Jessica Fialkovich – Exit Factor
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You have found Authentic Business Adventures, the Business program that brings you the struggles, stories, and triumphant successes of business owners across the land. We are locally underwritten by the Bank of Sun Prairie. My name is James Kademan, entrepreneur, author, speaker, and helpful coach to small business owners across the country. Today we are welcoming/preparing to learn from Jessica Fialkovich, cofounder and president of Exit Factor. I’m excited to talk with Jessica because I’ve been talking to other business owners that are actually considering exiting and a few that are actually interested in purchasing, which it’s a lot easier to exit if you have a buyer. So this is actually a very timely interview. So, Jessica, how is it going today?
[00:00:39.600] – Speaker 2
It’s going great. I’m having a great day. I’m really excited to be here, James.
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Nice. So I’ll let you start with just telling us what is the basis? What does exit factor do?
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Yeah, so great question. Exit Factor is an education and consulting company that helps business owners prepare their companies for sale so they can get more money in their exit and ultimately have a better deal.
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Nice. That sounds awesome. Everybody likes that.
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And how long has Exit Factor been around?
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So Exit Factor has been around for three years, but I’ve actually been in the M and a space for small business for over a decade. So I also run a business brokerage firm and a mergers and acquisitions firm, which is what Exit Factor was born out of. Was that experience got you?
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So you were if I understand correctly, you were working for other people and decided to go off on your own. Is that the idea?
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No, actually, I’ve been I’ve been an entrepreneur since I was 24 years old.
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So I started and founded my own business brokerage firm as well. Built and grew that with my husband over the last ten years. And about three years ago, exit Factor started off as a division of our business brokerage company. And then as it started growing earlier this year, we peeled it off, made it its own company. We took on a new partner.
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Wow. All right. And what was the trigger to start Exit Factor?
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So on our business brokerage site, we do lots of deals, do hundreds of deals a year, and we deal with a lot of small business owners, small to mid sized business owners. And what I was starting to get frustrated with was that I saw a lot of clients that would come to us and we wouldn’t be able to get them the full value of the company.
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And it was really just because they weren’t prepared properly. And when I say prepared, like, the business wasn’t structured to be really desirable for sale for a lot of buyers that would generate, like, a competitive bidding process.
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And the way to do that, I was like, it’s not some big secret we just don’t talk about it. As entrepreneurs, we focus a lot on the startup phase and the growth phases of our company, but we don’t focus on the exit phase. So it was really that problem that I wanted to solve. I wanted to get more businesses sold. Only about 20% or less of all small businesses are ever sold. The rest of them go out of business. So pretty startling statistics. And my mission, my passion, was to increase that percentage and ultimately deliver more value to the businesses that are able to sell.
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All right, so you exit factor essentially comes in before the actual sale or even offering, I suppose, get things in place that the owners are more owners rather than just selling a job kind of thing. Is that right?
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Yes, exactly. I mean, in an ideal world, our clients are starting to prepare their business for sale and prepare for their exit. Day one, right?
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A friend, if you run a business every day like you’re going to sell it, you’re going to run a more profitable business, one that’s easier to manage, one that honestly just more enjoyable.
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So ideally, they’re working on this type of plan or strategy right in the beginning. But worst case scenario, one to three years in advance of a sale, if you know exactly when your sale is going to happen, which most owners don’t, that’s when we come in and we really work with the owners to optimize their evaluation.
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Got you. So what have been some of the mistakes, I guess more specifically than just working in it too much, I guess, that you see business owners doing on a routine basis.
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Yeah. The number one mistake is I see business owners not focus on earnings and profit enough.
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So I kind of mentioned the top. Like, we as entrepreneurs, and I’m guilty of this too, is like we’re so focused in the startup and the growth and growth at all costs, and we think that a buyer is going to value that potential and all that money we’ve invested in the business. And the truth is, they don’t. They’re going to look at the bottom line. They look at the earnings of the company defined by a term called EBITA. And that’s the number one mistake I see owners make, is like, hey, you have not shown that you’ve been profiting from this business at a high level, and now you want a fairly significant amount from it. And valuation is a complicated process, but half of valuation is based on the earnings of the company, not the revenue.
[00:05:09.230] – Speaker 1
Interesting. This reminds me of a phone call that I had years ago. I had a printer repair company, and I was looking to get into Toner Remanufacturing. Back when that was a thing you could competitively do as a small business. I was on the phone with this guy that was selling his Toner manufacturing company, and it was a three way call between his broker, myself and this guy. And it was a tiny company. I didn’t even know if they’re doing $300,000, but they had the equipment and the knowledge and all that kind of stuff, so I thought it would be an easy layout to get in there. And I’m just talking to him. He had sent me some numbers, and I quizzed him on some of the numbers because I’m like, I don’t see any pay for you on here. And he was the guy. He was the only employee. So a strong argument could be made that I was buying a job, but my intention was to put an employee in his place.
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And I didn’t see any place to pay the employee. And he says, Well, I get a sandwich across the street every once in a while. And I’m like, Wait, what? And he’s like, Well, I trade toner to the sandwich shop across the street, so every once in a while when I’m hungry, I can run across the street and get lunch. He had a retail space too. And I was like, Wait, you’re paid in sub sandwiches? And I said that I hear the broker go I don’t know if the broker didn’t realize it, or the broker was hoping we would just not know or not care or not understand.
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But I learned that this guy was getting money from another spot. I forget where. It doesn’t matter.
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So the business, he had no intention to actually make it profitable. It was just something for him to do during the day. He’s kind of getting sick of it.
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I’m like, oh, my God, dude, you got nothing to sell. I would love to buy if you had something, but you kind of got nothing.
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It’s frustrating. So I can see how you can often be put in a difficult position, because I think some business owners think of their businesses like a little baby.
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And I’m like, I don’t think you should think of it like a baby, because I’m looking to sell my baby soon.
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Yeah. In my book, I talk that’s the metaphor I use, your business isn’t your baby. But I think for a lot of business owners and I’ve been there myself too, where whether it’s your baby or not, it feels like it becomes an extension of you.
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It becomes part of your identity, and then sometimes it’s hard to make those, I’d say, objective financial decisions that you have to make to transition it to what it really is, which is an asset that’s supposed to produce income.
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It’s an income producing asset. That’s what a business is.
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So have you seen some businesses go for more than I guess, you would expect them to in certain industries?
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Yeah. When we go back to evaluation, we talked about the earnings and then how you determine the value of a company is you apply what’s called a multiple. So what makes that multiple what it is?
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Some businesses sell for one times their earnings, and some businesses sell for ten times their earnings. And like, what between a one and a ten? And that’s where, like, those qualitative factors come in. Like, how is the business run? Why is it better than the others, how involved is the owner?
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And through exit factor, we’ve identified, I think twelve basic areas that buyers will pay more for, and the more of those boxes you check, it’s just like selling anything else. Like the more value you’re providing to your buyer, the more they’re willing to pay. So the more boxes you check, the more desirable of a company that you’ve built that produces time, money, and honestly, freedom for the owners. Those businesses get a premium. Like, those are what, trade for ten times earnings, or in some industries got you. Times earnings in other industries. The industry does play into it a little bit too, and the size, but yeah, designing a business that produces a great quality of life for his owner.
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I guess just for people that may not know. Can you explain the EBITDA?
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Yes. So EBITDA is a function of your earnings. So you take your net profit and you add back some non cash expenses, like depreciation, amortization, you also add back any interest in corporate taxes that you pay. And basically what that does is it creates a level playing field to compare your business against all others across. Because we take depreciation and amortization as like tax write offs, really, it’s not affecting our cash accounts as much. And then the interest in taxes is a choice of how we’re running to run our businesses. Like, some of us want to incorporate into C Corp, others don’t. Some of us run our businesses with growing through debt, others don’t. So it’s just leveling the playing field.
[00:10:06.630] – Speaker 1
Got you. Okay, so you’re taking that number, and I imagine that’s an annual number, right?
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In a long time since I looked at this. And then you’re taking that time as a multiplier, I imagine is industry specific and maybe area specific.
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Yeah. Not area so much so there’s a few things that go into it. One is size. So smaller companies will have smaller EBITDA multipliers.
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There’s usually plateaus. Like, once you hit a half a million in EBITDA, or a million, you’ll jump plateaus, and you’ll get paid higher multiples. So size does go into play, industry goes into play. Some industries are growing and more desirable, and some industries are declining.
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Geography doesn’t really play into it as much. It’s actually pretty stable, at least across the US. And then those qualitative factors go into it too, like we talked about, like, how is the business run, how much time and freedom is a given. Yeah. So those are really the big buckets that are the deciding factors of the multiplier.
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All right, can you talk a little bit about goodwill? Because that’s always like, brand recognition, logo, maybe, in the little neck of the woods that this business is running and how that gets, I guess, assessed. Let’s talk about just figure out how they come up with a number buyer seller together.
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Yeah. So there’s different aspects of goodwill. So when we’re talking about goodwill in terms of valuation, we’re talking about your intangible assets, your brand recognition and stuff like that. That’s on those qualitative factors that I talked about.
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So if you’ve built a brand that’s really well recognized, you’ve built a brand that’s successful in social media, you have some intangible assets, they really should be successful in producing an income for the business.
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And then that will set you apart in that multiplier. That would be one of the reasons that maybe your business gets a six, whereas the industry averages of three.
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So that’s the one side of goodwill and valuation. The second side, and we won’t get into too much today because I’m not a tax attorney or an accountant, but there is something called asset allocation. When you go to sell a company, like how much of that sale price is allocated to goodwill, and that’s a tax conversation and tax negotiation between the buyer and the seller.
[00:12:31.100] – Speaker 1
Got you. All right. When it comes to sale of a business, maybe this is jumping ahead as far as exchanging money. Do you typically people see buyers coming with a bag of money, one shot, or most buyers trying to have a tiny bag of money and then residual bag of money based on whatever, how the business does in years or months going forward.
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This is a really big myth and misconception. I think it’s funny. I talk a lot. I’ve been talking to thousands of business owners every year about their exits, and they all have this idea that there’s this phantom buyer out there with a pot of gold that’s going to show up at the doorstep.
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And the reality of the situation is that most buyers are just like us, right. So they’re just other entrepreneurs that are either getting into business or trying to grow their businesses. There are private equity firms and investment firms. When you build larger companies, they show up with even less cash than the first group of buyers. Yeah. They’re protective of their cash. They’re savvy investors.
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So most buyers will put a percentage down on a business, it’s somewhere between ten to 50%. The average is about 20% down. And then they’ll use different financing mechanisms to pay for the remainder of the business. So there is some deals that get done with seller financing. There’s another form of financing that’s like seller financing called earnouts. It’s not technically financing, but it’s pay on performance of the business. And then the majority of buyers use the SBA loan program. So through the small business administration. There’s a loan guarantee program that banks are able to take advantage of to mitigate their risk on doing these acquisition loans. So I’d say about 60% to 70% of all buyers, individual buyers, will use the SBA loan programs and the guarantee programs to finance business purchases.
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So, in that case, is the seller then getting a bag of money it’s just financed through?
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Yeah. If your business does qualify for SBA or bank financing, I should say the SBA doesn’t directly Led money. It’s the banks through the SBA program. So if your business does qualify for financing, and the business has to qualify too, not just the buyer, which is also important to show earnings right. Then typically those sellers are walking away with, I’d say, somewhere between 70% to 90% of the purchase price.
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You’re still not getting to 100%?
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No. Typically, all buyers, and even the banks at this point, will ask for the seller to carry a bit of money in terms of seller financing.
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And it’s not about the buyer not having the money, the bank not lending the money. It’s about mitigating risk.
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So a buyer have two really big fears. The first big fear is that when the owner goes away, the customers will go away. And the second big fear is that when the owner goes away, the employees will go away.
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Yeah. And so a way to mitigate that risk is to get the owner to stay engaged in the transition process. And the best way to do that is to hold back some of the payment of the business.
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You got that carrot dangling out and saying, hey, once you finish out this six months, year, or whatever it is yeah.
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And really help transition and also just not disappear to your private island and never answer their phone call again. When they have their first fire drill in their business and they don’t know what to do, they want to know that they have that lifeline and that support. And that’s what honestly, at the end of the day, when you unpack, like you do the why conversations with buyers like the five why ask why they really want seller financing? It’s that it’s not about the money.
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Interesting. Okay. All right. So I had a business that I sold. I didn’t know most of this, and I lost. I didn’t get in the neighborhood of $40,000, which is going to be one of the payments. It was the last payment. It was based on performance over the course of years, four years. And the numbers that we had put together in the initial negotiation, from my point of view, I thought there’s no way that they could drop below those numbers, because the numbers that we set up were less than what I did in my first year. The business was eight years old. So I’m like, there’s no way they could possibly drop below that. But still I was giving the buyer control because I couldn’t just go in there and sell for him or anything like that. And they did drop below that number. I remember the conversation when I went to say, hey, how’s it going? And they’re like, hey, funny story, we didn’t hit this number. And I was like, you just have all these emotions because one, you’re just like, oh my gosh, you just cost me a big nut. Two, how in the world did you not hit that number?
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And then you go to like, do I have any way to even tell if they’re lying? You don’t know. Yeah, so part of me was like, okay, that was a very expensive lesson. Education typically always is expensive for me to earn. When you sell, get all your money as fast as you can because you don’t want to rely on the buyer. Like, I, as a seller, just didn’t even think that the buyer could mess up that bad, but turns out they could or their employees could.
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Yeah. So that struggles what’s called an earn out, right?
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So what we’re talking about with seller financing, that’s a contracted debt. Like they have to pay whatever they’re contracted to do. Earn out the pay of performance. And look, if you’re buying a business, it’s the best structure to buy a business with.
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Because you only pay for it if the numbers are hit. And if they don’t hit, then you don’t pay for it.
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Best structure for buyers, probably the worst structure for sellers you saw, like, you have no control, right? Like, once you hand over the keys to the business, you have no control how it’s run. And depending on how earn outs are set up, if you do have to do an earnout, which we see in a lot of deals, there’s a portion of the deal that’s an earn out. And that’s just the reality. It’s protecting the risk for the buyer and you just have to do them. Sometimes you try and keep as much control as you can, meaning like earn out, you want to tie to a metric as high up the PNL as possible. Like, ideally the metric is revenue, right? You’re not getting into how they’re managing expenses or things like that. And then there’s other things that you can do to maintain control or oversight. You can stay involved for a little bit, but at the end of the day, earn outs are very transferring risk from the buyer to the seller and they’re very risky for sellers. And you just have to be super savvy in how you’re going to structure that earn out to increase the odds that you’re going to get paid in full.
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The reality of the fact is you might not get paid in full, right? That’s the risk you’re taking. But if you get the majority of your money up front and I always tell sellers, like, if you’re comfortable with the down payment, and if you’re comfortable with the upfront payment the first year or so, then just think of everything else in that earn out as a bonus. If it happens, it happens.
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Got it. All right. What are some of the pitfalls that you see sellers making, some of the mistakes they make besides one that I just yes.
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So we talked about focus on earnings. We kind of brushed over the topic, but like, it’s something people hear about a lot. Is the business being too much about them.
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Just not letting go of control?
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Oh, sure, yeah.
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Just the business being about them, then doing everything in the business. But I think the biggest mistake outside of earnings is just expectations.
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So I joke, everybody either thinks their company is worth nothing, right, and no one is ever going to buy it, they’re not crazy enough to buy it, or it’s worth a million, 10 million, or $100 million. Always round numbers. No one ever says, hey, I think my business is worth 2.6 million. It’s always like 1 million, 10 million.
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And so there’s just this disconnect on expectations of what the company is truly worth and tying that value to something that’s based in numbers and formulas versus just basing what we feel like we could get for the company. And I think it’s like very metaphorically, like our houses.
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So I’m getting ready to sell one of my houses up in Colorado and relocating down to Texas. I just moved down here and I’ve put money into this house right. To make it what I want it to be. Well, the reality of the situation is we’re not sitting in the best real estate market to sell a house right now. And I’m probably not going to get all that money, time and effort out of what I’ve invested in my house. It’s the same thing for businesses. And I think back to we were talking a little bit about the business being the baby and your identity versus your role. I see business owners having a hard time separating that when it comes to their expectations of what the company is ultimately going to sell for.
[00:21:51.330] – Speaker 1
Got you. That’s interesting. So I guess counter to that, what do you see from the buyer’s point of view? What are the booboos that they’re making?
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Yeah, so it’s interesting. So it’s kind of similar, like expectations. Everybody comes into these deals and they think everything’s going to go great. So buyers tend to have rose colored glasses right.
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In terms of what they can bring to the deal.
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So they’re very nitpicky in terms of how the current owner is running the business. Like, oh, well, why aren’t they doing that? And why didn’t they try this and I can do this better? And they have these rose colored glasses of like, hey, when I take over the business, all of these problems get solved because I know how to do it.
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It’s like a light switch, right?
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Yeah, exactly. It hurts them for two reasons. One, it is a very competitive process to buy a business. There is many less businesses available for sale than there are buyers. Like, on average, if you look at the ratios, we’ll see about 100 buyers for every business that’s listed for sale.
[00:23:01.390] – Speaker 1
Wait, are you serious?
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I would have never guessed that. I would have totally guessed opposite.
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Yeah. So if you’re a buyer and you’re trying to buy a business and one that we’ve talked about, like one that’s profitable, it’s run really well. It’s a really competitive process. So one of the things, the mistakes they do with these assumptions that they make is they offend the sellers.
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So they’ll come into a conversation with a seller and they’ll say, well, why aren’t you doing this? And you should try this, and you’re missing this opportunity. And the sellers feel attacked and they feel judged.
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And at the end of the day, that seller, especially, again, very good business, if it’s producing earnings, they’re going to have lots of buyers to pick from and they’re not going to pick that buyer that made them feel judged.
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So that’s one way that those buyer expectations hurt them. The second way is that they do feel like they can turn on this light switch and all the problems will be fixed after they own the business. And that doesn’t happen. It takes about a year to settle in as a new owner. Sometimes the business performance will go down in that first year because the buyer is learning.
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And so they’ll just overestimate the impact, the positive impacts that they’re going to have on that business. And sometimes they’ll either overextend themselves in terms of purchase price or they won’t protect themselves in some of the structures that we talked about earlier. But just like, same thing expectations. One of the biggest mistakes I see from a buyer’s side and kind of coupled with that offending the seller, especially. A lot of the sellers of small businesses in the US right now are baby boomers. And they’ve built these businesses over 1024 years. So talk about something being your baby.
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There are businesses that are very tied to them. And not to stereotype or something like this, but I hear this all the time from our clients. Like, I don’t want some young kid coming in telling me how to run my business.
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Yeah. As soon as that conversation happens, they’ll shut that deal down. They’re like, I don’t care what they offer me, I’m not doing a deal with that person.
[00:25:14.290] – Speaker 1
It is so interesting to me. I’m just coming off. I had a meeting with my employees yesterday and I guess nothing relevant as far as buying business or anything like that, but just the conversations about we’re talking about call audits between each other. Agents call answering service, whatever. We do these call audits between each other, and nobody was telling anybody that they made a mistake. So you listen to these calls and you could see, like, hey, there’s just one that I listened to today where the agent didn’t write down the person’s name, so she had to ask the person’s name later. Which minor detail, but it’s a big deal. Right. You take 100 calls a day. You should know, keep track of the person’s name that you’re talking to, because that’s a big deal. Yeah, but the crew told me, essentially is everyone told me they’re not comfortable telling somebody else that they did something wrong. And to me, I’m just like, I get told I’m doing something wrong almost every day. So I don’t know if it’s just being a business owner. You have a sicker skin. Maybe it’s being married, I don’t know.
[00:26:23.770] – Speaker 1
Whatever. It is so interesting to me that people are fragile in that way, because I can only imagine, like, with my business, I am certain that there’s somebody that could walk in, look around, and after a couple of hours think, hey, maybe you should do X, Y, and Z.
[00:26:40.180] – Speaker 3
[00:26:40.640] – Speaker 1
And maybe X, Y, and Z. I thought about it, but we tried it. Or maybe I never thought about it, but I never think that somebody would come into my business and say, no, you nailed it. Everything’s perfect. That would be cool. But I think they’d be lying to me.
[00:26:55.960] – Speaker 2
[00:26:56.500] – Speaker 1
So it’s interesting that people are just like, oh, my gosh, I’m offended. I’m not going to take their money. Their money is green, and they’re offering what I want.
[00:27:05.500] – Speaker 2
And some people do have that attitude to it about it, and I do think that. But you also have to remember the dynamic that’s going on between these two people, right? The buyer and the seller. It’s not like the buyer is not there to help them.
[00:27:19.660] – Speaker 3
[00:27:20.000] – Speaker 2
It’s just not like a consultant or a mentor is trying to help them grow their business. They’re pointing out things that are wrong in their business and then trying to negotiate, paying less for it.
[00:27:30.450] – Speaker 3
[00:27:31.010] – Speaker 1
Oh, same. When you look at a used car or something, you’re like, oh, tires are worn. I heard a squeak 20, but I’m going to give you twelve.
[00:27:39.280] – Speaker 2
Yeah. And there’s also the dynamic that’s a really big life change for most of these sellers. Like, they’ve been working or running their own business for years or decades, like we talked about, and they’re facing either retirement or a different career path, which is not something entrepreneurs handle very well.
[00:27:57.960] – Speaker 1
[00:27:58.760] – Speaker 2
I don’t know how many business owners we’ve helped retire, only for them to come back a year or two later, be like, I’m bored. I need to go buy a business, do something with my time.
[00:28:07.960] – Speaker 1
[00:28:11.530] – Speaker 2
I think one of the biggest surprises all of. Our clients face when they’re on the buy side of the sell side is how emotional these deals get. There’s a lot of emotion tied up in business sales for small to mid sized businesses. It’s not like just trading a stock. Right. It’s your career. It’s how you’re going to spend your life. It’s how you spent your life and built your life. So, yeah, it makes sense that you would want the issues pointed out. But then when you put yourself in this relationship, in this dynamic where it’s in a negotiation, it’s combative a little bit. And then if you’re someone that is facing a major life change that you’re not 100% comfortable with, there’s just a lot of emotion that comes up.
[00:28:54.080] – Speaker 1
Interesting. That’s crazy funny. You start, I guess in the conversation so far, it sounds like you have talked to a lot of businesses, business owners that are actually more involved with their business than I thought they would be if they’re trying to sell. So is it common to sell a business where you’re actually in it?
[00:29:17.970] – Speaker 2
[00:29:19.250] – Speaker 1
[00:29:20.160] – Speaker 2
Yeah, it happens all the time. I said the expectations. A lot of people think their business isn’t worth anything because they’re involved in it. But yeah, very small businesses sell all the time. Owner operated businesses, solo practitioner businesses, and for a lot of different reasons, depending on the industry, some businesses will just acquire others for book of business or employees or something like that. But it’s very common for most owners to be heavily involved in their businesses. It’s actually less likely that they won’t be involved in the business. That’s a very small percentage of the transactions that happen. Even up to, I’d say, the lower middle market, which is our businesses, valued up to $500 million. There’s still a high percentage of those owners that are heavily involved in the day to day operations of their business.
[00:30:10.820] – Speaker 1
That is so interesting.
[00:30:13.010] – Speaker 2
[00:30:13.540] – Speaker 1
I’ve been doing everything I can to remove myself from the business. One because somebody I hope to sell or will sell, and the other is because I don’t really want to own my own job and I want to be able to do stuff like I can have a crap job anywhere. I want to be an entrepreneur that has that freedom of time and money. Man, that’s so bizarre. I would have never guessed that. I certainly would have a hard time buying a business where I was buying a job.
[00:30:45.710] – Speaker 2
Yeah, well, you know, I think that there’s a desire for that. There’s actually a large pool of buyers that are looking to buy a business for a job.
[00:30:55.120] – Speaker 3
[00:30:55.540] – Speaker 1
[00:30:56.200] – Speaker 3
[00:30:56.790] – Speaker 2
I mean, that’s the majority of what small business buyers are looking for. They’re looking to control their own future, control their career, and they’re doing it by buying their own business, obviously with the opportunity of scaling that business, hiring their replacement and getting themselves out of it.
[00:31:11.830] – Speaker 3
[00:31:12.460] – Speaker 2
That’s everyone’s goal. But that is a huge chunk of the market. Like I’d say, probably 80% of the market is deals that are done like that.
[00:31:23.850] – Speaker 1
Jessica, you are blowing my mind here. Blowing my mind, because I would have never I guess I look at it, or have been looking at it like a real estate transaction, like a rental property. How much revenue am I getting, how much I put down, all that kind of stuff to cash in, cash out, not looking at how much time I would have to be sticking in this thing. So that is so crazy, because I just assumed if it was especially a one person show, like a man and a man kind of thing, that you wouldn’t have anything to sell. But it sounds like that’s not necessarily the case.
[00:31:56.620] – Speaker 3
[00:31:57.020] – Speaker 2
I mean, every business is worth something to someone. It’s finding the right buyer and then identifying what that value actually is. It might only be $20,000.
[00:32:07.620] – Speaker 3
[00:32:07.980] – Speaker 2
Because you’re just selling a book of business or truck or whatever, but it’s worth something at the end of the day. Now, if you can get yourself and this is what we work with our exit factor members on, like, you can remove yourself strategically over time, wear less hats in your business. Your business is worth more. Right, plain and simple. And you have more desirability for it. There’s more buyers competing over it. You get better deal terms, all that stuff. But for owner operator businesses, and I don’t want anyone to be discouraged if they are owner operator businesses, they do have a job. Those businesses sell every day, thousands a year.
[00:32:40.930] – Speaker 1
Wow. All right, so I guess I’m excited for this conversation, even more so because you continue to blow my mind. Tell me, have you ever followed up with business owners that sold a year or two later? And what are some of the stories? I guess what do you typically see with them?
[00:32:59.820] – Speaker 2
Yeah, we don’t keep in touch with every single buyer because mostly we’re working with sellers right through the relationships form there. But we do have relationships with the buyers too. Some buyers will get into business and they realize it’s not for them.
[00:33:15.280] – Speaker 3
[00:33:15.620] – Speaker 2
They came from corporate, they tried to be entrepreneurs. They come back two years later and we’ll resell the company for them and get them out.
[00:33:23.240] – Speaker 1
You’ve actually sold the same company multiple times?
[00:33:26.150] – Speaker 2
Yeah, I think our record six. So we’ve sold one company six times for six different owners. The same company, same company, yeah.
[00:33:34.130] – Speaker 1
Holy cow. How much time are you talking here?
[00:33:37.670] – Speaker 2
That’s over the course of ten years now we’ve been in business, so they were one of our first clients.
[00:33:44.560] – Speaker 1
So every year and a half, whatever they’re selling yeah. Down each time, or was it going up?
[00:33:51.180] – Speaker 2
No, it’s pretty steady, actually. That business is pretty much steadily sold for the same amount every transaction. And you see that in different industries, like restaurant and retail, tend to flip more frequently than some other businesses. So this is in the restaurant industry, so that’s not uncommon to see. I mean, even if you think about it, you see restaurant spaces flip constantly in our city.
[00:34:13.080] – Speaker 1
[00:34:13.840] – Speaker 2
So part of those flips that we’re noticing as patrons of the restaurant are actually sales, not just somebody taking over the space.
[00:34:21.640] – Speaker 1
[00:34:25.170] – Speaker 2
There was a recent one. A client of ours that sold stayed on with the buyer. We became very friendly with the buyer, so we got to see what they did with it. And they really did very well in terms of their execution of their growth strategy. So they ended up buying a different business and then a couple of real estate properties. And this is over the course of they just hit their five year anniversary of the first acquisition, and they are under contract to sell the end of this month for ten times the value that they put into the company.
[00:34:57.730] – Speaker 1
Wow. Good for them.
[00:34:59.310] – Speaker 2
Yeah. That’s in the construction space.
[00:35:01.230] – Speaker 1
[00:35:02.850] – Speaker 2
Those are great stories to hear, things like that. That’s life changing for both of those owners. So very happy for them.
[00:35:10.690] – Speaker 1
So let’s talk about maybe this is too broad, but revenue points for a given business. You talk about this kind of the stages or the steps where you start getting the larger multipliers. Is it the 500,000, 1 million beyond like that? Or is it, I guess, are there smaller numbers for I’m trying to think like a man with a van maybe won’t be doing $500,000.
[00:35:37.390] – Speaker 2
Yeah. So I think the first plateau, we’re talking earnings, not revenue. So how much money? So the first step is, like, in your industry, how much would you need to pay yourself?
[00:35:49.600] – Speaker 3
[00:35:49.870] – Speaker 2
And you brought up this example of the business owner you talk to that was paying himself, and subsequently right. So the first step is really like, okay, if you’re a man with a van, and how much would you have to earn for this to be a good salary? And that depends on the industry. It could be $50,000, it could be $100,000. That’s the first step in determining, like, hey, your business is worth something of significant value.
[00:36:15.770] – Speaker 3
[00:36:16.580] – Speaker 2
The next step is $500,000 or more in earnings. And that’s when you start to attract what’s called not just those individual buyers that are shopping for jobs, but strategic buyers, other businesses that are slightly bigger than yours, competitors, things like that. And why that’s important is it broadens the buyer pool. So there’s more competition, more competition, the price goes up. Also, those buyers tend to have more financing options. Banks are much more excited to lend more money than they are less money. Like, they make very little money on a loan of $100,000, but on a million dollars, they crush it.
[00:36:54.230] – Speaker 3
[00:36:54.600] – Speaker 2
So more financing options, and then the next major significant plateau is a million in earnings. And that million in earnings is when you have the private equity and investment buyers come in. They look for a minimum, typically of a million in earnings when they’re interested. And again, important, because now you have another third group of buyers that are coming in, bidding on the business, trading the price points up.
[00:37:19.130] – Speaker 1
Sure. When you talk about earnings, you mean profit, like in your pocket profit?
[00:37:23.720] – Speaker 3
[00:37:24.350] – Speaker 1
Okay, all right. And do you find a lot of businesses that are bringing in a million dollars in earnings that hit the sale mark?
[00:37:33.090] – Speaker 2
No, I mean, so if you look at all of the US based small businesses, 96% of them are under a million in revenue. Right. So we’re talking a million in earnings. We’re talking about less than 1% of got you.
[00:37:47.140] – Speaker 1
[00:37:47.750] – Speaker 3
[00:37:48.580] – Speaker 1
Is that a common thing?
[00:37:50.070] – Speaker 2
Yeah, but when you talk about, like when I talk to business owners, they’re like, hey, how do I sell my business for ten X? How do I get these multimillion dollar exits? Part of it is tied to earnings. And hitting that minimum of a million in earnings, that’s like the bullseye that you’re chasing. That’s where your goal is. Your first one.
[00:38:14.260] – Speaker 1
Make more money.
[00:38:17.150] – Speaker 2
Sorry about that. Businesses are their money making machines, right? That’s what they are doing it, right?
[00:38:21.720] – Speaker 1
[00:38:22.290] – Speaker 2
They’re assets that produce income.
[00:38:25.650] – Speaker 1
Tell me about typical business that I see is going to have some expenses that are paid for that could be somewhat of a gray area on whether they’re actual business expenses or personal expenses. People play that game, the tax game, whatever. But then when it goes to value their business, they got to say, wait, we paid for that cell phone. That’s only my personal cell phone. Something like that. Or car. I imagine you see all kinds of things. How do you differentiate or dig through their books to actually figure out, or do you dig through to figure that out?
[00:39:04.940] – Speaker 2
Yeah. So this is a dangerous game for business owners to play. It’s basically called the strategy is called add backs. And some business owners have heard of this, where you can take those personal or nonessential expenses in your business and you add them back to the bottom line. And why it’s become dangerous is because it’s become abused. To be quite honest. I’ve seen Lamborghinis in personal PNLs, divorce, attorney fees, Rolexes, vacations. This is so common anymore. And my husband has a saying, you can’t steal cash twice. So you’re hiding cash from the IRS, not paying taxes on it. You can’t then add it back and then expect buyers to verify that. And we have to remember, too, like we said, 60% to 70% of these buyers are then taking it to a bank. So you’re now going through a bank and appraisal process and underwriting process. Like, they’re not going to verify those add backs. Got you. We all have to make a decision as business owners, of how much are we going to write off in our business to save that 30 or 40% income tax that’s going to affect the bottom line of our business sale in the future.
[00:40:17.110] – Speaker 2
Typically, we see buyers and banks will look back three years on our historical books and records to prove that earnings numbers. That’s why I said most business owners, it’s best to start planning your eggs at day one, but if not about three years in advance, because then you start to clean up some of those personal expenses and they’re not on your business books and records for the three years leading the sale. Because every dollar you drop to the bottom line, yes, you have to pay taxes on it, but you also get paid a multiple.
[00:40:46.550] – Speaker 3
[00:40:46.770] – Speaker 2
And we’re saying three, four, or six times that dollar in the business sale. So, yeah, you might be saving the $0.30, but you’re giving up the $5 in the future.
[00:40:56.280] – Speaker 1
Got you. All right. That’s interesting. The divorce attorney, you could probably make a strong argument, right? The business caused the divorce.
[00:41:02.380] – Speaker 2
Yeah, I mean, they had an argument. But look, we all know how banks work, right? We bought houses, we’ve gotten loans to start businesses. They’re pretty black and white. So there are very few expenses that you can add back to a business’s bottom line that are personal in nature. Like very few arguments. I’ve seen one with the banks. Got you recently.
[00:41:28.810] – Speaker 1
[00:41:29.340] – Speaker 2
We could do a whole show on things we found in business owners. PNLs. And I get it. I don’t like paying taxes either, and I’ve run businesses in the past where there was some gray areas, expenses and stuff. But if you want to sell a company in the future and get the maximum value, you just have to limit those.
[00:41:46.240] – Speaker 1
Got you. That’s the game, right?
[00:41:48.080] – Speaker 2
[00:41:48.950] – Speaker 1
Tell me, we haven’t talked a ton about your business, so tell us about how your business has grown and some of the things that you’ve changed over the course of the few years you’ve been in business.
[00:41:59.610] – Speaker 3
[00:42:00.120] – Speaker 2
So like I mentioned, I started with the business brokerage firm. My husband and I bought one small business brokerage office and we grew through acquisition, so we bought out other business brokerage offices. Well, you did, yeah.
[00:42:13.630] – Speaker 1
Was that a plan?
[00:42:15.020] – Speaker 2
Yeah, it was funny. Like saying the plumbers house always leaks.
[00:42:20.000] – Speaker 3
[00:42:20.570] – Speaker 2
So we were trying to grow organically for the first few years, and then we’re like, Wait a second, we buy and sell businesses for a living. Like, do you think we could buy other business brokerage offices? And we’re like, duh. Yes, we can. So about five years ago, we started growing through acquisition, and through that we expanded into a regional firm. So now we have offices in three states operating in two different time zones. And that’s also when we did the expansion of exit factor, too. Was during that time period. So we went from a two person firm to two people. My dog, like I used to joke, was our first day of work, and now we’re at 50 people about on the business brokerage side.
[00:43:06.330] – Speaker 1
[00:43:07.040] – Speaker 3
[00:43:07.440] – Speaker 2
Exit Factor. Since we’ve branched off, we have three full time employees dedicated to us, and then we have a shared services division that helps us with legal and bookkeeping across our company, but also across other companies that are owned by the same parent organization. That’s our growth story. We’re looking at a national expansion with Exit Factor this year is what we’re doing right now. And then we’re looking at international expansion early next year.
[00:43:36.130] – Speaker 1
Very cool. Very cool. And as far as the acquisitions, was that tough? I mean, the reason I ask is that’s mostly service based. There’s not a whole lot of equipment or anything like that.
[00:43:51.550] – Speaker 2
[00:43:52.110] – Speaker 1
Which means that a lot of that and I guess I don’t know how books of business work in the acquisition business, but I imagine once a buyer buys and a seller sells, you see them again often.
[00:44:03.070] – Speaker 2
It depends. Like, you can you can structure training programs. You can structure long term transitions, which could be a year or multi year contract. We didn’t need to do that because we’re acquiring a business that we are familiar with. We’re acquiring our competitors. We’re acquiring people in the same space. So we needed a really short transition period, a couple of weeks at the most.
[00:44:25.910] – Speaker 1
Oh, wow. Okay.
[00:44:27.100] – Speaker 3
[00:44:27.610] – Speaker 2
We knew what we were doing. And I think that’s a pro of growing through acquisition or selling, even selling to a buyer in your industry. Like, they know how the company runs.
[00:44:38.180] – Speaker 3
[00:44:38.860] – Speaker 2
You’re not signing on for some long term contract to transition the business. If you’re selling to somebody that’s ready to step in and take over day one, knows what they’re doing, doesn’t need any training in the industry.
[00:44:50.990] – Speaker 1
Got you. So you bought your competition regionally or some of your maybe not exclusively, but was that tough? Did you reach out to them? Were they already on the market? How did that work?
[00:45:02.690] – Speaker 3
[00:45:02.990] – Speaker 2
So it’s a really patient process.
[00:45:05.220] – Speaker 3
[00:45:05.810] – Speaker 2
So it’s kind of like developing your bench for good talent, right. Of who you’re going to bring on, your executive leadership team. And I think I see a lot of similarities in that, like getting to know your competition and other people that are in similar industries or businesses to you, you know, culturally, who’s going to fit, who’s not going to fit. And then you just have to develop those relationships over time and be patient for the right time.
[00:45:31.230] – Speaker 3
[00:45:31.600] – Speaker 2
You can’t force a deal to happen. One of the transactions that we just closed two months ago, I’ve been working on that transaction for six years.
[00:45:41.550] – Speaker 1
[00:45:42.340] – Speaker 2
It’s just patience and knowing and having honestly good relationships with the people that you do want to acquire down the road so that you are their first phone call, which was this gentleman. That was his first phone call when he wanted to sell. He knew I was interested. We did good relationship.
[00:45:58.950] – Speaker 1
[00:45:59.830] – Speaker 2
And he called me and said, all right, I’m ready to retire. All right, let’s get it done. But it took six years to get to that point. The actual deal took three weeks.
[00:46:09.270] – Speaker 3
[00:46:09.720] – Speaker 2
But it took six years to get that phone call.
[00:46:12.360] – Speaker 1
Got it. I guess I’ve had clients that it took years to sign. Yes, whatever.
[00:46:19.230] – Speaker 2
It’s the same business development.
[00:46:21.110] – Speaker 3
[00:46:21.760] – Speaker 2
You’re looking at a longer sales pipeline.
[00:46:24.570] – Speaker 1
Lines in the water. Right? Yeah, totally. All good. I guess just universally, since you’ve owned your business for a long time, it sounds like. What year did you first start your business?
[00:46:35.410] – Speaker 2
So I started in this industry in 2012. My first business, which we didn’t talk about, I was in wine and spirits and started that business.
[00:46:43.140] – Speaker 1
[00:46:43.650] – Speaker 3
[00:46:44.020] – Speaker 2
I started that business in 2009 before wow.
[00:46:47.080] – Speaker 3
[00:46:47.480] – Speaker 1
How come you get out of there?
[00:46:50.450] – Speaker 2
It was the right time. I mean, it was funny when my husband and I were 24 when we first came up with that idea for that. So we’re like, hey, be super cool to sit around and drink good wine all day long.
[00:47:02.200] – Speaker 1
Doesn’t sound terrible.
[00:47:03.370] – Speaker 2
Yeah, it doesn’t sound terrible until like three years into it. We’re like, it’s really exhausting to sit around and drink wine all day. It sounds like, you know, it sounds like, you know, a first world problem. But honestly, it was the major reason we got out of it. It just wasn’t what we saw for ourselves long term.
[00:47:22.990] – Speaker 1
Got it. All right. And did you end up selling that business?
[00:47:27.040] – Speaker 2
We didn’t. We sold that business. We had same thing. We had a couple of different businesses in the wine and spirits industry that were related. So we sold the first one in 2012, and I sold the last one in that space in 2015.
[00:47:41.280] – Speaker 1
Oh, wow. All right. Very cool. Congrats.
[00:47:44.610] – Speaker 2
[00:47:45.400] – Speaker 1
So I guess what’s the future for your business for EBITA Factor?
[00:47:51.910] – Speaker 2
I love what we’re doing. I love this focus on the preparation and consulting. I love the education, these conversations like we had today, just opening business owners eyes to the possibilities. One story I don’t tell too often, but one of the major reasons that my husband and I do what we do is because our families missed that opportunity. So my grandfather owned a chain of pharmacies and missed the opportunity to sell. He sold for pennies on the dollar, honestly, and to latest in retirement. It didn’t set my dad up in a good place. My husband’s father didn’t realize that selling the business was an option. So my husband said, hey, I don’t want to take over the business. He just shut it down. And so this is like I really feel like I found my passion and my purpose stemming back to my family businesses and my husband’s family’s businesses, but really to help business owners open their eyes to the possibilities of looking at what they’ve built and not just being their baby, but it being something that can provide really big financial impact for them and their families for generations to come.
[00:49:03.230] – Speaker 1
Nice. Very cool. Another question that just came up here in my head. You work with your husband.
[00:49:12.830] – Speaker 2
Yes. So we actually he’s not involved in exit factor, but we do own other businesses together. We’ve been partners and worked together for years. I’m going to be 40 this year, so yeah. So almost 16 years we’ve worked together. We started when we first started dating, we were working at the same corporation. So since about three months into our relationship, we’ve always worked together.
[00:49:36.310] – Speaker 1
All right. That alone is impressive. So there I don’t know many spouses that can or do work well together.
[00:49:43.960] – Speaker 2
Yeah. Not easy every day, but it works really well for us.
[00:49:47.900] – Speaker 1
Sure. No, I get any partnership is tough. So one that you have to go home to after you leave the office.
[00:49:54.130] – Speaker 2
I know, right?
[00:49:55.950] – Speaker 1
I don’t know. Kudos to you, man. Super cool there. How can people find you, Jessica?
[00:50:01.240] – Speaker 2
Yeah, the best way to find me is if you go to Exitfactor.com/podcast. There’s a landing page with all my social media links, but my email address is also on there too, if anyone has follow up questions and wants to reach out.
[00:50:13.970] – Speaker 1
Got you. And if someone was considering purchasing a business, can they also get in touch with you there?
[00:50:19.380] – Speaker 2
Yes. If you want to reach out. I actually have a whole pre vetted list of business brokers nationwide that I can recommend working with on the buy side and got a few resources to recommend too.
[00:50:32.010] – Speaker 1
All right. And if someone is interested in selling their business, same thing.
[00:50:35.710] – Speaker 2
Same thing. We’ve got that pre vetted resource. We’ve got 165 of the best business brokers in the country that we’ve pre vetted. Make sure they do a good job. So happy to provide those referrals.
[00:50:47.720] – Speaker 1
Nice. Super cool. That is all I have for you. Jessica, thank you so much for being on the show.
[00:50:53.380] – Speaker 2
Thanks so much, James. It was great being here. Great conversation.
[00:50:56.140] – Speaker 1
Oh, my gosh, you taught me a lot. And I’ve been doing this since 2006, but it’s interesting. When it comes to buying and selling business, it’s not something you do every day or at least take the back. You do it every day. It’s not something that people not in the space do every day. So it’s interesting because I feel like many entrepreneurs were going after a goal that we don’t know a whole lot about.
[00:51:21.320] – Speaker 2
Yeah. Honestly, people typically only buy or sell one business in their lifetime. It’s not like we’ll trade houses here and there, commercial properties or whatever, but it’s very rare that we work with buyers or sellers that do this multiple times, which is, I think, why no one really knows. I don’t think they don’t know what they’re doing, but they’re not going to perfect it because they don’t do it multiple times.
[00:51:47.670] – Speaker 1
Right. Yeah. The whole $10,000 for talent. Right. And you’re spending two or something.
[00:51:55.570] – Speaker 2
[00:51:57.030] – Speaker 1
And in the end, they leave money on the table or could potentially leave money on the table.
[00:52:00.940] – Speaker 2
Yeah, we see a lot of times, especially with owners or buyers, that I don’t think they can do it on their own and they don’t want to help a lot of money or risk left on the table.
[00:52:13.970] – Speaker 1
Got you. Interesting. I appreciate your time, Jessica.
[00:52:18.190] – Speaker 2
No, thank you so much. Yeah, and just let me know once it’s all wrapped up and done. I’d love to share it on our social channels and our newsletter and everything, too.
[00:52:29.220] – Speaker 1
[00:52:30.130] – Speaker 3
[00:52:30.510] – Speaker 1
This has been an Authentic Business Adventures. It’s a business program that brings the struggles, stories and triumphant successes of business owners across the land underwritten by the Bank of Sun Prairie. If you’re listening or watching this on the web, you can do us a huge favor. Smash that big ol subscribe button, give it the big ol thumbs up, and most importantly, comment and share with all your entrepreneurial friends, the ones that are buying, the ones that are selling, and of course, yourself. If you have questions for Jessica about either, my name is James Kademan and Authentic Business Adventures is brought to by Calls on Call offering call answering and receptionist services for service businesses across the country on the web, Calls on Call and of course the the Bold Business Book Book, The Entrepreneur and all of us available wherever find books to sold. We’d like to thank you, our wonderful listeners, as well as our guest, Jessica, the co founder and president of Exit Factor. Jessica, can you let us know that website one more time?
[00:53:24.500] – Speaker 2
[00:53:27.480] – Speaker 1
Easy enough. Past episodes can be found morning, noon and night. Podcast link found at drawincustomers.com, thank you for listening. We’ll see you next week. Want you to stay awesome. And if you do nothing else, enjoy your business, especially after you sell it.