David works with owners of lower-middle-market software and services companies. His typical client will be the owner of a company having revenue between $3m-$20m and 20-50 employees. His sell-side services cover the entire process of preparing the...
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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 the how to exit podcast. Today I'm here with David Jacobs. David, I want to thank you for being on the show. You're a California business broker and got a lot of experience in this space. And I think we're gonna have a fun conversation today.
David Jacobs 0:43
Well, thank you for the invitation. Ron. I look forward to this conversation.
Ronald Skelton 0:46
Cool. We start in the same place almost every time. I kind of jokingly asked people you were born, now you ended up on a show about mergers and acquisitions. Could you fill out the gap in between? How did you end up on my show, man?
David Jacobs 0:56
Well, there were, there were a few years in between those stages. But you know, I grew up in the Midwest and I lived on the East Coast for a while. When I came out to California in the mid 90s, I went to the corporate software world and worked at companies like Oracle and Siebel systems, BMC Remedy, and SUSE Linux. And then I really made a career change and decided to pursue something entrepreneurial, I took over a family business. And it was my father's and my mother's out of it. It's kind of a family emergency and I stepped in. He sold commercial printing, almost exclusive catalog work, and worked with four printers and had a you know, a nice list of loyal customers. So it was a good business for him. And I saw an opportunity to expand it by creating some software. And that's what I did for seven years.
Ronald Skelton 1:50
Awesome. So you actually got to play the role of taking over the family business. I did that at an earlier stage of life when I was 16, almost 17. My father owned a painting and remodeling business. And he kind of just said, you know what, you run it and I'll work when I need a little extra cash to go fishing or something. He overseen it. It was kind of like I now see that it was him training me. But you know all our all the all the people that work there and helped us out all knew me as the guy that ran it. Right. So it was an interesting way. The fun thing was is I think I was an entrepreneur from birth because I told the story on the show before but I asked him to probably 13 or 14, I asked him if I could work for him. He says, oh, you're not old enough. You're not old enough, maybe a little bit younger than that. And I'd already worked a summer job stocking shelves at the local gas station where my mom had worked. But uh, I wanted to earn some money. So I just grabbed the push mower, we lived about five and a half miles from the nearest house, like we were like from town. Everybody, my next door neighbors had 3000 plus acres, right? So we had a little 26 acre pecan Grove. I grabbed my, the family push mower and push it all the way into town and started mowing lawns. And after a week or two of that my dad's like, if you're willing to work that hard, I want you, I want you helping me. So that started the going out and painting houses with my father. Let's jump into kind of, there's a, there's this kind of boiling up topic that everybody's asking about. And we thought you and I talked about it before the, before the show a little bit the economy, the interest rates and stuff, you know. How do you see that impacting, you know, business brokerage, buying selling businesses, the ability to sell your business?
David Jacobs 3:35
Sure. So you know, I can speak from my own experience. And I'm pretty narrow and the type of clients that I work with, you know, part of the firm. And if somebody comes to me, and it's not my niche, I'll refer them to a colleague. But you know, I'm very focused on software, businesses and services business. And there's a hybrid between the two, which I call a software enabled service, which is what my printing business evolved into. And, you know, I think my general impression of what's about to happen here is, you know, the interest rates are going up. The economy is going to wash out some of these companies that kind of, aren't very well managed and aren't positioned in a competitive area or within a competitive position, and, you know, they're gonna go away, and there's not going to be much they're left to sell. But the good businesses will survive. And when you think about the discount rate that's applied to the valuation of these small companies, whether the interest rate is 3%, or 6%, you know, these businesses are getting discounted at 20 to 25 or 30% in the valuation. So, you know, I don't think it's really going to affect the valuation. I think it's just going to wash out the poor performers.
Ronald Skelton 4:45
So I see that I think we were talking about the show. I know that for me, it's impacting what I'm looking for. So I think it might do that with some of the other buyers as far as, you know, what are we what industries are we looking at and you know, kind of are they recession proof? You think that's the case across the, do you think that's a personal bias of mine? Are you think that's the case? A lot of buyers take a second look at what they're thinking about getting into?
David Jacobs 5:08
Well, you know, I think it really depends on the type of buyer and the imagination, you know. You had talked about coffee roasting. And I would say, you know, do you really want to own a coffee shop in like a downtown area? Where people may or may not be coming to work every day? Probably not a good business. But perhaps that's an opportunity to develop a coffee roasting business with one retail location, and then ship those high margin beans all over the country. So you know, can you see a business that's failing, or likely to, you know, rapidly contract based on the new working environment, and then in your mind come up with a new way of bringing those products to market and grow it into something very large. And, you know, I know out here, you know, I'm in California, and people are into gourmet coffee. But there's a number of small roasters that you would say, oh, you know, this business is gone. Because people aren't coming into work. But you know, they've gotten boxes, and UPS machines, and now they're shipping their beans all over the country, and they're buying bigger and bigger roasters, which tells me, you know, business is good and growing. And so, you know, I see, I think you can, kind of make those leaps in a lot of different industries and you can get your foot into a, you know, maybe a slightly declining local business at a big discount, and then you can reposition it for something that can achieve and be successful for the next 10 or 20 years.
Ronald Skelton 6:30
So you're right in the heart of Silicon Valley, right? You're, you're you know, I lived right, I was just, we were talking about this before the show. I lived probably 5, 10 miles from you, for in the early 2000s, for about nine years worked up and down that valley. Is the reason that you're in that software and that stuff is just because that's what's abundant around you, or is it because that's what your backgrounds from?
David Jacobs 6:54
You know, I would say it's both, and I would say that, you know, most of my clients are not local, because of venture backed startup does not use a business broker. You know, those are, those are either grow very quickly and become large public companies, or the funding gets shut off and they decline. Most of my clients are, you know, bootstrapped. It's an engineer who went had a product idea grew into a, you know, a company, they have 20 to 50 employees. They're generally not here. So I think that really what I can bring is, you know, I, because I worked in this world, I do have contacts at these large public companies like Oracle, Microsoft, LinkedIn, blah, blah, blah. But I also understand the business. And I think the understanding of the software business, from a business broker perspective, is pretty unique. You know, if you're doing 20 or $30 million, you'll meet lots of very knowledgeable investment bankers that can help you exit your business. But if you have a software company doing three, five, maybe $10 million, there's not that many business brokers that can really navigate that they don't have that kind of corporate or experience. And I think that's what I bring.
Ronald Skelton 8:00
I was kinda I guess, it's, uh, I was kind of making the assumption, you would end up dealing with a lot of divestitures and stuff, because where you're located. You could get very many of those? Where people are, the bigger companies are trying to divest of, you know, some, some software company or piece of a software company that they had bought that they don't really need.
David Jacobs 8:20
That, no. I haven't found that. It's usually just an owner operator. And, you know, they're, they, the private equity funds are very active at cold calling, and trying to engage in a non-competitive transaction. And the best client of all, for me, is when one of those deals falls through. And that, you know, the seller has just, I just spent $50,000, and accounting and legal fees, and you're not interested in my business anymore. What, what just happened? That's a, that's a great client for me, because they've been through the process and they know what to,- they all create competition. So,
Ronald Skelton 8:57
I actually had a gentleman on the show that he has the defense or software security type of business. And he, he only gives a like, I asked him what is sourcing dealflow was and the reason I was asking about divestitures is he's got connections through all that. He buys a lot of companies divesting, you know. They, they buy a bigger company that had a software arm doing a different product and they didn't want that product at all. So he buys those. But uh, so let's go into you know, kind of just what is it the heart and soul? How do you, how do you evaluate a software company? Or the, in your business are the valuation is different? Because I know the mom and pop brick and boring companies I have usually sell between 1x to 3x. And it's just kind of cookie cutter. I know a little bit about the software space and that those evaluations are both a little more complex because recurring revenue and often above that multiple.
David Jacobs 9:55
Yeah, so you know, software companies are somewhat unique. They, they can be so desirable that people don't even pay attention to the, you know, STE and EBITDA. They're looking at top line revenue growth, which I don't know of any other industry that or that exists. And it's just the the amount of competition and interest there is from the buyers. But yeah, you know, recurring revenue with low turn is highly valued, and you can get multiples, I don't know, up to four or five times, revenue, recurring revenue. Services revenue, and, like, custom engineering work is less valuable, because you really can't predict, you know, when the, when the next payment will go through on the credit cards. But yeah, it's a, it's slightly different and I think, you know, what throws people off, if they haven't done a lot of software transactions, as they get into, you know, trying to do a multiple off of earnings. And that really breaks in this space, because, you know, software company can grow so quickly, that the earnings multiple, essentially doesn't make any sense.
Ronald Skelton 11:01
I get that. It was interesting, you said it was off at revenue, because that's there's very few. I don't know if there's any other there probably is, but industries where they're multiples off the revenue, as opposed to the, I mean, you can always calculate it, but, you know. I can get it, I understand why, just because a lot of the companies are doing the acquisition. They're publicly traded, and all they're trying to do is increase shareholder value. And so by acquiring something, plus, a lot of times they're acquiring for the talent. So some of the software companies get bought, because what engineers and software, you know, experts you have on staff. And it's so hard in this valley to hire great people, that it just makes sense to buy those companies for the talent.
David Jacobs 11:46
It does. And, you know, it's, it's very hard to decide if the, if the company really has strategic value and who that would be, versus some financial value. And, you know, what we read in the press and all these strategic acquisitions, by popping multiples, and, you know, there are strategic acquisitions happening in the kind of lower middle market where I operate. But there you know, it summer, you know, I'd say half, half, you can find a strategic buyer. And then the other half is more of a financial buyer. It's a private equity fund that, you know, sees it as a standalone business, it could be bolted onto another acquisition, and there'd be some synergy. And then the idea is to grow it and sell it as a middle market company. So you know, five to seven years down the road.
Ronald Skelton 12:29
So if you, if you got a listener out there, and they operate a software company, what are your three top things they need to know before they sell? Is there any different than a brick and mortar company?
David Jacobs 12:40
You know, I would say that for a software company in the lower middle market, which is you know where I am. So you know, 3 million to 20 million in revenue, the buyer pool is pretty limited, right? Because these, if your business is running well, it's going to be worth way more than the $5 million SBA loan. So it's very hard to sell this to kind of a person, right an owner operator, because they just can't come up with that amount of capital to buy it. So you're really looking at like a private equity fund. And the interesting thing about working with the private equity buyers, is that they have a tremendous amount of capital, right? They're not cash constrained at all, where they are constrained is with time. So getting the business properly packaged and put together so they can quickly say yes or no without spending, you know, 10s, or hundreds of hours, I think is the key part in courting these types of buyers.
Ronald Skelton 13:31
It's interesting and let's talk a little bit about the structure of the deal because it is different. Usually an SBA loan, almost always, I would say 99.9% is 100% buy out, and the owner cannot be involved afterwards to the fact that they can't own anything. The SBA has a guideline, and it says you're buying 100% of the company. The opposite is typically true, from my understanding from the private equity and that private equity wants to leave some of the equity with the, the original CEO, and have them stay around and do an earn out or you know, to operate the company. Is that true in most cases?
David Jacobs 14:10
It is and I broaden this bit. There are four or five different types of buyers. You know, really understanding what, what my client the seller wants in terms of their you know next five or 10 years of their professional life. Lets me know who to approach, right? So you know, a private equity fund is not a long term buyer. They're a buy, grow and flip. Right? If you're okay with your business being sold again in five to seven years, that's potentially a good pool of buyers. But you got to remember that a private equity fund is really a financial buyer and their financial from, their managing a an asset portfolio. They're not operators, so they need somebody that's able to show up to work every day and run the business. And this is kind of the shortcoming of working with a private equity fund. If you look at like a family office, you know, there's absolutely no intention of flipping. They're going to own that thing for 15 or 20 years, they want to grow it as big as they can. And then they're going to pull out distributions. So it's a very different approach and depending upon, you know, what kind of business and what kind of, I guess values that the seller has, you kind of know who to, who to pursue.
Ronald Skelton 15:22
It's interesting is uh, I had Adam Coffey on here, and he, he, he grew a heat and air, I want to, I think there's a second one, to a billion in revenue, and we were talking about that process. They sold that to private equity, I think, if I'm not mistaken, like five times, and each time they wanted him to stay on as a CEO. So he sold like 80% of it got to keep 20 or whatever, and then they sold 80%. And you know that and he just, you know, if you look at that there's, there's a way inside of this, you can get multiple paydays, if you're, if you're a good operator, you don't mind hanging around, and you're just looking for ways to increase your wealth, and exit to a private equity, where you will remain in and have a system growing, because those guys are you know, they're acquiring other companies and plugging them into you. There's a lot of stuff going on. If you're a great operator, I don't know there's, there's a faster way to considerable wealth than, than working through that process.
David Jacobs 16:19
Oh, you know, I completely agree. The, the buyers that come with institutional capital, whether it's a you know, a private equity fund, or a corporate strategic buyer, family office, these guys are very sophisticated and very bright. And if you have the type of personality where you can work well with those types of people, and in a collaborative way. I think that there's tremendous, you know, one plus one is three, right? Because these guys are going to bring a perspective and a capital and access to talent, that is a small business owner. There's no way you can come up with this by yourself.
Ronald Skelton 16:54
So is there any difference between like the family office and the private equity owner as far as what they're looking for? Since scenario one wants to flip it and needs an operator, and the other one's gonna hold on to it for long terms. Is there a different way to prepare each of those?
David Jacobs 17:09
I think it's what the business is, and how defensible the position is. So you know, I would say like some type of a consumer focused software, or a SaaS business is probably more of a private equity play, because they have a short timeframe and looking, they really want to hop on the trends and grow, whether it's some kind of consumer product or a business application. Whereas you know, if you have a software product that's, you know, well developed and mature, so not much engineering effort, and you control a small niche that, you know, it can't be very large. So the big public companies won't consider it. But it's completely defensible. And there's no way that you know, Google and Microsoft and those other players can get in there. That all of a sudden becomes a candidate for family office, because they know that business has to survive for 15 or 20 years. That's their timeframe.
Ronald Skelton 17:59
I get it. So I love,
David Jacobs 18:01
Making a classic versus a hit movie, right? You know, the private equity guys are looking for the hits. The family offices looking for a classic that, you know, people will watch every year and they'll continue to collect the royalties off of them.
Ronald Skelton 18:14
I got it, I got it. So listen, I love a great story. Tell me, tell me about one of your favorite deal transactions. You know, you don't have to name the company. I know, there's non disclosures and all kinds of stuff like that. So whatever you feel comfortable sharing which one of your favorite deals you help facilitate.
David Jacobs 18:30
Um, you know, I can talk about a software company that I sold, where there were, there were two partners, one guy was in his mid 60s. And it really devoted most of his working life to the business. He'd been at it a little over 20 years and, you know, pulled a small salary but certainly did not get wealthy from owning it and running it. And he had brought on a younger partner who was in his mid 30s very capable software master's degree in computer science from a very well respected school. And the younger guy ran the business day to day. The older guy kind of stepped back and was doing more accounting and receivables and kind of strategic plans. And uh, they needed to sell and you know, in a normal business, the young guy would take out an SBA loan and buy out time. But with software company evaluations there was no way to get that around to kill. So we you know, we packaged it up and went to market and we really got met uh, just a number of very impressive buyers. I think we got 14 offers to large public companies and private equity. Anyway, we we got way more than what the financial value of the business was and the younger guy was actually hired by the, the buyer a large public company and given a very high level role, with guaranteed impressive salary for many years and not only did they both get a fair amount of cash. But it really the young guy who still had lots of ambition and drive really got moved up onto a kind of a global stage from what was, you know, a small platform that he was working from the path earlier. So it was just a great deal all around not only financial, but also in terms of everybody's career.
Ronald Skelton 20:16
Awesome. So what's a, is there a horror story that you're willing to share? Like just something like terribly went wrong and in their you know, or maybe even something that has a great value learned lesson learned that you you know, you'll avoid next time?
David Jacobs 20:30
Well, you know, I'm, I'm pretty new at this business brokering job. I've been doing it a little over three years now. You know, most of my clients are great. I have a client now who's you know, I mean, we're in due diligence, this deals gonna close. I'm gonna miss talking to him every week, because the deals gonna close. And we'll both be on to the next thing. They're great. I had a client in the past that just refused to listen. And, you know, I guess my takeaway from that is, it's really, it's a partnership, right? I'm not your vendor, I'm your partner. And, you know, I'm going to see all the dirty laundry that's hidden in your financial statements, and understand both the good and great you know, decisions that you've made along the way, and also see some of the mistakes that have been made. And if you don't have that kind of personality to work collaboratively, I'm not going to be able to find you a buyer, because the buyers are bright, and they're going to get into the details and find out what's happened. And if you can't say, hey, you know, I tried this, and it didn't work. And this is what I learned. And this is how we pivoted, if you become defensive, you know, none of these deals will ever close. Because the buyers can't work with somebody like that. It's you know, it's a transaction between two people in the end. And if you're not the kind of person that's trustworthy, over the 12-month transition, you know, nobody's going to risk capital with you.
Ronald Skelton 21:49
I think the other side of that is if you try to hide any of that, we're gonna, you know, buyers are gonna find it, and then you just destroy trust, you know.
David Jacobs 21:49
You have to get out in front of it.
Ronald Skelton 21:58
Yeah, it's one of those, if I find something that should have been disclosed, and it wasn't the it's just natural to, okay, what else are you not telling me.
David Jacobs 22:07
Ronald Skelton 22:07
David Jacobs 22:09
Everybody appreciates how hard it is to be an entrepreneur. And they like, you know, if you say I tried it did work. I think that's more attractive to a buyer. Than, you know, not not disclosing, not talking, making the business seem really simple, which none of these are everybody would be doing it. It's, it's, it's really just a, it's a transaction between people, and you need that kind of personality, to work collaboratively. I think is what I've learned.
Ronald Skelton 22:35
I'd love to actually have conversations with business owners and find out what didn't work and why it didn't work. Because that's my first question is what didn't work about it. Right? And the reason is, is you're handing this something before buying this. We already see what works, it's on the books, it's, I've got, you know, hopefully I've got some operating procedures around it and everything. But knowing what you've tried, how you know, how you went about trying it and why it didn't, why you feel like it didn't work, is very valuable and the fact that anybody buying something, things are gonna grow it, right. They're gonna, they're gonna go out and try things and grow it. And, you know, I've had one guy, you know, he, he almost sunk his business was something he tried, and didn't end up buying the company. But I honestly think the only reason it failed when he tried is, he was probably about a year and a half too early. Right? You know it's uh, you know, I just moved back to Bay Area. I'm about an hour and a half north of you. I'm in North Bay now. And you know, when I first lived here, it was the 90s. I used to solo fish, the Sacramento River in a canoe, and people thought it was crazy. Now I see people out there. I was fishing for sturgeon in a canoe and having them dragging me up the river. And I see people doing it on YouTube constantly in kayaks. And in the 90s, I was crazy, now it's an easy thing to do. Same thing with some of these things in the business just because somebody tried it, they might have just been too early to the market. And but just understanding what they tried what when they tried it, you know what they would have done different. That's consumed considerably valuable information to, you know, to have conversations about. So another reason why I think the private equity guys and even myself are willing to leave some equity on the table for the previous owner, just to have a reason for us to chat on a regular basis. You know,
David Jacobs 24:27
Really, you know, business is a team sport. So, you gotta have a team behind you. And, you know, some some, I've coached some of my clients who say, Oh, I work 70 hours a week, I work so hard. That's not attractive to a buyer, right? You're like, I work 40 to 50 hours a week. Sometimes I get called in the evenings, but, you know, my staff is great. And if I got hit by a bus, the business will continue to operate, and that's what the buyers want to hear.
Ronald Skelton 24:52
That's what we want, right? I got on the phone, a friend of mine was looking, looking in the auto industry and he I don't think, I think he got it through a broker. Or one of the Biz Buy Sell type of sites or whatever. But it was a, they did an upholstery. They did window tinting, and you would think that small, but they were doing one point and this is an Oklahoma, Oklahoma City. They were doing like 1.7 million revenue, tinting windows and fixing upholstery stuff. So it wasn't that small. And as we get to talk into asking the owner or, or the broker, so what does the owner want to, you know, sell? Well, he wants he wants more time. He's a professional golfer. He wants more time on the golf course. I was like, Cool. He's willing to stay on part time. And so my response was, okay, what's part time? And he says, oh, you know, 30, 40 hours a week would be wonderful. I'm like, okay, wait a second here. Now, how many hours is he working? And turns out, this guy is working 13, 14 hours a day, you know, six days a week on this business. And he has not one but out of seven employees, he has two others. So three people are working those kinds of hours. He has a window, he had a window tint or the like the out of all that business, I think 80% of was was the tinting. And one guy was doing all of it. Because he was on commission, he loved to work. He would work 15 hour days on a regular basis six days a week and make a ton of money because it was commissioned based. You know, the guy is a buyer I was working with a friend of mine is about to pass the bar. And I said, well, you do realize there's some labor issues here. Right? You know, you're about to pass the bar and you're going to be under deep scrutiny. There's a couple of things, you wouldn't be hesitant. I don't think you can call that guy a 1099 employee the way he's doing it. So there's a lot of stuff that rose up. But when you did the math backwards, a lot of the sellers don't realize when we see that, I see you're working 90 hours and working three jobs. I have to, you know, when you're adding back your salary, or whatever. I got to take back and look at the three salaries it takes to replace you. So they had three people working the job, just six or seven, you know, depending on how you broke it out. The company wasn't very profitable.
David Jacobs 27:01
Why is it? Why is there so much labor involved in producing that amount of STE, right? Could the business be organized in a different way, or the pricing models changed to be more of a reasonable level of commitment?
Ronald Skelton 27:13
Yeah, and that's great. But we're not turning around buyers, right? We, we actually don't want to buy anything. We actually have to physically operate for more than a few weeks of you know, getting used to it. So you know, I can't bring in a single operator to replace the owner. I have to bring in three. And then I have to bring, you know, break that one guys weren't done and have at least one apprentice underneath him in case he decides he's leaving and doing it on his own. There's just so many different things. When he broke down the model, the math just didn't make sense. It was not nearly as attractive of a business. So that happens in the software world, world too. I came from that space. I lived here in Silicon Valley, I was director of operations for some of the bigger IT companies and tech companies in town. And it was not uncommon for people 60, 80 hour weeks, right? Every, I was responsible for all the computer systems where every outage they ever had. If it wasn't fixed within so many minutes, they hadn't been getting me on the phone. Right? Even as an, even when I got all the way up to the senior director, everything escalates, right? So I said, I've been on the phone in the first five minutes of outage when I was attacked. Now it might be okay, you're down for 30 minutes, you have to call me. But you know, that's the way you get to stuff. So even in the software companies, I think you have this problem where you know, somebody acquiring, finds out, you're pulling 80 hour weeks. There, that's just,
David Jacobs 28:36
And you know, if, if you're writing software, and maybe have a team of five or 10 engineers working for you, but you're the only one that can make like the architectural decisions. Why is it so complicated that you're the only one that understands. That's, that's a big question for a buyer, right? Because that's, that's not safe, right? That's owner dependent. And, you know, the hardest businesses of all to sell, big, small doesn't matter and owner dependent business can't be sold.
Ronald Skelton 29:03
Yeah, the other side of it is, is a lot of times these guys, every client they have only works directly through them. Right? And that happens, it has to happen the software side too. Like you're the lead sales guy, if something breaks or a service, you know, somebody needs you to fix something or report a bug they call the owner. And that, that is pretty much concrete, you and you got same issues. You can't leave that company until you get somebody that can handle those roles, right?
David Jacobs 29:28
And I would say that applies to the sales and marketing too, right? I mean, if it's if it's my reputation within a community or geography, you know, you're not me, you can't replicate that. So, we know one of the first things I talked to people about is just okay, day one, where do I find the next new customer? You know, are people calling in are they on our do I have to go to a conference? How does that work? Walk me through that. And uhm, you know, I'm surprised by how many people don't have a process and a system in place that sales you know,
Ronald Skelton 29:59
You know it's more common than you think, right? We did a roll up last year, and we were working on marketing agencies and a matter. There was a team of us, M&A guys, there's about eight of us that were on this company. And three of us were the acquisitions that were out there talking to marketing agencies. In a matter of less than 200 days, I think it was like one or 185 days, we talked to 216 agencies. And the common thread amongst them was finding good people, right? Like sourcing staff, and lead generation. Now, you would think that marketing company, now there were a bunch of those company, we were talking to lead generation companies also. They were finding, finding their own leads. But a lot of these big marketing companies, COVID really impacted them, because, you know, I used to call it you know, wine, coffee and elbows. If you can bump their elbow, or drink wine or coffee with them, you, they didn't land them. So they went to trade deal. A lot of these guys got all their customers, through trade shows, through, you know networking with, you know somebody introduce one of your friends introducing you to the owner of this or whatever. And when COVID hit, they were just at a loss. So, lead generation finding, how the customers find, or how the companies find new customers. I'm not surprised when I hear a lot of times I'm the, I'm the lead sales guy for motors, because he had to be right. When he, we founded it, you know, you started.
David Jacobs 31:27
This is a, this is, you know, we were talking earlier about how you can take a small business, maybe declining revenue and transform it. I think this sales and marketing area is a huge potential, right? I have a client now who he represented a buyer on it. Early in my career when I was working on a deal and he has a family law practice, and he wanted to sell it and he called me and I'm like, I don't think I'd be law firms. Because those are relationships, personal relationships between the attorney and the client. He's like, that's not what we're doing. It's like, we're finding our clients online through digital marketing. And we're finding a lot of them. And I looked at the numbers and how he was doing it, I'm like, wow, this, this is a sales and marketing process, just like a software company. And this will sell like, in there's buyer interest. So you know, even in a business that you would say this, this is how it works. If you can make it work, you could grow a fairly large company out of that idea.
Ronald Skelton 32:22
And those are very appealing to, especially what he's got there as a law firm. That's a very appealing to other law firms, because they're not taught that in college, right. They're taught how to do law. So the fact that he's figured out how to digitally source new clients would be extremely valuable. In those, funny thing is, I, I found out through trial and error that you can't own a law firm, at least in Oklahoma when I was there, unless you're an attorney, because I was, one of my businesses was a real estate investment firm. We spent so much money on attorneys, I was like, I'm just gonna buy a law firm and have them work for me. And then they can do other work on the side. And I talked to the State Bar Association just called the State Bar Association and asked what that process would look like this, you just can't do it. They don't allow it.
David Jacobs 33:08
That's, that's also true of a lot. Like I sold a group mental health practice. They had 50 therapists in Oregon. And you know, you had to be, you have to be a licensed physician in that state to own a medical practice. So that also applies.
Ronald Skelton 33:22
That's interesting, because there's a way around that. There's they're called medical service organizations. You can actually set an MSO or there's a dental service organization too. So to buy a medical facility, you can set that up in most states, I think like almost all but two states, you can actually do a medical service organization or dental service organization. That's what I was fishing for, is there's some type of legal service organization where I own the building, I own the systems, the processes and everything else. I did, you know and then I employ attorneys, and I can't tell them what legal decisions to make. Like you, if you own an MSO you can't tell a doctor, you can't prescribe this you have to prescribe that. That's, that's, that's, that's banned. But you can and a lot of people do. I have friends doing dental roll up where they're buying up dental offices, and that they're doing it through dental service organizations, and they're not cheap. It's like not expensive. They're about 25 or $30,000 for states. You have to set them up by state by state by state. But uh, so if you ever have another guy that wants to sell or something and you want to think about it, there is a way around that. It's just the, California is probably a double that. Everything is legal here is more expensive. So of course. Yeah, so like my wife has been, we're moving here and we're here now and I was like she was like first that's my first thing I was like, you want me to move where? I remember she didn't blink an eye when I told her I wanted to move where I wanted to move. Take care of family. So now we're, we're here. So for those of you listening, the show the reason the backdrops not my monkey anymore, is I'm actually sitting in my tiny home in a forest, in the middle of redwood forests in California. So uh,
David Jacobs 35:04
Ronald Skelton 35:04
You and I need to go get coffee or something someday. I drink hiring fees at most coffee shops carry them since I go down to the bay. I haven't been down since I've been back. But I'll be down in the bay a lot. I know a lot of people down there.
David Jacobs 35:18
Okay, well, that would be great.
Ronald Skelton 35:20
So what's one common myth inside of this profession? And specifically to software in the, in your like, there's something that's commonly known or like commonly believed in the space that, you know, in most spaces? Is there anything out there you just wish didn't exist as a conversation?
David Jacobs 35:38
You know, I think this. So I'll flip something on its head. This idea that, you know, I'm going to start high with a very high asking price and negotiate down. I haven't seen that work, not once. And the reason why is that that just like I said before, about the private equity guys, the people with money with real money, they don't have a lot of free time, and they don't want to play this negotiation game. So I think it's better to put a fair price on the business using standard multiples or metrics, however, the industry values, typical transactions, and then you attract enough buyers that you create competition, because a lot of these guys, they're very competitive. And once they decide this is the business they want, they're not going to let it go. And the price goes up. And you know, it's, it's never, you know, here's your check for $12 million. And, you know, you hand them the keys. It's always, well, here's a check for $10 million, and I'll pay you another million dollars in six months and another million dollars in 12 months. And, you know, you have to work for this many hours. It's there's always deal terms. And you really, you got by the competition not only pushes up the valuation, but it gets those deal terms to be more rational, because of course, the buyers are going to try to overreach if they sense they're the only one that's interested.
Ronald Skelton 36:54
It's interesting there's a, I was smiling, because I just thought about like, the last time I've been to an auction is I really overpaid for a couple items there, because number one, I really wanted them and I didn't like the guy bidding bidding against me, he was, you know, kind of laughing. He thought it was funny. So I was like, you can't outbid me. So he ended up getting this little awkward, you know, irrational, I want to say, war. So about eight, nine months ago, we were on the phone with somebody. Hey, I've got two other office. That's like you know, that are higher than yours. I was like, I had to say, and I was like, I'm sorry, you should probably take one of those. Because I was at where I needed to be. And I didn't even want to know what their offer was because I had the gut feeling if they told me it was like 10,000 or $100,000 more in this particular case than what I was offering, I probably would have tried to rationalize out doing them. So at this stage, I was like, I knew this was the starting of you know, them coming back to me going back and bidding this thing up. I was like you know, okay, I'm out. And uhm,
David Jacobs 37:53
But you know, the other thing I'll say is that, like the, the example I gave earlier about the software company that I sold to a large public company. You know, we had 14 offers. All, all the buyers were, you know, highly educated, extensive private equity, finance experience. Everybody got the same financial statements and tax returns. And the offer's, the highest offer was almost three times the lowest offer. So give everybody the same information and depending on what their plans are for the future, they're going to produce a different valuation and,
Now I'm gonna ask, for statistical, for statistical purposes, I want to ask this, because I've asked a lot of times when I've heard this story. Did the seller take the highest offer?
Ronald Skelton 38:25
In the end, they did.
David Jacobs 38:38
But the final buyer, at some point, we went, we had three rounds of bidding with the top three or four. There were two private, two public companies and one private equity fund. The buyer liked them all equally, though, like God, these are great guys, you know, they have different plans, but we could, we could see working with these people for extended period of time. You know, can you sharpen the pencil, we like this, we don't like that. They did take the highest offer, because that buyer said, we're buying this. And at this point, you just tell us the best you can do. We're offering a dollar more. Nobody's gonna take this from us. So we can either, you know, run through 100 iterations of this, or we can wrap this up now. And they want to get it in for that fiscal year with their taxes. So they're like, okay, this is the highest we could get. We went back to the number two and said, hey, you know, could you push this up by 2 million, he's like, if I lose my job, but you know, I'll bump this up a bit more that we could we could still do it. But I understand the situation and, you know, we realize we're probably not going to get this one.
Ronald Skelton 39:42
That's interesting. The reason I asked that is, most often, I would say almost 80, I'm guessing here. All statistics, are all the statistics on this show are made up in my own head. About 80, 85% of it and my guess is the highest offer is not the one that's accepted. It's the person you, and especially with the brick and mortar companies is the person who's taking care of the brand, the employees, right? There's a lot of other factors that come in other than the number. You know,
David Jacobs 40:09
I would say that it's, it's typically the highest cash offer, because there's always a deal structure. And somebody might come, I mean, I'll just throw numbers out, let's say somebody comes in offers 12 million cash plus another million in a year. And somebody else comes in offers, you know, 15 million, but it's 7 million cash and 8 million over the course of three years. Typically, they're going to take the most cash up front. And it really depends on the employees and the timeframe, you know. If, if they're selling to a private equity fund, they know that business is going to be sold and probably changed. But if the buyer has a history of coming in, and you know, firing all the employees and changing all the contracts, that's going to be a big red mark. And is unlikely to be accepted.
Ronald Skelton 40:53
I didn't think about that. Buyer history. Actually, that would be a huge, especially in the P&E, and the private equity and the family office. Is you could, you know, I've never even considered that. The, that has a huge play into you know, the decision making process. What did you do with the last, what did they do with the last three companies they bought?
David Jacobs 41:13
Well, even like, even before that stage, when the offer is accepted and closed, it's you know, they're making an offer. How many offers have they made? And how many deals have they cross the finish line with? Because from a seller's perspective, you know, usually in exchange for accepting an LOI, there's an exclusivity period. And I think the business off the market. And that slows, I mean that's, it's not devastating if the deal doesn't close, but it means restarting, and then explaining why the deal didn't close, because it would raise the concerns from the other buyers, that the first buyer found issues and due, due diligence. So, you know, it's really asking for a fairly large commitment.
Ronald Skelton 41:51
So we're about 40, 45 minutes into this. So I want to cover a couple of things. What resources are out there. If somebody, if they're, I don't know if, you know the family offices have their stuff together? So in the private equity, from the sellers perspective. What resources are out there? How do they contact you? You know, if they're thinking about, okay, I'm looking at exiting in the next, you know, six months, three years, you know, somewhere in that range. Where do they need to start? What resources are available to them?
David Jacobs 42:21
Well, you know, people that have lower middle market size businesses are welcome to contact me. I'm you know, I'm open and willing to network. And I like meeting people and hearing the story, even if it turns out, it's not a good fit. But you know, three to 20 million in revenue and 20, let's say 20 to 50, or 15 to 50 employees in the US, love to talk to you. I have a website that I run where I create some blog posts around my thoughts. So you know, if I said anything interesting or controversial, there's probably a long form kind of article that I've written with those same ideas, because I tend to repeat. So that's davidjacobsbusinessbroker.com. And I'm also, I'm a very big believer in Exit Planning. I do have the SEPA certification, even though you know, I don't use it in a formal way. Like going through the exit planning exercise, even in a, an abbreviated form with somebody like me, or some there's lots of people that can do Exit Planning, and getting an idea of, you know, what's the business likely to receive offers for, what are the tax implications? So you know, working with your CPA, understanding what, what is documented and structured in your business. So that when it's time to go, in your time to sell the business is well structured and ready for a transaction. I think is a really great first step.
Ronald Skelton 43:44
Awesome. Appreciate it. And then uh, for you guys that are watching the show, you already know that I've got his name up and his LinkedIn profile up there. For those guys who are just listening in. It's the standard LinkedIn linkedin.com/in/davidjacobs. So actually, it's uh, let me double check that. It's David,
David Jacobs 44:01
It's Dave Jacobs is mine.
Ronald Skelton 44:08
David Jacobs 44:08
If he start for David Jacobs business broker, I should come up.
Ronald Skelton 44:13
Yeah. You need to put the business broker. Your name's fairly calm. I just did it this morning. And we're connected. And I was like, I had to dig a little bit. But if I wasn't put business broker up there, it popped up. I could see it. But it's Daves, D-A-V-E-S. Jacobs with an S doc. That's, that's the name you have under your URL. So it'll be in the show notes, and that stuff. So, I want to ask the favorite, my favorite question we'd like to talk about is, what can my audience or myself do for you? What is it, what's your next step in your journey? How can we help you move forward?
David Jacobs 44:44
So you know, I'm always looking for sellers who own quality businesses that have a reason for selling and you know, I see it as a partnership. So if you are a seller and you're considering exiting your business, it's time to retire or something's come up in life. You know, I'd love to hear from you,. If you want to introduce me, you know, I'm open to referral fees. If you're a broker that's representing a buyer, and you're interested in one of my clients, you know, I'm here to get the deal done. So I'm glad to pay referral and fees like that and share in some of the success fee that I did these transactions.
Ronald Skelton 45:20
I love networking and networking meetings and stuff as I get out and meet people around this space. And you know, and go through the different meetings. I go through, I'll keep my eyes open for companies that fit your, your profile too. Nothing, nothing makes me happier. And they've got hey, I got a guy. So appreciate that.
David Jacobs 45:38
Ronald Skelton 45:38
Let's see here. I think that's it, man. Was there anything cool? Like, what, we asked a lot of questions, we covered a lot of topics. What should have I asked? What did I miss?
David Jacobs 45:48
You know, it was a good conversation, and you want to talk to so I'm really enjoyed it. There's not a lot of opening the mind, it's the business broker and thing is really a transaction between two people. So you know, it's talking and networking. And, you know, if you're allowed to talk to a number of brokers and get a feel for who you're like, if you're a buyer, you know, you want to meet not only this, which will help facilitate the transaction, but you really have to meet a number of business sellers, to get a feel, and you'll find your way. It's a not a big fan of entrepreneurship. And, you know, buying a business is, I think, a quicker way to earn a living than trying to start something from zero. It's a hard road to try to launch from nothing.
Ronald Skelton 46:31
Yeah, I think it's got a higher chance of success too. When you buy one, it's up and running, it's yours to crash and burn. And hopefully you won't do that. If you look at statistics, the odds of starting something, having the market accept it, and then having it grow to something significant, is very difficult. I mean, it's I did the math and the average, like if you look at, I think, I think they've come down to like one and 2000 companies that are actually started ever crossed a million dollar revenue model. And, you know, again, like I said before else is just statistics on the shore made up in my own head. But if you look at the first five years, you know, so many failed, and you have those out of the ones that succeed past the five years. Only a certain percentage, very small percentage of those cross that million dollars of revenue. And you can either play a game and go try to start, you know, 100, 200 or 1000, 2000 businesses to cross that market. Good despite one that's already there. So, well I appreciate it, I appreciate having you on here, man. I think it was fun. If there's anything else you want to add. Make sure people know how to get a hold of you. Your links are in the show notes. If not, I'll call it a show.
David Jacobs 47:42
Okay. Well thank you very much for the conversation. It was great. Welcome to California or welcome back.
Ronald Skelton 47:47
Welcome back. Thank you very much. All right, hang out for just a second after we end. And that's the show, guys. Hey, it's your host, Ronald Skelton. I want to thank you personally for watching the show today and invite you to call our new hotline 918-641-4150. That's 918-641-4150. Call us and tell us about our show, ask questions, suggested guests or even tell me about a business you have for sale and we'll reach back out to you. Again that number is 918-641-4150. Call our hotline leave us some information. Thank you. The investors and entrepreneurs professional mastermind. The investors and entrepreneurs professional mastermind combines that additional peer to peer mastermind introduce first in Napoleon Hills 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 T i e. P m.com. And check out the investors and entrepreneurs professional mastermind.