Lane Carrick has started, grown, merged, bought, and sold multiple businesses in his career. He was the founder and CEO of Sovereign Wealth Management, the founding shareholder and Board Chairman of Triumph Bank, and a founder and Director of B.B....
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Ronald Skelton 0:06
Hello and welcome to the how to exit podcast where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with the sole intent to share with you what it looks like to buy or sell a business. Let's get rolling.
Hello, and welcome to how to exit podcast today. I'm with Lane Carrick, and he is a serial entrepreneur who has started, grown, merge, bought and sold multiple businesses in his career. He's the founder and CEO or was the founder and CEO of sovereign wealth management, and the founding shareholder and board board chairman of triumph bank, and a founder and director of BB King's blues club. He's currently resides in Dallas, Texas, where he serves as an instructor in the Southern Methodist University Cox School of Business Leadership Center, where he has received eight technical Teaching Excellence Awards. And most recently, he's taught mergers and acquisitions as an alternative investments to MBA students. He also serves as a managing director at the 86 group, a boutique business brokerage and investment bank banking firm. He's currently representing 15 businesses across the state of Texas as a sell side advisor helping them maximize the proceeds received through the sell of their companies. Welcome, Lane. Thank you for being on our show today.
Lane Carrick 1:39
Thank you. That was a mouthful of an introduction one.
Ronald Skelton 1:41
Yeah, it's like, like when I got a little tongue tied there, but uh, you know,
Lane Carrick 1:46
yeah, I gave you too much material.
Ronald Skelton 1:49
My fumble is there for your amusement. So it's okay to laugh at me. I laugh at me all the time. So let's just jump right in. One of the things I always like to do is get the audience connected to you. So kind of your origin story. How did you get started where you're from? Tell us something that you know kind of connects us with who you are.
Lane Carrick 2:09
Sure. I'm 63 years old, born in Memphis, Tennessee, in 1958. I was I guess from origin story standpoint, I was an orphan until I was adopted at two years of age. And my mother and father My father was originally from Tyler, Texas. My mother was in Columbus, Mississippi. They built their first home my father was a home builder, and built our first home that I grew up in the year I was born. The went to high school with a gentleman named Kevin Wilson Kim and ended up founding holiday. Yes, an iconic brand, first brand and the hotel motel industry. My dad became one of the f irst franchisees of holiday inns and he built a chain a chain of them across the southeast and it came time for college and he told me to go to college and study what please me and when I graduated, I'd come into the family business. So I went to college and studied philosophy and psychology because that's what I enjoyed. And my senior year around December, he called me in my dorm room and told me he had great news. He sold the business and retired. So that's my origin story is a wonderful adoption by loving parents, who raised me with love and kindness and sent me off to college and then they had sold the business so I went to New Orleans to watch a sugar bowl game. I got offered a job at a at a Wall Street member firm I had no idea what a Wall Street brokerage firm was. They don't teach that to philosophy and psychology majors. I ended up becoming the head of the mutual fund department for a New Orleans based brokerage firm. Came back to Memphis Three years later and went to work at a Dean Witter Reynolds and other Wall Street firm managed money for clients as a stock broker, which was the term in those days I don't think they apply that anymore. And I left there in the 1990s and established what really was the first now what we would call multifamily family office in the Memphis area. fee based so I decided I didn't want to work on the commission model. I want it to be able to consult clients and be paid on top of the table and not for having any incentive to buy or sell specific products to get compensated. And so I built that business, sovereign wealth management into a national company, we became the family office for some ultra high net worth families that were founders and or CEOs of major household brands, Mrs. Fields, cookies, holiday inns, Harris gaming. And so I had a career for about 25 years as an advisor to ultra high net worth families, it was a lot of fun. Not every day was but most days were a lot of fun. We, you know, sort of the centerpiece of our service offering was writing investment policy statements helping families decide how to allocate their capital. Most of the time it had come out of an operating business and now was liquid and my counsel to him was they wanted to apply the same discipline to managing that liquid money as they did when they were running a business that produced that money. And we needed to capture that in a plan and follow that plan and amend it as we go as necessary. So we wrote investment policy statements and and held the hands of the wealthy families helped direct their investments. And I sold that business to an upstream aggregator about 10 years ago, 2001 2002. That firm was subsequently acquired by bigger fish, Goldman Sachs. So I was a little fish acquired by the bigger fish acquired by Goldman Sachs. And
I spent a few years after that goofing off. And my wife and I moved to the Gulf Coast of Florida, and ultimately decided to move here to Dallas, where we've been for two and a half years, we have a daughter who was a graduate of Southern Methodist University and decided to make Dallas her home. So we arrived two and a half years ago, and I reintroduced myself to some of the leadership at SMU that I knew previously, and started instructing through the Cox School of Business Business Leadership Center. As you mentioned, teaching mergers and acquisitions and alternative investments in the MBA program. It's been a lot of fun keeps me sharp, these are very smart students, most of whom have graduated going out into the workforce held, you know, significant jobs, and now they're coming back to get an MBA, so I, I can't go into the class unprepared. And I joined the 86th group in January of last year. So I'm coming up on a one year anniversary. As a business broker, I guess the only difference between a business broker and investment banker is the size of the deal. And we kind of straddle the fence between those two. But we focus on on businesses with one to $50 million of annual revenue. And we offer them a highly professional service that typically is associated with an investment banking firm. And it's a lot of fun. I love tearing apart like you, Ron, I love tearing apart businesses and understanding how they make money and what their value proposition is and what their strengths and weaknesses are and helping owners who oftentimes are very good at running their businesses, but not necessarily great at the skill set of taking their business to market and understanding how to sell it. So
Ronald Skelton 7:56
it's interesting you get to set on the kind of the straddle both worlds, right, I often think that the corporate world and the academia world are separated by some barriers that they shouldn't be right. But I've got friends, you know, people I even even call friends here. Who are tenured college professors writing books on business who have never managed an employee on their life. Alright. So inside of that, what do you see is like, you know, I'm sure you bring practical knowledge back to the classroom. But as far as the textbooks first, you know, mergers and acquisitions go versus what really goes down on the field and the brokerages and the investment bank, is there any big disconnects that like that needs to be like, you know, the textbooks have at one way that never goes that way.
Lane Carrick 8:47
Well, you know, the thing about textbooks, and this applied when I was in wealth management, I believed that the efficient market hypothesis was largely true. As did Ben Graham, who wrote the Graham and Dodd textbook on value investing at the end of his life, he said, don't work anymore, because everybody does it. So you can't do it anymore. You know, there's the efficient market hypothesis. It says the markets too efficient for, you know, individual investors to take advantage of misinformation. But it also assumes that all investors are rational. And therein lies the problem. And you have the same I think, challenge when you take the textbook on mergers and acquisitions, buying businesses, selling businesses, and you apply it at a human level with people that have egos, and are anchored into belief systems, which may be right or wrong. When I teach at SMU, I lead off with a story about a holiday Yen's, the company that my dad built franchises for, and I ran the family office for the what became the chairman and CEO of Holiday Inns. And I tell the story of when Donald Trump did an attempted hostile takeover at Holiday Inns because he was mad at them, because they got into a partnership in Atlantic City that didn't work out well. So he bought 5% of the stock of the company and announced he was going to take over the company and just strip the assets and sell them off and how they ends when really appreciative of that effort. And so they this battle of egos, you know, ensued, and there were a lot of behaviors and outcomes that, you know, a rational person would look at and say, why would someone do that they borrowed billions of dollars against the company and distributed it out as a dividend to shareholders, to prevent Trump from doing the same thing borrowing against the assets. But you know, I find that the textbook is a very good description of how businesses should be valued, you know, discounted cash flow, multiple of earnings, comparable business sales. And then I go to a business owner had a conversation with one today, every business like his that sold over the last year is sold for an average or a median of 3.2 times owners discretionary earnings, I have that conversation with him, he says My business is worth seven times earnings. Why? Because a friend of mine sold his business for seven times earnings. Now, you know, it's very difficult, I can't go back to the textbook and say, well, this kind of cash flow model, you know, or this or that. So you're dealing with human emotions. And again, people are anchored into belief systems. And that's probably my biggest challenge is trying to have a dialogue with a seller who comes to the table with a certain perception of their business, and its value their babies prettier than everyone else's baby. And their houses is the best house, you know, on the block and and to take it from an unemotional place and just say, well, maybe it is, and if it is, the market will respond that way. But here's where the markets gonna price your business,
Ronald Skelton 12:01
It's interesting everything, including businesses, houses, whatever, they're worth exactly what the market will bear, right, what the market will pay for them. And a lot of times, you know, I've had conversations with GE here recently, one of the local companies here, he thinks he wants 300k, you know, I basically said that's just like, it's a small, small business. And he only does, he doesn't do 300k in revenue only, he only did about 105k in profit. And I was like, you know, you're a single operator, there's not, there's not really a business here. The only reason I'm interested in is your customer list, I own a business that services, the same market. And so I worked out an offer for him. He's like, nah, nah, I'll get better from it. I was like, oh, call me when spring comes around. And you have to fly back to Oklahoma and run this thing, because it's seasonal. And we'll talk then, and but yeah, people derive their like that, you would never take advice from the guy that just knocks on your door to deliver your box, you know, on, you know, what your house is worth. But you know, if somebody tells you, you're there, their business is worth, you know, 4x or 5x or 6x, that, you know, long as it fits the narrative in their head. They go with it. Yeah. Right. So
Lane Carrick 13:20
I think that may be the most challenging part of my role is to reset expectations. And, you know, I think that the industry success rate is, speaks to the fact that brokers and I'm not impugning the quality or integrity of brokers, but this is an industry stat. Only about 30% of businesses that go to market with a broker sell. So seven out of 10, you know, the transaction doesn't go through. I think, largely, that's because of mispricing unrealistic expectations over the price of the business. And so for me, I want to try to hit that head on right up front, because we work on 95% of our compensation successfully. And so that's the first and hardest part is to try to figure out, does the client have a realistic expectation of value? And generally speaking, there's a reset because they almost universally come with an inflated expectation.
Ronald Skelton 14:26
I don't know how you address that in the marketplace. There's two I think there's two factors a lot of business brokers take a listing fee. So whether they sell it or not, they made some money so you know the scenario and I've all my listeners have heard this scenario and over again, but the scenario is you got a business for sale, you go see broker number one and he said, you know, he says your business is worth a million dollars. And you're like you've already scheduled two other appointments. You figured you get a second opinion. You go to business broker number two and say, hey, the last guy in my business is worth a million bucks. What do you think you can do and I like to do one or two One of the quarter 1.25. Right? In the meantime, you hit the third guy, it's 1.5. And realistically, the business is only worth probably, you know, 6 00 to $800,000 to start with, right, but they've got this false expectation and backed up not one broker, but three brokers told them for at least a million, right? When none of them like I don't know how it is in Texas, I haven't looked it up and the state of Oklahoma, you don't even have to have a license to be a business broker. Right? I can buy a business card right business broker on it, start passing it out, and your business broker, some of the franchises have some decent decent training and stuff like that I have friends that business broker, so I don't want to ruffle their feathers too much. But if your business broker is requiring 5, 10, 15, sometimes even $20,000, as a listing fee, I would really start looking at in your in that in your in that sub, if you're making less than $10 million dollars a year and they're asking that as a listing fee, I would probably venture to say, be very careful at least do your own math to figure out what the industry says your business is worth before the before you hear what a broker says your business is worth right.
Lane Carrick 16:09
That's a great point, I have found myself in the very position you described where I come in to meet with a prospective seller and they've already met with one or two other folks. And and basically they're they're trying to get you to bid against the other. You know, brokers investment bankers to tell you how much their business is worth. And I think it's a waste of time on both parties part, you know, there. But I do think that the business brokers like, you know, realtors might very well say, well, look, I'll take the listing, he's asking way too much. And then the market will come in and tell him his house isn't worth that it'll lower the price. And I'll, I'll get the sale. You know, my experience in business brokerage is it's a much longer and more intense process for us to take somebody to market and deal with buyers, there's so many moving pieces, that for us to hope that the seller has a reset, and becomes more realistic, and they stick with you, after you played the game with them and told them validated their expectation. I just think it's a losing proposition for both parties. And I suspect if people if brokers were more realistic with the customers and setting expectations, you'd see a much higher close rate on businesses that are brought to market. 30% is a pretty terrible rate.
Ronald Skelton 17:37
So you probably have a better insight as a college professor, teaching mergers and acquisitions that a lot of individuals I have on here. What do you say the current state of the market is for small to medium sized businesses?
Lane Carrick 17:52
Yeah, so first and foremost definitions. You know, when I was in the wealth management business, we used to call people high net worth investors. And now there's high there's, ultra high, there's massive Blue in You know, so for us, you know, I think a small businesses as below a million and in an annual revenue, and obviously below a million in profits, that sort of one to 50 space is what we call micro private equity. And then 50 Enough is lower middle market up to middle market up to and above. And so the space that sort of below a million dollars is is more challenging than the space above it simply because very difficult for those businesses to get bank financing. You know, so 90% of the deals that that we do run are done with SBA financing, because it's plentiful, it's cheap. The government is doing everything in their power to make capital available to small business buyers. And interest rates are at historic lows, all the things that make that attractive, and they have a box in the box is that they're going to loan you they're going to they're going to have you model out the business that you're buying, they're going to look at the last three years of historical earnings. They'll recast it in the owners discretionary earnings, which is the EBIT of the company earnings before interest, taxes, depreciation, amortization, they're going to add back owners comp, and they're going to add back legitimate owners discretionary earnings. So if I run a company, and I take my wife to Nick and Sam's every night and run up a $200 have, arguably that's not a business expense. And if I can convince a buyer, that that's exactly what what was happening. I might be able to add that back. And the SBA wants to see they want to look in the rearview mirror and say, Well, what's happened with this business? And so what can we reasonably forecast the future will look like, then they're gonna allocate an amount for the new owners comp, and then what's left has to serve as debt. So they'll loan up to 90% of the purchase price of the business to historically And at but right now in the sort of COVID environment that alone up to 90, but you got to pay the money back. And so there's a principal and interest payment due. And they want to see at least a one and a half to one debt coverage ratio on the cash flow that they model to be left. And they're not looking in the windshield as much as they're looking in the rearview mirror. So one of the other challenges we have is odors coming out of COVID, their business is starting to perform really well. And so what they see happening for the last 90 days is really exciting. But the SBA and the banks are going to work off last year's tax returns, all right. So, again, financing happens more in the rearview mirror than in the windshield that sellers are looking in the windshield. With that said, there's a lot of capital available for businesses that are of the size where they qualify for SBA loans. And that's above, you know, typically above a million dollars in sales, more than a few $100,000 in net income owners discretionary income available to pay compensation to the owner and service the debt principal and interest. When you get below that you really are looking at a buyer that's probably going to combine cash and seller financing. And that's a different game, you know, and oftentimes, you might even be able to get a little better price with cash and seller financing because of the seller financing component of it. But right now, I what I would say in terms of the market of micro private equity, that one to 50, where we focus is the government's printed a lot of money. But that money is out there chasing stocks, pushing bond yields down buying up Bitcoin, pushing up real estate valuations, it is just, you know, we have asset bubbles, my opinion across the board. As a result, we're seeing family offices in the state of Texas, according to a recent report, at a record high percentage of their portfolios in direct operating businesses 20 to 25% of the capital being pushed around by family offices is going there because of the relative valuations of other asset classes. So there's a lot of money looking for deals right now. And there aren't enough deals to spend quality deals to satisfy that demand. Now, what's not happening is at least not in my field of vision, is I'm not seeing buyers just gobble up and push up multiples to some crazy level, because they have to satiate their appetite to buy a business. So a lot of deals aren't getting done. But if you have a quality business you got which means in my opinion, you got clean books and records, right. So if you have three years of good books and records, which a lot of small business owners don't have.
Or they've been running the business like personal bank, which is understandable if you run and you own your small business, but that gets muddy and complicated for a buyer to unravel all of that and understand it. But if you have clean books and records, you have sustained profitability and cash flow, if you're growing, that's a plus, and you're bankable, then you're going to get a premium multiple right now. So average deal over the last 12 months on biz buy sell in this quest are selling at about 3.2 3.25 Multiple. That's a middle average, right. And that doesn't account for all the variables that go into that. But it just took the average business. And I'm seeing businesses sell at higher multiples of that when they are attractive, and an otherwise good good look in businesses. So it's a seller's market right now.
Ronald Skelton 23:49
I see a lot of advertising going in to do things like I do, which is buy to selling business and teaching other people to do that. So you got a lot of new guys coming into this space. And then you have your traditional buyers they at this realm, the peony firms and institutional buyers are probably not that active. At least I haven't seen that in that sub $10 million revenue model, they're kind of looking at a bit for bigger players, which is good for us, you know, the guys that want to do what I'm doing, just because we can build something fairly quick to get it across the above the threshold it catches the radar, but uh, out of these new buyers, one of the big concerns I had and I want to ask you today is when you get a bunch of new people doing something and they really don't have the skills or even potentially I mean there's people doing these courses that have never run a business but they're now out they're gonna go buy them. One of my biggest fears is anytime you get that going on it happens in real estate happens and other stuff. You get a lot of new, inexperienced people that are hurting the business owners hurting the market. Then legislation comes in and they try to legislate the problem away. Do you see any like in your brokerage in your investment banker? realm? Do you see any signs that you're getting a lot of people that are very inexperienced thinking they're gonna buy businesses?
Lane Carrick 25:12
Sure, we get a lot of inbound calls from people looking for businesses. Some percentage of that or is legitimate is you will know, being here in Texas, we have an enormous population transfer, particularly from California, to Texas, they're coming from a highly regulated state government to a less regulated state government. And I get a lot of calls from Californians that are relocating here that are looking to buy businesses who have mixed levels of sophistication. I'm always kind of surprised at the relative sophistication of buyers that I even assume are sophisticated. You know, they have a financial background, but they know nothing about deal structure, deal terms. And they, they would benefit from someone like you, who can walk them through the mechanics of doing a deal. So, you know, Wealth Management, I saw that where I had clients that were fortune 500 CEOs, and they knew how to run those businesses, when it came to their personal finances. They weren't any more sophisticated than a lot of other people in it. But oftentimes, they suffered from the illusion of believing that because of their success, they had a greater knowledge that they have, you know, you I think you your point is well made, we all watch the Gamestop frenzy, and, you know, the Reddit trading boards, and, you know, I've been teaching class and had people trading on their, you know, their phone apps. And, you know, the old story of JP Morgan, back in the frothy stock market era of the 30s, before the Great Depression when the shoeshine boy was given in stock tips, and he went, Okay, that's it. You know, I'm out. There, a lot of people making a lot of money right now that are not doing it because of their intelligence or sophistication. I'm 63 years old. In my experiences, when that happens, it tends to end ugly. But it probably never ends when people think it will last longer than most people believe the pendulum just keeps swinging. And my father who's been deceased for a number of years now used to be my marker for that if my father decided to buy stocks, it was time to get out. It was time to get in. And I've lost my stock market barometer. It's
Ronald Skelton 27:36
interesting. I've seen the same thing. I've heard that in that bubble, the, like, when the shoeshine boy starts telling you stock advice, time to get out, I jumped out a real estate because of the same thing, right? When, you know, you're and I have a company that was teaching real estate investment. And I used to own the part or all of the local real, the real estate investment associations. But the problem is, is I would look around the room and see 60 7080, sometimes 100 150 people in the room. And if you'd ask everybody who's bought a house this year, just a few hands would pop up, like then you say whoever bought who's ever bought a house, right? But if you ask them if they're just a few hands pop up, and then you ask who's out who's put up an offer on a house this year? And like 5060 people, you know, half the room and raise your hand? Well, they're making offers on houses, they have no ability, no knowledge, no nothing to buy. And, you know, it turns out they're what they're doing what's called wholesaling, which is a legitimate strategy. But inside of that what happened was is the Obama state passed a law this year actually have as of November, you have to have a license of brokers or a real estate license in order to wholesale real estate. And it's because you know, too many people are getting they're making contracts on houses, they couldn't close and hurting homeowners. The same things in this in this business acquisitions and mergers, if it gets that popular and everybody's graduating high school taking that five or $6,000 course on how to buy businesses and going out and trying to put offers on it. As they your one your one senator son or daughter away from you hurt one person the wrong way and they realize this, there's a systemic problem with it. More regulation will come in and you know, it just it's it's one of those you just got to keep your eye out on the market. Everything ebbs and flows.
Lane Carrick 29:24
I'm not a fan of overreaching government regulation. And I've been a small business owner. I've bought so I've started built, as you've asked for the introduction. And I know how hard it is to sit in that seat and meet payroll and I was in a heavily regulated businesses. I ran an SS Securities and Exchange Commission regulated investment advisory firm. So the SEC would show up on my doorstep and knock and an auditor would come in and live in my office for a week. I ran up I was chairman of a bank. And we were regulated by both the state making commissioner and the Federal Reserve and the So I've lived in a highly regulated environment. I'm not here to debate the merits of that. But what I would say is you're right, when, you know, I think there was a scream and cry for regulation of the trading apps and for, you know, everything surrounding the speculative frenzy of the short squeeze around game stock and the other things and, you know, you can pass regulations, but people are going to, people are going to act in irrational exuberance, as our previous treasury secretary called it. And I don't know how you can regulate every law to keep people from acting in an irrational way.
Ronald Skelton 30:40
And let's jump right back into, you know, just buying and selling businesses and buying and then building them and, and, you know, staying in this stand in this lane. Where do you see the market going? I see. I see a large aging population of baby boomers, one generation ahead of me, maybe two generations ahead of me, who are still sitting in the seat of businesses with no succession plan, no way to no plan to exit. And we're starting to see that now. There's a lot of businesses that just close, right, they work until they don't work anymore, and they close. What do you see is a way to get the word out to those business owners that there is this secondary market for people who want to be part of what they built?
Lane Carrick 31:34
That's a good question. First and foremost, I agree with you. The demographics are are are factual and objective, there is a very large population of people who are at retirement age who own and operate businesses without a logical succession plan. And, and so they're either going to sell their business or they're going to close it. And so that's a given. And I expect over the next couple of years, the next several years, the next decade, probably, we're going to see that trend, continue to develop, and we're gonna see more and more businesses coming to market and it creates a great opportunity for people that have the skills and the humility, you know, the energy to step in and take over that business and operate it. In terms of helping business owners understand their choices, I don't know the answer to that, I'm sort of of the opinion that somebody running a business is going to ask their friends, when I was in the wealth management business. 90% of my clients came from referrals from their friend, neighbor, accountant attorney. And I'm presuming most small business people have accountants, attorneys, you know, friends that may own businesses, and that's how they get referred to me. And that's how they get referred to other business brokers. So I'm not much of a resource in terms of how we could better educate them. What I would say is that once they make that decision to take their business to market and that they should interview multiple brokers not for the purpose of having a bidding war on who will, who will offer them the highest price because the business broker isn't buying your business, right. And a good business broker is going to tell you what the mark what they think the market will bear, they're going to tell you what, what businesses like yourself for and, and keep you from setting unrealistic expectations. But when I was a young stock broker at Dean Witter Reynolds in 1980, you know, there were 20 brokers in the in the office, and somebody would walk in and ask for a broker and there was a system of, of, you know, how they got referred within the office, and there were 20 people doing 20 completely different things. And the outcome that that poor guy or Lucky guy, walking in the door, asking to talk to a broker guy, could be the worst possible outcome, or they could get with somebody that was trustworthy and reliable and took care of them, and use the financial planning model, etc. But it was the Wild West, and it's probably a little better these days. But if you're going to go pick somebody to invest your assets, you would probably want to go talk to two or three and try to get some understanding of you know, what, what is your process? And how much do I pay you? Are there any hidden fees? You know, what can I expect? How long will this take? Who are my buyers? How do you find them? And I find that people don't really ask a lot of great questions, which means they don't know the questions to ask.
Ronald Skelton 34:42
And I'd add, I'd add a question.
Lane Carrick 34:45
How much is my business worth? And then the person that tells them it's worth the most gets the business?
Ronald Skelton 34:50
You know, I'd ideally even lean on that question, right? If somebody if a business broker tells you, your business is worth X, I would venture to say the business owner should say How did you arrive at that number? Yeah, I, a business owner should really understand the mathematics or which the broker come up with a number that they're presenting. The reason behind that is is like, sometimes those relationships don't go where they're supposed to. I was actually on the phone a few weeks ago with a business owner. And he says, well, the business broker says, I'm worth 1.5 million. I say, great, you should have taken that check. Exactly. And he said, well, he wasn't buying it. I said, Ah, exactly. Yeah. Right. Did you ask him how he did his math? Because I want to see what model he's using to evaluate your business. Yeah, no, I turned in my financials and stuff. And I told him that, you know, so and so said, my business is worth it. And he told me, he could beat it. And that's how he came up with it. I said, so you don't have any formal offers. At that price. And this is longer into the conversation. My first response is always always, somebody says, My business is worth 1.5. I was like, Great, let's see how we can get you there. Right? Cuz I haven't seen anything at this point. You know, maybe we can. And when he didn't like the story of how we were gonna be able to get him there. I was like, Hey, you're gonna have to go back grow your business for a couple more years. You're about halfway there. You know, you really want 1.5 you're about halfway there. Like, not only am I not interested, I don't think any other people I know. And I know a ton of guys who are buying businesses right now. I'm in multiple networks, I run in masterminds and stuff that where we help each other do this. I don't know, anybody would be interested in paying you what you're asking for your business. So you know, I promise to tell you how to get there. My answer is you got to go grow your revenue almost to x.
Lane Carrick 36:31
Right? Yes. Ron, that's that's a story that resonates with me, I've got that exact situation right now. I had a conversation with a prospective client, they said My business is worth X million. I said, How did you come up with that? They said, because we take x out of the business every year. And I said, Well, if you take x out of the business every year, that's a 3.25. Multiple, that's not an unreasonable request, I got the financial statements. They didn't take that out of the business. It's a 6x, multiple. So my response will be, it's not going to sell at 6x. The markets 3x, maybe somewhere between three and four. So you need to go back and grow your business for a few more years. But this is a retirement trade, I think in the relationship with the seller, and maybe the most important decision, business decision, financial decision they're going to make in their lifetime, to take a relationship on a false premise, which is the business is worth more than what you know, the market will there is an injustice to the seller, and it's an injustice to you. And again, 30% of these businesses are selling 70% or not. So just look at the outcomes that the industry is experiencing.
Ronald Skelton 37:42
So I was on the on the podcast, I guess it was last week or the week before with an Australian broker who, who has a very high close rate. And I we were chatting about it, he they close I want to say I think he I don't want to get his number wrong, but I think it was close to 200 businesses a year and they're in multiple locations. And they have 30 or 40 people in his office that help between 35 and 40 people that help him do this was not a small operation. He's got an office in Hawaii. Now. He's from Australia. But uh, it's a fairly large organization. I was like, Well, how do you do that? He says, I turn a lot of them away, because they don't like the valuation they come up with. But the reason I can do it is I value it in such a way that I know it'll sell. I look at three or four different models, I look at the industry what they're paying. Because I have been doing he's been doing this for 18 years. So he goes, I have a huge list of people who buy these things, I know what they buy them at. So and that's really, the nature of it is just your business is worth what the market will bear. I see people getting the six axes and stuff. But it's really rare. It's kind of a lottery, especially small business. It's usually a strategic purchases, meaning competitor, or somebody in your line of business bought you to bring in your engineers, your team or something to grow their business. They're already they're already large. That's what we refer to as a strategic purchase. Right, right. They're just it's other than that most of your institutional buyers, most of your local buyers, they're not gonna do that. It's just not, you know? Well, it's
Lane Carrick 39:20
a I mean, you think of it as just an internal rate of return calculation, right. So when, when I was buying businesses myself, and operating them and doing a roll up in the wealth management space, you know, if I'm paying 3x on a on cash flow of business, I'm buying, you know, if I can maintain that cash flow, then I'm getting a 33% return on my capital. You know, my required rate of return to invest in an illiquid operating business was 25% or more. Otherwise, I could put the money into other asset classes, small cap stocks, micro cap stocks, other things where I had some measures liquidity or market ability, you know, I could sell, I'm not going to make 25%. But to me, I've always looked at the universe of investing as stacking, you know, risk premiums on top of the risk free return, which right now is what one and a half percent or something crazy, because it's the T bill, right. And so, you know, if you want me to take my money and put it in a government bond, I'm going to require very low rate of return, if you want me to put it in Microsoft, that's pretty good, you know, credit, I'm going to require a little high return. But you know, when you get out here to a small operating business, where the failure rate is, is high, you're gonna, I'm gonna have to make an attractive rate of return. So to me, I, you know, I would turn it to the to the seller and say, Well, look, if you were going to invest your money, if you didn't know this business, and you're going to go buy a business, what rate of return would you require? For buying, you're buying that business and putting your capital in it? Well, is 20%, that's fine. Multiple, you know, is 33%, that's a three multiple, it's for multiple at 25%. I don't think people should invest capital and direct operating businesses, you know, without expecting, you know, a reasonable rate of return. So the multiple, and you're right, for a business that could there were wealth management firms where I knew I could go in and close the office and let that staff go and pull those assets under my existing platform. And I could reduce the cost and increase the cash flow, and I'd be willing to pay a premium for it. So there are synergistic buyers that will pay up. But, you know, that's not the typical case.
Ronald Skelton 41:47
You brought up a point of there is like the internal return rate of return the one of the investors locally asked me said, you know, used to be a private investor for me and the real estate space, he says, Well, what would be the return rate of return for buying businesses and I said, Well, usually at least 33%. He goes, that's that's not real. That's not That's not a change achievable, I said it is, I said, the reason you get less than that, on other transactions, is you're trading the liquidity being being able to be liquid. For a higher rate of return, you buy a small business, it's not nearly as liquid, it takes time to, you know, if you decide you want the money back out, you got to put it on the market market, it's solid, you got to be running, well, while you're doing that, or you'll it'll depreciate. So you know, but it is very common to get those type of rate of returns inside of a business. And well,
Lane Carrick 42:37
and you can leverage those returns. So we'll go back to the SBA analysis. So let's say you and I decided to go out and buy a company making a million dollars a year. And we could buy it at a three multiple, so we paid 3 million for it. And we put down $300,000. And we borrow 2.7 million from the SBA on the 90% loans they're doing and we qualify for it, the business qualifies. So now we have 300,000 of equity in the business and his cash flow and a million dollars a year, we're not going to direct you know, some percentage of that to serve as the principal and interest payments on the debt. Every month, we pay down principal and interest, our equity and that business grows just like the mortgage on your house. So you grow the business, you pay down the debt, three years later, you turn around and sell the business. And, you know, if you sell it the exact same multiple, you've gotten a much higher return on your equity. Now in terms of at risk capital, you know, the SBA is gonna require that you personally guarantee and pledge and so, you know, you have you have the risk. But but, you know, and a lot of PE firms, there is a multiple expansion run between small businesses and, and lower and middle market businesses. So the typical small business is going to trade around three, the typical middle market business is going to trade at six. So when we do see PE firms dipping into our space, what they're doing is they're looking to take a platform and start bolting on businesses so that they can aggregate and get to middle market, and then just bank the multiple expansion, right? So I bought businesses at three, and then I turn around and sell them at six, I haven't necessarily approved the business, all I've done is position the business to a different buyer who has a lower return requirement. So that game plays
Ronald Skelton 44:31
as well. I mean, it's very, it's one of the ways that the private equity in the host and some even family offices do it, to buy to play that arbitrage of different levels, right to buy up a bunch of $10 million companies, because once they brought, you know, or 5 million $10 million revenue companies, because once they crossed that $25 million, they're at the peak of that multiple or they can you know, you know, either take it public or you know, move into a sell it to a public trading that's getting even higher. Multiple and receive full value. They're they're playing the arbitrage game.
Lane Carrick 45:03
Yeah. And the upstream public companies that you're referring to, they're playing the game too. They're buying companies at 10x. And they're trading at 20x. You know, and so it's a creative to them as well. So yeah, there's always the bigger fish out there, I guess until you're Jeff Bezos, right, there's always the bigger fish out there to gobble you up. But, you know, for small business owners, if they really want to turn it into something special, they could aggregate businesses at a certain acquisition strategy, and then flip them at a higher, higher multiple. But at the end of the day, just buying a business at a reasonable multiple and putting leverage on it, and then running the business so that you don't lose the cash flow that existed when you bought it. Now, if you're buying a company that's not making money, and it's turn around, that's a whole different deal. It's a whole different game, you know, but my counsel to people that want to buy business for the first time, is buy a business that has stable positive cash flow. And, you know, it's a lot harder to turn a business around than it is to maintain and it's hard enough to maintain.
Ronald Skelton 46:14
So you said something out there, it caught my attention when you're counseling people that want to buy a business for first time. You've been doing this longer than I have, you've been doing this probably longer than a lot of the guys that listen here. What would you say? What would you wish? Like you knew? Like, what do you know, now that you wish you had known when you started buying and selling and merging? And like, what's one good takeaway that you could tell us thinking this?
Lane Carrick 46:38
Well, first and foremost, I still learn things regularly. So I will tell you, it's 63 My dad told me when I was 21, that I was too smart for my bridges and the and that the older I got, the smarter he would look. And he was absolutely right. I was Leah. You know, Leonardo DiCaprio in the bow of the ship. I was, you know, king of the world. And then the older I get, the more I realized what I don't know. I just think you have to, maybe my biggest takeaway is, is, is recognizing overconfidence, I think a lot of people approach investing from an overconfident position. And, you know, they buy Bitcoin at 20,000. And it goes to 22. And they think they're smart. And I'm not picking on Bitcoin, I'm just saying that, you know, so it's one thing to buy business, it's another thing to operate the business successfully, it's another thing to sell it successfully. These are complex things. I think you should approach it with some humility. And and I think you should really surround yourself with people. Maybe if there's one takeaway, one of the things I always do now is I take anything I do to somebody that I've got a few people in my network that will shoot holes in anything, if I bought Microsoft to him is a startup, knowing what it's going to turn into, they find a reason not to invest in it. So I really tried to poke holes in in everything, you never see a pro forma that shows a business losing money. You know, when you're buying a business, you, you, you you plan and you think about how you're going to go in there and approve things and grow the business. Most business owners are a lot smarter than we think they are. We look at their businesses, and we go Why did we do this? And why didn't she do that? So I think just approaching things from a position of humility, respecting, you know, what, what's been built, understanding the challenges surrounding yourself with people that you consider to be good, honest advisors that will give you honest feedback, inviting people to attack your assumptions, in the processes that you're involved in. And being open minded about it. I'd say those are kind of life lessons that might apply across the board. But, you know, the the art of buying businesses hasn't changed my I show a clip from the movie Wall Street, the original Wall Street with Martin Sheen and and Michael Douglas, where he's at the board meeting for the company that he's trying to take over. And it's the greed is good speech that he gives. And, you know, part of my instructing on mergers and acquisitions, I talk about how what I've observed with a 35 year career in investing in financial markets at a fairly high level. You know, what I learned was that there, the market is populated by extraordinarily smart people, smartest people that you can find coming out of Harvard, Yale, and Princeton and MIT are calculating things all day long and investing based on you know, their analyses. It's really hard to think that you're smart. than the rest of the market participants that you're going to outsmart them on a daily basis. But markets work, they arbitrage away in efficiencies. And that there are certain core things that go with buying a business, you need to do your homework, you need to examine the business, ask tough questions, you really need to understand the business as well as possible.
You need to forecast out, you know, your what you think's gonna happen, you need to figure out what can go wrong with it and model what happens, if those things go wrong. You need an if you're particularly starting out, you need a good lawyer. And you need a good advisor, it could be your lawyer or a good advisor like yourself, or someone that can help them, you know, know what they don't know. and guide them. I did a deal when I was 24 years old, the first deal I did, I bought a medical X ray, equipment, hardware and film, business. So they sold the hardware, they sold the film, and but they made all their money cleaning the machines, because the imaging course now it's all digital, the film left a silver deposit, and you would go clean the silver deposit, and we made all or we could give away the equipment and the film, and they would just pay us to clean the machines. But I'm 24 years old, I think I'm 10 times smarter than I am. I've never done a deal. But we had a really good experience lawyer who was probably my age now then when I was in my 20s. And he'd been around the block a few times. And we got to this impasse in the deal where the buyer or the seller wanted us to buy inventory that hadn't sold in five or six years. And when he called face value, what had no value, right, it was completely worthless. And he told us, he said, Look, there's price, and there's terms and the, the seller sets the price, and you set the terms. So let's put a term in there, they will pay you in face value, but we'll pay it to him as the inventory actually sells. And so to me, I was all locked up in this fight over, you know, the issue of the inventory. And he had a solution, which was a term, you know, it was a structure a deal structure. So I see a lot of deals fall apart, and it's easy for deals to fall apart because the buyer and seller by the time the deal gets done, they're typically exhausted, you know, from the time somebody takes our business to market till the time they sell, it can be six months to a year, they probably had a couple of people poke around and do due diligence. They're tired of answering questions. By the time somebody submits a letter of intent, and it gets executed, there's usually a 30 to 45 day due diligence period, then there's an asset purchase agreement. And then there's the bank financing. And they're 50 things that can go wrong, right? A sentence and, and a lawyer document inside a purchase agreement that you know, one side or the other doesn't lie. So it's hard to get deals done and patience, and humility and being surrounded by people that have more experience than you do. They can counsel you and say, Hey, this is important. This is right. Or there's a solution to this. So take a deep breath. And let's go find that solution.
Ronald Skelton 53:32
I agree. What's the what's a good way if somebody wants to reach out to you? What's the what's your preferred way for them to contact you?
Lane Carrick 53:38
Yeah, so I do email really well. My get enough voicemails and text messages where I get way behind on those. But I'm really good at email. So my email is. lane, L A N E at the 86,86 is a numeral the 86 group.com. I'll put down for better or worse that pops up on my cell phone and all other media 24 hours a day, seven days a week. And I'm responsive to it. Is that the right word of the day, seven days a week?
Ronald Skelton 54:09
I put that on the screen. Is that correct? That's correct. Thank you. Okay, so for those of you guys who are watching this live on the video side, it's on the screen and for for for the purpose of not getting spam into this folder. I will not put it in the text description because the text scrapers will feed that into spam. So you'll have to hand write that down. So I appreciate having you here today. I appreciate everything. This was kind of an interesting angle on things. We talked a lot about leveraged buyouts, the LBO model where we're using the bank to finance it, which is something that not very many of the guests I have do that method so most of us we there, we either have funds or we just we just haven't went down the bank route yet. So maybe it's the crowd I'm hanging out with. But uh, I appreciate the the knowledge in that realm and Look forward to having further conversations with you and learning more with with you. And I'm always looking for stuff in Texas too. So I, myself and I know some people that are looking for stuff in Texas. So I wouldn't mind hearing about some of the business. I actually have two ladies right now who are looking for construction businesses in that realm. So in Texas, yeah,
Lane Carrick 55:21
that's gonna be a booming industry. I don't have a construction business. I have an electrical contractor in DFW that's growing pretty dramatically and the owners ready to move on to other things. And I was just pulling data today and you know, the story on Texas is just so incredible right now. You know, Dallas Fort Worth gained 1.2 million in population over the last 10 years. And Cushman Wakefield released a study recently that said that they thought the DFW Metroplex would be the fastest growing Metroplex over the next decade. So it's a great story. For Dallas Fort Worth, it's a great place to be. But I'm about to learn about a lot about tiny homes, we have a listing a new listing for a tiny home manufacturer. So I don't know a lot about it, there's a TV show I've seen. It's a thing, obviously,
Ronald Skelton 56:11
it is I'm there, I think they're overpriced. I'm a real estate investor by previous trades. So I got a great deal of mine, just a family who had one custom built, and her husband got to play it overseas, and they weren't gonna be able to live in it. So it was three quarters of the way done. I had the crew to finish it up. So I pretty much got it for what they had into it. And as soon as it was done, it's worth twice, wait, at least twice what I paid for it. But uh, yeah, I'd be interested in hearing about that. I don't know where the market is on, it was really hot for a little while. And then, you know, it kind of cooled off. I think it's, it appears to still be moving well for me, because I'm in all the communities, right? I'm in all the Facebook groups, except for tiny houses. So one of the hardest problems that they have is when you move them around there, it's hard to find lots and land that allows them to have it on there. Most of the building and coding of land has been listed as an RV. So the same the same? What am I looking for a zoning or code code enforcement type of stuff that would allow a tiny house to be on the house overlooking a lake would allow somebody to move a $2,000 camper on their live out of it. Yeah, right. So they don't there's nothing in the code that just separates the two. So it's really difficult. Sometimes when we're traveling, we ended up having to park an RV parks to live in the tiny. So
Lane Carrick 57:40
yeah, Ron, thanks for having me on today. And thanks for the work you do in supporting people to make better decisions in the small business world. I'm a broker I work on commission. But I really like to see people make good informed judgments about what they're doing and do things the right way to give them the best chance for success. And you're in the same same spot trying to help people make good decisions. So I appreciate what you're doing. And if I can ever be a resource for your guest, welcome that opportunity and hope to stay in touch with you.
Ronald Skelton 58:11
Awesome. Now we're gonna end this now and thank you everybody for joining us and Lane stay on here for just a second and I'll chat with you afterwards. Thank you very much. The investors and entrepreneurs professional mastermind, the investors and entrepreneur festival mastermind combines the traditional peer to peer mastermind interviews first in Napoleon Hill's famous book Thinking Grow Rich, with accountability partnering, where your peers help you ensure that you set goals take action and get results. If you want to scale blow past roadblocks and achieve success faster than you might think is possible. I suggest you take a visit over to tiepm.com that's tiepm.com and check out the investors and entrepreneurial professional mastermind