There are lots of considerations when buying or selling a business. What is the company’s value? How and when will you communicate the sale to the employees, vendors, and customers? What is the exit strategy for the current owner?
To answer these questions and more, we brought in one of Maine’s top business brokers.
Rich: After a career in local and federal economic development, today’s guest transitioned to a financial services and insurance practice, primarily working with small business owners here in Maine. As a financial advisor, he was often asked by his business owner clientele to assist them in the sale of their business in order for them to begin retirement. Not finding any decent solutions, he stumbled upon business brokering.
He and his wife, Juliet, who has been a nationwide recruiter for over 20 years, eventually discovered Transworld Business Advisors, the largest business brokerage in the world, and became a franchisee in 2019. Together as owners, they launched a Maine Business Advisors, a full service business consulting firm, assisting business owners in buying, growing, and selling businesses.
Let’s jump into the business of buying and selling a business, with Justin Holmes. Justin, welcome to the show.
Justin: Thank you, Rich. Thank you for having me. I appreciate it.
Rich: I was just commenting that it’s like 400 degrees in each of our respective houses, with no fans, so we can have the highest quality audio. So we’re going to try not to pass out during this entire interview.
But let’s start off with some of the most important questions. What are some of the main reasons why owners are looking to sell a business?
Justin: Oh, geez. You know, they really run the gamut. But I would say that most often what we’ve heard from people is that after years – and often decades – of investing every ounce of their energy, their time, their money, and their patience in a business, irrespective of how much they may love what they’ve built and what they do, they’ve just reached a point where quality of life and spending more time with family or on a boat or on a golf course or in a drum circle is more appealing than waking up early and putting in another 16 or 18 hour day.
Rich: Understood. And so is it sometimes retirement, and other times maybe there’s some other reasons as well? You mentioned retirement in the bio.
Justin: Yeah. Unfortunately there are situations where people have health issues or maybe their spouse or partner does, and that can certainly drive the timeline forward. You know, some folks may find themselves in an industry which is in transition or in decline. That’s often a painful conversation to have with folks.
It used to be my understanding that more and more people would retire and leave the state, often to go to Florida or Arizona. That seems to be less and less the case. I think more and more people are seeing the value and appeal of living in Maine, comparative to other places and what they have to offer.
Rich: Absolutely. And so Justin, what are some of the benefits to the other side of the equation? Why buy a business when you can just build one from scratch?
Justin: Yeah, that’s a great question. I think it’s being able to look at a successful recipe rather than relying on measuring out your own ingredients and seeing how they come together and what the end result is. I think there’s real appeal in continuing something that’s proven to have worked, as opposed to simply coming up with an idea from scratch.
That being said, we actually have clients who have had an idea or an invention or a concept, and they’re just beginning to take it to market, and they already want to sell it. But quite often I think people want to be able to hit the ground running. And I think comparative to what the startup costs are, it’s far less prohibitive to buy a business in most cases than it is to build something from scratch.
Rich: Sure. And seemingly a successful business, I would hope.
Justin: Yeah. Right.
Rich: So if we own a business, how do we know what that business is worth? What kind of steps do we need to take to figure that out?
Justin: Yeah. That I think is probably one of the first questions that nearly everybody who calls us who’s considering selling, has. They have no idea. I think a lot of folks know what their walk-away price is, but that’s usually not very close to what the actual assessed value ends up being. So it’s not rocket science. There’s no great secret to it.
What we do at Maine Business Advisors is, well, a few different things. So as a financial advisor, I have the ability to be able to take tax returns and take that financial information just to see how profitable a business is. And business owners are allowed, under IRS code, to deduct allowable expenses. And the concept of living out of your business allows a business owner to enjoy the financial benefits of running some of their expenses through a business, which is great when you’re owning it. But when you go to sell it, those values are hidden because they’re not demonstrated on a tax return.
So we have to have conversations with the business owner to be able to pull out those values, and then plug them back in on the other side of the equation. And then we also have to look at comparable transactions. We have to be able to see what other businesses like theirs are selling for both here in Maine, in New England, the Northeast, and throughout the country. And so here at Maine Business Advisors, we actually use two different software programs to accomplish . And what we end up with is a report that uses nine different methodologies, including those comparable transactions and the analysis with the tax returns, to come up with a range of a value. And usually that’s within that range of what the business owner has been considering their business to be worth all along.
Rich: And so how much of it, like you take a look at earnings and consistency, does all that play a part in those valuations, or are those less important than we’ve been led to believe?
Justin: Yeah, there’s certainly a driving factor. I think nobody wants to buy a business that that’s consistently lost money over the years. And you know, I think on paper, a business can be in the red, but in reality, can provide a business owner and their family with a very decent living. So I think that’s all part of the equation is figuring out how do we demonstrate the true value of being a business owner. And that’s not always on the bottom line of a P&L statement. You know, it’s a little bit more nuanced than that.
Rich: So if we’re considering selling, how do we improve the value of our business? What is the buyer looking at? And, you know, I’m thinking about it almost from like selling a house. There are certain things you’re supposed to do for curb appeal or that have more value, like fixing up the kitchen than maybe some other things. So if you’re looking to quickly increase at least the perceived value of your company, what kinds of things should we focus on?
Justin: Yeah, that’s a great question. Well, I think the common challenge that we’re seeing, and I think this is probably nationwide, is the ability to be able to attract, hire, and retain talent. So, you know, we’ve got businesses that have been profitable over the years, but they’re having a hard time holding onto employees. So being able to incentivize those folks to stay on is really incredibly important. Especially if you have a business owner coming from away and they don’t have relationships in that community, it’s harder to have conversations with prospective employees about coming to work for them. So holding on to talent is a big thing.
You know, with a lot of our clients, more and more we’re talking to folks whose timelines are one to five years out. So in those cases, we actually rely on a team of attorneys that we have available to us that help do some advanced planning ahead of time. And so that may be something as simple as a key person policy on a manager who’s just indispensable to the business, or maybe setting up some sort of a qualified or non-qualified retirement plan that can be used as a carrot to hold on to folks. And then if folks are more than a year out, what we advise them is maybe don’t take every single deduction you can. Try to drive revenue in a responsible way as well and demonstrate what the true potential of the business is. It’s really not all that dissimilar from making sure that the house has a fresh coat of paint, kitchen looks good, plumbing’s working, those sorts of things.
So I think the further out somebody is in their timeline, the more value, we can help them demonstrate just by doing some of those proactive things initially when we’re speaking with them.
Rich: All right. I we are ready to sell, if we decided now is the time for whatever the reason is, what is the very first step we should be doing?
Justin: Well, valuation is certainly one of them. A common concern or question that business owners have is, I don’t want anyone to know. So, that’s sort of the Catch 22, that’s where it’s so dissimilar from selling a house. Because if you’re selling the house, you put balloons on the mailbox and you have an open house and you list it everywhere that you can, and your realtor works hard to do that for you.
This is the complete opposite. You don’t want your employees to know for obvious reasons. You don’t want your customers to know because subconsciously people just don’t want to patronize businesses that are for sale. There’s something that’s inherently a little unsettling about that is, why is this business being sold? What’s wrong? You don’t want your competition to know, you don’t want your vendors to know. So being able to disseminate to them like a marketing plan that is both aggressive and confident is really probably equally important to the valuation. So those two considerations are really what we cover first and foremost.
We actually have clients who have decided to sell their business, and even their own spouses and partners don’t know that they’re planning to sell. I don’t know how that’s going to play out on the other end of the sale, but by confidentiality in our profession, so we don’t say anything to anybody until we’re given permission.
Rich: So as a marketer, I’m interested in this piece that you really need to have a good marketing plan in place. So is there an expectation, especially in a service industry where you’re maybe not selling as many physical components of the business, to show that there’s a steady process of leads and conversions, as well as maybe having something in place such as we recently updated our website, or we invest in SEO, or we’ve got paid search that always generates this many leads a month on average. Like, do you get into the weeds that much when you’re starting to look to sell your business?
Justin: So in terms of what Maine Business Advisers is doing on those fronts?
Rich: More so what are the companies themselves expecting to expected to do? Like if you’re trying to show that you’ve got a steady stream of income, are potential buyers looking at what is your marketing plan, what are you doing right now to make sure that the pipeline stays full?
Justin: Yeah, I think that’s a question that we’re hearing more and more from prospective buyers. And so I think prospective sellers and active sellers are becoming more tuned in to that. Right. Because I think the idea of just having an open sign in the window and having a reputation in your community is no longer enough in a world that increasingly relies on Google reviews and an active website, a Facebook page, and a social media presence.
So, you know, to be honest, those companies more and more often are working with companies like flyte for example, to do that sort of stuff. And when they’re not, if their timeline isn’t extremely short, then we advise them to really augment those efforts because they do pay dividends, both in the short and the long-term. And I think we’re seeing buyers increasingly on the younger end of the spectrum, and that’s an expectation that a business has already at least begun to address that if not mastered that, at least has an idea of the importance.
Rich: Well first of all, I appreciate the little plug there.
Justin: That wasn’t planned, there was no discussion of that.
Rich: But the other thing is, it is funny because in the past five years I’ve had a number of businesses come to me and say, “We’re looking to sell our business in the next one to five years, and because of that, we want to have a new website, or we want to have paid search in place.” So I was curious to hear if that’s something you’re seeing more of.
Justin: Yup. I will just interrupt you real quick just to mention that it’s funny that you say that, because we’ve had more than a couple clients recently who have been embarrassed to tell us they don’t have a website. They don’t really do online sales. And it used to be that “Well, that’s just not something that works for us.” But what we’re hearing more often is like, “I’m really embarrassed to tell you, but we haven’t taken that step because I have no idea how to do that stuff and I haven’t had any time to do it.” So that value is very evident to business owners of all ages and all industries. It’s becoming the expectation.
Rich: So once I’ve got my valuation in place and I decide that I want to move forward and maybe I’ve done the marketing plan. I know what I’m going to do forward. If I’m working with someone like you, what are some of the following steps? Like, how do you let buyers know that my business is for sale? If I don’t want to tell anybody about it, I assume that’s where you guys really come into play. And I’m curious to know what the process looks like and maybe how long the whole thing takes.
Justin: Yeah. So it takes a while. And we set that expectation early on. The average sales cycle for a business typically can be 9 to 12, our contracts run for 12 months. So we obviously want to hit the ground running as well as we can, but it takes a little bit of time. We rely a lot on what Transworld has done. You know, they’ve been a business brokerage for over 40 years and they do a lot in terms of they have a huge mailing list and all of our listings go out to every prospective buyer who is in that database. And there are millions of people in that database and hundreds of thousands of active buyers. And I think there are a lot of franchisees with Transworld who find that in and of itself can be enough.
I think here in Maine, sort of being what had always been historically sort of the last stop on the bus line, we have to be a little bit more proactive than that. So we do work with a company – I think you can guess who – to do search engine optimization and Google ads to attract buyers and direct them to our website for our listings. We do boosted social media posts. We do aggressive outreach on LinkedIn. And then we do some really old, tried and true, traditional outreach methods. Our marketing department will actually go do searches on zoom info and other places and find other businesses in the industry. And unless they have been identified, because we do specifically ask a client if there’s anybody you don’t want to sell to, the people who aren’t on that list will receive a letter that just mentions that there’s been opportunity for a similar business in their industry within this state and are they interested in finding out more information.
And if they are, they have to sign a nondisclosure agreement in order to find out where and who the business is. But all of those efforts result in bringing buyers to the table. And honestly, in the time that we’ve been doing this in the year and a half or so, no one particular method has proven more effective than the other. We get responses from a myriad of our outreach activities.
Rich: For the seller, we’ve got a buyer on the hook, and they’re interested. What’s a good exit strategy for the seller? Should they just plan on walking away from the business, or should they work for the new owner for a while? Is there something that’s more common these days and something that might increase… like, do people want the previous owner sticking around maybe for transition purposes, or is it just better to start fresh?
Justin: Yeah, that’s kind of case by case. I think it depends on how familiar the new owner is with the industry, that type of business. I think a lot of folks want that hand-holding process. And what we found is that most of our clients who are selling are willing to do it. They’re willing to give weeks, and perhaps even more than that, of their time to sort of show up every day and kind of show them how everything works. And depending on the industry, you know, being able to introduce the new owner to clients helps with the retention, because obviously there’s going to be some attrition when a business changes hands. And obviously, even more important to that is introducing the employees to the new owner and saying, “This is the person I’ve chosen. They were a good person.” This is why you want to stick around, because right now it’s an employee driven market. People can move and so that’s really important.
But I think pretty soon, what we’ve experienced is within a few weeks that honeymoon period is over. I think the owner’s ready to retire. I think it’s a different dynamic to not be the person in charge. And I think the new buyer becomes increasingly wanting to take the reins themselves. So that handoff process is different on a case by case basis.
The other consideration that a seller needs to keep in mind at all times is what are the financial and tax implications of how I hand off this business? Do I do it in a lump sum? Am I willing to hold paper or doing some sort of owner financing? How does all of that work? And there are risks and benefits to doing either a full sale or holding some paper. But when you start thinking of other things like taxes, capital gains in particular, then there are a lot of different strategies and ideas that really need to be considered before the deal is signed and everything has gone through.
And so we try to get out in front of that very early on because some things can’t be undone, from a tax implication standpoint particularly. And we don’t want the client to feel like it actually created financial pain for them to stop.
Rich: Are there businesses or specific industries that do really well in business brokerages and maybe some that don’t, that aren’t easy to sell, because of the nature of the business?
Justin: Yeah. I think more niched businesses are harder to explain what the opportunity is, or if it’s something that seems complicated. If it’s a business that requires a license or a certain type of education, you’re obviously going to be talking to a smaller group of folks. So those businesses are harder to attract a level of interest.
A lot of folks would think that because of COVID, that service businesses – particularly restaurants – may be really hard to sell. And I would say that maybe last year that was the case. I think a lot of people didn’t want to go anywhere near a restaurant from a prospective owner. The restaurants that have survived, that have adapted, are actually doing very, very well. And so we are seeing more buyers revisit that idea. And having worked in the restaurant industry for a long time, I have a true appreciation for how hard those folks work. So when a restaurant owner is ready to sell, they’re ready to sell. And if anybody in the restaurant industry is listening, I think they should be comforted somewhat by the idea that industry’s coming back and people are willing to make that move now. And that wasn’t the case a year ago. That was not the case.
Rich: Do you have any mistakes that you continue to see either from the buying perspective or the selling perspective that you wish people would stop doing?
Justin: Oh, geez. Yeah. Well, I don’t want you to tell anybody, your team can’t say anything, but I’m going to tell my golf buddies, or I’m going to tell my sister-in-law or whoever. It’s one of those things where they understand the value of keeping the secret, but when it comes right down to it, boy, isn’t it hard to keep those lips closed. Because, you know, it’s exciting. I think the idea of having financial freedom and freedom of time and quality of life is really appealing. And there are some unintended consequences to that because it’s like a game of telephone. The word gets out and before you know, you’re not selling because you want to retire, you’re selling because you can’t handle that anymore or you’re just too tired.
And so we really try to remind people that, you know, the confidentiality is never going to work against them. Some business owners are determined that they need to tell their employees, you know, I’ve got to let everybody know what’s going on. Well, I wouldn’t argue that there is a time to do that, but the later in the process that can be done the less of an impact it’s going to have. If you tell your staff that you’re selling in six months, you could lose a huge number of those people. And then all of a sudden you have an asset that’s not worth as much.
Rich: Yeah. Just the uncertainty alone, people probably looking for a company that’s not being sold and it would make sense for them to leave.
Justin: Yeah, absolutely.
Rich: So Justin, we love to ask everybody who comes on the podcast this question, and so I’m curious to know your answer. What one thing would you change if you could to improve the business ecosystem here in Maine?
Justin: You know, when I was in economic development everybody in Maine talked about how do we get the next MBNA, how do we build the next LL Bean? What’s the next brick and mortar business that’s going to come in and employ thousands of people and we’re going to have the 21st century version of a mill here in town, where everyone’s going to go to work and get paid a decent wage. And what we realized is the world was changing back in the early 2000s with the internet and everything, was that approach of trying to attract businesses that were in other parts of the country, just wasn’t where Maine could play. They can’t play in that space from an infrastructure perspective, certainly from a workforce perspective, we don’t have what states that are growing like a Texas, for example, would have. And so offering tax incentives or tax-free zones, in my personal opinion Rich, that’s a race to the bottom. And you end up having businesses that come in and they take full advantage of what those tax breaks and financial incentives offer, and then they leave.
And so what Maine has that few other states have, I would argue, and I would think you would agree Rich, is that Maine is one of the few states where you can tell somebody that you’re from there or you live there, and I’d say 99% of the time they’ve got something positive to say about it, right? It’s, “Oh, I went there as a kid at camp.” Or “I went on vacation there”, or “I’ve always wanted to go there” or, “Do you know Stephen King?” It’s kind of like it was very positive. And so quality of life, quality of place is what Maine has in an abundance. And so I think, I feel like the state’s beginning to move in this direction. I think that we need to be our own biggest promoter and cheerleader in terms of this is where you want to spend your life. If you have a family, this is where you want to raise them. If you like to be outside, this is where you want to be. If you like good food or clean living and fresh air, this is the place to be.
And I think we haven’t always done a good job of doing that. I think Mainers have always been traditionally skeptical of people from away. And I think that’s starting to change. I think if we can be more open and more inviting and be more promoting our state and the culture that we have here, then what comes with that is greater diversity, a younger population. You know, Maine right now, the oldest median population in this state. We need youth, we need diversity, we need fresh voices and fresh perspectives. And I think that’s where Maine can really differentiate itself.
My wife is a great example. She grew up on the coast, working class family. Her father was a well driller, was the first person in her family to go to college out of state. And built a very professional and successful career in Boston. But what the internet and modern technology gave her was the opportunity to return here for quality of life. And we’ve seen COVID really be a catalyst for that, where people can live irrespective of where they work. So their company can be in Boston or Berlin or Beijing, but they can live in Buxton or Belfast. And so those are the people that we want to attract, because those people have spouses and partners and family members who are going to come here and they’re going to need a job, or maybe they want to own a business.
So it sounds a little self-serving just to put it in those terms, but to be completely transparent, we need to do a better job of broadcasting the message of why Maine is just such an incredible place to live, work, and play.
Rich: Awesome. And good alliteration I might add, too. Justin, this has been great. If people are thinking about buying or selling a business and they want to talk to you or learn a little bit more, where can we send them?
Justin: So our website is mainebusinessadvisors.com. So there you’ll be able to see myself, my wife Juliet, we’re co-owners of this business together. We have brokers as well, their bios are there. All of our listings are there. And our services are obviously there as well.
And you can also find us on Facebook, and you can find us all on LinkedIn. I would say that I think a business owner would do well to work with a business broker even if it’s not us. There are other brokerages here in Maine that also do a fine job. There’s not a ton of us, but I think if I were looking to sell a business, I’d call us and I’d call a couple other people, too. I’d weigh the options and the benefits. And I think we do a really good job here and other folks do too. But I think it’s not a well understood and well known profession here in Maine, but I think as we’re seeing the baby boomers start to exit their businesses in increasing numbers, I think we can play a valuable role in assisting in that process.
Rich: Awesome. Thanks so much, Justin. I appreciate your time today.
Justin: I appreciate it.