How2Exit Episode 63: Lisa Forrest - Co-Director of Sponsor Finance and Search Fund Lender.

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.

And now a moment for our sponsors. I want to highly recommend you get acquisition Aficionado magazine every month acquisition aficionado magazine brings you tactics for business buying and selling you won't find anywhere else learn firsthand from industry leaders who share their success stories featuring in depth interviews and stories from leading figures in the business acquisition industry. This multi platform mobile magazine speaks to acquisition entrepreneurs wherever they are in the journey. And I want you to visit acquisition aficionado.com today. Hello, and welcome to the how to exit podcast today. I'm here with Lisa Forrest and she is the co-directors and sponsor finance search fund lending at Live Oak Bank. And we're going to talk about all the things around funding m&a and acquisitions today, thank you for being on the show today.

Lisa Forrest  1:23  
Thank you so much for having me, Ron, really appreciate it.

Ronald Skelton  1:26  
You know, I always like kind of starting off from the beginning. But like, sort of out of all the areas you could have went into in banking. How did you get into to landing, funding m&a deals?

Lisa Forrest  1:36  
Well, like anything sometimes it's just sort of the place in time where you find yourself. Sometimes you don't necessarily have a plan, but you go with it anyway. And that that's me. I, I graduated from college in the 80's. The economy wasn't great. I got offered a job at Bank of America. So I took it right I moved from Northern California down to Fresno California wasn't my first choice. No offense to anyone living in Fresno wasn't my first choice. But that was the opportunity I was given and I was gonna make the most of it. So I moved solo in my Toyota Tercel and started to kind of create a banking career for myself. And I loved it. SBA, Small Business Administration lending at the time, it was a lot more kind of bogged down. I know there's still a lot of stories around Oh, SBA loans are so hard to get but , but really, they're, they're, they're pretty cool. programs just got to work kind of with right people on it. But anyway, I was given the chance to, to research SBA lending for Bank of America in Fresno at the time, no one else wanted the job. I was, you know, 21 years old and said, Sure, I'll take it on, and fell in love with SBA lending, and then further sort of qualified my niche for business acquisition and m&a, lending, largely kind of cut my teeth on SBA lending for our next generation of entrepreneur. And I've never looked back, it's been a 36 year career for me, kind of all starting from just this opportunity that I grabbed on to and did something no one else seemed to want to do. And I kind of created a really nice life for myself. And I count myself very fortunate, very lucky that I've helped a lot of people in my career, and I'm really just really proud of that it's been very rewarding.

Ronald Skelton  3:28  
That's awesome. And it's, you know, it's really rewarding. This whole that is coming. I think it's kind of becoming more popular now. Schools are teaching what they call ETA entre, entrepreneurship through acquisition. And they're seeing a need in the marketplace for it. And, and you know, I, I mean, when I did my MBA, maybe it was because I was in marketing or, you know, instead of a straight entrepreneurial program, but I wasn't, you know, taught the art of mergers and acquisitions, it was like, it was, I don't remember hearing about it in any of the other courses, either, you know, but now it's, it's more popular and, and a lot of the schools and stuff. So, I think, I think there's a need for it. I think there's going to be a lot of drive here over the next few years to try to do something with a lot of the companies that are, you know, owned and operated by the baby boomer generation, and who you know are should be or could be looking to retire soon.

Yeah, absolutely. Way back when it was, you know, nothing fancier than just business acquisition. And we, we've always had a need in our country to provide for exits for our small business owners for our privately held companies out there. I mean, we are funding I mean, your how to exit I mean, we are I'm on the funding side, so I am providing the fuel for our small business owners to retire. Their wealth is built up in their small business and, you know, there might be some business owners that own real estate and other assets and they You've diversified, but to the most part that the largest chunk of their retirement is, is held up in the business value. And I, I use the word rewarding earlier, it's been men really rewarding for me not to only help finance the next generation of entrepreneur, but I feel a lot of pride in helping our business owners exit with their retirement dollars. They've spent years kind of building up their companies, My, my parents were business owners. And I mean, it's just something that I've really enjoyed being part of in that financing that silver tsunami, which is just building and gaining even more momentum.

There's, there's a, I want to call it a myth, or a rumor or something out there, that the investment bankers and the, you know, search funding world is all for like Ivy League college grads, and we were talking a little bit before the show, I know better. So let's talk about who can get funded with what you do.

Yeah, so for me, there's, there's a place for everyone. A, a big chunk of what I do during the day is help our, you know, MBA students that are transitioning from their, their programs, who are literally going into business school, to get education to prepare themselves for this acquisition process, the acquisition opportunity, and I'm all for that, that's amazing. Our business schools are doing an amazing job. And myself and my co director, Heather Anderson, I mean, we spend all day long every day helping promote that being mentors and educators for our next generation of entrepreneurs. So that's a big part of what we do. It's not the only part. This next generation of entrepreneur, the need for that, whether you call it entrepreneurship through acquisition, ETA,  just m&a business acquisition, you know, however, you come to the space, if you're coming with an MBA, that's terrific, I, I mean, great, you, you've taken the time, the energy, the expense to educate yourself. If you're also coming to business acquisition from your W two job, you want to transition out of corporate America, you want to transition out of what you've been doing, you've got a nice resume, that could allow you to, to operate lots of different kinds of companies, and you don't necessarily have the MBA behind your name. But you've got a desire, a skill set a passion for owning a business, there's room for, for all of that. And really, that's how I came to this space was financing business acquisition. And then the kind of the, the knowledge base around it getting a little bit more formalized and having more methodology around it. That's great, too. But there's room for, for everybody that wants to be a business owner.

So I can already kind of get a good guesstimate I guess I would say a what, uh, what the bank would want to see it in the business itself. Like, you know, their financials, the, the history, you know, the industry and all that. But what would the bank look at in the individual? What was the what's, what's important that the individual has, you know, as far as, as their credit score is their work history and the related like, I know, SBA, they, they want to make sure you have some ability to do the job of the company or buying some related experiences stuff. Is that okay? Is that the same with conventional loans? Or what, what does the individual need to present of themselves to you to get the bank's interest?

There are some of the same aspects, some of the same process. If you're sort of buying a home, sometimes our, our clients like to liken it to buying a home. There's certain aspects of the process that seems very similar. But there's a lot different when you're buying a business. Yes, the personal side, and I'll talk about that in, in a minute. I really want to lead with debt service coverage, cashflow coverage, the quality of the company that you're looking to buy. Sometimes we have folks coming to us that want to get pre qualified first before they've even found a business. And it's really the the marriage of what the business buyer is bringing to the table, either via their resume or their personal financial statement. It's, it's the marriage of that leading strongly with the analysis of the company that they want to acquire. We are looking at certainly the credit score of our buyers, you know, bankruptcies, short sales, foreclosures, things like that, on your, your personal side of the ledger are gonna be really tough, at least for us at Live Oak, because we, we look at how you've sort of (inaudible) yourself and the the SBA for speaking about SBA in particular with part of my answer here, the SBA is there to mitigate and shore up a collateral shortfall. The SBA program for businesses acquisition is designed to be a cash flow lending program. So the fact that you might not have full collateral to support the deal, you know, you might not have is it really getting a $5 million loan, let's say, you know, we're not necessarily looking for $5 million worth of collateral. And you may not have run your own company before. But aspects of your resume should give us indications that you are qualified to sort of figure this thing out from an operational standpoint. And we, we definitely heavily look at your, you know, credit score and, and how you've sort of paid your bills, etc. In combination with a heavy emphasis on cash flow analysis, cash flow coverage, the ability for the company to pay for the debt that you're seeking on a historic basis. So it's both aspects coming together to give us a feel if this is, you know, good idea. There's a lot of quantitative numbers, cash flow, debt service, coverage, structure, but there's a lot of qualitative too. And so our buyers are generally telling us a story about how they're going to be able to come in transition, the seller transition that the customers, the employees, and kind of what's in their head, show your work. How is it? Why is it that you think this acquisition is a good idea? And it's you working with your lender to see if that all tracks? did? 

You

Lisa Forrest  11:33  
I know, it's really kind of a long, rambling answer. But 

Ronald Skelton  11:36  
that was good. That was good. 

Lisa Forrest  11:37  
Not one black and white way to look at it.

Ronald Skelton  11:40  
Yeah, that's good. Now, you've been doing this long enough that you've been through economic cycles. So the question I have is we're facing, you know, they're toying with they're like, Okay, we're in recession, we're not in recession, we're toying with, you know, this, this could be bad, or maybe it's not going to be so bad. But over that, during, during these times of uncertainty in, in the financial institutions, and in the financial markets, the, the banks and stuff to the purse strings like kind of tighten up and it becomes stricter and harder to lend, or is like a good business, still a good business, and you guys will find a way to get it funded.

You know, this is really interesting. I mean, we're, we're having this conversation every day, at least at my bank. And there's a couple of things we know for sure. capital's more expensive debt is more expensive now. So compared to January of this year, compared to August of this year, if everything else stays the same, the price of the company stays the same. Nothing else has changed. The debt is more expensive. So the way we look at business acquisition is it's a balance. It's a balance of the capital stack, the capital structure, it's a balance between your debt, your equity, and I submit your seller note. So most SBA loans are done industry standard with some amount of seller note in second position behind the bank. So you know, the seller isn't getting all of his or her money on day one. Couple reasons for that. One, it just aligns everyone's interest to make sure that this, this new buyer coming in is successful over a very long period of time. So all things being equal. If the business still costs the same today that that price hasn't changed. The debt service or the EBITDA is still the same debt is more expensive. So now debt service coverages margins are getting skinnier. So what are we going to do with that? You know, we're in the middle of figuring all that out, I would say, at live oak in our sponsor search from lending. Our, our credit policy hasn't changed. But I will say our credit standards are, we think reasonable thier we typically want a little bit more debt service coverage than maybe the, the lowest levels of SBA lending policy compared to other SBA lenders. And we're unapologetic, unapologetic about that we do want a little bit more coverage and margin out in the marketplace. So our deals are still getting done. But our cash flow coverages always been a little bit higher. So on any given deals, some of our debt services might be a little bit skinnier, but they're still meeting our standards. And above I have heard in the marketplace, there are some lenders because they still wanna keep up with the same amount of volume they've always done from a production standpoint that they might be lessening, lessening their debt service requirements, which might seem a little bit more like whoa, shouldn't you be tightening up? Well, each lender is going to have their different viewpoint on their level of risk. So we're not actually changing our standards because I think they've already always been kind of where they should be. But it's, it's gonna be interesting to see what happens over the next six months. So now our price is going to come down a little bit to offset everyone's kind of balance in the acquisition project we're, we're hoping that's the case. But we'll, we'll see kind of how sellers want to participate in this part of the process.

You brought up something that indirectly, it's fairly important for all of our listeners to know is that on all government loans, whether you're buying a house or an SBA loan to buy a business, the government isn't loaning the money the bank is and the government is insuring or backing or guaranteeing it in some shape or fashion. So therefore, a lot of people think, well, they read they go to SBA site, this is, this is what SBA says it requires, and they don't realize the banks at Liberty, that's the minimum to get, to get insured. And now the bank has to build its own risk assessment, its own lending criteria around it. So each bank is going to be a little different. And a, a lot of people don't get that he's like, Well, I qualify for an SBA, I looked at their website. Okay. And you might have to go through three or four banks before you find one that like, that works for you. Like, no, I, I looked at the SBA website, I qualified for everything on there. So yeah, but the banks can add things on there, they can have things they're looking for. Right? A lot of people don't get that they don't understand, it's the same way with, like, if you want to get a VA loan, like a veteran's loan to buy a house, one bank to the next bank, can be a slightly different one. They can tell, you know, he's like, why I'm, I'm guaranteed by the VA, how, how can you tell me no. And then you go to the next bank? They go, yeah, we'll do it. No problem. Right. And I was in real estate for a long time. I've seen it many times. Now, I'd seen in your bio, that you mentioned, doing deals all over the 50 million mark. That indicates to me that you're doing deals outside of SBA, so you have a conventional lending normal. So

we do and Live Oak Bank, we have i Miss, like 30, different 30 Plus verticals. So I'm, i'm an industry agnostic vertical, meaning that you could be looking at a manufacturing facility, you could be looking at some distributor of these weird little widgets, you know, that's what's so fun about business ownership. It's amazing what our small business owners do to make a really nice living and, and contribute to our economy. So my clients come in to me, generally from an industry agnostic perspective, however, at Live Oak, which is really cool about this is that we have 30, different verticals plus where we're really good at certain industries. And we also have a venture capital arm, we have a middle market lending arm. In addition to my self funded search deals that are mostly SBA, I'm also doing traditionally funded search deals, which are on the conventional spectrum. So we're a lender, that that's kind of lending along a parameter.

So what's the difference? If you know, step out of the MBA, just graduated MBA, a seasoned professional is, you know, looking at creating a holding company acquiring one or more companies? What's the difference in what they need to present to you? Is it still the basic things like you know, the I know that their credibility and stuff comes into play, but is there is there something is that presentation or that approach to a, to a lending institution such as yourself different from, you know, from that SBA loan, search funders, you know, topic guy, to a guy who's your team that's going out to do more than one acquisition.

So generally, if let, let's maybe start with the first acquisition that's being contemplated, maybe I'll just get my little plug, I have office hours with my partner, Heather, every Wednesday, eight o'clock Pacific Standard, and feel free to email me or send me a LinkedIn and I can get you links to our office hours week over everything. From a self funded searcher perspective on our Wednesday, office hours, we go over everything SBA, and we give you a pre LOI process on what to bring to us what to show us if you want to talk to us about deals, we do that every Wednesday, SBA, sort of one on one, then on Thursday, our Thursday call eight o'clock Pacific Standard, we actually give you our cash flow model. And we give you an executive summary template, like an investment memo template for you to share your buyside viewpoint on deals and we can help you kind of look at three or four deals pre LOI. So generally what we need to see and I'm going get I'm going to talk about acquisition number one, we need to get your viewpoint of the deal, what you think about cash flow, how you're analyzing it, how you're thinking about the structure of the deal. We also have an m&a questionnaire that Heather and I have created after our kind of 30 plus years of doing this, where it talks about a lot of qualitative aspects. Tell us about the licensing that's required. Are their customer concentrations. What's the seller been doing? How are you literally going to transit Shouldn't the seller we have a whole, like four or five page questionnaire for you to give your thoughts about the deal. And it's a lot of qualitative aspects of it. So generally, if, if people want to talk to us about deals, it's a cash flow. It is an investment memo overview. So you can tell us your viewpoint about the deal. And it's to the extent that you can fill out this m&a questionnaire, pre LOI, that's also really, really helpful. Those are the three things we'd like to get and plus your resume. And, you know, maybe a little bit about your personal financial statement.

That's interesting, I think that'd be a very valuable exercise for anybody to go through. I mean, just this thing's you probably solve a lot of them in your head. But to have them on paper and say, what, what is your process, like, have somebody document their process for transition in the previous owner, is you know a powerful exercise to go through? Because, you know, a lot of times you think, well, they're just gonna, they're gonna leave, and then they're gonna answer the phone for me whenever I need it. And that's not a plan. That's a

Lisa Forrest  20:58  
yeah

Ronald Skelton  20:58  
 hope? That's a daydream.

And Ron, I think your question was, if you're coming out of our MBA school programs versus, you know, maybe kind of coming out of a W two job. I mean, it's the same information everyone needs to show us it's, it's basic sort of context around that specific transaction. And we asked for the same information. You know, no matter how you're coming to us,

I was leaning more towards you, okay, I'm not going to buy a $5 million company, I can't qualify for the SBA side of it, I've got a $30 million company interested in selling it to me what you know, and already assured that it's not this hypothetical, I don't have one, right, this second letter to say, if you had something like that, and you had the team put together you had the experience to run it, was there a different presentation that needs to be made? And, and I think you answered the question in that executive summary and on your Thursday calls.

Yeah. And one nuance if you're, if you're approaching a larger transaction, that's going to take you out of the maximum funding available for SBA. Then typically, the other element that you're bringing to us is your investor cap table. Most of our searchers, all of our searchers are coming to us on our larger conventional transactions with sponsors. That's why we're sponsor slash search fund lending, you got sponsors or investors behind you. We also have sponsors and investors on our SBA loans as well. Definitely, for our conventional transactions, there's always going to be sponsors or investors, and knowing who's in your cap table supporting you. From the standpoint of, you know, what's their experience? Have they done other types of industries, as the one that you're presenting? What's the equity situation like, for helping you grow the company, so on the conventional side of thing, a much, much more in depth on the investor side, but again, on the SBA side, to their, you know, investors in our SBA deals as well, too, in, in a lot of cases, which we appreciate.

We talked a little bit earlier before the show that you enjoy helping veterans do their you know entrepreneurship through acquisition, you know, you, you have special programs, or you, you reach out to veterans, how do you how to veterans hear about this?

Yeah. So, you know, the, with anything in this sort of lower middle market, there's, there's a lot of fragmentation. And I don't have to tell you that wrong. So I know you've you, you were at a point in time where you transitioned. And there's a lot of resources out there for veterans, but they're not very organized, or there's no cohesiveness to it. And you, you would probably have a better answer for your fellow veterans out there. Well, how do you find these resources? I think sometimes it's just luck. It's sometimes it's just that you happen to speak to someone that connects you with something and that person connects you with something. It's like almost old fashioned networking. And I know you're coming out of the military with a very structured day. And now you're transitioning into civilian life, and it can be overwhelming and, and you know, intimidating. For civilians, we're, we're thinking you're intimidating us. And it's also happening on the other end of that other end of the fence, too. So I just tried to do podcasts that gear themselves towards veterans, and just organically over the last, you know, four or five years just trying to make as many connections as possible. And anytime someone mentions that they're a veteran, I'm, I'm on it. You know, it's been we had our little pre column out, let's talk about that. And that's just kind of how it works. Unfortunately, it's just, it's just not cohesive.

And for the veterans out there, Google's your best friend, it's still I still not found I've been out of the military for what, 25, 30 years now. I'm getting old. I was in the military in my 20s and I just turned 50. So 

Lisa Forrest  24:52  
I would

Ronald Skelton  24:52  
say LinkedIn is a really great resource. Send me a LinkedIn if you're a military veteran, send me a LinkedIn request. And then you just will then start being because I have a lot of military veteran feeds. And then it just becomes organtic, organic. If you're LinkedIn with me, then all of a sudden that starts and then your feed starts, you know, looking like the content that makes sense to you. Twitter has veteran ETA sites on Twitter as well. And it's just you just kind of start. And I think that you'll see a grassroots effort around it. Any of the military veterans out there, I can also connect you with some of the organizations that I'm aware of that can help you and our business schools, love. You know, veteran eta, our military veterans make amazing CEOs and owners of their own small businesses. And this is just a personal passion for me. And I'm, I'm happy to help connect you in any way that I can about a third of the business between Heather and myself about I'd say about a third of our business at any given time is trying to get our military veterans into that CEO seat for their own small business ownership. And I can we can connect you with other veterans that we've helped buy businesses.

That's awesome. That's awesome. You know, we do have a question that popped up in one of the LinkedIn users asked, what are their What are your criteria related to the personal financial statement? And we covered this a little bit like that we talked about having a decent credit score. But is there a way to enlighten on that a little bit?

Yeah, sure. Well, I'm gonna lead with tell me about the deal. Right. So that's what I start with. Tell me about the deal. The SBA program, in particular, it's meant to be there to kind of shore up and mitigate sort of shortfalls, if you will. And if, if, if I'm sort of gearing or if I'm kind of picking up on the question you're putting down as maybe if you don't have a super robust personal financial statement today, does that bar you from buying a company? And not necessarily SBA does require a certain amount of equity downpayment, and that's cash down payment 10% of the total project. The,  the way I answered the question now is that there are investors out there that are interested in backing good resumes, potentially bringing in some equity, they're going to need some want some ownership for that equity. But there are ways to get into business ownership, if you don't have a robust personal financial statement. Today, we're gonna want the good credit score and a good resume. But I think the SBA program has gotten more sophisticated, in that it's really recognizing a strong resume, and we have connections to get, get, get you with some equity out there where it could be a really nice partnership.

Awesome. Are there any industries you totally avoid? Like you just you don't that your, your, your bank? We just don't fund this industry?

Yeah, and, and generally, that's an easy a much, much easier question to answer versus what what industries do you like we'd like a lot of industries are industry agnostic, we're also very good at certain industries, it's easier for me to point out probably three or four industries that aren't a good fit for us at Live Oak. Lots of lots of lenders look at things differently. So I'm gonna answer this from a bankers perspective. So anything tied to new construction, ground up new construction, whether it's residential or commercial, it's just not a good fit for us, that can have a tendency to be on the front end of the cycle, 

let's say it's the leading indicator isn't it

Lisa Forrest  28:43  
the first to recover, but also the first to, you know, have some issues. So we just don't need to take that kind of risk in our portfolio. And, and I suggest if you're looking at new construction, because that you have an affinity for that and you have a network around it, then definitely work with lenders that specialize in new construction, not just a lender that says up. I don't know I don't really know much about it, but I'll do it you definitely want to work with industry leaders in cons, construction industry for sure. It can have a tend to be project work lot out kind of inconsistencies from year to year. And that's just not a risk. We want to take on ties to cyclical industries, like oil and gas, that's just not we just don't know that very well. And so we, we kind of stay away from that. And there are things in our portfolio because we are the nation's number one SBA lender by, by a pretty large margin, we have a pretty robust portfolio and there are certain industries that time to time just haven't performed very well for us and so there are a few of those I'm happy to go over those if, if people wanted to reach out directly but kind of that new construction, tie is an oil and gas that's those are two ones that we just avoid

Ronald Skelton  28:45  
I think it's important to know just because you know, and to know one thing like, this is two industries, you, you kind of avoid, but also know that there's, there's banks out there that that's what they specialize in. 

Lisa Forrest  30:12  
Sure, 

Ronald Skelton  30:12  
but one of the things you'll, it's the common themes that I find, after talking to a bunch of these guys do in search funds and opposite acquisition entrepreneurs like myself, that, you know, are long out of college. But still buying businesses is a lot of us don't know, I joke around, we don't know exactly what we want to do when we grow up. We're, we're looking pretty wide. As far as different businesses and different industries and stuff, we're looking for the business and the business model more than we are. It's doing X, Y and Z. L. That said, you know, knowing I shouldn't if I'm going to work with a company like you and I think like, I really like who you are, what you're working on, and you're willing to help. Knowing that I'm probably shouldn't be out there trying to beat the doors down on new construction companies is a valid, valid thing to know. Right?

And again, one lenders opinion, 

right

Lisa Forrest  31:01  
 You know, we're good

Ronald Skelton  31:02  
I got

Lisa Forrest  31:02  
 at certain things. And we're really good at those things. And there's other lenders that are going to be really good at certain aspects. And so you definitely want to be talking to a wide net.

Ronald Skelton  31:13  
So guy here name, I'm gonna hope I don't mess up his name is Christian. Christian asks, what is the typical DCR you're looking for debt to credit ratio you're looking for?

Yeah. So for us, and again, this is going to be lender to lender as Ron pointed out, the SBA has some standard operating procedures in which every lender participates has to do certain things and the certain exact way, but there's a lot of latitude and a lot of leeway from lender to lender as to how they want to organize their credit policy. So debt service coverage, let me just give you a definition of how I'm going to answer this question. Its adjusted cash flow or adjusted EBITDA over all your total annual debt payments. So it is the amount of cash flow available over to cover your total annual payments, that would be principal and interest on your SBA loan, plus principal and interest on your seller. Note, that kind of again, I alluded earlier that generally you're going to have a seller note, and then interest only on your line of credit. So you're going to put all your debt together. And your cash flow needs to cover the total debt payments at 1.5. Times are better. That's our Live Oak standard, for the most part on industry agnostic kinds of deals at 1.5 times or better, some lenders will allow a lesser coverage ratio, and you just have to kind of find the fit that works for you and follow the bank's kind of policy and sensibility that, that sort of resonates with you. But for us, it's 1.5 or better in the last full year. And we go over this all on our Wednesday call too. So again, not, not too much of a plug. But if you did want to kind of attend one of our zoom sessions on Wednesday, we actually show you an average deal example and kind of walk through all of that.

That's awesome. So what would you say? (inaudible) your what would be your top three things you would tell a search funder acquisition entrepreneur, somebody out there looking? What are the top three things that they should know or be looking for, in order to like, have a great chance to, to have get help from a lender like you?

So we are big cashflow lenders, so I'm always going to start with tell me about the specific deal that you're looking at? What is the debt service coverage? What's the cashflow? What's the margin? And also, what is your viewpoint on being able to grow the company? Most of my acquire, I'd say all of my acquire clients are not only looking at the status quo, but is the company set itself up for exit success, which also means growth success, too. If a company has just been no growth for a really long period of time, you know, maybe that's not the best deal for you to put your capital into. But that's only for you to answer. So I would say historic cash flow, historic debt service and ability to, to cover the debt requested with appropriate margin, your ability to appropriately and realistically grow the company. And also I would say just you know, does the does it resonate with you? Does it doesn't mean you have maybe you had no idea that a company made, you know, these little things that go on earbuds or something like there's a company that makes that and it might not even be an apple but like some company makes this little wire here. So maybe you didn't even know that before. But could you get behind that? Could you be passionate about that? Could you you know see yourself leading the employees at that company? So it's historic ability to, to cover the debt appropriately? Your ability to grow the company? And can you literally see yourself? You know, sitting in that company leading that company and its employees, I think those are the three things that, that I think most of our clients are looking at.

So, you know, I've seen a couple cases over the last few years where people, they bought a company because all the numbers worked. And they were just weren't right, a right fit for the company. So I love the last part we'd like, can you see yourself running that? The My favorite one, and, and it came from a story from somebody on here was a, a banker, Wall Street type where three piece suit every day buys a moving company, and then he you know, they're, you know, moving, moving your house from one location to another type of company. And the majority of the employees there were either parolees, like non violent offenders, but he had a lot of blue collar workers who were, you know, from a rougher side of life. But you know, the guy brings everybody into boardrooms and like, tries to set it, you know, boardroom setting and (inaudible) ate him alive. So, you know, can you do you see yourself as a fit and vision of running the company. And you think that the company know that you think that the culture of the company is a fit for the culture that you want to create and be around, I, I think a lot of people miss that. A lot of people miss the cultural side of things,

and Ron the idea of culture and lower middle market, maybe it's a 15 person company, but there's culture there. And I've seen the other side of things like you've got an investment banker, that might be one of our, our buyers, you look at that person's resume. But what that doesn't tell you is that he comes from where she comes from a family of entrepreneurs that have run restaurants or run, you know, H fat companies or duct cleaning companies. And this, this sort of investment banker, or someone coming from private equity use has been itching their entire career to get back to doing something with their hands. I mean, so you can't judge a book by its cover and this idea of culture, and just seeing yourself bettering employees lives. That's the third part to that. And I, my buyers all take it really seriously.

One of the big issues learning this industry i mean in this space is company evaluations. They're almost as bad as asking an average Joe his opinion, right? Even though even the top schools you look at like top Ivy schools, a lot of them have over 100 models. I've heard as many as 147 models for valuing companies, how much time does your bank and use on the like, their side of the valuation making sure that the company is valued at the right, the right value before the purchase?

So it is a an ongoing conversation? And this is how I answer it. I'm not the valuation gal. I'm the debt service coverage gal. So they are related, though. And the 1.5 debt service coverage that, that we've aligned on Heather and I as as partners together over the last 12 years, and, and me in particular doing business acquisition for over 30 that 1.5 debt service coverage that's also not just completely made up. It's it's our observation over the years, that if, if you have adequate and appropriate margin, it generally will dovetail and be proportional to the value. But from a buyer standpoint, you're you're getting to the proper valuation that includes a lot more than just covering debt, it is the investment thesis, can you grow the company? Where has the company been? Are you going to have to put more investment in the company to grow it? If you have to put a lot of investment in a company to grow it that might be a discount? Is there a lot of maintenance capex? Is it very asset intensive, so that you have to keep investing in the company just to maintain it that might, you know, have a different impact to the valuation? Where is it located? Is it a is it a growth industry? Is it a status quo industry? What, what region or is it located? You know, labor constrained supply chain there's so much that goes into valuation. So I'm not going to answer your question. I'm acknowledging that it is a very complicated process. And then you add personality to it too. You can take any given deal same metrics, same debt service coverage, same cash flow and then you throw in a cellar personality with your buyer personality and those two personalities are going to be different in you know, then another seller and another buyer and you throw the sellers goals into this And it's complicated. So it's almost easier for us just to say, well, I'm going to look at adequate debt service coverage. And if you come to the value in a certain way, and it resonates with me from a debt service coverage, great, then we're all happy. But you know, sometimes people take three year average, sometimes if, if your last full year was just skyrocketing growth, you might discount that and more heavily on the other years. I mean, there's so many different approaches to your point.

You know, I've heard a few horror stories of people coming to me and going, hey, you know, I negotiated this deal, I took it to the bank, and they wouldn't find it. So, like that one banker actually told the guy, congratulations, you've negotiated a deal that nobody can fund. So at what point in the process does should some somebody reached out to their, their lending or their funding solution and start working with them to make sure they're negotiating? Something that'll work?

Yeah, we Heather and I, we like to go earlier sooner rather than later. We, we like to start early. That's why we do these weekly sessions, you know, we get to know you, we, we start forming a relationship, we are a part of our value proposition. Just, you know, one, one bankers opinion, part of my value prop is that I will look at probably two or three, maybe four deals with you pre LOI, and especially on the beginning, when you're getting your reps in and trying to figure out how this kooky business acquisition process works. Yeah, the last thing you want to do is back yourself into a corner where the seller just really loves the offer you put in, it can't be done that can't get done. So we're like, sooner rather than later. That's also why we give you tools so that we can use everyone's time efficiently giving you templates in order to share your thoughts about a deal. Knowing that we're going to probably look at two or three, maybe even four deals with you. That's why we just tried to create a process that made it efficient for you to check in with us.

Okay. The other thing that is a scare tactic for a lot of the guys in this space is the due diligence process. What role and due diligence is the bank take to make sure I know there's gotta be some because they're going to make sure their money is secure. But from a search funder or from a acquisition entrepreneurs. perspective, what, what is the bank going to do as far as due diligence and, you know, not that we shouldn't do that area. But knowing what you guys do also helps make sure like, we know what we better focus on because you're not gonna even look at that area.

So it is a balancing act. It's the buyer, better buyer better have their own opinion, because we're going to ask for it. And if you don't have an opinion about the deal, then we might not be a good fit for one another because we're not here to tell you what to think. We're here to help think about what you think with you. So first of all, we, we want your opinion. That's why we, we give you tools and templates in order to share articulately, your opinion, it is definitely our, our bank opinion. Of course, we have underwriting we have pre, preflighting process. So we're gonna give you our opinion, you're gonna have an accountant, that's going to help you do some level of due diligence that's going to be appropriate for that deal. A lot of our searchers, a lot of our acquirers, pay for a quality of earnings report like a limited audit, it depends on the nature of that company, if it's super clean, then maybe our clients opt not to get a quality of earnings report, but a lot of our particular clientele gets a quality of earnings light that at least helps to do a little bit of a forensic audit on the financials. And then you're going to have your attorney as well. And then an insurance professional making sure that all the insurances in the company are appropriately identified and tagged. And so those are just some of the other professionals you're going to have on your deal team.

So 

It's not one opinion

we just looked at

Lisa Forrest  44:03  
it's a combination of five or six, including ron

Ronald Skelton  44:07  
we just built a deal team, didn't we have an accountant and an attorney? Right? You guys, the banker, and then we have there was a fourth one and they're missing somebody

Lisa Forrest  44:16  
insurance, insurance

Ronald Skelton  44:17  
insurance

Lisa Forrest  44:18  
 accounting, Attorney bank, and, you know, the buyer themselves.

Ronald Skelton  44:24  
right the buyer

Lisa Forrest  44:25  
 We want you to have a point of view.

Ronald Skelton  44:28  
And in some, some extent to sell, right? The seller has to participate in all this provide all the data, you know, present the data in a logical, organized manner that makes it viable, right. You're not going to do forensic accounting, and most people won't do a forensic accounting to fix somebody else's books to make them correct and clean because they only ran it horrible, and then expect to get funded. Those books have to be run well for a little while. So

yeah, and that's where structure comes into play too. And it is So deal specific a lot of times we'll get questions. Uh, well tell me, how do I organize a seller note? Well, or any question really, I mean, it's just going to depend on that specific deal with sort of the nuances on each, each particular deal. But balance structure can help can help. But it can't necessarily fix if, if, you know, if you've got a really extensive laundry list, like you just mentioned,

tell me about, I love stories. So let's get a story in here. Tell me about your favorite delight, the one that meant the most to you, or the craziest one most memorable, you've been doing this long enough, what's something cool that you guys have funded and help get going?

I think for me, it's just sort of the, the typical sort of idea of a deal. It's not necessarily any one transaction per se. But this is what I enjoyed doing. During the day one, I learned something new every day, every day, I learn something new. And I love when someone brings us a transaction. And you're like, really, I had no idea that even existed I had, I didn't even think about it. But I had no idea that there was a company that did that thing. You know, we have a lot of verticals, industries that we know really, really well, which is amazing. But I'm still super intrigued when someone says I'm bringing you this little bolt that we specialize in, and it goes on horse trailers. And you know, and we're like, there's an industry for that. Yep, there is. And we're like, top three or whatever. I just still love learning about what our privately held business owners do for a living and create wealth and employment. You know, still small businesses create more jobs in this country still, then, you know, the biggies that we think about every day. So anyway, that, that still is really intriguing. To me, just learning whatever I learned new that day.

So we're getting we're gonna listen to the minutes, I've asked a lot of questions and stuff, as you can you've got Is there any thought in your head, like, we really should have talked about this, there's anything we've missed that we want to cover for a few minutes.

The search part of the process, it's really hard. Trying to find a business to buy is, well, there's lots of hearts to hard things of the whole process. But the milestone and the process you go through of actually finding a company, it's really hard. It's there's not like some master list in the United States, you just go Tennessee, you know, revenue level, it doesn't exist. So finding deals either through sell side advisors, brokers, and the part of the process where you have to amass contacts, so that you can fill your funnel for reviewing deals of interest. It's a really hard part. So just managing people's expectations. It's just part of it, it can be lonely, it can be frustrating. This idea of entrepreneurship through acquisition it, there's a lot of people really interested in doing this. So it might seem lonely, so part of it is upon you to find other people that are doing this. But yeah, we get a lot of questions. Hey, can you introduce me to all the sell side advisors in Wyoming? No, that's your job. You know, you got to do that. But there's, there's more and more organizations that are trying to make the search process more efficient and less fragmented. But you, you're when you get you, when you put your foot in the pool on this thing, you're gonna say, Oh, my goodness, how do I even do this? And I'm just saying yes, it's hard keep keep going.

You know, I run to I run a business networking on Zoom twice a month for mergers and acquisitions, guys, it's all ETA guys. Some of us call ourselves, acquisition entrepreneurs, search funders. And it, it become interesting enough that around the world that I did it on two different times. So one of them's in the morning at 8am. Pacific Standard Time, the other ones at 4pm. It's on the first Tuesday in the third Tuesday of every month on Zoom, and we get to 25. We're just kicked it back off. So we got about 25, 30 people showing up. And I got guys from Australia, England, like all around the world, Singapore, you know, just, just around the world that are doing this. This isn't just a US thing. But there hasn't been a really good place. For you know people to help each other out. What I do is free. It's my podcast sponsors to help give back to the community. And a lot of the mentors that teach this space, they have their own little, you know, groups like you know, Jeremy harbor has the harbor club. Roland Frasier has his epic program and there's 1000s of people in those, but they have their own little cliques and they do their things inside of that what I've done is like, I don't care where you come from, who mentored you if you learned it in school, you learned it from one of the mentors. You're welcome here. Come in, we'll have we'll ask questions of each other, help each other out, move each other forward. And I'm hoping to see that grow more It's just you know, ETA guys, search funders, acquisition entrepreneurs, whatever you call yourself helping each other out. So, you know, that's, that's out there, you can find it on my LinkedIn, and you'll find it in the show invites to the show notes also. So if you guys are out there and wanting to be part of that kind of community do that. And then when you're ready, you know, I want you to reach out to, to Lisa here and go to her Wednesdays and Thursday things you know what to present. But if you're just, you know, if you're in that search fund, that, that search process takes a while, right? Like I was telling some people or like the beginning of the year, I was pretty sure I was gonna buy some type of coffee roasting company, I liked it and put subscription models on it. And then I strayed away from it. And then I found somebody at one of my, my networking guys, a guy I've known for a while. And one of the networking guys, he goes, You know, I've had three of those coffee roasting companies, they do really well, if you if you're really serious about that. Don't run away, because you see this weird, you know, I was moving back away from it, because the international pressures of like being sourcing beans, right. And he's like, there's ways around that you can buy from a local sorcerer. And you know, he just knew all the answers and things. I was like throwing my hands up and said, maybe not. But uh, yeah, so there are resources out there, there's kind of like the veterans resources, they're hidden, you have to ask around, I'm trying to make this a little more popular to where and, you know, you're, you're, well, you're welcome to invite any of your people to go to this, I tell other people, if you want to sponsor once for a couple of weeks and come in and help co host it. Same thing with any of the guys out there that have large crowds of people do an acquisition entrepreneur, if you want to come and join our, our meetings ever wants one, like co-host it and be, you know, one of the co-hosts, that'd be fun. So 

Lisa Forrest  51:36  
yeah,

Ronald Skelton  51:37  
to your point, though, there are communities out there, you know, Twitter's got it good SMB community, search funder.com. 

yup

Lisa Forrest  51:45  
And a lot of the podcasts around entrepreneurship, that are really good, that are really, really good. And so I think once you really start putting your, your toe in the water, you aren't alone. It is going to feel lonely at times, and it is lonely at times. But to your point, Ron, there are more and more resources around this and next year in their generation of entrepreneurship has to happen has to happen. So stick with it.

Ronald Skelton  52:12  
I would say it's a little lonely and a lot frustrating, right? There's, you get into, you know, you'll get into due diligence on a lot of companies and just realize like, ah, yeah, this thing's a mess, right. And I'm not a big fan of the broker deals because I think a lot of times the broker deals, the broker caused the mess. I, I, I also submit to if you found a really good one, stick with them and tell them what you're looking for. Because it's kind of like real estate agents, it's pretty easy to get a broker's license. Matter of fact, most or some states don't require a license at all. I just moved from Oklahoma, you don't have to have any credit credentials, whatever, to name yourself a broker, right? There's a lot of states like that. Some of them, you just have to be a real estate broker with no business experience whatsoever. So it's kind of scary that the business brokers out there, there's no really like business brokerage you know certification or licensing exam she had to take from many states. So if you find somebody and the paperwork that they're presenting to you looks accurate and good. Stick with them, tell them what you want, and help them have them help you find other stuff. Because there's just, it's just like the real estate world. There's so many bad, you know, agents and brokers out there, that it just, it really wastes a lot of your time. And it's personal opinion. But it's one that's shared by many people in my space. So,

Lisa Forrest  53:27  
yeah, ou know, we did a survey of our CEOs that are have bought businesses and, you know, to that point, maybe unfortunately, wrong, but like 80% of our CEOs found deals through brokers. So it might just be part of the process, you're just gonna have to really navigate eyes wide open, and then have a good deal team around you. 

Ronald Skelton  53:48  
Well, the other side of that is

Lisa Forrest  53:49  
 the deals that, that you shouldn't be working on quicker to get to the ones that, that are worth the time.

Ronald Skelton  53:55  
The other side of that is, is at least if they're working with brokers, they're thinking about the processes started cleaning up their stuff. I do a lot of cold outreach. And I do get a lot of companies that are just like the other thinking about it. But they haven't put any work in towards making themselves marketable. Right? Like,

it's not a perfect, it's not a perfect process whatsoever.

Well, I think we're running out of time here. Like I told you, before we got slightly, we get to the end of that and be like, oh, man, let's make sure everybody knows how to reach out to you how to contact you that's in the show notes. What's your preferred method for people to reach out to you?

I would just say email, just email me at Lisa dot forrest f o r r e s t at Live Oak dot bank. So easy swing just mentioned, hey, that you saw me on this, on this podcast that helps me kind of level set what I might have talked about and happy to help in, in  any way.

And I want to thank you for coming on the show today. And I think that's it.

All right. Thanks so much. Ron. Enjoyed it.

Oh, hang on for just a second. 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. I don't want to announce our new channel partners the ITX marketplace since 1998 ITX has created 5 billion in value by selling more than 225 it businesses in 20 countries. IDX works exclusively with it enabled businesses generating between 5 million and 30 million who are ready to be sold in m&a to decision makers who are ready to buy for over 25 years ITX has developed industry knowledge that helps determine whether a seller is a good fit for their buyers before making the match ITX mergers and acquisition marketplace we have partnered with it has a proprietary database of 50,000 plus global buyers seeking it service firms managed service providers, Microsoft service providers software as a service platforms and channel partners with Microsoft Oracle ServiceNow itself and the Salesforce space. If you have an IT enabled business you're ready to sell. I want you to visit the I T exchange net.com/marketplace How to exit that link will be in the show notes visit them now. The investors and entrepreneurs professional mastermind. The investors and entrepreneurs professional mastermind combines that additional peer to peer mastermind introduced 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 T i e. P m.com. And check out the investors and entrepreneurs professional mastermind