E114: Eric Grafstrom Helps Small Businesses with Selling Strategies and Valuation Tools - How2Exit

[00:00:00] Ron Skelton: Hello and welcome to the How2Exit Podcast. Today I'm here with Eric Grafstrom and, we are gonna talk about buying, companies and the company he's building and assisting, the smaller mid-market, right? You're assisting, the guys too small for the investment bankers and stuff like that.

[00:00:16] So, thank you for being on the show today, Eric. I hope I got your name right. I said it and I was like, I think I got it right and then the uncertainty would be sitting there on me until, I got that cleared. So let's start with your origin story. I joke around about the different ways to get you to tell me the origin story, but just let's straight out and ask how did you get into mergers and acquisition and wanting to create tools and resources for people buying and selling companies. 

[00:00:39] Eric Grafstrom: Yeah, it's an interesting story. So I've had a career. It's probably a little, different than some of the other guests that you've had on. I come from, the internet space. I started in, the late nineties, well, mid nineties. I was, I like to say my climb to fame was I was the first guy that was dumb enough to try to sell webcasting when people did not have sound cards and speakers. ~Uh, ~so that company, was AudioNet became broadcast.com, and I was out selling, truly was selling webcasting to companies. The idea was we could, get them to broadcast everything from an earnings call to a corporate event over the internet. And that journey, took me from, after Yahoo acquired the company.

[00:01:11] I moved to London. I worked for Yahoo in Europe for a few years, and then landed in Silicon Valley about 20 years ago. Left Yahoo before things got, really challenging. They faced a lot of headwinds. Still big fan of the company, a lot of great people that I met there and moved back into early stage startups. And over my time I was, going from, moving into executive roles and ended up leading a couple different exits. Some were, successful exits that you read about, so, everybody did well. And it was a successful exit. Some were more along the lines of an asset purchase agreement, and in some cases it was really just trying to kind of piece off the assets and, land the team somewhere or close the company down.

[00:01:51] And what I learned from that was a lot of the mechanics, but in a less traditional sense. So we were talking about, venture backed companies. And so different motivations, different, things that were important to investors and potentially to some acquirers. And what I realized though is that, access to a lot of the tools, the information, and the professional resources were out of reach for most people when you started to look at Main Street businesses. I'll talk a little bit more about that. But really, I decided a couple of years ago, what if I could take the skillset and some of the knowledge that I built up and productize it. In a way that allowed kind of traditional main street business owners, largely the ones that are too small for a business broker.

[00:02:33] So we're talking about companies that are worth less than 2 million to move through the exit process on their own or with very limited support from an attorney or a CPA, but do a lot of this online. 

[00:02:47] Ron Skelton: We have a similar background. I dunno if you knew this before you got on the show with me, but, I was the senior director of operations for excite.com, head to head with Yahoo, back in the day. Like, in software engineering side, but the server sites of the data centers and all the, Oracle databases and all the, Sun Microsystem systems and the network operating center. All that stuff reported up through me. For about their last two years in existence.

[00:03:08] And you're talking about some successful exits and some unsuccessful ones. I was there right up until the time we started liquidated equipment. Cuz they went under and then, we won't get into it, but at and t forced them under in a vicious thing and end up losing a lawsuit over it. Then I went into the anti-spam, antivirus community and worked for spam startups, basically companies that were combating spam. Some of those sold. We have a similar background. So funny thing is how I got into mergers and acquisitions is, I moved to Oklahoma.

[00:03:34] There was no tech companies to, to be in or run. Very few anyway. So, I've moved there to take care of family members and, then I ended up in marketing, coaching and real estate. And then, that all led to this. We have some of their backgrounds. Like I was trading employees with you guys all the time. So Excite will steal employees for Yahoo. Especially, network engineers like our high-end guys that can do, routing and manage the high-end, high speed networks. Our networking equipment. We were constantly battling. Getting somebody from Yahoo and then next thing you know, ~somebody,~ from our company would go over to Yahoo and we we're trading employees all the time.

[00:04:05] Eric Grafstrom: When you try to, explain the volume of traffic that moves through a site like that or through a network of sites like that, it is staggering. It is no small task just to keep things up and running and running efficiently. 

[00:04:18] Ron Skelton: A lot of people don't understand the excite portal, and I'm sure Yahoo was the same way. We had 180, I wanna say 187 or 189, 189 products on there. So you had news and weather and email and like there were 189 of those. And the way we designed it, a product could be down and the site be up. Like if the network goes down, the network goes down. But, a product could have a flaw, and be down, so you might lose one part of the portal. Okay. So now you're, you've got this exit guide. 

[00:04:43] And it's for, you said, for companies that kind of get overlooked by the investment bankers and the advisors. And it's for that small one. Let's talk about a little bit about what you're putting in place. How do you help him? Like, how we know who you help, but how do you help them?

[00:04:58] Eric Grafstrom: Today we're focused largely on sellers. Eventually we're gonna bring in, support and tools for both buyers as well as some of the service providers that could be a broker or CPA, small business attorney. But today we're focused on sellers. And we've helped several thousand sellers start to move through the process. Largely what we find is that most are starting with a question of what do I do? Where do I start? What do I do? And just to kind of give you some data points, we've had several thousand people move through what we call as our free assessment. Which is a, I like to call, it's more of a pricing tool than it is evaluation tool.

[00:05:31] In our case, again, these are businesses that, probably have revenue that's under $2 million. The business value is probably, say maybe a few hundred thousand dollars to maybe a million, to a million five. And so they start with, what is my business worth? And we help them with that. So we do a, basic seller's discretionary earnings calculation to give 'em a sense of how they would price their business. About 50% of them actually know who that buyer's gonna be. It's an employee, a business partner, or member of the family. So they're not actively out trying to find a buyer. What they're starting with is, if I wanna sell my business to Ron, because you and I have been business partners for the past 15 years.

[00:06:08] What's the right price that, I should charge for a buyout? And then what are the steps we need to take? So we start with the pricing, which is, first and foremost we automated that process. And then two, they move into how to package that business up. And so, in our language we would refer to that as, more of a prospectus. But again, these are small businesses. In some cases, they just wanna show the methodology and some of the data behind the valuation. In other cases, if I am trying to find a buyer, I may want to, provide a business summary. So step one, give them the ability to price the business. Step two, give them the ability to package the business in a kind of a nice, slick PDF format.

[00:06:46] And step three is walking them through the information they need to prepare to engage a buyer in that process. So, what do you need to put into a data room and give them, kind of a workflow that's online. And all of this is stuff they do on, at their convenience from their laptop, from their phone, from their, tablet, computer.

[00:07:03] Ron Skelton: How are you doing the evaluations with them? I know you're asking questions and stuff, but, it's always a question of if you look at the different university models, like some of these major universities have a hundred, I think one of 'em is teaching 140 something different ways, 150 ways to value a company. I think the two most competent, common ones in my world anyway, for brick and mortar companies, non-software companies, is a seller's discretion, earnings or EBITDA, a multiple model, right? But there's discounted cash flows. It's fairly common. I think it's second and running, and there's all these other models. What are you guys using to help them figure out what a company's worth? 

[00:07:39] Eric Grafstrom: Yeah, great question. When I started this, that was one of the questions that came up, as I was kind of talking to people in the industry, and we're using a seller's discretionary earnings model. When someone moves through our platform, they're self-reporting revenue and profit. Assets and liabilities. They're telling us a whole bunch of other things around when and how they want to exit. And this allows us to kind of customize the experience for them. So if you're someone who's trying to sell a small brick and mortar business to an employee versus, somebody who's trying to sell more of an online business to say, anyone but they need to go out and market that business. Those pathways are very different. 

[00:08:14] Now uh, discounted cash flow analysis really requires, more robust calculation and actually using financials. So what we offer for free is just to start to help establish a baseline for them to price the business. We'll look at it expanding into, actually bringing a human in to do it, a full on valuation where that's necessary. To date, we've run several of these SDE models and again, it's just an automated calculation that's taking the SDE and is using an industry multiple based on how they answer the question. And then it's calculating what the price point should be, but it gives a range. And generally speaking, that's enough for most small business owners to actually start the process and engage with the buyer.

[00:08:55] Ron Skelton: Okay. Even inside of the standard multiple model, there's some consideration giving for different types of revenue, right? So, sellers discretionary earnings is 65%, recurring revenue is gonna get a higher multiple. But that's usually built in because the industry has a common, like for me, like for instance, I own one of the many things I have. I own a pest control company of all things. And the fact that a lot of pest control companies have recurring revenue, we have customers that we service on a regular, quarterly basis or some of 'em even monthly. That's already built into the industry model. So it's okay to just say, well, if you're below this size, you're at three x.

[00:09:29] If you're above the size, you're at whatever X. I have to imagine there's a lot of industries where, like, this time last year, I was looking at coffee roasting companies. Not very many coffee roasting companies actually have a subscription model, but that's where I was taking 'em. I was gonna acquire them, and get into basically show, acquire them, build a recurring revenue model of subscription based, business volume. Some of 'em have it already, but, not all of 'em. And really bolster their revenue based off that recurring subscription. That number is different, right.

[00:09:59] When you do the evaluation, especially if you get over a certain size, the PE guys and stuff like that are gonna give you a much higher multiple and your recurring revenue than they would ever on your standard revenue. So do you take things like that into consideration or?

[00:10:11] Eric Grafstrom: Today we're trying to provide, the tools and information to get people out of the gate. That's why we refer to it as assessment. We use the term valuation loosely because it's something that a lot of our customers are familiar with. But what we don't want to convey is that this is a robust and, valuation that really does require, a professional commit. Again, we can provide that to you, but most are trying to say, look, they have an idea and a gut feel of what their business is potentially worth. And if they already know who that buyer is, or they're planning to find a buyer within their network and their local community, which between those two use cases accounts for probably about 80%.

[00:10:46] They're looking for something that, it kind of gives them a range to start that process. Is you move into larger transactions, then yes, you're gonna require more of a, hands-on approach to calculating that valuation. But when I started this, part of my thesis was two things. One, when you look at small businesses in North America, about 95%, or simply too small for a broker. They're gonna sell to someone that they already know, or they're gonna find a buyer in their local community. And there are very few, if any, tools and services that are out there that help somebody move through that process.

[00:11:20] And so the cost of human capital, whether it's a broker or an attorney, or a CPA, really is, more suited for about 5% of the market. So there's really no democratization. There's no m and a platform for small main street businesses. So if you think what LegalZoom did by, bringing the formation process online for small businesses, quite frankly, it wasn't something that small business owners really wanted to pay thousands of dollars for an attorney to go do.

[00:11:45] And when you looked at attorneys, they really didn't want to spend their time on a wash, in a rinse and repeat model of trying to walk somebody through the difference between an LLC or an S-Corp or a C-corp. And so they brought this kind of process online, which largely could be done on a do it yourself model, and then some level of kind of a tech enabled service providers that can be done virtually. And we're taking very much the same approach. 

[00:12:08] Ron Skelton: Now, one of the roles of those advisors and the brokers is like an educational role. They teach the seller, the business owner to what the process looks like. You're gonna provide some basic information. You're going to do a conversations that'll lead to some form of letter of intent. Then you gotta explain what a letter of intent is. If you both agree on the terms on the letter of intent, that's probably gonna lead to, some form of due diligence. And this is what due diligence is. How do you handle that? Are you part of the education process for these? 

[00:12:39] Eric Grafstrom: Yes. And that is a combination of, content online. So our resource section has, a hundred plus articles that people can read. We also provide videos that, anywhere from 30 seconds to two minutes long. And then we also offer a coaching. So what a user, or what a small business owner gets for free is they get an estimated, valuation range for what, that allows 'em to kind of give an idea of how to price their business. That is done for free. There's plenty of content out there they can consume for free. So if they wanna understand what is a letter and of intent, how do small business valuations work? What is, some of the basic jargon, whether it's EBITDA or cash flow, some of the things that may, they may not be familiar. They can, consume all that inform, on our website at no cost to them.

[00:13:21] Now, instead of having brokers, we have small business coaches. So these are people who work with small businesses day in and day out, and small business owner may move through and say, okay, my floral shop in Kansas City, Missouri is worth somewhere between 385 and $425,000. But they may have questions. And so we allow them book a session with a small business coach and that oftentimes is asked, answering some of these very basic questions about the process. And in some cases it's validating, some of the things that they already believe they may, do or the steps they need to take. So it tends to be, a combination of online resources as well as a small business coach that help 'em with that education process.

[00:14:02] Ron Skelton: Okay. And then Legal Zoom will actually give you, some fairly generic templates for contracts. Do you guys have like a standard LOI that they can use? Do you have purchase and sales agreements? Is there a legal Zoom type of forms that you can say, Hey, this is your basic generic form you can use.

[00:14:20] Eric Grafstrom: We provide both an LOI and an NDA, which someone can download and they can customize. We partner with Law Depot, and so when somebody actually moves through the transaction, so let's say they buy it, what we refer to as a guided exit. A guided exit gives 'em three coaching sessions as well as a, a report that they can present to their buyer. And so that allows somebody to kind of go through pricing their business, getting organized to engage a buyer, presenting the business to a potential buyer. And then when they get the point where they're ready to transact, they have two options. One is that they can actually, click through and we partner with Law Depot and provide a 30% discount off of their rates, whether it's an asset purchase agreement, business purchase agreement, there's all sorts of different documents that they can customize.

[00:15:00] That way we know it's done, correctly and professionally. Or they can book a, follow-up session with a small business attorney. And, some of the people who are some, followers and active users within the Twitter community, are some of the people that we like to partner with, and we can make that connection if they do want to actually speak with an attorney.

[00:15:20] Ron Skelton: So what stage in development are you guys? Is this a up and running product people can use right now, or are you still developing things out or?

[00:15:26] Eric Grafstrom: No, it's up and running. We launched the service in March of 2022. We've had well over, 5,000 small business owners actually go through the process. And some have gone all the way through and actually closed the transaction on our platform, which is a wonderful thing. Now, they're not necessarily obligated to, to let us know that the transaction has been completed. But through our coaching conversations, we know, or, and in some cases they've come back to us and thanked us that we've been able to help 'em move through that process.

[00:15:52] But it is early stage when you look at, tech companies, this is just the beginning. We don't have the capability just yet to allow buyers to come in. But what we're providing today really caters to small business owners that are getting prepared. And so let's just say 50% of 'em, are off market because they already know who that buyer may be. But when the buyer comes in, what they're looking for is, I think, what we're gonna be able to solve for the buyers, there's two big issues they face every day, which is, sourcing and due diligence. And so today our, owners, when they move through the process, they state very clearly if they're looking to find a third party buyer and when they wanna sell. Whether it's now the next 90 days, sometime within the next year. And then they also, upload their information into a data room.

[00:16:36] Well, in the near future, we'll open that up so that if a buyer wants to come into the platform and search for businesses based on, let's say revenue and geography, they can say, okay, well just show me everybody who wants to sell in the next 12 months, that has revenue, say between 300,000 and $750,000, that has their information into a data room. And so what we'll provide that buyer is the opportunity to actually, engage with highly qualified people, and they may not even need to reach out to the buyer to see if they're interested. Sellers may get to, a notification that says, Hey, you have three people that would like to access, your information. Do you want to go ahead and grant them access and start the due diligence process? 

[00:17:17] Ron Skelton: So, in that due diligence process, you guys, in your product roadmap, are you building out like a deal room? Like here's the standard document somebody would expect in a due diligence process, and here's a folder structure to put that in. 

[00:17:30] Eric Grafstrom: We actually have that today. What's not available is just simply opening that up. For you and for others that are technical, user permissioning is a non-trivial feature to add. So, it is today, when somebody goes through, they can navigate and there's a whole section that we refer to as documents that shows them, based on the pathway that they're taking the information that they need, what resources we have available to help them answer some questions if they need templates, and then they upload all that into a deal room or into a data room.

[00:17:57] What doesn't exist today is just being able to permission. So if they say, I'm gonna allow my CPA, full access to this, and then I wanna allow this potential buyer access to this for 14 days. It's a non-trivial thing to develop from an engineering perspective, and that's the piece that we need to add. 

[00:18:13] Ron Skelton: Yeah. The security around that, especially since it's such sensitive information. Like how can you let somebody watch it or look at it, read through it, but not download it and distribute it? I want you to be able to look at it, read it but I don't want you to download and give it to anybody else, right? Or if you can download it, how do I wrap it in something that has a temporary 14 day, you know, password. A secured PDF with a timer on it or something? I don't know what you would do in that realm. I know there's stuff out there. It can be done.

[00:18:37] Eric Grafstrom: Open it up wide open in a fashion that's not secure is relatively straightforward. But nobody wants that and that's not a good idea. So what we wanna do is we wanna be very thoughtful about how we do their permissioning. So it gives the owner and the seller, a sense of controlling confidence that they know who's gonna access it, when they're gonna access and what they're accessing it, and have full control over that and do it in a very user friendly way. And that takes a fair amount of time, not just from an engineering perspective, but also to think through those use cases and present it in a way that's very easy and intuitive for someone who's probably not very technical to be able to go about doing that. 

[00:19:10] Ron Skelton: So I wanna ask a quick question, and this will probably be a little bit of a rabbit hole, but I think it's worth to go going down. I honestly think there's some space inside of this where AI's gonna take over. And what I'm referring to is, in the due diligence process, having standard, balance sheets, income statements, payroll, all the different, accounts receivable, all the different things you would look through inside of a full due diligence, AI can probably do that faster and better than a human now. 

[00:19:40] And in the near future, where a lot of like the bigger deals get these, audited financials. Like in a multimillion dollar PE deal, you would have third party audited financials. I would be shocked that maybe as soon as six months and probably no longer than 12 to 18 months, that there'll be AI tools to do audited third party financials, right? You'll be able to submit, maybe even give it your username and password to your, TurboTax or whatever you're using for your small business financials. It crawl through it. Ask you a bunch of questions, right? Because nobody does 'em the same and help you formulate a standard, set of documents.

[00:20:17] It's possible now I've been playing with feeding some of these tools, balance statements and stuff, and it knows enough about it to actually indicate I should ask certain questions already. What's your thought process on that? Are you guys looking at integrating something like that into it as if it's available?

[00:20:33] Eric Grafstrom: We're having conversations. What I try to be careful of is we've got a lot of things to deliver in the very near term. And when you ask that question of a talented engineering team like we have is, that becomes a very fun research and. So the answer is there's plenty of opportunities for AI to be applied with this. Whether it's helping somebody kind of craft an exit strategy and figure out how to, send the right email to, engage, potential buyers or, doing automated financials. What we're focused on today really is, the very simple steps as a technologist. Part of what you try to do is you try to figure out, okay, let me manually perform a process and see if that actually solves the pain point you and the user need.

[00:21:11] And then let's figure out how to apply some of the more sophisticated technology to do the automation or to apply AI. So we're in the stages where, there are definitely things that we are doing, more manually than, we will need to do when we start to scale. But a lot of that is really just identifying that we're solving the right issues for sellers to kind of start to move through this process and it's working. And so now it's, how do we start to, build those is more efficient using a technology platform. 

[00:21:38] Ron Skelton: That's awesome. What's next for you guys? I mean, what you see is okay, we're right here, right now. This is the next thing we're gonna do. And can you lay out your product roadmap a little bit to us? So we know where you're going.

[00:21:49] Eric Grafstrom: Yeah. I mean, the first thing that was pretty obvious that we saw for when we launched a services. Most owners want to know, what is the business worth and why is it worth that much money? And I would say we've got a very cost effective way of bringing users to our site and moving them through that process and, helping them understand that. That piece has actually been working well for well over a year. The next step that we solve for was, helping them package up the business.

[00:22:11] And that's a fee-based service. And, we've kind of solved for that. And then the coaching sessions are something that, have proven to be, very popular. What we're seeing demand for actually from sellers is, help me do more of this thinking and this modeling and this process on our own. So whether it be calculators, whether it be, more interactive tools, but, they're hungry to learn and it's not because they necessarily, want to go perform all these things, but there's a confidence level. On one hand, we are providing a very, cost effective and affordable way for, tens of millions of small business owners to start and move through this process because we're using technology instead of people.

[00:22:49] And again, we're not in the business of trying to replace business brokers or CPAs. I look at this as the high volume of very simple transactions that, are akin to years ago. You would call a travel agent to book a flight from San Francisco to Dallas. Well, you do that off of your phone now. And so, whether it's travel, stock brokerage, very basic legal agreements. A lot of these processes have moved online. What we're seeing from our customers is, they want more tools that help them build confidence. So it's kind, kind of a combination of education and in giving them information and learning. But also it's just a bit of confidence so that they feel like they're doing the right thing for themselves, for the buyer, for the business, and for the employees.

[00:23:31] And so people want to understand more tools around. Well if I change this and wait a year before I exit, what happens? If I were to, make these changes to make the business, more capital efficient, what would be the impact on the valuation? What are the ways that I can actually ensure that this transition goes smoothly so that when I leave, if I've done a seller financing deal, how do I know that, my general manager is gonna be able to take over? And six months from now, I'm gonna feel confident that she's in place and she knows what to do.

[00:23:59] And so, much of this is something that they're not looking to spend hundreds or thousands of dollars by hiring a professional to help them navigate that process. What they're looking for is simple tools that allow them to kind of start to model these scenarios out and educate them and move through the process.

[00:24:16] Ron Skelton: Are there certain industries you just don't touch or are you guys open to all of them? 

[00:24:20] Eric Grafstrom: It's a great question. From a marketing perspective, we don't necessarily, shy away from everything. Things that are very popular, service-based businesses, as you might expect, are very popular on our platform. Retail is also very popular. Third, after that would be, bars and restaurants. Construction's actually, surprisingly, fair share of our, overall, uh, customer base. We are not a tech startup or a software platform. There are great solutions, whether it's a Flippa or a Micro Acquire.

[00:24:49] So, those businesses tend to focus more on e-com and blog sites and small SaaS businesses. So I feel like that's been, largely has been addressed. We're here for the kind of traditional main street small business. The bread and butter, 35% of our GDP, and those are the people that we want to help.

[00:25:08] Ron Skelton: So what about, each state has their own rules and laws, and then you have federal rules and laws. Getting into that, how do you and your normal broker, even your small town broker. I just moved to Northern California from Tulsa, Oklahoma, of all places. A small town broker in Tulsa, Oklahoma that helps sell a mom and pop company.

[00:25:26] Especially if they've been a broker for a while, they know some of the ins and outs. They know when the attorney needs to get involved. Good example would be, I think I wanna say 40 something of the states. You have to actually have, be a veterinarian to buy a veterinarian service. You cannot be a non-vet. You cannot be an individual and own a veterinarian service. So there's a way around it. There's, what's called medical service organizations and, you can do an MSO. That said, there's certain things that, I bought a pest control company, thought I was gonna hang the pest control license on, somebody else thing.

[00:25:55] And realized in Oklahoma, it's the safest bet is that I hold a license and I hadn't run down and get, like, take much of tests and get a license out on everything. There are some quirks inside of each one of these, especially licensed professions. I don't know if all states are this, but I try to buy a law firm a long time ago cuz I was using so much law for my real estate investment group. I actually use so much law services in my real estate investment group. I wouldn't buy a small firm and move them in house. And you can't own in Oklahoma, maybe all the way. Maybe in all states, but in Oklahoma you, you can't own a law firm if you're a non-attorney. You can't receive any revenue from it whatsoever.

[00:26:28] So there's just these weird quirks and stuff. So how do you deal with that? Or you, that's why I was asking the industry question. Are there certain industries you avoid cuz they're highly regulated or? 

[00:26:36] Eric Grafstrom: Well, you keep in mind. Our mission today is largely to help with the where to start and what to do and move through this process. When I founded Exit Guide, I had this belief that, before somebody's ready to put their business on the market, there's a whole bunch of questions that they have and that there's an opportunity to drive value. And we've proven that out. So as I mentioned earlier, about 50%, they already know who this, the buyer's going to be.

[00:27:01] And so you don't necessarily need involved in the consummation of the transaction. They're just looking for tools and maybe a little bit of guidance as to how to go make that transaction happen. And that's where we're sticking today. Our business is as of today, is not tied at all as to whether the deal closes or not. Our value is delivered in, somebody says, okay, I think I'm ready to go do this to actually getting the deal done. And we can bring in resources appropriately. As we expand, there may be, areas where we need to be a little bit more thoughtful about that as we drive deeper into the transaction.

[00:27:33] But today, we're more of an, kind of a, would say a mergers and acquisition enablement platform with the opportunity to expand into an online marketplace. Versus actually, trying to get into qualification of whether the deal is, legally, able to close or not. 

[00:27:49] Ron Skelton: Okay. So that answers that question, but I was just, cuz I was curious. There's some intricacies about certain industry that, yeah. Like some states are doing, I actually have industries that are opening up that are new, that are federally regulated. I mean, are you okay with some of that stuff? Like, I just moved from Oklahoma and, we'll just get right into it. They have grow operations and that's legalized marijuana. Medical marijuana, California's legal for recreational. But on a federal level, that's not. Do you, at your stage, you're still in that kind of early valuation stuff. Does it matter to you whether or not it's federally okay or not?

[00:28:22] Eric Grafstrom: No. No, not really. I mean, we're simply looking at the numbers and an industry code that they, provide. So they don't provide an NAICS code. They answer a question that maps to an NAICS code. I think the answer to your question is we expand and, gobble up more data. How do you know that a grower for someone who might be in medical marijuana or recreational marijuana space, how do you know that valuation is accurate if you're, say, potentially trying to compare that from a valuation multiple to, a nursery?

[00:28:51] Don't know the answer to that question just yet. We're very clear that, we're not providing financial or legal advice. We're more about enabling people to kind of move through this, with the information that they give to us. So, I would say, in the foreseeable future, it's keeping an arm's length away from, making a judgment on the legalities of the transaction or wherever it may be. And just more so about providing guidance, tools and resources, and support to kinda move through the steps. 

[00:29:18] Ron Skelton: I imagine as ~that, ~that industry matures, it's gonna be really difficult to do the valuations because in some states, just a licensing loan, in some states, a licensing is a thousand bucks per, and they just hand them out. Like, Oklahoma's ~wild, ~wild west, you got a thousand dollars, you can have one. And in some states it's hundreds of thousands and there's only one or two licenses. Having the license alone would drive the valuation of the company up quite a bit cuz it's a very expensive thing and there are limited numbers.

[00:29:43] So, I was just curious in that space, cuz I've got a lot of people from Oklahoma. Friends of mine are like, Hey, should I get into this business? There's a few reasons I tell 'em no. But the right now it's still, it's oversaturated there and it's pretty, it's an immature industry.

[00:29:56] Eric Grafstrom: There's all sorts of questions that or opportunities, to solve. I'll leave it to others to figure out how to deal with, valuations and banking and cash flow and all the other complexities that go into that marketplace. Certainly something needs to be solved, but, we'll leave that for someone else's startup, not mine.

[00:30:13] Ron Skelton: Yeah. Cool. So, how did you guys, like, what was the process look like? You had this concept, you had the idea, I'm sure you, you engineered a solution. What was the process of getting your first few customers? Did you guys do cold outreach or did you just run ads online? Or how did you tell them? 

[00:30:29] Eric Grafstrom: Yeah, no, it was both. I mean, what I love about this is I've spent my entire career in the internet space. So 30 plus years working with, high growth and early stage companies. And now I get to work with what I, often tell people, at least people within my professional network. I work every day with people who have real businesses that drive real value, that delivers real revenue. And it's a great thing because sometimes when you're in tech, you know that you're a solution looking for a problem. Whereas for me, we're solving a very big pain point for tens of millions of people with very real businesses.

[00:30:59] The difference though is when you say, in my case, we live, now live outside of Austin, Texas. If you wanted to open up a pizza place, here in Austin, no one's gonna say, well Ron, are you sure people in Austin want pizza? I mean, that business has a different set of complexities, which is can you deliver a quality product on a repeat basis at scale? Can you do it without, busting your budget from a cost perspective and attracting and retaining talent? So there's a whole set of complexities. But the value proposition is relatively straightforward. People like pizza and if it's good pizza, they're gonna wanna buy it, as long as you can kind of string everything else together. What's different about what we're doing is it doesn't exist.

[00:31:38] The problem exists, and that is, what happens to 90% of the market that is not gonna go to a business broker, listing their business on an online website doesn't necessarily help them and doesn't wanna, or cannot afford an attorney to kind of move through this process. So how do you solve that? How do you productize that? And so a lot of this is starting with a thesis and then building components and trial and error and what you think will work may or may not work. And I think some of the, of this process is a combination of art and science. The science is, okay, we can run ads online, drive people to our website, and we can collect data as to whether they fill out this assessment form and give us this financial information.

[00:32:20] So that was really, that was step one. But then you have them and they say, okay, if my pizza place here in, in Lakeway, Texas is, worth, $285,000, then what do you do in terms of helping them move through those next steps? And, it is a very humbling experience, I'll tell you that. Because what you think will work and what you think makes sense to you, and you can hire a professional designer to kind of move through that user flow, can confuse the crap out of somebody who, is a very smart business owner, sitting here in Texas or in New Hampshire or in Minnesota, because you just haven't gotten it right. And so, those are the pain points of moving through. Are you offering the right thing in the right way from a software perspective?

[00:33:02] So we did a lot of interviews, a lot of cajoling to try to get people to kind of move through that process and give us that feedback. And that's just an ongoing process. You're always looking to improve, the level of engagement for how long people spend. And when they spend time on your product, which is an online product. The hope is that time is not a time that where they're frustrated and confused and trying to figure out what to do. But it's a time spent on actually getting value and getting what they need and getting that done quickly and efficiently. 

[00:33:33] Ron Skelton: I imagine some of the tools you guys are putting together would be useful for, for brokers in the respect that if somebody comes to 'em and it's like, Hey, your company's just not quite there yet. Are you getting referrals from brokers at this point? Like when somebody says, Hey, your company's not quite there yet, there's these guys over here, ExitGuide, they'll help you get ready. And, maybe if you grow it a little bit, you can come back to me and I'll help you sell it. But right now it's just not, you're too small.

[00:33:57] I mean, it happens. I have some friends that are brokers and they turn away deals because, not as often because they're too small, because they like to help. Especially if they have junior brokers in the house. If it's a good business and it's too small, a lot of times they'll have a, a junior broker cut their teeth on it. That said, If they're busy, those guys get turned away all together. So I would imagine you get a lot of referrals from, or you should or could get a lot of referrals from brokers out there that say, Hey, you're not ready for me, but these guys can help you. 

[00:34:23] Eric Grafstrom: Well, no, you're spot on. And actually that's where, I wanna be very clear, we're not out to replace brokers. Good brokers are busy. And I find that ones that I've, talked to, whether it's just a casual conversation or we've connected through a business opportunity, they love what we do. And we like that because what they see is this is, a solution for, people who they genuinely just as a professional and on a personal level, they wanna help somebody.

[00:34:46] But if it's a deal that's just quite frankly, too small or too early. Today, they have, well, up, up until ExitGuide existed, they really didn't have anywhere to point them. It's not a great feeling from a broker perspective. But if they see something that may be worth, again, 300, 400, $500,000 that they can't, put the time and resources into, they now refer them over to ExitGuide. And conversely, we're going to see deals that are going to require a level of handholding and professional, insight and resources that our platform won't simply, won't be able to meet the demand for. And so, I often go back to that travel analogy, which is, we don't think twice about booking a plane, a flight from, Dallas to New York, and then maybe, a hotel or a rental car, whatever may. You can do all that from your phone.

[00:35:33] But if you're gonna take your family on a safari to Africa and you're gonna plunk down 15 or $20,000, you want a professional involved because you need to understand some of the things you just simply can't absorb. You don't have that pattern recognition and an institutional knowledge. So, what we wanna be able to do is fill this gap where, people who are looking to kind of move through this process for a very simple, low end, or lower valuation transaction. They can do that online and maybe they need access to a coach, maybe they don't, but they can do that online for a few hundred or a few thousand dollars.

[00:36:03] But as we start to kind of see some of the people that are coming in, if they need access to a broker, we want two things. One is we want great brokers to be able to refer to them, or refer our owners to. But conversely, what we find is that some brokers, really like the idea of being able to come to us and utilize our platform for managing a deal flow process. That's a little bit further down the road. But.

[00:36:26] Ron Skelton: I was gonna ask that next. I was like, are you looking at your product roadmap? Do you actually have a, an avenue inside of your project roadmap, for, your services we could offer as a fee or, or something to the brokers themselves so they have a structure to walk things through. Some of the franchises have those structures. Some of 'em, I don't think. I think some of 'em are a little bit wild west. I know somebody bought one of the franchise brokerages and, he went to a couple different, three, four day classes and he has structured, fairly structured with things to go through. And I know somebody who's worked in another one who they have spreadsheets and stuff they use for valuation.

[00:36:59] But there's no structural, okay, here's a deal room and here's what it should look like. Here's all the files you need to put in it. There's no structure for them. So I think there would be a huge win for you guys to have a, a product roadmap that includes brokers. 

[00:37:11] Eric Grafstrom: It's not just brokers. I've had people, whether they're brokers, m and a advisor, CPAs and small business attorneys. And in some cases, small business coaches. There's business brokers who obviously are, they're right in the wheelhouse of somebody who's ready to sell their business. But oftentimes a small business owner will turn to a CPA or an attorney. Or they'll get a referral to somebody who's not a broker, but it's someone who may or may not know something about the process and they want to help. And maybe they are integral part of the process. Small business attorneys and small business CPAs.

[00:37:41] I've had it. We've actually had some of our valuations, some of our assessments, filled out by a CPA on behalf of their clients, because the client just doesn't want to deal with it, or they're not comfortable with it. And they look to that type of expert to kind of help them at least manage some or all the process. So, from a vision standpoint, right now we're enabling these tens of millions of sellers. A lot of transactions are between people that are known. In some cases, we're giving them the tools to market in their local community, and then opening that up so that buyers can come in and start to identify, opportunities where their people are ready and organized and prepared to engage.

[00:38:15] But, we've also had inbound interest from, a lot of these service providers, including brokers, but also others who want to or need to be part of that process. And so, allowing our platform, and that gets back to the earlier, part of our conversation about permissioning. How do you allow a CPA to maybe access some, but not everything. Same may might be for an attorney who wants to access everything, but then, if somebody is helping out with certain aspects of the deal flow, they don't need access to everything. Maybe they need to be able to upload, but not download.

[00:38:43] So, the vision for ExitGuide is huge, right? Really it becomes, an m and a transaction platform with a marketplace bolted on top of it. And so it's just a matter of getting there and learning along the way. But we're starting with sellers because that's where the biggest demand, there's biggest need in trying to solve that pain point today.

[00:39:02] Ron Skelton: So, I've been through enough of these evaluations and calls with the business owners to know that, often when you start asking a little bit of the financial questions, the business owner, especially if they have a CPA and accountants doing their work, they're really focused. A lot of these guys are just focused on what they know best. And, if I were building the software, I'd literally have what I call a hell if I know button. Like, if you start asking questions about financials, like, hell, if I know here. You click the button, it says, okay, who knows? Well, here's the name and phone number and email address of my CPA.

[00:39:32] Please send him a request. I'll tell, to fill out these questions. I'll call ahead of time and tell him that, he's getting an email to fill out some questions. A lot of these guys, they just don't know. I mean, and it's not right, wrong, good or bad, not making fun of him. To be honest. I think it's better that they don't, than some of the business owners who do and try to do everything themselves, and they become a, a silo business or a business that's, everything goes through that owner and it's gonna be hard for them to sell. 

[00:39:55] Eric Grafstrom: Well, I agree with you 100%, Ron. And, that is where we're trying to make this very approachable. And so I may have mentioned this earlier, part of this is providing the tools and kind of the tactical way of getting through this, as you would with any other type of online transaction. Buying a plane ticket or selling stock or, managing some type of project. But then you're gonna kind of get to a point where it's outside your comfort zone. And so how do you bring those resources in, whether it's somebody that you already have a relationship or whether you need to identify somebody. And so, we wanna bring all these resources into the platform. And some of what we're solving for is very tactical, but at the other end of the day, you know the hell if I know. Which is a great feature. I'm not sure how we'll name it. We'll name it after you or something. But, the other piece of this is that we're solving for a lot of this is fear, uncertainty, and doubt. You have smart people who have successfully run a business.

[00:40:44] Maybe they started it or they bought it and now they're ready to exit it. And this is foreign land to them. And so we wanna make this not only easy, but we want to ease that stress and that fear, uncertainty and doubt, and give them the confidence that they can move through this transaction and we're here to help. But if they can get through 80, 90, or a hundred percent of it on their own, using our tools, fantastic. If they need a little bit of support, We're making some of that available today. But as this grows, you're gonna get a lot of people who may want to a la carte that help. And that's where I think that there's a huge power in being able to kind of make, that sort of help, accessible through, a virtual experience and just being able to hop onto a Zoom call or BNA chat session and get answers to their question and continue to take the process forward.

[00:41:26] Ron Skelton: So maybe I missed it. You probably already said it a dozen times and somehow I was listening for something else. But what's your revenue model? I mean, how do you as ExitGuide get paid?

[00:41:35] Eric Grafstrom: Sure. Today, owners pay for access to coaching and for some of the tools to market their business. We'll continue to expand those types of services. As we start to see larger transactions that require, more of a level of involvement, then we will look at taking a piece of that transaction. Because doing it on an all car basis is just gonna be, too complex and probably nickel and diming people too much. So there's, one world which is largely the do it yourself. Which again, it's the biggest part of the market when you look at small business in the US is, these are businesses that are gonna transact and they're gonna do this for, largely a couple hundred bucks. And they're gonna do it themselves with very limited, if any, help from, a professional, whether that's a coach or a broker or anybody else.

[00:42:18] But as we start to move up and more people need to come in and leverage the platform to kind of move through that process. That will take a commission off of those deals. 

[00:42:27] Ron Skelton: Okay. I was gonna ask, are the advisors and coaches, are they in-house or are you guys doing a revenue share with people that are already in the industry advising and you do a referral out or?

[00:42:36] Eric Grafstrom: It's a rev share with a coach. So, today we've recruited a handful of small business coaches that work with us. And, those initial small business coaches are critical, from where I sit as the founder of the company because, not only did I need them to do their job, but I need them to be able to articulate feedback that informs our product roadmap and where did things break down and what can we improve and, how do we enhance that experience and what are other things that we can deliver?

[00:42:59] So I've kept it very tight for a reason. But that has more to do with just kind of being, an internet startup guy for all this time is what you're trying to do is balance between driving revenue and scaling the business, but also making sure that what you're building does scale and deliver the value that you want. And you need this kind of very tight feedback loop that we're getting right now when we do these coaching sessions. Yes, people pay for them. And it always warms my heart when they say that it was money well spent and that they got a lot of value out of it. For me it's also one I, not only do I enjoy doing them when I do them, but it's invaluable insight is to kind of how people think through things and how they're approaching this.

[00:43:37] Ron Skelton: You can always go back to those advisors and stuff and go, Hey, what did they ask you that I could put into the website. Quite honestly a waste of your time. The site should have had X, Y, and Z. The coaches will always be needed, I think just because there's unique circumstances. But as you learn all these cases where, okay, 15 people have the same question across these four, these first coaches, that gives you a bot model. It's kind of that frequently asked questions model. Like, okay, this question gets asked so often we probably just integrate it right on in.

[00:44:02] Eric Grafstrom: And we say we have coaches, not brokers, for a very specific reason. One is that it's more, with enabling a seller. So if they need help with just somebody to kind of help them move through a transaction with their known buyer. It doesn't make sense for someone to pay a commission on that. And again, that's close to 50% of the people that are moving through our platform. It may also be someone there that's just gonna, have to give them advice.

[00:44:23] A seller may want to go find a buyer, but they may be unsuccessful at doing it. Or they need to figure out, well, how do I actually build a prospect list? So the coach is there largely to kind of help them with the process. A broker is, got a very clear incentive and it's aligned because they want to get the maximum price for the business. There's a lot of, of steps that happen before that where it doesn't necessarily make sense to have a broker involved, but it does make sense to have a coach involved. 

[00:44:47] Ron Skelton: Yeah. I have a love-hate relationship with brokers in this, in the effect that I think they kill more deals, than they actually, to get complete. And mainly because like that last thing you just said, they're trying to maximize what they get for the business. And often it's a scenario where, I've explained this on the show more than once, a guy decides he wants to sell his business, he goes to broker number one and says, Hey, I need to sell my business.

[00:45:11] And the broker says, cool, I'll take a look at it. And then often the business owners already talked to their CPA and the CPA says, well, in order to retire, you need another million dollars in your investment. So the business owner says, I'd really like to get a million dollars, my CPA says I need it. The brokers wanting the deal. Like a lot of these, especially since a lot of brokers charging an upfront fee just for taking the listing. They'll charge five, 10, $15,000 for management of the process. So they want that fee and they go, yeah, we'll try to get you that.

[00:45:37] Well, he goes, so that's broker number one. And then he said, well, I've already talked to two other brokers. I need to go have my appointments with them. And he goes on broker number two and he says, Hey, the last broker said he can get me a million. My CPA says that's the bare minimum. Well, this broker does his numbers magically and says, well, I can get you 1.25. And by the time they're get to the third one, they're at 1.5 and it's really worth 750 K. A scenario plays out more often than we want to, anybody wants to admit. And that's, I think that's a lot of reasons why only a small percentage of the listings ever even listed by brokers ever get complete.

[00:46:08] Eric Grafstrom: Well, I believe that there's, as with anything, there are a lot of, good and great brokers that are out there. And then there are some, that are not so good. I get asked about brokers, I get asked a lot about sites like BizBuySell, and what I believe is, they serve their value. But, sometimes whether it's marketing or sometimes whether it's, unrealistic expectations from a seller perspective, something gets lost. If you're selling a brick and mortar business or a service-based business, and again, those generally tend to be hyper-local. So if you're listing your business in Kansas City, it really doesn't matter whether somebody in New York or Minnesota or Florida is looking at it.

[00:46:42] Cause that buyer's probably gonna come within a 40 or 50 mile radius. So your money's not very well spent, which, suggests it might have a lower, close rate. That said, if you have a business that can be run remotely, then getting those eyeballs does make sense. There are brokers that are out there that, are worth every penny and help handhold someone through the process, and they know the industry and they know the buyers and they can make a transaction happen. There's also some that, as you pointed out, aren't always as forthright as they could be. And in both cases, when I started Exit Guide, I said one of the things I want to do is, not just necessarily tie myself to a successful transaction because, one, I think that's a precarious revenue model.

[00:47:19] I think it's part of our model, but it's not necessarily the corridor revenue model because we can deliver value with a lot of people who just need help navigating through a process or, may or may not, achieve their first goal, but then have a secondary goal. So, this isn't a strategy, but those that are disappointed by listing sites or a bad experience with the broker, I think ExitGuide is a very good option for them because it gives them more control, more empowerment, more knowledge to kind of, take control of that process on their own.

[00:47:47] Ron Skelton: Don't get me wrong, I've met a lot of brokers. I've interviewed a bunch of them. I like a lot of them. I just think, in the grand scheme of things, I think that the broker industry has some real inherent flaws. You know that in most states, you don't have to have any formal license whatsoever to become a broker. And then the other ones the license, like here in California, the licensing be a business broker is that you have to have been a real estate broker for more than two years. And they're absolutely, totally two different things. 

[00:48:11] Eric Grafstrom: They are. I think, I've mentioned this before, but I think, where I see this going long term is, is the way of the travel or the real estate agent, you have to deliver real value. And so, no one's gonna pay a commission to sell a home if you're just simply providing access to a lockbox, with a key inside or, trying to book a, a flight from Dallas to New York.

[00:48:31] I think, if that's the value that a broker's delivering, ExitGuide and other services will probably replace that type of broker. But, back to my analogy of, if you're gonna book a trip and that's a safari to Africa and it's, spending serious money on it and it's way more nuanced and customized, then I think, those brokers will continue to, to not only, deliver value but as we know from a demographic standpoint, 85% of small business are owned by Gen X and baby boomers. Well, those brokers are gonna have more opportunity than they know what to do with, and they're gonna want to continue to push up markets cause they wanna work on the more interesting higher value deals that require a level of sophistication that they're gonna bring to the table.

[00:49:09] And I think ExitGuide is gonna continue to kind of, elevate up where people will understand how to move through these transactions on their own. They don't today, but, we're solving for that in, in many respects. And then as we start to grow, we'll scale up and start to push up with more complex deals as we build out our tool set in our online service.

[00:49:27] Ron Skelton: Yeah. In your travel scenario, you wanna go take photos of the line or you wanna be eaten by it? And then the business side of it, do you want your brick and mortar company to your 30, 40 years of your last of your life listed on a pretty website? Or do you want it sold? So, I get it. I appreciate that there's good guys out there. And there's people that are just trying to figure it out. I don't think there's even bad brokers. I think some of these guys just haven't figured it out yet. And just like anything else, real estate agents are the same way.

[00:49:52] If you looked at, like, I just moved from Tulsa, Oklahoma on a hot year, meaning that years that where the real estate's really moving, there was something like, I wanna say there was over 6,000 licensed agents in the, Tulsa County system. And there were 2000, 2000 to 3000 listings at any given time. It'll tell you right off the bat that most of these people don't have a job, let alone doing their job. Because they just, there's not enough listings to go around. And it also tells you, it's kind of a, it's the alligator pit, right?

[00:50:19] Everybody there is trying to feed. It's funny as everybody who thinks they're, in a great market, everybody thinks they're a great broker. Now's gonna be the test for the real estate. Even the business with the insurance, interest rates going up and stuff. The ones that are still here two, three years from now, will be the litmus test of who are the great guys, who are the guys actually getting deals done? Because it's gonna be a little tougher to get stuff done. Man, we covered a lot of stuff. It's getting close to the top of the hour. Let's do the, if somebody can only remember three things from the show, what would you want 'em to remember about, you and, ExitGuide?

[00:50:46] Eric Grafstrom: Sure. Well, one is, ExitGuide's trying to solve for the 95% of market. Meaning the small business owners that are too small for brokers, and that they need help navigating through the process. So, always looking to get exit guide.com and the brand out there. Build awareness within the community that, listens to this podcast.

[00:51:03] There's potential opportunities to partner, but also just from a referral basis where, you can't help, please do send them to ExitGuide. Two is, is an entrepreneur. We are gonna be raising money. So if there's people that are out there from an investment perspective, you can always, find me on LinkedIn or eric@exitguide.com. And three is, I'm a big believer. I mean, my career largely has been driven on, on people that are smarter than me, building me up and giving me opportunities. And so, one of the things I love about, following you and others, whether it's on Twitter or through podcasts, is just learning and growing and finding ways that we can help each other out.

[00:51:41] So, even if it's something that's not specific, I've got my own startup that I'm trying to kind of build into something big and great. So I certainly don't have all the answers and just love networking and meeting people that are in the industry, that, we can share ideas and explore ways that we can help each other out.

[00:51:57] Ron Skelton: That's awesome. And, I thank you for being on the show today. 

[00:52:00] Eric Grafstrom: It's one thing to be on a podcast you've never heard of. It's another one to be on, one that you've actually listened to and follow. I probably hate the sound of my own voice and I'll listen to it this time.

[00:52:06] Ron Skelton: So just for your amusement and everybody listen in the show,~ uh,~ for the first year and a half that I ran this show, I never listened to my own voice. I have an editing team that edits it, and even when I want to go back and learn the way that the audio tracks are recorded, I can listen to you only. Because I don't sit here and take notes anymore. It's distracting to you and it's distracting to me. So if I go back and, want to take notes or, and I edit the transcripts myself sometimes. So for articles and stuff. So I get to read the notes then. But, If I really want to hear something, I go back and listen to your track only.

[00:52:34] Because I was concerned, I would be so concerned about my own voice I wouldn't wanna do anymore. Now I'm just so used to it. There's a thing about time behind the mic. Once you get so comfortable with being behind this thing that it just, becomes a little more natural and you just, I guess it's like the hell if I know. There's a give a shit button too, right?

[00:52:49] Like you just don't care anymore that like, you sound a little awkward. People like it, you're helping people. You provided an extreme amount of valuable knowledge here today and it was a blessing to have you here.

[00:52:58] Eric Grafstrom: So thrilled to be on here and look forward to future conversations.