Summary

Paul Bellows shares his experience as an entrepreneur and the cautionary tale of his business sale with seller financing. He highlights the importance of proper deal structure and the potential risks involved. Paul emphasizes the need for a strong deal team and the importance of being mentally and emotionally prepared for the sale process. He also discusses his transition to becoming a business broker and the role of coaching and consulting in the M&A industry. Paul's goal is to help business owners optimize their businesses for sale and make informed decisions. In this conversation, Paul discusses various topics related to business valuation and the M&A process. He emphasizes the importance of maintaining strong margins and effectively communicating a business's value proposition. Paul also shares insights into the number of businesses sold and listings in Tucson, as well as the types of businesses in the area. He explains different valuation methodologies and the use of business broker databases for comparisons. Paul highlights the significance of financial integrity and the need for accurate and transparent financial statements. He also addresses the importance of setting realistic expectations and conducting financial audits to ensure a thorough evaluation of a business.

Takeaways

• Proper deal structure and strong legal agreements are crucial when selling a business with seller financing.
• Being mentally and emotionally prepared for the sale process is essential to make informed decisions.
• Having a trusted advisor or consultant can help optimize a business for sale and ensure a smooth transaction.
• Setting realistic timelines and being flexible in the sale process can lead to better outcomes. Maintaining strong margins and effectively communicating a business's value proposition are crucial for success.
• Understanding the number of businesses sold and listings in a specific area can provide insights into the local market.
• Different valuation methodologies, such as cash flow, revenue, and EBITDA multipliers, are used to determine a business's worth.
• Financial integrity and accurate financial statements are essential for a successful M&A process.
• Setting realistic expectations and conducting financial audits can help ensure a thorough evaluation of a business.

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Transcript:

Jon Stoddard (00:01.127)
Welcome to Top M&A Entrepreneurs. Today, my guest is Paul Bellows. Paul is from Tucson. This is my first local podcast guest. Anyway, Paul is an entrepreneur. He's also an author. He's got a book called, Your Business Coach, Business Coach by, Your Business Coach in a Book. So it's called SLAP. It's a nice book. It's really detailed. So he also is a,

Paul (00:10.286)
I'm sorry.

Jon Stoddard (00:31.119)
business broker here in Tucson for benchmark business group. That's what we're gonna talk about. But Paul is an entrepreneur and he's got quite a story on how to grow a business and then kind of get screwed over with seller financing. And the reason I bring this up, I see a lot of people on Twitter, LinkedIn talking about, hey, don't buy a business unless it's seller financing. Paul has a cautionary story that we're gonna jump into about that. Well, welcome to the show, Paul.

Paul (01:00.198)
Awesome. Thanks for having me, John. I appreciate being here and everything you do to help business. At the end of the day, I'm a business owner advocate. I love business owners. I love entrepreneurship. And I do everything I can to help business owners be successful. That's my whole mission in life. So I appreciate everything you're doing to help them as well.

Jon Stoddard (01:21.051)
Well, thank you, thank you. So let's get start talking about where you started as an entrepreneur, you have a business and then you sold it. Little bit of a seller financing, how that story went because I just wanna say, hey look, just because you see a lot of these celebrity gurus out there say get seller financing, that's not always the case.

Paul (01:44.346)
In my case, my first business was a restaurant when I was 20 in Tucson. That was just a huge amount of hours. I financed it myself and eventually left that business. Eventually I ended up in high tech over 10 years later. Specifically in a space called Semiconductor Test Equipment. We manufactured and upgraded equipment.

tested computer chips and printed circle boards. So it was a high tech type of space and we were pretty global for small business and my partner and I grew that from our basement. And then, you know, ended up having offices throughout the world and about a hundred employees. And so, you know, it was very exciting, a tremendous amount of work. And so at some point I thought, there are some other things I'd like to do. And I really decided,

I went through a couple of acquisitions, I grew the business and I decided, you know, I think there's an opportunity here for somebody else to kind of take this and run with it to the next level. We were going to have to retool and that was going to require like a $10 million investment, right? So I looked around and I could have financed that through a combination of banks and so forth and I was like, well, do I want to spend the rest in the next 10 years dealing with that?

And so we all kind of make reasons for exiting, right? And I was still in my, at that time I was in my late 30s and a little burned out from the industry and the travel. And I had a partner, meaning I had offices throughout Asia and I had a specific partner who had really helped us expand in Asia. So long story short, I'd worked with this guy for 10 years. When you work for somebody for 10 years traveling, you get to know that person.

We'd completed thousands of deals, right? Selling test equipment. These deals went from 5K to over a million. So a wide range of all types of test equipment and services. And so I knew this guy pretty well, and I made him a sweetheart deal. I was like, here's my business. Let's find a way for you to grow your business. Here's all the assets. And it was a little money up front, and a five-year note.

Paul (04:08.226)
monthly payments and that was a long time and I'm not saying I'm not advocating that was a the best plan and idea and I didn't have probably my best deal team. I was being super clever which is different than being super strategic and you know I was being smart and trying to help him and trying to help myself and family and trying to maybe not to pay some paying taxes on the

Jon Stoddard (04:09.287)
That was a long time ago, yeah.

Paul (04:37.366)
you know, just interesting ways of handling the transaction. And about a year and a half into him paying, I took a year off. That part was great, right? I played some golf. Yeah, you know, I got in shape and played some golf and, you know, and looked at future opportunities and what, you know, what did I want to do next? And, you know, I spent 15 years in that industry. And, you know,

Jon Stoddard (04:49.123)
Yeah, you were getting paid during that year off, right? Yeah. OK.

Paul (05:06.278)
It came down to one month, my chuck didn't come in, right? And my wire didn't make it. And this was, you know, from a buyer in Malaysia. So, you know, I started investigating, having conversations, and he had been acquired by a bigger company that basically neither one would honor our agreement. And so I'm looking to be basically hung out to dry.

Jon Stoddard (05:29.415)
Shoot.

Paul (05:35.294)
And what that means is, you know, you hire a lawyer, you start getting involved in international lawsuits, and you quickly find out how expensive they are and what's required. And then dealing with countries that, you know, you're going to have to go to international courts. And he had bought, he had been purchased by a company in excess of a billion dollars in revenue. And I'm, you know, I'm a little guy compared to that type of business.

Jon Stoddard (05:44.536)
Yeah.

Jon Stoddard (06:01.455)
They could let hang you out to dry for a long period of time. Yeah.

Paul (06:03.39)
Yeah, yeah. And so we fought it for a little bit and burned through some cash. And at the end of the day, I had to basically walk away. And, you know, there's a million and a half dollars out there I never got. And, you know, that changes your life. And, you know, I was living large, probably more than I should have. And a lot of money went to some battles I was fighting. And, you know, I started, you know, I looked...

Jon Stoddard (06:16.559)
Yeah.

Paul (06:32.89)
What can I do next? And that's, you know, I really thought the things I excelled in and I enjoyed were building teams and putting strategies together, right, and connecting those two. And so that's what I'd done for myself. I'd done it for other organizations. And that's, you know, a high level of consulting. But it doesn't pay a lot of money right off the bat. And I'm...

Jon Stoddard (06:52.707)
Yeah. Let me, let me ask you about that. Just to reconstructing that kind of like a, a prosecutor trying to find out what happened there. Now, did you have conversations with your partner and say, Hey, what the hell's going on? And you know, you heat up the phone with him going, you son of a bitch, what happened? Yeah.

Paul (07:04.334)
Sure, absolutely. Yeah.

Paul (07:12.114)
Yeah, yeah. It quickly came that they were using this as an excuse not to pay me. He really took the role that he had very little decisions in it. You know, decision making. Looking back, my contract wasn't as thorough as it could have been. Right. We had a lot of inventory and a lot of equipment. And so we didn't take care of some of the things we should have in terms like a UCC.

Jon Stoddard (07:30.157)
Yeah.

Paul (07:40.438)
You know, I really trust that there was a lot of trust in it. And the agreement could have been a lot stronger. I could have prepared for him having an acquisition like he did. And, and, you know, we, we were sold on building organically or through smaller acquisitions. So this was, took me by surprise and maybe I was a little unprepared and a little ignorant and I didn't have a great deal team with me. I didn't have looking back. I didn't have the appropriate.

legal team and the agreement. But at the end of the day, he dropped the ball. He wasn't willing to fight or advocate for me. And, you know, at that point you battle what you can. But it was very, you know, there's the financial part and then there's the heartbreak part. I was heartbroken because of, yeah, that's how it felt. And, you know, I had to work on that.

Jon Stoddard (08:30.391)
Yeah, there's the betrayal. It's a betrayal part. Yeah.

Paul (08:39.642)
And, but at the same time, it made me a lot better as a consultant, as a business broker. I never want to put any of my clients and my clients are usually people who are selling their business, right? Retiring people, you know, people that are, you know, they've been working on their business for a long time. And so I want to put them in a position where they're not having to, to go out and try to be the collector, right? Or fight a legal battle, you know, where, where they're being compensated well for

Jon Stoddard (09:02.255)
Yeah, yeah.

Paul (09:08.106)
you know, working hard, building that organization. You know, a lot of businesses, this is their main retirement, right? For me, I was still a young entrepreneur, was just reinvesting in other opportunities that I couldn't do.

Jon Stoddard (09:15.664)
Yeah, yeah, yeah.

Jon Stoddard (09:19.995)
You got at least, uh, you know, 20 more years to try to build something back at 34. So let me, let me ask you about that again. It's like, was it 50 or what was the split? Like they give you cash upfront or was it a hundred percent self-financed? I mean, uh,

Paul (09:24.402)
Yeah, yeah, and it just was a pivot.

Paul (09:33.622)
No, it was more like 20% upfront with 80% carry. And, you know, and there was a lot of growth potential and opportunities. So, you know, the amount could have even, we had some criteria built in there where the amount could have even increased based on performance. And, you know, we, I positioned us really well and with relationships and, you know, and our clients were, you know,

Jon Stoddard (09:37.816)
Yeah.

Jon Stoddard (09:44.164)
Yeah.

Paul (10:02.658)
Fortune 100 tech companies, right? So, you know, those take a lot of agreements and you have to prove yourself and the technology has to be there. But in terms of the deal side of things, you know, I just wanted to, I didn't want to burden him with the debt, right? And with having so much overhead and, you know...

Jon Stoddard (10:04.751)
Yeah, yeah.

Jon Stoddard (10:27.371)
You were thinking about the best interest in the company and everybody at whole to overburden the company, which turned out, yeah.

Paul (10:36.49)
I put myself last in this arrangement and it bit me. So now I take a much more balanced approach, trying to find a win-win for all the buyer, the seller, the employees, the customers. You got to look at all those factors. But in this case, I didn't put myself high as a enough of a priority. You forget when you're still kind of that young. In my case, I was a young man.

Jon Stoddard (11:00.038)
Yeah.

Paul (11:06.958)
And I had grown this business pretty rapidly and found some success. I thought I could do it again. And it's challenging to do it again and make that much money again. When you found a niche that was really the timing of it was really good, you know? And I found very few businesses that could match what I was doing in terms of profit, in terms of gross margins, and in terms of the global appeal, in terms of the tax.

Jon Stoddard (11:14.203)
We all do. We all do. Yeah.

Paul (11:36.274)
You know, all that stuff, there's very few opportunities I've seen since then. So part of this was I could play because I was a little younger and I was a little riskier in my approach. And, you know, and so you learn from those lessons and nowadays, you know, depending where somebody's at in their stage of their career, they may not be as much of a risk taker as I was. And I took too big of a risk and I put myself last and I got burnt.

Jon Stoddard (11:47.524)
Yeah.

Jon Stoddard (12:03.991)
Yeah. So where was this adjudicated? And do you think that would there have been anything you could have done to put into place a lot more legalese that would have protected you?

Paul (12:18.174)
For sure. We should have done some agreements that would have given me the opportunity to recapture my investments. We were looking at making sure this was an agreement and making sure that it was based on US law.

Jon Stoddard (12:29.776)
Yeah.

Jon Stoddard (12:45.061)
Yeah.

Paul (12:47.218)
And there definitely could have been a UCC or some other instruments similar to that to really make sure I would have had access to in the US.

Jon Stoddard (13:01.743)
Yeah, where was it adjudicated? In the US, oh yeah. Well, that kind of begs a question. You put yourself last and you know the, just last year or two years ago, if you got an SBA loan, seller financing was on a 10 year standby. It's now on a two year standby. That's putting yourself last, right?

Paul (13:26.946)
It definitely can be and you got to know what you're getting yourself into. Right. And I think anybody has to, if they don't understand the intricacies of this type of deal, this is where you spend the money. You get the good attorneys. You educate yourself. You talk to people like you and me.

Jon Stoddard (13:33.72)
Yeah.

Paul (13:52.554)
You learn from the lessons, the painful lessons we've had to go through, but you don't skimp on the deal. And I skimped on the deal team. I sidetracked probably some of the things that I should have done just to keep my costs down and just to make it easier transition. And I really didn't shop myself. I made a sweetheart deal to this guy.

Jon Stoddard (14:14.391)
Yeah. I mean, they are painful. Most painful essence are the ones that stay with us the longest. That also create these working principles in the future. Well, what, what did you say? I know you said that you would have had a stronger deal team, a stronger legal team in place, don't skimp on that stuff. Like, you know, it, you know, better, more clauses in a contract.

would have been better because it would have been shown up on a UCC filings, especially if another U S company purchased it. Yeah.

Paul (14:44.726)
Right. And he should have set up a U.S. company. I mean, there's things that we should have done. You know, that's there's the legal perspective, but it's also my own personal readiness. I was really burned out. So I didn't go to market. I didn't find competitors. I didn't shop myself appropriately. You don't want to operate from a position where this is your only opportunity. You know, you need to look at options. You need to look at other opportunities. And.

Jon Stoddard (14:48.681)
Yeah.

Jon Stoddard (14:56.589)
Yeah.

Paul (15:14.242)
And I was, and you don't want to operate from, you know, I wasn't desperate, but I was burnt out. So, you know, being personally, really mentally and emotionally, having your family behind you, really getting everybody on the same page, taking care of your mental, physical health. I look back and I wasn't maybe healthy in some of the areas I am now, or I could have been a lot healthier. And so...

You know, all those things come together, your perspective of where you're at, your financial situation, your relationships at home, relationship with yourself, and putting yourself in a position where you can look at multiple offers. You can really, I think I undervalued myself and undervalued my organization. I didn't get what I would consider a strong enough, you know, valuation. So.

Part of this is the deal team in terms of the legal work. Part of it was my own mental and emotional health. And part of it was trying to force the deal to happen before it's time.

Jon Stoddard (16:17.03)
Yeah.

Jon Stoddard (16:27.407)
Yeah, that brings the question. And I've actually been in this situation. I had an e-commerce company and I took it. I was just burned out, burned out of selling hearing aids, having to talk louder than I normally have to do because people want it. That's not a joke, like what? But you have to talk louder to people with hearing loss to sell hearing aids. And I took it, when I first took it to market,

I was burnt out and people were telling me, no, it's not going to sell for what you think it's going to sell. You're working too many hours in the business. You're not delegating all of this stuff. The metrics aren't right. And I took that to heart and took it back and retooled it to resell at Empire Flippers. After a year, I put it on Empire Flippers and sold it in 72 hours. So there was a difference.

When you do all those things, people are telling you what to do, it does change the outcome of what you're trying to do.

Paul (17:30.206)
I would add that I probably was so independent at the time. I probably wasn't that ready to be coachable. Um, you know, and in hindsight, I should have brought some, uh, I had brought a consultant on when I made the acquisition. So I had a smaller company. I made an acquisition of a company bigger than us. So I had brought a consultant in on that acquisition and really helped with organizational structuring and process improvement and, you know, structuring our chain of command.

Jon Stoddard (17:35.46)
Yeah.

Paul (17:58.094)
and our financial chart of accounts, all that was really helpful. But when I went to sell it, there was things that, you know, now that I've been on the other side as a consultant and trusted advisor for almost 20 years, there is a lot of things that could have been done to strengthen that company. And I should have been patient. I should have probably made those investments. And I personally should have been a lot more coachable to learn, to really dial down some of my drive and independence.

Jon Stoddard (18:20.123)
Yeah.

Paul (18:25.934)
I had bought this company with the goal to sell it in five years, John. So I had a smaller company, I bought a company, I'm going to sell this in five years, right? I got other things I want to do. And I sold it in five years and three months. So I let the timeframe dictate when I was ready to sell and not other things like my readiness, the business's readiness, the market condition, the buyer. I let the timeframe of my goal be the driver. And that's not always that, you know, puts you in an ideal position.

Jon Stoddard (18:30.692)
Yeah.

Jon Stoddard (18:54.851)
Yeah, should you have been more specific about your goals? I need to sell in five years. I'm gonna sell it for this amount and I'm gonna put this much in my bank account and et cetera. Yeah.

Paul (19:06.774)
Or I'm going to sell within five to seven years with these, with these types of factors, right? I want to get this much out. I want to have this team, but be a little flexible with the timeframe sometimes and don't, and don't force it. If I would have given myself a little more time, been a little less, had a sense of urgency and focused on performance and quality and building it the right way, I think I would have made a much better decision.

Jon Stoddard (19:12.58)
Yeah.

Jon Stoddard (19:31.275)
Yeah. Well, Paul, I want to thank you for sharing this, you know, these hard points in our life kind of help us with our character. And then move us to the next step. If you, if, if you're strong and you achieve it, it goes like, Hey, it's a loss. I'm going to take the loss and move on and learn from it. So you went into coaching, per business coaching for something. Now tell me about this coaching is that, and you're still doing it. Cause I see it's still present on your LinkedIn profile.

Is that like an EOS type of deal? What kind of coaching is that?

Paul (20:06.39)
Well, when I started coaching, and you know, two hats, coaching is like the one-on-one building's leadership scales, and consulting is more of a project-based. So for a long time, I was coaching leaders to be better leaders of entrepreneur companies, right? And then helping them develop strategies and execute those strategies, and raising their level of ability to lead a team and to better have a world-class strategy. The last few years, as

Jon Stoddard (20:11.526)
Yeah.

Paul (20:36.174)
really only, I'm only doing coaching for people that really want to exit. You know, that really want to exit the next year or two. And, you know, I have some other coaches on my team and, you know, we kind of specialize in different areas. So I've really flipped it around from being a full-time coach, full coaching, you know, for almost 18 years of 30 to 40 hours a week, you know, of one-on-ones and team environments.

to right now where it's mostly helping business owners put their business on the market, position themselves in the business, making sure it's the right time and at the right price and sell it to the right buyer. And...

Jon Stoddard (21:19.791)
and the business has the right metrics to get the best offer for the seller. Yeah, okay.

Paul (21:23.39)
Yeah. And sometimes that sometimes you have to tweak those things to make the business ready to go, right? To optimize the performance, to optimize the sell. I really think, you know, I'm in the optimization business now. It's coaching, but it's not startups. It's not midterm. It's coaching people to optimize your business for an exit that's going to happen in the next six months to two years. And so.

That's just the life cycle as you become a trusted advisor. Where's your niche and where does your strengths match? And I just want to help as many business owners realize a great...

Jon Stoddard (22:01.231)
And is that mostly in Tucson? I mean, or is it all over the place?

Paul (22:04.126)
Yeah, I would say it's probably the 80-20 rule for me. 80% of my business I'm working with or listings are in Tucson. And there's a handful in other states or maybe even internationally. But yeah, and I just.

Jon Stoddard (22:15.631)
Yeah, cause it doesn't really matter, right? I mean, really, I think you're an M&A advisor on this, your coaching on your LinkedIn, M&A advisor. Cause that's exactly what they do, yeah.

Paul (22:21.162)
Yeah, yeah.

Yeah, and my lessons I learned, painful lessons come to play, you know, and structure deals so that doesn't happen. And so I have no, you know, it's a little, at first it was very embarrassing and very difficult to talk about. And over time, I saw it as a way to help other people and learn from it and make sure other people don't repeat those mistakes. And for the most part, I think...

Jon Stoddard (22:31.588)
Yeah!

Paul (22:53.804)
I'm able to help people make much better decisions than I make.

Jon Stoddard (22:57.251)
Yeah, having a point of view, but your message, the message too, to help other people avoid the dragons. Yeah, yeah.

Paul (23:05.034)
Yeah, yeah. And that brings a lot of fulfillment, right? And sometimes I'm the right guy to help coach them along and sometimes it's another person on my team or somebody else. But you know, any business I put on the market or I list isn't perfect, right? But we try to optimize it. We try to make sure the team's good and the financials make sense and the business model is solid and you know, they position themselves, but they're not perfect.

Jon Stoddard (23:23.046)
Never.

Paul (23:32.818)
And so we just try to talk about the risk of putting on the business now versus the risk of putting it on the business one or two or five years from now. And are they personally ready? And what's that risk look like? And sometimes it's risky to put it on now and sometimes it's risky to put it on later. It's a very individual conversation when you talk about risk mitigation in terms of the timing of when your business goes on.

Jon Stoddard (23:55.363)
Yeah. And let me, let me ask you how you just jumped into, so like, okay, I've got a lot of skills here and I want to help people get the maximum value for their business and I'm going to go work for benchmark group. How did that, how did that, I mean, how did you make that leap?

Paul (24:11.458)
Yeah

Paul (24:14.934)
Well, over the years, I had helped quite a few people with making acquisitions. So I would be as a consultant, not as a broker. So brokers make a commission, most of us, right? We work on a commission on helping somebody buy or sell a business. So I was charging them a consulting fee. And about five years ago, I had a couple of clients that were facing an exit. And I really, I thought this is something I can do and learn and be really good at. And not just as a consultant, but as a broker.

Jon Stoddard (24:23.717)
Yeah.

Yeah.

Paul (24:44.862)
and help them with all the phases of the business. So I really started getting involved in who's out there. And so that's when I found Value Builder. And Value Builder had, uh, with John Warlord. Yeah. And so I, yeah, he's, he's one of the top trusted advisors in the world. Right? I mean, he has a group, incredible platform. So I became part of his affiliate network. You have tools, you have access to their coaching. Uh, you have access to.

Jon Stoddard (24:56.155)
John Worlow, he's the man. Yeah, I've had him on my show, yeah.

Paul (25:14.79)
their valuation and their whole platform. And so I was using that and learning a lot. And I took a master coaching class for people that are experienced coaches that want to add kind of the brokerage to their product mix. And so as I was taking that course, one of the instructors was the founder and CEO of Benchmark Business Group, her name is Susan Clements.

So I was taking a class from her and I said, well, she's got this coaching thing down and she understands the business brokering side of things. And she's and she has a really great style about her and just a unique way of bringing the best out of people. And and so we started talking and doing some and working together. And and I made it. I made a decision about do I grow this brokerage on my own and build.

build it with my own team. Yeah, and I talked to some other brokers. And they were obviously interested in having me because my presence in Tucson and the network I have and the reputation I have. But I just kind of find that I wanted somebody that had coaching, consulting, and brokerage. And so there really wasn't that type of fit. And so Benchmark Business Group out of Iowa

Jon Stoddard (26:14.588)
just start a brokerage here in Tucson by yourself. Yeah, that's what your first thought was, yeah.

Paul (26:42.518)
consulting, coaching background with the e-myth. They had this incredible background of doing that and then about 15 years ago got and bought a brokerage company. So, they combined all those things, all those aspects pretty seamlessly. I understood that and that made a lot of value to me and it brought a lot of value to me. We tried to see what this could look like moving forward in the future.

You know, my role is, okay, I'll become an employee. I'll set up the Tucson office and my jobs to, you know, add some brokers. And obviously list as many qualified, strong, small businesses that we can and find buyers around the country. You know, not all our buyers are local. So that's been going on for over two years.

great success and found some niche markets. And so they bring strong processes, a great team, and just the ability to coordinate deals. I'm the facilitator, right? I have to list the business, work with the seller, but then I have to work with the seller's lawyer and the CPA. And then I have to work with the buyer and the buyer CPA or attorney team. And so you become the main facilitator.

And that's working on the pricing, working on the marketing of the business, and then working with all the parties involved. And that's a role that I think I enjoy. And it's a lot of fun bringing all those things together. And so it wasn't what I expected, Norman. I think I was expecting just to grow this organically through my own efforts. But I found somebody where I felt at the end of the day, John, it would expedite my growth. It would expedite building a world class.

Brokewood here in Tucson by bringing in their processes and their people and their support team and their leadership. And then I could just piggyback on that and really grow it quickly. And so from that perspective, I think it's been an awesome move.

Jon Stoddard (28:51.239)
So is it now their students and she's facilitators of the value bidder, John Wolter's program. Uh, so is it more of an M and a advisor that benchmark is, or is it a broker? They just, you know, there's, you know, there's brokers out there. They get the listing and they just say, Hey, we think it's worth this much. And then they put it out there, their list and that's it. They, they take the offers and get it. Or do you guys go.

Paul (28:57.688)
That's right.

Jon Stoddard (29:18.435)
You take a look at the business and say, well, you got a great business, but you're working 60 hours in the business. Nobody wants to really want to buy a job. Your profit margins a little bit lower than the, you know, industry comps. We should get it up and then kind of work backwards and, and focus on the individual. Like, so what are you trying to do? Like, what do you want to, you want to put 500,000 in your bank account or a million? Because if we want to get a million, we got to get it to three X or five X, something like that.

Paul (29:47.166)
Yeah. I think it's a great question and a great analysis of the difference between a broker versus a trusted advisor. I'm going to come from a trusted advisor's perspective. So I met with a prospect yesterday and they have a business and it can be sold right now. And so I look at case by case, we do evaluation, we see this is what your business is worth now. But if we were to do these things...

over the next six months or a year, we think we could get you an extra 500,000. And so we go over those options. And some people are ready right now, right? They're mentally ready, the business is ready, we're going to list this thing and maybe there's a couple fine tuning things we can do. Other businesses are six months, a year, three years out. And so we're going to have those hard conversations and we're going to really look at that business case by case.

You know, what's in the business owner's best interest? What's in the customer's best interest? What's in the employee's best interest? And really kind of talk through that. And at the end of the day, you know, we're going to try to help them make the best decision. If that means working with them, or working with your team, and increasing the value of the business, like you see, you know, making the margins a little better. Adding a couple of exacts.

or adding a salesperson or building a better dashboard or I'm working with a client now, we're going to put him on the market probably a year from now. And he's really strong and really profitable. He has a niche market. He really dominates, but his pricing, he hasn't changed his pricing in several years because he didn't think he had to. But I spent yesterday...

Jon Stoddard (31:33.275)
What do you mean he didn't? Let me ask you about that. What do you think he didn't add to? Because I tell you, the first thing we look at a lot of, when I coach a lot of business buyers is, can you run this business? What's going on? Tell the story. And like, what are the price? Because you can change the price as day one, right? Especially with turnarounds. Like maybe it's not as profitable. Okay, you can change the price as day one.

If you're thinking about doing more marketing, great. That's a multi-year project. You don't even know if the hypothesis is going to work. Uh, you can cut expenses. That's a 90 day timeline. Right. Uh, why wouldn't somebody change prices? What, why is that? Why does the owners not say, well, we got to keep up with inflation because the money's not as worth as much as it used to be.

Paul (32:23.698)
I think for a couple of reasons, in his case, his margins were really strong and he wanted to maintain those relationships. And he didn't want to rock the boat and maybe he didn't have the confidence of keeping his pricing. So his pricing was behind the inflation significantly. But he's still because of his subscription-based model and what he does, he has a really strong margin to begin with. But he's leaving a lot of money on the table.

Jon Stoddard (32:33.691)
Yeah.

Jon Stoddard (32:42.714)
Yeah.

Paul (32:51.474)
And he hasn't communicated his value proposition appropriately. And so he has good retention. It's a subscription-based model. But he's finding that there's some competition coming up on our face. And so they're lower pricing. And so we're going to strengthen his value proposition marketing message. We're going to increase the pricing selectively. And I think it's going to have an impact within six months on his bottom line. But it's also going to strengthen his

retention rates, lower some of his attrition, and it afford us to get a couple of other people in there that he needs so that he can completely be in a position so he doesn't have to do anything. He only works part time now, but I think this will finance our team growth as well as enable us for him to...

to be in a position where somebody can come in and walk away and he's really not needed.

Jon Stoddard (33:50.967)
Yeah, that's cool. That sounds all like John Warlow's program, value builder stuff. Let me go back. So you started this Join Benchmark 2022. How many businesses have you sold in the last, what is it, 2024? Couple of years. I hate to date these things because then he goes, ah, this is an old podcast.

Paul (34:11.534)
No, that's OK. It's about a half a dozen that, you know, that and they range in all sizes. And some of them are run on the South Side and some on the acquisition. Right now in Tucson, we expect by the end of this quarter, which we're in March, so we'll have about eight listings here in Tucson. And I have a handful in other places. When it takes a while to get.

listings on the market when they're a little larger or a little more sophisticated company. So, I have a listing coming up that's 8 million and a 15 million. So you just don't list those overnight, right? Those take a while and the smaller ones you can get a little quicker, a little less sophisticated in terms of gathering information. But the larger, yeah, those are just our average.

Jon Stoddard (34:42.755)
Yeah, what?

Jon Stoddard (34:49.892)
No, no, those take a while to cultivate. Yeah.

Jon Stoddard (34:59.991)
And is that in Tucson versus Phoenix? I have to tell everybody that's watching this. So we live in Tucson and there's Phoenix right down the road, 40, 50 years ago, I-10, it's a hundred miles and there are lots of gaps in between that. Right now there's no, there's houses, construction, everything between a hundred miles between Phoenix. Phoenix is growing at a breakneck speed. Like the fast, one of the fastest growing cities in the nation right now. And they just, you know, growing out.

Tucson is like a hundred years behind. They don't fix their roads as fast and just the politics and everything else is just, it's a different community for business here.

Paul (35:42.014)
It's a different community, but you know what? There is a lot of business owners that are baby boomers that, that maybe they're not restaurants or retail, so you're not driving down the road seeing them. But there's a lot of niche successful business owners been running their business for 25 to 40 years and, and they're aging out and they got a really profitable, strong business. So a lot of the businesses, I mean, some of the business I work with, their customers are local. Don't get me wrong.

Jon Stoddard (35:47.972)
Yeah.

Jon Stoddard (36:08.603)
Yeah.

Paul (36:09.218)
I'm about ready to list five daycares. And so those are local clients, local kids, local parents, right? And, but the buyer probably won't be local. Yeah. And they've been running these for a long time. They're really successful and they have great reputation. At the same time, some of the buyers, because of my background, they're a little more sophisticated and their clients are national or global.

Jon Stoddard (36:18.279)
They've gone through cycles of all their kids, yeah.

Paul (36:34.882)
They just happen to be in Tucson because of the lower cost of living. It's a great lifestyle. Some of their employees are here. Some of the employees are elsewhere. But there's a ton of businesses that, I mean, you know, there's manufacturing businesses here that the average person is not familiar with. There's business services or B2B. There's high tech. There's online businesses. And so, yeah, you know, we'll deal with the occasional, you know,

restaurant or retail, but that's not our main focus. You know, we're high in main food.

Jon Stoddard (37:06.775)
Yeah, yeah, you and I have a mutual friend who used to be an attorney, bankruptcy attorney for restaurants, and you said avoid them at all cost.

Paul (37:14.866)
Yeah, I was offered one this week and, you know, and we make the decision who we work with, right? Based on the owner, based on their values, based on the valuation of the business. And so I haven't even decided if this is something I want to list or not. We're going to do our due diligence and mutual evaluation. And maybe it'll make sense, maybe it's not, but we're selective on who we work with, the types of industries, the valuation of the business, who we think the buyers are.

And so that makes it a lot more, I think, selective and fun when you can work with people you really want to work with. And to me, any business should be selective on who their clients are and really understand their value and their worth.

Jon Stoddard (37:58.535)
Yeah, let's go through this process benchmark evaluation. Cause that's the biggest thing. I even do interviews with private equity guys that, you know, are throwing off, you know, 50 million in EBITDA. And, you know, my listeners, hold on, what happened there? Throwing off 50 million in EBITDA and they want to know my watchers. Like, oh, what'd they buy at their multiple? But

How do you guys go through this benchmark of valuation?

Paul (38:31.99)
Well, in general, we have three different methodologies. And so we do an opinion of value. It's a pretty deep dive. We're looking at a minimum of three years tax returns. So the net income.

Jon Stoddard (38:47.115)
You're looking at the 1120s, the net income. Are you looking at the, which line? The net income or the ordinary net income in 1120s?

Paul (38:55.23)
Well, and we're going to both, right? We're going to look at both, right? And what we're going to do is at the end of the day, that business gets its own valuation based on its historical records. But we're going to compare it with everything on similar businesses priced in the open market. Any business been sold in that space, we have those databases. We know what every business industry has sold for, and the multipliers. And the multipliers.

Jon Stoddard (38:58.31)
Yeah, both.

Paul (39:23.03)
can go by cash flow or seller's discretionary earnings. We do multipliers by price, by the revenue. You know, what's the top line?

Jon Stoddard (39:31.247)
No, what listing is this? Is that database access tool? What database offers that? Is that just through being a business broker or what is it?

Paul (39:41.739)
Yeah, it's a business broker database that we pay a subscription to, to have listings of every industry and all of those listings. So yeah, yeah. And so that gives us a wealth of information. So that's just a, you know, you have to, at the end of the day, all those valuations and multiples that people come up with, they're made over time by lots of acquisitions, right?

Jon Stoddard (39:49.859)
what they're sold for. Wow. Okay. I didn't know about that, but that's cool.

Jon Stoddard (40:08.271)
Yeah, it's like kind of like dollar cost averaging. Yeah.

Paul (40:10.93)
Yeah. And you can't break, you know, there's a little wiggle room there, but you can't break. If something's used to being sold at a three multiplier, chances are you're not going to get a five. I don't care what you're doing, right? You can ask, oh, David, you know, a sophisticated buyer or if they, you know, usually people aren't going to overpay for a business. So you have to justify what your business with.

Jon Stoddard (40:23.299)
You can ask all day.

Paul (40:36.87)
You can look at a multiplier of EBITDA, a multiplier of revenue and a multiplier of cash flow. And we weigh all those and every business is a little bit different on the weighing we give those three multipliers. And so that's our evaluation is looking at similar businesses, what they've been sold at, those three different areas, and then weighing the price multiplier, the revenue or the cash flow multiplier, the revenue multiplier, and then the EBITDA multiplier.

And then we weigh those. And so some of those we may break it up 33, some of it's 50, 20, 30. And so we really look at the industry specifics, but we also have to understand at a macro level what that business is worth. And then we have to look at it from economic return on investment. What's the ROI? What can the capitalization...

perspective say from somebody who's buying this, you know, what's the net in that? What's going to net cash flow going to look like? You know, and, you know, different buyers care about different things. You know, are we talking to strategic buyer, you know, or are we talking to financial buyer? And so, you know, we can we can look at the capital earnings method as a way of understanding evaluation.

Jon Stoddard (41:50.512)
Yeah.

Paul (42:03.094)
But then we also look at what we call buyer's test method. You know, what's that person gonna have to pay in terms of a down to get financing? What are they gonna have to put a down payment on? What's their annual debt gonna be if they get financing? What's their interest rate gonna be? How much is real estate versus how much is business? And what's the ratio? And so out of that information, we're gonna end up with three different valuations.

And then from there, we're gonna weigh each one of those. And that requires a little bit of art and a little bit of science and a little bit of research on the industry.

Jon Stoddard (42:43.823)
Well, so what do you do with a Delta? If the Delta is tiny, it's not an issue, right? You're gonna settle on something. But if the Delta is large, you're gonna go, okay, what's the conversation?

Paul (42:57.422)
The conversation is, first of all, what's the industry looking at? Is this out of whack with what the multiplier would look like for the industry? So there has to be a conversation about the industry. There has to be a conversation about who's...

Jon Stoddard (43:15.283)
You mean tailwinds or headwinds?

Paul (43:18.318)
Well, I'm not sure. It really comes down to also who's the buyer? What's the conversation with who do we think this buyer's gonna be? Is it a strategic buyer? Is it somebody that's gonna be in their space that's a competition?

And what have they done in the past? I just got off the phone this morning with an equity group that's made 10 acquisitions in the last five years. And so understanding their buying patterns. Now we may, that may be a selective price for that one particular buyer, if you will, but going to market, you know, we, we have to weigh each one of those methodologies. And some of them get weighed a lot and some of them don't get weighed very much.

And fortunately, I have a good finance team back there behind that benchmark that does a lot of the heavy lifting. And then we sit there and we look at each of our valuations and we look at from different perspectives and find out what would we do if we were in the buyer seat? Right. And so.

Jon Stoddard (44:37.011)
Right, right. Well, let me ask you that because a lot of these companies, the larger ones in the lower middle market, middle market like Woodbridge, they will list price. They come at, they kind of use the same valuation methods, three different ways they come to a price. Generational, they don't put numbers, they don't put evaluation on because they want this blind auction from private equity or strategic buyers.

and pick the biggest price with, you know, some kind of offer in front of them and go, great. One offer might be, you know, $5 million. The next offer came from a private equity for 10 million.

What's your kind of, how do you guys do that?

Paul (45:26.038)
There's the aspect of we're trying to find the right fit, and it's a financial question, right? But we're also asking what's the bright fit in terms of the culture, in terms of the team, in terms of geography, in terms of do they want a carry? So there's a lot of factors that go into there. But at the end of the day, we're...

I think pricing it appropriately and not just trying to hope that you get the one buyer that's going to buy a premium is the key here, is really being defensible. The way I look at it, can I take this valuation to a bank with the financials I have and with the valuation I have, would they finance it to a well-approved buyer that's through an SBA loan? Would they finance it through that?

through our pricing. And so that's the biggest test for me is, does a bank think that this business is financeable?

Jon Stoddard (46:30.767)
Yeah, I think we're on the same wavelength there because I think SBA banks, the blenders are the guardrails. If I take the valuation to the bank and they say, yes, the dollar discount, the DSCR is gonna be 1.5 or greater and it's done that year in year out, great. We will finance this deal and given that the buyer is, you know, financially has the wherewithal or personal guarantee.

whatever that is, but the cashflow can handle the debt payments. Yes, we will fund this deal. We'll give it a term sheet. A lot of the times we see this valuations come out and go, well, I'm not even sure how that works because if we put, I don't care if you put 90% or 60%, it can't, the debt service coverage ratio doesn't, it can't handle that. Even if we put it under stress tests, like most businesses, new buyer comes in, there'll be a J curve.

It drops a little bit because you're making a little few mistakes. You lost a person, you lost the contract, whatever it was. Uh, and it dips below the 1.5, whatever the, you know, the number is on the debt service coverage ratio is, uh, a lot of the time these businesses go like, dude, this, this is like, it can't handle the debt. We can't buy it. I don't get it. Yeah.

Paul (47:54.026)
Yeah, yeah. And.

And we don't want to put something on the market that's going to be hard to sell. Right? I mean, if it's overpriced, at the end of the day, supplying demand still rules. Right? I mean, you can't break the economic rules of supplying demand. If there's no demand for this business at this price, then it's going to waste your time and my time. So I'm just saying from a macro level, you have to understand...

that factor. And if you can't, and if the debt ratio is out of whack, then I'm wasting my time and then we have to look at what's the appropriate valuation. So remember, most of the business owners that are selling their business between 500,000 to 15 million aren't sophisticated finance people. Right?

Jon Stoddard (48:51.291)
No, there, there's somebody that picked up a trade and worked their ass off for 25 years and built something, uh, and looking back going, holy crap, I've been, you know, uh, $15 million business. I'm a millionaire next door. Trade guy.

Paul (49:07.178)
Yeah, and those are beautiful to sell because they usually have strong teams, right? They have a strong historical record. And, you know, we try to look at what's the typical asset sale going to get us. Because most of the sales, you know, there's some stock sales, but they're, these are asset sales, right? And so, you know, there's a lot of factors that go into understanding,

Jon Stoddard (49:28.517)
Yeah.

Paul (49:37.55)
Are they ready to sell now? And if they're not ready to sell, I'm not going to list them. Does that make sense, you know, financially or personally?

Jon Stoddard (49:45.223)
Yeah, let me unpack that a little bit. What happens, and this is, I think, characteristics of some business brokers out there, and I'm not saying all of them, but they'll, to get the listing, just like real estate agents, they'll say, I think I could sell it for $5 million. Great, wow, and they start, the seller builds these sand castles in their head about what they're gonna do with all this money, right? And it's not worth 5 million. Maybe it's just worth 4 million.

But they're anchored on that number and all the buyers come in, they look at it and go, hey, we only think it's worth, you know, 3.5 at the most for if you do a lot of this seller financing, some kind of standby. Because what happens to that? Why do, why does that happen so frequently?

Paul (50:35.682)
Well, I think it's part of the industry that...

Paul (50:41.826)
isn't thinking from the perspective of trusted advisor. They're thinking about how do I get a listing and how do I then almost do a bait and switch? Right. And I think it comes back to the culture of the individual or the team you work for. That's never been my approach in anything I've done. So for me, I think what's, I want to tell the truth to this seller.

Jon Stoddard (50:51.087)
Yeah, it's transactional. Yeah.

Paul (51:10.066)
even if it's hard, bad news, right? Your business is, I had a conversation yesterday, your business is not worth what you wanna pull out, what you're walking away with, right? What you wanna walk away with versus what I can sell it for. We got a big gap here. So either expectations have to change or you need to make some changes to your business. I believe...

I'm doing them a disservice if I, anytime I would try to list somebody on a price that's not defensible.

Jon Stoddard (51:47.599)
Yeah.

Paul (51:48.074)
Right? First of all, they're going to set expectations for themselves, and a lot of times they're not going to run the business the same way. I want them to put their foot on the shutter and run that business and keep running it. And at the same time, I want to put a business out there that I have a great chance of selling and I have enough on my plate where my opportunity cost is high.

So I'm going to list you because we agree this is the valuation. I'm going to go ask them to talk to their deal team. Talk to your banker, talk to your lawyer, talk to your CPA. Get their input about our valuation. Go test this out. And sometimes we hear a little news back, hey, explain this, or we don't understand that. But most of the time it comes back that this is a solid approach and a solid valuation.

And that I think helps us build trust and it makes sure that if I put something on there, I'm not going to waste my time or the seller's time trying to sell something and hope that somebody comes with an offer like, well, we didn't get the five million, but take the three million. You know, so in that case, I'm not at all commission driven. I'm driven on the customer, the seller and the buyer having a great partnership and a great relationship and doing something that's in the best interest of both. And so.

Jon Stoddard (52:59.131)
Yeah.

Paul (53:13.427)
I think it comes back to your core value. Are you a trusted advisor? Are you just trying to sell something?

Jon Stoddard (53:18.007)
Yeah. Let me ask you a different scenario. Somebody has got a nice business, been running it for 25 years, and he's got a number in his head, wherever that came from. But you say, it's not worth that, and we probably won't get that. Even if you do get that, that number is the country club number versus the number that they actually deposit in the bank. There's a difference.

But he said, if you really want that number, it's gonna take about two years to get there because you need to put value builder in place. How do you have this conversation with somebody who says, do you have any more gas in your tank to do this? What are the characteristics you look over? Like maybe there's, is it, everything's good in his family. It's just that maybe there's health sickness or something going on.

That's not an option to gas in your tank deal.

Paul (54:22.006)
I think the important thing is you really have to dig deep into their personal readiness. You really have to dig deep into the, I always do an assessment of the business and I do assessment of the seller. There's some great tools, but also I have a lot of years of doing good needs analysis, really understanding the business owner's mindset, where they're at personally, where they're at professionally, and where their business is at. That's a lot of crap.

Jon Stoddard (54:26.948)
Yeah.

Paul (54:51.534)
probing questions, right? Clarifying questions to really understand where they're at. Are they being realistic with where they're at? Sometimes they're not being realistic, so that's a conversation. And if it's a health issue, then what can we do, right? Do we need to bring management team in? Do you need to sell this at a different price point? And so you can't put lipstick on a pig, right? You gotta tell them exactly where they're going at.

And, you know, I show them this is most likely, this is what your business is valued at. This is what we're going to go to market at. This is what you're going to make after any liabilities, pay off your debt, pay the broker fee, pay all the, you know, pay your taxes. What's the walk in the way money, right? And I had a tough conversation, John, just yesterday with the guy with this.

Jon Stoddard (55:40.176)
That's what you really walk away with. Yeah, yeah.

Paul (55:49.162)
And he has to go think about what he wants to do. Right? You're walking away money, he's not there. His business isn't performing the way he wants it to. So he has choices. He can accept less. He can invest in building that business up in a few different ways. And we'll walk him through those options. And sometimes those are tough conversations. But at the end of the day, it's not, you're coming from a position of not trying to sell him anything.

I'm just trying to share the truth and share some options and give them some good scenarios. Really ask him to talk to his deal team. Maybe sometimes we come to my conference room and we sit down and we look at those options from different perspectives. And at the end of the day, what's his resources available? What's his timeframe look like? What do they have available? And sometimes it's just a matter of time.

Yeah, there's hard discussions. Well, are we going to keep this business going with the team you have, or do we need to bring a GM in, or a CEO, or do we break this thing apart? There's all types of options out there. But it's not, it's, you know, most of the time the guys I'm working with really are passionate about their business. They're passionate about the performance. They're passionate about taking care of their employees. They're passionate about taking care of their customers.

They usually want to do the right things, because the people I attract have been doing the right things for a while. They want to do the right things, they're willing to put a little more time and energy into it, and they want to walk away for a lot of these guys, just walking away with the retirement. Now, we do work with entrepreneurs, so we're going to sell it and reinvest, right? Like what I was trying to do. But a lot of the people we're talking to are baby boomers trying to retire, and hopefully they come to us before, you know,

where we have a little more time to really get the thing performing at a better level. But these are tough conversations. I don't mind having them. And if I'm not the right guy, then they can find somebody that maybe will tell them what they want to hear versus telling them what they need to hear and telling them what the truth is.

Jon Stoddard (58:04.895)
Yeah. So this is kind of a personal story. My son is trying to, he's 16 years old. He's kind of 6'3", growing fast and he's 14 feet, but he did some speed test trials and he got a 5.8 in the 40-yard dash, which is, I don't think it's slow. I don't think it's fast. He's 16. And he was pretty disappointed, but 24 hours later, he's back working his ass off towards that goal.

of being at a five second and 40 yards in the next football season. That's what I would look for. And somebody says like, do you got gas in your tank? The next day you're in new goals.

Paul (58:44.242)
Yeah. And part of any trusted advisor is helping people create goals that can be accomplished, right? Smart goals, specific, measurable, attainable, realistically high, time trackable. I call it smarty and your goal, right? So a lot of my coaching was helping people identify smarty goals, execute the plan, and watch the growth and maybe get other coaches or other people involved in that. But if...

If they have some gas in the tank, maybe that's where they should go. If they don't have gas in the tank, then they have to look at those options of what's in their best interest or what we can do to help them out, to make sure that the business can stay valuable. What you don't want doing is somebody's burned out and that business starts tanking.

Jon Stoddard (59:31.503)
Yeah, yeah, and the valuation keeps going down. I got one more question. We're almost on an hour. So I always, this is what I warn business buyers. I say, great, you can buy a business. It's a great valuation. You can go to the SBA. You're approved for that. But if you're levering up a business that's never been levered up like this on a loan, 90% of it, so where, you know, maybe it's a 1.5 debt service coverage ratio.

Paul (59:34.368)
and evaluation.

Jon Stoddard (01:00:00.975)
So every check you cut, 66% goes or more goes to playing off debt. It changes the characteristics of the business and what you can spend on to grow, bring people on, et cetera. How do you have that conversation with these buyers or sellers or, you know, how that looks like, especially if the buyer is a single, like if it's a business and they're buying strategically, it's a different story, right? But if it's a, like somebody that's, you know, acquisition entrepreneur,

Levering up a business, 90% debt, it kind of changes characteristics.

Paul (01:00:36.29)
First of all, we've got to plug those numbers into some forecasting. Right? So I want to do, you know, there's two sides of every decision, the emotional side and the factual side. And so I really want them to understand what this is going to mean to them from a financial standpoint. How do we forecast this out?

Paul (01:01:02.926)
And then talk to them about, because your forecast has to tie in with your people, your processes, and your plan. What's the total real investment? It's not just financial, is it? It's your time, it's the people you got to bring on board, it's the processes you have to develop, and it's the cost of money. So you kind of have to say, this is where you're currently at if you're trying to sell something.

or this is where you're currently at, you're trying to make a purchase. I try to forecast all that out. I create with every customer I've had a vision of the future. And what would this acquisition do? Acquisitions to me need to help me accomplish my vision of the future. They can be opportunistic, but most of the time they need to be strategic. My goal is to grow this amount over this period of time. How do I make a strategic purchase? Well, what is it gonna take in terms of my team?

my organizational structure, my processes, my cost of money, and what is my best options? There's opportunity cost pursuing any acquisition, right? So I really helped them understand, and we, you know, with being in QuickBooks or in Excel spreadsheets, really forecasting what their business is gonna look like in the future from a financial standpoint, from a team standpoint.

and from our resources. What is strategy? Strategy is understanding your goals and vision, understanding how you're going to achieve that, and understanding the resources necessary to accomplish that shared vision. You have to lay all that out. And so that's a combination of people, it's a combination of financial numbers, and that's a combination of processes. So is this acquisition going to help me get where I'm going to get, or is there another way?

So that's from, if I'm going from an acquisition standpoint, I know that doesn't apply to everybody, but I really want them to buy in to the forecasting of their organizational structure and of their financials and of the cost of money. And I want them to see the bottom line and I want them to see what their role's gonna be and what they're gonna have to add because chances are they're just not, it's just what they have now isn't gonna get them where they're gonna go.

Jon Stoddard (01:03:25.231)
Yeah. And that's referred to as like, if a big percentage of your cash flow, free cash flow is going out to pay debt service, you just don't, you know, it's got to be there. I got to ask another question. And this is inherent with small businesses, financial integrity, accounting, most of them you'll see. I mean, I could see these, I coach people all the time. I can see they're sometimes on their spreadsheets. There's sometimes cash counting with.

inventory, not accrual. Most of the times they're not balanced. The net income on the income statement doesn't match the net income on the balance sheet or the cashflow statement or whatever's in cash. How do you fix that? How do you go back and do kind of a financial audit and help them go, this is the real, this is the evaluation of your assets. These are the assets because sometimes they just don't put all the assets in their chart of accounts.

They're just all over the place. And sometimes they're borrowing money from someone.

Paul (01:04:29.27)
Yeah, I mean, financial integrity, you can spot that pretty quickly with most organizations, right? You look at their balance sheet, you look at their tax returns, you look at their P&L. And on the consulting side, there's never been a chart of accounts I couldn't make more better, right? In terms of from an entrepreneur's perspective, what story does that profit and loss and balance sheet tell me as a business owner?

And so the first thing I do is I ask the business owner to explain their story of their P&L and balance sheet.

Can they do that? And so then I learned a lot about their financial literacy. Do they understand what they're looking at? And chances, and it's all over the place, right? Some of them understand a little, and some of them understand a lot. And so I really try to understand, do they know what their story of their finances is telling? Do they know how to tell the difference of what they're doing year over year?

and have they made any strategic decisions to get there? So what's the history? What's the current assessment? What's their forecast? We have those conversations. And at the end of the day, I'm gonna look in their QuickBooks, I'm gonna look at their tax returns, and we're gonna have conversations about, I'm gonna ask them, tell me the story behind this. And some of them get it right part of the time. But part of that is educating them on their financial. And then what's, who's their financial team? Is it an in-house bookkeeper?

Jon Stoddard (01:06:03.267)
Is it their wife? Hahaha

Paul (01:06:06.011)
Are they getting somebody to, very seldom, unless it's a bigger company, are they really getting any audits done? How strong is their financial team? And where's that team looking like? And we require, in a deal team, we require all of our listings that have a CPA that we talk to. And so that's usually an outside.

Jon Stoddard (01:06:17.648)
Yeah.

Jon Stoddard (01:06:28.395)
Yeah, I gotta tell you right now, you're just going to one deeper level versus a typical business broker. They just put that stuff out there, yeah.

Paul (01:06:36.182)
Well, yeah, and I won't. And that has to do with the thousands of profit and loss statements I looked at by being a consultant for almost 20 years. Right? I'm not going to just look at it. I'm going to dive into it. We're going to ask deep questions. And I want to understand the owner's perspective of his business or her business and what it means to them. And if we need to bring in other, if we need to help them understand that,

or bring in some other talent to redo those, we will. We'll give them advice or we'll give them referrals, I should say, right, on people that can strengthen their literacy or just come up with better books. But every buyer is going to look at your books. They're going to tell their own story.

Jon Stoddard (01:07:28.599)
Yeah. And they're going to read, they're going to tell their own story. They're going to create a story. What they see, are you doing a good job of turning assets into cashflow? Are you getting effective, productive, more efficient at it? Yes or no. Right. Yeah.

Paul (01:07:39.73)
Yeah. And so I think it's over the place in terms of sophistication, literacy, and integrity of financials. If I see something that doesn't make sense, we're going to dive in, we're going to ask a lot of questions. And if it's too messy or if they're playing games, I'm not the right fit for them.

Jon Stoddard (01:08:00.899)
Yeah, sounds great. Paul, I took you over seven minutes over the hour. So thank you so much. My first Tucson Top M&A Entrepreneurs Podcast. Thanks so much.

Paul (01:08:11.427)
Well, thanks for having me, Donna. I appreciate you bringing me on.