E109: Jim Afinowich: Longtime Business Broker On Selling Strategies For Mergers And Acquisitions

[00:00:00] Ron Skelton: Hello and welcome to the How2Exit podcast. Today we are here with Jim Afinowich. He's the managing partner for IBG Fox & Fin. And man, you guys have been doing this for, what, 30 plus years? I think your website, the website said over 1100 closings?

[00:00:14] Jim Afinowich: That's correct. 

[00:00:14] Ron Skelton: Awesome, man. I'm looking forward to learning from you today. Thank you for being on the show. 

[00:00:19] Jim Afinowich: Yeah, you're welcome. Thanks for having me. Ron. 

[00:00:21] Ron Skelton: I always like to start with the origin story. We talked a little bit before the show started. I knew you, like you told me, you started off as a broker and then you got into a little bit more advanced, advising and stuff. How did you get into the space? What got you into mergers on acquisitions? 

[00:00:34] Jim Afinowich: I would be what some people would call the classic entrepreneur. The last time I worked for anybody else, I was 20 years old. I know I'm unemployable. So between the age of 20 and 34, I own 14 different businesses. And if they had a diagnosis in those days, they would've said I had attention deficit disorder. But what I ultimately decided was that I really liked doing [00:01:00] deals better than I did running businesses. And, uh, it's now been over 35 years selling businesses and I haven't gotten bored. So just, love the deal of the deal.

[00:01:13] I mean, I love the business of business. All businesses have a common denominator. Common denominators. You have to manage people, you have to manage money. Hopefully there's more money coming in than going out. You have to provide a product or service the public wants at a competitive price. Now if you know all of the financials and marketing and management, you can learn the end product. It doesn't make any difference where either selling airplanes or pizzas or brokerage services, you still have a business to run.

[00:01:47] So we, everybody that works in my firm has owned and operated a business at some time. That's very, very helpful. The end product you can learn, is it pizzas or airplanes? [00:02:00] But your staff have to learn that. But basic financial statements the same. 

[00:02:05] Ron Skelton: So let's fast forward right now. You've done, you've had a lot of experience. You've seen the different stuff you've seen, having done it for 30 years, you've seen the full cycle of the economy, recessions and, boom economies and stuff like that. What do you see going on right now that can be a lesson learned for the guys out there? 

[00:02:26] Jim Afinowich: Well, the economy is always changing. It's never, never the same. We're either going up or we're going down, there are cycles. Now, how severe the cycles are? Varies from time to time. Are we in a recession? Are we going in a recession? Have we been in one? I can give you three different people will answer yes to each of those questions. So you have to know that there's going to be a change. One of the best ways to buy a business or sell a business is using an SBA [00:03:00] seven A loan.

[00:03:01] And when SBA looks at it, they say, well, how much debt service can this business cover? And now let's give it a coverage ratio. Like for every dollar of debt service after certain expenses, we want you to have a dollar and 35 cents. They anticipate that there's gonna be a decline. So don't over-leverage when times are good, because times will get tighter, and you need to have your debt based upon the low water mark, not the high water mark. So know that there's gonna be change in the market and just be prepared for it. 

[00:03:41] Ron Skelton: So now the interest rates are going up, the actual offer that ends up going to the owner by those loans has to go down to, because it covered the debt coverage ratio, is that right?

[00:03:51] Jim Afinowich: That is correct, yeah. Well, I'll use private equity as an example for larger transactions, the [00:04:00] majority of the deals we sell today are to private equity. And so they get money from investors, they buy businesses with it, and they have to get a return for their investors. If they're going to get the same return today that they did a year ago, with interest rates being higher and knowing that they leverage their purchase, the multiple they pay has got to go down to compensate for the interest rate going up. So yes, multiples values go down when interest rates go up. 

[00:04:34] Ron Skelton: So those are the guys that were thinking about selling last year. And I'm probably regretting it cuz we don't know when that's gonna switch around. It could switch around next quarter, it could switch around and it goes up and down. I don't know if the last time, correct me if I'm wrong here, but usually it doesn't last more than a year or two before they start correcting things. 

[00:04:50] Jim Afinowich: But that's true. But the value of a business is very volatile. I've seen people, wait. We had a client [00:05:00] selling a business in February of 2020 and he decided, yeah, if I wait a little, wait a little bit longer, my value's gonna go up. And well, COVID came along. A number of days later and the business became unsellable. We are just now talking about three years later, going back to market with the business. I think it's a fallacy to always look, try and predict what's gonna happen in the future. You can't, you just need to position, your business for sale.

[00:05:37] And I like to tell people, you need to run the business like you're never gonna sell it. And you also need to run it like you're gonna sell it tomorrow. Those may sound contradictory, but they aren't, you don't know. I'll give you a very sad example. We had business. A lady came to us and said, Hey, my husband [00:06:00] owned and ran this business. I had nothing to do with it. At an early age, he was killed in an accident. I've taken it over. I'm learning about the business and how to run it, but I need to sell it. It wasn't set up. It was totally dependent upon the guy that died unexpectedly. And it was a business that was worth millions of dollars.

[00:06:23] And in the end, she ended up, we couldn't sell it, had to close it down. So he didn't run the business like for someone else to take over. It was totally dependent upon him. 

[00:06:36] Ron Skelton: One of the first endeavors when I moved over from real estate to, wanting to do mergers and acquisitions, was a stimulus scenario. And I spent probably a few months trying to see if I could fix that. Right. And I don't think it's fixable, meaning that I went out and talked to attorneys and talked to, forensic accountants and some other people that I knew and say, can we build a team that can recover and run a business, [00:07:00] until it's able to be sold in the event, that somebody passes or something happens and it has to be sold. 

[00:07:06] And the problem is, there's just too many logistics. The reason I did that was there was a really cool, commercial electric company. I wanna say they had 30, 35 trucks. That means they had 35, commercial electricians and they would do manufacturing plants and stuff like that. Owner dies, has a heart attack, passes away, and they couldn't sell it. They couldn't do anything with it. They couldn't even cut their checks, the payroll check. The only person on the account was the owner. Even, it took a little bit, but even the owner's wife had a hard time getting anything done.

[00:07:36] The business pretty much just sat there and they auctioned off all the assets, but that wasn't what that business was worth. I thought maybe there's a way to solve it, like, build it, raise a little money that we, cuz we'd have to put our own money in to run it until it's, until it is sold. But, there's just too many risk factors, right? If one person in the estate decides that they don't like what you did, you may never get your money back.

[00:07:56] Jim Afinowich: So that's very true. Some businesses can [00:08:00] stand the passing of an owner, some can't. Look at your business and say, if I died, tomorrow, who would run my business? Who would take care of it? Who would sign the paychecks? And if you don't have answers to those questions, then your business is probably gonna go away. You need to think about those things ahead of time. And we particularly, younger business owners and they're in their thirties, they're gonna work for another, they're not gonna think about selling it for another 30 years, so they don't have to do anything.

[00:08:34] Well, the day the doctor tells you, you got the X number of months to live. It's hard to sit down and just change it overnight. 

[00:08:44] Ron Skelton: I like these, the people that come and say, Hey, I wanna sell my business in the six months. I said, great, it'll take you three years. And they're like, what do you mean? I told you I wanna sell it in six months? I said, well, you want to sell it in six months, but now you gotta change your, you've been running it as a sole operator with two, this guy was a heat and air guy. He said, you're running it as a sole [00:09:00] operator with two part-time guys. You gotta get yourself if you really wanna sell it, cuz he said he thought he could sell it and make money, use the money to retire, put it in his retirement account. 

[00:09:08] I was like, if you want to do that, you need to move yourself out of the business. He had one really good tech. I said, make the other tech the guy that goes out and does everything. You start backing off getting another person. We walk through the process, but he thought was six months, like, I'll probably sell this in six months. I was like, not if you want a real check. Right? 

[00:09:26] Jim Afinowich: Yeah. I mean, if you want to give it away, if you wanna sell it in a discount, you might sell it sooner. But yeah, I mean, a lot of what we do as a broker is educate, our clients and potential clients as to the realities of the market. And, it's not what you want, here's what it takes. In some areas of business, the average sale can take a year. We like to talk with owners at least two or three years in advance to get the business ready to sell. To start [00:10:00] thinking about it, and an analogy I'd use is, if you're gonna sell a house, what do you do?

[00:10:04] You put a fresh coat of paint on it, you take care of the yard, take care of the problems before someone comes in and wax it off the price. You've been involved in real estate. Take a house that needs a new roof, it's gonna cost you $10,000 to put a new roof on it. Buyer comes in and says, that house needs a new roof, and I'm gonna take 20,000 off the price cuz I gotta pay for it and I gotta deal with it. And I don't believe it can be done for 10,000. So, eliminate the question. Eliminate the problem before it pops up. 

[00:10:38] Ron Skelton: Yeah. And as a real estate investor, I don't do very much of it anymore, but I'll tell you, you pull off a $10,000 roof, you don't know what you're getting into cuz you're allowed to open up other stuff, right? I don't know many how many times, especially in Oklahoma where I was buying stuff, how many times I pulled off a $10,000 roof to just pop a roof on it and realized that the electric in the house that I just bought was still two man, which means it was bare wire wrapped [00:11:00] around insulating tubes.

[00:11:01] Once I see that as an investor, I have a moral obligation to fix it cuz it's a fire hazard. So now I'm another two grand into, with my team, which you can be more in this state and more in most states, but for my team, it's still a minimum of two grand to rewire the entire house. Right? You start digging into the wiring and realize, wait a second, there's no insulation in the wall. Like, you open a can of worms. So when a, when the investor says, I'm not gonna, it's 10, 10 grand for a roof, I'm gonna knock 20 grand off. In his mind he is like, it could be a $40,000 adventure.

[00:11:31] Jim Afinowich: Exactly. It's, the same thing with the business. A buyer is gonna come in and do due diligence. The bank giving you a loan is going to do due diligence. Simple things like do your financial statements match your tax returns. If they don't, well, what else is there a problem? Maybe that's off by a thousand dollars. But is it off by a thousand dollars or is off by 101,000 [00:12:00] and you're only seeing the 1000.

[00:12:02] Ron Skelton: Right. I'll tell you, as a buyer, I always assume that you're more likely to lie to me than you are to lie to the IRS. So, when I look at your tax return and then I look at your, your financial statements you had in me, we're gonna look at the tax return with more honesty. We're gonna think it's more honest than what you show us. That's just my natural inclination is like, you're probably gonna lie to me fashion than you would ever lie to the IRS. 

[00:12:25] Jim Afinowich: But if you find something off on the tax return, maybe it's explainable, maybe it isn't. I would say if, I'm the buyer, you're the seller. If you're gonna lie to the IRS and risk going to jail, how much are you gonna lie to me? All I can do is sue you. I can't put you behind bars. One of the advantages of small businesses, is having things that you can write off. You've got a company car and it's used for business that's used for personal, there's some gray lines there. But a lot of times we sit [00:13:00] down with, people that wanna sell their business. And one of the first things we do is what's called re-casting financial statements.

[00:13:07] We want to know what the real cash flow is to that owner. So we do what's called add backs. Your membership to the country club isn't a necessary expense. So I can adjust the, add that back to my income. You get too many add backs or questionable ones, it just raises flags, you lie to the IRS. What would you do with me? But also most businesses are gonna sell for a multiple of earnings. That adjusted earnings of seller's discretionary cash flow, or EBITDA, whatever the basis that you're using in this valuation. It's gonna sell for a multiple of that. So I'll talk with a seller a couple years in advance, and I'll say, all of this, let's call it gray money, that's [00:14:00] questionable.

[00:14:01] For every gray dollar, you're saving yourself, what, 35 cents in tax? And I'll say, that's right. I'm saving 35 cents on every dollar. And I'll say, yeah. And when we sell your business, we're gonna sell it for a multiple of four times earnings. So for every 35 cents you saved, you just gave up $4 in the sale price. So is it, is it worth saving that money? You're gonna lose it in your sale price? So let's clean that stuff up ahead of time. I know this may sound un-American, but if you're gonna sell your business in the next couple years, I want you to pay all the tax you possibly can. 

[00:14:40] Ron Skelton: Right? That's why it's when they said, I wanna sell it in six months and say, great, and they'll take you three years, is because we look at the last three years tax returns, the last three years of financial statements. And, if you really want the best, highest, maximum value you need to show, not only has it been good for the last three years, but it's actually increasing. You're not, you're in an [00:15:00] inclining business, meaning that the business is growing, the business is doing well. Right. And unfortunately, you've done so many deals, over 1100.

[00:15:10] Correct me if I'm wrong here, but unfortunately, a lot of owners wait until they're too burned out or they should have thought about selling a while ago. If you look at the snapshot of right now, and you rewind five years ago and if, you ask 'em how they were doing five years ago, it was better. And it wasn't cuz the economy was better, it was because they were engaged. I honestly think that people wait until they.

[00:15:31] Jim Afinowich: Well a lot of times they wait too long. And one thing we tell every brand new client, don't take your, your foot off the gas pedal. Cause we've seen people that, they put their business up for sale and now they relax. And they quit pushing and their sales start going down. You look at a business that dropped a dollar in revenue and a buyer's gonna go, oh man. It's a downward [00:16:00] trend. What is the bottom gonna be? Now I'm gonna have to discount the price cuz of your trend. You wanna sell while business is going up, not while business is declining. If you can't at all, possibly do it. 

[00:16:14] Ron Skelton: Yeah. And one of the guys that, we talked to came into one of my meetings. He says, I'd never sell my business art. Now I land, I landed our three biggest customers. I was gonna sell it last year, but this year we landed our three biggest customer. I was like, man, it's the perfect time to sell. He's, what are you talking about? You knew you wanted to sell it last year. You already have what you wanna do next. You already like have, he already has a team working on the next project. I said, now you landed three big customers. You've got a decent incline. Sell it now when you can show people that I've got a business, it runs well.

[00:16:40] It's actually growing. I've got three of the biggest clients we've ever got. I just got this other project I want to go focus on. I want to take some ships off the table and go work on that and we'll be happy with that. We don't mind that your story is, I'm ready to do something else. We do mind that, you wait until it plateaus for a year and a half. You sucked all the money out of it and like, now you wanna [00:17:00] sell it to us cuz it, it's not paying for your other hobby, your other project. That's a different world. 

[00:17:05] Jim Afinowich: Completely different world. And you know what we're talking about with businesses, unlike real estate. I mean, you can look at real estate and say, give me some comps in that neighborhood that's gonna be between 175 and 185 a square foot. The value of businesses is much more volatile, widespread. Y'all saying beauty's in the eye of the beholder? Well, we have a deal we closed recently. We had six offers on, and the offers range from 12 million to 18 million.

[00:17:43] Same business, same set of financials, six different buyers. One buyer looked at and said, Nope, most I'd pay for this is 12 million. And another buyer said, yeah, I'd pay 18 million for this. And then everything in between. So much [00:18:00] of what sets the value of a business is the buyer's perception of risk. Risk, the old investment attitude, the greater the risk, the greater the return. So if the buyer, the greater a risk I see in buying this business, the greater a return I'm gonna want for taking that and the lower the price I have to pay. Now that may be real risk or perceived risk.

[00:18:30] So you want to look at it from a buyer's point of view and say, where are the risks? There's customer risk, customer concentration. Business has three customers that each are 30% of the business, and you lose one of those customers, you go from being profitable, losing money. That is a very, very big risk to a buyer. So if I'm the buyer for that deal, [00:19:00] I'm gonna say, yeah, I'm gonna discount my price because of that risk, but also I'm gonna change the terms of the deal. I'm not gonna write you a check. I'm not gonna give you all cash for. I'll give you a down payment and I'm gonna give you payments over X number of years.

[00:19:18] And if one of those three customers goes away, so do my payments. I'm gonna pay you on an earnout because of customer risk. That's one thing. Financial statements being a mess and don't match. That's risk there, gotta do that. Risk management risk. How deep is your bench? I see this all the time. The owner has 90% of the customer relationships. They do all the sales. And they say, yeah, well here's the keys and I wanna walk out. No, buyer's gonna want you to stay on for a couple of years to [00:20:00] transfer those customers, and mentally you're already gone. So to eliminate that risk of you being the only guy doing the sales, you need to start bringing somebody else in.

[00:20:14] It's if you are buying my business Ron, when I say, I got two scenarios. One is, yep, I know my customers. I've been the customer rep, the sales rep for the last 20 years. I take care of 90% of the customers myself. I'm proud of that. Now, business B said, yeah, I started out, he took care of all the customers to begin with and I still know him and talk to him occasionally, but a couple years ago I brought in a sales manager and he's taken all over all the direct relationships. So, that eliminates the risk before the buyer sees it as a risk. Cuz I guarantee you, when a buyer sees a risk, he's gonna discount the price and change the terms in a [00:21:00] way that is not gonna excite you as a seller. 

[00:21:04] Ron Skelton: Now you mentioned earlier that you had one of your deals where it was a range from 12 million to 18 million. I always love, I love those scenarios cuz my favorite question is, which one did the seller, like which offer did the seller actually accept? 

[00:21:16] Jim Afinowich: In this case, he accepted the 18 million one. But a lot of cases we find that they accept not the highest offer, but the one that they like the best. It isn't just total dollars, it's terms. I remember doing a presentation at a conference once and I was trying to make a point about values. I went out to the audience and I looked at a guy and they said, man, I really like that watch of yours. That's fantastic. I said, I'll give you $10,000 for it. Would you sell it to me? And he said, for 10,000? I said, yes. I said, okay, let's shake on it. We shook on it and I said, okay, gimme the watch. Here's a dollar. He goes, what's that? I said, [00:22:00] well, that's your first weekly payment. Now I'm, I'll give you $10,000, but it'll be a dollar a week till I pay it off. Well, whoa, I didn't agree to that.

[00:22:08] I said, well, yes you did. We shook on it. We hadn't talked about terms, we only talked about price. So terms make a difference as well. So maybe you take the second, third offer cuz you like the terms, but more importantly, when an owner is selling a business, it's almost like putting their child up for adoption. It's time to kick the kid out of the house, but you wanna make sure they have a good home. You like the people that are taking it over. I remember one deal, it was a veterinary practice that was being sold and there was like six different offers. And it was another broker in my office doing this.

[00:22:47] And he, went into the vet and he said, Hey Doc, I got good news. I got a full price all cash offer. And he said, well, which buyer was it from? And he said, oh, so-and-so. And he said, [00:23:00] no, I don't wanna sell to him. I wanna sell to, buyer number B. He said, well, buyer B offered you less money with 50% down and carry a note. This is full price in all cash. The doc said, I don't care. I'll sell to buyer B on those terms before I sell to buyer A. That guy is a jerk. Employees and customers have been with me for 30 years. I want my employees and my customers taken care of, and I'm not sticking 'em with a jerk, like that guy.

[00:23:29] Ron Skelton: I refer to that as a safe pair of hands. A lot of business owners wanna know that they're handing this over to a safe pair of hands for their customers and their employees. And hands down you can build, you can buy house, I almost said housing. Cause it's worse in the housing industry too. You can buy houses, businesses, or anything on that matter. Based on your rapport with the owner fast at a lower price and better terms, than somebody coming in with all cash if they can't build that rapport. And just understanding, like, understanding what the seller really wants to [00:24:00] accomplish and helping them get there is, is that, so we're currently, I've got a team of people, advisors and stuff like you that come on the show and stuff contributing, but we're putting a book on, building rapport inside of these deals. 

[00:24:12] The whole book is about the rapport building side of it. Cuz I think it is so critical for any business transaction more than almost anything else. And I think a lot of people get it wrong, especially new guys like myself. And when you first got into that, we were taught, look at the balance sheet, look at the income statement. This is a numbers game. Are the numbers good? If the numbers are good, you buy the business and it doesn't work that way. 

[00:24:32] Jim Afinowich: No. The single largest reason mergers fail is not financial, it's cultural integration. You're looking at the culture. In the mid-market sale of mergers and acquisitions, about 70% of our buyers are private equity. Private equity is more concerned about the people than they are the numbers. Who's the manager? What's the management team [00:25:00] look like? Are they the right people? Can we work with them? The numbers are important, but that isn't the last thing at all.

[00:25:08] Ron you had a very good point in understanding what that seller wants. If you're a buyer looking at a business, you do need to understand what they want. 

[00:25:18] Ron Skelton: Yeah. And a lot of people just don't realize that there's, there's the physical part of the money, the assets and stuff, but there is a huge psychological component to this. As owners and entrepreneurs, you've been an entrepreneur all your life. We really tie our identity around what we do. You ask a hundred people on the street who are you? And they'll tell you their job. Well, I'm the CEO of so and so. Like, no, I ask you like, I do it for fun now. Like, I'll be in a coffee shop, somebody will step beside me. It's like, Hey, I don't say, what do you do? I say, so who are you? And, I say it like that kind of passing and they're like, they'll tell me about their job.

[00:25:52] They'll tell me about everything. The funny thing is rarely do they tell me about their family unless I ask. And rarely do they say, I am, John Smith. I love to paint [00:26:00] paintings and I love to travel. I'm a security guard at this guy place, or I'm the CEO of that. 

[00:26:05] Jim Afinowich: Yep. And part of the checklist, if you will, to see if you're ready to sell your business is looking in the mirror. Are you ready to sell that? As a guy who makes his money on commission, when the deal closes, when a seller backs out at the last minute, I've spent hundreds of hours that I'm not getting paid for. We try and screen potential sellers. And after all these years, I found one very simple way of doing that. And that's saying, okay Ron, if we sell your business today, what are you gonna do tomorrow? And if you don't have a clear vision of what your life looks like tomorrow, there's a very good chance you're gonna back out of the sale because that business is your identity.

[00:26:57] Now. And the guy that says to me, [00:27:00] oh, I'm gonna play golf. Yeah, you can't play golf seven days a week. So maybe selling your business right now isn't right for you. So as a broker, I don't wanna waste my time with someone who's not gonna sell. And if they can't tell me what they're gonna do afterwards, then they're probably not ready. Is the business ready? And are you ready as an owner to sell? Both of those questions have to be, have the right answers. 

[00:27:26] Ron Skelton: And the buyer should know both those too. As a buyer, that's one of the first questions I'll ask. Like, you spent 30 years here, and when we close this, what does the next day look like? What are your plans? And, I did it in the real estate. I built that muscle in the real estate world just because, I did a lot of creative deals inside of the, residential real estate world. Somebody says, well, I need $60,000 down on a hundred thousand dollars house. And I was like, $60,000 down. You mind if I ask you what you're gonna use the money for? Well, I'm gonna go on a cruise. This is a little old lady. She's like, I'm going on a cruise. I was like, that's one heck of a cruise. You're gonna spend $60,000 on a cruise. Like, no, no, the cruise is 10 grand.[00:28:00] 

[00:28:00] I was like, in my mind I was like, okay, she needs $10,000 down for sure. Right? And I was like, then why 60 K? Well, I wanna make sure you got enough skin in the game. I'm gonna make sure that this, like, that I'm safe. I was like, there's something I asked her, I said, is, there's something I don't know about the house, right? What has you been so scared that I gave you 10 or $15,000 on you go on your cruise? What am I gonna find that I want to back out and give you the house back and lose my 10 to 15 grand? That would've been different if I gave you 50 or $60,000. There's something there I don't know. And, but understanding their motive, understanding what's going on and helping 'em get there is absolutely critical.

[00:28:38] And so many people overstep that. They look at, they want, wanna see balance sheets, they wanna send LOIs. 

[00:28:44] Jim Afinowich: Yeah. And I will, oftentimes, I ask the question, why do you want to sell? And on a lot of cases, I'll just listen to 'em, stare 'em in the eye and say, now tell me, why do you really wanna sell? And they'll say, [00:29:00] well, I'm tired of dealing with employees labor today. Just as it what it used to be. I'm sick of managing people, but I didn't want to say that cuz I thought, that would turn a buyer Ron. And I said, no, the best answer is an honest answer. It's easy to remember. It's gonna be the same every time. So when a buyer asked me, why do you wanna sell? I can tell 'em you're selling for health reasons. You're sick of the business, you're sick of employees. Be honest. 

[00:29:33] Ron Skelton: Absolutely. And, I've found that it takes a minimum of three times to get an honest answer from somebody. If they're trying to sell me something, like the first time they'll gimme a story. The second time they'll gimme a little bit of the truth and it minimum the third time that I ask. So I usually, like, what are you selling the business? I'm looking to do something different. You play the NLP game. Something different? Well, I wanna do this, this and that. And then you give them a little bit more, you just repeat it back to him. Well, I'm just tired of [00:30:00] managing people. I've got this solopreneur thing I'm gonna do. I could do it all on my own. I don't wanna manage anybody anymore. Then you get the truth. Right?

[00:30:06] And in most cases, if I'm a buyer who doesn't mind managing people and or I like managing people, then it's a blessing to me. Cuz I was like, look, if he doesn't like managing people, chances are for the last six months, 12 months, he hasn't been managing them well. And if I can step in and treat them better and show them better guidance, we might be able to improve upon the business. 

[00:30:26] Jim Afinowich: That's real important, as a broker, sometimes my job I view as being a matchmaker as much as a salesman. Yeah. I've gotta sell it. But you're gonna have a better deal and better outcomes if you have the right match. I'll look at a business and say, and the owner is making half a million dollars a year. It's the most money he is ever dreamed of in his life. He's really happy, he's reached a level of contentment. And I look at it and I say, my God, what that business could do if you just [00:31:00] hire a salesman, if he'd get a website.

[00:31:02] So I want to sell that business to somebody who's good at marketing and promotion. If it can make half a million dollars a year with someone who hates that and doesn't do it, put in a buyer who's good at that, that next buyer's gonna make a million dollars on it. And, and pretty quickly.

[00:31:22] Ron Skelton: I love your approach cuz you know a lot of these guys are gonna come back 10 years from now and wanna sell it again. And if they had a good experience with, you're gonna bring it back to you, right? It's the same way when somebody brings, I always ask, what did you do before this business? Especially if they've only, if they're trying to sell me a business or we're talking about buying a business that's been in business less than 10 years, I'll say, well, what did you do before that?

[00:31:41] And if I find out they grew and sold another business. I do my best to build the best, deepest rapport with this individual. And I asked that one guy, I said, man, like, you're a really cool guy, man. He says, you're really nice. Well, it's intentional. I said, I want you to love me at the end of this transaction whether I buy your business or not. And he says, why is that so important to you? I said, you've created [00:32:00] three business you told me about when you're ready to sell your next, and all of them, he grows 'em to a certain point, hits 'em to, they were getting to about eight to $10 million. Get to, he gets about 45 employees and he just goes, gets where he doesn't like to run the business.

[00:32:12] It's just too big for him. Right. And then he sells it. Takes about a year off. And then he comes up with another idea and does it again. I say, when you hit your next, eight to $10 million business with 45 employees and wanna sell it, I wanna be on your list of people you call, right? I'm 50, but I plan on doing this until I can't do it anymore. I have a holding company. I plan on holding a lot of companies over the years that are well run. You're building decently ran companies are some things I would do differently. I'm not gonna lie to you, but, I wanna be on your list when you've, whenever you're done with this one.

[00:32:39] And even if, whether I buy this one or not, I wanna know that you'll call me on the next call. 

[00:32:45] Jim Afinowich: I think it's appropriate in every business deal not to burn bridges behind you. You're gonna look at things differently. And I see buyers come in that are so arrogant, they're immediately want to change everything cuz they know [00:33:00] better. And a lot of times I will suggest, you know what, even if you don't agree with it, he's been here for 20 years. He's successful. He's making a good, good margin, don't change anything for six months. Go in, get to learn the business, get to understand the business. And then after you understand it and you've got some time in the saddle, then you can change the direction of that horse.

[00:33:27] But don't, don't do it right out of the starting gate. That's we going back to, we were talking about someone taking the second or third lowest offer, not the highest offer for the deal. Part of that is a, most transactions today have the seller carrying a note. Very seldom you're gonna get all cash. So whether you get paid on the deferred portion of the purchase price depends on the success of that business. So you have to look at it and say, boy, I'm [00:34:00] gonna be carrying a note for half a million dollars. If I don't think the guy's gonna be successful, then don't sell to 'em. You're gonna lose out on the note. You gotta feel comfortable. So that's another reason.

[00:34:13] Ron Skelton: I like to play poker. I'm about to get one of my tales away here. One of my tales is if I really like you as an entrepreneur. So right now I'm looking for media companies and stuff. Like that's what I look for. When I say media companies, not talking about Fox News or anything that's crazy. I'm talking about, newsletters, podcasts, blogs, and I get they're profitable already. And if I really like the entrepreneur that built it, I don't ever offer a hundred percent of, equity buyout. Meaning I don't offer to buy a hundred percent of the company.

[00:34:37] What I offer is 75. I want 'em to own a 20, 25% of it. I want 'em to stay engaged. I want 'em to believe my vision of where I'm going with it, but I want 'em to contribute ideas along the way cuz they built it up to this point. They know stuff about it that I don't. Not only will I, do an order, have them finance part of the deal, but I try to leave some skin in the equity back to them because they know people in the space. 

[00:34:58] Jim Afinowich: Most private equity groups do [00:35:00] that. That they want to have, want to get skin in the game. You can have a contract that ties you to it. But part equity, again, in mid-market transactions, 70% of the deals my firm sell are to private equity. And I would tell you the majority of those deals, they're buying 70% and having the seller roll 30% equity. Now they're typically holding it for five years and then they resell. And if you've got a good financial partner, in a lot of cases my clients get more for 30% down the road than they did for the 70% to begin with. That can be a good model for everybody involved. It doesn't suit every situation, but it suits a lot of 'em. 

[00:35:47] Ron Skelton: I interviewed, one of the guys that been through that, he's got a couple books down now. It's Adam Coffey. He was a heat and air company and I think he went through, I wanna say at least four or five private equity transaction where they kept him on as a [00:36:00] CEO. The first one bought 80% and the next guy bought 70%. I asked him, what did those checks look like? He goes, well, the second check was bigger than the first. And then often he says, more often than not it, the next check was equal to or better than the previous one. Cause we were growing so fast.

[00:36:15] And imagine, a lot of these business owners are like, ah, I don't want to hang around. It's not like if you're pulling 50, 60 hours a week. Now, if you negotiate with that private equity and say, Hey, I got a back office for a little bit, then they're gonna have you hone in on what you do best. I've seen it, I've seen where, I know right now of two guys that are, they're doing their earn out. They didn't want the CEO title anymore. They wanted to be back to a soft, lead software engineer. Cause that was, they helped build the software, they were good at it.

[00:36:40] They're hanging around, on a, about 25 to 30 hour a week lead software, reviewing code and stuff and working on other projects. And the private equity firm is okay with that cuz they negotiated, had that from day one. Right. So there is some leeway inside of these negotiations, about how many hours you have to fit in on the other side.

[00:36:59] Jim Afinowich: I had a private [00:37:00] equity group I was talking to once and they said they always make the seller hold some equity for a period of time. That's the golden handcuffs that hold them to the deal. And I said, what about, contracts? And he told me a story of a business they bought, where they didn't make the seller hold any equity. But the seller agreed to work for 'em for two years afterwards. And so they had the closing, it was, in the conference room at the business. They got done with the closing, the owner walked out the door, went down to the parking lot, got in his car and drove away. Sent a message saying, I'm moving to Costa Rica. Good luck. 

[00:37:51] He said the guy didn't even, the seller didn't even stay for the afternoon after he got his check. Now he agreed in the contract [00:38:00] and he negotiated what his salary was and everything that he was going to get working for the next two years. And he said, the guy's out of the country. He's got all of our money. Right, the contract and what I would sue him. So, rolling equity is in that group always mandatory. 

[00:38:17] Ron Skelton: Yeah. And it's often beneficial, right? A lot of people don't understand like a lot of the, people I talk to and the meetings that come, like that I host and stuff are like, I don't wanna sell private equity cause like, I don't wanna be done. I was like, if you sell your company and you kept 30%, would you work for it? Cuz they're thinking they're getting, this one guy's like, I'll probably get a two, two and a half million dollar check. Now that's good enough for a little bit until I figure out what I wanna do next.

[00:38:38] I said, if you get a two and a half million dollar check now, and a $5 million and the potential of a $5 million check within five years, and you only needed to put in 30 hours a week instead of 60 on this company, would you stay? He goes, well, absolutely. I said, then don't tell these private equity guys you're not interested because you can negotiate deals that are close to that. Right? If you picked the right one, [00:39:00] then in his particular company it could grow that. The reason it wasn't growing is he doesn't know marketing. It went viral with, they had a lot of referral growth. But if you got the word out through some good marketing and a private equity company, put in some money towards getting the word out, I think that company would double or triple. And if you look at the way that private equity does it, it's gonna double and triple because of the other acquisitions it makes. But I said, quit telling people you don't wanna talk to private equity. I think you're making a mistake there. 

[00:39:27] Jim Afinowich: Yeah. I mean, private equity is like anything else. There are good brokers, they're bad brokers. There are good private equity groups. There are bad. I've got 3,500 private equity groups in my database. We've been collecting those names for 35 years and from nine different offices across the country. So this is something I don't tell them, but I'll tell you in your audience and our, in our CRM, we have notes and the note will say next to the private equity group. Talk to [00:40:00] John about them. Now we don't wanna put in the, in writing that these guys never do what they say.

[00:40:07] They retrade deals, they lie, they don't have their, you know what, all the bad stuff. So when, anytime we get a deal with a private equity group, we go look at the CRM and go, oh, okay. I remember one deal like that. One of my partner in Colorado, I called and said, Hey, you've got a note in the CRM about this company? And he said, oh, yeah, yeah, they are the classic trip to Tahiti. And I said, what do you mean trip to Tahiti? He said, oh, you haven't heard that? He said, that's something that private, it's a tactic private equity groups use, or some professional buyers. They'll come in, they'll say, yeah, oh man, this is Ron.

[00:40:49] This is great. I'll give you a $10 million in cash. Now we, we just have to go through our due diligence and they'll stretch out due diligence for six months, and then at the [00:41:00] last minute they'll come back in and go, oh, Ron, I'm really sorry. But, in due diligence we found that there was a piece of bubblegum underneath the conference room table. And, all my partners wanted to cancel the deal, but I've talked them into staying in it. Only thing is we're gonna, now with what we found, the price will be 5 million instead of 10. It'll be a million down and 4 million on an earnout. Now, I know that makes you unhappy, but this process takes a year to sell a business.

[00:41:30] You can go back to market, find another buyer, spend a year at, you're gonna end up in the same place. Or, if you take our new terms, we can close next week and you'll have that million dollar check or whatever it is. And what they've done is, when they offered the 10 million cash mentally, they sent the seller to Tahiti. Six months they were in due diligence. He was sitting on the beach, got his feet up, got the Corona on the [00:42:00] table next to him, and he has checked out of the business. So that's why they call it a trip to Tahiti. Now you come back, you're gonna take lesser terms and have your money and be back in Tahiti in two weeks, or you're gonna go back through the whole process for a year again.

[00:42:18] So that one equity group, I ended up not deciding not to work with because they were, known within our organization for a trip to Tahiti.

[00:42:27] Ron Skelton: I had a similar situation in the real estate world where, one of my, he's a friend. I still consider him a friend. I'm friends with him on Facebook, and I won't say what he does. He's professional in one of the sports, I won't say what that sport is cause it'll give it away. Everybody listen that knows me, knows exactly who I'm talking about. But, he's a sports professional and a real estate investor, and he owns a few other businesses. But, his game was, he would submit, he had a team, he'd submit a hundred, 200, 300 offers a week, and, full price offers on MLS and then, for real estate.

[00:42:56] And then it would say contingent upon inspection. And then, [00:43:00] people would accept his offer. He'd put in there 90 days or 180 days to close. And then you would basically lock it up into contract for three months to six months. And then when his inspector went over there, they found all this stuff wrong with it. And they would beat him down on the price and they couldn't sell it. They're under contract. They couldn't sell it to anybody else. Yeah. And, I was like, he's like, you gotta do this. This is, it works. I was like, I'm just not playing that game. I'm not, I'm done doing people that way. It works for you. Don't work for me. And it's like, it would work. He didn't get it. Like he, oh, it would work for you. And I was like, no, it doesn't morally work for me. I'm not interested. Right. I don't want to, create a pool of people who hate my guts. So he just didn't care.

[00:43:38] A different mindset. And I know private equity, not the whole reason I leave equity on the table is I like, what do the big guys do out of, what do they do? What can I implement that'll work for me, but I don't have to implement the stuff I don't like or goes against my moral compass, right? Yeah.

[00:43:52] Jim Afinowich: Finding a private equity group is like finding a partner in a business. Finding a business partner is like [00:44:00] getting married. And you know what? 50% of marriages end up in divorce. You don't wanna get married after the first day. You want to check out your partner, all the same analogies apply in a business transaction. But, I sometimes that I go to another point, I oftentimes have a seller say to me, I want all cash. I don't take anything but cash. I want to sell a hundred percent. I won't sell any less than that. I won't carry. and I'll say, yes you will. I'll say, no, I won't.

[00:44:29] I'll say, yes you will. And I said, okay, I got two options for you here. Option number one is you're gonna get 5 million in cash and you can walk away goes, yeah, that's what I want. No, wait a minute. Option number two is you get 5 million in cash and you get to keep 30% of the business. Now, which do you want?

[00:44:49] Well, I'll take option two. I said, see, you will take, you will roll equity. In fact, sometimes rolled equity is something that I [00:45:00] use or an earnout as a negotiating tool. Depending on the size of the business. Smaller businesses typically go to market with a price. Mid larger companies, we go to market without a price. We try and get multiple buyers, play one against the other in a polite way, run an auction environment. And so let's say, we think the business is worth $10 million, and somebody comes in and offers 15 million for it. We're not gonna say, oh God, that's a lot more than I thought. Fantastic. I'll take it. 

[00:45:34] There's due diligence and a lot more negotiation to come. We might say, well, that 15 million's a nice down payment. And I believe in enough in the business that, I want more, but I'll take it on a note. Or I'll take the 15 million, but I'll give you 80% of the company for it and I'll keep 20. You're negotiating and you're using that earn out that equity role as part of your [00:46:00] negotiation. And that helps. 

[00:46:04] Ron Skelton: Yeah. So in that scenario, one of the things that comes to my mind is I have a I have some people that I've been talking to and they're like, I'll just sell it myself. I've sold my last two companies. I use brokers in those, but I'm gonna sell this myself. So like, okay, who are you gonna sell it to? And they're like, well, probably private equity. I was like, okay. Would you sit down, like I asked the guys, I don't play chess, but the only scenario I can think of in my own head was chess.

[00:46:29] I said, do you play chess? And I was like, yeah. He goes, yeah, I'm pretty decent at it. Like, okay, are you at, what level are you? And he gave me a level cuz he knew. And I was like, was that grand master level? He was like, no. I said, would you sit down with a grand master and play against them for your business? And he says, well, absolutely not. And I said, why would you go to try sell your business to private equity when those guys are freaking grand masters at what they do. And you don't have that database. You don't know these companies. I said, go find a broker. Go find an advisor that been doing this for 10 or 15 years.

[00:46:59] They have that list of [00:47:00] brokers. They know how, I mean, those private equity companies, they know their behavior. They know what they've done in the past, they know their history stuff you don't know, and they can help you navigate this transaction. If you're gonna sell your business to your buddy or to your son or son-in-law. That's one thing. You could probably negotiate that with a small team of a, accountants, attorneys. Are you gonna sell this to a sophisticated buyer? You probably should not have a one-sided transaction, but somebody's sophisticated on your team. And, he said, well, I'm pretty sophisticated. I say, all right, well, good luck. That scares me as people think that because they've done something before they can do it again. 

[00:47:34] Jim Afinowich: Yeah, I see that all the time. And while you're, people say, well, Jim, you're Joe's biased cuz you're a broker. Well, yeah, I am. But I sold a number of businesses on my own and I thought I knew everything about doing it. I went through, a large number of transactions. Years later as a broker, I look back and go, Man, was I stupid? You don't know what you don't [00:48:00] know. And you also have to understand that selling a business is an emotional process. If you said the most you could dream of is $5 million from your business and you're sitting across from somebody who says, I'll give you 10 million. Could you really keep a straight face?

[00:48:19] And not show that? A lot of what we do is educate people about the process, but it that emotion, like I said before, it's like giving your child up for adoption. You need to separate that emotion. And the broker can do that. The broker knows the buyers. They know the value, they know the process. And selling a business is a full-time thing. Most businesses when we sell, we want to keep it confidential. You don't want your employees, your customers, your vendors knowing it's for sale. You get calls during, you're selling a business, you're talking with buyers during the day. Can you [00:49:00] afford to take hours out of your day to talk with buyers?

[00:49:03] I see people do that. And then they're sales start declining cuz they're spending their effort on not running the business but running the process. People think, oh, I'm gonna save myself 6, 8, 10, 12%, whatever the commission rate is. And last study I read said, on average when someone uses a broker on average, they get about 25% more. The broker is gonna more than pay for himself. 

[00:49:29] Ron Skelton: We'll nail this coffin with one last nail. So I'll give you a scenario. You got a business for sale, a private equity company you've never dealt with, reaches out and says they're interested in it. But somebody in your network sold five businesses to them. What do you do? 

[00:49:41] Jim Afinowich: I call him. We do research. I say, how are they to deal with. What kind of tricks did they play? Do they do, just, it's like checking out a reference. Yeah. You're gonna, you're gonna find out about these people and are they the best buyer? What I'm seeing a [00:50:00] lot today with good businesses is that buyers are reaching out to businesses directly. And they wanna be the only player. When I represent a seller, I'm gonna get multiple buyers play one against the other and drive the price up. Would I represent a buyer? I don't want any other buyers involved. I want to get it as cheap as I can. Well, I see buyers reaching out to businesses, and the owner thinks, boy, I got a great buyer.

[00:50:28] I'll give you one short story, quick example. I gotta call on a Wednesday. Guy said, Hey, I've got a letter of intent to sell my business. I talked to my lawyer. He said, I ought to talk to you before I sign it. So come in and see me. He does. He said, okay. I've negotiated. They've reached out to me directly. They're in my industry. It's a synergistic buyer. I really like these guys. We've spent eight months negotiating it. I've got 'em up to 6 million bucks. But my lawyer said I should talk to you first. [00:51:00] I said, okay, give them my name, tell 'em you're hiring a broker. This is the largest transaction of your life and you want to be professionally represented.

[00:51:09] Tell him I'll call him in two weeks, as soon as I get my arms around the deal. And he says, oh God, we can't wait two weeks. He said, the letter of intent expires on Monday. I said, trust me, I've done this a long time and I got eight months negotiating, they will wait. So he took my advice, called the buyer. The buyer said, oh God, don't get some damn broker in the middle of this. They just delay it and screw it up and we got eight months in this. And I said, Nope, nope. I want a broker. That's Thursday afternoon. Friday morning, the buyer calls the seller back and said, listen, I really don't want this delayed, but some damn broker in the middle.

[00:51:45] You agree to leave the broker out and I'll give you 8 million instead of six. Five seller called me and said, Hey, it took me eight months to get into 6 million. I haven't even signed your representation agreement, and in 24 hours you [00:52:00] got me $2 million more. I said, well, I guess you're signing my representation agreement now, aren't you? And he did. And we sold the business to somebody else for $10 million. He thought 6 million was a good price. The buyer was happy to pay, go to eight to keep me out of the deal cuz it was it $10 million business. Sellers don't know what they don't know. And I can I could go on from now until the cows come home of stories.

[00:52:28] I've heard of people who sold their business because they were contacted directly and they thought they'd save themselves a commission. And I don't have the heart to tell 'em, but I know, man. You left money on the table, you could have got a million dollars more. But they liked the number that was on the table.

[00:52:46] Ron Skelton: I had business networking hangout where we had some people in the guy, like I sold my business two years ago for X, Y, and Z and there was a broker in the room that's like, you he had less leg experience. I think he had like 15 years experience. The guy asked him four questions like, [00:53:00] what was your EBITDA, what was the industry? Did you have any customer concentration look, look like? And he said he left at the end of the floor question, he looked at the guy and said, you left money on the table. He goes, that year that you sold that I sold four software companies like yours for nearly double what you got for on a multiple.

[00:53:16] These companies were paying twice that and multiple that year. I thought he was good at getting like a four X or something like that. He goes, companies were paying all day long ax for that type of software, recurring revenue and everything. 

[00:53:26] Jim Afinowich: Yeah. I mean, you can sell a construction company for a three or four multiple and a software company, easily can hit with, an eight 10, multiple of its recurring revenue. Now the hard part is when the construction company owner comes to me and says, Hey, my buddy just sold a software company for a multiple eight. I want to sell my construction company for a multiple 8. Going downstream's much harder than going upstream.

[00:53:52] Ron Skelton: Or you get into other industries and it's done totally different altogether. So for these, for content sites and newsletters, it's totally different [00:54:00] math that's based off of not EBITDA or seller's discretionary earnings, it's actually off of revenue. Because the profit margins on it, on these are astronomically. If you get something like a content website or a, newsletter and stuff, and they're profit margins under 70%, they're doing something wrong. It's very profit, it's done off a multiple revenue and it's usually 36 to 42 times month average monthly revenue. So you take their revenue over the last 12 months divided by 12, and then you're paying between 36 and 42 months of average monthly revenue. So it's a totally different model.

[00:54:34] So yeah, having somebody that knows the industry, the first one I seen, I offered, the guy said, well, what you, what do you make for a year? Offered him three times, which would be 36 still. His profit, and he was like, no, that's not how this is done. He knew enough to know better. So I had to go do my research and realized I stepped into a new industry without looking at how that industry was value, the valuations were done. And you've done stuff across all so many different industries. If you step into another industry that you gotta look [00:55:00] at, the comps in the real estate world. You gotta look at what's happening in that space? What are people paying? What's normal? We're above the hour now.

[00:55:07] I think we could talk for a long time on this. We're both passionate about the topic and stuff. If somebody could remember two or three things from the show and from you, what would that be? 

[00:55:15] Jim Afinowich: Run your business like you're never gonna sell it and run it like you're gonna sell it tomorrow. 

[00:55:20] Ron Skelton: Awesome. So keep fired up, motivated, but keep your, like you're never gonna sell it and keep your accounting and your paperwork and stuff like you're gonna sell it tomorrow in your management operating systems. I get that right? 

[00:55:30] Jim Afinowich: That's right. Exactly. Correct. 

[00:55:32] Ron Skelton: And then how do people reach out with, to you, what's the best way to contact you if they wanna have you look at their business, maybe have you helped buy one or sell one for them?

[00:55:40] Jim Afinowich: We have offices in nine cities around the country, so we can help people most anywhere, if we can't, we can refer 'em to the right people. Let's say email, email, phone, website, any of those, would work, email. 

[00:55:53] Ron Skelton: I'll make sure your, I'll make sure your website and your email address get into the show notes so that people can reach out to that. [00:56:00] And the website is ig or ibg business.com. Is that right? 

[00:56:05] Jim Afinowich: That's correct, yes. 

[00:56:06] Ron Skelton: I, B as in boy, G as in, I forgot what it, 

[00:56:09] Jim Afinowich: India. Bravo golf. 

[00:56:11] Ron Skelton: There you go. I'm prior military and you nailed that faster than I, I was like, well, why did I forget that? They made us memorize, I was military intelligence. We had to memorize that type of stuff. But yeah. Awesome. I appreciate your time today. 

[00:56:23] Jim Afinowich: I use that all the time. 

[00:56:25] Ron Skelton: All right. So India, Bravo golf, business, singular, dot com, and then you can get in there. I appreciate your time today, and we'll call that a show. 

[00:56:33] Jim Afinowich: All right. Thanks, Ron. Appreciate it.