E146: Damon Pistulka Discusses Mergers and Acquisitions in the Current Economy

[00:00:00] Ronald Skelton: Exit podcast today. I'm here with Damon Pistulka. He is the founder of exit your way. And we're going to talk about mergers and acquisitions, selling your business and all kinds of stuff, the current economy.

[00:00:10] Thank you for being on the show today. Let's just get started there. 

[00:00:14] Damon Pistulka: All right. Thanks for having me. Appreciate it. 

[00:00:16] Ronald Skelton: Yeah. We're cutting up beforehand. I always like to do that to kind of lighten the mood, get us laughing and stuff. Some people ask me, why are you guys always laughing when you come on?

[00:00:23] Cause I do my best to tell a story or get people in a better mood. Cause this could be a dry topic, right? So, we're having fun. We're going to have fun with this and, let's just kind of get started with your origin story. How did you get into this space? And,let's make a connection there with the audience so they know who you are and where you come from.

[00:00:40] And then we'll get into the details of the conversation. 

[00:00:43] Damon Pistulka: All right. All right. Origin story. Well, for me, that goes back a couple of years. Actually I'm an odd duck. I live north of Seattle, but I grew up on a farm in South Dakota. And when I say a farm in South Dakota, I had more in common with people that live in Alaska than I do with people that live in Seattle. Because we have a 70 miles to the nearest Walmart.

[00:01:06] that was an interesting experience for me. I was the first, first one in our family that went to college. I had three brothers and a sister. And my parents expected each one of us to go to college. I went and got a degree in mechanical engineering. and subsequently, I've been able, I kind of fell into that.

[00:01:23] I had friends that were in engineering. I was like, hey, that's kind of cool. I'll try that. My father or my mother hadn't gone to college yet. Other than a little bit, both of them attended a little bit before they got married. So I found engineering and then I found manufacturing.

[00:01:35] And once I found manufacturing, I was lucky. I started working in a company that was growing fast and they, right when I was still in school. So before I was out of school, I was working full time. I knew where I was going. And, they were growing fast and I was able to build a couple of factories for them there locally and, help them design them, lay them out, that kind of stuff, buy equipment.

[00:01:56] And I was able to do a lot of automation work for them. They were really expanding. We're doing high volume automation. It was a molding company. At that time we were building toner cartridges for copy machines and we were the sole supplier for the North America and the Eastern Asia rim or something like that for Toshiba.

[00:02:15] And it was really fun 'cause we got to do a lot of high volume automation stuff there. And and also you 

[00:02:20] Ronald Skelton: were doing. Injection mold plastic, the case, the toner cartridge? Okay. 

[00:02:24] Damon Pistulka: And then assemble all the pieces. So it would go to another local facility and they'd actually make the toner and put it in. And then it was shipped globally.

[00:02:33] With them in my late twenties, I was able to move to Tennessee and build a facility ground up. It was a cornfield when we started kind of thing. And I ran it for five years and it was just a blast because I had never really been exposed the entire part of, that from that level.

[00:02:48] And then we, quintupled the business plus while I was there. Did a bunch of fun stuff. and then I started,you know, you're in a family business, great family, love them, still talk to them today. But you're at a certain level, you're not going to go any further. And, I moved into another business that was local in Tennessee there.

[00:03:05] And owned by, which I didn't even realize at the time. I thought it was two guys that owned it, two partners, and it was actually an investment group that backed these two guys. They had money, they had three of 'em came in and they did it. And the one facility was in Tennessee where I was living at the time.

[00:03:21] And the next thing you know, a year and a half later, they go, Hey, we want you to run the company. Come to Seattle and, that was my first foray into being an investor owned company. And I'd been in these family business, you're building value, but they don't really talk about it. In this investor business we were talking about it. 

[00:03:36] We knew where we were going to go. We knew what, I didn't even really know what EBITDA was before that. They sent me to school so I would learn financial. They hired a leadership coach to hang out with me for a year. And, that kind of stuff. So they really spent a lot of my development.

[00:03:50] And subsequently, we are able to build and sell that business, and we bought some others along the way and doing things with that, and evaluated. I don't know how many. The owners, I would go out and I would be doing the operational evaluation. The owners will be doing the financial stuff. We'd work together and do that kind of stuff.

[00:04:06] So I really learned how m and a worked in that first business. And in that business, we actually went out and, secured, I forget at the time it wasn't a ton of money, but it was 50 or $75 million to buy our biggest competitor. Got to the end, it didn't work. So we ended up selling the company to a strategic buyer that worked out pretty well.

[00:04:30] And I got done with that whole process and we were able, the business was a 60 year old business when we started. So the whole transformation and everything, it was just a lot of fun. I really enjoyed that. So that same investment group had me work for a few other businesses they had doing turnarounds.

[00:04:45] And then I subsequently worked for other investors and holding companies doing turnarounds or growth or acquisitions and that kind of stuff and buying and selling it, in what was it like 2009 or something like that. I got to the point to where, I was just like, Man, I don't want to make money for some investor somewhere else. And I don't like the decisions that I have to make because I'm working solely for that dollar, that bottom line dollar.

[00:05:12] That's what we, that's our sole focus. Now, people are going to say, no. You're going to have private equity people on here to say, no, we care about the people. Well, okay. I call bullshit on that. Because at the end of the day, if it's a dollar a person, it's going to be the dollar.

[00:05:26] And that's what you have to do. And this is realize you have to do that.

[00:05:28] Ronald Skelton: They raise money from other people. It's not just their money. 

[00:05:30] Damon Pistulka: Yeah. Yeah. It's not their, it's not their deal. Yeah. They're accountable to them. And I understand it gets, and there's a place for that. But I wanted to really be able to help founders and people that are in a community, build their community, build their business legacy, build their generational wealth, for their families and see their employees grow. 

[00:05:50] And then I want it to allow them to sell their business for the maximum they can, while preserving as much of that legacy as they can. And it just really is, has been since I started doing that. And it was 2015. My partner, Andrew and I, we worked together in businesses before started doing it.

[00:06:10] And then we were doing business brokerage, he was. And he said, Hey, come on and join me. Cause I actually after I quit, that I was building manufacturing plants. I love it. I think it's just fun, right? You get all the big buildings, all that stuff, put all the big equipment in. But, in 2015, we started working on it and I, in about six months, I was like, business brokerage is useless.

[00:06:31] 90 percent of the businesses aren't ready to sell. More than that, never sell even close to what the owner wants for them. Why the hell aren't we helping people? We did this our whole lives. Why aren't we doing that? And then selling the businesses for the money that, that these owners really need or expect.

[00:06:49] And that's what started our business. We changed what we were doing, started doing it. Like we were doing it for the investor owned companies. But with a focus on the community and the people and everything else that we can have. 

[00:07:00] Ronald Skelton: That's cool. And then how do you, go about like, the problem I see in that and I see with business brokers in general is, the owners wait until they're really thinking I got to sell or want to sell now, not realizing that there's a prep cycle. One year, two year, three year cycle to be ready to sell.

[00:07:19] And at least if you're going to do, anything near what the company could be worth. 

[00:07:24] Damon Pistulka: Yeah. I'm sorry. We can't help many of those people. It's just, I can't, cause my partner pressures me all the time to, Hey, let's try. And I'm like, try? Why try? I'm not going to climb Everest without working out. I can't do it. So why start on the journey without working out? And so we really, we honestly don't work with that many people that are retirement age unless they realize I'm going to, I want to undertake this. Because they're going to find somebody, a business broker down the street's going to tell them what they want to hear.

[00:07:52] They're going to say, Oh yeah, your business is worth that much money. Oh, I got buyers that are looking for your business. They're going to find three or four of them, they're going to tell them that.

[00:08:00] Ronald Skelton: And they're all going to one up each other and the business is gonna. That's my biggest problem right now with the brokerage world is. 

[00:08:06] Damon Pistulka: Oh man, don't get me started here.

[00:08:08] Ronald Skelton: I always joke with the, people like, how do brokers evaluate or value companies? I always tell them that's because the, the owner comes in there and says, my financial advisor says I need a million dollars to retire.

[00:08:18] And the first broker goes, I can get you a million dollars. And he goes, I got two more appointments to check. And so let me go visit all the other two guys and I'll come back to you. And he goes to the next guy, the last guy said he'd get me a million bucks. He goes, I can beat that.

[00:08:30] I'll do 1. 5. And none of them's actually looked at the daggum numbers of it. And this thing gets listed at 1. 75 at the end of it. When it's really worth 800k, right? If you really get down to it now, everybody's heartbroken. The owner thinks that everybody did him wrong and nothing was ever done wrong other than the fact that nobody told him the truth.

[00:08:47] And it happens all the time. Now, I tell people a time when we talked to him and I haven't talked to very many people in the last six months or so, because I kind of changed my thesis what I'm buying. But, brick and mortar companies. When I used to do the calls all the time, first call would be, we're talking, I'm getting to know them.

[00:09:04] What, how do they build what they build? And at some point they say,I kind of got an idea where I want to be when I sell it. It's cool. What is that? I need to be about a million and a quarter. And I'll say, cool. Let's see how we can get you there. And that's the only way I would say, cause you don't know enough at that time.

[00:09:15] Most of the time you don't have their financials to know whether or not they're on target or not. And a lot of times the answer is to get you there you got a lot of work, right? We can get you there. I can find it. After interviewing 160 people, I know people that can get you anywhere you want to go.

[00:09:28] Now, the real trick is will you do the work?

[00:09:30] Damon Pistulka: Yeah. And that's where we really come in. When someone realizes and wants to do the work and we're like, because we're operators, right? That's what I did. So it is weekly grind it out. Do the things you need to do. We like, we were talking before, you got to get the right people on the bus.

[00:09:50] You got to lay the vision down. You got to get everyone working together and you got to make sure that are we moving that way and you can't do that by, let's meet once a month and see how we did. That's a surefire way of effing off for a year and not getting anything done. Ours is, what did we do this week?

[00:10:07] Where we got, what do we need to do to get better next week? Come back again and look at it again. And in between we're making sure we're, priming the pump, getting the people doing what they need to do and empowering them really, because most of these businesses have tremendous talent that just needs to be uncovered and unleashed.

[00:10:26] Ronald Skelton: It's funny because I run, I'm 51, so I've been around businesses and managing people for so many years. I got it boiled down to three questions. I ask it every single meeting I'm in, other than this, we set our goals, but the three questions I end up every, either end of meeting with or somewhere during the meeting, you're going to hear is, what did we do well?

[00:10:42] What can we do better? And what did we miss? What are we just totally missing? We should have on the radar. We don't have on the radar at all. And if I get those three questions answered at every meeting, we usually can move something forward. What are we doing really well? Cause we don't want to double down and do more of that. What's working, right?

[00:10:58] What are we missing? What do we do that just didn't work? What are we not getting done? Where do we need support? And then what are we forgetting? There's often where you go, we probably should have been looking, we're doing X, Y, and Z?

[00:11:08] Our goal is this, but if we actually came at it from this angle and looked at it from over here, we did something totally different. We might be able to get there faster. And, I think if more business owners would take that, take the time to not only set their goals, but do what you're talking about weekly.

[00:11:23] Where are we? What do we get done? A lot of times it's oh, cool. We got twice as much done this week than last week. How do we do that? There's a lot of times there's a little digging in there. You find something's working, like what happened to cause that?

[00:11:33] What broke loose? And then a lot of times it's had a really slow week. Cool. What got in the way? Sometimes in your world, manufacturing stuff. Sometimes it's supply issues. Sometimes it's equipment breakdowns, but you need to know what causes those types of things so you can make sure you clear the path that doesn't happen again.

[00:11:47] Damon Pistulka: Yeah. And especially now that we work a lot in e commerce and even our healthcare work is, there's so much that happens in manufacturing, you can see activity, right? And in e commerce, I think is a tremendous challenge for people because it's all happened electronic. You don't see any of it.

[00:12:02] You may have a warehouse, you see things moving in and out or something like that, but it's nothing like where you're manufacturing and you see all these things happening. And you have to have these dashboards, KPIs, things like that, because you can make wrong moves, on a platform like Amazon didn't cost you tens of thousands of dollars in hours.

[00:12:20] And it's, it is fascinating for me in that because that kind of ability to measure and understand what you're doing is powerful in all industries. 

[00:12:31] Ronald Skelton: The other thing I like to look for, because everybody always talking about KPIs and 95 percent of the time when I see somebody's KPIs, they're trailing indicators. Meaning they're, they tell you what happened.

[00:12:41] And I always look, I always look at them and go, where are my leading indicators? Like, where are things that are showing me that something's about to start happening or, or forecasting? There's both. Like one of the big things in mergers and acquisitions is people talk about turnovers when employees leave.

[00:12:55] So I always have to say that cause, we have a lot of people in Europe and turnover is their revenue. That's what they refer to as revenue. So turnover here, people leaving. But you know, that happens a lot when you do acquisition or you buy a company and merge two companies together, a bunch of people leave.

[00:13:10] They always measure that in turnover. We lost 20 percent of staff. And I'm like, okay, how do we get a leading indicator? I've been bugging people. I actually pitched it to two people. I know that make HR related software and they play it in the AI world as they go out and create this tool for us.

[00:13:24] Cause I think people like it. Monitor all the job performance websites, LinkedIn and all that, and look for change detection. So when I start talking about, Hey, we just got acquired by so, I want to know how many, I've got 37 employees on LinkedIn. How many of them updated their profile? Because that's a leading indicator.

[00:13:40] People are looking to leave. How many people have one on, updated their Indeed or whatever is out there for job resume. Like understand where my employees are, where are they hanging out and what is the, they do it all the time in consumer, what do they call it? Consumer sentiment or whatever.

[00:13:53] Basically what is the consumer thinking? They should do it with employees too. You should be able to track like what is, what's going on in the mind of our employees. And if you did that, you could actually improve the communications process. Cause, I see everybody starting to update their resumes. Now I've got uncertainty and that's what's causing that. Start bringing some certainty into conversations of, Hey, this is where you're going to end up at the end of this, thing. But,when we're looking at that weekly meeting, how do you identify things that are kind of leading indicators or? Cause like in the world of e commerce, like things are moving so fast, if you're always playing against trailing indicators, then you're always reactionary.

[00:14:29] Damon Pistulka: Yeah. Well, there's the leading indicators in e commerce are a little tougher. I mean, you can get, there's some, I mean, if you've got large email lists and you know your products, you know what that kind of does, when those things are scheduled, I mean, we had some clients before that had huge email lists.

[00:14:44] And when you can just guarantee that we're going to get X tens or hundreds of thousands of dollars because it's an email list week, right? Or email week. But, in the other ones, and when we're in manufacturing, when we're in a construction kind of related thing that are doing projects or seasonality kind of stuff, you can really tell that from, if you've got a CRM that's working right, what are the new leads? 

[00:15:06] And you kind of throw a dollar to it, because they can get close. And then what are we quoting and get us there? And then what do we actually have that, that we think we're going to close or backlog? And those are pretty simple that we use for a lot of years.

[00:15:19] Ronald Skelton: Start tracking success rate on how it closing our, cell cycle process and that type of stuff. Yeah. 

[00:15:25] Damon Pistulka: Cause your CRMs are now, it's so easy to go. Okay. At the lead phase. We're going to value those at, 25%, 50%, whatever you want. And you just increase that as you go and just leave that. It's a million dollar project, but I'm only going to give you a 10 percent credit at that stage and 50 percent and 70%.

[00:15:43] Ronald Skelton: I always found CRNs, especially it's a small to medium business size. So basically 5 million revenue and below is overly complex for what's truly needed for these guys. What's your favorite one in that space? 

[00:15:55] Damon Pistulka: If you go to somebody that puts in HubSpot, they're going to tell you that HubSpot is the thing. And I'm going to tell you that, there's a lot of them out there.

[00:16:05] We've used pipe drive a lot, but I'm not saying it's the best by any means, cause there's other ones that do better. But realistically, the thing that you have to understand from a CRM standpoint, on the small business is even more important. You and I are in business and we're both selling, we're both doing all this stuff.

[00:16:21] Who talked to Jim last week or Stacy last week? Okay. And what did we say? If you don't know, that's your biggest thing. And I'm talking email, I'm talking phone, I'm talking text. I don't care what it is. LinkedIn, it should be in your CRM. Get that happening. Your life gets a lot better because then I can go backward. and especially if you're doing project like I talk construction, anything like that, where you, you have conversations around the project, the bid or whatever you're doing.

[00:16:49] If you're not getting that, that's your basic thing. Now, they're going to tell you, people are going to tell you, Oh, you got to use it for all your marketing, all that other stuff. And I'm like, listen, yes, you do. But I'm talking about operating a business. I'm talking about in that point where we've identified a lead and we got to, get it through.

[00:17:06] That's the, really what I see as the basics for those kinds of business.

[00:17:09] Ronald Skelton: I'm such a nerd. I actually got so sick of most of them. I just use a tool called the air table and build out one myself. I could build something within minutes, because they have some templates that'll get up and functioning and then we can just add functions as we need, for the businesses that we run.

[00:17:24] Damon Pistulka: For me, it's what is the communication with your customer or your potential customer? And if they've got a lead, it's got to be in there and then just that communication path and what do we got going with them, and that's really all you need. 

[00:17:37] Ronald Skelton: That stops a lot of the, he said, she said too, right? Joan over there told me you could get it to me at 15 percent off. I was like, it's not in the CRM. No, he didn't. Cause people play that game, right? They know so and so is on vacation. So let's tell you that, at least in my world, people are like, so and so they sent me, they could get it to me at X.

[00:17:52] First of all, didn't have the authority to do that. And second of all, I don't think he did. But anyway, let's talk about, like you talked about e commerce. I know you have some experience in the manufacturing stuff. Are there particular industries you guys really like? 

[00:18:05] Damon Pistulka: Yeah, we're really bullish on three that we spend most of our time.

[00:18:09] It's more today, not so much in the manufacturing, even then we do an e commerce and healthcare, but manufacturing e commerce and healthcare is where we spend our time. 

[00:18:17] Ronald Skelton: How's the, the reason I'm asking him, that was a leading question. I'm leading into something. How is the current, I would almost call it an uncertainty in the market.

[00:18:26] I don't think we're in a bull market or a bear market or I don't like, I don't think anybody really knows. It changes from day to day. It's always, are we in a, recession, depression? So in the uncertain market with increased interest rates all the time, how has that impacted the industries that you guys focus on?

[00:18:42] Damon Pistulka: Not much. Because listen, if you're leveraged right, you're not over leveraged and you're running decent. You're running ahead of three quarters of the people that are in business in your industry. Like you said before, keep doubling down on what you're doing good. And, yeah, makes it harder to, if you have to go out and buy buildings or whatever the heck you're doing that kind of, it's gonna do that.

[00:19:08] Just hate interest rates and really interest rates aren't that high. They're just coming back to more of what they probably should be and get used to it because we aren't going back to that again, hopefully.

[00:19:19] Ronald Skelton: You and I have lived a long, long enough to know they were much higher, when we first got into the business world, they were much higher.

[00:19:26] Damon Pistulka: Yep. And two from the M& A space. It inflated the value of companies like crazy because everybody was running around spending like drunken sailors because, the money doesn't cost anything. We can pay you more. And now it's, we're coming back to reality in that.

[00:19:39] And, in businesses, it is. Capital intensive I mean, you've got to look at the cost of, if I got to buy a million dollar piece of equipment, it cost me more to buy that piece of equipment. So those kind of things. Yes, there are impacts, but I tell you, the impacts when you really get down to it, most businesses have enough capacity and when you get into manufacturing owners, nine times out of 10 are equipment junkies and I appreciate it.

[00:20:04] I love it. I think it's fun. You gotta come direct and realize that and just, you got more utilization there. You can get it out of it in a long ways. And then when you look at the e commerce and healthcare, yes, e commerce is all that electronic transactional. And if you're not leveraging AI, automation, simple reducing the amount, or I don't even say reducing the amount of people, but allowing yourself to scale at the same amount of people.

[00:20:32] I mean, we got a client right now that, that has really leveraged technology to grow, kept the same people. They got employees that have been there it's a, I forget. Hell, it's a 60 year old family owned business. And they switched into e commerce in the last four or five years. And they went from, when we started, it was under 5 million.

[00:20:54] So it's going to be over 20 this year and they haven't increased employees. And it's like four, so you gotta be leveraging technology. And I see in the, in the healthcare space where we're doing that. And we don't, we're not in huge clinics or anything like that. I mean, it's under a hundred employee kind of thing, but in, and we're around occupational rehabilitation.

[00:21:13] But AI and that same automation kind of stuff, is making the back end of those businesses so much better because, there's a tremendous amount of time just to document something that AI can get 90 percent of the way done now, with final edits by somebody rather than me and their click, click, click, click, click. Which I am a provider. I'm not somebody, I'm a doctor or a PT person. 

[00:21:38] I'm not a data entry person, blah, blah, blah. But the way you can take some of these applications now, and literally I'm seeing them making like, Lambda templates and answering questions, to that template for that patient and the AI will generate a document that's 90% of the way done.

[00:21:58] And when you look at that and you go, it took what, took somebody 20, 30 minutes down to three on a weekly, monthly basis, and you've got, you've got 30, 40 of those people working out there. That's a huge, huge savings. And the other thing that we're seeing on the backside of it that's really exciting is consistency and quality goes up, dramatically because you and I are going to document the same thing completely different. 

[00:22:21] Ronald Skelton: I think it'll actually improve healthcare too because now AI can take a look at your blood work. All your health statistics, all your health history, everything all at once. And then give that, I think a doctor still has to look at it, but they can look at the doctor and say, look with the symptoms, with the health history, with X, Y, and Z, here's the four things you probably should look at. It's a multiple choice now, right? 

[00:22:42] And a doctor gets that because, I don't think at this point you're not going to be able to, there's still a such thing as a great doctor or a great operator is human intuition.

[00:22:50] Damon Pistulka: It's making us better. I mean, you go into this and I look at e commerce and manufacturing, and what AI is doing now for customer service or account management in those industries is absolutely fan freaking tastic. Because I can put Damon who could be, I could be a real, mediocre customer service person. 

[00:23:08] But when I've got data at my fingertips and it's going whoop, here's what you bought from us, customer B, this is all the stuff you've done. What are you working on today? It gives me all the technical specs. I mean, I don't even have to think about it.

[00:23:20] I'm the best customer service rep that the company could put forth. 

[00:23:26] Ronald Skelton: Yeah. I think there's lots of room in that too. Cause imagine if you think about a, in software companies, you usually have a guy who's out there doing sales, and then you have account managers that help you cross sells and upsells. A good AI can actually look at your entire customer base and go, these four customers are buying X, Y, and Z from you, but they're buying A, B, and C from, Joe over here and we provide a better service in them. And just like it would be constantly updating them as to, even what to say during that it's a better copywriter than most.

[00:23:54] A good AI better copywriter than, I would say your average six figure copywriter, right? Somebody's going to charge you a hundred grand to come in and rewrite it. Now it won't be your top guys, the guys like the top, top guys that can't beat those yet.

[00:24:05] But, if you only got a budget of say, five figures to do your copy, maybe low six figures to write your sales and marketing copy. Or your upsell pitches and stuff like that. And you're not going to have somebody spend six months analyzing your customer data and everything.

[00:24:19] And it's current status would be in six months that I told you to beat a $25,000 guy, six months ago. But now it beats and and I'm trained in that area. I have a master's degree in marketing and been studying under all the greats because, it's a trained, trained skill. It writes better than I do. And I've spent 20 grand learning the model. 

[00:24:40] Damon Pistulka: Yeah, it does. And it's going to make the people, the companies that utilize it better. And I think this is just a, an advantage that if you're not looking at it today, you're probably going to get beat by somebody that you don't even know that is.

[00:24:57] Especially the other thing is in an M& A, there's a huge potential in the background of that. That it's got some cool stuff it's doing. 

[00:25:05] Ronald Skelton: Yeah, I'm curious, I think there's some low hanging fruit that nobody's dealing with yet. I actually, I put together a project to see what it costs to fund it.

[00:25:13] And that's just something I don't want to fund at this stage. My last software venture cost me almost everything I had and had to start over. I created an online dating site once to try to keep people honest in their profiles and found out nobody in the market wants to be kept honest in their profiles.

[00:25:25] That was my biggest failure in life. Fifteen years ago, twenty years ago. But, I think there's a huge play in AI due diligence. And, um, like, really, basically, you can almost build an AI forensics accounting tool fairly quickly.

[00:25:39] Consume the IRS laws, consume all the standard accounting practices, and then start doing a learning model off all the weird quirks people do. And you can learn that model inside and out and build one hell of a tool that you just stick somebody's tax returns into. And they're current books in and at least ask, ask the right questions.

[00:25:56] Damon Pistulka: Oh, yeah. Yeah. You can get the questions that, that you need to ask. And there's a lot of things too. And it's just, any business really. I don't care who it is. I mean, anyone just the ability to get on and create a chat bot for my bakery company down the street.

[00:26:11] If I want to spend the time to figure it out, I can do it on a weekend. 

[00:26:14] Ronald Skelton: Yeah. I play around with AI a lot. I have a, personal mentor bot I created that actually, it runs its own newsletter and I'm, I work for it. And it's just a fun project I use to learn AI. But, I'm the virtual assistant for the AI cause all I do is prompt it and then ask it what prompts I should be asking. And then it'll tell me to do things like copy and paste this into the newsletter and I do what it says. And I'm working on auto GPT to actually, where it just takes over and runs and on its own.

[00:26:40] But I've got some bugs in that software. I'm a nerd by previous trade. That's the thing, right? These tools actually code better than your mid level guys. So if you just utilize, if you're a mid level guy, now you get to step up your game. You don't get the, you don't ever need to make the mistakes a mid level guy would make. 

[00:26:53] Damon Pistulka: Yeah. And that's, that's a good point to your technicians, everyone throughout your organization should be using it.

[00:26:59] They should be using it. And we have to be, we gotta be careful about private data, we have to do all that kind of stuff because it is. You're submitting that data to something, you don't know where it goes after that. Unless you're using one of the apps that keep it private, but it's a, it's something that I think is gonna, we don't even have a clue yet.

[00:27:16] Ronald Skelton: Yeah. I'm a big believer, I'm prior military intelligence. The illusion of privacy is an illusion, right? We all have this illusion of my data is private and then they post, you post what you eat for every meal on Facebook. There's no such thing as private. Unless you turn off all your electronics and, now you can't even turn off your phone.

[00:27:32] So unless you just disown electronics and don't have them. You've traded that, that privacy for convenience, right? So we just live in a world where everything's available to everybody. 

[00:27:43] Let's go back into, kind of what's happening in the space.

[00:27:46] Are the buyers becoming more picky because of the economy? And I see that from the PE level in the strategic buyers. I see I'm interested in things that are a little more, what do you call it? Recession proof, veterinarian services, health, pet stuff. Things that are fanatic golf, right?

[00:28:05] Like I don't care how bad the economy gets, the golfers are going to golf, the pet owners are going to take care of their pets. Bass fishermen are going to bass fish, right? Even if they have to carve wooden lures out of pieces of limbs they have in their yard.

[00:28:16] They're going to go do it. There are some passion industries, but what do you see happening as far as on the buyer pool? 

[00:28:23] Damon Pistulka: Buyers are getting pickier. Like you said, if you're discretionary, that's a tough one. It's a tough one. But if you're fanatic based, like you said, like some of these things, wouldn't you love to have a pickleball company right now.

[00:28:39] Talk about fanatical and following and all that kind of stuff. 

[00:28:42] Ronald Skelton: The question thing is, my question with that one is for how long? Is this a permanent thing? Cause some of these things come and go, and some won't stick.

[00:28:49] Damon Pistulka: Yeah. And some just grow. I mean, you look at, you look at the fishing. Talking to a guy that owns a bass lure company or a lure company.

[00:28:59] And,you think about that, you think about in our early days when what's his name, the guy out of Tennessee that used to do the fishing thing. Oh, son, that was, they were doing that with, scraping two nickels together to try to do it, do a television show to do it.

[00:29:13] And now it's big money. And this kind of stuff is these hobby businesses have really come out of it. And, you look at something like pickleball and you go, well, is it going to be a flash? Is it going to be something that's going to be gone and in a couple of years? Or is it going to grow?

[00:29:26] You don't know, but yeah. It's about, and people are looking at the boring business too. If you're doing something around infrastructure. You got to keep repairing roads no matter what. Keep the water flowing no matter what. We've had some clients that do that kind of work that, and engineering. When you look at the engineering stuff and, Infrastructure engineering.

[00:29:50] Ronald Skelton: I interviewed a guy yesterday who's really, he's a lawyer, but he's into agricultural technologies. And he said, okay, where's that in moving? And it's getting more proficient about how much water you use and how to water just the roots as opposed to what, not wasting water.

[00:30:04] And there's just, all these rooms for improvement. The tech can continue to grow because there's just, there's ways to do things better and more efficient. 

[00:30:12] Damon Pistulka: Yeah. And you look at the ag industry, we still have huge opportunity there when you, yeah, when you look at reduction of herbicides. You look at better water utilization, you look at automating the monotonous driving of these huge pieces of equipment across these mammoth fields. All that stuff is going to change the way we view how that was done. 

[00:30:35] Ronald Skelton: Yeah. I was watching the video just because I was curious where it got to after I heard that listen to him. And these guys were on this farm and they weren't in their tractors. The tractors are just driving through the fields on GPS units doing its thing. 

[00:30:46] And he just watched it from a central control. This farmer, he looked like a farmer, had the, the overalls on and everything had a drone flying over, over his farm and was looking at dry spots and stuff in his fields. The drone had, probably what was, probably flare forward looking infrared.

[00:31:02] And I'm a satellite imagery guy, so I know all the different cameras, but you probably use a flare or some type of multi spectral lens on that. Cause you could see moisture, and temperatures of the soil. So he could tell if he had dry spots and stuff like that.

[00:31:15] And it's like the technologies these guys are doing now. And, if you look at things like that, they almost have to, because if you're in certain areas of the world, you only get one or two crops per season, right? You mess one up, you got to wait until next year to make it, make your mortgage payment.

[00:31:28] Damon Pistulka: Yeah. My brother in law does that in Colorado. He's got the drones. He's got all the, it's all that stuff. They're using every bit of it, mapping every foot of the field to understand that soil conditions to put, adjusting what goes on and those, it's crazy what that's doing. 

[00:31:43] Ronald Skelton: I know somebody that has a big, they grow vegetables inside, and they have so many sensors in a hydroponic system.

[00:31:50] And I always used to do a aquaponic outside to grow vegetables on which we have fish in the system. And they have so many sensors in there. The pH drops it, halfway through the field. He knew he had a dead plant out there. Like he could tell that something was rotting into something.

[00:32:02] He knew exactly where, these are tens of thousands of square foot of the greenhouse. And, he was giving me a tour and he's Hey, we got to go over here to building three about, station 47. We got a problem. Go over there. And he had a couple of pieces of rotten fruit that fallen down in one of the tanks and they were changing the pH level of the water, but the sensors could pick it up.

[00:32:21] And it's insane what these things could do now. 

[00:32:23] Damon Pistulka: All that's going to drive, the investment is going to drive where people are putting their money because, we investment buyers, the PE buyers, they've got to overcome that increase interest rate they're dealing with now. And, so that's creating some challenges on values, creating challenges and where they can invest their money because they got, and their investors have other places that they can put their money and get much higher interest rates. And they've been able to get just out on, in a government bond for God sakes.

[00:32:51] Ronald Skelton: It's paying better now. A lot of people don't understand these guys, people think private equity, they went out and raised the money and they can do whatever they want to with this. Not how it works. They have rules. They have things you have to do. They have to deploy that capital.

[00:33:01] So a lot of these guys are under pressure right now because they did slow down investing. They've raised, tens of millions, if not hundreds of millions of dollars. And now they've got it sitting there and by their rate, their private placement memorandum said they raised money to do X, Y, and Z, now the models changed on them a little bit, right?

[00:33:18] So a lot of these guys either have to basically, not utilize the money and give it back and start over and do another private place memorandum with a new thesis or a new agenda or what do you want to call it. Or, make a shift in the economy ? And if you think about, the guys that up there that were doing things like, travel and Airbnb and stuff, those guys are having a real problem right now.

[00:33:40] Damon Pistulka: Yeah. There's different parts of the market that, that across the globe where they're just going to have to deal with this. Like I said, a little bit ago, we can't continue to spend money like drunken sailors because of the interest rates are zero.

[00:33:53] It's just we gotta come back to reality here and reality on, on where we should be spending money, the evaluation that we need to do before we spend the money. And I think, and the investment buyers really lead the way in a lot of that because they're under, like you said, they're under the strict guidelines of where they can invest their money.

[00:34:10] And on the other side of that, the people that are getting ready to sell their business or selling in the process right now is selling their business. If you don't think that, if your business was worth 3 million last year, it's probably worth, I'm guessing about two and a quarter this year.

[00:34:25] It took a good 20, 25 percent off. And I'm going to tell you if anyone wants to know how to value a business and it's under about $5 million, the SBA is a good place. They need 1. 4, 1. 5 debt service coverage ratio. And when I figured it a couple months ago before the last rate change, it's about 220k a year to support a million dollars in debt.

[00:34:48] That's what you have to have a free cash flow after growth capital is taken out to get an SBA loan for a million dollars. 

[00:34:56] Ronald Skelton: So what was the number again? Two something? 

[00:34:57] Damon Pistulka: 220 and it was 180. It was 180 the year before. 

[00:35:01] Ronald Skelton: Yeah. It's a huge difference, right? That coverage ratios really impacted his businesses.

[00:35:06] Cause a lot of people like listening to this show, they think they're going to go in and get, $5 million SBA loan. And buy the same company, they were going to bought, a year or two years ago. And, they're not, they're going to get a company with lower EBITDA. 

[00:35:18] Damon Pistulka: Yeah. Yeah. Because if you're going to spend $5 million, that thing should have about a one, 1. 1 million in cashflow after everyone gets paid, after you take out the money you need to grow the business. And they're going to make you put, do it like that. So if it does, then great. But I'm telling the sellers on the other side, you can just as easily divide your cash flow after that by 200, 200 1/4.

[00:35:43] And that's about what the value is going to be. So if you got a broker on the street, that's telling you it's worth double that, you can call bullshit on it. Because it's at the end of the day, if someone's going to buy your business with an SBA loan, they have rules.

[00:35:55] Ronald Skelton: Yeah, they have guidelines they have to follow. And then if you get above that, you still have to play. 

[00:36:00] Damon Pistulka: Yeah, it's a little different game, but they still are dealing with this interest rate change. 

[00:36:07] Ronald Skelton: I think they're still a little more risk adverse now than they were before. Money was so cheap before they could, I could just go get more money.

[00:36:13] I could just go get more money. Now they're really being selective. A year and a half ago when I first started doing this podcast, I didn't have a dozen brokers coming on here telling me I'm looking for, I've got, PE firms and all we're really looking for is veterinarian services, pet services, health services.

[00:36:28] I've interviewed three people this week that specialize in, physical therapy, chiropractic, and that type of stuff, right? Cause that's not going anywhere. They moved to that specialization in the last year or so. Cause what two of the guys, that's where they come from. One of them was a vet before, a veterinarian, before she got into mergers and acquisitions.

[00:36:44] And then now she's helping, anything in that service business. The other guys in the UK, he was, they call them physios. So a physio is kind of a cross between a physical therapist and a chiropractor. Maybe even occupational therapists a little bit, they kind of bridge all that. It's a very interesting market because it's not going away.

[00:37:01] People are always going to get hurt. People are always going to need a better way to work to not get hurt. So a fairly stable, but that's what I see a lot of action happening in right now, is the things that are, they're safe, right? 

[00:37:12] Damon Pistulka: And you said it too. I can't buy a business today and then go, Oh, my bad.

[00:37:17] We need to put a few more million into it because that few more million costs us a lot more that. 

[00:37:21] They gotta be, they're getting more pickier and they're getting, the values are lower. There's just no way around it. 

[00:37:29] Ronald Skelton: Business out there, they're looking at, okay, I may retire in the next, X number of years.

[00:37:34] What's the time frame to work with a company like yours? I know everybody has their own time frame. What's your minimum and what's your normal? If you don't have X number of months before you're wanting to get out of it, I can't help you. 

[00:37:46] Damon Pistulka: It's a minimum of two years. You can't, if you don't have to do much value growth, right?

[00:37:51] If you got to do a lot of value growth, who knows? I mean, we have clients that have been with us for four or five years and we just know we're on a value growth path. That's what we're doing. We're doing the right thing. They're doing the right things, and they're just getting it there because sometimes you're going to get to the point, just say, listen, David, my bakery on the corner is not going to be a $10 million bakery.

[00:38:10] I'm at a million now. I might get it to a million five. It's okay. Steve, we should probably think about how long you really need to be in your business before you can actually get out and, we're going to make it better and you're going to take some of the extra money you're making.

[00:38:24] You're going to invest that. And then together, that with the terminal value of your business, you're going to make your nest egg that you need to do with that. And it's a combination, but it, and it could take longer. I'm just saying in that case, but if you don't have two to three years, I always tell people, if you don't have two to three years and your business isn't, it's going to be hard to sell, just get ready to close it down. 

[00:38:49] It's a hell of a lot less stress. Run it hard until you get to the end and just go, listen, this is what we're going to do. I'm going to close it down. Orderly liquidation because would you rather do that and have a nice party when you leave. Or go through a year or two of leaving it on the market, talking to a hundred people that aren't going to actually buy your business and come into that same conclusion disappointed.

[00:39:15] Ronald Skelton: It is interesting. There are other cultures, right? I think it's Japan right now has a big problem. Same thing we're having. They have an aging, aging community. And, I was reading a couple of different articles from over there. They're saying right now, business owners, multimillion dollar businesses are being given away. Basically for, you have to qualify, you have to prove you can run it and stuff, but they're just transferring it for legacy and keeping the employees employed.

[00:39:38] They're just like, they're finding a fit and they're, their owners were just retiring out and it's literally a giveaway. It's just there's no value transfer or whatever. And it's I'd rather retire, give this to somebody else and give them a shot at it and then shut it down and fire everybody and sell the equipment.

[00:39:54] Damon Pistulka: That's a good path. If you can do it without, keeping the risk. And that's where some business owners are stuck because of leases or other things that they're going to be on the hook. And then you're like, if I got a couple of million dollars worth of equipment or something like that's still on lease, that risk is always hanging there.

[00:40:11] Ronald Skelton: Big manufacturing. I looked at a concrete plant and they had, three of their big things that move the concrete around where big cat, lifts and those things were 750 K a piece, right? My first thing I looked at is like, when the hell you need three of those things, right?

[00:40:24] One of them was older, but the other two were fairly new. And,like you said, it happens at tech industry where people get,a little more equipment than they really need. We used to call it, I was always like the director of operations, stuff like that. And I used to go head to head with CTOs all the time because CTOs would like to go buy a million dollar piece of EMC hardware, to put on the floor so they can tell their golf buddies they own one.

[00:40:43] And it was like, you buy that thing. I have to build, build it out, maintain it and use it. And it's not the best use of our money or time. Like it doesn't perform that much better than the, much cheaper, additions. But no, like they got to have one. Cause their buddy at the golf course did it, or EMC gives them a box office at the shark tank down in San Jose.

[00:41:01] Damon Pistulka: Yeah. You really need to make sure you're spending smart and at the end like that, if you could do that with a business and give it and get rid of the risk, deal with it, that wouldn't be a bad idea. If you don't need that cash, it's a lot less headache to, say I want to do something else.

[00:41:15] Ronald Skelton: So what, how do you take a look at these companies when they come in? What's the process somebody goes through when they first walked through the door? Is there a evaluation process that's going to measure where they are and then try to figure out where they want to go or what does it look like?

[00:41:28] Damon Pistulka: Yeah, it is. If I said it was a valuation, with a V at the beginning, it's a understatement because you really need to evaluate a company and really look at the different areas. Sales and marketing is a big one. Because if you're going to sell your business and you've been selling word of mouth and blah, blah, blah, and you and your buddy are the ones that are doing it, we really got to see that's going to be successful in the future.

[00:41:51] Then you look at your team, your financial systems and how you're doing that. And you got to work all the way through that down into the, in the legal aspects of your business. You got anything outstanding there that's going to, going to take care of it, but we go beginning to end when we do it.

[00:42:06] And then we do, what's the market given good companies now? And how do you compare to that? Is your gross margin about where the industry average is? Or you need a second wind? It's really, you got to make sure you know, you're at.

[00:42:18] Ronald Skelton: And then there's tiers in the market, right?

[00:42:19] You're at the SBA loan. If you really only want to get, an SBA loans, you're going to get, One X to three X, even a max. Or, if we can get you, if you want to work with me for three years and we can get you above $10 million, cause a lot of times these PE firms, each industry is different.

[00:42:34] I think in some manufacturing realms, it's hard to get a PE firm to dip below $25 million in revenue. But in some of them, like it depends on the market, right? So there's areas where that you, they're that gap between. I'm going to sell it to somebody on the SBA loan and private equity to be interested in this. It's narrow enough sometimes by working with a guy like you, they can go up to, and that's a higher multiple most of the time.

[00:42:57] Damon Pistulka: Yeah, we've done that a few times now. And it's usually what we're trying to do really. Because if you can go from, I'm going to sell the to my friend down the street, or I can sell to, at a lower, lower middle market kind of private equity thing where you're EBITDA, you got to get your EBIT up above a million at the, at a minimum, really, really to try and do it.

[00:43:17] But if you can get it up closer to five, you really have opened your options for becoming a platform on a smaller investment firm. Or a nice size tuck in for a larger investment. And your multiples go up significantly, right? From the first one on the street, you can do that.

[00:43:32] Then you go to the six plus, and then you might even go to the seven to 10 and you get into the higher range. 

[00:43:37] Ronald Skelton: Then you get the chance that you're more intriguing to the strategic buyers too. Because now you make a significant impact, when they acquire you, especially if they're publicly traded and they acquire you, it actually impacts their overall picture. A hundred million dollar company acquires a million dollar company.

[00:43:51] Doesn't make a blimp. A hundred million dollar company adds, $5 million to profit, now they've got a 5 percent increase in profit kind of looks good at their, on their stock. 

[00:44:00] Damon Pistulka: And they get the value increase from where you're at, which is good for you. Which is theirs and can be in public as much higher.

[00:44:07] And they, they gain value overnight. 

[00:44:11] Ronald Skelton: Yeah, exactly. And then they've got access to all your customers too. Which is kind of what I'm looking for, and they can cross sell, up sell and repurpose your customer base.

[00:44:19] Damon Pistulka: And that's why they do it. That's why they do it. 

[00:44:22] Ronald Skelton: So how do people reach out to you? What's the way that you want people to connect with you, work with you? I see you have quite a few resources on your website and everything. 

[00:44:30] Damon Pistulka: Yeah, we do. Our website, we got a resource page on our website. They can go there, download guides, checklists, all that kind of good stuff. They can reach out to me on LinkedIn. Or, just get on our website. You can schedule meetings with us there.

[00:44:42] Do it that way on the ExitYourWay. com website, do that. 

[00:44:46] Ronald Skelton: That was ExitYourWay. com. It'll be in the show notes. So one last thing before we call it a show today. If somebody can only remember one or two things from the show, what would you want them to remember?

[00:44:56] Damon Pistulka: You have to be, if you're going to sell your business and you talk to three business brokers and they're all telling you what you want to hear. You probably need to talk to a fourth one. 

[00:45:06] Ronald Skelton: Okay. I agree with that a hundred percent. If you're being told what you want to hear, you're probably being told something that's not a hundred percent factual.

[00:45:13] Unless I guess there's, there is a case somebody has done a lot of the research and they have their expectations, but that's not common. Well, I appreciate having you here today. And I think we should call that a show. 

[00:45:22] Damon Pistulka: All right. Thanks for having me.