there lessons that you’ve learned along this process that you really could have only learned by doing it. That even listening to interviews or reading you’re still not able to understand the lesson until you’re doing it yourself or making that mistake yourself.
Walker Deibel: I won’t say mistake, I’ll just say, we all want a process. We all want to know what the end is and we all want to do the steps and get there. One of the things that I’ve learned is that every deal, every deal falls off the rails at one point or another. And you work through it. I can almost tell you now when it is. It’s during the negotiation of the contract. It’s once the lawyers come in and they are all defending their clients. You’ve got to take the time to cut through the lawyers and just buyer-seller one-on-one, come to terms, agree. Let them do their work, but the thing is, once you start getting to that level detail, it becomes really emotional for everybody. There’s a lot at stake. Everyone’s spending money and the deal is going to fall apart. It does.
In fact, if you talk to intermediaries, what you’ll find is if you are going into closing and the deal hasn’t fallen apart yet. They’re nervous, because they know it probably won’t close. So that is something that you can’t really put, in my book I’ve got the process of how to do this. You don’t really put an arrow where, right here is where it falls apart, because you don’t know when that’s going to happen. It is just something that I see over and over. It’s the messy human part of the team sport of acquiring a business.
Alex Bridgeman: Is there a good way to recover from that? I assume if there is a deal that’s falling apart. Both sides, there’s a lot of emotions, maybe frustration. How do you come back and still end up closing?
Walker Deibel: Lean on the broker. Again, I’ve tried to close deals without one. It’s never worked for me, it’s just never worked. Because you’ve got to have that middle person who is truly incentivized to lead everyone to the common goal. There are times in negotiations and deal-making, where the only move is to step back from the table. That’s when you get to let the broker do their work and bring everyone back and get everyone under the common goal and just move forward. Just remember why you’re doing it and leverage that middle-man.
Alex Bridgeman: Walker, Thank you very much for your time. We don’t want to overstep your schedule. Thank you very much for sharing your time with us. Karen and I really appreciated it.
Karen Spencer: Yeah we really enjoyed it.
Walker Deibel: Yeah, Alex, Karen, thanks so much. I really appreciate being here. It was a lot of fun.
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