Eric Gall is the registered broker and founder of Edison Business Advisors. Over the past 25 years, he has participated in many forms of business transactions including full and partial recapitalizations, joint ventures, spinouts, and roll-ups. Eric...
Eric Gall is the registered broker and founder of Edison Business Advisors. Over the past 25 years, he has participated in many forms of business transactions including full and partial recapitalizations, joint ventures, spinouts, and roll-ups. Eric has consistently produced results and has the credentials and experience to either sell your business or assist you in buying a business.
He helps people buy and sell businesses in the lower middle market, ranging from $1 million to $25 million in enterprise value. Eric is discussing his work with dental service organizations and medical service organizations who are rolling up practices. He notes that there has been a shift in the attitude of recent graduates when it comes to entrepreneurship, with many opting to work for someone else rather than start their own practices.
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[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit podcast. Today I'm here with Eric Gall. He is the founder of Edison Business Advisors. He's out of Florida, and I'm excited to learn from him today. Welcome to the show, Eric.
[00:00:11] Eric James Gall: Thanks, Ron. Pleasure to be here.
[00:00:13] Ronald Skelton: Cool. So I know you've been doing this, what, 20 plus years or something? Can we do the origin story? I always start off with everybody, with the origin story. My running joke is you were born and then you ended up on a show about mergers and acquisitions. Can you fill out the gap in between?
[00:00:26] Eric James Gall: Yeah, yeah. It didn't happen that quick. I got my start back in the late nineties at Ford Motor Company. Working in the business office where I did a lot of post merger, integration work with, Jaguar, Land Rover, Volvo, Mazda, Ford. And while I was there, I became involved just kind of haphazardly in selling off some small internet based businesses that they purchased before the internet bubble. As well as getting involved in some joint, ventures that we did, in the licensing space. So as our office got involved in that, it kind of started the bug, for me.
[00:01:05] And then, in the mid two thousands with a few friends of mine, we decided we would go off and we would try to pull some money together, create a little small private equity group and purchase some businesses on our own. So we did that. We purchased seven businesses in automotive services, transportation, logistics and software. And we operated those for a while and the great recession hit, and many of them bailed on me and went back into the corporate world. Jobs are much, a much safer environment than being an entrepreneur. I had kind of inherited, the management of everything and had to make some decisions.
[00:01:46] I could hire some people to run some businesses, but I couldn't run them all myself. Cuz I didn't have a team anymore. And, with the, money tightening up and everything else going on, the cost of materials, like, in the automotive service businesses. The cost of oil shot through the roof, the cost of, tires which are made, are oil byproduct, shot through the roof. So the margins, just minimized. The decision was made that I needed to start selling these businesses off. So we packaged 'em up and we started selling 'em off. And I really enjoyed that process of not just selling them off, but even buying them at the time in the early two thousands.
[00:02:25] So as I sold those off, my thoughts were okay, I could go back into corporate America, or I could leverage some of the skills and knowledge that I gained in buying and selling businesses and help other people do it. So we made that decision in 2009. I got started down here, we stayed in Florida. Started with a gentleman out of Orlando, Florida, who was a, probably about a 25 year veteran at the time in the industry. He's still going at it in his mid seventies. And he was more main street. Because I felt, I should probably get my feet wet selling the smaller businesses first, right?
[00:03:03] So I sold a lot of restaurants, for him. I sold a lot of salons and day spas and, it was a good experience, but I really wanted to go a little bit more up market into the lower middle market. And his business and branding, was more situated in, main street type businesses. I made a decision to, leave in 2014 and start my own business. We named it, Edison. There was a precursor to Edison Business Advisors, but we stuck with the name Edison. But we kept, some continuity here and it eventually become medicine business advisors, in 2019.
[00:03:40] But over that time period, we were able to move the business a little bit upmarket into the lower middle market. Where we're targeting deals now, at a million to $25 million in enterprise value. But we also still do, some local main Street, businesses here in, in southwest Florida where we don't have to travel too far. And we will do, obviously businesses that'll go up to, between that 25 and 50 million mark as well.
[00:04:06] Ronald Skelton: Awesome. And then are there specific industries that you like to work within or the just broad spectrum?
[00:04:14] Eric James Gall: Well, oddly enough, I had a CPA firm approach me a few years ago, and they asked me if I could sell some dental practices. And there was some training available at the time through IBBA on dental practice sales. So I jumped on that and I had a little bit of experience in the dental world, as I had, I'd lived with four dentists in grad school for a period of time. And then I also, one of 'em remained a really good friend of mine and I helped him with the, acquisition and, eventual sale of his dental practice at one time.
[00:04:50] So kind of peripherally involved. So I learned a little bit, but not a ton. But the education offered by IBBA was very, very helpful. So it allowed me to create templates. And, basically as a former process engineer at Ford, it helped me create a process for properly preparing a dental practice for sale. Getting the information that a buyer needs to make that decision. I started down that road and had some, I've had some success in dental practices. Also in, medical related businesses, including medical practices, medical billing businesses, and the like. So I mean, that's where I've kind of migrated towards. And I'll call it, one finger of a five finger hand.
[00:05:34] My background and passion was always manufacturing, being an engineer. So machine shops, metal benders, anything that's manufacturing related, I'm very comfortable in that space. No white questions to ask the seller. Know how to prepare those businesses for sale as well. There's not a ton of 'em in southwest Florida. So the ones I have sold are predominantly in the Midwest. So I'll go up to Pennsylvania, New York, Ohio, Michigan, New Jersey, et cetera, where I have some connections. And I'll sell, manufacturing type businesses there. And then of course, there's all the service related businesses that we have down here in southwest Florida, where I cut my teeth, when I got into the industry. As well as I continue to sell those today.
[00:06:20] So those are contractors including like AC contractors, drywallers, remodelers, you name it, electrical contractors. Sold several of those as well. So those service related. Also service related businesses, would include things like lawn and landscaping companies. We were talking earlier about how some of these aren't very sexy businesses, for the young people. But, they're money makers, they're consistent. The business, stuff grows in Florida. So it needs to be cut back, needs to be trimmed.
[00:06:51] And it's a year-round business down here. They're great businesses for someone to purchase and operate for long term. So, we've done a lot of those, in addition to the restaurants and salons and spas and things of that nature as well.
[00:07:04] Ronald Skelton: Awesome. So let's go circle back around to your, we'll kind of go through the different things you do. And let's start off with the medical. Are your buyers primarily dentists, chiropractors, doctors, in the profession? Or do you have, are you working with the outside buyers, like TSOs, MSOs and that type of stuff?
[00:07:24] Eric James Gall: Yeah. Predominantly in the medical and dental space we're working with, dental service organizations, medical service organizations. Folks that are rolling up, those practices. A lot has changed in the world over the past 20 years. When I was young and hanging out with the young dentists, their mission was to collect enough money to purchase their own practice. The reality is today, these young dentists, a couple things have happened.
[00:07:50] One is, Because of their school debt. It's taken them a lot longer to collect that money to purchase that initial practice. And I think the entrepreneurial spirit that was there in, I'm pushing 60, not quite there yet. But in my day, there was a strong entrepreneurial spirit, among me and my classmates. That I've saw kind of disappear in the kids that graduated high school in the nineties and, early two thousands. And I think it's starting to come back with the younger set now, fortunately. But, there's a gap in age groups where, there's, I just wanna work for somebody.
[00:08:36] Ronald Skelton: Yeah. There's a lot of those popping up. They've been popping up for the last 15, 20 years. Like even in, I just moved here from Tulsa, Oklahoma. I had a horrible experience at one. But I get it. I'm about to say their name and it's, just to clear it up. It wasn't the franchise, it was that doctor at that franchise. But there's one and it goes around and it's called My Dentist. And what it is, is they buy up a dentist office and then the dentists come in and they get a salary to, to manage as many clients as they want.
[00:09:02] And everything else is taken care of for 'em. So that's typically your dental service organization. And for the listeners, if you're not a dentist, or not a chiropractor, or not a doctor, or not a veterinarian, chances are in most states, you can't buy a practice unless you set up one of these DSOs, MSOs. So, DSO is a dental service organization and MSO is a medical service organization. The thing is, if you set one up, you can't tell the dentist or a medical professional how to treat a patient. But everything else, they're a salaried employee of yours, but they have to have full spectrum of, who to treat, what to treat, what they're allowed to treat them with, what medications they can use and stuff.
[00:09:40] You can't have any say in that. The only reason I know is when I first got into the space two years ago. Somebody had come up to me and said, you, we basically formed these groups where we're helping each other out. And the group kind of split down the middle and like some of the guys are gonna go off and do a DSO rollup. And the other guys are gonna do a marketing rollup. So I have a marketing MBA, so I went with the team to go do a marketing rollup, buy marketing agencies and, did not participate in the dental rollup side. I did the research of both of them fairly thoroughly before I made my decision. Even though my, my master's degree is in marketing, I still wanted to know what, which one was.
[00:10:13] So it was fascinating, right? It was fascinating that I think at that time I was, I'm gonna mess this up. Either 38 or 40 something, 40 something states, you can't own a dental office unless you're a, a dentist. So that's cool. So you have, you're helping local practices sell up to these DSOs. And I'm sure there's some volume or some accounts where somebody's coming from dental school and their parents are helping 'em buy a practice or something.
[00:10:42] Eric James Gall: Well, certainly. The smaller ones where the DSOs don't have interest in. Those will trade to another dentist. And it could be, I don't wanna say that, the younger generation can't afford it or they aren't enthusiastic about eventually owning their practice. There's certainly a good set of those out there who will buy. It's just a smaller set because what's happened is, they've gotten comfortable working for someone. They need to still pay back that debt. Or, the DSOs coming into the picture have been able to pay a premium and they've driven up the price of the business, of the practices across the board.
[00:11:19] So they're competing against someone who's got deep pockets. So it's, it's changed the dynamic of the industry and definitely the transaction size and volume and everything associated with dentistry and medical right now.
[00:11:34] Ronald Skelton: In your experience, at what level do the DSOs once they start playing in? What's below their minimal threshold? Just ballpark.
[00:11:42] Eric James Gall: I think they like to see about half a million in EBITDA and up.
[00:11:46] Ronald Skelton: Okay. That makes sense. All right. And as for a dental's office, that's not very big actually. I mean, I had a car wreck and lost some of my, I don't show it, but I wear a partial. Cuz I've shattered it, hit my head real hard in the car wreck and shattered a bunch of my teeth. But, that dental pill alone was in the thousands. Like, not quite tens of thousands, but that up close. So I can imagine that. And I was in that chair for what, three different sessions, two different days for an hour or two apiece. And he's busy, right? I had to wait a couple weeks to see him. So I can imagine there. It's him, uh, and two dental assistants and another dentist.
[00:12:22] I bet he's pushing that. If you do the numbers, like if, once somebody's fairly established a half a million dollars in EBITDA and I don't know what their expenses are. They got rent and that, that equipment has to be outrageous. Right? What is the ballpark? I wonder what that is. That's a good fascination question. What is the ballpark? I guess you evaluate this on a regular basis. You're selling dental offices. What does the opportunity cost to set up a dental office instead of buying one? Like what does all the equipment per station normally run?
[00:12:49] Eric James Gall: Well, I mean, I haven't gotten involved in, setting one up, so I can't really tell you. But you know, when you're talking about, well, honestly, I was peripherally involved. I sold the dental office practice. He had six offices. His EBITDA was probably around that $900,000 range. And, in one of those offices, part of the purchase agreement called for the seller to expand his office by doubling it into the space that was next door.
[00:13:19] He had a small, I think it was like 1200 square foot office, and he converted that into a 2,400 square foot office. And, in the contract he was gonna be reimbursed for that. And if I recall, it was probably about, $250,000 of, cost for equipment. And, interior buildout of that 1200 square feet. So, I think he had four operatories that he added, in that space. So if you look at it, from that perspective, cuz there's some efficiency there. You're probably talking somewhere around 600 to $800,000 per operatory. No, 60 to $80,000 per operatory.
[00:14:05] Ronald Skelton: 60 to 80, okay. I had a real, when I was in the real estate community, I actually had a real estate private lender that was a dentist. And, he knows they're transactional. So you sell a house, you give 'em their money back and then you find a new house and you say, Hey, I'm ready for a loan again. They make money every transaction. So we sold a couple of houses, paid off this dentist lady. And I won't say her name on here, cuz I didn't get permission to. But she said, Hey, might be a while before I'm ready to lend to you again.
[00:14:29] I'm gonna add two more chairs. And on a regular basis, she would lend me between 200 and $300,000 to do real estate. So I was like, well, how much does these chairs cost? She goes, well, I gotta, tear down the wall. And she tell me all this stuff. And the majority of the cost was the chair, the x-ray. Cuz each one has its own equipment. But that setup and all that drills was, I think it was like 80, $90,000 for her digital, everything she needed to have a booth. And, she was trying to, she bought enough space out of the building to it. Do four, four new chairs. And she was gonna do two and then two more later. But this way, by the time she had got her cash situated enough where she called me back and said, I'm ready to lend to you again.
[00:15:11] I'd already found two other lenders and, didn't do enough volume that need her, that I always like, thanked her and, but yeah. That it gets expensive. So that's one of the reasons why. I mean, these businesses need to change hands. We're talking about mom and pop, Main Street businesses. You do a lot of, even the manufacturing companies. A lot of these communities, these manufacturing companies in are in, they're one of a dozen or two dozen or three dozen businesses and they employ 50, 60, 70, a hundred people. It's a significant impact to that community if it doesn't change hands. So, we were talking right before the show how it's, these kids comin' outta college.
[00:15:49] I call 'em kids. The young adults come outta college and they hear about acquisition, entrepreneurship, ETA and stuff. And most of them wanna run to, while I wanna own a software company. I want to own, video games or, I want to do eBay store. I'm dating myself, Amazon stores, right? I'm starting to find some cool people out there that are buying these manufacturing companies, buying these lawn service companies and buying these other things. And it's usually, the sweet spot I think these are guys that, most of the guys I've seen doing that, they bought one or two businesses and they get the, they respect the fact that these are established businesses with cash flow.
[00:16:24] They tend to be in their late thirties, early forties. Is the guys I see that are buying these up. Is that true with what you're seeing buying the manufacturing plants and the, and the other stuff you're selling?
[00:16:36] Eric James Gall: It's a broad spectrum, but yeah. I would say, 40 and up is the vast majority of buyers. 50 is probably the median age of buyers that I work with. Going back to your earlier question on, build out your own or purchase one. When you purchase a dental practice, you're purchasing a set of clients in an income stream already. So if you just look at that build out cost that we just talked about, if you were to purchase, it just makes sense. Because you're making money from day one.
[00:17:09] Ronald Skelton: It's interesting because when you come outta college, if you are entrepreneur, or you have this desire and I still catch myself doing it. Even though I know better. I know the failure rate of small businesses, but I still wanna start one here and there. If you're truly an entrepreneur, you see a problem, you wanna solve it. In this space of acquisition through entrepreneurship, problems already solved. You're just looking to, buy an existing, functioning, running business, maybe make it better.
[00:17:35] I joke around and it's like when you buy something that's up running and been around for 30 years, it's yours to mess up, instead of yours to, to create and build. So you're almost looking for, not somebody who's so much entrepreneur, cuz those guys want to solve problems in the world. You're looking for operators. Guys who maybe they've done it for a long time. They know how it should be done. They don't think their last boss was doing it right. And they don't want a new boss. They wanna go out on their own, but they're not wanting to do it from scratch. An operator to me is a different, totally different species than an entrepreneur.
[00:18:08] You have to have a little bit of entrepreneurial spirit, but it's, like I am truly a hundred percent entrepreneur. And what I mean by that is when something is running well and you're doing the same thing day in and day out, my eyes glaze over and I gotta have somebody else in there helping me do it. Cuz I don't wanna do the same thing over and over again. I'll do it once or twice, but after I have to do it three or four times, I'm hiring, assistance and team members and I wanna go solve a new problem. And that's your typical entrepreneur. They're looking for the next fire to put out.
[00:18:38] So I think that, correct me if I'm wrong here, but the majority of these businesses are selling the, like, the true proven operators. People who, they know they can run a business. They've been running their last boss' business for the last 10 years and not getting paid right to do it.
[00:18:53] Eric James Gall: Yeah. I'll give you a couple examples. We'll go back into machine shops. You talked about a community that has employs, a lot of folks or an industry that employs a lot of folks. I sold two, machine shops in Meadville, Pennsylvania. Over the past few years. And Meadville, if you look through their history, like I would call it the mecca of, tool and die shops. Small tool and die shops. The first one I sold up there, it was a third generation, machine shop. Not a huge one, but you know, a very nice shop, very clean shop, a beautiful building, longstanding customer base. Did great work, for their clients.
[00:19:34] And I sold that one. The individual who purchased that was, like you said, running a business for someone for 10 years. He was running a machine shop in the Cleveland, Ohio area. And he was telling me he was struggling with the direction his management was steering him cuz he didn't feel it was, I guess totally ethical. And he wanted to be, the head of, a business that was doing great things for their clients. Not someone that was trying to skimp by, or squeeze by, for a little bit of extra profit of margin. So we, uh, got him established in that business. He's purchased it and he's doing great.
[00:20:16] And last time I spoke to him, he was managing his way through Covid, but even through Covid, they were still dropping, decent profits to the bottom line. The other one I sold up in Meadville, much larger, over a hundred employees. Probably about six, $7 million worth of machine tools sitting on the floor. A fourth generation, the fourth generation was in there as part of the ownership team already. And that one, the fourth generation was just kind of not motivated to, grab the bull by the horns and continue on. They were ready to exit. In that one we sold it to, a gentleman and his investment group that he put together. And they were former, continental engine folks. So they were building airplane engines.
[00:21:04] So they had sourced from machine shops, across the world. So they were sourcing from machine shops in the US and China, but they knew in that in the, aerospace industry that, US source parts, especially for defense contracts and stuff are mandatory. So they wanted a US based, machine shop that they could purchase and then grow. And they're doing phenomenal. The new blood that they brought in, the new clients that they're bringing in, they've been kicking butt. Both groups were rather young. So, the first individual was probably right around 40 years old. The second group, they were closer to that 50 mean, that we were talking about.
[00:21:47] Ronald Skelton: Yeah. It's interesting. I noticed you said fourth generation. I kind of stepped back a little bit. The running joke is the first generation builds it. The second generation grows it, and the third generation destroys it. And that's been the case at almost everything I've seen that is in third generation. So to make it to a fourth generation, says a lot to that family and their family values in running that business. So, that's a business that needs to be protected and carried on and makes sure somebody gets their hands on and runs it right.
[00:22:13] So, and that's the case with a lot of the businesses you're dealing with. These manufacturing companies, these mom and pop. They're not owned by the Googles of the world. They're owned by, the guy that has the house two doors down from you, who's lived modesty and left. He didn't go buy himself a mansion even though he might be producing a million dollars. That was never important to him. What was important to him, it was usually, taking care of employees, taking care of customers and stuff. And, I don't think people really get the gravity of things. If we don't find more people to buy these businesses in the next 10 to 15 years, the impact that's gonna have on our economy.
[00:22:50] It's insane, right? If you really look at the statistics, 50 something percent, 51, 52% of all, if you look at an employment base. I think it's 51 or 52% of all businesses are owned by somebody that's 60, 60 to 65 plus or older. Like they employ over half of our countries, and they're gonna either want to or need to retire in the next 10 to 15, 20 years. Or they're gonna die in their seat. Nobody gets to live forever. I've met a few of these guys. I don't want somebody right now, he's right on 80. And I asked him, I said, his wife wants him to sell this business. His friends would want to put me in touch with him. I knew him. He was a private lender in this space, but he owns another company.
[00:23:27] And when I got him on the phone, I was like, are you interested in even selling your business? I know your wife's interested in you selling it, and your friends are telling you to sell it, but what are you wanting to do? And he literally just said, I don't wanna sell it. And I was, what's going on? Because all my friends that sell their business, they die in a few weeks. I'm not ready to die. He really had it in his mind. If he didn't have anything else to do, if he didn't have a purpose in life, if he wasn't running his business, he'd be gone, before long. So I was like, well, are you gonna sit in that office chair until the last day? And he goes, well, I hope somebody comes find me in this office when I'm gone.
[00:23:59] He's like, that was his plan. And I said, well, who's gonna run it when you're gone? He goes, my son's here. It's like, I've talked to your son, he doesn't want it. I said, maybe he'll sell it to you. He was just that very blunt about it. And he used to be a business broker. Years ago before he bought this one, the guy that introduced me to him, he didn't know I already knew him, but the guy that told me he might wanna buy that, he bought a, a ham company where they call it a honey roasted, a spiral cut ham.
[00:24:23] Frank had bought this, this honey baked ham, spiral cut ham company in town that was doing really well, from this other gentleman. There is some of that in the world out there. The guys are just like, I don't know what, there's nothing else for me to do. I enjoy doing this and I'm just not gonna do anything else. But, economy wise, if we don't find an exit or a succession plan for these businesses, it's really gonna have an impact on us.
[00:24:47] Eric James Gall: This is probably a great time to talk about the sba. Changes that are coming down, down the pipe. I think they'll help immensely in addressing this. The SBA rules in the past, if you sold your business and the buyer used an SBA note to purchase it, the seller couldn't stay on as an employee any longer than 12 months. They had to fully exit the business and they had to sell 100% of the company to that buyer or buyer group. The SBA announced last week that they were going to allow fractional ownership. Which basically means the seller can retain a portion of the ownership and stay on, longer term. So I think this is going to, open up a whole new world of, how deals get done in that, I'll call it seven, $8 million in less range, in enterprise value.
[00:25:45] You're gonna see a lot more folks who are gonna look at this opportunity from the SBA and say, okay, I can sell a portion of my company now to my employees, to family members, and still stay in that seat. To run the company or help run the company, as long as they want. And then they, that fractional of ownership that they keep, they can sell down the road. So that's one opportunity. The other opportunity is, we're looking at is folks who may be younger. And they're looking at, Hey, I'd love to take this business to the next level. I just don't have the capital to grow it. Maybe there's some, folks with operating experience who can come in and invest. And I'll give them an ownership share.
[00:26:32] So you'll see people taking out SBA loans to invest in the company. To give them the working capital to say, if it's a dental practice that doubled their size, or a machine shop that needed, a couple million dollars more of new machine tools to service a new, contract that they're putting the bid on. It's tough to get that capital for an owner. They can go to this fractional ownership model. Someone can go to the SBA and then, invest in that business or purchase a portion of that business. Creating kind of that migration out of that, baby boomer generation that, you know right now is all or nothing in those small businesses.
[00:27:13] Ronald Skelton: It's interesting a lot of the guys who do what I do, they've shied away from the SBA because of the different business models. And one of those business models is, they'll raise the funds or they have some funds of our, we have some funds of our own. They have funds of their own. And they're doing holding companies. So they're not rolling up, they're buying companies that fit a certain criteria, sticking in a HoldCo. And one of the ways that we like to, to find great companies is, things we don't have to manage. So we bring an outside operator in and it's very common, to have that outside operator put some skin in the game.
[00:27:47] That's what we were gonna do with this concrete plant. Is we had already identified somebody who was great at running a company. Took his last company, it was financially distressed. They were doing, I'd say that they were doing about, nine and a half, 10 million after doing higher numbers before. He comes in as like the, GM type level, general manager type. Pretty much ran the thing, but took it over a hundred million dollars and short of like five or six years. Like really turned this thing around.
[00:28:13] The parent company, the owner sold it. So he took an exit at that point. And he was looking to buy his own. Didn't know anything about search or anything. But we found this concrete plant, it was kind of in the same situation. So he had about $300,000 that he could invest and we were gonna buy the concrete plant. Offer a big chunk of it to him. Start off at around 15 or 20% of it to him. And have him earn more of it over time. So come in, he puts his down payment, he puts his money in, got skin in the game. And then over the years, as he corrects it, he gets bonus structures and he ends up being, a 40, 45% owner of it. And then we exit in five to six years. That was the whole game plan. You can't do that in the SBA.
[00:28:55] The SBA is always like, well, you can't do partial. So we were always happen to okay, do private, private placement memorandums and like, how are we gonna raise the funds. Who's pitching and what. So it does open up a lot of doors. For all you guys out there doing, whether you're doing a HoldCo or roll up or whatever. You can actually, once the institute and we see the rules. They've made the announcements. They haven't made the rules yet, have they?
[00:29:19] Eric James Gall: They haven't. And those will be, those are kind of highly anticipated right now.
[00:29:23] Ronald Skelton: Yeah. So once we see, the guideline, they're opening up the floodgates a little bit here. Let's see what happens when they define what can go down that channel. There's a potential here that it opens up the doors to a lot more of these mom and pop, main street businesses. This small, medium businesses to, to change hands.
[00:29:42] Eric James Gall: Definitely a lot of the, sellers I speak with, the first question you ask 'em is when they have kids in the business is like, why don't you sell to your kids? And they'll say, well, my kids don't have the money. If the kids can leverage an SBA loan and purchase, say 80% of the company over 10 years as the parents exit. That makes a lot of sense.
[00:30:05] Ronald Skelton: Yeah, it does. Before, like you could only stay, like you said, the owner can only hang around for 12 months. A lot of these guys are just not ready to totally leave. I might circle back around to the guy I was telling you about earlier, and say, Hey, what if we could do this where you don't have to leave. You can still show up every day, you can still make sure the products are made right. We'll do what we do best. We're gonna revamp your website cuz it's old. We're gonna put you in some different channels. Now, one of the things I was gonna do is put him on Amazon and I just seen his products all over Amazon. So maybe somebody stepped in and got it.
[00:30:37] Therefore, it's been a year since I've talked to him. I gave him a verbal playlist of what we were wanting to do with it. So maybe he just acted upon it. And which is cool.
[00:30:46] Eric James Gall: I've already started assembling a list of sellers, or perspective sellers that I've spoken to in the past who've said, yeah, I'd really like to sell to my kids. But, I'm thinking that the way to go is a third party sale. The reason is because my kids don't have the money. And, I don't want to stick around, run the day to day and be here 60 hours a week. All they learn the business. But I think there's, I can think of one right off the top of my head.
[00:31:14] He's a pool contractor. He does very high-end pools. And he's got four kids in the business. And I asked him, why don't you sell to your kids? And he said, well, they're still too young. A little bit too green, to do so. Maybe 10 years down the road they could run this business themselves. But, at 26 to, 20, they're not ready. But if you gave them 80% ownership through an SBA loan, and as that's being paid off, as they pay that down. The seller can train those four kids to operate the business and slowly kind of back himself out as he feels confident and comfortable with them running the business. And he's taken out 80% of his equity already.
[00:32:01] Ronald Skelton: He's taken some chips off the table for his retirement. That's another reason why a lot of these guys don't sell their kids and stuff, is they need the money for retirement. That they've done really well at running their business, but they put it all back in every single year. And, not built an outside portfolio that will sustain them once the business is sold. In our roll up, when we were doing the marketing roll up, my team, there's three or four of us doing the interviews. We interviewed, I wanna say it was over 200, 218 or 216 marketing agencies doing five plus million a year.
[00:32:28] And in almost as many days. Like we were doing two or three a days sometime. And only, I could use one hand. I don't need my second hand with fingers to do my counting, of businesses who had outside investments and stuff that were enough. That when they sold this, sold their marketing agency, that money did not need to contribute to their retirement plans. I think they wanted their money, they're gonna get their money. But only one or two of 'em had been paying themselves well enough, and using it correctly and buying, you know. One of the guys that come to mind, he was buying commercial real estate. He owned the building he was in, he owned the building his marketing agency was in. He owned the building across the street.
[00:33:07] He owned some other real estate and I don't know how he's doing now cuz commercial real estate that took what hell of a hit during covid. Not very many business owners do that, right? A lot of these business owners, everything's in their company. And they, they go to their CPA and just say, that's one of the reasons why, you gotta watch what people say they want for their business before they get to you. If you get an off market deal, somebody goes, yeah, I need 3 million in business. Like, cool, how did you come up with that number? What valuation model did you use? I'm assuming you got a, a $1 million sellers discretionary earnings or something. No, that's what my accounting said.
[00:33:39] An accountant said I needed to pay my bills off, cover my debt, and retire comfortably. I was like, okay. Those are two different things that don't have any connection to each other. That said, they've gotta take some chips off the table. Now the cool thing is with you, which your scenarios, you were telling me there's a new possibility, right? Father wants to sell the company to his four sons and just use your pool servicing company as an example. They're not ready. He needs to take some chips off the table and he sells 80% of it to his kids. Hangs around as an advisor, but he can take some of that money, put it back into the company, which he never would've been able to do before under SBA rules. But some of the money back into the company as a loan and make the kids pay that back and bring in a general manager or some education, maybe he's a great leader but not a great trainer.
[00:34:26] So he couldn't bring in outside resources to bring his four sons up there, or, his four children to, bringing them up to speed. I know a lot of great guys that are great leaders. They're not necessarily great trainers. And a lot of great trainers that are horrible leaders, right? And there's some people that make that bridge. There's some good people that really, they just, you would sell, almost say that a great manager is a great trainer, but a great leader doesn't necessarily need to be one. There's a good chance that a lot of these cases, business can sell and flourish because they can sell to family, they can sell to employees. Use some of the money, loan it back to the company, bring the right training in, and get them up to speed and make sure they're in safe hands and get paid back even that money later.
[00:35:11] Eric James Gall: Yeah. I think it opens up just a whole new world of, potential deal structures that we can apply, based on the given situation. I just thought of another, perspective client that I've been talking to has had some health issues. And he said, well, I'd love to sell the business to my employees, but they can't afford it. But with fractional ownership, you could take, 2, 3, 4 key employees. And then through sba, sell them 80% of the business.
[00:35:41] Ronald Skelton: Yeah. I've had a few guys on here. We talked about ESOPs. Well, it's stock ownership. And they take some money to set up, not as much as I thought they would. I thought they were gonna be a lot more expensive to set up than that. But I still think, you need to have about ~a, ~a seller discretionary or EBITDA about 750 K or more. You need 35 to 50 employees for it to start to really make sense. Most of the time it's not the employee's money.
[00:36:03] A lot of people think if you need esop, all the employees have to pitch in to buy the company. Usually that's done through an outside investment bank. There's somebody's paying the owner off and there's an outside investment bank involved in this transaction.
[00:36:16] Eric James Gall: Yeah. I've been peripherally involved in a few of those as a consultant. A few of 'em worked just fine. The one that sticks in my head though, is the one where the owner said, I'm gonna test this model. I'm going to, China for a month to tour China, and I'm gonna announce it before I go. He was back in one week. Cause they all started telling each other, they're the boss, they're the new owner. They created so much animosity and chaos amongst the team that they were falling apart. I don't think he was back in one week, but after the first week, he got a call. And after the second week, he cut his vacation short to come back and say, okay guys, you know that ESOP we were talking about? It's off the table. You guys can't work together.
[00:36:59] Ronald Skelton: Part of that was on him. If you think about it, like when you ask somebody, from the show. Somebody called me up and said, Hey, gonna sell my business. It's not ready yet. How do I know when it's ready? He goes, I'm involved in everything right now. I said, do the vacation plan. He said, what's the vacation plan? Tell everybody that in four weeks from now, you're taking two weeks off. Think of everything you need done during that two weeks. And I want you to take the time off, and think of everything you're gonna do. You're gonna need done during that two weeks and delegate it out.
[00:37:27] And then come back and see what gets done and what doesn't done and fix it. I said then two months from now, tell everybody you're gonna take three weeks off. And every two months you're gonna, you're gonna do this every two or three months. It might take longer cuz sometimes you're gonna have to fix some stuff. But at some point you need to be able to take the entire month of December and half a month of January off. When you come back everything should be, not only running as good as it was when you left, but probably better.
[00:37:50] Like things were improved. They've made sales that you didn't know was even a potential on the sales list. Depending on your sales cycle, because if you really wanna know how well it's run, look at your sales cycle. And if you have a 45 day sale cycle, then you need to set up a time where you're gone for longer than that. Do they find new clients? Do they close them? Do they get products and services delivered that you were not involved with? Never knew or never met. That's a key indicator that you're ready to sell this. So the next operator knows he has a functioning company that can operate without you.
[00:38:20] And it doesn't happen overnight. Like, Hey, I'm gone. I'm gonna be gone for two months. It happens where, I'm gonna be gone for a week. And here's what I need you to do. I'm gonna be gone for three weeks. Here's what I need you to do. I'm gonna be gone for four and a half weeks. Here's what I need you to do. Then you take a, I'm gonna take a three month sabbatical. Johnny over here, you're at the helm. Good luck. And then you talk to Johnny and say, Hey, only call me if chip's on fire. And see if they can do it. I didn't come up with that. It was like five or six guys on the show.
[00:38:46] They had the same scenario where they walk people through that. It takes something for people to get used to, not being around. I've created a few companies where I circled myself with people who absolutely needed me. It was a flaw in my own design. I wanted to feel smart and intelligent. I brought in people that could do their job .But when there was a problem, like you teach us, you would teach 'em how to tie their shoelaces and then if it, they come back and go, this one's in a double knott. How do I untie it? And every new problem required my solution. And that's not a way to run a company.
[00:39:16] You don't know you've created something like that sometimes, cuz you're in the helm, you're doing your thing, you're in your tunnel, right? The trees are going 90 miles an hour and you see what you see. You're trying to, you accomplish things until you step back and go, nobody around me solving anything that I didn't design. I didn't put the system in place. What if I go away for a week and see what happens? Now I'm of the other mindset. If I do something two or three times, I start bringing in my assistants and go, here's what I'm doing right now. I don't wanna do that. My job description for a VA is, I'm gonna be a little crude here for you guys.
[00:39:47] Do shit I don't want to do. Like, find stuff I do and see if you can do it better. If you can do it better, take it away from me. So anything I don't wanna do is the number one step. Like, do stuff Ron doesn't wanna do. And the second one is, find stuff you can do better than Ron and tell him. If you see me doing something that's repetitive, like, I'm posting on social media on a regular basis. Like, my VAs, my assistants, they know, they say, Hey, why are you doing that? Give it to me. I got that. You don't need to do that no more. Go do something new. That takes something. And it takes something for these business owners to do this too. Especially these guys they've been doing the same thing for, your business owners, what are they 25, 30 years at the seat?
[00:40:22] Eric James Gall: Yeah, some of them. Some of 'em have never been away from that seat like we were talking about. And you chat with 'em and they'll tell you that, yeah, I'm way too ingrained in this company. I'm way too important to the operations and some of 'em like that because it makes 'em feel important.
[00:40:38] Ronald Skelton: There you go. Their sense of identity's tied around it. So that's the other thing you have to break as a broker, right? But, it is fascinating how deep each of us tie our identity to what we do. If I walk up to a stranger on the street and say, Hey, my name is Ron Skelton, who are you? When they tell me who they are, they almost always will tell me what they do.
[00:40:58] Try it sometime when you're just like, not in a business setting. If you're at a coffee shop and say, Hey, I'm Eric, who are you? And they'll say, my name's so and so, I'm a security guard, or I'm a cop. Or they'll tell you what they do. Without you having to ask. Sometimes if they don't, if they say, oh, I'm John. I'll say, cool. What do you enjoy? They'll tell you what they do for a job. Like they don't tell you, I enjoy going sitting over to the ocean, watching their waves wear off the rocks. Circling back around to this, what we're talking about here.
[00:41:24] Eric James Gall: Yeah. We talked to business owners right up front about, what their level of involvement is in the business. Because we need to set a clear expectation for the buyer. And the other thing it does is, it does highlight opportunities for a buyer. Cuz my thought, especially in the smaller businesses, the buyer pool really doesn't want to buy a business. They'd like to establish something of their own. So when you set, out a list of opportunities for them to take that business and, put their own stamp on it. It really gets them excited.
[00:41:58] So I'm not really afraid of a owner who is the business, and selling that type of business because it does present significant opportunity to a buyer. You just gotta present it right. But the person who, has established a business that runs by itself, where the new owner isn't coming in on day one and working in the business. They can spend all their time working on those opportunities. Obviously, that's more attractive to a buyer. Especially the buyers who've accumulated more capital can afford a larger business. Because in larger businesses, you find that's the case more often than in smaller businesses.
[00:42:32] Ronald Skelton: Yeah. There's a shift along, somewhere along that sellers discretionary earnings, EBITDA shift. Where you're selling to operators versus selling to like holdcos and guys who wanna put an operator in place. I'm 51, to be honest, I really don't wanna operate anything. I'd rather hold and I catch myself doing it. I actually still write articles for some of my newsletters. Partly because I enjoy it, but partly because I acquired them too smaller. I built one from scratch.
[00:42:56] That said, is it the right way to run it? Yeah, probably not. I know there's better writers out there than me. But, you catch yourself wanting to do certain things, wanting to contribute. How do you deal with the conversation of what they're gonna do next? Because the sellers reluctance to close, they'll come to you, they know they need to sell, they wanna sell. But their ability for them to close is really hinged on them being comfortable. Like to show up to the closing table, they have to know what they're gonna do next. They have to be comfortable with what the day after close looks like.
[00:43:28] Eric James Gall: Yeah. You need to have that conversation with them right up front. I wanna retire, I wanna spend more time with my grandkids. I want to travel, I want to do this, I want to do that. Whatever that bucket list may be, I take note of it. Because, you know, you talked about the human psychology of a deal. It's a huge change in someone's life, especially when they've been doing the same thing for 30 years. To step away from it. And in the process of stepping away, they develop all these fears and phobias of what's next. So you gotta go back and remind them of all those things that they said that they wanted to do once they left the business. And say those things were excited you back when you and I first met.
[00:44:11] Are they not exciting you again today? Aren't you excited about, taking that European vacation now or going to Australia like you said you wanted to do? Aren't you excited about that now? And that kind of gets them back into, yeah, I can do this. There's so much psychology involved in a deal. I feel like I have an honorary degree by now.
[00:44:34] Ronald Skelton: I have the same conversation early on. One of the guys, he's like, I'm not quite ready, but come back. And he was still getting his business to run on its own. And, I have a tendency to do the follow ups until I get what I call it, a giphy? Somebody says they're interested in selling. I'll call 'em back until they tell me to go f myself, right? Like, until they tell me to quit calling. So you're in my database and I'll just run through and make my calls. Sometimes it's every six months or something, if I'm really interested in it.
[00:44:59] So I called this guy back and he goes, yeah, I'm not selling. I said, well, I thought you wanted to go spend time with your grandkids. Well I told you I was making this thing run on its own. He goes, I took a month off and took the grandkids at Disney World and everything else. So my rule of thumb now is if they only list one or two things, let's think about, let's get creative and go, what else you wanna do?
[00:45:15] What else you wanna do? Because if they have recommendation that it's hard to be around your grandkids for 40, 50 hours a week. He's like, I was so ready to get back here and do something at the office. The grandkids came over for the summer. They're there with my wife right now. I'm at office every day. If they only have one or two things go, oh, cool. What else would you like to do? I did it myself. When I got outta real estate, we had enough properties.
[00:45:36] Our houses were free and clear. Our cars were free and clear. We really didn't have that much debt. So we live in a tiny home that's cheap. I can park it on a piece of land almost anywhere for just under a thousand bucks a month here. Even here in California under a thousand dollars a month usually.
[00:45:48] Let's make sure people know how to get ahold of you. Start off with, what's your target market? Meaning, I know you can do manufacturing anywhere. You just told me about Pennsylvania and stuff. So kind of give me your, I'd love to work with X, Y, and Z companies in these locations. And then we'll follow up with how do they reach out and get ahold of you and how they find you.
[00:46:07] Eric James Gall: Yeah. I mean geographically, has some bearing. So anything in Florida, we'll look at any listing or any business in Florida that wants to sell. So they're part of our target market. We've done deals in the panhandle, the east coast, northeast, and a ton in the south, in southwest Florida from Tampa South, on the west coast. So, that's geographically any industry, in Florida. Outside of Florida, we're really looking at, businesses that are in that, million to $25 million enterprise value to make it worth our time to travel up to them. So, my team, cuz I'm not the only, I have five other intermediaries, but our team, my focal points are mostly medical, dental, manufacturing, outside of the state of Florida.
[00:46:57] I've also done large restaurants outside of the state of Florida. So if it makes sense, we'll do it outside of the state of Florida. My team's expertise, I've got a former veterinarian. I've got a, a former, retail shop owner. I've got a former e-commerce, business owner. I've got a former, marine related business owner, who had a tour boat business. So, we've got a lot of skills on our team. A lot of different industry knowledge, that we can apply and that we share with one another. Outside of the state of Florida, usually stuff that fits within those types of businesses. Great service related businesses anywhere.
[00:47:37] So, lawn landscaping, ac, contractors, electrical contractors. We've dealt with enough of them, here in southwest Florida where we know the space, nationally. So that's kind of what we're looking for from a sell side. From a buy side, predominantly we like to help folks who are looking in Florida because it's easy for us to source businesses in Florida. Outside of the state of Florida, where we don't, there's no cooperative broker network.
[00:48:07] So a lot of the other brokers, if I brought them a buyer, let's say in North Dakota or California, and I said, Hey, here's a buyer. They're interested in this business you have for sale. The answer I give back is, okay, gimme the buyer, I'll give you a small referral fee. They cut you out of the deal right away. So it's hard to help buyers outside of the state of Florida. But if someone's looking to purchase in Florida, we've got tons of tools to help them find the right business, which is great. The other services we provide are valuations. So those range anywhere from an opinion of value that we do, starting at $1,500 to a certified business appraisal.
[00:48:49] I've got three on staff. Three certified appraisers on staff. And then we can do some exit planning. Usually we're too busy to do in-depth exit planning, so a lot of times we will outsource that to a colleague of ours. Or if it's something that's real simple, we can help, business owners do their own exit plan. Execute their own business plan. So, that's the fourth leg on the stool, of services we offer. General consulting, we kind of stay away from, someone wants us to come in there and help them grow their business or something in that effect. But we do have partners in that space that we can refer 'em to as well. Our focal point is really buying, selling, valuing, and planning your exit.
[00:49:33] Ronald Skelton: And I can see where the growth comes into play. Cuz somebody comes and say, Hey, I really need $3 million under my business. I'm willing to work a little bit to get there. And you're like, a lot of times the real answer, and I've had that to have this conversation with sellers. A couple of times, probably more times than I'm willing to admit. Like, cool, you got about two or three years worth of work to do. Here's what you need to do. You gotta grow your EBITDA or your sellers descretionary earnings at this. There's some cool ways to do it.
[00:49:54] Here's two or three different guys to, they can advise you on how to get there. So do you outsource that type of conversation?
[00:50:01] Eric James Gall: We'll refer business coaches over.
[00:50:03] Ronald Skelton: Cool. So how do people reach out to you? What's your preferred way for people to contact you?
[00:50:09] Eric James Gall: The best way is phone or email. Phone number (239) 738-6227 is my direct line. Email is Eric, E R I C at Edison, E D I S O N, B as in business, A as in advisors.com. And of course, our website is www dot edisonba.com.
[00:50:30] Ronald Skelton: Cool. And I'll make sure that stuff's in the show notes. I typically don't put your email in the show notes cuz of the spam engine. But I'll put your phone number and the website. So thank you for being on the show today. Let's just call that a show and hang out for a few minutes.
[00:50:42] Eric James Gall: All right. Appreciate it.