Carl Allen an entrepreneur, investor and corporate dealmaker with almost three decades of experience buying and selling businesses. I’ve enabled over 300 deals and done $47 billion in deals over the last 27 years.
Having started his career in...
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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. I'm really excited. Today we're here with Carl Allen, Carl Allen is an entrepreneur, investor and corporate dealmaker with almost three decades of experience buying and selling businesses. He's enabled over 300 deals and done $47 billion of deals over the last 27 years. Having started his career in investment banking, he has analyzed 1000s of businesses big and small in 17 different countries and across 23 business sectors. He has assisted hundreds of business owners raising both equity and debt financing. And he's developed a skill set and knowledge he uses to advise entrepreneurs the same way advise some of the largest corporations. He runs dealmaker, wealth society, formerly ninja acquisitions, and which he started in 2012, to empower entrepreneurs around the world to chaise the life they have always dreamed of, and give them the tools to achieve it. Welcome, Charles. Sorry, Carl, and thank you for having you on being on my show. So I almost made it to the whole thing for fumbling, it's actually the two things I do is when somebody has a complex name, I butcher it. And then if they have a really simple name, I trip up somewhere in that I was just thinking to myself, I made it all the way through without stumbling. But this is raw, organic, and as it gets, so they get what they get it as as we dish it out. So Carl, thank you for being on the show. I'm really excited. I've read a lot of your work. I'm a fan. And so I'm looking forward to this conversation. We're gonna have the day, just so everybody else kind of gets to know who you are and what you're up to in the world. Can you start with kind of that origin story of what got you into this and what you do?
Carl Allen 2:20
Sure. So I got into the mergers and acquisitions world a long, long time ago, actually. So 1992, I left university my first degree was actually in engineering. But all my buddies had gone to work for investment banks. They weren't as smart as me, but they were earning a lot more money. So I took the switch. And I went to work for for Bank of America, which was a large American investment bank. So I got involved in mergers and acquisitions. I was doing deals with the likes of Boeing, IBM. Lately, Microsoft, so had a lot of fun and kind of learned the hard way. You know, how to do deals, how to find deals, how to structure deals, and learn the whole concept of, you know, what is what is the leveraged buyout or you know, how to buy a business and use other people's money to to finance and structure the deal. So I left the banking world, I went to business school in Chicago, did an MBA, spent some time in private equity. And then we'd invested in, in a technology business, which we ended up selling to Hewlett Packard. And as part of that deal, I went to HP, I was an internal director of mergers and acquisitions, and had a great time had a lot of fun, flying all over the world. You know, doing deals, you know, worked on deals, largest deal we do was about $14 billion.
And it was great because HP at the time, was getting kicked in the market by IBM, who transitioned to become a software and services company. HP was still really printers and computers and things. So we went out and bought a whole bunch of software and services companies, but then my world and my life completely changed 14 years ago, to this day. So it's very apt that we're having this conversation. So 14 years ago, to this day, I was in a boardroom in Moscow with hp, and we were buying a business. And at the time, my wife was 36 weeks pregnant with our son Josh, and he was still cooking in the oven. We thought he had a bit more time to go. And I'm literally in this meeting trying to close this deal was a large deal. And my phone's like ringing like every 30 seconds and it's my wife, so I thought I better answer it. And she's in the back of the ambulance. Going to hospital. She Got into labor, what is it broke. So she said to me, I don't care what you're doing. You've got to get yourself back to the UK as fast as humanly possible, or you're gonna miss your son being born. So literally, I ran out of the boardroom, I had my phone, my wallet, and my passport, my luggage in my computer, probably still there, because I've never been back. I literally got to the airport, got on a plane, got back to the UK had a police escort, escort me all the way to the hospital. And I made it about five minutes before my son came out. So my son was born, he was tiny, because he was four weeks early. And I'm creating this little guy, my arms. And I just thought, you know what, I'm done. I can't do this anymore. You know, I've got a young family now. They need to be my focus. So I quit. I walked away from a million dollars of bonuses and stock options. And I quit and I retired, I was 37. At the time, I was financially in a really good place. I thought, well, I'm going to retire and be with my family. And I lasted three weeks, three weeks in, I'm freaking out. I sat down with my wife one night, we open a bottle of wine. And I said to her, like, what am I going to do? She said, Well, your biggest strengths, your biggest weakness, you're one of the best deal makers in the world. You know how to buy and sell companies just do that, why didn't become a business broker. So I thought Cool, okay, so I set up as a business broker, I found a business to sell it was a UK transportation company, spent about $5 million in revenues, very profitable. found a buyer, big corporate competitor to acquire them. And I've worked on that deal for about three months. And the night before the deal was closed, and I was up for $250,000 success fee. As you know, brokers tend to make most of their money when a deal transacts. So I'm waiting for this big fee. And it's the night before closings the Thursday night. And the owners of the business called me and said, Hey, we're pulling the deal. And I know I can't pull the deal. But working on it for 90 days, and I got a shoe not earned any money for three months. So I got this huge, big check coming to me. So they said, Well, hey, come down, and we'll talk to you about it. So I drove down, and it's lashing with rain, you know, middle of the late evening drives down. And they called an all company meeting. And I walked into the business, and it was a transportation company with loads of vehicles, but also had a warehousing facility as well. So we're in the warehouse, and all the drivers are there and all the admin staff and the salespeople and they said, Look, we're pulling the deal, because the new owner has come in today. And basically given us a list of names. They want us to fire everybody, they don't want any of the employees, they don't want the they don't want the building, they're going to change the name. They just want the customer list, and they want the assets. That's all they want. And whilst you've got us a lot of money for the business, we can't retire to try and sell we can't retire knowing that all these people, and they're all in the room, all these people that have so loyally served us for such a long period of time. We can't put them into harm's way. And they said something to me, which changed the course of my life. They said to me, we care more about the future of the business than we do about the money that we're going to receive. And I don't know what possessed me. I looked at them and out to all the people. And I said to them, for crazy words, I said I or buy the business. And they looked at me They looked at each other. And they said you will buy the business. I said yeah, this is an amazing business. It's stable. It's generating tons of cash flow. It's got a super clean balance sheet. There's loads of great prospects for it. I've been working on the deal for three months. So I know everything about the business, I said, I will buy the business, I can probably get you about half of what you would have received selling it to a trade buyer. I can pay you some of that as a closing payment because I can finance a lot of the assets. And then we'll do a profit share for say three years. And then I pointed at the sales manager, I pointed at the operations manager and I pointed at the Financial Controller. I said I'm going to give the three managers 10% of the company and we'll buy the business together and we'll run it together. And they looked at each other and they looked at me and they said okay, we'll give you 30 days. Bearing in mind all the legals have been done all the due diligence has been done. It was just a case of talking to a bank and this will give you 30 days If you can pull it off, you can have the business on those terms. So I got in my car, a bearing in mind, like people are hugging me, they're like high fiving me like the Savior. I got in my car, I thought, What on earth have I just done?
I said, Honey, we're buying a transportation company. She's like, What are you talking about? You had one job to do, which was to sell it? Why are you going to buy it? So I explained the rationale, I said, we'll make a lot more money buying this company than we will selling it. So she said, Well, I'll tell you something, Mr. Wall Street. And that's that was my nickname. She said, do the deal. But you're not spending any of our money. Find a way to get other people to fund this transaction. So that's, that's what I did. So next day, I called the I called my lawyer, I called the bank, I raised the money. And within about three weeks, I've closed the deal. So I was the owner of that business, we did very, very well. And then about three years in once I've cashed out the previous owners, the three managers that I partnered with, they did a management buyout, and they bought out my 70%. We did some bolt on acquisitions at the time as well. So that was a phenomenal deal. And that taught me one very, very important lesson that on Wall Street deals are primarily about financial engineering, right? On Main Street deals are primarily around seller, psychology, numbers are important. But they're not as important as an owner, in most cases, finding the safe trusty pair of hands, that will protect the employees protect the legacy of the business. And, you know, I've lost count the number of sellers that I've met, who care more about the name of their business than they do about the size of the check. So that set me down a path of acquiring businesses, businesses that I was interested in, so they're in my lane, I could add a lot of value.
They were generating lots of cash flow, which is great if a business has got assets even better. But if it's got cash flow, then you can raise financing, the financing is actually the easiest part of a deal. If it's generated, the more cash flow the business generates, yes, you'll pay more. But the more financing that's available. But for me, it was finding a distressed seller, of a good business, a seller that was highly motivated to exit retirement sickness, death, boredom, frustration, burnout, whatever reason. And then me riding in as a white knight, and basically building a deal around what was valuable to them, which was legacy, trust, safeguarding all those different things. And that's one of the biggest mistakes that a lot of business buyers make. They think it's all about the money. And around 20 25% of cases, money is all that sellers care about, you know, I don't buy those businesses. I don't, I go and find businesses, that sellers, they really care about who's going to buy, they don't want to sell to a competitor per se, they're not interested in private equity. They want safe pair of hands to continue the journey to continue the legacy and will take the employees along with them. So that's what I do. And so I've done tons and tons of those deals. And then about four or five years ago, I was just getting inundated with people saying hey, can you teach me how to do this. So I built a coaching system. I distilled all of my principles, all my methodology is all of my case studies into an implementation system, so that anybody with a basic understanding of business can leverage their skills, leverage their experiences, leverage their passions, and go buy small businesses, rather than making what I think's a fatal decision of starting a business from scratch. And the data is crazy. So in 2020, there were nearly 7 million Americans that started a business from scratch. 7,000,096% of those businesses will fail. Yet, there are today about two and a half million small businesses for sale in the United States. And about one in 11 of them will sell over the next 12 months. So what I'm trying to do is connect those two communities together by giving all of the buyers out there, the tools, the strategies, and the access to financing. so that they can go and find the perfect dream business for them, and then structure it in a way where it's a win win, it's a win for the seller, it's a win for the buyer, and then giving them the tools to then accelerate and grow that business, either organically or through acquiring other businesses into. So that's what I do. And I don't just teach this stuff, I do this stuff as well through my private equity company as well.
Ronald Skelton 15:26
That's awesome. So I picked up that it's as much about the legacy of the brand and the name, and the what you're going to do with the employees and how they're going to be treated. And I've only been like talking to business owners now for about two years. But I totally get that I totally see that. I've only had one or two business owners that were interested in the price. And both case to both cases, it was because there was a divorce. And there was some requirements, I guess, in the case that they didn't like, the valuation, they had to sell it for something close to the professional valuation. Because, you know, the judge was worried that they were going to dump it to you know, get vindictive, right. So but yeah, it is very common, especially businesses that are second and third generation, they want to know what you're going to do with the name. Right? They want to know, you know, the brand, they spent, you know, two generations, three generations building, they don't want to see it go away right away. And you're the
Carl Allen 16:29
quick little case study for you. So it wasn't an 18 I bought a marketing agency in Burbank, California, near Hollywood, and that the seller, so this was a business, multi seven figure revenue, profitable, and the seller had, you know, an asking price for the business. And the broker told me she wanted all the money up front was a retirement sell. So I went and had breakfast with her, she cooked me breakfast in her house on Mulholland Drive overlooking, you know, Studio City was beautiful. And I'm sat there. And I asked her the question that I always asked sellers, I said to her, what is more, what is really important for you in this deal? Tell me what this deal needs to look like. Now normally, you would expect somebody to say, well, I want a million dollars, I want half a million dollars up front, and I want 8% coupon on my seller financing. She said three things call number one. You can't change the name of the business. I went okay, well, it's crazy. If you buy a business as a going concern, you can't change the name because the names got a reputation in the market. The names got brand equity, too silly to change the name of the business. Number two, she said you can't change the logo. Okay, never heard that before. And I've seen pretty much everything. I said, Okay. Explain that to me. She said, Well, in 1985, when my husband and I started the business and the husband passed away several years ago. He said our logo and it wasn't a great logo from being on. She said the logo was an international design competition, which in the 80s, he probably would have done 2018 It probably would have come last but anyway. So she said you can't change the logo, because we're really proud of the logo. He said number three, you can't fire any of the employees. They're like my family. And I want all of those three things written into the legal documents. I went, Okay. I said to her, Well, if I can do all those three things, can I pay you in installments for the business over a three year period? And she went? Yes. So I've given her what she wanted, which for me were easy things to concede. Now, I was asking her to do the deal on my terms. She said yes. And then she said, Oh, hold on. I'm going to have some closing costs. I need to pay my Broker, I need to pay my lawyer. Like, how's that going to work? I said, well, guess what? I will cover those costs, because I was acquiring the business with surplus cash on the balance sheet that I was inheriting. So I have the working capital to cover all of her costs, and she hooked me. She's like, this is great. So we did the deal. And when you're closing a deal, if you're not raising any capital, you can close deals very very, very quickly. And what I do is if I'm buying a business purely on a seller financing structure where there's no external capital going in, I'm very, very light touch on my due diligence. I'll do my legal due diligence, so I'm making sure I'm buying something that's safe. But you know, I'm not going to go through and do bank recs. tax audits and all those different things not really, because if I do the deal, and I find out I've acquired a basket case business, I'll just give it back. Because as you know, when you've got a deal, that's primarily seller finance, as a buyer, if you default on those payments, the seller has the right to take the business back. So for me, that's always been my ability. And what I find is really powerful in the market is there a lot of sellers out there, they would rather or go clothing payment, or a speed of transaction, that it's a super quick deal. You know, they're not crawling forensically, all over a billion documents for six weeks, the deal can be done fast, they can retire or do what they're going to do. And then you can do the majority of the due diligence once you're in the business, because even if you do external DD, you're never going to find everything that you want to find out. Once you're in the business, you can look under the hood in a lot more detail and get everything that you know and get get the finance team that's in the business or the CPA that advises it. To do all that for you. It's like, hey, so tell me what I really need to know. Okay, well, there's this Alright, well, okay, that's not a deal breaker, we're good. Let's keep going. So, so you're right, the name, the brand, the legacy, the culture, the employees, they're huge, not for everybody. But for the majority of the businesses that I speak to.
Ronald Skelton 21:28
So I was talking to a business had been around for 63 years, I'm not going to say their name, because I'm hoping it comes back around. But anyway, it was a third generation two daughters are running it. And one of the things they were really concerned about is like keeping the name around. And they they're ready to retire as a reason they were selling it. And the interesting thing is, when I slid the deal across the table, they had some financial issues, they had close to $4 million in debt on a company that's making 13 million in revenue. And dismal Prophet, like they just weren't running very well. And they knew that they had some problems a couple years ago with a relative embezzling money, I'm pretty sure and if they're listening, I've already told them this, I'm not afraid to fight. And I'm pretty sure that that one of the sisters was embezzling still, oh, that's why the books are such a mess. But she said, You know, one of the things that she said is, you know, I understand that you're concerned with my sister, like, but she's the one that needs a job for the next year, until she couldn't, you know, till she hit 65 or whatever, and retire. I was like, Okay, I'll pay her what she's making now, which was like, 45. Or maybe it's 52,000 a year, but I promise you, she's not touching the books. So long as you're okay with that. She's no longer an accountant, we'll find something, I don't care if it's sweeping the floors for a year, I'll eat that cost, she can stay there, she can show up to work. Or I might even just put her on, you know, as an advisor o'clock call her up when there's when there's something I need that you know, questions about. And I'll just pay her not to come not and show up. But you know, but as long as I pay her, maybe I just, you know, cash her out and pay her the 52,000 up front. Yeah. But, you know, would that work? And she's like, Okay, what stop that deal was the, the IRS. The one of the big chunks of cash they owed was, you know, almost $1,000,000.09 100, and something 1000 to the IRS. And they were doing these quarterly meetings with him or every so often they had to meet with them. They went to meet with the IRS and their banker, and told them that they were going to sell it to us that we were going to take care of that and take responsibility for paying them on those structured payments they were paying. And the IRS said you're not transferring any assets until we get this stuff. So we're, you know, they brought in some other people to help them do that. And I gave them the attorney that I'd already lined up to negotiate that down because they never even tried to like, argue it or clean up the books and resubmit it or anything. So I had already found a local attorney that really good at doing tax negotiations. But I gave him ours. And we stayed in touch. They're still working on it. I haven't talked to him in a few months. But you know, the interesting thing was, and I'm going to ask you this is when I slid that dollar down deal on this. Two things were funny. One of my one of my partners in the deal is a friend of mine, he's in law school. He's really good with business and about to graduate law school. He's also retired Marine Corps. When I slid that when I when I pulled out the manila folder to slide that deal across the table to explain it to him. His face turned green, he put his mask on he got up and went to the bathroom. Now this guy is a retired, you know, like he's medically retired Marine guy, and he got up and left the room. So I still told him about like, you know, turning green when I slit $1 deal across the table. But you know, the interesting thing they pushed back the hardest on was I had an unwind clause, right even on the dollar down if there's more skeletons because we hadn't seen a good set of books or anything. The thing was really, you know, their financial accounting was just garbage. It was bad. So I was like, Okay, we'll take this on, I'll bring my accountants in, we'll straighten it out. But I have 45 days, if we find something we just can't fix, I get to give it back to you. So we had a 45 day unwind clause, they were more concerned that I was going to have that I had the right to hand it back to them at 45 days. And they were that I was only gonna give them $1 down. And you know, and pay, though, and I was, I was thinking, I think we took a 60%, we're gonna leave 40% on the, because we're gonna clean it up, I had already found another few as a concrete company, I found another one that made similar products that was for sale much smaller, they only did 3 million in revenue, but they were doing a 30% profit margin. So my goal was to have there and they had already kind of stepped away and had a general manager running it. So I was going to have their general and there were 40 miles apart. So I was gonna have the general manager run both sides. So what I was gonna do, right. But my question is, when you when you say you can, when you do minimal due diligence, when they're going to do an all I'll find that structure, do you put an on one clause in your in your contract? I know that you can.
Carl Allen 26:04
No, I don't actually, I don't, although in your situation that you'd mentioned, then you know that that would be a red flag. But like for me, you know, I'm not signing any personal guarantees, I'm not raising any capital, for me to do a super quick deal, it's quicker for me to buy the business, then go in and do the due diligence. And then if I find something like nuclear, I'll have to give it back or, you know, if they're not prepared to take it back, then you know, I'll just liquidate the business. But that's never happened to me, ever. And I've done lots and lots of deals where I've got in super quick like that, I'll always do some legal due diligence. And you know what I'm doing, when I'm doing dollar down deals like that, then I'll always typically buy the assets. If it's a cash flow business that super doing really, really well, I don't need to go out and I need to raise external financing for closing payment. Typically, I'll always buy the legal entity. Because in most cases, it's more tax efficient for the seller to do a deal like that. And secondly, it's easier to raise capital, when you can leverage the credit history of the legal entity. In the UK, it's impossible to raise financing actually, on an asset deal. In the US, it's a lot easier. But still, I think it's cleaner to take the legal entity with you. In most cases, but you know, if you're just doing a deal where it's purely seller, finance, you've not done the due diligence, I'll just buyers buy the assets.
Ronald Skelton 27:42
See, you do an asset purchase, instead of buying the LLC itself. That's good. So that's what we were going to do with this one, just because they had a lot of issues that they actually had a pending three pending lawsuits, the IRS was one of them. The other two were vendors that they had not paid. They settled one out of out before we even got to that, you know, the offer table, the loi, and the other one they were working on. But uh, they had about three out of that 4 million million was the IRS. And two and a half, I think was accounts payable, like hard materials, and then a portion of it with some loans and stuff they had taken out that they had,
Carl Allen 28:30
I would never do that deal. I think where where this legal stuff happening on a business or there's a divorce situation. You mentioned before or there's been a shareholder death and the deals gone into, like a probate scenario. I just walk away from those deals. Because there's so many deals out there, there's so many businesses for sale, I just want an easy life clean, quick, no has that that's kind of how I roll. And what I what I coach my students through is is the is the art and science of building the deal origination funnel, so that you're getting access to deal flow every single day, and you have a super quick process of vetting those deals against your deal specification. And then you know, weeding out the ones that you know are going to be too complicated or too time consuming. Because you can burn a lot of time trying to chase the perfect unicorn deal. You know, the perfect unicorn deal is the one in 11 businesses that sells really quickly and sells for a premium valuation. You can do those deals, but for me, I'd rather buy a business where I can pay a discount to market value structure in a creative way. And then you know, add a lot of value to the business very, very quickly. So for me, it's like buying a house that needs a little bit of fixing up if you buy a pristine developer already. House, it's gonna be harder to increase the value. If you buy a house that, you know, you can do a quick remodel on it to coin a real estate analogy, and do that super, super quick, you're adding a lot of value to the business quite quickly, that's kind of the perfect deal for me. So the old, it's got to have cash flow, it's got to have, you know, good systems and processes, you know, customers that love the business, big growth opportunity. You know, that's like the perfect deal for me.
Ronald Skelton 30:28
So in that, in that scenario, you buy Quick Flip what we would call quick flips, easy houses that can flip pretty easily, they just need cosmetic. You know? Yeah. You know,
Carl Allen 30:39
having said that, you know, typically I'll hold on to a business for at least two years, okay, so I'm not a business flipper, where I'm in and out within 60 days, you know, I want to be in the deal for absolutely at least 12 months, ideally, two or three years, you know, I'm, I'm a partner in a business that I've owned for seven years still, you know, it will take an astronomical multiple, for me to sell that business. But then sometimes I'll get bored or buy a business, I'll make some money out of it. And then I'll just get fed up with it, I'll end up giving it to management, or I'll sell it, you know, I'm totally, I'm totally cool. And often when I sell businesses, I'm happy to take seller financing. You know, I'm, I'm happy to let a buyer pay me over time, knowing full well that if they default, I could just go take the business back. And I've done that a couple of times. And then I just find another buyer five, so find another seller. So I definitely done that. But it's really interesting, because you know, not every business that you look at is actually sellable. There are a couple of things for me, that sellers failed to do, before selling the business. And I wish there was more education on the sell side, to get people in that in that kind of frame of mind. There's, there's a very phenomenal gentleman up in Canada called John Warrillow, it was built a wonderful program called the value Builder System. And he's written a couple of great books, is a super guy, I don't know him all that well come across him a few times a bit on his podcast, built sell radio, but he's developed a methodology for making businesses a lot easier to sell. Because the two things that sellers fail to do before they go to market is number one, they they just don't get ready. So all their financials are not in order, the legal docs are not in order. And they, they're working in their business, not on their business. So if you own a company, and you're working in the business every day, all the processes are in your head, all the sales relationships are with you. You can't really sell your business unless you're going to sell it and stay there. Because the business is not going to work if you're not there. So that's one of the biggest criticisms I have of a lot of small business owners, they don't ready the business for sale, they grew it for sale, by extracting themselves from the day to day operations. So that if somebody else buys it, it works, you know, just as well. The second thing that a lot of sellers fail to do. And this is really important is they don't figure out who that ideal buyer is going to be. So there's only three different types of people that can buy a business, you've got individuals, or people like me, you know, small teams that are coming in and buying the business, you know, we don't really have any leverage, we don't have anything that we can bolt into per se unless I'm bolting a business into another one in my portfolio. But we're offering that legacy driven, safe pair of hands employee protection strategy. Now for a lot of sellers, that's what they want. Other sellers, they'll want to take a partial buyout, stay with the business for a few more years have access to other working capital, and then get a second bite in the cherry if they sell later. So that means you have to sell to pee. That's the only way that you can do that strategy. And the Strategy three years you don't care about the employees. You don't care about the legacy. You don't care what happens to the business. You want the highest valuation, and you want as much as you can physically get a closing. So you've got to sell to a trade buyer competitor, because as you know, a trade buyer can get lots and lots of synergies by acquiring and the business they can cross sell products and services between the two customer bases. They can strip out tons and tons of cost. My first deal story the transport business in the UK that trade buyer was basically buying the business at a gross margin level was not buying any overhead, it was just buying customers.
So for them, they were put to pay a lot more money, because the deal was going to generate a lot more cash flow for them. So sellers, before they pull the trigger, need to determine who they're going to sell to. And once they've done that, let's go through a process of polishing up the business and giving it that curb appeal all the documents sooner in a row, as the owner, I'm not involved in the day to day someone can come in, and someone can take the business on, and whether I'm in it or not, will make little to no difference to the success. And I think if all sellers went through that process, you know, we it'd be a lot easier to do deals. But then I think on the flip side, I think you'd see valuations going up. So it's kind of it's swings around about isn't it? You know,
Ronald Skelton 36:04
right. And I see that a lot, I have a, you know, business owners will reach out to me, and I own a small pest control company, which I bought before I learned how to do this stuff, I bought it wrong, bought it too small, and ended up having to work in it occasionally to help keep moving. But I did it to employ a couple of relatives, but uh, the, you know, when you buy when you buy these businesses, are you looking for a certain size of company, like, in my mind, I'm looking for something that has like 10 or more employees, because after that, there's probably somebody there that can run it when the owner wants to leave? Right? If it's not got more more than 10 plate players in there, they probably don't have the systems and processes for that owner to easily walk away.
Carl Allen 36:49
Yeah, yeah. So for me, that that kicks in, in my experience at around a million dollars of annual revenues. In some industries, you can get away with maybe five 600 Protect, particularly in the SAS market. You know, Amazon FBA type businesses, I bought a few of those. So but generally around a million dollars of revenue, you've got employees, systems, processes, and some kind of culture, which makes a difference. But then on the other side, I very, very rarely go above 10 million. And I would say my sweet spots in the one to $5 million revenue range, which a $5 million revenue business is still a very large business, in my opinion, what I find is when you go above five, and certainly when you go above 10, there's a lot more kind of buying competition in the market. And I think you have sellers that are less distressed, that owner investors, not owner operators, they've got all of their systems and things in play. So for them, it's about value maximization, and they're not as home GUP on that kind of that cultural transition. And what you'll know, from valuation, the bigger the profit, the bigger the multiple. So deals, you know, certainly about five or $10 million in revenues. And whilst there's a lot of financing to do those deals, you end up paying a lot more money in terms of a premium, just because there's a lot more people out there, it's harder to justify the legacy acquisition at that kind of level. So for that reason, I typically stick into the one to five range. And when I'm coaching my my students, you know, that's where I have them, you know, really focus. And, you know, I said to my students, you know, to find the perfect deal for you, it's only got a tick free boxes, box. Number one, it's a deal in your lane, you know, the industry, you're passionate about it, you can add lots of value number two, as a distressed seller of a good business. And number three, it's got cash flow. If it's called those three things, those deals are really easy to close. And size, I think for me, is is really important, because this kind of you know, one to $2 million deals in terms of revenue, a lot of buyers for those businesses, especially a trade buyer level, because if you're a trade by you're doing $50 million in revenues, are you really going to buy a wants $2 million business? No, you want to buy a 10 to $15 million business takes the same amount of time. I see quicker, the bigger the business because the data is a lot more readily available. It's not doesn't take the seller two weeks to pull all the info for you goes back to my point, a lot of sellers that just never ready, they that they never have anything for you. And brokers don't tend to do a great job of reading them. So like m&a, it's like an ecosystem and this works in every industry. You've got the billion dollar guy The 100 million dollar guys, the $50 million guys, the 10 to $15 million guys, and then everybody else. So I'm playing in the everybody else range. And what I often do is sweep up a lot of smaller businesses kind of in like a roll up structure. And then I'll go and flip that in time, you know, to the larger buyer.
Ronald Skelton 40:22
That's awesome. Let's jump in real real quick. I haven't had anybody on the show that really knows that LBO what they call LBO, the leveraged buyout, and raising capital to give the owner a check. So can you give us a little detail? Like, are you familiar with the SBA loans and what the requirements are? Is there a certain credit score or experience level or anything?
Carl Allen 40:44
Yeah, absolutely. So there's actually six ways to finance a leveraged buyout, I'll tell you what they are very quickly, and then we'll dive into the SBA. So number one, you can use surplus cash. So if the business has got more cash on its balance sheet than it needs to trade, the business, you can use that you can use seller financing, and also earn outs, which as you know, are like bonus payments based on higher than anticipated future performance. You can leverage lines of credit, if the business has access to existing facilities that it hasn't used. You can use asset based lending. So you can leverage real estate accounts receivables, inventory, IP, even plant and equipment, you can go raise equity. So for the sorts of deals that I do, it's more angel investors. And the benefit of an angel investor in a deal is not only are they bringing capital to the table, they're bringing knowledge and expertise, which as the new owner of a business you can leverage as you improve the business in the market. And then number six is cash flow lending. A lot of people there's a myth that the business has no assets, you can't raise capital, it's completely not true. Technology. Businesses don't have assets, but they have lots of cash flow, a SaaS business and Amazon SBA business, there's funders out there that all they do is SAS deals, all they do, or Amazon deals or online deals, you can get up to three turns on the annual free cash flow. Or you know, SDE, as it's sometimes called in the States, you can get three turns on that, and amortize that, over five to eight years, if you're doing a traditional lend, or if you go down the SBA route. The seven a loan is typically a 10 year amortization, the five or four loan is a 25 year amortization to qualify for a 504 loan, you've got to be buying a business that includes a piece of real estate, and the real estate is worth 51% or more the combined deal value. So let's say you're buying a business, let's let's do 400 grand of SDE, and you're buying it for two and a half times multiples, the business is worth a million dollars. Now, all the other strategies that I mentioned before, the buyer is not borrowing the money, the business is borrowing the money. If you're financing assets, if you're raising equity, if your seller financing parts of the deal. It's the business that's doing it, not the individual. But when you go to the SBA, it's the individual, it's the buyer, that's borrowing the money to buy the business. So your credit score as a buyer is really, really important. So this is what the SBA want. They want a credit score in the kind of high six hundreds, ideally 690 700 is where you need to be. Secondly, they need justification that the business is in your lane, so that you're buying a business in an area that you can add some value to. So case in point, you're a sales guy for IBM, and you want to buy a technology company great. The SBA are going to fund you, if you want to buy a Vinyard. They're going to say, well hang on a minute, that's not really in your lane, you would have to go and partner with somebody that knows how to run a Vinyard. They want to make sure that the buyers either as an individual or within the buying group have got the chops in the industry. And whilst you know, you've got big federal guarantees. backstopping a lot of this financing, you know, the SBA, they're not stupid. They want to make sure that, you know, you're doing the deal. Ideally, they want the buyer to be an owner manager.
I've done SBA deals, you know, I don't work in any of my businesses, and I never have, but what they want to make sure is that there's a solid number two or there's a solid General Manager inside of that business day to day One of the other requirements of the SBA is you can't do deals where there's any vendor take back of equity. So what I often do with deals is I'll, I'll let the seller retain a minority piece of ownership, maybe 10, or 15%. You can't do that with the SBA, it's only to buy the shareholders out completely. If there's two, so let's say you and I own the company, 5050, I could do an SBA deal to buy you out, you're 50%. And we stay within the business. But if an outside buyer came in the taken us both out of the business, you can't leave a shareholder in an SBA deal. And then the seller of the business has to be out of the company within 12 months, they can't be an employee, they can only be a contractor, you can't do earn outs, and you know, this kind of loopholes. There's ways around it, you can have consultancy agreements with rev share kickers, and warrants and all those different things. But classically, those are kind of the SBA rules. But the SBA is become a lot easier to do those deals. Since the Cares Act, where they waived all the fees, the Federal backstop went up to 90%. And they just become a lot more creative, and agile and flexible, in terms of doing deals that the only downside with the SBA is the time it takes to actually close a deal. You know, you're dependent on them, their due diligence, their funding process, their credit board, sign off from finding a deal and signing an LOI, you know, it can take three months to wrap all the financing up. And a lot of sellers, they don't want to wait. Because this is why a lot of cases, I'll give sellers, two options, I'll say, look, I've got two offers for you. You want a million dollars for your business, I can pay you 800, you get most of the money at closing, it's going to take me 90 days to raise capital, or I'll pay you a million for that I'm going to pay you over 10 years. And I could do that deal in two weeks. So you could be retired in two weeks. And if I don't pay you the seller financing, you can take the business back. And you'll be surprised the number of people that say, I'll take the OB Thank you very much. And then you buy the business. And then if you want to, you can go and do an SBA deal or another deal once you're in it, and refinance that seller note and cash the seller out at a discount. But why would you if you've got the cash flow coming out of the business to do it. So this brings me back to another really interesting point. And I call this I call it the annuity deal structure. So what's crazy, right? Is this is a very, very commonly asked question in mergers and acquisitions. How do you determine the value of a business? Now where most people get really hung up? Is it some normalized version of profit or cash flow or STD, whatever you want to call it, and it has a multiple attached and the average for a small business is kind of in the two to four range. And there's lots of things that change the multiple. But generally, that's how it works. But what what few people tend to realize is that often the structure of the deal can change the valuation. Obviously, if you're paying for a business over 10 years, you need to really offer more than if you're paying for it all upfront. But then also, a lot of businesses I look at,
I'll look at the valuation. And I think, well, where's that come from? That valuation has no bearing to the underlying financial performance of the business. And I'll ask that I'm very blunt. And I'll ask the seller, where's the valuation? They say? Well, you know, I'm looking to retire. So I called my wealth manager. And I said to my wealth manager, I need to make $10,000 a month for the next 20 years as my retirement. What do I need Mr. wealth manager, as a closing payment, for my business, less the tax, I'm going to pay for me to invest with you in whatever fidelity money market account you, you pick for me, that's going to generate me this annuity type payment. And they come up with a number. So that's the asking price for the business. Yeah, that can have no bearing whatsoever on the financial performance of the business. Now I have a strategy for buying those businesses. Because what I will say as long as long as the business generating at least $20,000 a month in cash flow. I will say to the seller, I will be your annuity provider. I'll just pay you $10,000 a month for 20 years. And if I don't pay, you can have the business bank, it's more tax beneficial for you because you're not having a big tax bill from a closing payment, you're just paying tax through your retirement income as you receive that money. And again, it's speed to deal I'm finding right now since kind of COVID, we're obviously coming out of COVID. Now, you know, massively, I was in the States three weeks ago. And whilst I was in the south, this is if COVID Never happened, and a, you know, we've come out of it massively. There's no real restrictions here anymore. You know, when we broke the back of it, but a lot of people have come through COVID, whilst their businesses have survived, and some have even thrived. I think a lot of these owners, they're just saying, you know, what, I'm done. I survived 911, I survived the GFC. I've survived COVID. How many more times do I have to roll with the punches? You know, I went out of my business, and I don't really want to wait. And it's, you know, it's early in 2022. It's cold and dark and wet in most places, get me out of this business, you know, can I get out of this deal in two weeks, four weeks. Now, I don't want to wait three months for SBA deal. Get me out. Now, if you could pay me 10 grand a month, you can have my business, so long as I get it back if you default. So these are some of the big shifts I'm seeing in the market. And again, it all comes down to seller psychology, that I can't emphasize enough. How much of that I'm seeing right now. And how much of that really goes into the kind of core of how I coach and mentor my deal makers.
Ronald Skelton 51:36
That's awesome. The so we're at 51 minutes now. And we try to cut this off about an hour. So the first thing I want to do is make sure people know how to get a hold of you. So I'm going to put this up. Earlier you said go to your website, that's car, dealmaker, coral calm, for those of you listening, not watching the video, and I'll put it in the show description. So if you're listening to this, and you want to go check out Carl Allen and what he's got to offer, he's got some free stuff there. Matter of fact, we were talking before the show, you really want you to do the free stuff before you come into the course. So you really know you want to get to do this. So check out deal maker carl.com. And I'll put that in the show notes. Right, he wanted me to come up. So he gave me a piece of his real estate investment firm. And then I eventually broke out and did my own. But uh, you know, I guess my lane would be different than others because I can learn fast. But if it was in the real estate, or it I probably could nail it fairly quick.
Carl Allen 52:35
So you have got what I call a horizontal skill set. And like, it's really weird. It's kind of ironic that you kind of just gave me your your little backstory there. So what I would say to you have three of the four characteristics of my most successful dealmakers and let me tell you what they are. So if you were to say to me out the 8000 Plus dealmakers that you coach and mentor all over the world, the ones that absolutely crush it. And I mean, in some cases make hundreds of millions of dollars from doing this. They fall into four camps. The first one, ironically, is females. I don't know whether it's because they follow the rules. They're more rigorous them or detailed. They don't cut corners. They make exceptional dealmakers the second are retired military. And I think that comes down to discipline, following roles, understanding a process and never deviating from it, you know, if you're in the line of fire, and you're not following the protocol, you're going to get killed, or people in your unit going to get killed. So military people through their mindset and the discipline, and just the sheer grit and fortitude, make phenomenal deal makers. The third, people that have done real estate deals, because buying real estate and buying businesses transactionally are very, very similar. There are some nuances in valuation and deal structure. But there used to originating deals, they used to deal flow, they're used to vetting, you know, that they're used to finding opportunities, and doing all those different things. They understand creative financing strategies, and all that stuff. And then the fourth trait is marketers, or people that are very good at sales, sales and marketing. And that's really powerful for two reasons. Number one, you'll get the whole concept of a deal origination funnel, so you know that it's very rare for you to just go out and find one deal and be able to close that deal quickly. Without using your own money. You need several horses in the race and it's like sales and marketing. You have a funnel, not every prospect that inquires about your product or service is going to buy it you need, you know a number of those people that Then secondly, as a sales or marketing professional, it's going to be easier for you to add value to the business once you've acquired it. So the good news for you is you have three of the four killer attributes that my most successful students have. So you'll kill this, you have uses your, I
Ronald Skelton 55:22
promise you, I'm not gonna try the fourth one, I don't want to become a female, I'm pretty, pretty happy where I'm at
Carl Allen 55:27
a female, you'd be Nirvana, you'd be a unicorn dealmaker. But the fact that you've got three of the other four, no excuses for you, but if you you will crush this.
Ronald Skelton 55:38
And it's interesting. You said about the lead flows, I'm building out a website, I bought a little domain called a CQ HQ, acquisitions headquarters. And the whole purpose of it is to find, I told my team that's building it out, and I've got a SWAT, I build teams. And what I do is I do all this stuff, I build teams around it. But uh, I told the team, I want to look at 100 deals this year, and, you know, we'll probably do a few of them. But I, you know, in order to pick out some really good deals, I want to, I want 100 people to raise their hand and say, I'm looking to sell my business through one of our tools. And, you know, the the marketer, that I have a guy who I have two people on my team that actually have owned marketing companies of different types. One of them is an analytics just junkie, he can, you know, tweak paid ads, and just really make it work. And the other one is a content marketing company, she's, you know, does content stuff, but they both had 100, you know, that that's not very many. So I, you know, I'm looking forward to Let's blow out all the water this year. But uh, and I totally want to what I want to do with them was go through them, evaluate them, figure out what's in my lane, what fits for me, and then kind of do what was in the real estate world. The reason I made so much money in the real estate space was every deal that wasn't a fit for me, I knew who it was for. So I'm building portfolios of buyers who people I know that are active buy in businesses and what they're looking for. So if I find something that doesn't fit me, I kind of already know like, I can walk into a house right now. And there's four or five investors in town, I walk in and go, I don't want this, but I bet this guy does. And it changes the way I structure the deal, because I know what their structure is, I know them well enough to know what they're looking for.
Carl Allen 57:16
Absolutely. So I have an inner circle program called dealmaker prodigy, which are my elite level, kind of coaching students. And we do that it's always capsure 50 people. And when we chat on a weekly basis, part of the fulfillment is we'll do a deal share. So if you find a deal, and it's not in your lane, you'll know from everyone else in the group that it's going to fit some of those people, and you'll get a finder's fee, or even a piece of the ownership you know when the deal closes. So that's definitely the way to do it.
Ronald Skelton 57:50
Well, I want to thank you for being on the show, hang out for a couple of seconds when we close the live stream. I appreciate it. We're at the hour, actually a couple seconds over the hour, and when on everybody's time yours and the people listening today. So thank you very much.
Carl Allen 58:04
You're welcome. Thanks for having me.
Ronald Skelton 58:05
Awesome. I'm on the investors and entrepreneurs professional mastermind. The investors and entrepreneurs professional mastermind combines that traditional peer to peer mastermind introduce first in Napoleon Hill's famous book Thinking Grow Rich, with accountability partnering, where your peers help you ensure that you set goals take action and get results. If you want to scale blow past roadblocks and achieve success faster than you might think is possible. I suggest you take a visit over to tiepm.com. That's tiepm.com and check out the investors and entrepreneurs professional mastermind.