We sat down with Sal Acosta to hear about his process for qualifying buyers and sellers, where he thinks the brokerage industry is going, and some common misconceptions about selling a small business.
Will: Before we get into small business sales, I’d love to have people hear a bit about your personal story. I remember it being quite interesting.
Sal: Sure. In terms of my academic background, I’m an electrical engineer. I studied at MIT. I did my MBA right after that at Tulane. Then I started with a pretty traditional corporate career working for blue chip companies in the electronics and electrical manufacturing space: Hewlett Packard, Motorola, Lutron Electronics (the people that do the lighting controls), and ABB, which is a big European electrical company.
At the same time, though, I was always intrigued by entrepreneurship. I always had what now is called “side gigs.” We didn’t call them back that back then, but I always had some entrepreneurial side gig in the background.
So, as I went up the ranks in my corporate career, and was lucky enough to have some pretty high level jobs, I started to get involved doing deals under the corporate umbrella: buying subcontractors, selling subcontractors, etc. There came a point in my career where if I wanted to continue those corporate tracks, I would have basically had to go overseas full time. To be quite honest with you, I was at a stage in life where I didn’t want to do that.
So then it came down to “Okay, if you’re not going to do that, what do you like to do? What do you know how to do and what can you get paid for doing?” And I said, “Well, I like facilitating all these buy and sell transactions. Maybe I can do that on a smaller scale for what we call main street businesses and lower middle market.” And, that’s what I’ve been doing for the last 10 years.
Will: I think you left out your time on the Civil Air Patrol! In any case, when you started considering main street transactions - was “business brokering” a term you were familiar with?
Sal: Not at first. Obviously, more people are familiar with invest ment bankers and M&A. Those are the terms that are used for bigger deals.
I quickly discovered that there was such a thing as as a business broker and that they did similar types of activities at a much lower transaction value.
Will: I remember last time we spoke, you made a distinction within the business broker industry. Something along the lines of those who focus on transaction volume vs. those who take a more hands-on approach with listings.
I know Landon and Acosta falls in the latter group. I imagine that means you need to be quite thoughtful with the sellers that you do choose to work with. What does that process look like for you?
Sal: Yeah, that’s right. Not everything is perfectly binary, but in general, I think it’s fair to say that there are some business brokers that focus on volume. Then, there are some of us that are a little bit more “boutique” or specialized, if you will.
We try to fine tune our process because we’re much more hands on. First, we have to make sure that these are businesses that can be really sold. Second, we need to show a high probability of achieving a transaction.
We do this by putting ourselves in the buyer’s shoes. Is this something that’s going to be attractive to me? Both in terms of price but also in terms of the value proposition, the business itself, the market.
Then we try to understand the market for this type of business. Does it exist? Do we know who we can present the business opportunity to? Do we know how to generate interest for this type of business?
Will: So what would be an example of a business where you may say, “Hey, look, I don’t think we’re going to be a great fit for your business?”
Sal: Sure, there are a few examples we can chat through.
One example is a turn-around story. This is when a business is losing money and in need of a turnaround. Now, I’m not going to tell you that that transaction cannot be done. In fact, some business brokers specialize in turnaround transactions. But, that’s not something that we specialize in.
Another example is when there’s a great business - it’s making money, there’s nothing wrong with it - but the expectations of the seller are unrealistic. In these cases, there’s not enough flexibility from the seller for us to be able to find a buyer that’s going to meet his or her criteria.
Will: I imagine in the absence of an MLS for small businesses, it’s easier for sellers to get fixated on an irrational price for their business.
Sal: Oh, absolutely. That is one of the biggest obstacles to trying to get a transaction done for the main street sector. A few factors can come into play.
One is that a lot of times the seller started their business from scratch 10, 20, 30 years ago. They’ve put blood, sweat and tears into this business. They’re very emotionally involved. They’ve plowed every single penny back into the business to make it better and better and better. But, having said all that, the business is worth what the business is worth.
The other factor is that every business is very unique. When you look at another asset - like a house, a commercial property, or a car - there’s not as many variables that impact the value of what the asset could be worth. Yet, the business has employees, the business has customers, the business may have intellectual property, the business generates cash, the business has market dynamics. These are all the things that make it much harder to value a business compared to other asset classes.
Will: And that doesn’t even touch metrics that many business owners fail to consider. For instance, revenue concentration is one I hear a lot. If a majority of your revenue is concentrated in a few customers, that’s a more risky business for a buyer to purchase.
Sal: That is something that, unfortunately, I see a lot of the time. They started their business. They landed one big customer, or sometimes that initial customer relationship event predates the actual business. Long story short, time has gone by and the business hasn’t found additional customers. Sometimes that one customer could be anywhere between 50% to 90% of the revenue. That is a huge risk for the buyer to take on. If the buyer loses that one customer, he or she has lost 50% to 90% of historic revenue.
Will: One thing I’m curious about is where you think the industry as a whole is headed in the next five or ten years?
Sal: It’s interesting because as we were talking about in the beginning, a lot of people don’t even know there’s a profession called a business broker. Most people know that they should find a realtor to sell their house or commercial property.
So there’s a lack of education, communication and awareness in the market.
I think it’s going to get worse in the sense that there’s a lot of baby boomers that want to retire. Now that they have likely delayed it for a year or two because of COVID-19, the time to reach them is running out.
Now, there are alternatives. Perhaps some of them plan to try to sell it to an employee or sell it on their own. That comes with the same pros and cons as trying to sell your house on your own.
But, you know, a fair majority think that their business is not sellable. They do not think it’s worth anything, so they just close it. They leave a lot of money on the table.
It behooves all of us, and maybe this publication is part of it, to get the word out that business brokers are out there and can help you sell your business.
Will: Funnily enough, I was on the phone this morning with an electrician in Tennessee. He’s 75. He has five or six employees and does a mix of residential and commercial work. I asked him about his exit plan, and he said he plans to close up shop. He didn’t know business brokers exist, and, apparently, neither did his accountant.
It’s a shame. When a business owner says, “Okay, I wash my hands. I retire,” it’s not just the business owner leaving money on the table. There’s, to use an economic term, deadweight loss. Employees lose their jobs. Businesses lose customers. Businesses lose suppliers.
Sal: Well, certainly, the SBA and the Small Business Development Centers (SBDCs) could play a role in helping us get the word out. But, it’s funny that you mention CPAs. I think CPAs, lawyers and bankers are key.
If you’re a CPA, you’ve probably had this client for 10, 20, 30 years. If you’re a lawyer, same thing.
These advisors can start asking, “Hey, what is your exit strategy to win? Are you planning to sell this business? When are you planning to retire?” As part of that conversation, they can mention that there’s a resource called a business broker that can help you.
My other hope for the industry is somewhat tied to the changes due to Coronavirus. Prior to 2020, most brokers were focused on their immediate geography. Now that everybody’s getting used to doing business over zoom, I think that’s going to open up the game a lot more.
To start, business owners will be able to talk to different brokers throughout the country. They will be able find one that feels best, that has industry-relevant experience.
Additionally, most business brokers are concentrated in the major cities. Now that we’re able to conduct business over Zoom, we’ll be able to better serve the rural areas and the business owners located there.
Will: On that note, part of the job of a business broker is something akin to “educator.” Oftentimes, this is the first transaction for both the seller and buyer, whether they’ve heard of business brokers or not.
I know one of your contributions to the education problem has been your book: The Secrets to Buying or Selling a Business. I really enjoyed reading that last fall.
What are the common misconceptions people have about selling a small business?
Sal: A lot of times these misconceptions are in the area of how quick and easy it is going to be to sell a business.
For instance, many sellers come in thinking, “Okay, I need X dollars to retire.” That’s often without the help of a financial planner to really understand how much they need to retire in what timeframe with what type of lifestyle.
Regardless, they come in and they say, “Hey, listen, this is what I need to retire. Therefore, that is what I want to sell my business for.”
Unfortunately, it gets back to the fact that the business is worth what the business is worth. Just because a seller needs a certain number, which may be higher or lower for retirement, doesn’t mean they can set that number as the asking price.
Ideally, those two things come together, but there are a series of exercises that need to be done and planning and forethought are required.
I’d really like to educate business owners that this is a process that’s going to take you six to twelve months. You shouldn’t come in thinking that you can call up a business broker and have a check in hand in 30 or 60 days.
Will: I imagine another part of it is that the deals normally aren’t one lump sum in a check at closing. Oftentimes there’s some component of seller financing in the deal.
Sal: Absolutely. Coronavirus has also created a lot more uncertainty. As a consequence of that, buyers are asking more and more for earnouts, where the business needs to hit certain revenue or operational goals in order for the seller to get paid out in full.
Will: For a seller who’s reading this and thinking, “Wow, six or twelve months. What can I do to speed that process up?”, what would your advice be?
Sal: Well, there’s a lot of things you can do to speed the process up.
One is what I call “reverse due diligence.” This is when you put yourself in the shoes of the buyer and say, “Okay, what documents and information are they going to be asking for?”
Normally, that means getting your financial statements together. It means making sure all your accounting is clean. It means making sure your tax returns are available. If you need employment contracts in place, you should get those done with your employees.
This is where a business broker can help. They can say, “Hey, listen, typically, for your type of business, for your size of business, these are the things that a buyer is going to be looking for.”
The other way you can speed things along is that you can start talking to a bank. A lot of times you can get your business pre-qualified for an SBA loan.
This allows you to go to a potential buyer and say, “Hey, listen, the bank has looked at this in terms of an SBA Guaranteed Loan, they like what they see. So if they like you also, then you know, we’re 80% of the way there.”
Will: Right. Not only does it help reduce the total transaction time, but when a buyer reaches out and the information isn’t ready, the buyer may lose interest and go with another business.
Sal: I’ve always been a big believer in the saying that time kills deals. The longer a deal takes, the higher the probability that it won’t be finalized.
Will: Totally. Well, this has been great. Thank you for your time. Any final remarks you’d like to share?
Sal: The one thing I will say, and it goes back to everything we’ve been talking about in terms of education, is that I would encourage anyone that is viewing or listening to call me now.
Even if you’re planning to sell your business in five years, call me now. Even if you come in and you say, “Hey Sal, I’m 60. I’ve met with my financial planner. I’m not going to retire till 65.” Okay, fine. Let’s start having that conversation now.
Starting now gives us time to work on things we need to improve, to make the business as valuable as possible, and to make the process as easy as possible when the time comes to sell.
If we have 1, 2, 3, 4 or 5 years to execute that, we have a much better chance of success.
If you know you want to sell now, I get it. We’ll start the process and will sell what you have in place. The market will tell you what it’s worth.
But if we start five years early, we can do a lot of improvements that are going to increase the value of that business when you want to sell it.