Know Your Broker: Andy Cavanaugh

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Andy CavanaughAndy Cavanaugh has had a taste for running his own businesses since his teenage years, when he was mowing yards for cash.  He wasn’t certain that was going to be his career path, however, and after an undergraduate degree in business and an MBA from UMKC he took the corporate path for a while.  But that life never really took with him, especially when trips took him away from his wife and two daughters and even more so when he was told he might need to be on the lookout for an email on a weekend evening, and possibly respond right away.  

He diversified into doing some tech development, consulting, and even running restaurants.  His last business was a franchise that he sold after running it for ten years.  He wasn’t thrilled with the franchisor and felt it was time to move on.  The level the business was at wasn’t a good fit for us here at Apex so Andy ended up selling it himself, learning a new the lessons we see every day here as brokers.

He had three buyers look at the business and had takeaways from the first two that backed out that helped him get to the finish line with the final buyer:

  • The first buyer was going to buy the business “for his daughter” but after two months of emails and phone calls, the daughter was nowhere in sight (Lesson: get all the stakeholders in the room before you can take a deal seriously).
  • The second buyer had some money to put down, but didn’t seem too interested in understanding the fundamentals of the business (Lesson: make sure there is alignment between buyer and seller regarding the opportunity).
  • The final buyer seemed to be a tire kicker, with 20 questions right off the bat, but ultimately he got serious and ended up buying the business (Lesson: don’t be scared off by a raft of questions; even if this person doesn’t end up being serious you’ll have those answers for someone else).

Andy sold the business this year, which means that he experienced what many business owners could never have foreseen: months of operating during Covid-19.  That experience taught him a lot, but now that he’s a broker he has a new respect for small business owners who toughed it out and made it work through an end-times scenario.

Having been a business owner also means he can have a frank conversation about best business practices.  When he was looking over some owner benefit items from a potential client recently he got curious about a one-time $7,000 charge for “building enhancements.”  The seller said those were for his wife’s cosmetic surgery.  While this might qualify as an “enhancement” it certainly wasn’t on the building and isn’t anything a buyer wants to see.

Having been the less seasoned business owner who ran too many personal expenses through the business in his early days, Andy told him that what’s done is done, as those charges were from 2019, but that the cleaner the books are, the better price a business will fetch (and the sooner it will sell).

Recently Andy also had an interesting conversation with a seller who wanted to know why Andy wasn’t pursuing things with a certain buyer.  “She doesn’t like the way your building faces, so we need to move on.”  The seller was upset and took Andy to task for not “selling his business.”  After hearing him out, Andy asked if the seller was willing to turn the building so that it faced South instead of West (what the buyer was interested in).  The seller started to realize Andy’s point and replied, “No.”  Andy pointed out that there are dozens of potential buyers who are fine with the current building’s orientation and those are the people we need to focus on, not the people who have problems with the business that cannot be fixed.  

When he’s not spending more time with his family to make up for all that travel in his consulting days, Andy can be spotted, like many of us, at Chiefs and Royals games.

Case Study #57: Built to Sell from the Start

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Built to Sell from the StartIn the early days of starting his company, Olympic Restoration, Kevin Waldron went to a seminar in which Michael Gerber was speaking and heard Michael say that if a business owner had to be there every day to open and close the business, that wasn’t a business: it was a job.  Right then and there he resolved to build a business the right way so that one day he could sell it, if he wanted to.

Kevin started out in the flood/fire/disaster restoration business working as an employee.  His boss was a real jerk to his staff and didn’t pay his taxes to the government.  Kevin got out of there as quickly as he could, using the reasoning that has launched probably millions of businesses: “If that jerk can do it, I can definitely do it better.”

Professional from the Start

The first step in creating a business to sell was not naming the company after himself.  He knew that could affect valuation in the future.  He also knew that the reputation of most companies in his industry: a mom and pop operation with a couple vans in which the owner usually answered the phones.  Instead, he hired someone to answer the phones early on to give the appearance of professionalism and people noticed.

Industry Changes

Kevin started in the industry in 1988 and ended up selling his business in 2005 so he saw a lot of changes happen.  But the key one was in service.  In the beginning the insurance agencies who hired him simply wanted their customers taken care of.  “We’re sending over Kevin and his team and they are going to take care of you.”  Let’s be honest, as consumers, after sending all those insurance payments over the years, we want to get taken care of.  But the property and casualty industry was the last sector to adopt the cutthroat tactics of the health insurance industry, i.e. doing “surveys” and then telling companies like Kevin’s that they were going to pay $XX.yy for a given type of service, no more, no less.  Oh, and while you’re at it, you’re going to start doing the work (making site visits, taking photos, etc.) that we used to pay adjusters to do.  No, we’re not going to pay you extra for that.

These changes squeezed his margins, for sure, but it wasn’t bad enough to push him out of the business.  He kept growing his team and his business.

An Unsolicited Offer

Many business owners first start thinking about selling their business when they get an offer out of the blue.  In this particular case, since Kevin had always been planning to sell the business, this wasn’t a trigger for him.  He asked his business coach for advice and he was told, “Tell them you have no intention of selling, and if they are okay with that, you can go as far as they would like.”

That’s exactly what Kevin did and at the end of the process he said, “Thanks but no thanks” and things stayed cordial between all parties.  At the time Olympic was doing $6-8M in annual revenue and the offer was 4X EBITDA on 75% upfront and 25% earnout.

Now, It’s Time

But all business owners who successfully sell can tell you at some point you know it’s time to go.  Sometimes there’s a dramatic event or aha moment.  Other times you just wake up one day and realize you don’t want to fight the insurance companies anymore and want to do something else.  That happened to Kevin one day and that fatigue probably led to his biggest regret in this process: instead of taking the business to market he simply called the company who he had gone through the process with years ago and leveraged that cordial relationship.  They were 7-10 days to an LOI, and then closed in 45 days.  The changes from the original offer from the past was no earnout as Kevin wanted to be gone immediately and because he was now doing $24M in annual revenue, his payout was much stronger.

Lessons

We always tell business owners that if you build to sell, it’ll be so much easier if and when you ever do that.  All businesses either close or sell.  There are no other options.  Some other lessons from Olympic Restoration:

  • Be thoughtful about your name.  While there’s definitely family pride in having your last name on the business, it can make things more challenging if it doesn’t end up being a family business and you want to sell.
  • Keep on good terms with potential acquirers.  While Kevin knew he didn’t want to sell at the time of the first approach, he kept such a cordial relationship that he was basically able to call his shot when he was ready to sell.
  • Go to market.  Kevin has said that if he had to do things all over again, he would have definitely gone to market with his business.  It may have ended up with the same buyer anyway, but on even better terms than he ended up getting.

Is your business built to sell?  If so, is it time to talk about selling?  If not, we would love to give you some advice on how to get ready for a sale some day.  Give us a call.

IBBA and M&A Source Market Q2 2021

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IBBA and M&A Source MarketThe IBBA and M&A Source Market Pulse Survey was created in 2012 to provide business owners and their advisors with analysis of changing market conditions.  Here at Apex we use these surveys to get a sense of what’s going on in the Main Street (businesses between $200k-$2M) and the lower middle ($2M-$50M) markets.  Q2 of 2021 gave us a chance to look at the strange year of 2020 and what has changed in 2021.  Given that the findings from the survey come out to over 100 pages, we’re going to save you from reading it and share just a few observations of our own.

Covid-19 Changed Conditions for Buyers and Sellers

While it may seem obvious that “Covid changed things” in the business transaction market, most outsiders would not necessarily be able to tell you precisely how.  

Buyers

Many talented individuals got laid off in March 2020.  While some of them were hired back, many of them weren’t, and this led to an openness to a shift in career, including buying a business.  The overall lack of certainty not just globally but internationally, and not just in how we live and work but even how we vacation and make future plans has led some to see business ownership as a way to control their own destinies.  We’ve certainly seen quite a few of those individuals come through our doors in the last 18 months.

Sellers

Sellers had to work through their own situations starting in March 2020.  Layoffs may have been part of the solution, but they also had to deal with local legislation and had to embrace remote work, even if they had previously never considered the option.  If they made it through 2020, even with the assistance of EIDL and PPP, they now had a story to tell: my business survived through a pandemic.  That made some businesses more valuable than they were prior to the pandemic, and the owners of some of those businesses, now that they’ve had a moment to stop bailing water, are keen to cash out.  The adjusted EBITDA on such businesses in the lower middle market have been enjoying a .5 multiple increase in valuation.

For those sellers who didn’t have a “pandemic-proof” business, they still had opportunities to sell to buyers who were open to turnaround options.

Areas of Focus

The survey also confirmed trends we’ve been seeing.  For example, in due diligence in the lower middle market, the focus has been on staffing.  With the major changes happening in employment trends due to the pandemic upheaval, buyers in the lower middle market have been focusing on key players and putting employment agreements in place for their transactions.  Main Street businesses are also looking at staffing issues and getting clear who has been in place and for how long, and what the turnover rate has been historically and during Covid-19.

Some things never change.  We still see a closing time of 3-4 months from LOI to dotted line, but 50% of those deals fall through for one reason or another.  One of the consistent reasons a deal may ultimately fall through is a total lack of mental and actual exit planning on the part of owners.  95% of owners do not have exit plans in place and get dismayed when we tell them about tax consequences or what they will need to do accounting-wise to be sale-worthy.  

If you’re serious about selling a business, whether this year, next year, or sometime in the future, the one single action you can take today to make sure you get more money at closing, a better multiple, and fast, smooth sale is exit planning.  Then when you’re ready to sell we can just start executing on that plan.

Need help getting started on that exit planning?  We know just where to start.  Give us a call.

Know Your Broker: Ryan Wenrich

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Ryan WenrichHaving been a business owner multiple times, Ryan Wenrich is another one of our brokers here at Apex for whom business ownership isn’t a theory, but a way of life.

Ryan was born and raised in Garden City, Kansas, but had plans of living in a completely different world.  His undergraduate degree was in finance and international business, with some study abroad time in Japan.  He had planned to return there to start work and a career, but there was a girl, and she had no plans in Japan.  He made the decision to stay stateside.

Without a corporate career to build, Ryan decided to buy some restaurants from his father.  His dad had been a CPA and to diversify his income had bought some restaurants as Ryan was growing up.  Ryan managed to talk a brother into going in with him on it.  They had some early success and before he knew it, Ryan had restaurants, a property management company, an accounting firm, and even a florist shop!  He was serving on multiple boards and felt spread a mile wide and an inch deep.  He made the decision to scale back a lot.

Most of the businesses got sold but some of them were simply closed and with all that restaurant experience he took on a role as Director of Food and Beverage for a local Kansas City business with over 60 different food and beverage concepts.  While he enjoyed the work, when Covid-19 hit, he was let go right away and he pondered what he would do next.

We had actually helped him sell a business some years ago and he had kept in touch with us.  Knowing we are always looking for solid team members, Ryan reached out to have a discussion.  What he loved about the possibility of brokering was the chance to exercise his entrepreneurial muscles: he would get to look at all kinds of businesses and talk with owners, but he would also be back in business ownership, in a way, by developing his broker practice.

Though he is a newer member of the team he’s already got some great stories.  One of them included a deal that almost fell apart at the last moment.  The buyer needed a license in order to operate the business he was purchasing and during the diligence process it became clear that he would not be able to obtain the license, which then affected the amount of the loan the bank was willing to finance.  Ryan got everyone back to the table and after a friend of the buyer who could obtain the license was brought in and cut into the deal, and the seller agreed to carry the financing that the bank would not, the deal went through.  “It’s all about getting everyone crystal clear about what they want to achieve from the transaction,” Ryan noted.

On the other end of the spectrum, before deals are even in the works, Ryan finds that a lot of owners have unrealistic expectations of what their business will fetch in the marketplace.  As we always say, a business is only worth what someone is willing to pay for it, and by the time you get to a realistic valuation and the tax implications, a lot of sellers can get discouraged and say, “Well, I’ll just keep doing what I’m doing now and earn this money.”  At that point Ryan tries to get to the root of the issue by asking what’ll be different X years from now if they keep on that path.  A business either sells or closes, and given that 99% of business owners have never done exit planning, sometimes our first conversations with them can be a difficult serving of hard truths.

While he’s done a few deals with dental and optometry practices, Ryan is resisting a specific niche: “I’m a generalist and want to see every type of business that’s out there.”

When he’s not working with buyers and sellers in KC he’s at his home in Topeka where his eight year-old daughter lives. What time he has after that he likes to spend outdoors: skiing, sailing, snowboarding, kayaking, mountain biking, and trail running.