ScreamingBox Technology & Business Rundown

Speakers
Eric Grafstrom, Dave Erickson, Botond Seres

Dave Erickson 0:03
Time is ticking. You're not getting younger? Is your business making you tired? Want to exit or sell your business? How can you do that successfully? On this ScreamingBox Podcast, we are going to discuss business exit options and strategies. Please like our podcast and subscribe to our channel to get notified when the next podcast is released.

Dave Erickson 0:45
So what happens when your small to medium sized business is successful, and you want to exit and move on to your next business adventure? Welcome to the ScreamingBox technology and business rundown podcast. In this podcast I Dave Erickson and my knowledgeable co host Botond Seres are going to dissect the various SMB exit options and strategies with Eric Grafstrom, founder and CEO of exitguide.com. In 2020, Eric founded Exit Guide to help ease the process for exiting a business for 10s of millions of small mainstream business owners. Exit Guide educates SMB owners on their options, and helps them price their business. When ready, they offer online tools and coaching to help prepare your business for sale. And when you and your buyer are ready, they provide expert support to help you close the deal. Eric got his start doing sales for broadcasts.com and moved from Dallas to London after Yahoo's acquisition of the company. After working across Europe, he eventually landed in Silicon Valley again working for Yahoo. Later he gained frontline experience with dozens of startups and has been part of IPOs mergers and acquisitions. He has led turnarounds, managed distressed assets, as well as putting out numerous fires for VCs and founders. Well, Eric, what motivated you to start exit guided 2020?

Eric Grafstrom 2:09
Well, thanks for the opportunity to be here, guys look forward to the conversation. You know, some of this just started from, you know, living and working in Silicon Valley and had a, you know, opportunity to go through various types of exit and some were, some are good. A lot of them weren't. And some were asset sales, some were winding down the company, some were trying to improve the valuation. In venture backed companies have their own laws of gravity, if you will, I mean, it's just kind of a different set of business rules that apply to companies that are aspiring to be a big company someday versus a mainstreet business. And I learned about small business owners, you know, most of them are over the age of 60 and they're really struggling with just some of the mechanics of how to get their business ready, so that they could sell it and move through a transaction. And so I just kind of felt like there was not only a big opportunity, but there is something of a mission to really kind of help the small Mainstreet business owners go through some of the mechanics of a merger and acquisition process. But do it in a very light online way without having to hire a bunch of expensive resources.

Botond Seres 3:19
Sounds like you're doing a public service Eric. Being a small business owner myself, I do wonder about this? Sometimes, like, if, if I ever ever want to exit my small business? Or if I wanted to, how would I get ready, but we usually end up being more on the side of, probably should start another business that is built from the ground up to be exited. I think you know what I mean. And speaking of exit options, I wonder if you could walk us through some of the preferred or maybe the easier exit options available to SMEs.

Eric Grafstrom 4:03
You know, every small business owner eventually exits. I mean, you know, Father Time is undefeated. So you will eventually exit any business that you own and operate. Different things may drive that it may be opportunity, it may be health issues, it may be a variety of things that push you into this decision. And so, one, I wouldn't call it a myth, but one thing I really like to share with owners is like, there's different ways of exiting the business, going out and finding a buyer and getting top dollar for your business. That is an option. And if that's when you can achieve, you know, we're all for it and ready to help you with that. But there can be other ways it can be selling to a member of your family, a business partner, an employee or simply selling the assets and closing, closing the business down. And in some cases, just closing the business. So Exit has a lot of different ways of, you know, happening. One of the things that not everybody necessarily realizes is that over 80% of small businesses that are brought to market never sell. And, you know, there's a lot of hype and interest out there and buying these small Mainstreet businesses, people call them boring businesses. And it is interesting, some of them are very good businesses. But the big challenge is, is, owners just don't know what to expect, they aren't prepared with the right information. So, you know, the greatest thing a small business owner can do to have a successful exit, is to actually plan and prepare in advance, before they need to get their business, you know, in front of potential buyers, because if you don't do that, there's a pretty strong chance that you're going to fail and achieving what it is that you want to accomplish.

Dave Erickson 5:42
You know, many businesses, I guess, maybe we can kind of classify the types of businesses a little bit. You know, there, there are businesses that are completely virtual service businesses and then there are businesses that are retail and have storefronts and, and either an e-commerce or a physical storefront. And then there's like, small manufacturing businesses that have a plant and facilities and assets. I assume the exit strategies for those three types of businesses are all very different. Is that correct?

Eric Grafstrom 6:17
Yes, and, you know, despite having a background in, in early stage technology companies, we really focus our time and energy on, you know, what you refer to as mainstreet businesses. And generally, these businesses are worth less than $5 million. And the reason for that is, you know, with so many businesses that are coming on the market, because the demographics, the resources, whether they be m&a advisors, Business Brokers, attorneys, they have plenty of work to do over the next 10 to 15 years by helping those businesses that are worth 5,10, 20 million dollars. And the model of charging an hourly rate or a commission can actually, you know, make a lot of sense. But when you're trying to sell, say, a $600,000, service based business, HVAC, you know, landscaping, things of that nature, or a retail business that's worth a couple 100,000, or maybe one or $2 million, you just don't have access to those resources and the way revenue profitability and growth of what we refer to as kind of the traditional mainstreet businesses generally has more similarities than a, you know, a SaaS based company that, you know, may be looking at a multiple of potential earnings, you know, based on certain growth metrics, it's really hard to kind of be consistent with those because some of that may be in the eye of the investor or the the acquirer. But you know, when you get a traditional business that's doing home inspections, or retail business, the economics of those tend to be pretty consistent across the board.

Botond Seres 7:52
So Eric, I'm gonna be honest, the only time I ever considered purchasing a business is for an entirely different reason than making profit. So I wonder if you can tell us about this segment of the market. The reason I considered buying the business previously, as in some countries, notably, Canada, it is possible to get a citizenship, if you would, you would purchase a business there on the assumption that you need to be there to operate the business. So I'm wondering if that's like a whole different markets, or?

Eric Grafstrom 8:32
You know, I can't comment on that one, we work in the US. And, you know, I don't know enough about citizenship. It's actually the first time I've heard that, and it's super interesting to me, and I'll have to learn more about that. But, you know, to your point, though, not every seller is actually looking to maximize the, you know, the sale price. We get a lot of people who want to see the business, you know, Legacy continue and selling to an employer to remember the family is actually their primary focus because they want to help the employees out they want to ensure that the business remains a part of the the community, they want to make sure that the people who operate the business and working at day to day status, you know, your maintain their jobs. I've seen instances where people are willing to take actually less than what they would be able to get by finding a potential buyer out in the marketplace, simply because they're, they're looking to kind of add more altruistic type motivation to sell their business. As far as citizenship goes, you know, I don't know. I mean, in Canada that, that sounds super interesting. Probably depends on the kind of business that you want to operate, but bringing, you know, smart entrepreneurs from all over the world into your country to, to live and run businesses and give back to the community sounds like a great idea to me.

Dave Erickson 9:50
It seems like there's lots of different motivations for people wanting to sell businesses but also to buy businesses or What is probably, you know, for people who are looking to buy a business, what seems to be their most common motivation?

Eric Grafstrom 10:07
That that's a very interesting topic. And you see a lot of this discussed on Twitter, what I've noticed is that especially Gen Z, and younger millennials, are super motivated to buy small businesses. And I think some of this is having, you know, a lot more control over their destiny, you know, the, the kind of loyalty to a big company, or maybe some of the, you know, things that have attracted previous generations to taking more of a W2 corporate approach are just not as common in some of the younger generations. And so I see a lot of very young people in their 20s and early 30s, who are insanely bright, and they're motivated to go by service based businesses. And you're finding that, you know, it's a combination of personal fulfillment and control as well as is, quite frankly, it's business, they're realizing that trade businesses, plumbing, electrical, HVAC, you can actually make a very good living by owning, you know, a couple of these businesses and if you start young, and you can build that up over time, you can modernize some of these businesses. So, you know, the motivation for a lot of younger people is, you know, give me something that I, you know, I may make some mistakes early on, but over time, I can build up my credibility, I can build up my operational expertise, and I can start to scale this thing up. So not only am I making good money, but I'm actually building an asset. And I think that is fantastic. I tell a lot of people look, you know, even though I've come out of, you know, venture capital backed companies in Silicon Valley, if you want to find the highest likelihood of becoming a millionaire, learn a trade, get a license, and figure out how to bid buy into some of these businesses with an owner that's going to need to exit in five to 10 years, and work your way into that and learn under them. And you'll actually have an asset that in 10, or 15 years is actually going to be worth a heck of a lot more than what you pay for it. And AI is not going to replace plumbers and electricians and a lot of other commercial and residential trade businesses. It just isn't.

Dave Erickson 12:14
Yeah, if you want to earn real money, be a plumber.

Eric Grafstrom 12:18
Yeah, that's right. That's right and, you know, job security for a plumber is probably much greater than it is for a lot of other, you know, roles and jobs that are in technology.

Botond Seres 12:29
It's next to impossible to automate plumbing, or

Eric Grafstrom 12:33
If you do, let me know, I’ll invest. Yeah, yeah, amen.

Botond Seres 12:43
I mean, they are doing some interesting stuff with like, the new robots, they can, they can do basic maintenance, like, you know, shut off walls, walls and such. But it's, it's far from being able to change anything under a sink. We're not even close yet

Eric Grafstrom 13:00
Yeah,Yeah, getting into a sink, getting into floor joists, getting into walls and repairing plumbing and laying out your, your 100%. Right. These are jobs that do take knowledge and training and expertise. And so you know, it's not just the actual execution of it, but it's, it's kind of that front end diagnosis for, for things. I mean, a good plumber or a good electrician, you know, they're worth their weight in gold.

Botond Seres 13:28
And I can't help but wonder a bit about the financial side of things. So when a business to me feels like buying the property, I'm sure it's rarely done in cash. I would presume, like most of these transactions, use the bank to fund the transaction, you say that certain records?

Eric Grafstrom 13:54
You know, I would say the, the market data suggests that actually a majority, well over 50% of deals are what's known as seller financed. And so there's, there's a couple of different options. One is what's known as an SBA 7a loan and there's, you know, brokers and banks that are out there that offer these types of loans for this very scenario. You know, I think there's two things that what I've heard anecdotally is one, it's just hard as you might expect, going and getting an SBA loan, you know, I'm sure there's well intended people that have tried to make this process easy. But it is a process. And if you're looking to move quickly, or you don't have the patience for kind of, you know, the ongoing requests for documents, financial reports, background information, so on and so forth. Some people just flat out, skip it. The other is seller financing. And this happens, you know, in a lot of deals that are smaller for a whole host of reasons either someone won't qualify or or both parties are not interested. In that case. You know, the buyer may say, Alright, look, I can give you 5% down, you know, solicitous, you know, pick a, you know, $800,000 business and they'll say, look, I can come up with $40,000. But, you know, I'll finance the rest of this transaction and, you know, attach that purchase agreement as some type of seller note. And so it's, you know, it's a commitment for the buyer to pay the seller, you know, over a period of time, with interest, using proceeds from the business and look at it, it works out more often than it doesn't, there is some some risk, but that risk is shifted to the seller, you know, where they were making sure that this buyer is actually pretty darn qualified, and also that they provide a smooth transition, which is essentially I mean, that's exactly what you want is you want that, that seller to come in and say, hey, look, I want to make sure that, you know, I'm here on site for maybe a couple of weeks or a few months to hand over the keys to the business, make sure you understand the ins and outs, but I'm also available as things come up, because they want to not just the business to succeed in the new new buyer to succeed, but they also want to get the money. So you know, it's a combination of banks, there's seller financing. The other interest in things come up, and this tends to go a little further up market. There are funds out there now, which are called eta funds, entrepreneurship through acquisition and much like any other, say private equity or venture capital fund, people go out and they raise money, and they find these businesses that, that need, you know, new leadership, new ownership, and they'll drop the operators in. And they're generally buying these to buy and hold these businesses, because, you know, they've got a 10,15, sometimes 30 or 40 year track record, they're throwing off cash flow. And so if you can, you know, get some economy of scale by having a portfolio of these companies and maybe decreasing some of your operating expenses, but continue to put operators in who've got another 20 or 30 years of runway in their career left. These can become, you know, a portfolio of really great investments. So those are the three that we've seen out there: the ETA funds, SBA, 7a loans and seller financing.

Dave Erickson 17:07
Well, the kind of the cornerstone of all of these deals, also comes back to the business. And although people have different reasons for buying business, they're all looking for a business that has a certain size or a certain value. How, what is the valuation process? I mean, example we, you know, we have, we have our example company, it's a T Shirt Company we use for, you know, showing a good business example, let's say we have our T Shirt Company, it's, you know, doing a million dollars of business a year, it's been in business for like, 10 years, it's not really growing, it's not shrinking. How would we go about an evaluation of what it's really worth?

Eric Grafstrom 17:53
Yeah, great question. There's three ways to, to, well, for if you include the public markets, but let's just, you know, take that out, because that's, that's not close to what we're talking about today. But there's three ways to place a value on, on a business. One is what's known as sellers, discretionary earnings, what you're doing is you're calculating the discretionary earnings of a business. So you've basically got the net profit, and then there's going to be things in there called add back. So you may run, you know, certain expenses through the business like club memberships, car leases, you may have a relative or a spouse or a partner on the payroll, but they're not going to bring us all perfectly legit expenses, and you're applying a multiple to that discretionary earnings calculation. It's, it's a good approximation, it's, it's not something you're going to take to a bank. Then there's what's known as a market based valuation where somebody is going in and accessing a database out there. And they say, okay, similar companies to yours with revenue and industry, you know, we're gonna apply a multiple to your ebitda, your net profit, your revenues, and here's what it looks like. It's good. It's probably the best one for businesses that are, you know, worth, say, anywhere from a quarter of a million or business with revenue, say, between a quarter of a million to $2 million. You know, I think that's going to change the most we're actually doing some things with, with automating, you know, that type of evaluation process. The challenge is the data set, those of us that don’t live in the technology world, you know, it's, it's a little bit of a head scratch to kind of, you know, look at a data set that may go back as far as 15 to 20 years. So if you want to, you know, draw comps on bars and restaurants, and someone's showing you a business that sold in 2014, is it relevant to where we are in 2024? You know, but that's what's out there today. So they're good, it's commonly accepted, but I think that's going to change. The third way of doing this is, you know, kind of more of an income based approach. Some people call this a discounted cash flow. This is, you're absolutely going to need a professional involved here, someone who not only has access to the data, but somebody who's going to run an analysis, it's a way more intensive process. If your business is worth, at least I don't know, four to $5 million, then you may want to explore this, but it's going to take a couple of weeks, it's going to be a pretty detailed oriented process. You know, it's cumbersome for a seller. Now, if this is somebody who's got a business at that size, they probably also have a couple of people on a finance team who can prepare reports, answer questions, do a lot of the back and forth. And so it just becomes more high touch as you go up market. And so, you know, really what most business owners can, can do is, you know, we've offered, you know, kind of a free estimated valuation in the past, we sell a valuation report for a couple 100 bucks using the market based approach. And so these are things that, you know, really will generally be accepted for most people, if they're not getting banks or other people involved in the financing, and they want something that's just kind of fair to both parties using some objective data and an objective analysis. So your T Shirt Company, you can apply a multiple to the revenue to the profit, you know, when that's going to somewhere between, you know, point six to maybe one, depending on the type of business, the growth that it’s seen. So, if the business is super profitable, then it becomes interesting. If it's, you know, somewhat profitable than, you know, it's, it's probably going to be a discount, you know, of the revenue number.

Botond Seres 21:39
It's quite interesting. I mean, cash flow is one thing, but what sort of internal values or uh I don’t know, markers make a business particularly attractive besides the numbers?

Eric Grafstrom 21:56
Well, it's a you know, and that's an interesting thing, because that sometimes gets subjective. And there's some emotion tied to it. Businesses are like houses, an owner generally sees, in most cases, not every case, a lot of owners see their businesses as having this kind of unique intrinsic value. You know, they feel like the brand has got some, some, some value, they feel like its contribution to the community and there's emotion tied up with that. And, and while that may be true, it's sometimes very hard to put a value on that in some cases. And so you know, what, what I tell a lot of sellers is keep in mind, somebody's not buying the business, as you see it, they're buying the they're buying the business based on, is it a business, and so they want to know, if I'm gonna pay this amount of money for it might only get my money out in 3, 5, 7 years, they're not going to wait 10 to 15 years to get payback on the money that they put into the business. So the things outside of the numbers that make it look interesting, is, you know, one stability and in kind of, Is it ,is it, some are protected from economic swings. So, you know, you have the plumbing is a great example that we were using before, no matter what the economy is, people are going to have leaky pipes, they're going to have problems with clogged drains, so on and so forth. The new installations may slow down, but the world is going to always have a need for people who, who can repair and deal with pipes. So that's one is just, what type of business is it? Two is, you know, probably a little bit more to the advantage of the buyer in some cases, which is, what's, what's the opportunity for efficiency, not everybody wants the business, you know, to be ready to roll 100%. So it's a little bit like the difference between buying a house that's a fixer upper, or buying a house that's in mint condition, and everything's brand new. Sure, some people want everything in mint condition, brand new, but you're going to pay a premium for that. People who are buying businesses generally are wanting to kind of walk in, I'll carry the analogy maybe a little bit too far. But they like to see that it needs a fresh coat of paint and maybe some repairs and a couple of other things because they believe they can make that investment and get the business for a lower value and then put some, you know, sweat equity into it, make some investments into it, that over a period of time, say two, three years, is actually going to have a big impact on the value of the business. So, it's, a lot of times people are looking at the business as it stands today, but they're also looking at what's the opportunity, can I come in and, you know, apply some I hate the word digital transformation, but you guys get what I mean? Like, can they, can they, you know, apply some technology to make the business a little bit more efficient? Can they improve marketing, customer retention? Can they do some things to make the business a little bit more profitable by just implementing some process and procedure? And suddenly they've got something that's generating a lot more cash flow with a little bit of investment. So those are the two big things which is is this business a more of a fad, or is this something's gonna be around forever? And then is there upside opportunity for me to apply my own domain expertise and other insights that I have to kind of transform the business into making it more efficient.

Dave Erickson 25:04
I assume as the business is currently running and is, quote, profitable, although a lot of profit is, is hidden by, you know, making salaries and other things, but if it's if a business is currently profitable and running, that obviously allows them to attract different types of buyers, or a wider range of buyers. On the other hand, a business that is struggling, has some debt, but also has a lot of, for better word primitive operational things could be seen as very attractive by people who feel they can turn a business like that around. Right.

Eric Grafstrom 25:42
It is, you know, I think I think what's changed and changing is, as the months and years go by there's more opportunities on the market. So the unfortunate thing is, someone may have a decent business that maybe could be more profitable or isn't quite profitable today, but could be. And, you know, if you're given the choice, and you're looking at buying in a certain market, with a lot of opportunity in it, investors, buyers are looking at things with a little bit more discerning eye because they have more choices, more things are coming on to the market. And so that's why we, you know, we tend to focus more on you know, helping people prepare their business so they can sell it, you know, you wouldn't just stick a sign in your front yard on a given Saturday and say, Well, I hope my house sells, you know, you might have a real estate agent command, or you at least take a little bit of an objective eye and you look at things and say, okay, you know, what needs touching up what needs repair, what things do, I need to kind of address. And so if the business is not a profitable business, it's going to be pretty hard. Now your option there is to do an asset sale, and you may be able to pay off all your liabilities and get out of the business with a little bit of extra cash in your pocket. So we tend to look at this less about, we're going to go help you find a buyer, that's not what we do, what we want to do is show you, you can exit a variety of ways we want to prepare you for success.

Dave Erickson 27:07
Well, let's talk a little bit about some of those options. We're going to use the T Shirt Company again, you know, ((Eric)it's great, I love the T Shirt Company) cranking along it has a little bit of profit, it's rolling. Two or three partners decide you know, we're bored of T shirts, and we're struggling to come up with new designs, you know, we'd like to do something with this business. You mentioned a lot about preparing a business for sale or transfer or something, what would be kind of the first steps we would go through to kind of take what we have and start preparing it for sale or exit.

Eric Grafstrom 27:44
Sure. So one is kind of around the financial side. The first thing I tell people is, if, if you don't know or you don't believe your books are in order, take care of that first. If you've maintained them, or you've lightly used a CPA or a bookkeeper, get that person engaged, we can always make referrals, but get your books cleaned up. Because if that isn't done, there's no use in trying to contact anyone much less, you know, engage us until you've done that. So first, make sure that your financials are up to date, because you're going to need to provide, you know, certain financial reports if somebody's interested in it. And so, the next step is okay, what, what's your exit strategy? Are you wanting to sell the business and if so, to who? And so if you want to sell it to an employee, that's a path that looks a little bit different than if you want to go out and market the business to go find a buyer? If you believe you're going to sell the assets, then really what's the value of the assets versus the liabilities? So there's a little bit of a kind of, Okay, what's your what's your intended exit strategy. Now, all of our data, you know, having worked with 1000s of small business owners, what I find interesting is, close to 50% of people come in doors say they already know who that buyer is, it's going to be a business partner, family member and employee. So you know, what you're looking at is a lot of people who, you know, have both sides that are interested in doing something but they just don't know what to go do. So get your financials in order, let's talk about what your intended exit strategy is, so that we know how to prepare you and then it's a matter of organizing the information you're going to be there's legal stuff, formation, documents, contracts, all that other stuff. So we help you kind of run through a checklist and gather that and load it into a data room two, it’s pricing. That's the ultimate thing. The business isn't worth what you think it's worth. It's based on, you know, some sort of sane methodology in there. There's, we've talked about what those can be, but there's, you know, pricing that business, which is extremely important. Now, if you're finding a buyer, then that becomes really important to have some justifications. We provide that kind of report that says okay, here's what we think the business is worth, and allows you to enter that conversation. If your goal is to sell it to an employee, and the business is worth $600,000, the only way this thing is going to get done is to sell it for $475,000 and that's what you want to go do, then that's fine, right? But we need to make sure that you understand on how you're going to price the business, not for what will make you feel good. But to get a deal done, at the end of the day, marketing your business into a community of potential buyers before it's ready, or saying it's worth something because you believe that, absolutely makes no difference if you can't actually get a deal done. And that's the number one thing that we focus on. So, you know, is the financials in a position that you can price the business, share financial information, you know, we've got a set price. Now how do we present that business to a buyer with the right price? And so these are things that we walk people through using an online dashboard and some other online tools and coaching. And then eventually, some, you know, we've had some people come in to say, I'm selling the business, and after a conversation, you realize, no, they're actually selling the asset. So it's, you know, through this, we're constantly educating the sellers to what it is that you're doing, not what you think you're doing, that may be misguided. So, you know, what type of transaction is in place here? And how do we kind of codify those terms, so that the two business people on each side understand what they're doing, before we start spending money on an attorney. Attorneys can help you with all this stuff. But there are a couple 100 bucks an hour and there are a lot of things that you can do in advance, so that when you do engage that attorney, you save yourself 1000s of dollars by coming to them with a letter of intent that outlines all the key deal terms, both people have signed it, they acknowledged it, what you don't want to do is have a lawyer get involved and suddenly, they spent 10 hours on a deal only to find out that this isn't a you know, share purchase or a business purchase agreements, it’s an asset purchase, and the two parties are off by a couple $100,000 A good attorneys gonna look at you and say, like, I can't help you until you to figure these things out and I'm a very expensive person to help you figure these things out you need to have a conversation. So, you know, being prepared for all of this, by the time you get to a contract is absolutely essential, not only for success, but to save yourself a lot of money.

Botond Seres 32:06
Pricing a business and getting financials in order, sure sounds like a big challenge. I wonder what are some of the other common challenges that sellers and maybe buyers face when it comes to exiting a business.

Eric Grafstrom 32:24
You know, there's a, there's a common saying that time kills deals and so, you know, I think what you have to do is really, and this happens, especially when I see people trying to sell their business to an employee or to a member of the family, have the conver, the hard conversation upfront, make sure that buyers are actually qualified. And vice versa, make sure the seller is really wanting to sell. Sometimes people are just dipping their toe in the water thinking, well, if I get this number for my business, I'll sell it. but if I don't, I won't? Well, you can waste weeks, sometimes months without really understanding how committed that person is to whether it's selling or buying a business. So, you know, make sure you have these hard conversations upfront. Hey, look, you know, here's what I'm trying to do. You know, if you can't get a commitment, there's no guarantees with, with any of this. But please make sure that both sides are really committed and actually have the financial resources and the, you know, basics to kind of, you know, proceed with getting that done. That tends to be one of the biggest challenges, you know, outside of price and financing. You know, when it comes to trying to apply for a loan, the interesting thing is, is, you know, financials are important, but what a SBA lender wants to see is how well do you know the business, I come from a world of early stage technology people and a lot of them have this fanciful idea of wanting to kind of move into the space and buy a traditional business, and, you know, digitize it. And there's nothing wrong with that. But they don't know anything about HVAC, or plumbing or whatever it may be, so an SBA lender may say, Look, I get it, that you've got an MBA, and you're really smart, and you've worked at all these great companies. But you know squat about commercial cleaning or more of a service based business. And even though you may be able to put 30% down, I've got somebody who has been a GM in this business for the past 15 years and she knows exactly how this business is run and she's actually a lower financial risk for us getting our money back because she knows how to run the business versus you are untested even though you may have a little bit more money and so that domain expertise really becomes an important factor for not just success but also in you know bringing in any type of investor or a bank to help finance the transaction.

Dave Erickson 34:47
Yeah, if you've been running an accounting business or then working in accounting for 30 years and you decide you want to buy a fish store, self sufficient dish aquaria you Dolly, you may be able to help them make their accounting really smooth, but you don't know anything about buying and selling fish, right, so.

Eric Grafstrom 35:09
Or you might kill them while you're, while they're sitting on the floor, you don't know how to take care of them. Right. And that's your inventory. So it's an interesting thing. I've talked to a lot of SBA lenders, and that's the thing you hear consistently is they said, look, I mean, I see smart people is, this has become a more popular thing, and Twitter and on YouTube people talking about these businesses, but what they want is they want somebody, especially if they're younger, is they say, go work in the business, even if it's for a year become the GM, maybe you're not doing exactly what you had planned on doing. But if you go and you learn the business, and we know that you're committed to it, maybe you get the license, which is needed to carry the business forward or you just learn the ins and outs of what that particular role is like for the people you're managing. That's a really important thing. So trades are a great way. But even if you can't be, you know, a licensed tradesperson, just simply working in the business and getting first hand exposure is going to do a heck of a lot of good, it sounds obvious, but it's not something that everybody thinks about because they're like, I want to own a small business, and they're ready to go. And they line up financing. But they fall a little short when it comes to actually being able to kind of get in there and get their hands dirty and make it work.

Dave Erickson 36:21
Yeah, I wonder how many wealthy accountants that started restaurants that failed.

Eric Grafstrom 36:27
Restaurants, I had one guy who owned a restaurant told me that he said, We raised our kids not to be in the restaurant business, and that's why I'm selling or why I need to find a buyer. He took it over from his, you know, his family, and he was ready to go. It was a great restaurant; I looked it up online. And I was like, This restaurant has been around for decades and had a great reputation. And, you know, four and five star reviews all over the place. And he said, you know, my wife and I, you know, our goal was to not have the kids work in the restaurant business. Yeah, it's a hard business: I love to eat, I love eating out, I love to cook, but never want to own a restaurant.

Dave Erickson 37:04
But it seems to me like there's almost two sides of this. The sellers of the business or person exiting the business has a whole bunch of kind of homework they have to do to figure out, you know, what do they actually want out of the deal, come up with, you know, proposal term sheets, get their books in order, their finances, try to figure out what assets they have in their business that has some value. On the other side, the buyers need to kind of figure out what businesses they actually can have an expertise in, and what businesses actually will work for them that they have enough related experience; if they can actually make the business a success, they actually have to figure out, what are they willing to pay for business? So as soon as those two sides, you know, each side kind of has their own homework, is that correct?

Eric Grafstrom 37:56
It is and that's where we see a huge opportunity. Matching buyers and sellers, especially online, really applies to a very small portion of the market. I mentioned earlier, about 45% of people are actually looking to sell their business to someone that's already interested in buying, a family partner, employee, sometimes person in their community. And then others have a business that posting online is quite frank, it's a waste of money. If you have a hyperlocal business, you know, getting back to the service based businesses or T-shirt businesses primarily sells to local businesses and community members. Well, someone looking at it hundreds, if not 1000s of miles away through an online ad that you post, yeah, you got it in front of a big audience, but of which 98% is just simply qual, unqualified or disinterested in moving to your town to your city to actually buy and run your business. And so, you know, a lot of this comes down to how do you help people go from, I'd have no idea what I'm doing to, I feel pretty good about this to, I'm actually ready for a transaction, you know, if we can solve that part of it, you know, it at exit guide.com, we're gonna see a lot of businesses actually, you know, go through this process successfully. And that's our, that's our goal. That's our mission, which is, you know, you don't have to figure all this homework out for your, on your own, we'll help you. And it's not, I'll admit, this isn't terribly sexy, and, you know, other than to nerds like myself, who groove out on, you know, successful transactions, and how do you use technology to streamline processes and other things with, you know, due diligence and all that other stuff and we could talk for hours about this and bore, you know, dozens of people I'm sure, but, you know, it's really how do you get people through the things that they don't know they need to go do and it doesn't become completely confusing, opaque and painful for them to go do them. How do we get this? They're like, Okay, I basically have a little bit of homework, but I've got this interface in front of me, I know what steps to take, If I have questions I can contact Somebody, and we create almost a consumer like dashboard that makes it very easy for them to kind of track where they are in the process.

Botond Seres 40:08
Well, I was going to ask if Eric has some success story he'd like to share with us, or maybe a case study?

Eric Grafstrom 40:18
Sure. So we've got a couple in, in, you know, there's, there's two sides to this. So, you know, I'll give, I'll give two that we've helped recently, one., and one other thing is I about to share is what I learned about businesses, you know, that I never knew existed. It is absolutely fascinating, one of the joys of doing this. So we had a gentleman who was in Jacksonville, Florida, he owned a lymphatic massage clinic. And this is helping a lot of people with a lot of very, you know, chronic illnesses. And he'd been doing it for a while, he was ready to retire and he had a former employee that was not too far away, who was now a kind of a quasi competitor. And, you know, word got out that he wanted to retire, but he had no idea, you know, what his business is worth, and then how to present it because this person was bringing someone else into the process, who actually had some M&A experience. Now, whether it was a small business or not, it was enough to kind of get this guy to say, like, I don't know what I'm doing here. And we helped him go from, you know, having very little confidence to putting together basically a package pricing the business, and then some, some consultation and getting, you know, all the things, you know, in order. And he walked into that first meeting, and he kind of handed them a valuation report. You know, when they asked him questions, he had answers prepared for those questions. And then when they kind of started moving to due diligence, he had everything absolutely ready. So, you know, Jim is. his name is Jim, Jim had actually a successful transaction by selling to a competitor. And, you know, we help people with asset sales or going out and marketing their business in their local community. And, you know, some of this is, will do, I just send an email out to people. And so here's what my business looks like. And so we had another, you know, a bakery in New York, where it was a similar type of approach where they really, you know, had a great offer, but they weren't telling the right story, they weren't putting forward the right information. And the reason this is because they make delicious baked goods, not because they, you know, know about M&A. And so it was really kind of packaging things up, I think it really popped just by showing some of these exquisite cupcakes and other things that they had. And they were able to find someone in the local community who, you know, always wanted to own this type of mainstreet business. And so it was really just putting their best foot forward and knowing what to share, not just showing that they had a great product, but actually, that they had some, you know, interesting business opportunities and financials, and they're ready for that. And I mean, this was one, this particular one just, you know, supremely talented on the, you know, I'll say on the creative side, but really, you know, the fact that she had a pretty successful business, given the, the business acumen and financial acumen was was was pretty darn impressive. It just showed the quality of our product, because the person who came in and bought it was actually looking at this thing, saying, like, this is just really just continue doing what you're doing, but just extra turn it around, but more like a business than a bakery.

Dave Erickson 43:24
That's really interesting. That's a good case study. In that kind of example, you did, one of the things that I think is interesting, you know, lining up with competitors, you know, when you're thinking of selling your business, you know, the emotion of competitors can be quite extreme, right, especially in physical businesses, but also others, where you you spent years seeing the competitor as, quote, an enemy or as a person you're competing with, and you know, trying to do things different. On the other hand, strategically, I would think, and maybe I'm wrong, but many businesses, there's a really good reason why a competitor would want to buy another competing business. They do it in enterprise sized businesses all the time. But on the local level, I would assume that's a good strategic way to exit a business. What do you see?

Eric Grafstrom 44:24
It absolutely is. It's not just competitors, but it's also adjacent businesses. I actually have a relative who I'm helping right now. And they own a spa shop in St. Louis and they've been approached by a pool, construction and maintenance company that they've referred business to each other over the years. They're ready to retire. And so this pool construction company is saying me as a your business has been around for 30 years you have a great reputation we refer business, this becomes super easy for them to imagine that they want to actually, you know, expand their business footprint, they want to increase revenue, they can use a couple of extra employees. So it's not just competitors, but it's also adjacent businesses. But you're right with competitors. If you're super local, and you want to be able to reduce some of your costs with cost of acquiring your cost of goods sold and materials, and, you know, open up or expand by getting another storefront in two towns over or within a region, co-packing, you know, people who are in the CPG space, you know, they'd love to find businesses where they're using the same co-packer. And they'll say, well, like luck. I mean, you know, we're both using the same co-packer, even these products aren't totally related, the mechanics of the business are the same, we've got this existing relationship. So I've seen this with people who have a lot of organic products that are out there with cacao and spices and other things and vegan quesos and whatnot. We've had several come to our platform, because these tend to be very small, niche businesses, and they're good businesses. But until they scale, it's really hard to make these businesses work. Well. You know, the co-packer, co Packer tends to be in a co-packer, somebody who basically does the production and gets it into the canister or the bottle, whatever it may be. They tend to see a lot of these businesses and sometimes they're the connective tissue, where they're gonna say, Well, wait a minute, like, Botond wants to get out of his business days been using us as well. Like, let me just introduce you to and, you know, someone says, Uh, yeah, I mean, we've got a couple of ingredients, we share distribution, channels are the same. So let's actually, you know, find a way to buy that business, even though it may be competitive, or it's just simply we're using some of the same resources.

Dave Erickson 46:44
Part of selling a business and being involved in the transaction is timing. Now, obviously, in the case of something catastrophic, like, you know, you're a family business and one of the family members passes, and you no longer want to be in business, that's kind of forcing your hand. But But most people, you know, when they get to the, there's a stage, right, where they get to the point where and I think this is occurring more often, older business owners, baby boomers, people who've been running businesses for a long time, you know, they want to retire, they want to exit the business and their motivation for getting out is really just, I don't want to do this anymore. Right? How do they approach selling a business versus somebody who's trying to offload a business because of some catastrophe that's happened?

Eric Grafstrom 47:36
You know, I equate this to retirement planning. The last thing you want to be as a 62 year old walking into a broker's office, a financial planner advisors office and saying, you know, I'm going to retire in, you know, three years, what do I do? At that point, it's, it's really hard for someone to say, well, like, you haven't, you haven't saved anything you've saved very little for the past, you know, 20 years, I don't know how much ground I can make up, your, your options are pretty limited. And so if you're forced into this, you're right, it’s health issues, sometimes it can be somebody passing away, those do force where I need to make a transaction happen. So you're going to get the best deal that you can get within that restricted time frame, the more you do in advance to prepare your business is going to play to your advantage. Now, you don't need 20 years to plan in advance. Absolutely, if you're starting a business day, or the early phases, if you want to start thinking about it, by all means, especially if you're in a partnership, I would talk about how that partnership will look if one of them you decides to leave the business versus waiting too long to make that happen. But, you know, those who plan ahead, you know, are armed with the right information and again, kind of using that retirement analogy, which is, if I learned my business is worth $400,000, and I want to sell it for a million, well, I can't wish my way into $600,000 in value and, you know, in three to six months, but you can do things to make the business more valuable, but it's going to take some time, better arm yourself with the information and say, okay, based on where the market is today, here's what my business is worth even with the wind at my back, I might be able to get maybe a little bit more than that. But if I invest in certain things to increase my valuation over time, have the right documentation in order, have the right mechanics in place for somebody to be able to kind of track that growth and what levers I can pull and buttons I can push to make that work. I can increase that value and be out but now I have a timeframe for when I'm going to be exiting my business. It's far more realistic tied to the financial performance and the business performance than it is to just wishful thinking. So it, just, just plan ahead. That's what we're here for. We're helping you get your business sale ready. But we can only do so much to get your business sale ready in 30 days. Yeah, we can help quite a bit. But we can help you get organized, we can help you with the right information. We can't change how the business looks on a balance sheet or an income statement, though.

Dave Erickson 50:10
And what do I do with all those emails I get every week from people saying, Oh, we love your business, we want to buy your business, sell your business to us, just contact us. What are most of those things?

Eric Grafstrom 50:27
They're akin in many cases to the vitamins that you can take to make your hair grow back and make you taller and in age backwards. So, I take them with a grain of salt, there's probably something in there that will help you and may be interesting. But, you know, those are mass emails that are sent out through marketing automation systems. What they're trying to do is to get you to respond. So I'm not going to tell you don't respond, but if you do, respond, don't assume that, that they you know, spent all night analyzing your website and talking to people and you know, Dayton, Ohio, about your business before they tend to send out that email. They're just kind of blasting those things out. So be prepared. And even if you do have a business, even if it is a legit person who's interested, you know, like, engaging a buyer before your business is ready is a recipe for failure. So if you're gonna respond, respond to those emails, because what the hell, I can tell you don't do it. But be, be prepared. That is like somebody who's who's sending out the mailers, you know, in your neighborhood looking to buy a house, they're not looking to pay top dollar for it, they're kind of hoping you don't know what your house is worth, and that you've got a couple of things wrong with it, that they can overexpose and say, Oh, my gosh, this kitchen needs $200,000 worth of work when it really doesn't. But they're gonna use that as negotiating leverage. They're just trying to kind of turn these things through.

Botond Seres 51:56
Well, Eric I’m can you mention planning the heads for successful sale? And I hope you like my next question.(Eric) (I'll see ya build up to it.) What do you think is the future of exit strategies?

Eric Grafstrom 52:14
Well, demographics are going to push a lot of small business owners into this situation. I think the way that we need to prepare people for this is through education. I think there's a massive lack of information that's out there for the options available to small business owners. This has a profound impact. This is 40% of GDP. And so I think the future of this really is, is, you know, getting small business owners to start thinking ahead, far too many lack any sort of plan or thought process around how they're going to exit. So I think the future really is companies like exit guide, of course, that are trying to educate owners and help them get ready for this transaction and this transition, and less around just simply trying to match buyers and sellers. The future is not matching buyers and sellers and marketplaces, it's actually getting these businesses in a position where they're ready to transition and successfully transact, transition. And if we can do that, we're gonna save a lot of jobs, we're gonna save a lot of businesses, we're gonna have an impact on, on a lot of communities. If we don't, it's, it's going to be really challenging, it will have an impact on our economy.

Botond Seres 53:30
Wise words.

Dave Erickson 53:32
Yeah, I think, I think the job market is changing with technology. I think the business market is changing. With technology. I think the demographics, I think it's a very exciting time to be in business, to start business, to sell businesses, to buy businesses. Maybe you can do before we exit real quick, talk a little bit about exit guide, what are the types of businesses you're looking to talk to? And what are some of the things that you offer them? And how do they get older?

Eric Grafstrom 54:03
Sure, great, well, obviously, you can go to exit guide.com. You can always email me, it's Eric with a C. So Eric, at exit guide.com, I'd be happy to chat with you. People come to our website, they start with getting what we refer to as a sale readiness score. This is kind of like when you get your credit score. It tells you you know where you are before you go get that mortgage or that loan for a new car. And there are things you can do to improve your credit score. So there are things you can do to get your sale readiness score up. So he basically looked at a bunch of data, what makes it successful transaction, what makes business deals fall apart. And so we ask you those questions. So when you come to exit guide.com You'll go through a two minute survey and it'll say, okay, you know, your sale readiness score. Say it's 585. And, you know, here's a couple of things that you need to think about addressing if you want to get your business sale ready and so from there, they can move into our program that starts with a $599 upfront fee and $59 per month. And we'll help them go from a lower sale readiness score to a higher one and get their business ready to take to market or get their business ready to sell to someone that includes valuation reports and includes coaching and and includes an analysis of what their business needs in order to kind of, you know, get it ready for someone to, you know, come in and go through due diligence. And so, exercise is really designed to kind of get that, you know, business ready for that process before you kick it off. And it's what we believe is one of the most fundamental things. So you can go to exit guide.com, get started, you can always email me, Eric at exit guide.com You can follow us on LinkedIn and Twitter and Facebook. We host monthly webinars. We've got another one that's coming up on the 24th with a guest who's going to talk, talk about, you know, you know, owners transitioning out of their business day to day so that it doesn't have that owner dependency. So there's a whole host of things that we offer to help people.

Dave Erickson 56:04
Eric, thank you so much for walking us through all the options and strategies that SMB owners can use to exit their business.

Botond Seres 56:11
Well, dear listeners, were at the end of the episode today, but before we go, we want you to think about this important question. How would you want to exit your business and what option do you dream of?

Dave Erickson 56:24
For our listeners, please subscribe and click the notifications to join us for our next ScreamingBox technology and business rundown podcast. Until then start planning your exit.

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