Episode 83: The Gap Fillers: A Lookback of 2022
2022 was a big year for a lot of people. So for the last episode of 2022 we are looking back on the year in the franchising industry and at Ask...
17 min read
April Porter : Jan 3, 2023 12:30:47 PM
One of the most common questions people have when beginning a business is, "What should I focus on first when building a business that can be sellable?" In this episode, you'll learn more about it! We have Jared Ribley as a guest on the show, who has a diverse background in business, including ownership, territory development, sales, and management. At the start of his professional career, Jared’s efforts were focused on understanding the operational needs of numerous Fortune 500 clients and developing creative problem-solving strategies. As a result, he was able to transfer his in-depth relational acumen to the environment of his own companies to enhance their success. In 2011, Jared was introduced to the world of private and confidential business sales, where he was quickly able to apply his many skills and comprehensive knowledge to business brokerage services.
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Prefer to read what we talked about in the episode? Read below!
Jared Ribley: You know doing those things as it's almost like incorporating them with a business plan from the onset because we all know this and once you're too far down the road, it'll make it three times more difficult to turn back and do something to sharpen the saw.
April Porter: You are listening to the infinite franchisee show, I am your host April Porter. I am a franchisee empire building strategist, creator of the infinite franchisee, program attorney and an award winning multi unit franchisee on a mission to fill the gap between the franchise model and the executive level strategies you need to increase profits, build a team and scale into multiple locations. Here, we connect every franchisee to infinite possibilities.
April Porter: Welcome back this week, everyone, I am so excited to be here with you to share my friend Jared Ridley, who is a Managing Member at Premier Business brokers here in St. Louis. He has active broker status as a certified Exit Planning advisor and a real estate agent.
Jared: Real estate broker, depending on who you ask, yes, correct. Thank you.
April: Yeah, I'm so glad that you're here with us. Because one of the things that we're teaching inside the infinite franchisee is of course, to always start with the end in mind, which means knowing what your exit strategy will be even when you don't have any plans to exit. And so one of the questions I get so often is, how do I value my business? How do I know the value of my business? And we talk a lot about there's a lot of different factors that go into that. But I know you're an expert on it, and I'd love to throw it to you and find out what's the first thing that people should concentrate on, when building a business, that will be sellable.
Jared: It is a big topic. And depending on who you ask, you're gonna get a bunch of different responses and direction - even if everyone's looking at the same source of information. So it's a little nebulous, I will tell you that my response is going to be a derivative of what people actually pay for. So if you're looking for estate planning or something like that, that may be a different not only calculation, but methodology. Ours is third party sale related. So it's literally the amount of money that someone is willing to give to you, for your company. And there is a still there in a number of different items to consider. First and foremost, the baseline is financial. So we take a three year snapshot, for example, usually the business tax returns, and we do our recasting. We're doing the recasting to figure out what the adjusted earnings are a majority of all businesses trade and are comprised of evaluation from Goodwill, Blue Sky, which is a function or a yield of that earnings number. It's just a matter of how you're calculating the earnings. And if you've caught everything. We have a process of doing that we have a internal spreadsheet that we use for all of our recasting to form the baseline. And then once we have the baseline and the adjusted earnings, because there's a lot of questions you have to ask as you're going through it because it's not some of it is obvious, some of it is not. So you have to find where accountants hide things, etc, hide things in a good way. But once we substantiate that, then we have the last three years of X amount of earnings. Once that's established, then we're going to look at third party databases comp sources, basically, to figure out what industries are trading for and why. So if you have, and I will tell you, if you have $100,000 in earnings, and you have a restaurant, and you have the same amount of earnings, but you have a medical manufacturing company, I promise you that the medical manufacturing company is going to yield at a higher rate because of the barrier to entry, etc, and so forth. So overall, we're looking initially at forming a baseline of financial. And then once that's established, we're looking towards the other industries, and the reasons why things are trading the way they are, and then also resting on our own experience as well. I would say pass that - which that's a lot of it, but pass that it's how reliant is the business on the business owner. That's a big deal. People will discount if they can't simply fill the shoes that you've provided, and that you're trying to step out of people discount heavily for that customer concentration, if 80% of your business is done with one customer, chances are they're gonna look for terms. Maybe it doesn't wane their interest, but it will affect their terms probably because now they're not they have to mitigate that risk. Because obviously, what if the client goes away? That one customer, so maybe earnout, or something like that comes into play? I would say, SOPs, most business owners don't have standard operating procedures for their companies. They don't because they don't think they need it. I would disagree, I would say, the level to which you don't need, it represents you being the standard operating procedure yourself. If it's not written down, it cannot be implemented, therefore, you're not going to get your time back, because nobody's going to know what to do. So that's why franchises, right, come with standard operating procedures, etc. And as I'm sure you're fully aware of that, because you can't just go over here and duplicate the model, without such you can't do it. So I don't think people discount valuation based on a lack of standard operating procedures, but I guarantee you they get a higher multiple if they're in place. And chances are the businesses is also reflecting that level of success if those things are already implemented.
April: Yeah. So I'm gonna go back to something you said at the beginning, which was, you really take an approach looking at, not just as what something worth on paper, but what is it worth based on what someone will pay for it? And I think that this is a really important distinction, because so many times small business owners are fed that line, you know, which they hear in the cosmos, they can't even identify where they've heard it, or who's told it to them. But it's like, “oh, it's my revenue with a three time multiplier”, or “it's my net sales with a three time multiplier, and that's how much my business is valued”. So how much do you guys run into that? And what are some lessons, maybe some hard lessons that have to be learned along the way, when selling a business?
Jared: Maybe 25% that come to our doorstep? Have that preconception that we have to battle a little bit, and I'll be honest, like, I love CPAs, I work with them all the time. Some of these misconceptions are coming from CPAs, which just baffles me. But I promise you, legal matters, and preparing tax returns are different than valuing a company. So I would say that there's those misconceptions can be overcome by a simple methodology. It's more complex than this. But basically, it's the ROI model, how long is it going to take me to pay this thing off that a lot of times is what's driving the yield, and we've seen as high and delta and as high as 10 times earnings, it's not too common, not too common at all. But when earnings get to a certain level, it just becomes so hard to obtain, that it will drive the yield. So if something's literally netting $10 million, they're gonna get more than a three multiple chances are, right? And then obviously, it scales backwards on both the multiple and level of earnings. But I think ROI is a really simple approach. And also, if you're an individual who owns a company who's thinking about selling, ask yourself that question, how long would you be willing to have a payoff schedule on your own business? That's a quick reality check a lot of times,
April: Right, that makes total sense. So something else you mentioned was the recasting. And having sold a business, I understand what a recasting is. But I'm wondering, you have to come across businesses that have not kept the records in a format or, or with enough detail to make it easy to do a recasting. So would you mind kind of explaining how that can affect like, how your bookkeeping can really affect or leave money on the table without you even knowing it?
Jared: When you're buying a company - it's a great question - when you're buying your company, visibility is everything. Once a buyer is underneath, nondisclosure? I will tell you this, that they are looking for reasons not to buy.
April: Good buyers are smart buyers are.
Jared: They're coming whether they know it or not, it's usually an unconscious thing. And so the more visibility and transparency you can create, the better because there's going to be a whack a mole process anyways, there's going to be things that nobody was able to foresee happening, that happened and hopefully it doesn't crater the deal. A lot of times it won't, especially for brokers involved. But I would say that's really imperative, if that makes sense. And the recasting just gets us it's a simplistic approach to show what the adjustments are, and why and what line item and etc, and so forth, it's really no different than probably what most CPAs would do if they'd have to do it. It's just our document. And we use it for literally every one of our opportunities because people come to us, depending on the business owner, he or she is going to come to us in, in the way that they are. And sometimes people have a bookkeeper, and a quarterly person, and the CPA, and then I've met people who literally have never done a P & L in their life, we were able to sell both, I'm thinking of two specific examples, actually. So we make the best out of whatever situation is brought to us.
April: Right. Making the best out of a situation, though, may also mean that at the end of the day, the person didn't get as much as they could have for their business, had they kept their books more organized, would you agree?
Jared: I would agree 100%.
April: So, the next thing you talked about was really the fact that being able to extract yourself from the business, lends the business to be more valuable, for what I would argue, are obvious reasons. I mean, if somebody knows that, they can come in and pick up where you left off, because your staff is able to take the ball and run with it, then they know they're not going to have any dip in revenue or earnings. Whereas if somebody has to come in and take over for you, just that ramping up period of them, learning what's going on could really affect the profitability or even the efficiency of the business itself. So therefore, I would think that there'd be more value associated with an absentee business. So assuming somebody wants to build their business to ultimately sell it one day, how would you prioritize creating those SOPs and backing out of the day to day operations?
Jared: I would say now, I would just say, now is the priority. Because those things take time, especially if you're starting at ground zero. And to your point, in what you preach, which I just completely agree with, is start with the end in mind, that's a part of that mindset. So one of the things that SOPs and things like that - those virtuous elements, allows you to do is step away from the business. So even if you're not wanting to sell, but you're ready, it's the same reality, at the point at which you can step away from your business and get your time back. You want either have an annuity somewhat, right? Newly based income, or and or you're ready to sell. So it's hard to prioritize that to answer your question. But and I would kind of be facetious, but kind of not in saying just do it now. Both. All.
April: Right. Well, something that I've noticed with a lot of business owners is that so often people are not starting with the end in mind, right? They're diving into this new adventure that they're taking on as a business owner, it's all excitement, it's rose colored glasses, they love, you know, interacting with every customer, and really making a great workplace environment for their employees, because they likely came from one that wasn't so hot when they were a corporate employee. And so they get wrapped up in all of this. And by the time that they're thinking of selling, they're ready to be done. They're kind of you know, burned out, they know that it's going to take a little bit to sell, but they're not as passionate. They're not as excited. They're not getting up at the crack of dawn and jumping out of bed anymore. They're having to roll out of bed after hitting the alarm, you know, five or six times or snooze. So when somebody is in that situation, have you seen like that negatively affect the business during that process of selling it?
Jared: Sure. In regards to general burnout, and being at a place where you're circumstantially imposed to make a decision versus like doing some of those things from the onset, for example? And I mean, is it is it ever too late? No. But depending on your timeline, and your own personal gas tank, it could be so you know, doing those things as it's almost like incorporating them with a business plan from the onset. Because we all know this, and once you're too far down the road, it'll make it three times more difficult to turn back and do something to sharpen the saw, so to speak. And I will give, you know, just, I guess encouragement to people who do stop and do those virtuous things. Even in the middle of all this stuff. I got a phone call last week. I'll give you a real life example. You know, we have 3 different products, basically, we have the the market assessment, which is complimentary. That's kind of what we talked about. It involves the comp sources and the recasting. That's non committal. It's just we want to understand what you want to understand as well. And then there's a CVA, we have a CVA on staff, which you and I talked about in the other podcasts that you probably got from the bank that was probably a CVA - certified valuation analyst. And so we have one of those people on staff. And then we have a readiness report. And we did a readiness readiness report is kind of what it sounds like, checks all these boxes. And we did one last year for an individual who has a really fascinating company, proprietary products in the healthcare space. And he had kind of just stopped the watch for a minute and was like, “I need to back into my get out number”. We thought that's a great idea. And he goes, What do I need to do in order to achieve my Get out number, because he had identified it. And we went through, we did the readiness report, which is a lot of heavy lifting. But it's basically a comprehensive SWOT analysis on the company. And we figured out a few different things. One of them, one of them wasn't SLP the other one was the business's way to rely on you, you know, we need to strategically get a couple other people around you that can absorb your output, and a couple other things as well, with sales channels, etc. He called me last week, and he goes, “we're up 50%, I couldn't believe it”. And he's not exaggerating, I'll be getting his financials here shortly to reestablish the valuation, because now we're probably closer to his get out number, and he was already at 10 million in value.
April: Well, that's the interesting thing is so many times people are afraid to pull themselves out of the business because they feel like, no one's gonna care as much as I do. Nobody's going to service these customers as well as I do, right. It's like, I'm, it's very egocentric, it's I am the business. That's why people come to me. And so they feel like if they remove themselves from that day to day, if they create those SOPs to do that, their business will decline, when in actuality, if you do it the right way, and what we call that in the Infinite Franchisee is having an ownership cloning system. So if you aren't just training people, but you're actually developing leaders who and teaching them how to take on the culture and creating that drive in them to know that they can impact the company, then what you've done is you've multiplied yourself, and if you can do 100%, then three of you can do 300%. And so it's just such an interesting dichotomy to me, that people struggle with seeing that.
Jared: That math is perfect. That was really well said, I'm going to use that myself. Standard operating procedures, good business systems, systematic implementation is the only thing that can duplicate your self. A lot of times, it seems like the business owner can't get over themselves, right? It's a psychological thing. “Oh, if I leave”, right? That's not the right mindset. The mindset is, you need to get to the point where you say, “I'm leaving, and everything's gonna be just fine”.
April: Well 100%. And the reality is, if you truly cannot leave, then you hired the wrong people.
Jared: I say this all the time. Most business owners don't own their business, the business owns them. For this reason.
April: Yes. 100%. Okay, so we've talked about strong reporting records, business systems, how much of a factor is controlling costs and the overall value of a business?
Jared: I think controlling costs comes from good record keeping. So back to one of the points that we talked about earlier. How do you know, right? Do you have good metrics? On the things that you're spending money on? Is it fully quantified? You know, is it - are you are you really optimizing your the buckets that you're spending money on? What's your return on your costs? Right? Like, a good obviously, a good p&l will show you these things. And that usually can't be done without a good bookkeeper or CPA, etc. But, you know, the, do you have technology that allows you to really understand your costs, and a lot of - when you're looking to cut cost, a lot of another intangible that I think you need to consider is the amount of time going into the costs as well. Could be a myriad of things. But that's also another - it's not just dollars, it's time spent on the costs. So obviously, it's one thing we call it fool's gold, you know, company that's making 10 million in top line revenue, and has $100,000 in earnings. Right? They're not controlling their cost. So you can work really hard, but if it's not falling to the bottom line, it probably won't mean much
April: Right. And then I know that I see this in my line of work, I'm not sure if these people are making it to you. But another point to be made when it comes to controlling costs is that you really can't build value in a business. By cutting costs to get there, you have to create more revenue, you have to be able to scale. And so many times I see business owners who get into this scarcity mindset, oh, my gosh, we're only making x and I want to take home more of that. So rather than making the right investments to grow X to you know, Y and Z, I'm just going to downsize my staff. And I'll take on more hours so that I have to pay less in payroll, thinking that they can somehow save their way into a more valuable business,
Jared: Scarcity mindset. It'll work in the short term. But in terms of a business model, I don't think that's the best practice. That's not what I see as being the best practice.
April: So again, I get this question all the time, which are the acronyms in your world? SDE, versus EBITDA? Can you give us a rundown of that?
Jared: Sure. Yeah, we deal in both Seller’s Discretionary Earnings is SDE. Simplest way to explain that is that it's basically EBITA except we are adjusting for officer comp, right? Owner salary, and owner perks, if you will - owner benefit. That's really the main difference. Just to keep it very simple and EBITDA is earnings before interest, taxes, depreciation, amortization, we're adjusting for all those things anyways, it's just with sellers, discretionary earnings, we are accounting for much more, because most of what we sell, I'd say by and large, is owner operator, when EBITDA comes into play, would be usually 500,000 in earnings, any level of adjusted earnings, or above. And that usually attracts a different type of buyer, the financial type, the strategic type, the individual as well. But I would say most of sellers, discretionary earning companies and calculations are purchased by individuals. So they're, you know, they're buying a job that they can control and grow and change. So that's probably the best explanation, I think.
April: And then something you just said made me think of another question. So we talked already about how really getting those SOPs in line and being able to extract yourself from that day to day and make sure the business isn't dependent upon you is going to get your business more value. But let's talk about that pool of buyers as well. Because there's a pool of buyers who are looking for that job that's gonna give them a lot of satisfaction. And then there's a pool of buyers that are looking more for that investment level opportunity where they're not going to be expected to go in and you know, make the sandwiches in the sandwich shop. And then well, one, I guess the first question is, do you see any other pools of buyers? Or do they basically fall into those two categories?
Jared: Those are really good classifications, the way that I usually describe it as there's three different schools or sectors of buyers, financial, strategic, individual. Depending on the opportunity, they can certainly overlap. Some opportunities are only designed for one some design for two of those. But the financial types are an I would say the financial and moreover, the strategic a lot of times are who you just described, who's not going to be turning wrenches and making sandwiches. And the individuals are more prone to do that are more willing to roll up their sleeves, so to speak. But the financial types are investment banking, private equity, etc., family offices, the strategic are competitors, and or like minded companies that can find synergies in your business. Good bolt on opportunities. You know, somebody, somebody has 100 grocery stores that they distribute to because they sell muffins. Well, you sell granola bars, right? Like simple match, stuff like that. And then there's the individuals and honestly, they're the individuals are probably a strong 50% of who we sell into. There's a lot of people out here that have good nest eggs, good business acumen, strong marketing backgrounds, or maybe accounting or legal, whatever it may be. And they're looking to put that acumen to work for themselves.
April: And the stronger you are in your business, meaning the more SOPs you have, the more absentee you are, the more your key employees can run it for you, the more it opens you up to really all schools of buyers rather than being relegated to just the bottom 50%. So it gives you more selling opportunity, I would think
Jared: It does. 100% even if your earnings are only $100,000. Still, if you can step away from the company, and we can call it potentially owner absentee? Yes, it becomes that much more saleable. It does.
April: That's awesome. Well, this has been tons of information, Jared, we really appreciate it. Because I know my listeners are very curious about this topic. If you could give them one takeaway that they could do today, to position themselves well for the day, whenever it should come that they decide to sell, what would it be?
Jared: Call us. To that note, though, I would say pick up the phone and talk to somebody in my position. That's usually the best first step. Because people in my position can assess where you're at, give you a couple of homework assignments, but call somebody in our position in the the intermediary, you know, role, not that CPAs and attorneys are not worth talking to - they absolutely are because where they work, we don't - we absolutely don't pretend. But in a lot of times, we see the chessboard, right? So we're looking four or five steps ahead. And if you want to start getting knowledgeable about this process, just talk to somebody that's in the middle of it every day. So yeah, I would I would say, just pick up the phone call somebody, like us.
April: That's a great advice. I think so many times, people are intimidated to call, right. They don't want to waste somebody's time or bug you or those types of things. But I know how free you guys are with the information and that you truly believe that a more informed business owner is a more successful business owner. So thank you so much for that. Now. I also know that you have a podcast would love if people want to get more information like this, can they listen to your subscribe to your podcast?
Jared: They can. So it's called Broker Banter. It's on our website, Premierbb.com. And there's a tab on there. That's very plainly broker banter. And then we are on Google and Apple, both of those platforms for the podcast listenership and we've got four, five, maybe six episodes up there now all unique from attorneys to wealth management to estate planners, to people that have sold their company to people that have bought their company. Now we have you coming to the next feature, which super excited about - it's a great resource. If you're looking in this direction, that might be also a really great place to start.
April: Awesome. Well, thank you so much for joining us today. You know, if you want to get a hold of Jared or have any other questions, you guys can reach him at their website at Premierbb.com. And of course if you have any other questions about scaling your business, just ask April Porter, we'll see you here next week.
Jared: Thank you so much.
April: Thank you for setting aside time to grow your business and mindset with me today. Every franchisee has a dream to achieve sanity, wealth and gratitude. And I created this podcast to help you do just that. So if you loved what we covered, and you know someone who could benefit from it, I would be honored if you would share it with them. Between now and next time don't you dare settle for anything less than infinite success.
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