Legal matters, business strategy, and life perspectives from the mind of a non-attorney.
Built to Sell Radio is a weekly podcast for business owners. Each week, host John Warrillow asks a recently cashed out entrepreneur why they decided to sell, what they did right and what mistakes they made through the process of exiting their business.
As an Exit Planning Advisor, I was excited to discover this podcast based on its topic category alone.
I was thrilled when I listened to an episode to find that John Warrillow is an absolute gem as a host.
My jaw hit the floor when the podcast responded favorably to my request to write a monthly article based on their episodes.
It’s the thing we haven’t been able to give to our readers. That is, the perspective of business owners who have gone through the rigors of exiting a business.
After all, I can talk about Exit Planning until I’m blue in the face.
I can tell you the best practices for Transferring Ownership to Children.
I can even explain Private Equity like I was speaking to a 7 year old.
But when it comes right down to it, you don’t want to hear about this stuff from some hot-shot advisor. Nope. You want to hear it straight from the horse’s mouth.
Let’s do it.
Scott Miller owned Miller Restoration – a company specializing in residential fire and water damage restoration – for 12 years before ultimately selling the $3 million-per-year-company for a 3.5x multiple in 2018.
On two previous occasions, Scott tried – and failed – to come to terms on a deal. The meat-and-potatoes of this episode comes from Scott’s dialogue as he reflects on those failed attempts.
John Warrillow: “You shared earlier that you had gone through a couple of ‘false starts’ with potential acquirers. At what point did you start to think, ‘Hey, it’s time to sell.’? Was there a triggering event?”
Scott Miller: “There were a couple different phases of that. Earlier on, maybe about 5 years into the business – I listed it. I just didn’t like it anymore. I felt like I needed to do something else with my life. I had a 1 year listing agreement with this person and he didn’t bring one potential buyer.”
“For a few months I was angry that he wasn’t bringing me anyone. But then I thought to myself, ‘You know what? I have a good team, and I’m making a good income… This isn’t so bad.’ Maybe this is just for the best. And I didn’t relist it.”
“I never disengaged during that listing period. That was really important. I had kept growing it during that time and identified the things that I didn’t like to do and delegated and hired so that I didn’t have to do those things.”
Do you buy or sell that Scott Miller made a critical mistake when he delegated tasks that he didn’t like doing?
In the last 2 weeks, I’ve heard 3 different business owners reflect on the reasons they began reorganizing the structure of the business, building systems and processes, and delegating tasks. All 3 identified a failed attempt to sell their business as the main reason. Somebody literally told them, ‘Hey, I’m not interested in the business unless you’re coming along with it.’
As an Exit Planning Advisor, listening to a business owner talk about delegating and hiring is music to my ears. It is easily one of the top 3 things that all business owners can do to increase business value.
In Scott Miller’s case, he didn’t do it because someone told him to, and he didn’t do it to create business value – he did it because he was plain sick of doing certain things every day. In the end, his reason for doing it doesn’t matter. The fact that he began delegating at this point was absolutely instrumental to the eventual sale of the company for a 3.5x multiple.
John Warrillow: “You went through a second failed attempt later. What was the triggering event at that point?”
Scott Miller: “Same kind of thing, I felt like maybe it’s time to do something else.”
“I was having a conversation with a good friend and he knew somebody locally who was a ‘finance guy’ that had a couple small businesses. His main business was in private equity.”
“He ended up having an interest in my business. From the time I started talking to him until the time the deal fell apart was about 15 months. I let myself get strung along far too long. It was an emotional rollercoaster. ‘Do I have my business sold? Do I not? When’s it going to happen?’ It was just delay after delay. Finally he called me about 1 week before the settlement was going to happen and said he needed another month because his financing fell apart. I finally said, ‘No, we’re done.’”
“The good news is that the same sort of thing happened with the business while I was going through the potential sale. The only way I can explain it is that there are certain periods of time when everything is just ‘clicking’. You know, revenue is strong, cash flow is strong, and the team is great. Then there’s other parts where the road is rockier. So, as I’m coming to the end with this guy, everything was just clicking. And at that time, I was thinking to myself, ‘Why am I doing this? Why am I selling this great business?’”
“So, I was actually happy that it fell through. Because I was having some seller’s remorse.”
Do you buy or sell that the emotions of going through an attempted business sale are vastly overrated.
The emotional roller-coaster of selling a business is very REAL, particularly for business owners who have spent upwards of a decade working in the business. Scott Miller does an amazing job of describing the ups and downs of those emotions if you listen to the full episode.
John Warrillow: “So, it falls apart and you go back to running the company. There must have been some other triggering event that lead you to finally getting the company sold?”
Scott Miller: “There wasn’t really a triggering event, but I can tell you a little bit about my mindset on it. The business was very strong. We were up to just about 3 million in revenue.”
“A little backstory: 5.5 years ago I started another business called True Blue Auto-Glass (it’s a mobile auto-glass repair and replacement business). I started that business because I wanted to have another business under the same roof, and I wanted to leverage our insurance relationships.”
“For those 5.5 years, I spent about 1 hour a week on that business because I had a General Manager that basically handled the operations. I really didn’t do much with it. It just sort of grew on its own.”
“Then I thought, you know what, I love the excitement of growing something. And I felt like I had hit a little bit of a wall with the restoration business in terms of growth. So that is what ultimately triggered me to sell the business. It was really about me being able to free up my mind to focus on a business where I could have some rapid growth again.”
John Warrillow: “Got it. So what did you do? Did you have a buyer in mind? Did you hire a broker? What was your next step?”
Scott Miller: “About 4 years ago I went to an industry conference in Chicago. The theme of that conference was Succession Planning. And there was a broker there that specialized in brokering restoration businesses. That’s all he did. So I joined his mailing list and just kept him in the back of my mind. When I got serious about it, I reached out to him and started going through the process.”
Our next Exit Planning & Business Succession Seminar will be held in Appleton, WI in October. Attendance is free but limited to the first 30 registered attendees. Click here to be the first to receive information about this event.
“Within 2 weeks of listing it, we got an LOI from somebody. We spent a couple of months with that person before it fell apart. We agreed on the general terms of the LOI, and when I started sharing financials with him, he wanted to make a large change in the offer.”
John Warrillow: “Why did he want to make a change in the offer?”
Scott Miller: “It was something related to our vehicles. We had capital leases on some of the vehicles. Basically, the IRS allows this type of lease to be treated on the financials like a purchase, so you can depreciate it.”
“Anyways, the deal fell through and we got another letter of intent. The buyer met my asking price of 3.5x earnings. I ended up getting 85% in cash, and held a 15% seller’s note at a 5% interest rate.”
Restoration companies generally trade between 2 – 3.5x EBITDA.
As a general rule, having a capital lease (as opposed to an outright purchase) is more a matter of personal preference than it is a major obstacle in valuing or selling a business. That being said, business owners who take advantage of capital leases may experience the following resistance upon business sale:
- Lessor Consent. The lease may need consent of a 3rd party (the lessor) to be transferred. From a legal perspective, it’s a pain in the a** anytime that another party needs to sign off on a deal.
- Lowball Buyers. Let’s face it. Some people are rats. They seek out opportunities to get something for nothing. A cunning buyer may spot the words ‘capital lease’ as an opportunity to claim that you don’t really own as many assets as your balance sheet shows. For this reason, it’s important to retain smart, experienced professionals who can help you weed out riff raff.
John Warrillow: “How much of this process did you share with your team? Were you able to keep it from them all along? Did you try to keep it from them?”
Scott Miller: “I was able to keep it from them all along. I tried to. I have very mixed feelings about it. I was advised by my attorney and my broker to not tell them. After all, it’s fallen through before and it may fall through again. There’s no reason to get people worried for – potentially nothing at all. But honestly, it was the most difficult part of the process by far. It was really difficult to not tell them.”
John Warrillow: “Why did you want to tell them?”
Scott Miller: “I felt like I owed it to them. They played a very big part in growing the business. They always had my back.
John Warrillow: “Why didn’t you tell them, other than the advice from your broker?”
Scott Miller: “I felt like there was a very real chance that I might not sell the business. And I was afraid that if they knew I was trying to sell – they would leave. But it’s something that I continue to struggle with. When the time comes to sell another business – I don’t know that I’ll do it the same way.”
Do you buy or sell key employees as a major source of regret for business owners?
75% of business owners who successfully sell report experiencing “profound regret” within 12 months of the sale (per Exit Planning Institute).
Of the sources of regret that have nothing to do with money – this is certainly one of the most painful.
If it’s so painful, why do all the ‘smart people’ advise you to sweep it under the rug?
In the end, attorneys and business brokers give logical advice. It’s their job. Their role – in this case – is to help you sell your business. Get the thing sold. Period.
It goes without saying, then, that they would advise you away from creating any unnecessary risks to that objective.
What’s the risk?
In this case, the risk is that you – the business owner – cannot find a way to tactfully and respectfully broach the conversation of a business sale with key people without causing significant unrest in the business. An exodus of talented individuals ensues, and before you know it there is nothing to sell. BIG RISK.
It’s a VERY difficult thing to do. Some business owners are talented enough to walk the tightrope – and some are not. Some groups of key employees are respectful enough to handle such a delicate conversation with maturity and grace – and some are not.
But guess what? At the end of the day, people matter. Friendships matter.
Is it worth opening Pandora’s Box now to avoid experiencing profound regret later?
Only you can answer that for yourself.
BUT – if you ask me – Selling for a large multiple should not be the goal of business owners planning for an exit. No, their goal should be twofold:
- To sell for a large multiple; and
- Experience profound HAPPINESS (not regret) in retirement.
Thanks for reading! Give Epiphany Law a call or shoot me an email if you have more specific questions! You can also follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.