If you think a big EBITDA number alone will get you a big exit… you’re in for a rude awakening.
In this episode, John sits down with longtime business advisor David Barnett—who’s helped sell hundreds of companies—to break down what actually drives value when it’s time to sell your business.
From misunderstood multiples to messy financials, from distressed sales to “built-to-sell” winners, this conversation pulls back the curtain on how deals really get done—and why most owners leave money on the table.
Because the reality is simple:
Buyers aren’t just buying your profit… they’re buying how confident they are that profit will continue without you.
What you’ll learn in this episode:
- Why EBITDA alone doesn’t determine your valuation
- The 2 questions every buyer asks before making an offer
- How poor systems, bad margins, and owner-dependence kill deals
Most businesses don’t sell because they weren’t built to sell.
If you want a real shot at a high-value exit, this episode is your roadmap.
Connect with David Barnett:
👉 https://www.davidcbarnett.com/
Connect with John:
👉 https://x.com/thehvacjack
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👉 Book a call: https://business.yelp.com/ownedandoperated
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More Ways To Connect with O&O
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You're a distressed business. I'm gonna buy you for distressed business price. There's not much of a choice. As a buyer, I have to get paid to take on your risk for whatever decisions you made. If I'm an individual buyer buying, uh, some kind of business, I want to know that I can learn the business. And in order for me to learn the business, I want to know that there's gonna be systems and things in place that I can pick up. And the only thing you're focusing on is a million of ebitda, but you're not really running a good business outside of that. You probably won't get what you want. As soon as you make that decision, I'm going to sell and do something else. You've got to transact this very illiquid asset quickly. 13 deals, only two or three of them were intentional. They built their business to sell it, and because of that, I paid a great price. Buyers are gonna ask two questions when they look at any business. Number one is gonna be, what is the cash flow? The second question the buyer's gonna ask is Welcome back to owned and operated, a top 200 business and entrepreneurship podcast. Where we talk about building a home service business. Today on the show I have David Barnett, a longtime friend of mine who has helped sell hundreds of companies over his career as a business advisor. We talk about how to build your company for, to prep it for sale. What are the value drivers to get the most money, and maybe most importantly, what are the things to avoid? It's an awesome conversation and I appreciate you tuning in. Make sure you hit like and subscribe, David. Welcome back to Owned. Did we actually have you on three years ago you came on my show. Okay. You and Kelsey did when, uh, when you were planning the second hold co conference. Second hold co conference. Yeah. Um, but I've never been on your show, but I gotta gosh, tell you, John, I'm, I'm actually a regular listener. Okay. And I've, I've sent a few people your way and Perfect. The last episode I listened to was the one about the billboards, and it kind of made me smile and think a lot about my old Yellow Pages days because I used to have a lot of conversations with, with guys in various home service businesses about how they advertise. And, uh, it was interesting, one of the. One of the things I, I thought about, uh, during your conversation was, uh, people would often say to me like, oh, I'm doing these other advertising things and people tell me that this is where they're learning about me. Yeah. And my response was always, but where are people getting your phone number? And it was, it was interesting because, uh, a lot of the time you talked about the attribution problem, it, it's existed before the internet. People would do one thing to promote their business, but not realize Yeah. Someone was looking up their number in the phone book, for example. Yeah. No, that, that's a good, that's a good call out. Yeah. I, I heard someone, and I don't even remember what business it was, but there was someone, um, maybe a year ago, and they were, they were doing Yellow pages, like this is just like my reference to Yellow Pages, but they were doing Yellow Pages in 2026 successfully. Mm-hmm. And it was like a meaningful part of what they were doing, uh, which was kind of funny. Uh, I, I think it, we talked about it a little bit on the show. Um, I'm pretty sure someone was prepping to buy a business. They bought the business, they were preparing to cut Yellow pages, and then they happened to look at the attribution tracking phone number for Yellow Pages, and they found that it was actually very productive. So then they kept it, it, it has to do with what the purchasing habits are of the people you sell to. And, you know, if you're selling to older folks who are still using that media, it, it could very well be important. That's funny. Well, today, uh, today we're talking, um, like prepping your business for sale. Yeah. Which I think is a, it's a good topic. We've, we've been buying, we've, we've done three acquisitions so far this year, and then I think we're probably gonna do two or three more throughout the rest of the year. So I'm usually on the other side of the table where I'm talking to people who. Maybe hadn't really thought that they would be having this conversation with me, and suddenly things that I care about as a buyer are coming to light that they didn't, they didn't really know they had to think about. Hmm. Uh, so that, that happens almost every day. Uh, well, well, I was just gonna say, I, I work with buyers and sellers, so Yeah. So, so I get to have this conversation from, from both sides of the table. And there are a lot of misconceptions on the part of business owners about what it's going to be like when, when they actually sit down to have that conversation you're describing. Yeah. And so I, I think this could be a really good conversation because what. People often think when they're running a business, you know, they're, they're thinking about the, you know, the KPIs making the sale. Mm-hmm. You know, managing employees, all that kinda stuff to kind of run the business. But they are often trying to do things like maximize the cash flow of the business while at the same time maybe minimizing their tax burden and, and they're doing all these different things, which seem like perfectly logical incentives to try to maximize while you're operating the business. Yeah. But they're not thinking about what it will end up looking like when, uh, not only do they have to present numbers and financial information to a buyer, but then when that buyer takes that paperwork and presents it to their banker. Yeah. And now, now you've got like these second degree people looking at your paperwork, who the, the numbers have to speak for themselves because the, you know, the buyer's banker's not gonna stop by and, and listen to your story about a Disneyland vacation or something like that. Yeah. Yeah, I think, um, I, I was, I was on Twitter, uh, which I like delete off and on depending on like what global crisis is happening. Uh, so right now it's deleted and, uh, but like, I'll, I'll, I was reading, uh, will Shriver, which I think is just a fun follow, and he's down in Tampa. We've had him on the show before. I think he's coming up. He like, he just has a lot of like, opinions on like the sell side and, and buy side, but a lot of opinions on like, the sell side for home service. And he'll just like throw out multiples and a lot of, and a lot of people do, right? He's just the one I'm thinking of, um, of just like, Hey, I, this company just sold for 10 times on 1 million of ebitda and, um. And there's not much more context than that. Mm-hmm. What, and I think like before we were recording, what I shared with you is that one of the funny things that I think people get in their head is EBITDA is the only thing that matters. And really, like, there's so much more than that matters. And um, you know, we don't know the context on that 1 million of ebitda, like, was that 1 million ebitda 5%? And like in that case, a 10 times is a very, that's a discounted purchase price. Really upside. 'cause it could be upside, right? Of is 5%. Yeah. Tons of upside is built into that business. But if that 1 million of EBITDA is 30 or 40%. They're not getting it 10 times for that. And I think that that's a big shock for people when they're like, well, I've got a million of ebitda. And it's like, yeah, but you're 2 million of revenue. Like there's no, there's no math that makes that math. Google keeps getting more expensive and affiliate leads are getting worse, and somehow you're paying more for fewer lower quality leads. And that's pretty much the game right now. So here's something that most operators are missing. Yelp. I know what you're thinking, but Yelp is way more than just a restaurant rating app. Last year, over 125 million home service leads were generated on Yelp, and almost 50 million homeowners are searching there every single month. Here's the real kicker, though. Their data powers answers across Jet GBT, Google ai, apple Maps, and Alexa. Basically everywhere people are searching before they even know your company name. So instead of fighting over the same expensive Google clicks. You're showing up where customers are actually discovering and deciding who to hire. One company Fuse service out in the Bay Area, hvac, plumbing, electrical does 20 million a year from Yelp alone. They're closing 75% of their Yelp leads, and about 70% of their entire customer base comes from the platform. So if you're serious about leveling up your lead gen, go to business.yelp.com/owned and operated and book a call. Do do you want to hear a mind blowing fact? I would love, I would love to have my mind blown. Yeah. Businesses are bought and sold between two parties that work to make a deal. Right. You have a negotiation, you come up with a price. Yeah. And then other people typically who are trying to then figure out what went through your heads often take the end result of that and try to create some kind of magical formula that explains your logic. Yeah. So this is why there's like 16 different ways to value a business. But not all of those ways apply to every kind of business. And, you know, multiplying the cash flow is just one family of methodologies. Yeah, sure. And, and so people will look at deals that have happened and say, well, this just turns out that, you know, the last five deals I looked at we're all within this certain multiple range of ebitda. So that must be what people are focused on. Mm-hmm. And they'll, they'll create this methodology. People start to repeat it, and then people that come into the field start to think, well, that then is how this is done. When in reality the methodology is a, is an attempt. To understand or sort of reverse engineer what has been happening in these real world deals. And what happens in the real world is people look at a business, they look at a cash flow, they start to say, well, is there upside potential? Like you just suggested? They then might say, well, are there some reinvestment things that have to be done in this business are, are, are the pieces of equipment getting old? Do they need to be replaced? Maybe I'm willing to pay less. And they end up working towards some final price. Yeah. And it's, it's, it's not necessarily the multiple that matters. And then whenever anybody mentions to me that a business sold for a certain multiple, I am, my immediate next question is multiple of what, that's the only question to be asking. Right? Right. Is it multiple of last year? Is it multiple of proforma? Is it multiple of average of five years? I mean, multiple of what, but, but there's a massive difference between ebit EBITDA and SDE. And all three of them are used in this conversation in the world of businesses. Yeah. And uh, it ama amazes me when I listen to different podcasts and conversations where people will say, oh, he sold for three times multiple of, uh, EBITDA or SDE. Mm-hmm. Well, SDE includes the value of an owner's full-time effort in the business, and EBITDA does not. So if you have a business with $200,000 EBITDA and the fair market value of the owner's efforts is a, another 150 grand, the SD is three 50, the EBITDA's 200 mm-hmm. Those are two very different numbers. You, you can't just shrug your shoulders and say three x mm-hmm. Because one of them is gonna bring you up to a million dollars. The other one's gonna bring you to 600,000. And, and these confusions between multipliers and data points is one of the number one reasons why buyers end up leading themselves into, into a problem. Yeah. That they usually avoid when other people point out to them, Hey, that doesn't cash flow. Like, like you, if, if you do this deal under the, you know, under the numbers you propose you're not gonna be able to afford to pay your debt. Uh, yeah. The people who really get into problems are people who don't have that, you know, the banker or the accountant or whatever, kinda looking over the shoulder. How many of, how many home service businesses have you like dealt with? Buy side, sell side? I've started helping people do this in 2008. Mm-hmm. So. If you just wanna say home services where you go to someone's house and do something, there's probably been over a hundred, for sure. Mm-hmm. Yeah. Yeah. What, what's like the normal size that you're, that you're think looking at? I'm typically helping people with what I describe as Main Street into lower mid-market. So I call Main Street EBITDA under half a million dollars. Yeah. Which, which are still, you can have a pretty significant sized business at that, at that level. Mm-hmm. Lower mid market to me is kind of now stretching up into that maybe 900 a million, uh, EBITDA range. Yeah. Uh, but when you get north of that, the conversations change because the buyers and sellers tend to get way more sophisticated. They have a much better understanding of what they're doing, and it's more of a, can be more of an MBA speak conversation, if you know what I mean. Mm-hmm. Like they're, you know, you got more of these private equity people and all that kinda stuff that are in that space. In the main street space, we're much more talking about owner operated, owner, owner-managed businesses, and you know, sort of that family sized HR apparatus where we probably don't have multiple layers of middle management. The owner of the business likely does know almost everybody that works there probably. Um, and, um, and a lot of the sort of decisions over $10,000 are still squarely in the lap of, uh, of the owner of the business. Yeah. I think, um, that's, that's typically who we're, uh, acquiring. Mm-hmm. Like it's been harder and harder, like as. You know, I think deals just change as you grow. And, um, we're, we're starting to try to get into larger just because the, the amount of time and energy that I spend closing a million dollar revenue business is roughly the same as a 5 million revenue business. Mm-hmm. So I might as well just get to five. Um, but yeah, we're, we're seeing a lot. We, we just closed deal number 13 and we have three more that we're actively like in conversations on. Um, but a lot of the time when we talk to people, it's the same stuff every time. You know, uh, well, how did, how did this number happen? How did we get there? Uh, sometimes it's total fundamental misunderstandings, but fortunately that doesn't happen that often. Um, but we did have, we did have one, the, the most memorable one was, um, someone had just started their business like a year earlier and they hit like 150,000 or 200,000 of earnings, which was awesome. I was super excited for them as an owner. Um. That was, and, but it wasn't like quite a, a business. It was two guys, uh, yeah, just sort of doing their thing, but they were working really hard. Uh, so we gave 'em a price for it, and I think it was $200,000, which. Was good for basically buying someone's job. And he said, oh, I thought it'd be I, 'cause I told him like, you know, two times multiple, and I, I basically mapped it out to be a hundred, a hundred grand. Um, and he, he said, oh, I thought it was two times multiple in revenue. So it, and it, that was, that was the most fundamental dis misunderstanding I've ever had of this guy that launched this job two years ago or a year ago, thought he would get $2 million for it. I was like, well, not quite. Um, he's still hanging around the hoop. Uh, maybe somebody will pay that one day, but he emails me once a year just like, Hey, you wanna move forward? And I'm like, no, I do not. Now, was this somebody you found through your own, uh, search? Or did was he, did he have a broker? Uh, pretty much everyone has been through our own search. Okay. So I think, you know, if you're on the buy side of this, uh, so this conversation's sort of twofold. Like, hey, if you're listening to this and you're prepping your business for sale and you wanna make millions of dollars in your sale, like, I think we can walk you through how to do that. Um, on the buy side. Like, here's probably what you should be looking for in a business. Uh, but most of our deals are actually, I don't think we've ever closed a broker deal. Hmm. I'm gonna have to like, and I don't think it's on purpose really. I just think. I mean, a lot of deal flow just comes through the podcast. Like people reach out and say, Hey, I'd like to work with you. And I'm like, sweet. So the three we've done this year have all come from the show. Yeah. Uh, so that helps a lot. And then, um, locally, we were, you know, as we were up and coming, we wrote a lot of letters. I met with a lot of people. So, uh, we just were very proactive about our outreach. Yeah. And you're, you're in businesses that naturally lend themselves towards tuck in integrations because you've already got the playbooks and the systems that you know, were Yeah. You just keep adding in. Just keep adding in. So when you, when you add a new business, you're not dealing with integrating what they're doing. You're you. Probably just take all of their customers and all their employees and just input them into your system. Like, like you're growing your business with a new branch, sort of, pretty much. Yeah, yeah, yeah. Pretty much it. The, the, in general, in the world of small business sales, the most common buyer out there is the individual buyer who is going to take over from the owner operator. But in certain categories, the business sales are more geared towards people doing strategic strategic acquisitions, which are things like home services, things like pest control is another one. Mm-hmm. Where, you know, the, the big national names in pest control, they are sending out letters all the time to the local mom and pop, you know, two truck pest control companies, always with the message, Hey, when you're ready to retire or do something else, give us a call. We have an acquisition program, you know, we can help you retire or whatever. Um, because they just so naturally integrate, uh, the, the biggest difference. You know, between a business that would normally be bought by an individual buyer and one, like the ones we're describing here that can be tucked in so easily is the requirement for having some kind of structured systems and methodologies within the business. Yeah. If I'm an individual buyer buying, uh, some kind of business, I want to know that I can learn the business. And in order for me to learn the business, I wanna know that there's gonna be systems and things in place that I can pick up and be trained on, and that they're documented, et cetera. When you look at, uh, you know, acquiring a plumbing business that's far less important for you, 'cause you know, you've already got that down pat. Yeah, well, I would, I would say one far less important, and two, you never see it anyways. Hmm. Um, so I, I don't know what it's like in other industries, but you know, from, from what I've seen, most people are never building their business. To create value. They're not building it to sell. Uh, it just so happened that I knocked on their door and was willing to buy it. Um, but it wasn't set up perfectly with a great system and a sales process and a marketing. Like none of, I've never walked into a business that had that, um, we created it inside our business and then we just added more companies into what we built. But, uh, I, I really don't think I, I mean, I've seen like some small versions of it, but every time you look at it, and I mean, it's worse than mine, so like, yeah, we tend to ignore it. I, I, I think the number is one in 10, one in 10 business owners look at their business as some kind of asset, something that they can work on to create value. Um, the rest of them need an income. And so they've, they've gotten into business somehow. Um, and they're running it so they can create that income. Yeah. And, uh, and it's, it's paying them when they learn that it's actually to x. Cash flow that their business is worth rather than revenue. Then they, they realize it's probably not worth selling. And this, this is why, you know, very few, a lot of people just shut it down. I feel. I I I, isn't it like one in 10 sell or something, or less than that? 20% of businesses that get onto Biz by Sell. Sell. Yeah. 80% do not. And in the, there's no firm data on what percentage of businesses ever change hands because of just the way that governments record this data. Yeah. Like most small business sales are asset sales. And so when one person creates a new entity legally an LLC or an S corp Yeah. The other person closes theirs down. The government records it as a new startup and a business closure. Yeah. They don't really record it as a business sale. Right. Yeah. And so, so it's hard to know, but we typically use the number of about one in five businesses, change hands, which could be between partners, you know? Mm-hmm. Father to son. You know, it's not really going out for sale through an intermediary in the public or anything like that. Yeah. So it's a very small number, but when, when most people find out what their business is really worth, they, they lose all incentive to try to cash out in a Mark Zuckerberg sense. Right? Like, they're not trying to get rich through the sale of their business. Yeah. They real, they realize, hey, it's not worth as much as I thought, it's worth what, what I've heard so many times is it's worth more to me, which I can almost certainly agree with in most cases. Like, if you are gonna, I think when you're dealing with a small business, I, I think the math gets, gets pretty hard where mm-hmm. You know, if, if it is a, if, if you are, if you don't have an immediate next step, if you're not running towards something, um, then after tax, after paying off debt, I mean, maybe you end up with a year and a half or two years of profit. And if you have been drawing income from that, that is a tough nut to swallow. Yeah. For when I talk to room fulls of business owners, I tell them, number one, the statistics on how many businesses actually get sold. Yeah. And I let them know that because of this tough, you know, shot at selling a business, what you really need to do is have some kind of envir, uh, retirement plan that someone who has a job might have. Like, you gotta have some investments, you've gotta, you know, talk to a financial planner, all that kind of thing. Um, and if you are able to successfully pull off a deal, then that you will be lucky to do that. But what I, what I find too often is people have been listening to some of this content on the internet about people who cash out for big money. Yeah. And they, they have this idea that they're building up this business and they will be rewarded for all these decades of work through one transaction that will yield millions of dollars. And then they kind of bet on that. And, and, and that's where a lot of people get into trouble. I, I think this is why you find so many 75-year-old business owners still running their business because they, they don't, I I see it. Yeah. I see that all the time. Yeah. Um, or they got it or they got an offer that, what I see is a lot of people that are like deeply regret not taking an offer that came along because they thought that it, there would be a better one. Mm-hmm. And, and they didn't realize that that was probably their shot. And I talked to them two years later and they're still still anchoring on two or three years ago profits, which have declined significantly since. Yep. So, yeah. I, I agree with you. I think it's a, I mean, it's an emotional conversation as I have it with a lot of people, a lot of these sellers, uh, as they're sort of like coming to terms with. The reality that they found, that they found themselves in? Well, when, um, so I talk to people usually at, at the point where they say, I need to sell, or something's going on in my life and I've gotta sell, and then they start Googling online. They, maybe they find a book that I've written or they find my YouTube videos, and then they will reach out and wanna have a conversation with me and they'll, they'll say, I need to sell my business. And, and sometimes they'll hire me to help do an evaluation, show them what it would sell for. And unfortunately for those people, they often need to do it now because they've got a pressing personal motivation. Yes. Health, divorce, need to retire. Yes. Whatever it is. When people approach me five or more years before they think that they might intend to retire, we can do that evaluation. And I often find a whole bunch of low hanging fruit. Yeah. Because one of the things I'll do is I'll do a benchmarking analysis and I'll come back to them. I'll say, listen, did you know that the average business of your size in your industry has a gross, gross margin that is three points higher? Like if, if you had that gross margin, it would mean this much more profit and this much more value. Yeah. Right. And, and sometimes they'll know that their pricing is off or they'll know that their costs are off. Mm-hmm. But they just didn't think it was that important because hey, what's 3%? But when you put it into nominal dollar terms, when you express it out as that 3% is actually worth $220,000 to you, sir. Like, then they're like, whoa, now, now I need to manage the business more precisely and, and get on top of this stuff. Yeah. And, and when they have that timeframe to start making the improvements, they can really do a lot to improve things. But if they've gotta go to market, then they're faced with this challenge. It's either you, you either price it for what somebody's going to agree that it's worth Yeah. Or you try to sell the sizzle. Understanding that if somebody's gonna buy the sizzle, you have to structure the deal in a format that shares the risk with them. Yeah. 'cause because you, you know, you can say to someone, do these three things. You're gonna get, earn an extra 50 grand a year. Someone might say, okay, but I'm not gonna pay you for that until we see the money. Yeah. Now, in addition to finding a buyer, you gotta find a buyer you absolutely have confidence in that's gonna be able to deliver on the, the vision or the plan that you are proposing. And this is where people get a little bit freaked out. 'cause they're like, Hey, wait a minute. Well, what if I, what if I sell to a person that turns out to be a bit of a dud? Yeah. What if they can't deliver? What if they can't manage? Yeah. And, and it's like, well, hey, you took risks when you got into business. You took risks when you ran your business. Now guess what? Now you're taking risks on the way out. Yeah. There's risks in selling it too. Mm-hmm. And, and the, the whole small business thing is just a, a prickly ball of risk that, uh Yeah. That you have to manage the whole time. Yeah. So something I think I'm, I'm, I want to pick apart that, like the gross margin thing. So something that I think is really interesting, and we talked about this before, recording. On X. Like you just hear the multiple, right? Mm-hmm. Like we said that, and, um, what's, what is interesting is how many other things actually matter than just ebitda, because I think if you're building and you're sort of like learning from Twitter or paying attention to what everyone's saying, like EBITDA is the only thing that matters. But, uh, there's a lot of other things that meaningfully drive value. Like gross margin's a really important one. Do you have a, a good, great or terrible gross margin? Right? And, and depending on how much m and a is happening inside your industry, the more set in stone those numbers become. So like plumbing, hvac, electric, according to the buyer universe, there's a right and wrong number. Like there's a right number of field to office ratio. Uh, there's a right number of gross margin. There's a right number of ebitda, and if you're below that. Like, you're not gonna be looked at. Well, because there is enough transaction activity to say, Hey, these companies are best in class and these ones are not best in class, and you wanna be closer to, to best in class. So I actually pulled out the list, so I'm just gonna read a few of these. Okay, so these are the ones that we look at. Um, advertising expenses, a percentage of sales. That one, I think usually catches people by surprise. The right answer is six to eight, which is kind of funny, but six to eight, that's the right answer, guys. Uh, what percentage of new construction? The right answer is under 5%. I, I know someone with 2 million EBITDA and like 40% new construction and he's convinced he's gonna get it 10 times and I'm like, you're not gonna get it 10 times. I, I have this conversation with so many people when they're looking at buying a business and, and I'll say, what's, what's new? Construction versus service. And, and at first they don't understand why I'm asking. And I'll say, well, think about the buyers in the world of service. Yeah. You're talking about people who hire, you know, a plumber occasionally. Yeah. They don't really know what the price should be. They just know they have a problem, they want it fixed. Mm-hmm. And if it's a business, the problem might be costing them money. So they really want it fixed regardless of cost. Yeah. And in new construction, you're working for a general contractor who actually knows your business and your margins likely. And they, and they know that if you try to push your margins higher Yeah. They understand that and they, they know when to go look for somebody else and you've got the whole problem of um, you know, when you get paid and sometimes retainage issues. So now your operating capital needs just go through the roof. Totally, totally. I have another few fun ones, just 'cause I think it's interesting. Uh, what's your Google rating? The right answer is greater than 4.8. Uh, what percentage of your sales are financed? That one's kind of interesting. Uh, they want to know that you're upselling. They want to know that you're offering good stuff. Uh, what percentage are you discounting? What's your callback rate like? The more mature an industry in their m and a, like in their consolidation, the more set in stone these numbers get. So if you're out there and the only thing you're focusing on is a million of ebitda, but you're not really running a good business outside of that, um, like you'll, you probably won't get what you want. The, it, it almost reminds me of back in the early 2010s when subway restaurants were like on top of the world. Yes. And everybody wanted to get their hands on one. Yeah. And there was a standard weekly report in a subway restaurant that kind of shows, you know, the traffic, the sales, the average ticket, all that kinda stuff. And people were buying subways based on that one document. They were like, send over that week report. And they were valuing them based on that. And there were lenders that had lending formula based on that report too. That's interesting because there were so many changing hands and you know, to your point, when there's a lot of activity, all of sudden gets set, there can be a depth of information, which Yeah. Is not normal across the breadth of the world of buying and selling small businesses. No, it, it's not at all like the more mature, the consolidation is inside your industry or trade. Like you have to be aware that buyers know what they're looking at. Um, but yeah, you know, if I was rolling up, uh, I dunno, like t-shirt companies, like the retail, like we have a franchise around here, frog something or other, um, that doesn't feel as mature to me. I mean, maybe it is super mature but it doesn't feel as mature. Uh, but you know, and hey, in six years we've done 20 years of consolidation for home service. So like it's pretty mature. People know what they're looking at and they can spot a good business for a bad business within a few minutes. It's, it's true. Yeah. Uh, what, what are some of the metrics you're looking at that, that seem to matter the most people should be focusing on if they're thinking about an exit? Well, let's, let's talk about, let's get back to the whole multiple, right? Yeah. So, so the methodology of taking cash flow and multiplying it by a certain number is supposed to give you what's called the enterprise value, right? And the enterprise value is what the cash flow is supposed to be worth to that acquirer, right? So, so put another, so like a lot of people have probably got touched on or listened to some things about investing in real estate, for example, right? Oh yeah. This is a good comparison. Yeah. So, so in the world of real estate, if someone says that buildings like that are selling for a 10 cap rate, it means that that investors need a 10% rate of return. So if the building is delivering a hundred grand of cash flow. Then divide that by 0.1 is the same as multiplying it by 10. It gives you a million. Yeah. So that building's worth a million because we need a a 10% rate of return, which is the a hundred grand. So, so, um, when, uh, we consider that building, when you buy that building, guess what? You got everything you needed to charge rents to those tenants. Mm-hmm. Right? Nobody sells you the building and says, but wait a minute, I'm gonna actually take off all the doors and windows and take them with me 'cause I don't wanna sell those to you. Yeah. I mean, the real estate investor would be like, what? What are you doing? So this is what happens though often in the world of business sales because that enterprise value is supposed to include everything required to actually generate the cash flow you've represented as being coming outta this business. And so what often trips up a lot of business sellers is that they think magically that. They get this multiplied number, this multiple this, this figure for their business. But then they get to keep all of their cash out of the bank account and they get to keep all of their accounts receivable and they get to keep all the operating capital. Yeah. And not just the debt and, and Right. But so, but in reality, what's gonna happen is someone's gonna look at that business and say, what operating capital is required to make this thing go? Because that operating capital is just as important as the service vans that go out and visit people's homes. Yeah. Without the operating capital, the business doesn't function. And, and this is one of the reasons why, for example, service businesses are gonna do better than new construction businesses, because in new construction, the GCs often want terms from you that you're gonna wait however long to get paid. Mm-hmm. In home service, you know, the homeowner expects to have to give you a credit card number at the end of the visit or something like that. Like you're, you're getting more quickly paid from, uh, from the customers. And so the other thing though is, is that whole. Uh, machinery and equipment side of things too. Yeah. So if I know that I need five vans to serve my customers and the five vans in the business I'm about to buy are clearly about to expire and die, and I'm gonna have to buy five more, well that's just like the real estate investor looking at a building that needs a new roof. Yeah. They're gonna agree like, yeah, okay, I can see this building's worth a million dollars, but it needs a new roof and that's gonna cost me 60 grand. Right. And so, so they're going to adjust downward their offer. To take into account the fact they need to make this additional investment because the real estate investor, just like the business buyer mm-hmm. They're not looking at the price they're paying you. They're looking at the total investment they have to make with respect to the cash flow they expect to, to be able to draw from the business. Yeah. So that's kind of the valuation conversation that, that I find catches a lot of people off guard when they go to sell because they'll make assumptions about how the operating capital in the business and everything, that they just get to keep it. And, and there's going to be an adjustment for it based on whether it's an asset or a share sale. Yeah. The, just to give some more KPIs, 'cause I, I just think these are kind of funny. Alright. Um, but for my industry, uh, the correct answer for vehicles is average fleet age has to be newer than five years and under a hundred thousand miles. And that's average. And that is the correct answer. That that was always the criteria. When I used to buy used cars, I always used to say under five years, under a hundred thousand. Yeah. Yeah. Well, I, I just, I think it's, I think it's funny 'cause I, I see, just see it on X and it's like, yeah, this dude got a 12 times for this million ebitda and I'm like, walk me through it. Like what was revenue was the whole asset Was the whole fleet two years old? Well, okay, so was like, was gross margin 65? You know, it's, it's always like, there's not enough context here and it serves people badly because then, then they go to exit and they're like, okay, well I'm expecting 10 times 'cause I saw it on X or I talked to this guy and it's like 10 times on what? Mm-hmm. 10 times on trailing three years average. Sure. Sounds great. It, you know, so there, so there's a joke. In, in the world of business brokers that you can sell a little coffee shop for eight times cash flow, um, as long as the espresso machine is worth that much. Yeah. The, the joke being the cash flow is next to nothing. Right? Yeah. And, and that's the problem with some of the data because there are these databases that business brokers participate in Yes. And, and subscribe to. And, and here's the average industry multiple for XC size. Yeah. Well, and that's the problem because, because AV you'll, you'll go onto different websites where they will have at these averages, but you can't actually use the averages. Like when I go in those databases, I will find crazy numbers like you just talked about, like the business has sold for 12 x. Yeah. But if you go one layer deeper, if the data's there, you can see that there was all of this equipment or something that, that you're like, okay, I get why the person paid more. Yeah. And it just so happens it turned out to be 12 times the cash flow. Yeah. Which may be had, was a very poor cash flow for the size of the business. But this. Outlier data point is now skewing the average. Yes. And so the proper way to use these databases is to actually go into them and look for other comparable businesses that look very much like the subject company that you're trying to evaluate. You. You wanna find businesses that have a close to the same sales, close to the same earnings as the one you're looking at, and see what people paid for those actual samples. And what, what you'll find is you'll oftentimes, the multiples are very close to each other because people are seeing the same kinds of things. But that's the indication you want to use, rather than these averages. Most businesses don't lose jobs because they're bad. They lose jobs because they're busy. And a customer could not get a quick answer, one missed call, one forgotten follow-up, and the job goes somewhere else. Quo helps solve that by putting every customer conversation, calls, texts, voicemails, into one shared thread that your whole team can see. So whoever picks up next. Already knows what's going on. There's no scrambling for context. No more botched communication and nothing gets dropped quo. Helps keep your team aligned, helps you respond faster and makes the customer experience feel way more consistent. If you want cleaner communication and fewer lost leads, check out quo at qo.com/own. You'll get a free seven day trial plus 20% off your first six months. Yeah, I totally agree with that. Uh, I mean, there's deals we've done that on paper are like six or seven times, but then, hey, it's a septic company and a million of that is septic trucks. That just is what it is. Uh, so yeah, I, I can totally resonate and, and we still felt like we paid a totally reasonable price. 'cause a million of it was septic trucks, and that's just what those things cost. Yeah, yeah. Have you Sometimes I will get into a scenario with someone where I have to explain to them that they actually have what I call dead capital. This is where somebody has, for example, invested a million dollars in equipment. Mm-hmm. But they're never able to create a cashflow that would ever justify the million dollar investment. Yeah. And, and the person will say, you know, I'll say, look, your cashflow is worth $620,000. And they'll say, but I have a million dollars worth of equipment. How can, how can my business be worth less? And then I'll explain, you've deployed capital in a way that is not yielding a high enough rate of return, given the risks of your industry. And so what then does it mean? It means either I'm just gonna sell off the equipment to someone who needs it. Maybe in another place, maybe they're gonna be able to employ it more, you know, in a better way. Or it might even mean that if they want to sell it as a going concern, if they wanna keep their staff employed, if they want to keep it active within the community, they may have to sell it for less than what. Uh, they think the equipment is worth. Yeah, and we, we often think about this concept when we think about business failure. Like a business has gone under, it's closed up and it's being sold for that famous quote, unquote cents on the dollar kind of scenario, right? Where someone, someone's just buying the assets are cheap. But there's a lot of scenarios out there where businesses get sold for like 85 cents on the dollar. They, they get sold at some kind of discount just because the owner is never able to demonstrate that they can earn, generate enough of a cash flow to actually make it worth the value of their assets. That these are some of the, I mean, I think it shows up a lot in asset heavy business. I mean, it shows up a lot in asset epi Business Foundation. I feel. I see tractors, paving companies totally, um, paving companies in the north. Have a really hard time generating any goodwill value beyond the value of their assets because they have to park their equipment off and for like three months every year down in Florida or Texas, it's a little bit different 'cause they can, they can do more, they can work year round kind of thing. So it, it, yeah, I mean a lot of, of, a lot of like that type of business up here, what I've seen them go for is just asset value. Yep. Because nothing else really makes sense. Yep. Uh, we bought a number of companies, like where I usually see that is, is debt inventory. We're like, Hey, I have $300,000 of inventory. And I'm like, well it's not worth that today. You know, you bought that in the nineties. Um, so I see a lot in inventory or Yeah. Equipment. It shows up a lot in equipment where you know, Hey, I bought this $20,000 tool. Or an excavator, but I only dig once a month. And you know, I'm like, I didn't make you buy the excavator. You should have just rented it if that's how infrequently you use it. Um, so we do the same thing, like, hey, the way we approach that as a buyer is I can't reasonably buy this and I have no use or need for it. You should just auction it and I'll, I'll sort of carve that out. That way I can buy what I want. That's a great way of treating it. And, and people will often also do the same thing with that excessive inventory that you mentioned. I carve that out too. Yeah. And I hand them the business card for an auctioneer and say, you, they can deal with it. I, I have no interest in it. Is this stuff that you actually could use though? Or is it really stale? Usually not. I mean, if it's really like, if it's really stale. So the pr the problem is twofold when you're walking into some, if, if you're walking in somewhere with like. Let's say $200,000 of IT inventory, and it's a two and a half million dollars HVAC company. And this is like, I see this a lot where, uh, it's gonna be two things. It's gonna be a ton of parts, and it's going to be a bunch of equipment. And the biggest question is I get is, well, why don't you wanna buy this inventory? I'm like, my guy, your equipment, if I bought it from you versus me buying it from my distributor will cost me 60% more. So I'm just losing money to buy your inventory. Like I have no use for it. Mm-hmm. My pricing is better through my, through my wholesaler, if it's pieces and parts. What I almost always run into is, in order for me to use this, I have to invest someone's salary. Someone's time to go Yeah. To organize it, figure out what you have. Yeah. Organize it in a way that makes sense. And it, that's like a very high friction cost. Mm-hmm. So it is much easier to just auction it all off for 10 grand pennies on the dollar because I'm not gonna spend $30,000 in wages fixing your messy inventory system. Yeah, that makes sense. It's just not worth it. I, I once helped somebody sell a, a bathroom fixture business. Mm-hmm. And the owner had been very successful over the years, had earned a lot of money. He started to get into purchasing liquidations of other similar businesses outta state. And so he had like basically a, a, a bathroom fixture showroom, which should have had an, an inventory of like $30,000 or something. But he had like 150,000. And when he ended up selling the business, what he ended up doing is he ended up. Mean, keeping the title to the excess of inventory, but it stayed there. Yeah. And the deal simply was that as the new guy sold his stuff, he would buy it from him over time. So he kind of like liquidated it to his buyer. I like that over time. I mean, it's a tricky problem, uh, because people just look at their inventory and they assume it's good, but, um, oh, what's the, is it Wealth of Nations where they describe the pin? So like in the making of the pin? Yeah. Do you, so, you know, they go in all of the things. You, you don't see everything that goes into it, all the going, yeah. So, and the idea is like every time there's a touch point from this manufacturer, there's additional cost added because of the labor input. So that's how I think about inventory when we're looking at it, is if, if it's, if you have too much inventory, it's not just the dollars of inventory that's probably not very well organized or like set up, but it's also the, the time and energy that it's gonna take my team. Uh, to, to basically buy something that's probably bought at a worse price than what I can just go get from my wholesaler. So it's, it's, I lose basically on every front as a buyer dealing with inventory. So the, the best, the best case scenario is here's an auctioneer, like go get 20 grand for it. And usually people will try whatever they can to sell to somebody other than, than what the scenario you're offering this. Yeah. This is one of the, one of the, the frustrations that a lot of sellers will get into because they get this idea of what it's gonna be like to sell, and they often liken it to maybe when they want sold a house or something. Like, yeah, you go, you sign contract papers, you get this big check or whatever. Yeah, it's cute. They think it's gonna be like that. And, and then they start to deal with buyers and they start to experience these conversations and they start to realize, Hey, it's not gonna go as, as well or as cleanly as I like. Uh, and, and they got frustrated when, and then they stop and then they own it 10 years later wondering what happened. Yeah. Like that, that's the, that's usually the buyer I'm talking to is the guy that is on the 10 year later and he's like, I had an offer. I was talking to one this morning. I had a huge offer. And I'm like, amazing. I'm super happy for you. Like you maybe should have taken it. Yeah. Uh, despite it being probably painful at that time. The, the, the unpopular way of looking at it, which I think is the more accurate way of looking at it, uh, when I talk with a lot of these business owners is I will say, look, you're not gonna cash out. And get this extravagant outcome. Like again, like I always use Marcus Zuckerberg as an example. Mm-hmm. But these are the stories that get put put in the media. Yeah. Are these crazy unicorn exits. Right. And because business valuations are quite low, you know, because of the risk involved in a small business, you're often talking two to three times the cash flow. For most business owners, they're not impressed with that whatsoever. And I get it, and if you can run it for another five years, you will end up with more money and still own the business. It's totally true. But when something happens, when you decide, mm-hmm I need to retire finally, or um, you know, maybe I'm getting a divorce or maybe I've got a health issue, or something's going on in my life and I cannot do this. The moment you make the decision that you've gotta move on to a new chapter in your life, then what happens is you now are in a liquidation because you've got to transact this very illiquid asset. Quickly. Yeah. Before your own subconscious attitude starts to wreck it. Yeah. So here's, here's what happens. As soon as you lose the zest and vigor for your business and the excitement to return customer calls at 7:00 PM and all that other stuff that people do when they're hustling and grinding and growing. Yeah. As soon as you stop doing that, what happens is your employees start to notice there's less vigor and, you know, spring in your step and it starts to rub off on them and they start to act with a little less zest and vigor. Yeah. And then things start to slip. You know, your, your, your steps don't get shoveled right away when it's snowing. The burned out light bulb doesn't get replaced right away. And then the customers start to feel this energy. Yeah. And it will start to impact your sales and your earnings. And so as, as soon as you make that decision, I'm going to sell and do something else, you've gotta undertake a course of action to get this moving quickly. Yeah. 'cause as soon as those negative energies start to impact your business, you create a trend now in your financial reporting that shows downward ness. Mm-hmm. And as soon as buyers see that things have turned down, then half it's tough of 'em freak out because they're, they're thinking you're on this death slide and Yeah. And that it'll, it's tough, tough to buy, continue. Yeah, exactly. It's tough to buy, it's tough to finance. It's tough to get an investor excited in if you need help as a buyer. Like it. So I always say to sellers, the moment you make that decision to move on to something else in life, yeah. You've gotta act with expedience, uh, and, and make things go. Yeah. I, I agree with you. I think, um, as I think about some of the people that we've bought, then it's been a really good scenario for them. And maybe I, what I'd like to talk about is like how to prep yourself if you're in that situation. Sure. Uh, but when I think about some of the folks that we bought 13 deals, only two or three of them were intentional. And those were the ones that got the greatest outcome. They were intentional. They planned on it, they thought about it. They, they built their business to sell it. Like they had their KPIs in mind. Um, and because of that, I paid a great price. Like we haven't been discount buyers when the business is good. Um, but if the business is declining or in, uh, some type of tough position, like, yeah, we tend to not, we're not gonna pay a premium. The only other, um, we've had, so we've had two that were just like great businesses that we bought. We had two that were lucky and I'll, I'll, I'll talk to you about what lucky meant. And then the other nine were distressed and they got paid for distressed. Like, you're a distressed business. I'm gonna buy you for distressed business price. And the problem is, like you're saying, there's not much of a choice, like they're in this situation, whatever that situation is, I'm taking on a lot of risk, bringing on distress into my life. Uh, I ha as a buyer, I have to get paid to take on your risk for whatever decisions you made. Um, so yeah, distress is distress, but the lucky ones, um, they happen to be in the right place at the right time, uh, which is usually like, I want to be in a market and they happen to be there and they answered my call. So, I, I always say that businesses never sell at a fair market value. It depends on who has greater compulsion. Yeah. Either the buyer or seller has more compulsion. If, if you say, I absolutely need to own a plumbing company in Toledo or something, then, then you're like acting under compulsion. Sure. Yeah. Like, well that's, that's not Toledo, but that's almost the exact scenario we have right now. Yeah. We're overpaying by like 20% and it has nothing to do with the quality of this business. I just have to get this deal done because it's strategic to us. Yep. I think my like message for most people listening is, you don't want to have to be lucky. Uh, you don't want to have to rely on some dude like me, because if you're relying on some dude like me to give you top of market, then I'm just looking for someone in that market. It doesn't need to be you. Uh, but if you build, you know, like those two companies that built great businesses and they got great, like that was, they got paid for the work that they put in, which was awesome. They built it to sell from the beginning. The buyers are gonna ask two questions when they look at any business. Mm-hmm. Number one is gonna be what is the cash flow? And that's going to be an examination of your numbers, what your add-backs are. Mm-hmm. And how easily you can justify all of those things, how clearly you can explain it. So this is the part that people often focus on when they're talking about, you know, getting your business ready for sale. The second question the buyer's gonna ask is, will this cashflow continue under my stewardship a hundred percent. And that's, that's when you start to focus on things like. How closely is the owner tied to the biggest customers? You know, like how important is, uh, that person being there to this business? How many family members are, are in the business? Are there key, uh, foreman who've come up with this person who are absolutely loyal to them? Who if we lost them, that the business could evaporate equally? Right? Like there's all kinds of, of relationships and especially in an industry like any home service industry. Mm-hmm. All of your competitors in a market have employees that know your employees. Yes. They all go bowling together. They all know each other from the pub or whatever. Yeah. Yeah. And whenever there's any hint of upset in the market, if there's rumor going around that someone's being bought or whatever, those other employers, those competitors like. Like if they think they've got an opportunity to get your best tech, that they're gonna make the call. Yeah. Uh, and so, so you have to really have an understanding of how cohesive this team is. One of the Yeah. Scariest things I am seeing lately, and I think it's because of all these conversations online about home service. Yeah. Is I'm seeing people who have no home service background at all coming in and trying to, trying to look at deals where they buy these businesses. Yeah. And, and some of these companies have like three or four techs and it's like, do you know how easy it is to lose three or four people all at one time? Yeah. Yeah. Like, I mean, our, our podcast is littered with those stories of, uh, I bought this business, it had three tax and two left the first day. Like, it's not, it's not hard. I mean, you know, as a, as a strategic, it's a little bit easier. Um, 'cause to us it's not, I mean, it would be very inconvenient. It'd be annoying. We, we want the team, but it wouldn't be bankruptcy. Uh, but it would certainly be an annoying couple of weeks as we sort of rebuilt that team. Um, but yeah, to the, out to a, someone just coming in, it's a, it's a very real risk. The, an interesting story that, that I heard from someone is a, a regional HVAC company mm-hmm. Wanted to go into a new community and there were like three or four good sized companies each with like under 10 techs. Yeah. And they, but they wanted to go into that community. So they approached all four of those companies saying, Hey, we'd like to buy someone to come into this community. All four business owners said no. Do you know what the regional did? They started to call employees and they said, we're gonna open a greenfield branch. Mm-hmm. We'd like to offer you more than you're earning today, but here's the thing, only if your whole team comes over. That's interesting. They poached an entire team. And open sense office. That makes sense. Yeah, that makes sense. And probably at a far lower expense than doing any of those acquisition deals. Yeah, yeah, yeah, yeah. That's a good idea. But, but now imagine, but of those, but this is back to like if you'd, you'd rather do it on purpose than be lucky. Because if you're in someone's way, if someone's determined to be inside whatever market you're in, you should attempt to capitalize on that moment. Absolutely. 'cause you will get a good price if you are strategic. If you are in someone's way, that's, that's one of the best places to be you. You tripped and fell and you're about to get paid 20% above market because you are convenient to me. But the moment you become not convenient to me. Like it, you know, you know, there, there is that whole sort of built to sell kind of, uh, methodology out there, right? Yeah. Where it's like, imagine the kind of company who is likely gonna be the one that sell that buys you. Yes. Right? Yes. And, and what would they like to see? Mm-hmm. I've seen people, you know, craft their business, even buying certain brands of equipment because they know that this is the, you know, the brand more likely used by those bigger companies who might come one day. That's what, that's what happened last year to us. We did a deal. I started talking to someone two years ago. He wasn't super, he wasn't very excited about the price, which was fine. I, I told him how to fix it. Get the, like, for the most part, like if you want to, if you want to. Build a valuable business. Like that should just be the focus instead of whatever you're currently doing. Like it should just be the focus. Hmm. So, uh, make it big. Make it good. And, um, so that's what he did. So he, he grew the business three times or something since we talked, and he built it to be bought by me. And now granted, by being bought by me would've been anybody else that was strategic, but he just had me in mind and it worked out amazing for him. Mm-hmm. Like, he got a, he got a great price. It was a great deal. It was really easy. He made it easy. He made it really easy for me to say yes. Um, and it, he built the whole, it was, it was kind of beautiful to watch it done that way because that was the first time I'd ever seen like someone built so intentionally. And, um, like we, it was an above market price, but it was easy to say yes to because it was like, oh, my integration cost is gonna be zero. Like you built, built it for me to take over. Did it work out well from your point of view? Oh, oh my God, yeah. So like, legitimately one of the best deals we've ever done, and I was the highest price we've ever paid. Like, it was amazing. But like, I would do that deal over and over again. Yeah. Uh, another interesting case that I came across, I was working with a buyer. They were looking at buying a, a home service company. Um, yeah. And one of the big data points, or the big boasts of the seller was, I've got this many people on an annual subscription plan. A service plan. Oh yeah. And, and so. The, the buyer I was working with was very happy about this. Very excited thinking. It was like mailbox money. Yes. It was like recurring revenue. And so I, I, I asked a bunch of questions. I said, well, how do they pay? Are they set up on a credit card? Are they paying monthly, quarterly? Like, what does this look like? What do their contracts look like? Like, and, and as we kept asking more and more questions, you know what we discovered? We discovered that the whole thing was pretty much a house of cards, because what was happening was their annual service plan gave people like two hours of service work or something included. So when somebody had a big project or a lot of a big repair, their own technicians were saying, Hey, if I sign you up for this plan, you actually save two hours of labor. And it's, it's, they were actually using the plan signups as a way to discount. Mm-hmm. And, and basically create the mirage of this regular cash flow, which wasn't really there. I, I, I thought that was very interesting. I don't know, is this something that happens, uh, that you come across That happens all the time. I, the biggest, the, the mu, the much more extreme one is prepaid memberships. 'cause that is a shit show when you go to sell. So we had someone, right, because the buyer has to deliver the service buyer. The gym's have to deliver the service that you got paid for. Yeah. So it used to be really popular to do these multi-year prepaid plans. We actually looked at a business a couple years ago that had one, three and seven year prepaid membership plans. And they, the seller pitched it as the same thing. This is mailbox, it's opportunity, it's all this stuff. And it's like. I mean, you, you collected half a million dollars here. This is not your money. Like, like yeah. Legally, if this is not your money, like this is a customer deposit and it's unearned income. Mm-hmm. Like you act, that has to go with the business. And that was a really big shock, uh, when they found out that, you know, this prepaid membership plan. Was actually a, a very significant liability to the business. On, on the balance sheet, it's a liability 'cause it's unearned income, but it, well, it probably wasn't recorded properly on the balance sheet. No, it wa it wasn't recorded and it was the same thing where we're like, oh my gosh. Yeah, you have this great membership plan. Like when we start, it's, it ended up like we dug deeper and deeper and deeper and suddenly we find out it was, it was $350,000. Holy cow. Of prepaid membership on a business that only did a million and a half. I mean, it was a lot of the enterprise value of this business wiped away by this prepaid membership thing they were trying to do. Well this is why you can have businesses like Jim's, which actually technically are insolvent. Like they have, they can have negative equity because they, they're able to pull this future earning into the present. Um, and, and what happens in that space is, is people will do this. They'll under recapitalize themselves, they'll sell a bunch of long-term memberships, and then their equipment starts to get old and somebody opens a newer, fancier, nicer looking gym, and then the whole thing collapses. This is why, I mean, a lot of states have consumer protection laws about that gym. Exactly. This specifically because this thing just kept happening over and over again. Well, it's crazy. Yeah. It's, it's a, it's a crazy problem. If you could, uh, if you could sort of like leave anybody that's thinking about selling in the next couple years with like a couple quick tips. What would you tell 'em? Get your business evaluated, like get a professional to look at your business and get it evaluated and show you what it would likely sell. Two things, what it would likely sell for and what the likely terms of sale would be. Because, because this is important. You mentioned earlier that, you know, people will hear, like on the golf course, this guy got 10 x you know, for his business. Nobody ever then challenges the person and says, what were the terms of sale? How much did you get on closing day? Did you have to hold a 50% note? Like mm-hmm. Is there a contingent note subject to claw back after three years? Or blah, blah, blah, blah. Like the, the, the terms of sale are really important because if a buyer buys your business and they borrow money from a bank, they owe the bank, they're not gonna get outta that debt. If there's anything that seems extra risky about your business, someone may still want to buy it from you. Their concern is the risk associated with that bank loan. Yeah. You can still sell the business for the price you want, maybe if you're willing to adjust the terms by sharing risk with that person. Yeah. So it could mean holding a bigger seller note, agreeing to an earnout arrangement. And with the SBA rules changing such that, you know, seller notes and things are often now being postponed until the end of the SBA loan. I'm actually seeing more creative people doing deals without SBA loans because yeah, the seller wants to be able to get their money sooner, even if it means they're financing a beer chunk of the deal. Um, that's, that's how we're getting a lot of deals done right now. We did two SBA deals back in 2021, but, um, I mean pretty much everything these days is cash and seller note and um, yeah, it can be somewhere between 20% down to 50% down. We don't typically go above 50. Um. I mean, that's pretty much our deal structure right now. And working out well for the sellers. 'cause we have 13 other people that I've paid on time, so that one's pretty easy. Um, so just like easy to reference check am am I gonna pay you? Uh, but also they get the benefit of a higher purchase price. They get the benefit of interest payments. There's a lot of good, um, inside a seller note, especially if there's no bank, because then you're the first position lien holder. Yeah. So your, your note is actually a valuable asset from a, you know, collateral point of view. Yeah. Like you're, you're the first person in line that that's come up more and more with people, um, just as they like, as we've had to, as we're doing more deal activity, we're having to explain exactly this to them. Uh, and it is valuable. Yeah. Yeah. It's kind of interesting, like in inside the debt stack, it's gonna be senior. Maybe the seller, senior, maybe it's not. Um, maybe it's subordinated to senior, like SBA and then, uh, like equity's at the bottom. So like in, in a type of sale, like you gotta get paid in a bankruptcy. That's a real asset. Um, yeah, it's valuable. Yeah. Um, uh, have you done any deals where you have gotten conventional financing on that hard assets of the business you're acquiring? We did that, uh, probably a couple years ago. Um, but honestly, we just, we, we, so every time we, uh, talk to a seller, we offer them the same three options and people always pick the same one. Um, but like, we'll, like, we're open to these three options. We'll give you 100% cash. Here's what that deal looks like. I will go get a bank loan. Here's what that deal looks like. You can hold the paper. Here's what that deal looks like. Yep. And you're offering different prices, ev Everyone chooses. Yeah. There's a better price for sell. You're sharing the risk, so the purchase price is better. You get the benefit of interest rates, like on a deal we're doing right now, if we go get a bank loan and the purchase price is 2 million, if you sell our finances 2.3 plus you get a half a million of interest over a five year period. I mean, it's almost a $3 million deal. That's a 50% difference here. Here's, that's a lot. Here's the reason though, why you're being accepted on these terms, but a new buyer would not. It's because everyone can look at you and see that you have a successful track record in these industries. Yeah, I mean, that helps a lot. That helps a lot. Being like, Hey, I have 13 deals and 12 of them have seller notes. Yeah, it, it's pretty straight. It's pretty straightforward, but you can actually give someone references. I do. Yeah. Here's the people to call. Yeah, yeah, yeah. I've never missed a payment and, and like one of my, uh, one of my pet peeves is these people online who talk about, oh, you can buy a business with no money and stuff like that. And I, I, I always like to clarify these little points because what the, what you can get away with is not what a new buyer can get away. That is likely true. That's likely true. Well, they can walk in and look and touch and feel my core business. Yeah. And then I do have a Rolodex of people that we pay every month. Yeah. Awesome. Yeah. Yeah. I think my tips would be, um, build this, build with intentionality. Mm-hmm. Uh, when we s you know, we started like really focusing on ebitda, not with really an intention to sell, but just like a focus on running a good business. And it was kind, you know, this whole time. Growing in this, you know, I'm 10 years into my career this year of ownership, and I always thought it was a light switch where one day I could just go from growth to optimized. And it is not a light switch, it is a, it is an on-ramp. And it took like 18 months, probably 18 months to two years to really go from being, um, like just really high powered growth, sort of lower margins. My KPIs weren't what they should be to be a valuable business, uh, to, hey, this is, this is now a valuable business. And it took two years, 18 months to two years, and I think, uh, people get in this illusion that it's, it's very quick, oh, I could just be profitable tomorrow if I wanted, or I could, you know, do whatever I wanted tomorrow. Uh, but it took a lot longer than I thought to make that change. Um, and I think that's probably the on in the built to sell mindset. If I would've just always built with sort of like, Hey, I wanna run, run a good business because what happens if I get sick? What happens if I get whatever? Uh, if you're not set up to, if you're not set up to transact, it could be two years. Yeah. And I think that's what catches people by surprise. So be intentional. Try to have, you know, build a good company along the way. Yeah. I, um, yes. Another, another thing that, that people get misled by, by some of the online content out there is just what is the actual timeline to selling a business? Yeah. And I had a business brokerage office for three years before I started doing this as a consultant. And in that three year period, at the very beginning of my career as a broker, I took on this one listing. I sold that company twice, meaning that it was about to close and then it didn't Oh, that stuff. Yeah. And I, I finally sold it the last month I had had my office. Yeah. So that, that file was on my desk for 36 months Yeah. Until it finally got sold. And, and I like. It. I'm happy I got the deal done, but that was the reality for that owner. Like, he made a decision one day I want out. And that's how long it took. These are are highly illiquid assets. Um, you know, and, and in his case, what was frustrating the transaction was that he owned the real estate and the business and he insisted he wanted to sell them both together. That's idiotic. If he had been willing, sorry, I don't know this guy, but Yeah, you gotta, oh, listen, I, I let him know several times over that period of time if he had been willing to separate two. It's just impossible. It's like I have to have that conversation with everybody. It's like. These are two different human beings. Yeah, totally. Like you're talking to me. Totally. Because I'm buying businesses, not because I'm a real estate investor. You gotta go find somebody else or lease it back to me, or sell me the business, do a lease, and then sell the property on that very first day. 'cause that's the most valuable that property will ever be. Well, just like you are handing out some auctioneers credit, uh, business card, you should find a couple of wreak guys. I, I do. Yeah, I do. Oh, okay. I've had this conversation so many times because, and people are like, what do you mean you don't want the property with the business? It's like, I'm buying businesses. I'm, I don't want whatever deferred maintenance is inside your roof. Yeah. It's just, it's a terrible CapEx decision for me. And I usually have to walk 'em through the math of like, why on earth would I do this? There's, there's a reason why people like Walmart and CVS and all these big companies do not own their real estate. Yeah. Like they, they can make much more with their capital using it for inventory or other, other things. Right. Than investing in real estate. Yeah. Yeah. Funny stuff. This, this was a good conversation. I feel like we got some good stuff done. We hopefully help people prepare their business to be worth a ton of money and then sell to me one day. That'd be awesome. Yeah, that's right. So you, you should publish a list of states and the target dates for your expansion. Yeah, so we, we had actually, we brought this up on a show the other day and multiple people have called and referenced it. So I think we are gonna be a little bit more formal about it. Um, this year we have three, uh, partnerships that we've done through the show. Yeah. And we'll probably do two or three more because people are like, as we talk more and more about it, people are reaching more and more out, which is awesome. And I'm excited that people wanna partner with me. I think it's cool. Um, but yeah, I, I, I think we probably will because it, it's, uh, it's starting to get some legs. Awesome. This is great. I'm, I'm so happy to see you grow. Uh, when I met you in Ohio a couple years ago, you had just moved into your new facility and it Yeah. You were just getting things set up and it was like totally cool. Like you could Yeah. You could see how excited you were and, and your staff too was excited like to, yeah. I guess to be all together in one spot and everything. Yeah. Uh, and it just must be cooking in there now. Yeah. We're probably around three times the size we were then, which is funny. That's crazy. That's awesome. Yeah, it's crazy. It's, it's crazy. We, um, it, it is kind of funny is, well, you know, back to this like focus, I'll give some real EBITDA numbers just to round this out as you start focusing on like, what are the value drivers behind my business In 2023, we probably did like 600,000 of ebitda. In 2024, we did around a million. In 2025, we did three and a half and we bought three businesses. So you, this number's gonna sound shocking, but you know, there's a lot of m and a in there, but, uh, we're pacing above nine and a half for 2026. Wow. And like, the more we just focused on building the right business and building value and focusing on KPIs, it just, it started coming together. But like that's a four year ramp. Yeah. Like it takes a long time. Yeah. And like, we're still on the ramp. Well, and, and, and you know, yes, the business is growing, but your personal evolution has had to be a big part of this because the, the manager that took that business, you know, that was running that business 10 years ago, you're not the same guy. And no, I'm, I'm a, yeah. Many people can't, it takes a lot more, many people can't do this personal growth, but I, I think it's really, uh, kudos to you for this. Well, Jerry's out on me. Well, as, as long as you can recognize which things to hand off to the right people quickly enough, I think you can, you can manage it too. Yeah. Awesome. Well, thanks, thanks for spending some time, uh, today. This was a ton of fun. If people want to check you out, where can they find you? Yeah, if you, if you look up David Barnett with the words small business on any podcast player or YouTube, you'll find me right away. Or if you, David David c barnett.com is my blog site. Uh, I've got a bunch of books on Amazon. I've got, I've been making YouTube videos for 11 years. And yeah, basically I talk about buying, selling, financing and managing small, medium sized businesses. So if, if conversations like that interest you, uh, find me online and, uh, and follow along. Awesome. Thank you. Thanks John.
