We sat down with Morgan Tate to hear about his journey into business brokering, his thoughts on seller education, and how COVID has affected the market for sellers and buyers of small businesses.
Will: I’m always curious about how people journey into the business brokerage industry. What did that path look like for you?
Morgan: I got into it through an unconventional way. One of my business partners, Mike Lenz, had come into the career by selling his business in Toronto. After doing so, he relocated to Victoria, B.C., and noticed that there were no real services to help business owners sell. So he started his own brokerage.
My other colleague, Keith, did his MBA here on Vancouver Island. His thesis was on small business acquisition, which led him to interviewing a number of business owners. Those interviews gradually progressed into actually helping them sell their business. Keith and Mike joined forces about 4 years ago.
My introduction to Keith and Mike occurred while working in wealth management. I remember leaving our meeting thinking the industry was super interesting. So a few years later I reached out and started working with them in a marketing role. I was fortunate to get a couple referrals, by simply updating people on what I was doing. Before long I was helping out with the advisory work as well.
Will: I imagine there are quite a few parallels between wealth management and business brokering. Before we dive into what you all do as a firm, I’m curious how you landed on the name Paratus.
Morgan: Sure, so Paratus is actually the name of the software company. The brokerage firm is named Chinook M&A. The name Paratus comes from Latin, where it means “be ready.” As the #1 reason businesses fail to sell is being unprepared. So the whole concept behind the software company is to help business owners prepare to independently sell using a suite of tools. We help business owners “be ready” to sell their business.
Will: That’s a good story behind the name. On the topic of being ready, one thing that has always stuck with me is that so few small business owners actually know that selling is an option. Why do you think that is?
Morgan: I think there’s just a lack of education on business valuation. People don’t really have an idea of how it’s determined.
We had a buyer inquiry the other day who asked if the asking price included the lease. And it was sort of a confusing question, but we get those all the time.
Another recent example: my colleague Keith was speaking to a friend. Keith was pretty confident he could get him at least $500,000 for his business. Yet, the owner was convinced it wasn’t worth much and was planning on just closing the doors.
The list goes on. A lot of people discount what their business is worth. But then again, a lot of people will overestimate what their business is worth, which is a different side of the same problem. In both cases, there’s a lack of transparency which causes misunderstandings and strange rule-of-thumb valuations.
That being said, people generally understand using market comparables for valuing something. They know how to find the value of their house. They can look up an address on MLS and see what their neighbor’s house is worth and what it sold for. But there’s not really a way to do that for businesses. It’s murky. There’s not much price transparency.
Will: That’s an interesting point insofar as, there are a number of comps databases out there, but the buyers and sellers don’t have access to them. There’s normally an intermediary or business broker sitting between the market participants and the data.
Morgan: Exactly. And the business brokerage community isn’t the best at marketing, I would say. People are always like, “Oh! You help people buy and sell businesses? I didn’t even know that was a thing.”
Because of this, most people don’t even know the business brokerage industry exists. And to be honest, we have the same marketing problem with our M&A firm. People don’t know there are services to sell your business, just like there are services (software, brokers, etc.) to sell your house.
Will: Right. How much does this education problem fall on the shoulders of business brokers versus, say, government agencies like the Small Business Administration?
Morgan: I think that government agencies are definitely a factor. But, not everybody is going to look to the SBA for guidance. Not every business owner is going to walk into the local SBA office asking how to sell their business.
But, probably every business owner is going to be at least in contact with their bank, or financial advisor, or accountant. So pushing the education through those professionals, the close advisory network that pretty much every business owner has, is ideal.
Will: Sure, that makes a lot of sense. The next drop-off we hear a lot about is the percentage of deals that fall through. Something crazy like 40% or more. So, for the owners who know selling is an option and they have some interested buyers, what goes wrong?
Morgan: One big reason is that they don’t have the information ready. It gets back to the “Be Ready” concept.
Oftentimes there is a buyer who’s interested in the business based on some high level information. But, once they start asking for a few basic details, the deal starts to fall apart. The owner either doesn’t have the information on hand or takes too long to gather it. It creates some doubt and uncertainty for the buyers.
They question whether the business owner has the right systems in place to track their business. For example, it doesn’t give the buyer a lot of confidence if it takes the owner two months to pull their monthly sales for the year.
Another factor is having trust in the numbers. A majority of people are pretty honest, but any sort of contradiction between what an owner has said and the real numbers (whether intentional or by accident) starts to erode the little trust a buyer has. Again, this all gets back to being prepared.
Will: That’s a really good point. Not only does being prepared with financial statements help with moving a deal forward but it prevents trust breakdown later on.
Outside of the potential issues within a deal, we’re obviously in somewhat of an anomaly of a year or two. How do you see COVID impacting business transactions as we start to hit a recovery?
Morgan: The interesting thing for us is that we had like two months where everything was at a standstill, and then it’s been just as busy as it was at the tail end of 2019, which was super busy. So, I think it’ll just pick up where things left off to be honest.
We have macroeconomic conditions where there’s low interest rates, and people, you know, are looking for ways to allocate capital into new asset classes that are going to perform better. That’s one factor.
The other factor is more on the sell side. It has to do with the fact that business owners may not want to go through something like this again.
There is this ‘Baby Boomer Wealth Transfer’ that everyone keeps talking about, but back in 2008, these same Boomers didn’t want to sell their businesses because they were in the middle of a recession and valuations were getting a haircut. Whereas right now, valuations haven’t gotten hit in the same way, unless you’re in tourism, or food and beverage. Valuations have mostly stayed pretty standard across the board.
Obviously, this has also been super stressful. Owners have had to cut expenses, lay off people, and maybe even pivot their business. So, my sense is that people are pretty exhausted and will be looking to exit.
Will: Would it be fair to say that your projection is that it will be more of a buyer’s market coming out of COVID? As more sellers start trying to sell - to avoid experiencing something like COVID again?
Morgan: It’ll be interesting because it’s definitely a seller’s market right now. We’re seeing it in the competition on deals.
But, I’m interested to see if that flips at all. The business for sale market is almost always a seller’s market. There’s just a lack of inventory - of businesses for sale. The demand is always greater than the supply.
I would imagine that there’s going to be an increase in some of the quality businesses that are going for sale, the ones that have been holding out for a while. As owners start to sell, there might be a rolling effect of “Oh, Bob sold his business!” and then Sally decides, “Maybe it’s a good time for me to go. I know Bob got a ton of interest.”
Whether it will become a true buyer’s market, I don’t think so.
Will: One aspect that is unique about Paratus and Chinook is that you support both for-sale-by-owner and working with you all as hands on brokers. What are your thoughts for sellers in terms of thinking about those two options?
Morgan: One big observation for us is that people who are going to sell independently are going to sell independently, while the people who want a little bit more support will usually seek out business brokers.
In either case, the biggest factor in driving business value is to detach yourself from the business as much as possible. Being able to separate yourself from the business increases your buyer pool, which drives your business value.
If you are already in a specialized industry that takes certain knowledge and you’re essential to the business, it’s harder to sell.
It’s why selling an interior design business can be really hard. If there’s only three employees, then the main designer is probably the business owner. A business like that can only really be bought by another designer.
Whereas if you own an interior design store that has 10 employees and the General Manager already does all the design work and is planning on sticking around, then it is easier for an industry outsider to buy the business. This widens your pool of potential buyers.
So regardless of whether they’re going to work with a broker, or sell it themselves, that’s going to make the process much easier on either side.
Will: That’s a really good point and gets back to education. The sooner business owners start thinking about their exit plan, the earlier they can start to detach themselves from their businesses.
Well, thanks so much for your time. This has been fun. Any final remarks on Paratus?
Morgan: Sure. I think the biggest thing for business owners is that it’s never too early to think about your exit plan.
The way we think about Paratus is that with our PriceBuilder and DealBuilder products you have a private and low-cost way to both value and market the sale of your business directly to buyers. You can test the market without having to put your business out there. For instance, if you’re in a small town, people can connect the dots if you list your business on the local Craigslist. With Paratus, it’s a much more private, direct approach.
Moreover, our PriceBuilder tool may help you discover whether your business is actually worth what you think it is.. The average Mainstreet business sells for $200,000. That’s not an insignificant amount of money. So it’s something worth exploring for business owners because, unfortunately, a majority are leaving money on the table.