E200: Buying or Selling a Small Business? Get the Insider Tips You Need to Secure Your Deal

[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit Podcast. Today I'm here with Patrick O'Connell and he is a mergers and acquisition advisor. And we're going to talk about all things buying and selling small businesses. Thank you for being here today Patrick.

[00:00:12] Patrick O'Connell: Pleasure to be here.

[00:00:13] Ronald Skelton: And I always start with the origin story. Kind of give us your origin story.

How did you get into this space? What made you wanted to become an advisor in the mergers and acquisitions space? And let the audience know who we're speaking to today.

[00:00:26] Patrick O'Connell: Yeah, certainly. So my name is Patrick O'Connell. I am the Founder and Managing Director of M& A Transaction Services at O'Connell Advisory Group. We expertly assist buyers and sellers through acquiring and selling private businesses valued between one and $20 million. We specifically offer services such as financial diligence, quality of earnings, purchase price negotiation, and really serve as a partner for folks looking to buy those businesses. 

Before I got into M and A, I was fortunate enough to go to James Madison University where I received a degree in accounting. Worked, several years in larger transaction shops, and now lead a small team and, which primarily operates in that lower to middle market.

[00:01:21] Ronald Skelton: Awesome. And to, to all to offer quality of earning stuff and a fractional CFO and those types of things. I had, I figured you had some type of accounting background. Cause it was a very, very accounting centric. Let's talk about the type of transactions that you've done or businesses you've worked with in the past where people can get an idea of the scope. I see you've done quite a few deals in the notes you gave me.

So give us some examples of the different types of businesses.

[00:01:48] Patrick O'Connell: Yeah. So I like to call myself industry agnostic. I've done a wide variety of industries. Some that come to mind recently, HVAC, kitchen remodeling, construction, pharmaceutical. I do spend a fair amount of time in service based businesses. It's the quote unquote, boring cashflow businesses, landscaping, roofing, et cetera. I like to think I can do everything outside of healthcare.

[00:02:18] Ronald Skelton: Okay, so that's kind of the end thing these days. To everybody wants to do something in the services business or around it. Like I was telling you before the call, before we started the recording, I'm involved in a role of service type companies, but the manufacturer of like kitchen cabinets and that type of stuff. And, uh, I network with acquisition entrepreneurs all the time. And the thing that I've really noticed is probably more than a third of them, maybe even close to, half of them are looking for some type of services related companies. It's a very common, the boring business thing. So I, when I got into the space, I figured it'd be more ever, everybody's going to be after a SaaS or a, or, you know, something like that.

There's a fair amount. That's a pretty good chunk of people too. But I was, I'm really kind of shocked at over the last two years, how people have really taken under the wing of wanting and looking for, service based companies. What they call boring companies, mom and pop manufacturer, you know, small town manufacturing companies and that type of stuff.

[00:03:18] Patrick O'Connell: Yeah, certainly and I agree. When I started out in big transactions, working with a lot of larger private equity clients, I was also surprised that some of the industries they were targeting. To your point on the manufacturing, I worked with one private equity firm who bought a series of plastic manufacturers in California as part of a roll up strategy.

And then a few months later it was working on software deals. So definitely a combination of the expertise with the PE firms, as well as like what their strategies are.

[00:03:53] Ronald Skelton: One of the things I find interesting is I move around quite a bit. I told you before the show, I'm living in the Redwood forest, Northern California. What I didn't tell you is this is a mobile studio and our house is a tiny home like you see on TV. So we can pack up and go anywhere. And, we were in Dallas for a year or two before COVID hit.

And as I started my mergers and acquisitions space, we were just going to Dallas. And,Dallas is big enough. You have everything. Manufacturing, like if you look at the portfolio of businesses available to browse through on any brokerages website, and let's just go with the biggest one, big, BizBuySell, right. 

If you go to one of those guys, the big guys, and you look through there's everything there, right. I move into the Redwood forest of Northern California, and I'm probably 20 miles from anything that considers a town of over a population of,50, 000, right? 

We're probably 25 miles from at least that. This town has a population of 4000 during the weekdays and about six or seven during the summer weekends. It's a vacation destination. That said, I get on here and I was like, you know, what's local here. I'm just, out of curiosity. And there's very, there's a lot of wineries because I'm surrounded by vineyards. And I'm close to the ocean.

So there's that, but there's no manufacturing here. There's no, very little. Maybe, it is California too. So maybe it's because of the expense of running some of that stuff. It's basically restaurants, vineyards, bars, and that type of stuff. So I think, maybe some of it has, is a little bit dictated by where you're at and where you want to live. But, what's common, you've done the full variety.

There's gotta be some commonalities between, you know, software versus brick and mortar and that. There's some probably that, when you're doing it on the acquisition side, there's probably a set of steps or a set of,actions you need to do to get through the transaction that is uniform across all.

[00:05:43] Patrick O'Connell: Yeah. I mean, regardless of the industry space or the parties involved, the process is pretty similar. As you know, I've had the pleasure of listening to a lot of your guests, great M& A folk and discussions. It really is a combination of who are the parties involved? What are their motivations? What does their timeframe look like?

And then really starting at an LOI or preliminary negotiation, conducting comprehensive diligence, and then negotiating a fair purchase price. So both parties walk away, giving up some concessions and then ultimately a fair purchase price.

[00:06:21] Ronald Skelton: And then across the industries a lot of people don't if you're new to this you probably don't realize that there's actually different valuation models across different industries. Let's talk a little bit about like, what you see, I know I've seen you guys do some price negotiations, a little bit of,you know, valuationreview and stuff on that.

What do you see that's common amongst them? And what do you see that's different than the valuation models?

[00:06:46] Patrick O'Connell: Evaluation is a tricky subject. I'm asked quite a, quite a bit, what is this value worth, et cetera. Ultimately in main street, lower middle market deals, it comes down to market comparables in the last 12 months of what similar to a like businesses look like. Assuming you can find, let's say a handful of businesses that make sense from an optics and strategy space. Really it's fair to assume that those, the purchase price should be in line with what others were willing to pay.

That's just a simple fundamental capitalism and market rule.

[00:07:26] Ronald Skelton: Yeah. I mean, that's the market, standard capitalism rule, right? A business is worth what the market's willing to pay for it. But what I was referring to is like, for instance, I thought, you know, as I come in here and learn one or two different valuation models and,I have this down just three, four years ago when I got into this. I started doing the research and I see that some colleges and universities teach as many as 130 different valuation models, right?

So, I was like, there are some very standard ones at this level. Especially at the lower middle market, but, like multiples of EBITDA, compared to as long as, as long as that that's in line with the, like you said, the comparables in the market. See a lot of people trying to do that one. Then I got into where I'm acquiring newsletters and digital assets that are very high profitable, and they don't do that at all.

They actually go off of multiples of revenue, and it's off of monthly multiples. So somebody says, you know, the newsletters for selling, they want 32x. That's not 32x, EBITDA or SDE.

Which would sound crazy because, those are yearly calculations. It's 32 times the trailing 12 months average of their revenue, right? So if they're making $1000 a month revenue, they're going to want $32, 000. And it's because, if it's run right, a newsletter podcast and those type of things, I wouldn't say podcast.

And I kind of threw that here because we're talking on one. They're not nearly as profitable, newsletters and stuff like that. If you're running them right, they're usually at, how do I put this? If you're running a newsletter and you're at 75 percent profit margin or less, you're probably messing it up.

Like they're, they're extremely high on the profit margin. So that's why they can trade at multiples of revenue as opposed to SDE or anything. 

[00:09:05] Patrick O'Connell: Yeah.

[00:09:05] Ronald Skelton: a, and

[00:09:08] Patrick O'Connell: Yeah and if you think about think about like industry specific, software a lot of times is valued on revenue versus service businesses, multiple of EBITDA. 

[00:09:17] Ronald Skelton: And things come into play. Like, do they have recurring contracts versus do they have, just one and, one and done type of marketingthose types of things. Okay. How does a company like prepare themselves? What's, what do you, what would you suggest for both sides? Let's talk about how a seller prepares themselves to walk through the process and anything you see that's unique inside of the way you do it. Or, we always talk about buying and selling, but let's talk a little bit, cause you're an advisor too.

Let's talk about growth through acquisition. If I'm a business owner and I come to you and go, I want you to help me buy four companies to expand. What is the process that, that buying company needs to go through to prepare for that process, to that activity I should say?

[00:10:00] Patrick O'Connell: Yeah. And I work with several, I like to start off the conversations with what kind of market are you targeting? What sort of businesses? Assuming that's established. Discuss kind of what's the pipeline look like? How are you going to find these deals? If they have a team that works with them? If not, there's several channels such as private off market listings, marketplaces, BizBuySell, et cetera.

And then it's understanding how they're going to finance the deals. If they want to do a few transactions, it's, it could be quite expensive. Do they have private investors, lenders, et cetera? What does that capital look like? Because once these businesses are identified, it's a first come first serve. You sometimes have to move quickly, at least in the early phases.

So it's understanding what they can afford to purchase, et cetera. And then having the other levers to pull such as due diligence providers, lawyers, deal team, et cetera, to quickly execute on the transaction in the early phases. And then check off all the boxes to ensure that investment makes sense.

[00:11:12] Ronald Skelton: So, When you say investment makes sense, just describe some of the elements that a business should look at to make sure that they're acquiring something that makes sense to them.

[00:11:25] Patrick O'Connell: Yeah. Making sense. One, can the business service the debt in order to purchase it? What is the business look like in 12 to 24 months based on what the buyer's criteria was? Are they looking, is this their first purchase? Is this part of a larger strategy? Does that strategy make sense in terms of the other things they purchased?

There's a lot of elements depending on, who's buying the business and what they're really looking to leverage at off of it.

[00:12:00] Ronald Skelton: Where do you, where does your process stop as far as the, so if you think about scenario I told you where somebody comes in and says, Hey, help me, help me to acquire some businesses. There's a prep work, like, okay, what are you looking to buy? All right. There's the lead generation. Let's get some businesses to talk to, right?

There's the things I know you do. Cause by your profile, what you told me already, there's the financial due diligence. There's the letter of intent, uh, review. There's the,statement of earnings or looking at quality of earnings, making sure that their, their financials look good, that type of stuff. 

But, how far do you take them through the process? For example, most of these deals, if they do fail, they fail, especially in the mid and up markets. During the integration process, they fail to integrate them well. Do you hang out with the companies you work with any of the cultural side of things? Are you pretty much a front end advisor?

[00:12:53] Patrick O'Connell: Yeah. So I like to think we're a full suite acquisition advisor from start to finish. Meaning, we'll work with clients, identify companies to purchase, analyze them, work in the LOI phase, conduct comprehensive diligence, negotiate purchase price on their behalf. And then more importantly, stay on in some capacity in the first one to 90 days.

We found in our clients, hopefully can speak to the same benefits. Providers or acquisition advisors are often the second or third closest person to the buyer themselves, given they've been significantly invested on a time basis, understanding the business, some pitfalls and possible synergies. So we will work with our clients in those first one to 90 days to make sure they're just setting themselves up for success in the longterm.

[00:13:53] Ronald Skelton: Okay. Talk a little bit about what's out there on the market right now that, we keep hearing the phrase silver tsunami and we hear this baby boomers are retiring and that type of stuff. Talk about what you're seeing that's truly available because I do see that. But I also see a full mix of everything else. To people wanting to switch careers, people, divorces, illnesses. It's not literally nearly, in my world I don't think, I haven't seen this. It's nearly as heavily weighted in that silver tsunami is it's being marketed. What do you see? And when you're out there looking around for your clients and for you, uh, for prospective clients?

[00:14:30] Patrick O'Connell: Yeah. So I'm seeing certainly a lot of folks looking to retire.When we'll first establish contact with them I always ask, why are you selling this business? XYZ. There are some other elements, some, you know, it was two partners working on a business and they unfortunately were separated. So it just didn't make sense for them to continue operating it together.

Some want to just really retire. They're sort of burnt out from the 30 years of being in business. And then others just want to do something different. They're ready to move on. They have multiple businesses and they just want to sell off one of them.

[00:15:12] Ronald Skelton: Is there any particular, one of those classes, it's easier to work with and more conductive to getting the deal done? Or is it kind of just, hit and miss are all different?

[00:15:22] Patrick O'Connell: I think those that operate a few businesses, most recently we've had more success. The ones with, this is my legacy, this is a part of my family. We've closed on several of them, but there's just a little bit more of emotional elements involved. Versus someone saying, Hey, I run three businesses. I just want you to buy one of them.

[00:15:44] Ronald Skelton: That's interesting. Cause I kind of smiled when you said that, cause I consider myself as an acquisition entrepreneur. One part therapist and two parts,looking to buy and run companies because, you have to get inside of there. You got to build deep rapport. You got to figure out what is the, what's next for these, these individuals and make sure they live into that vision of what's next.

Do you, you are taking that, do you really kind of dive deep into what are they doing next to help? It's mainly to help them close, right? So when they start getting kind of cold feet towards the end, you can remind them why they're doing this and why they're here.

[00:16:22] Patrick O'Connell: Yeah. So I always, and I either read this in a publication or coined it myself, I always say that deals are one half financial, one half emotional. Obviously there's a lot of money on the line. There's serious investment from both parties, but at the end of the day, buyers and sellers are human. There's an, there's an emotional element to these things.

Which isn't very important and needs to be considered throughout the process.

[00:16:52] Ronald Skelton: It's actually been scientifically proven in many studies that we, anybody who's not, anybody who has emotional capabilities, if you're not a psychopath, if you have the capability to be emotional, we make our decisions off of emotional decisions and we back them up with logic, right? And, one of the problems that I see regularly in this and in the rollups I'm involved in, in the conversations I have with sellers is, they don't know what they're going to do next. Or maybe they do, but when it comes down to the very, the wire and it's time to sign things over, they're so tied into this or so tied their sense of identity is built around their company, right? 

You ask the average person, who are you? And they'll tell you what they do. So, especially entrepreneurs. You walk up to an entrepreneur and go, Hey, I'm Ron. Tell me about yourself. And they don't tell you about they got a wife and a kids and they tell you about all about their business.

[00:17:45] Patrick O'Connell: Yeah. And that's, that's some, that's one of the things I love about entrepreneurship. It becomes your identity.That's why I support folks in the ETA community looking to really just change their life for the better. While I'm an acquisition advisor, I'm also an entrepreneur at heart.

I just, I love the flexibility and really just the enjoyment of seeing others kind of step into that journey.

[00:18:11] Ronald Skelton: In your role of, looking at these businesses and in your lens of having the accounting degree. Having done, you know, 50 plus transactions where you looked at that. What are the, some, some of the common things that you see, what makes your job harder?

I guess that's the word I'm looking for, inside of the financials, inside of the financial review.

[00:18:31] Patrick O'Connell: Yes. I work with definitely both sides of the table. I think a lot of it is in the early phases of it. Just unwilling to have the ability to make concessions. A lot of folks have a certain dollar amount that they're, if they're selling the business, this is how much money I'm going to, this is how much the company's worth.

Regardless of what rhyme or reason say, I'm either going to get it or just walk away. And then on the flip side, the buyers are the same thing. This business should be worth X if it's not like, there's no room for negotiation. And having done,50, a hundred at this point. There's always concessions that need to be made to get these transactions done.

It's really just finding the right set of parties to complete these.

[00:19:22] Ronald Skelton: We do a lot of cold outreach and inside of that, so when you're listed out there, when a company is listed, they have an advisor. Even if it's a, a broker or even a new broker. Somebody has sat down with him and kind of explain the process, explained, valuation, how it all works and set some of those expectations.

Sometimes it's good. Sometimes it's bad. We're not going to get into my opinion of your average broker. Most States don't have any requirements for one. That said, if you look at conversations with the off market, like if they don't have that, you end up having to play that role. And very often when I reach out and we reach out all the time, like we're currently reaching out to cabinet makers and stuff.

I was telling you that. One of the concerns we always have is they think they hit the lotto, right? They look at our profile. They look at, you know, we've been in business for a long time. We've owned multiple companies. I've owned real estate investment firms and stuff. And they think we're going to overpay for the business.

So they get this thing where they think they just hit a lot, they just pulled out the winning lotto ticket. And in some sense they have, because we're going to pay a fair valuation for the company. But that, you got to set, when we're building rapport in those first few calls, we have to explain to them and be kind of that broker mentality of, look, this is how companies are valued in this space.

You can Google it yourself and verify what I'm telling you is true. But in this space, companies are going to sell between 2x and 3x your seller discretionary earnings or your EBITDA. Which is, calculated a different way, but basically,we're going to look at your tax returns. We're going to be in your financial statements, and that's how we're going to base this.

And, it's interesting in the home services realm and a lot of businesses, they're like, well, can we just go off, if I give you the numbers can we go off of that? And you start asking why? And it's, I think it hasn't happened on this roll up I was telling you about. Just because we just started and I haven't talked to enough business owners to know. But in a lot of spaces business owners tried to look at, if they don't have a broker in place to explain things, they think a lot of their cash based business can be calculated into that number. And, uh, the joke that I like to tell is, you can only steal it once. If you didn't pay the IRS for it, I can't pay you for it, right?

There's just no way to prove it, track it, and it could get me in trouble. Do you do a lot of off market transactions where it, where it wasn't listed? Somebody asked you and told you they wanted to build their manufacturing company or there are, their business and you just reach out to the market and see who is for sale?

[00:21:45] Patrick O'Connell: Yeah, so I've worked with a few, and to your point about valuing the business based on the tax returns, I mean, that's quite literally how the SBA assesses. I work with several lenders who are great andit just makes sense you know, that's, that's how the business should be valued.

Obviously there's a balancing act between tax returns and financials, but that's ultimately what the business is worth.

[00:22:09] Ronald Skelton: Yeah, but there's still that, you know, especially for the off market ones. There's still this, there's this myth out there in the market that somebody is going to come along and pay you. It happened in the real estate space. So way more than what you wanted for it.

But my real estate investment firm, we constantly send out mailers and stuff to all kinds of different potential sellers, right? High equity,non resident meeting. They're not living in the house. They've owned it for a long time and it's either free and clear or it's high equity.

And then we could actually do things in some cities where it's really cool. We could pull like eviction notices. So if you try to evict somebody, we know that's a rental cause you try to evict somebody. We know you're frustrated, right? We know it's high equity and we were just, we could correlate this data.

And, on those calls,you would call somebody up and they'd say, they have a $400, 000 house. And they go, yeah, I'll sell it for 600 K. They think they've hit the lotto. And, um,I think some business owners do that too. When we talk to a investor, acquisition, entrepreneur and stuff, they think they're getting, they heard somebody on the internet got 10 times their, uh, profits or their income for it.

And they think they get 10 X too. They don't understand there's a, there's an arbitrage to this game. There's a, there's levels to the game. That 10 X 12 X is there. If they can get their tax returns above 10 million a year, they can get them, right. I was just curious in that space that you're out there, you're talking to the random, or a, not random, a collection of the business owners.

Most of the people that come to you, they already had evaluations done, or do you get to get a chance to sit down with business owners and help them come to realization of what their company's worth?

[00:23:45] Patrick O'Connell: Yeah. So I've been fortunate to work with all parties. Business owners who may be looking to sell in the next 12 to 24 months. We start to put together a plan of what's your strategy? Why are you selling the business? What are some of the operational challenges you have today? And how can we fix them?

Because ultimately, what I communicate to sellers and owners is I work with a lot of buyers. This is what they look for. If I was buying your business based on our deep discussion, these are some of my concerns. So let's start to develop a plan, which will not only make your business better today, it'll also make it more valuable. So it's a win win.

[00:24:35] Ronald Skelton: Okay. What are some of the common ones that people, you have to get people to work on?

[00:24:41] Patrick O'Connell: Getting a better, getting a better management team in place. A lot of these owners in the service business, they're the sales pipeline. They're a lot of times their partners are significant. Others are the billing people and they do the accounting and payroll. So, assuming that they plan to leave the business, which almost all do. There needs to be other people and employees in place that can quickly continue the business with that new owner. That's one of them.

[00:25:13] Ronald Skelton: Awesome. And I see that constantly, right? The preparation to sell is often, you know, a multi year process, right? They've got to, uh, get their financials straight. And if they trying to minimize taxes for the last three or four years, and they want to maximize the exit, then they need to take the time to, to turn that around and maximize what they're showing as profit and what they're showing as income.

That said, there's also like how many hats they're wearing and disassociating themselves with the company a little bit. Being backing off. There are buyers out there looking for buying a job. There are you know, service professionals who want to grow their business and buy other ones. But the pull of those is way smaller than the pull of, everybody looking to buy a plumbing company, right? 

Not everybody that wants to buy a plumbing company actually wants to turn a wrench. So, I can see, definitely see the need to, bolster that team and stuff. Do you run into cases where, I'm just saying, thinking of my own experiences, where somebody spends the time, they fix those things. 

They do what you say. And then now they've got a company that doesn't require all their time, right? They got a company that it's running fairly well and they're thinking, I don't think I want to sell it anymore, right? If you think about it and I, I'm going to go sell my car, I'm gonna go trade my car in. Before I do it, I want a good trading value.

So I'm gonna go get it detailed. I'm going to go have it washed. By the time you get every, you know, I'm going to go fix these minor little clinks in, in, in dense so that I get the best value out of my car. And then right before you go trade it in, you're like, I don't know. This is pretty nice. Why would I trade this in?

I don't have a payment, right? I see that happening in the business realm a little bit. There's actually a phrase that I've heard recently. I think it came up a couple of times in the very beginning of this podcast. Where they said acquired to retire. They would acquire a competing business that was better run, fold theirs underneath it, and then leave that management in place.

Especially if it had a GM. If their owner did everything, then they could fold it underneath it. Now they, now all they do have to do is, oversee it. They work four or five hours a week and uh, do that. Do you see any of that going on?

[00:27:18] Patrick O'Connell: I do. And some of them communicate back when I follow up after a lot of our projects are complete and they say, the business is running great. We've boosted our profitability XYZ. I'm going to hold off for selling for now. And then, I've had a few folks come back one or two years later and they say, okay, maybe I'm ready now.

And the benefit is, A, they went through the process. They have a lot of the documents, and the company is just in a better position for sale, so it just makes it much easier. So it's kind of, it's kind of a win win, but, at the end of the day, if they're improving their livelihood, we've done our job.

[00:27:59] Ronald Skelton: I've met more than one business owner that went through the process and that's, they wanted to retire and move closer to the kids in Florida or whatever. And they go through the process you're referring to and the process that all business advisors and brokers will tell them they need to go through to prepare it for sale.

And then what they find is they can actually run it remotely now. Cause they've got a great manager in place. Maybe they have to come back every once in a while and check on some things, but I know at least three business owners right now. One of them is a competitor to one of my business. He owns a small pest control company.

He lives in Florida, right? And his business is, in another state. And he only goes back twice, two to three times a year to check on it. Cause it's ran well, the employees run it. And he asked, he's done the job that the broker told him. He did so well, he doesn't physically need to be there all the time.

And, uh,that's an earmark of a company prime and ready to sell. Go on vacation for two months. If you come back, you're making more money than you did before you left, you're probably ready to sell the business.

[00:28:56] Patrick O'Connell: Yeah, absolutely. I mean, some of the best businesses I've seen, have had an owner, which is just not involved and they have very, very proficient GMs, head of sales, sufficient fractional CFO. Like those are the three levers, like you have to pull and really they're not much, they're not involved other than the ownership stake.

[00:29:18] Ronald Skelton: What are some of the strategies people can, um, to use, to set themselves up for that? Growth by acquisition is an incredible lever. I mean, that's why, if you look at why PE firms do what they do, and the reason they can grow year over year at 30 percent or more, is because they go growth by acquisition. I see, we see the big guys doing it, right?

The Googles of the world and the Amazons. They buy stuff weekly, if not daily. Why do you think that more small mom and pop businesses don't get into this to, to grow?

[00:29:47] Patrick O'Connell: It's quite time consuming. Especially if you don't have a team in place. If you think, not even thinking of Google or Meta or whatnot, who have probably full buildings of M& A teams. It just is very time consuming. Even when I work with part time folks looking to get into ETA or whatnot that are trying to manage a W2.

I've found the most successful M&A folks are just a hundred or 200 percent all in. They eat, sleep, and breathe this because it does take just a considerable amount of time to find the right deal, execute, implement a correct strategy. There's just a lot of moving parts.

[00:30:32] Ronald Skelton: And if you think about PE firms they have, that's what they're built around, right? They are the M and A team for all the companies they acquire. what I'm curious is, is why, you know, you build a company, you're starting to do a million, 2 million, $3 million a year. Typically you're going to have 50 plus to a hundred employees.

Why not have three in the company that, some of your, a CFO quality, somebody that's really good with financials. Somebody who's really good with generating leads and, starting conversations. And then, an offsite corporate attorney that can review the deal. And basically you have a sales department, you have a marketing department.

I don't understand why you don't have a growth or acquisition department in companies. why it's not more common inside of companies doing two to $5 million a year.

[00:31:17] Patrick O'Connell: Yeah. And that's a great point. And I wouldn't be surprised just given from my media outlets and whatnot. If more of those things do start to be implemented, because there is serious growth potential in really just building through acquiring.

[00:31:33] Ronald Skelton: Yeah. You know, when we look at what we're doing and you're,you're in this space, I'm in this space, it's very logical to us. But as the, as we're looking to acquire these companies on the roll ups, one of the things I always pitch when somebody brings me in on a roll up, and this is the, the second one I've been involved with is, great, let's buy these companies. But let's teach a team at that company to, to acquire and make it a self propelling machine. So that, you know, at some point, somebody on the permanent roll up is actually sourcing deals for us.

And then we teach them what we're looking for and why we're looking for it. And then later on, they come all the way to the table and say, Hey, we're ready to close on this. And all we are as a board of directors going, yeah, that's a good acquisition. And yay and nay. And then when we sell the company, not only have we sold something that says, yeah, we built this through a roll up, but the last four transactions they did on their own.

I think, they think that will add a multiple or a, an avenue to sell on some of these, it would be incredible. Yet to see it done.That said, you know, I just don't understand the logic that why it's not in place.

[00:32:40] Patrick O'Connell: Yeah. And as far as sharing that knowledge and whatnot, I mean, I do that with my team. I've been looking to make a better effort in doing short looms or recording just my day to day and just kind of talking out loud what I'm doing. To ultimately kind of pass on that knowledge and resources, because it's much easier to observe someone throughout the process and quickly learn, pretty much like a hands on learning. Rather than, you can read as many books about how to buy a business, but until you actually do it or go through the process, it's just a little bit of a different game.

[00:33:18] Ronald Skelton: Yeah, I've interviewed 200 people, just probably 210 by now, 215. And it's still different than actually getting it done, right? To set through the transaction, set through the due diligence and to set through a close is totally different than, all the questions and answers. I've asked so many people, and all the books I read and I've interviewed 47, 48 authors by this point about their book.

I've read many of those books on the subject. And I still, it's still different. It's still different to walk through the process. And it's different a lot of the times because we're not dealing with machines and logic and stuff. We're dealing with humans, human emotion, frustrations, you know, all the different things that come up. Frustration with the process, you know,the standard communication issues that happen in all relationships, unmet expectations, basically, is what it boils down to. Somebody expected something, or they just, they have a vision of how they think things should have went, and maybe that's just not the way things go in this industry or the, or, it didn't go in that particular deal. And you have to deal with all that. You have to be able to detect those things.

[00:34:24] Patrick O'Connell: Yeah. There's certainly highs and lows in any transaction.

[00:34:28] Ronald Skelton: Yeah. So I see something in the notes you gave me. You said you could teach me how to quickly review perspective deals and the questions I can ask owners. I probably, I always say I kind of developed a gut feel for things, but it may be my own fallacies. A lot of times it's like we turn away from things like, yeah, this just doesn't feel right.

And it's just not a right fit. But what are some of the ways you'd recommend our listeners to speed up the process of reviewing deal after deal after deal? Because you got to go through a stack of them to get what you're looking for.

[00:34:58] Patrick O'Connell: Yeah. And to that point it was in terms of after speaking with dozens of first time searchers or whatnot who wanted quickly to review deals, I figured, Hey, let's just try to share this topic of quick things I can pick up a SIM and just say, good deal, bad deal. Let's move on. So a few of those are just asking like very high level without, you know, NDAs or not giving away secret information. Just asking the owner, what does your day to day look like? And that's really to get an understanding of, is there a general manager in place? If they say yes, my day to day is not very involved. A lot of them do say it, maybe going one inch further and saying, do you have a GM in place, et cetera. Because ultimately, if you're not trying to buy a job and they are running the day to day and whatnot, you need to move on.

Like that's, that's a deal breaker. A lot of times you can delineate that from the size of the business, smaller businesses, you're likely going to have to be heavily involved, et cetera. Another one is, understanding the customers and like the costs around the business at a high level. What's the percentages of various costs? Such as salaries, are you using subcontractors, et cetera. A lot of times in service based businesses, contractor relation, contractors, they use a relationship based and that relationship is from the owner. So, I've seen buyers be successful in transferring that relationship over, but there is no guarantee you'll get the same price or whatnot. So that's also another thing to consider how confident you are stepping into that shoe, et cetera.

And then the last one is really just doing sort of like high level math of if you're going to fund this through, let's say an SBA loan. They have certain debt service coverage limits and ratios. So it's just quickly calculating what the net profit and profitability looks like based on the asking price.

A lot of times, if there is a serious discrepancy between like a listed price and what the actual price should be, it's best to likely just move on because you're too far apart, even if the business looks great.

[00:37:29] Ronald Skelton: I've seen that, that I had just had a case of that, that relationship not transferring over. I pulled a listing off nearby. Here's something I thought I might be interested in. And, the lease was the thing that bit me. Right? So the guy had been, I don't want to say what it is because I just told you where I live and I'm going to say something really bad about this.

But, let's just say it needed a fairly large lot, not a car dealership, but it had a lot of space. The landlord, this space is in California, so land is expensive. Landlord had been nice to the previous owner because they've known each other for the last 20 something years. He's been there and hasn't raised the rent quite some time.

So, in the discussion of what it looks like to stay on that in that location and location is central for this particular type of business because it's selling stuff. And, um, landlord comes back and says, yeah, yeah, the lease that he's been paying is irrelevant. Like, okay. What do you, he told me he's paying $3700 a month.

What are you looking at? He goes, well, I'm not going to lease this land out to anybody else for less than 12, 000 a month. And I was like, okay, the business doesn't work anymore. That, that was significant enough.With SBA loans and everything else it would take, it's a $4 million tiny type of transaction. With the debt cover severage ratio, and you just tripled, rent almost four times rent.

It just doesn't work anymore. Nobody's going to be able to buy this particular business. And the guy really honestly doesn't care because things have popped up around him and he can sell it for such a profit. Somebody could put, it's a big area. Somebody could put in a small apartment there or a multi story living unit there, and he gets millions. So that friendship, the friendship, it's a lot of, in a lot of cities where the city had developed around a little business, the lease is what kills the deal. The lease with the new landlord, a lot of people, they overlooked that too. They think on buying the business, you got to remember that you got to be able to transfer that lease over.

You got to be able to negotiate and, stay in that unless you plan on packing a business up and moving it. And I've yet to see a business move that didn't have some hit. A friend of mine owned and I always helped with him and at some point I had some minor stake in it, martial arts studios. And we would, we moved one of them literally around the block and to a bigger facility.

We lost 12 percent of our students.You couldn't see it from the window from where we were, but it was literally around the block and everybody knew, uh, the 180 students that were going to the school knew months in advance because we took him over and gave him a tour. We went over, but it was just enough of an excuse that, a big chunk of them just never, never came over to the new facility.

It happens every time. And, uh, if you can't, if you can't negotiate with, that's just one, one of the vendors, your leaseholder is your, one of your vendors. And these service industries, like we were looking at electrical contractor and he, two thirds of the guys doing the work were subcontractors, right?

He's been in business for 30 something years. And, a lot of these guys like, Oh, my dad did business with him. And that's the rate my dad gave him. And he probably, I promised my dad I wouldn't raise rates on it, but you're not him.

[00:40:36] Patrick O'Connell: There's some, and that's those and the things you speak to, are the nuances people often overlook if you haven't done this a lot. To your first point on the rent, very overlooked. And that's something I actually have made a point to discuss almost on like the first or second call. Just to put it in their mind of, hey, who owns the land?

What does that look like? If the seller owns the land, but they want to keep it, that's a little bit easier to work with. You can kind of easily incorporate a fixed rent price over 5 years with a 3 percent escalation. As well as a right of 1st refusal, which limits the risk likely that will be able to be mitigated.

The 2nd piece in terms of contractor relationships and whatnot, I actually did a deal in November, which we spoke before we jumped on, it was the kitchen remodeling company. And the owner's son worked as an employee for the business. And he actually would effectively just tear down the bathrooms. For his annual salary was much lower than what the new owner would have to pay for a contractor to come in.

To the point where it was about a three to $400, 000 cost hit that the new owner or my buyer was going to have to incur just because they were only paying $500 per teardown compared to after calling a few subcontractors. I think they quoted at 3000. So just, just little things like that. You have to be looking out for when you review these sort of transactions.

[00:42:18] Ronald Skelton: I always have a, I never tell the seller this, but I always have a little org chart available in my notes. I draw a little org chart and I always put, general manager who's running the day to day, sales manager who's running sales, who's closing the deals, right? And I put underneath that marketing because somebody's providing content.

Who's handling marketing, marketing to set the sales guy up for a win. And then, you know, and that's just my structure. I don't think necessarily, I'm a marketing nerd by previous trade. That's what my MBA is in. I don't necessarily think marketing always falls on ourselves, but in my mental work chart, that's where I put it on this.

And then I look at things like accounting, who's doing the accounting. And as we're doing cox, I rarely just straight up and ask because I build a lot of time. I just build, I'm building rapport with the owner. Tell me the story of your business. Tell me what you created, how it works. What are the daily operations like?

And then occasionally I say, cool, who does the payroll? And, you know, you'll find out very often and it's like, Oh yeah, my wife does that. It's like, cool. She got her own salary? And when I see the, when I see the payroll chart, is she going to be on there? No, no, no, no, no. She just does it. It's like, cool. Is she going to work for me for free? 

There's a, there's always at least in small companies, I say under 50 people, there's always a couple of people out there that do something because, even if it's the wife or the son or, or somebody comes by and does something and helps out, that they don't really charge for the under charge considerably for. And you just got to track that stuff.

[00:43:42] Patrick O'Connell: That's why a lot of these businesses have a hard time selling because they didn't plan for that. Their profit, they haven't raised their prices in forever. So their profit margins are too lean to cover all the roles that need to be replaced when they leave, right? Yeah. And on the flip side, some of the knowledge and content I've been sharing is, anyone can read an income statement. At least someone who's buying a business should be able to read it. What a lot of serious risks are in the balance sheet. Like just because the owner's salary is 50, 000, he may have distributed himself 500, 000.

I was working on an acquisition of a brand agency in Manhattan and the two owners took zero salary. After receiving the employee head count in the payroll report I was like, Hey, where are the two co owners salaries? Oh, we don't take them. We don't burden the P and L with them. I'm like, okay. So I went to the balance sheet and they were each taking 500, 000 out.

So I said, okay. Considering if they've each paid themselves 150, 200, 000, it effectively eliminated earnings because the business couldn't support it. So just things like that, you need a second set of eyes if you're not comfortable with it, because it's just very easy to manipulate things like that.

[00:45:05] Ronald Skelton: It is. And it's, it's not always, it's rarely as malicious as you, as your first instinct thinks it is. When you see something like that, man, they're trying to rip me off. And it's not really usually that. It's usually just, they didn't know any better. Be honest, most of these business owners were never, never went to college like you did to get a financial degree.

If they went to college, it wasn't for to be a CFO, right? They don't have an accounting degree. But they got stepped into and nobody taught them accounting. So the, to the extent they've learned accounting is to keep their personal tax person off their butt, right. So when they, I grew up, my father and I, my dad owned a painting remodeling business.

He remodeled houses. I honestly remember going with him to the guy that did our taxes. And my dad would have this brown paper bag full of invoices and receipts. And he would have the top was rolled down and it would be stuffed in there. I mean, they would be stuffed in there. If he was kind, sometimes he would break them up and group them by month and by job site, right?

So they'd have paper clips on them. But it literally hand this stuff to the guy and the guy would just shake his head and says, okay, it'll take me a few weeks, but I'll get this taken care of. For my dad, that was, by the end of February, early March, he had to get all that stuff in a bag and hand it over to the accountant.

So the accountant can get the taxes done by April 15th.That's what accounting looked like to the painting remodeling business. And this wasn't something that was small, small, it was, you know, six figures.I ran it from the time I was 16 to 20 and that's what I do. I collect everything up and I kept it a little more organized than he did, but I didn't put it in an Excel spreadsheet and I was a computer nerd even back then. 

I didn't even think of it because dad showed me that, okay, everything goes in this file, a cabinet. At the end of the month or at the end of the year, we take everything in that filing cabinet, we compress it down, put it in a brown paperbag and go take it to, the accounting guy at his house.

That's what happens in a lot of these businesses. That's just kind of, their accounting has been, the checkbook. Until I went to college, I thought accounting is what, you know, I balanced my checkbook in the business. We have a business account, which is something we didn't have when he was doing it.

All right. I thought I took a step up. But it happens a lot inside of these businesses. They're, I refer to them as acquisition, accidental entrepreneurs. My father never set out to be an entrepreneur by any, by any means. It just naturally came upon it. Before painting houses he used to restore Mustangs in our garage.

He would, uh, cut the panels off and replace them and stuff. And people would pay, he would buy one, fix it up, sell it for a profit. Nobody ever sit down with these entrepreneurs and said, okay, that's cool. But this is how accounting works, right?

You need turbo tax. And this goes into accounts receivable. And this is like, you know. Lot of these small businesses, I don't think it's malicious or anything. They just, they don't know any better, right. Nobody's ever sat down with him and said, wait a second, now things are, you know, the internet's there, YouTube's there. There's so much out there for them to do, it's a lot better than what it used to be. But a lot of these guys, they just don't know any better.

[00:47:55] Patrick O'Connell: Yeah. And that's such a cool story. And I appreciate you sharing me with that. And I always tell all of my buyers that 97, 99 percent of the time, any significant error, as I call them, is not malicious. They either don't know better. They have a fail or a failure on the accountant they hired who should know better.

It really is hardly ever malicious, but with that being said, these things need to be uncovered, identified, et cetera, because they, they do happen. There's a lot of especially baby boomer businesses, you know, I've conducted over 50. They're some of the nicest people I met, like genuinely give back to the community. Accidental entrepreneur, to your point, they're just excellent people.

But they do occasionally lack technology, sophisticated systems, which can cause pitfalls.

[00:48:51] Ronald Skelton: I've seen the other side of it too. We went and looked at a manufacturing company. It wasn't even listed by a broker. A friend of ours told him, he had told us he wanted to retire. He invited us to come over. It was me and another guy. It was going to be his deal. I was just kind of walking him through it.

And, I would get equity for this. So it was worth my time. So we go over there and I didn't even notice there's no computers in their office whatsoever until I said, well, you know, we got to the point where like, okay, show me what you're doing financially. Let's take a look at that. And he goes, okay.

He goes, come back here. And he showed, he opens up this room and it's probably bigger than my office. It's probably, 15 by 15 foot room. Full of filing cabinets that were used like, six foot tall. You could barely see in the top. Like you pull open the top drawer and you're peeking over the edge of it.

And inside of every one of these filing cabinets, I'm talking 360 degrees and an island in the middle of filing cabinets in this room where the green books. Like the accounting, the old, he'd pull out a book, right? And it's the old green book of charts or whatever they call those things. It was green with the graph paper kind of stuff inside and all the accounting was in it.

And I thought, Oh God, this is going to be a nightmare. Then he handed me the two most recent ones and they're balanced and they had a balance sheet in there and an income statement in there. And it was better done than anything I've seen on a computer. Everything was just, and I'm not, you know, yeah, I have a master's degree.

I've taken accounting in both my undergrad and my master's cause I had to, I'm not good at it. Right. So I usually bring somebody in. I understood his stuff right away. So it's going to have to be moved to a computer. When I, when he handed me that and I'm looking through it, I'm like, dear Lord. Then I started looking around.

That's when I realized there's not a computer in here whatsoever, right? They still had, the phone you pick up and hit the line that you want to open up. The old push, you know, I had to click a button. So they had a telecom room that had the big PBX, telephone system in there and everything.

A lot of room for improvement. We didn't end up helping that guy buy that company. Not before any other reason that he was pretty sure his son was going to come around and take over it. But he wanted to see what it would be worth while like, what it would be worth to him if the son said no and they needed to sell it.

But, uh, it can be done well on paper and be done well otherwise. I asked him, I said, did you do all this? And he's like, no, no, no. My wife says CPA. I think he was in his eighties at this point and his wife's been doing the, you know, the accounting for this place for 60 something years.

So that's just the way she learned to do it. And there was no ever, never need to change it. Cause that's what he understood. I got to meet her briefly. She goes, I do everything else on the computer now, but he won't let me. He won't let me do that there. He doesn't. He doesn't want to touch one.

So, I was like, I wondered, I never even sat down to do that. We didn't get far enough to sit down to do the math. What does it take to move that to a computer? Cause somebody's going to have to sit there and type all that in, right?

[00:51:27] Patrick O'Connell: Right.

[00:51:28] Ronald Skelton: No reason I even shared that story is, not all over everybody who does it accidentally or whatever on paper, or, you know, doesn't do it the way that you or I expect, it's not meaning that it's done bad.

Sometimes there's some really good records and really good tracking of everything. They stayed on top of their account, their accounts receivable for a manufacturing company was great. I think they had some that were, 45, but nobody was even 60 days past due. He just managed everybody.

[00:51:55] Patrick O'Connell: Yeah. There's, there's dozens of companies I've looked at that don't have the best accounting or just systems in place. They're great businesses to own.

[00:52:06] Ronald Skelton: Yeah.

[00:52:06] Patrick O'Connell: It might be a function of the owners focused on profit first or whatnot. At the end of the day, if you have the best technology in place, your company doesn't make money, you don't have a business.

[00:52:20] Ronald Skelton: I'm going to interview those guys pretty soon here. I think the guys that wrote the book Profit First. I just interviewed the,some recent authors. Just interviewed the guy, uh, Mike Moyer, who does,Slicing Pie. I don't know if you're familiar with that, but, it's a brilliant way to earn equity and divvy up how a company's, the equity split inside of a company.

But, I put a reach out to the author of theProfit First. I'm going to get him on here too, because I think it's a brilliant way for some of these smaller businesses to get going and to keep things working and to make them sellable at the other end is, when they focus on that.

We're running out of time here. Let's cover like, what is your ideal customer and how do people reach out to you?

[00:52:57] Patrick O'Connell: Yeah. So if you're looking to buy a smaller private business, ranging from 1 to 25 million dollars, I'd love to help you. I've been doing this for over a decade. Have conducted financial diligence, quality of earnings, LOI review, purchase price negotiation for over a decade. I truly love supporting entrepreneurs, private equity, family offices, and deploying strategic M& A strategies and eliminate risk along the way. 

I've been fortunate to be in this business and do it to support my family, et cetera. So I'd love to kind of partner with you on this journey because whether it's me or someone else, aligning yourself with a sufficient deal team is critical in order to achieve these successes.

[00:53:48] Ronald Skelton: Okay, cool. How do they reach out to you? What's the best way to reach you?

[00:53:53] Patrick O'Connell: Yeah. So the best way to reach me is on LinkedIn. You can also reach me on Twitter, as well as I've been putting out educational content on the M& A Transaction Service YouTube channel. So go ahead and check that out.

[00:54:07] Ronald Skelton: Cool. I'll make sure all that's in the show notes for you guys are driving or something like that, you can come back and check the show notes. I'll put all his contact information. Patrick, thank you for being here today. I think we, we covered quite a bit. So, what do you think, anything else you want to add before we take off?

[00:54:21] Patrick O'Connell: No, thank you very much for having me, Ronald. Really appreciate it. And thank you for everything you do for the M& A community. It's truly great.

[00:54:29] Ronald Skelton: Awesome. We'll call that a show.