Cracking the Cash Flow Code -- Chris Younger Transcript
8:37PM Oct 27, 2023
Welcome to cracking the cash flow code, where you'll learn what it takes to create enough cash to fill the four buckets of profit. You'll learn what it takes to have enough cash for growing lifestyle, have enough cash for when emergency strikes, fully fund the growth program and fund your retirement program. When you do this, you will have a sale ready company that will allow you to keep or sell your business. This allows you to do what you want with your business when you want in the way you want. In cracking the cash flow code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick is going to help us through finding great thought leaders, as well as providing insights he's learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable, and allow you to be free of cash flow worries.
Hey, how are you today is The Josh Patrick, you're accepting the cash flow code. And my guest today is Chris younger, he's the co founder of class six, which is a mergers and acquisition firm. They help people sell businesses, maybe even buy businesses. I don't know if you do by side. But we know you do sell side. And I like to bring folks on to talk about this. Because it's really important for you to know what it takes to get your company what we call sale ready. Whether you're going to sell or not is the place you really want your business to be for a whole host of reasons. And we'll probably get into that today. But first, let's bring Chris on the show. And we'll start a conversation. Hey, Chris, how are you today?
Good. Thanks for having me on.
It's my pleasure. Thank you for joining us. Let's start with this. You wrote a book called author of harvest the definitive guide to selling your business. So what is in your opinion, the most important thing somebody needs to do if they're getting their business ready for sale? You know, I
think there's a lot that goes into that, as you well know, in terms of getting the business ready to mark it, I think there's a couple of different pieces to start with. One is just understanding what the owners objectives are, and then benchmarking that against where's the business today? And hey, if there's a gap there, what's that plan? Or what's that process to get it from here to there, usually, what we see the most significant risk for businesses is that the business is way too dependent on the owner. And that'll destroy value, right? Because it creates risk in the eyes of a buyer. If the business whether it's the owners, the key salesperson, or the key product developer, or the primary person doing delivery, that'll certainly limit the value of the business. And so what we typically work on first with business owners is just hey, how do you build your team, which not only makes the business more valuable, but hopefully it gives that owner more of the life that they want? So they're not working 80 or 90 hours a week?
Yeah, I find that we call the CRE Operation Freedom in what's actually what I've learned over the years, is that the owner has to be out of the day to day operations of the business. And there's two reasons for that. One is he keeps it from getting burned out, which actually, in the long run, if you do that successfully, really often relieves that need to sell the business, for sure. So I'm yelling about you. But I've done this several times, where we've gotten people to come operationally free, the business starts making a lot more money. They're spending a lot less time running the business. They say, Okay, let's bring the business to market. They look at me like I'm out of my mind.
Yeah, we always tell clients, we really want them indifferent to whether a sale happens, because that means all options are great. And if a deal happens, it's going to have to be a fantastic deal to convince them to leave what otherwise is a pretty good situation for him. Yeah,
you know, there's lots of reasons it's so businesses in ers talking with a client just before we went on his podcast, he has a soulless business to a 36 year old son kind of market value, probably of eight to $10 million. And he wants to get out of it because he doesn't want to work seven days a week, I said to his father, I said we could get a competent General Manager and you're making enough money to pay somebody to do that. And you'd probably leave a lot of pressure and maybe 36 years old, with over a million dollars of free cash a year. It's pretty hard to match that when you sell your business.
It is yet you're definitely going to trade highly concentrated, usually much better return asset for much more diversified portfolio, but much lower returns for sure. Yeah. I think for most business owners, successful business owners, that'll be by far their best investment over their lifetimes for sure.
Yeah. Well, you mean private businesses are worth a lot while you run them. They're often not is worth nearly as much as if you stop running.
Yeah, right. Yeah, you have to do you're gonna have to convert it into cash at a really good rate. That can
be a challenging thing to do. When you prepare a business for outside scrub scrutiny. What do you need to do? Because I think that's a really, as a good question we should all be thinking about that all the time,
I think about it in two or three different buckets. One is just getting everything in order today, what we see in transactions is the level of diligence that buyers are performing is probably twice as extensive as it was just three or four years ago, they're hiring firms to come in and assess all kinds of different facets of the business. And so part of it just getting the business ready to survive all the asks and inquiries and document requests and follow ups and all that. And if I had a dime for every client that told us ahead of time that their business was the cleanest we'd ever see the financials were in perfect order. And after a little bit of work, you discover, yeah, there's probably a little bit of work that we need to get done on those to get them ready. And then the second piece, I think, is really around kind of identifying what are the Achilles heels in this business? Right? What are the issues that a buyer is going to uncover? We use a bunch of assessments in our practice to identify what are those issues going to be is trying to give that owner the test ahead of time, because regardless, if you're going to be able to fix them or not, you're going to need to be able to answer the issue and deal with Hey, what is it that a buyer's concern is going to look like? And what's your story around that. And then the third piece is, hey, if there are things that you can do to eliminate some of those risks than, hey, let's get to work on those before you go to market. And I'll say the final piece for most buyers, they're buying the future. And so putting together a really credible growth plan that's got roots in historical performance, and there's not too much pie in the sky that will create value for the business owner, because that helps the buyer see, hey, there's future opportunity and future growth in this business. I'm willing to pay more for that.
Yeah, I found that in selling businesses, what you just described is what you'll go through with a private equity buyer, likely not go through with a competitor, because they don't have all that stuff, nor would they think it's really important. I mean, this is one of the things I just sold a business recently to private equity. It was a $1.8 million managed services business with an $800,000 profit. And they went through all this garbage that they kept saying, I said, you're buying a really small business, why are you spending almost as much as the purchase price on due diligence, and they kept saying, This is what the bank requires, which is pure BS, frankly,
yeah, it's for private equity. In particular, right there. They've got folks that they're accountable to. And I think it's gotten to the point now where the due diligence reports that they have to get, it's almost no one wants to be the guy in the room when something goes wrong. And they didn't get the report from whatever the outside third party was to validate it. So it's a little bit of cya.
Yeah. And they're my experiences. Most of these guys don't know how to run businesses anyhow. And they're gonna ruin it once they take it over. But that's a different conversation, I'd like to talk for a second about what I call mock due diligence, which is when you take a client through what a buyer is going to hopefully not look at, but might look at, and what's your methodology for doing it. How are you in due diligence, by the way, is where the buyer has the right to look at everything in your business to find out if it's worthwhile for them to buy, they will sign a nondisclosure agreement. And they will go through your business and ask you all sorts of questions. And there's a good chance the first time you go through this, you might take your business off the market like I did, because you're gonna do the assault. So just get prepared for that.
Yeah, the process of examining your own business and understanding where you might have exposures, I think that's a good practice, regardless of whether you're going to sell the business or not, what business owner wouldn't want to have a business that is more scalable, and more predictable, which is really what buyers are looking for, they want to eliminate potential problems downstream. And so that's what they're looking for. That's what they're trying to identify. And that can show up in a variety of different contexts. One is, hey, are the financial statements accurate that they're looking at, because that's obviously a big piece of how they're coming up with their valuation and how they're assessing the health and prospects of the business, but they're also going to look at your team, they're going to look at your contracts, they're going to look at your customer base, they're gonna look at your supply chain, they're gonna look at your intellectual property, all those different pieces. And those are, you know, it becomes a, again, I think it's just a good practice to do a self examination and understand, hey, where do we have potential issues? Right? Where do we have potential roadblocks that could get in the way of a deal getting done or reduce valuation? Again, we have a series of tools that we use, we've developed a tool called copilot, which is asked about 200 questions, and all it's designed to do is just issue spot. So that hey, if something pops up with one of those questions, and we need to dig further and see how big is that issue that just potentially arisen?
Yeah, that makes sense. In how often do you find owners actually are interested in fixing the problems that you uncover with your mark, your diligence,
it varies, right? I think some owners may not see the need for a change. There may be risks that an outsider would see as significant that they don't necessarily perceive. And that's what Part of our job is just to help them understand, hey, this is how the outside world is going to look at the business. And obviously, they hold all the cards in terms of what they want to do with their own business. This is more just, hey, here's what to expect. And I would say, again, at least for the clients that we have, most of them are there are dedicated to trying to address the issues in the business to the extent that they can, I do think that oftentimes, business owners who've been managing a particular risk for years and years are just way more comfortable with that risk than an outsider would be. And so sometimes, it's hard for them to really appreciate how an outsider is going to look at that risk and the impact on valuation.
So one of the things that I often will encourage somebody to do is, again, the folks we work with generally are under $10 million in sales in finding a good financial buyer can be a challenge for that a strategic buyer, which by definition is a competitor is often a better and they'll take a look at the risk in a similar manner, if the owner does because they're in the same industry, and they understand what that industry is about. So if there's a risk, for example, if the owner is involved in day to day sales, and they have a sales team, they're likely not going to be as concerned about that, as a financial buyer who's coming in, in doesn't have a team that they can bring in or integrate with right away. Do you have that conversation with your clients about who the right buyer would be? Yeah, all the
time, right? You're always trying to explore with the owner, Hey, what are their priorities? Right? What is it that they're trying to accomplish, and that can push them one way or the other in terms of the right type of buyer? Again, we typically are working on larger deals. But I think from a buyer's perspective, even if it's a strategic, if most of the relationships with customers are resonant with that owner, that's going to create some anxiety for them and other risks. To your point, if they're endemic to a particular industry. I don't disagree. I think most industry buyers are gonna you know, they're already comfortable with it. We sold a waste hauling company at one point, which obviously, it's got lots of potential safety risks. A lot of the financial buyers, we had a hard time getting comfortable with the fact that you know, there's quite frankly a risk of death right in their industry 300 trucks on the road, every day drive in however many miles you and your odds of having something bad happen are pretty high. Whereas the industry folks, the Waste Management's of the world, they understood that risk and got very comfortable with it. A lot of times, it'll just depend on what's the character of the risk. And hey, does a with that particular buyer, do they think they can mitigate that risk?
Yeah, that's absolutely true. What about internal sales? Do you guys ever get involved in that?
Yeah, we typically, we have a lot of clients that show up, and they would love to sell the business to the management team. And which I think is, it's a great strategy. Most times, unfortunately, the management team, when really comes down to Hey, they're going to be signing on a note that's got a personal guarantee that's got all their assets at risk, and that they now are not taking a salary. They're the last person paid, I would say eight times out of 10, they get pretty nervous and tend to back away, I like to say I think 1% of the world's population is probably suited to be a business owner, given the risk tolerance that they have to have and kind of tolerance for pain, as I like to say, and a lot of folks that are employees, I think that they may romanticize what it means to be an owner, but it was often challenging for them to get comfortable with that level of risk. But it is if you can make it work. It's awesome. Right? I think it's a great reward for the team and a great opportunity for them to make their own wealth, which is terrific.
The challenge I find is and this is usually a three to five year process, because we have to convert the new owner buyers, who are managers right now into heavy gun owners mentality. And there's a specific process we take people through to actually help get that done. Yeah, if you don't do that, and you say, three months before you want to sell your business, you go to your management team and say, Hey, I'd like you guys to buy this. And here's all the risks you're gonna take, there's a pretty good chance they're going to say no, but if you started three to five years ahead, and you identify potential buyers, you say, Okay, here's the process, we're going to go through to get you ready to become the next owners, you're likely going to have a sale, it takes a lot more time, is what I'm saying for sure. Yeah, no, no, that makes total doing a third party sale. Yeah, for sure. For sure. So that's one of the things that we find is in the level that we're at, especially if the owner is intimately involved in the business, or there's no recurring revenue, like with construction companies, they're essentially not saleable to a third party. Exactly, exactly. So you have to sell it internally. Or if you're big enough, you can do an ESOP. employee stock ownership, in fact, the largest construction company in Vermont, that was they ended up doing an ESOP because they could not get an offer that was even close to fair market value in this company was doing close to a billion dollars a year in sales. So
yeah, yeah, they're your point. They're tricky to get done. And a lot of times, especially at that size, if they're doing big bonded projects that gets in the way of financing that a lot of buyers want to use. And so that makes it much more challenging. It's not surprising,
not surprising at all. So I'm curious about as he you cultivate high yield investments, what do you consider a high yield investment?
I don't? Yeah. In terms of kind of high yield, I think it's more around a what kind of return is the business owner gonna get on their investment of time and energy in this type of process? And it's really around, hey, I think the time that an owner spends on working on risk in their business and thinking about growth strategies in a more disciplined way. And I would argue that's going to be the best time that they ever spend in their business in terms of return on investment. As I think about a what are the limited resources for an owner? Usually, it's time and money. And I think the job of the owner is, hey, how do I invest my time and money in the most efficient way possible? And again, based on what we see is just a spending your time on making your business more scalable, making it more predictable cutting risk out of it, at least our experience has been? We've seen dramatic returns on investment of that type. And does that's typically what we're referring to as high yield.
Yeah, is I think the key to that, which is something we already talked about, which is making the owner operationally irrelevant in the day to day operations of the business. Now we'll give them time to work on what we call the 5000 per hour job, which is what can you do be totally owners spend the vast majority of your time doing stuff like of hire somebody for $30 an hour to do for sure, yeah, or job. Or just learn how to delegate effectively, which, again, is a problem for most businesses.
Yeah, we have a an exercise in a tool we call the 8020 exercise, which is really helping an owner understand where their time is going. So you track time for two or three weeks and get a sense for where is their time being spent. And then what you really want to analyze is, hey, let's dissect those activities and prioritize them in order of what they liked most what they liked least what they're best at, to what they're worst at, and what adds the most value to what adds the least value. And then that gives them at least a roadmap for some of the activities that they should either be eliminating, because it's not adding a lot of value or to your point delegating, because there's a there are people and most donors have a hard time with this. Initially, they think they can do all of it great. Well, a lot a lot better than they can so. And that's that's the goal, right is to get them out of those activities.
Yeah, absolutely. It's really interesting, they find that buyers are more concerned about owners being involved in the tactical issues of a business and the strategic issues. Yeah, if you make yourself operationally irrelevant, and you are a strategic wizard, and making your business as successful, it is, for some reason, buyers and their due diligence, completely ignore the strategic part of what makes a business Great. Yeah, it's
amazing. You're talking about private equity. We've watched this movie over and over again, where you know, you have an entrepreneur who's been very, very successful. And, you know, I like to say, you know, most successful mid market businesses, they're successful, because that owner has figured something out. And they've been creative, how they've gone to market and they've been thoughtful, and they again, they've, they've figured something out. And it's amazing to me how quickly the you know, a private equity firm or a new investor is to ignore, you know, the, the founder, in my prior life, we did a roll up where we acquired 27 communications companies, and one of the very first things that I learned was, you know, you want to listen, encourage and support those entrepreneurs in the best way you can, because they know how to make a successful business. That's why you bought it. But you know, oftentimes, a buyer might show up as the smartest guy in the room and ignore what the founder has, you know, spent years learning and by and large to the detriment of the business.
Yeah, I find that's especially true of smartgrid equity deals are the big ones. They've got all the systems and processes in place to view the business as $20 million is always dependent on what the business owner brings to the table. For sure, sometimes it's tactical, but if it's strategic, that's where the business has become unbelievably successful. And the reason is, as the owner, you mentioned, the largest figure something out and I tell the story all the time is that back in my very early days in the vending business, my mentor had built a $40 million food service company to Charlotte with a margin of 14% where the average in the industry is 3%. Yeah, it's pretty good margins for foodservice business. Yes, international company bought them out paying them a lot of money. And about a year and a half after the deal was done. The CEO of that region called him is, you know, shields. This office isn't big enough for both of us. So you're going to be leaving right now. This is a guy that they should have picked his brains for the entire computer as a billion dollar computer bottom, he had figured out how to get a 14% bottom line. You had a 3% bottom line, why aren't you picking this guy's brains and it did was he was absolutely devastated because he wasn't expecting it. It happens more often than not.
Yeah, again, as we talked about decimal usually for some kind of unique reason, right? I mean, it's they've they have figured out a niche or figured out a way to process things or an operating process, whatever it is. And to your point, and I think it behooves any investor you listen closely. You know, obviously, I'm sure there are things that they can do to improve it. But to ignore that founder, I think is to a buyer's detriment for sure.
I agree with that it Chris, unfortunately, we're out of time. And I'm going to bet some of our listeners might be interested in selling businesses, some of them might want to get your wise advice, I looked at your website, and it looks like you guys have some really good tools to help people figure out where and who they might want to sell to. So how would people find you, they can
just email me it's Chris CHR is at class six partners.com. And it's Class VI, the Roman the six partners.com. And you know, always happy to send tools out content, whatever it is, we love entrepreneurs and believe in what they're doing, and always want to support them, whether they're clients of ours or not. So
what's your website URLs? If somebody wants to check it out?
Yeah, www dot class six partners.com. Cool.
And I've got two things I'd like you to do. The first one I've asked for 115 times as to go wherever you're listening to this podcast. And please give us an honest rating and review. If you love us, give us five stars. If you hate us give it one star and only cry a little bit. When do you do a one star but if you do it you guys tell me why at least. And the second thing is, is one of the things that I see with most business owners as they think their business is gonna get him to retirement, the world that Chris works in, that might be true the world that you live in, a slightly not true, there's 8 million businesses in this country, and only 4% of them have over 50 employees, only 14% have more than 20 employees. So that means the vast, vast majority, you guys have small businesses and those small businesses that aren't going to get you the retirement by himself. So we've developed this process we call the financial freedom accelerator. What it does, it says where are you now on the road to financial freedom? Yeah, what strategies might you want to be pursuing? That will get you to financial freedom, which will create excess cash that you can use to pre fund your retirement before you sell your business or just close it down, which happens again, way too often, it's easy to find out more about it, just go to www dot sustainable business.co forward slash freedom as WWW dot sustainable business.co forward slash freedom. Check it out. If you want to have a conversation about whether it's a good fit with you click on the top with Josh bar. So this is Chris younger, you're with Josh Patrick. We're at cracking the cashflow code. Thanks a lot for stopping by. I hope to see you back here really soon.
You've been listening to cracking the cash flow code, where we ask the question, what would it take for your business to still be around 100 years from now? If you've liked what you've heard, and want more information, please contact Josh Patrick at 802846126 for extension 102 or visit us on our website at WWW dot sustainable business.co. Poor you can send Josh an email at Jay Patrick at stage two solution.com. Thanks for listening and we hope to see you at cracking the cash flow code in the near future.