[00:00:00.000] - Chris
Okay. Welcome to the show. I'm Chris. We got Brandon over here. Hey, for those of you that are new to the Head Hard Boots podcast, a little bit of background. Brandon and I are the founders of Floedlight Consulting Group. Head Hard Boots is really a passion project of Floedlight for the uninitiated. Floedlight is a full-service consulting company. We work with restorers all over the country. Our book of clients represents almost a quarter billion dollars worth of revenue across the industry around in the United States. Our team provides support, advising, coaching to these companies to help them grow, help them become more profitable, and ultimately build an exit-ready business. So if that's you, floodlightgrp. Com. Floodlightgrp. Com. Certainly, check us out. Look us up, kick the tires. Take our health and value assessment at floodlightgrp. Com/audit. All right.
[00:00:53.810] - Brandon
Yeah, man. Yeah. Here we go. Yeah. So fun combo today. I think one of the things that's fun about our role with the podcast, we just get to make friends with some really rad, influential people. People that have the opportunity to help business owners increase the win, the successes. And JT is one of them. JT is broker. He helps represent businesses when it's time to put together a deal and exit.
[00:01:17.030] - Chris
He's done a billion dollars transactions in the last... How many years he's been operating? Yeah, incredible.
[00:01:23.710] - Brandon
Dude, that's a crazy number. It's a big number. It's fun. Anyways, long story short, the guy knows what he's talking about. We just dig in. We get into some core elements of this planning and building an exit ready business. We don't get caught up on, I think, what everyone's talking about. We were able to just get into those maybe less obvious elements of the conversation, of the process of the planning. I think there's a real clear align on and an encouragement on start today, doing what you want to end up feeling the results of later.
[00:01:56.950] - Chris
And for those of us that are really antsy and follow the shiny objects, it's like, okay, tell me what to do. What can I do? There's even a couple of nuggets in there. It's like, go do this. We get into overhead costs, managing overhead costs, costs of goods, inflation. What do you do about it? There's a couple of nuggets in this show that I think people find really useful and valuable. And hopefully a little bit different angle on the whole buying selling businesses, the M&A, the PE thing that hasn't been talked about ad nauseam in the public sphere. Exactly.
[00:02:29.810] - Brandon
All right. I love it. Let's go. Wow.
[00:02:32.560] - Chris
How many of you have listened to the Head, Heart, and Boots podcast? I can't tell you that reaction, how much that means to us. Welcome back to the Head, Heart, and Boots podcast. I'm Chris.
[00:02:43.430] - Brandon
And I'm Brandon. Join us as we wrestle with what it takes to transform ourselves and the businesses we lead. This new camera angle makes my arms look smaller than yours.
[00:02:52.850] - Chris
I'm noticing that, and I really appreciate it.
[00:02:55.110] - Brandon
I thought you did that on purpose. No, I don't. I didn't, and I am not happy with it. Hey, all, thanks so much for listening to the show. Hey, if you're not already following, please do so and ultimately share, right? Like the coolest currency that we have in terms of supporting this is share it with a friend, share it with somebody, a colleague, a peer, one of your downline team members. Let them be able to take advantage of the information you're already leveraging in your favor. And finally, guys, if you hear a show that really moves you, that really moves the needle, will you please leave us a review? Those five-star reviews help us a ton.
[00:03:30.120] - Chris
Right on. And listen, if you're trying to grow your business, you might consider checking out Floodlight's business opportunity audit. It's free. We provided it no charge. It's actually what we use to assess new clients as they come in. It's a 110 point assessment for your business. And we've now decided to give access to the general public for it. So go and take our business opportunity audit at floodlightgrp. Com. It's going to help you identify the biggest gaps and opportunities in your business right now. And at the end, it'll assign you a health score to let you know That's exactly where your business stands right now. So go check it out, floodlightgrp. Com/audit, and take the boa. It's a great way to get a pulse on your business.
[00:04:10.370] - Brandon
JT, sir. Welcome. Welcome to the show. Before we hit on the cord here. We had a little life chat. You are a busy man. You keep finding yourself over here on the West Coast, which is interesting.
[00:04:23.680] - JT
I do. I lived in Portland for 35 years. Three and a half years ago, moved to the southwest corner of Utah, just outside of Zion National Park, and back regularly babysitting grandkids while our kids travel.
[00:04:34.650] - Brandon
There's this little pocket up here in Oregon. I mean, you, we got Rosebrook, just a a tight industry. Eugene Hicks is based out of Oregon, another stud and a guy helping a lot of businesses. And of course, we're biased that we think Chris and I have some value to offer. We're up here. There is a little group that comes out of the Northwest.
[00:04:56.330] - Chris
Jerry Edel for years was like 15 minutes That's from my house. That's right. The background in Portland with a family service master business. So, yeah, this is right. That's right. This is a... Civic Northwest is one of the epicenters of the restoration industry.
[00:05:12.540] - JT
Yeah, and they say that Pacific Northwest will cause hair loss, but they can't prove a thing with the three of us. They just can't do it.
[00:05:18.550] - Brandon
Yeah, just turn the cameras off. We'll be fine. Yeah, that's right. Well, dude, we're excited to have you on the show. I mean, for those that don't know, we've admired and respected you and your input in the industry for for a long time. We were actually introduced to you the first time through Eugene. You and he have a professional history, and he just admired you and spoke highly of you. And we have often turned to you to just get some additional layer of insight on what's happening in terms of what businesses need to be considering regarding exit readiness and multiples and all the things surrounding exiting your business or preparing to exit. And that's where we want to go with you today. You've been gracious enough to share your time. And so we just thought, hey, let's get a dialog going where we can start talking about some realities of what's going on around us, maybe get outside of the feeding frenzy talk and some of the disappointment, I think, that some of our contractors have experienced this year, too, because They were probably at the bar and their friend told them they were going to make a bazillion dollars if they sold their business.
[00:06:20.200] - Brandon
Then some things have been changing over the last 18 months. I think there's a lot of ground for us to cover and still be fresh. I think there's a lot of opportunities for people to get in a perspective of your level of expertise and professionalism that's a call away. And so we want to be able to have a chance to highlight that as well.
[00:06:38.290] - Chris
And I think just to frame the conversation just a little bit more, there are going to be some people listening this that are brand new to the industry. They're a couple of years in. They know they're not looking to sell. They're not getting ready for their exit anytime soon. But I think what we've talked about this ad nauseam, you and me, JT, and as a team, we talk about this a lot. An exit ready business is a really healthy business. So even If you're one of those newer restorers and you're just the very beginning of your heroic journey, listen up, because the stuff that we're inevitably going to talk about is the stuff that is going to create a really profitable business, really high cash flow, all the things that you want in a company, whether or not you sell next week, next month, or 10 years from now.
[00:07:23.040] - Brandon
And if you're a leader and you don't own the business, listen up, because these are the things that if you execute well on, you're creating a ton of return on investment in your position. Huge value opportunity. Yeah, and that creates the upside. So anyways, JT, we're going to shut up now. Give us the quick background. There's probably a few people listening that don't know who you are. So just really quickly, primary focus, Who you specifically work with, and then we're going to launch into some really good Q&A with you, my friend.
[00:07:50.600] - JT
Oh, quick background. Okay, I own three companies in the '90s, so I'm sitting in... I've sat in your shoes a lot over the years. I've got a tremendous empathy and understanding for the conversations that business owners have with themselves and with their spouses and what the road ahead looks like. And over the last 25 years as an advisor, 17 of which have been in the restoration space, I've been able to bring that experience and understanding to business owners. And what I ask of business owners, whether it's restoration or trade services, it's all about an education for me. And I really want them to make intentional and purposeful decisions. And the first thing I ask is that they want answers. And I'm shocked at how many people don't want answers. They just want to burn that bridge when they get there. And the thing I hear the most is, I should have called you two or three years ago when I first thought about selling, and there's no way to back up at that point. So as long as business owners want answers and want to make purposeful and intentional decisions, then we make a pretty good team.
[00:08:56.730] - Brandon
Love it. And you've got the pedigree and the track record to prove it. We've been interacting with quite a few folks that you've had a partnership with. You've helped them create the exit opportunity for their business and accolades, a lot of respect for you and how you carry yourself, and hence why we want to continue to develop our relationship. Okay, my man. I think if you guys are cool with it, the place I want to open with, because I literally had a conversation not that long ago that I actually felt really guilty about, man. And that was two and a half years ago, two years ago, even, the multiples, the information that was being shared in terms of what business owners could consider a possibility has changed. And it changed what I feel like was very quickly. And so I literally was having a conversation with a relationship, and we were both really disappointed because what he and I had been talking about two years prior was not being reflected any longer in the current conversation. And he was very frustrated frustrated. I understand it's frustration. Of course, I'm heartbroken because I feel like I was sharing information at the time that was valid, and now I feel like that information has changed.
[00:10:10.750] - Brandon
Long and short of it, sales are down this year in general for a lot of teams. Multiples are changing. The dialog is changing. I don't want to talk about it from an assumptive posture. I want to talk to a guy that's experiencing it firsthand. What is going on, man? What are you seeing? What is happening? Is this right? Is this just an assumption or is this softening a reality for us right now?
[00:10:36.020] - JT
You're partially right. And I appreciate you bringing it up. I could take you through the complete rise and fall of where multiples have been over the last seven, eight years, and we won't have time to do that. That's its own discussion. But in the day, we'll say six, seven, eight years ago, four, four and a half, five, those are great multiples. Pe started entering the picture, started pushing those multiples, five and a half, six, six and a half, seven. And the industry strategics, the ATI, BMS, first on site, Blue Sky, Ucustom, they're right behind. But PE took the lead in pushing those multiples. Well, what's happened the last year is very interesting. Everybody is expecting now to get five and a half, six, six and a half, seven, seven and a half, depending on the size of their business. Multiples still range between three and eight. It's rare to get eight. You've got to be a sizable player in the market. And I mean sizable, with adjusted EBITDA of over three, three and a half million. To command those multiples. What's happened the last 12 to 18 months is that two things, it's really twofold.
[00:11:37.040] - JT
The market is soft right now due to this mild winter. We had a polar freeze, which wasn't big enough last, I guess, in January. It was a three-week period. It wasn't long enough to carry the winner, we'll say. So numbers are down. So when you say sales are down, that is correct. That's 100 % accurate. And you never want to sell on a down year, right? My job is to put sellers in the best light possible. So right now, there's a lot of owners who are waiting to get through 24, get those numbers brought back up, and then they're going to pull the trigger again. But it's been a little bit mild. Even throughout this year. There's a few customers, a few clients that They're up, but the norm is that they're stable or down.
[00:12:19.330] - Brandon
I was talking to a client yesterday that's very heavily focused on commercial. Their business is booming. So have you experienced or seen a lot of the companies maybe that have a harder leaning towards commercial were more spared this year than not? Do you see, was it more the residential heavy businesses that were impacted by this downturn, if you will, in the industry?
[00:12:42.710] - JT
Yeah, perfect question. Let me answer it this way. I'm going to give you a perfectly useless economical answer here.
[00:12:49.690] - Brandon
Can you correct me here?
[00:12:50.930] - JT
Yeah, it's going to be terrible. A lot of buyers want the bread and butter of residential. They want that to pay the bills. They want that to be the even keel in the business. But they love one foot in the sandbox of the large projects, the large losses, the cat work, maybe not that there's going to be travel for. But let's face it, it's exciting. It's high margin. It doesn't come around very often. But that is a high risk, high stakes game. Your AR, your labor, everything gets extended in this commercial large loss arena. So depending on where they play in commercial, it falls in the same bucket. If it's the normal day to day commercial, we'll say it hasn't been beat up too bad. Now, we say that there's been two hurricanes in Florida. Francine landed, what, yesterday afternoon, I think. We don't know the effects of that yet. But I have several clients down there with mobile cat teams. Some of those work out really well, and others do not. So it can be all over the board. There's more and more people looking at the daily bread and butter of the residential than the high risk game of commercial, if that makes sense.
[00:14:02.090] - JT
And there can be very stable commercial out there, but they realize that's much more of a highs and lows. And the game plan moving forward is to smooth out those highs and lows into something predictable.
[00:14:15.250] - Brandon
Interesting. It's so interesting. That was a little counterintuitive for me personally. We've had several conversations with PE firms. Some of them have a very specific avatar profile that is literally like no commercial. We don't care about it. We're not going to consider And at first glance, I'm like, I don't not understand that perspective, but you've enough time with them. They've spreadsheeted that thing 10 different ways, and they understand they're doing a lot with business analytics to make that determination.
[00:14:43.080] - JT
If you put yourself in their shoes, This is what they're going through. They've got to sell that predictability and the cyclicality of it to an investment board. And when they can't do it, their default position is, guess we better rely on something that's more predictable. So they've got to sell it, and it's difficult to sell.
[00:14:59.860] - Chris
I think in the midst of this conversation, we're really talking about a few different things, right? There's the weather-related catastrophe losses, which often is commercial hotels, schools, commercial buildings, etc. Which big high dollar, big high margin, and also long AR collection periods and so forth. And the unpredictable, too, the cost of mobilization. Some of those opportunities don't come to fruition, and you have these significant costs that are just sunk costs. So there's that whole cat travel, hurricane type. That's right. Then there's the local organic cultivating direct sales relationships with small hotel groups, local school districts, that stuff. Probably different perception from investors around that steady Eddie five, six, seven, $8,000 average loss numbers versus the big, we go travel, we send crews out regionally for things. Things. Because part of what we sell our clients on, and I think, frankly, a lot of restore is really interested in, is the fidelity, the sure deal of commercial relationships where we don't have an intermediary. We don't have a referral partner potentially dictating that relationship or a TPA, a third party that's negotiating that relationship for us. We get to just create a relationship with that chief engineer or that director of facilities.
[00:16:27.590] - Brandon
Yeah, I think it's a different monster.
[00:16:28.990] - Chris
It's a different things, but it's interesting, though. I think often, PE, like investment bankers and so forth, don't necessarily have enough domain experience to differentiate those two. Would you agree with that?
[00:16:42.300] - JT
At least that's correct. That is correct.
[00:16:44.000] - Chris
First pass, They have a lot of commercial. They don't necessarily differentiate those two things.
[00:16:49.870] - JT
Large loss in some of the cat looks great on paper, but you get down to the nuts and bolts of it. I mean, I've had clients wait two and a half years for FEMA approval on a million six project.
[00:16:59.350] - Brandon
Oh, sure.
[00:17:00.030] - JT
Well, you got to float that for a year and a half or two and a half years. And that's not easy. A lot of companies, they're more than ready to settle to get some of that cash back out of the deal. And so that's why I say it's a high risk, high stakes game. You got to have the chops for it. But if you do, it can be very lucrative.
[00:17:17.810] - Brandon
It's amazing.
[00:17:19.260] - Chris
All right.
[00:17:19.420] - Brandon
I think a good place to lean in, guys, is in JT, I'm just really excited to hear your perspective on it. Okay, if this is true, then if we've seen some multiple softening, We see some holding back. We definitely know of people, their number that has part of an LOI at this point is people are coming back to the table and saying, not so fast. We're not going to be able to stick with that number. What do we do? What are you seeing? What are some of the patterns? I think if you're cool with it, I think one of the things that I would love to lean into is wrong assumptions. Normally, as business owners, we think it's going to be this thing that's going to make all the difference. I think often we're wrong. So just leaning into that from your perspective, and let's see where it takes us.
[00:18:06.650] - JT
Well, and I love the general broad question there. There's so many owners that think an LOI is about the number, about the total figure, and it's not. It's a great place to start. It absolutely is. But there's three key numbers to a deal. There's the enterprise value, that's what your company's worth. There's a pre-tax yield, that's the number that happens at the closing table with all the The balance sheet adjustments, the cash, the AR, the AP, liabilities, et cetera. And then once everybody's been paid, then there's a post-tax shield, what I call a walkaway number. When it's all said and done, what does that owner get to walk away with? Ultimately, that's the number that matters. So there's so much emphasis on this first number and very little on the last two. So this is where an owner receiving some advice and an education on what matters. And what I mean by that What is those balance sheet adjustments? What matters to that individual moving forward? Is it some rollover equity? Is it continue working for a bit after you sell? Or do you want to just stop and retire completely? And that's really not an option.
[00:19:14.450] - JT
The larger your company is, these PE firms and the industry strategics, they need that owner to stay for a year, two or three. And there are sellers who don't want to do that. And that can be a very interesting conversation. It can be about the career paths for your key individuals. I've heard more than one owner say, listen, I'm a one horse show. I've taken it as far as I can go. I want to hitch my wagon to some big horses and really be able to bring this team places where I can't pull them. Very admirable. That's part of an LOI discussion. Burnouts are part of an LOI discussion. I sold a company a year and a half ago. Nice size deal, just over 20 million. And because of the growth that happened, he was losing patients with me a little bit, but because of the growth that happened, we got them an $11 million earnout on top of the $23, $24 million. So now it's a $35 million deal. So there's a lot of discussions that can be had outside the number. And that's just the tip of the iceberg. There's eight or 10 other variables that are part of an LOI discussion and what may be important to the seller and their family.
[00:20:22.190] - Brandon
So what I'm hearing you say, and this is super interesting, I think I'm going to want to hang in this pocket a little bit. So even if, let's say we just come into it with a very raw understanding, top-line, ultimately, there's a bottom line. Most of the time, our multiples are being determined by our bottom line number. But what you're saying is there's these other levers that an exiting owner could be prepared to pull on that will, even if the multiple is not what they want, because in general, this is just the multiple that's available right now in the market, there's these other earning potential, earning levers that they could be keyed in on or getting some from a guy like you to prepare for. Tell us a little bit more about that. I mean, you hit over it at like 30,000 feet. But what are we talking about here, when we say earnouts, give me an idea of some of the different types. How would this thing come together? How can I be prepared to even think about them and how to leverage them in my favor?
[00:21:19.780] - JT
Sure. We'll shift gears into earnouts. In the owner world, an earnout is a dirty word, right? The owners want to recover the value of their business today. They don't want to recover today's value a year or two from now. And that's not how I look at an earnout. The way I look at an earnout is if you're growing and if you hit these certain key metrics, let's take advantage of that and get some of that value back to the seller. Now, the buyer's perspective is, listen, we're buying a business that's growing. We expect it to grow. Why should some of that value be put back to the seller? We're buying a growing business. Don't penalize us and take of those profits because we wouldn't be buying it if it wasn't growing. So I see two sides of it. Now, an earn out, what it does from 30,000 feet as level of the playing field, when there's these risks, and bar none, every business has risks. Some are cleaner than others. Some have client risk factors, some have ownership factors. Some have key employee factors. Some have cyclicality. There's any number of reasons why there may be risk.
[00:22:27.760] - JT
But an earnout levels the playing field. And if the business is what the owners say it is, and the trends are what they say it is, then earnout shouldn't scare anybody. The hiccups come in where the sellers can over promise, and they'll say, We're growing 25 % a year, year over year. And then this year we're going to land X hospital or X university, or X Corporation. We should be up 45 % by the end of the year. Well, buyers listen to every bit of that. And when it comes down to negotiations, they'll say, Great. You I just said you were going to grow 45 % this year. Let's set an earn out at that cap. And if you hit those numbers, you get X. And you can imagine the sellers. Whoa, that's the best case scenario. We don't want to just set it at 45 %. What if we hit 20 or 25 %? Well, now the whole conversation changes. So the earnouts are a really tricky thing to navigate. But at the end of the day, I want the value to be delivered today and future value to be delivered in the future.
[00:23:30.300] - JT
And that's how I try to approach them because it's unfair to the seller to think anything else.
[00:23:34.960] - Brandon
So this is interesting. So one of the things that we've heard very commonly as a penalty recently, and we're tooting our own horn a little bit here. When our clients are succeeding, and then for whatever strategic reason, they determine they want to start some conversations with a PE or a strategic, there's this situation right now where people are making gains. It's not us. They're executing, and they're developing robust gains in their business, meaning they've, most of the time, increased their profit substantially. They've increased top line based on the kinds of relationships they're pursuing. There's been this shift in personnel internally that's allowing people to be more optimally producing because they're in the right seat doing the right thing. There's all these benefits. Ultimately, most of these owners right now are getting penalized because there is no direct correlation to the that mirrors their current performance. It's like there's this reality right now where we have people that are working very diligently to build their company the way that they need to to make it exit ready. Then they get excited and they start having these conversations. All that work and all the growth, they're trying to be discounted because they can't roll backwards and say, did I do this consistently over the last three years?
[00:24:55.620] - Brandon
And so in a case like that, because that's not abnormal right now, is that where part of the opportunity could potentially be, where they could maybe get aggressive about negotiating something around the earnout because they know all the hard work they've put into that company is going to fucking continue to yield a result, and they don't want to get robbed of the value of it, right?
[00:25:16.680] - JT
Correct. Timing is everything. Let me give an example. I sold a business in the Bay Area in January, actually, nine months ago. And they were brought to me, and another advisor had put I put them at 1.9 million. I put them at four. And we no sooner hit the market, they started growing. They picked up, I won't name names, but they picked up a couple of nice corporations locally in the Bay Area. They picked up university. They picked up a hospital. And she kept saying, We're growing, we're growing. And I said, listen, you've put me on a timeline. I'm trying to get you out of here by the X date, but I also need to maximize the value. One of those two has to break. I can't deliver on Okay? Because we've only got three months of the new code 2.0 behind us. No buyer is going to write you a check for three months of great history. They're buying the history, but they're buying it for the future. They're buying it for what it can be. So I said, something's got to break. And I said, I have a question for you. If the growth is going to continue like you say it is, what if we pulled it from the market for nine months, let these numbers mature, and then go back to market this fall?
[00:26:30.140] - JT
And now this was fall of '23, okay? And she said, We'll do it. We'll absolutely do it. And their attorney called me and said, What the hell are you thinking? No advisor tells their client to pull a business from the market. And I said, Listen, I'm pretty sure there's millions added to this value if these numbers mature. And he said, okay, he let me have it. And he said, If you're so sure. And I said, I am sure, but I'm banking on what she's telling me. And he said, She's I'm telling you the truth. I said, okay, October 1 came. This was March. She convinced me to go with the Q3 numbers. I had multiple buyers lined up. And instead of turning down offers in the mid-fives, we got an accepted offer at eight. And then it went to nine. And so we added millions based on a six month delay and letting those numbers mature. And so if there's a key takeaway here, timing is everything. And not only for the trend of the business, but the potential upside. And that's where there can be this earn out that says, we've only got a short window of history.
[00:27:36.390] - JT
You're saying you can accomplish this and are currently accomplishing this. If that keeps up, we'll kick you an extra X number of millions. And that's very common. Because had they been doing that number for five years, eight years, it would have been a very different conversation.
[00:27:50.400] - Brandon
A few point, yeah.
[00:27:51.880] - JT
That's right.
[00:27:52.580] - Brandon
So mentally, I'm just trying to experience this from my own seat. So not too long ago, we had some teams talking to us about valuation on our business. And it's so interesting because we're not even in the market, not even. Sure. But it's amazing how fast your mind starts to think about some of these numbers and how I had to... Okay, I'm just going to be super transparent here. Oh, careful. I know.
[00:28:20.150] - Chris
I had to take a bit of a walk and get my head dialed back in because it was so easy for my mind.
[00:28:29.570] - Brandon
I feel like There's probably some ego talk here where it was so easy for me to begin to give in to the easy road out, the whatever. I can only imagine if you've been building your restoration business for the last 10, 15, 20 years, and you're finally putting up a hand and saying, I'm burnt, man. I'm ready to get out of this gig. And you get caught in this frustrating conversation where it's like somebody's telling you, yeah, but for this, you could be done now. But if you want to hold on a little longer, I think there's more gas in the tank. I'm just thinking mentally how easy it is to give up. If you're getting in a serious conversation about multiples, people start to think about, oh, wow, that would be nice. I would do. Here's where we're moving. And you start going into this process and owning a fucking business is hard. Growth.
[00:29:20.900] - JT
Let's face it.
[00:29:21.860] - Brandon
This is hard, right?
[00:29:22.950] - JT
That's right. Business ownership is not for everybody. And it gets awfully lonely around the water-cooler. At seven, eight, nine o'clock at night, midnight, when you're staring at the bedroom ceiling and there's no answers up there. And who do you turn to? That's why these peer groups have become popular. Give me someone to ask a question to, because as a business owner, you're supposed to have all the answers. And when you don't, it's frustrating. If business ownership were easy, everybody would do it. And it's not easy, especially in this industry. And so what I do, you touched on it. You, for that conversation, Brandon, you became the pretty girl to dance.
[00:30:03.600] - Brandon
Yeah.
[00:30:04.430] - JT
That's the analogy, right? Someone's looking at you, trying to figure out if they can ask you to dance, and ultimately, are you going to go home with them that night? A little bit crude, but that's how the conversation starts. And it's amazing to me how many people get flattered by that. Yeah. Everybody's got analysts in BDO's cold calling restoration companies the last three years. Every week, I get four or five companies call me or email me and then say, oh, I got a note from this company or that PE firm or that industry strategic. They're interested. And I said, well, they reached out to you and 400 other people this week. And they don't believe me. But they're flattered that they're on the hook and that they were asked to be in this conversation. And then what's even more disturbing, they'll say, well, I sent them my financials and I sent them my tax returns. And I said, well, did you bother to sign an NDA? No, what's that? They'll say, we got to back up. Let's get the horse in front of the cart again here. They just want to charge down that road.
[00:31:06.230] - JT
And they'll say, oh, yeah, they're going to buy me. They were so interested. Well, they're talking to you and 300 other companies just like that. So don't think that you're going home at the end of the dams because they ask you about your financials. It doesn't work out.
[00:31:18.990] - Brandon
Yeah, I think that's a huge reminder. I was just blown away. I did a little bit of an after-action review because, again, we... But no, we're just now getting off the launching pad. We're so excited about what we're building and the momentum the organization and the team has. But mentally, man, I was just blown away by that experience. You know what? That terminology you use of you get flattered, and that's exactly what happens. That's right. You get flattered, you get caught up in it, you start to think about it. It's just amazing how quick your mind, I think, sees a path of least resistance. Correct. That would be a whole hell of a lot easier than grinding this thing out for the next 20 years.
[00:31:57.350] - Chris
I think, too, we've had to, as much as we can get caught up in that, too, we've had to remind our clients of the same thing when they start getting into a conversation with a strategic or a PE company or whatever, and they start to do the napkin math, and it's like, oh, my God. That's right. Every 10 of those conversations, five, six, seven, eight, nine of them, end up the numbers look dramatically different when they actually come to the altar. They actually get into the due diligence. Because, of course, these bankers and these PE companies, they're not stupid. And They start putting the fine-tooth comb over everything, putting the magnifying glass on customer relationships, past financials, the makeup of the team, turnover, the leadership depth in the company and all this stuff. All of a sudden, their number looks a little bit different that they're willing to. That's right. Could you talk a little bit about that? Because there is, like you said, there's the LOI, but then following a letter of intent, that's when all that due diligence starts to open up. Am I right?
[00:32:59.900] - Brandon
That's right. That's correct.
[00:33:01.080] - Chris
What are some of the hot buttons that start to erode value when that banker, PE company, perspective owner or buyer to look at things that really tend to pop up?
[00:33:15.350] - JT
Yeah, it's a perfect question, and it's a loaded one, Chris. Let me frame it a little bit. Buyers, in general, the negotiation phase of the LOI, there can be IOUs, Indication of Interest, MOUs, Memorandums of Understanding. It goes by a lot of different things, depending on how detailed the buyer wants to get. But some of it's not their fault. And what I mean is, pre-LOI, it's not their job to conduct due diligence on a business. It's my position that if an LOI is agreed upon and a buyer is that interested, they should have had enough information early to make a solid offer with 90 % of the material facts, if not 100 %. And what happens so often, these When companies go to the market or they entertain these conversations with just some financials, and there's no discussion about order involvement, no discussion about client risk factors, no discussion about TPEs and their effects, and no discussion about AR and collectibles and those sorts of things. Well, all of that comes out post-LOI and due diligence. So my philosophy is, if it's not the right buyer, let's fail fast. Let's fight out in two or three days, not two or three months, which is why I'm so thorough when I go into it.
[00:34:33.020] - JT
That's just my approach. I mean, it's our job collectively to put businesses in the best light possible. We also present them that way. But if there's a strike against them, if there's a negative, a hiccup, a glitch, whatever you want to call it, let's let it be known right away. You're going to find this. This is what you're going to find in AR. Let's say there are two owners or three owners with a couple in their son, and maybe there is some risk factors there. Well, let's get it on the table We don't talk about it day one, not 45 days later. The mental angst that gets created by that is amazing. And so I think what you're talking about, though, to put a label to it is called retrading. Somebody agrees to a price, a buyer and seller agree to a price, and then they start in on their quality of earnings. We call it a QE. And most of the time it's a buy-side QE. They hire forensic accounts. They go through the financials in a tremendous amount of detail to prove that the financials are what we said they are. There's no more devastating glitch that can occur when our numbers are different than their numbers.
[00:35:41.250] - JT
Devastating. It changes the whole conversation. And so I go to great lengths to make sure that we're spot on. So the types of issues that come up in due diligence, first and foremost, is this QE. There are issues that arise. Do they need you the owner, and what are they going to pay you? That may be very different than what you're currently paying yourself. So there might be an adjustment for that. How about your spouse? Are you going to act in a lot of, to a buyer's credit, a lot of PE firms and industry strategists will let the owners choose their career paths, if you're really good at building bridges and selling, go do that. That's where you're adding the most value. If you're a great operations guy, go do that. Keep the train on the tracks. If you're somewhere in between, do that. They don't want to fundamentally change who that seller is. And so beyond the numbers, it can come down to personalities. It can come down to the owner involvement. That's key. Every owner wants to minimize their involvement in the business. They do, and they want to wear 15 hats, but a lot of them do.
[00:36:52.990] - JT
And when they're talking to buyers, they portray the five hats that they're wearing and ignore the 10 that they're not. And so a very common comment from a buyer is we feel the seller is more involved than what they let on. And oftentimes, they're true. So we can't sugarcoat some things because we need a comfortable buyer or we're going to have a deal. So the numbers, the owner involvement, the client risk factors, the cyclicality, we typically go... Let me say it this way. Every buyer will pull monthly reports for the last 20 Four months. They want to see month over month what's happening with sales and collections and where the cyclicality is. What was the one big job? A lot of times, they'll pull PnLs for specific projects. And so if you had a $700,000 large loss or CAT event last October, let's see the PnL on that. Maybe that one project was 50 % of their net for the year. Do you think that changes the discussion? It absolutely does. So And this is just the tip of the iceberg. It can be any number of variables. But does that help, Chris?
[00:38:05.070] - Chris
Oh, yeah. Not to be crude, but the most common phrase that we hear from clients when they're in that due diligence phase is, They have crawled up my ass. All right? Yeah. I'm getting in probing every possible... I mean, and I'm sure it does. I'm sure it feels that way. Yeah. Liftify.
[00:38:23.600] - Brandon
Com/bloodlight.
[00:38:24.760] - Chris
You've heard Brandon and I talk a bunch of times about the importance of Google reviews, maybe even heard our episode with Zack Garrett, the CEO and founder. Recency, consistency, two of the most important things when it comes to maximizing the benefit from your Google reviews. Why not use an outside partner? Liftify is targeting 20 to 25 % conversion, right? So if you do a thousand jobs a year, you ought to be adding right now 200 to 250 reviews a year, every single year. If you're not doing that, you owe it to yourself to get a free demo from liftify. Com. See their system, see how it works, see how it affordable it is. I promise you, you'll thank us. Liftify.
[00:39:05.180] - Brandon
Com/bloodlight. We spend a lot of money and a lot of attention trying to get that first call. And one of the things that we do once it happens is sometimes we leave it to chance, Who picks up the phone? How do they respond? How do they walk that client into a relationship with us? Well, one of the benefits of partnering with a team like answerforce. Com is we can systemize that, we can make it more consistent. We can also have backup for when our teams need that help, right? Somebody goes on vacation, somebody's out sick. We get a storm search, we get cat event. All sorts of things can have an impact on how we receive that client. But the most important thing is they need to know that they've chosen the right team. And so answerforce. Com, can support you, be a bolt on partner to help you consistently produce an awesome onboarding experience with that first call with your client. So answerforce. Com/bloodlight. That's great.
[00:39:58.840] - Chris
Cnr magazine, We're friends with all the folks at CNR. Michelle and her team, they do a great job of keeping their ear to the ground and reporting all the important information from our industry. You want to stay up on all the M&A activity and what the latest best practices are for selling your company successfully. She's got that. Great articles about all the four quadrants of our business. Cnr is constantly pushing out great material and leveraging great writers and subject matter experts in our industry. It is the water-cooler of our industry. So if you're not subscribed, go cnrmagazine. Com. Follow them on LinkedIn. Follow Michelle on LinkedIn. Trust us, if you're trying to stay on top of everything happening in the industry, your best destination is cnrmagazine. Com.
[00:40:42.260] - Brandon
You guys, many of you have already heard about Action Actionable Insights and the training and the technical expertise that they bring to the industry. But how many of you are already leveraging the Actionable Insights profile for Xactimate? That's the game changer. It's essentially an AI tool that's walking alongside of you as you write your estimate, bringing things to your attention that should be added, that could be considered. All of them items that increase our profitability, increase the effectiveness and the consistency of that scope, and it can do anything from helping a new team member assimilate some estimating best practices. And it also helps the grizzled vets add back that few % that we've just forgot over time. So actionableinsights, getinsights. Org/ floodlight, and take a look at what the Actionable Insights Xactimate profile could be doing for you and your team.
[00:41:37.540] - JT
There are no secrets, believe me. My father was a veterinarian, and as a kid, I watched him strap on a rubber glove up to here and insert that up to preg test cattle. And that's what it feels like. It is an invasive process. And believe me, it's unnerving when a buyer says, Can you send me a CPA copy of your Quickbooks? You're lifting your skirt all the way up. And believe me, they put four or five forensic accounts on it for a month, they will find every key number there is to find. There is no hiding. And when they come back and start asking questions, you don't have to have answers on the spot, but you better be able to find them. And this is where the CPA communication comes in really handy. But again, I'll circle back. If owners don't want to prepare for that a discussion and their attitude is a little will just address it when it comes up, it's very dangerous place to be because a lot of those deals fall apart, not once, but twice or three times. And then they'll say, I'll just keep it. And they're probably never going to sell.
[00:42:37.640] - JT
They're the people that can die at their desk.
[00:42:39.630] - Brandon
Yeah, they're going to be the inevitable baby boomer group right now. I'm not dissing on anybody. I'm just getting a face full of these stats. The baby boomer generation right now is all on that precipice of absolutely having to sell their organizations. For most of the blue collar type service providers, which is probably, I don't know what the percentage is, but my gut says the average mom-paw shop that feeds the bulk of our economy are not SaaS companies and big white collar outfits. That's right. And how interesting it is to know that how many of those business owners will get forced to exit, and they're not going to either make money. They may not even be able to sell. It may be giving up a closing of doors. There's very few family members that are excited about taking on multi-generational businesses right now. It's just this massive wave that's creating a lot of buyer opportunity if you're interested in working hard and developing something like this. But there is a load of people that will be desperate and they are not going to sell. The stats, even When you're coming from outside of our industry, the business and analytics are all over this.
[00:43:49.400] - Brandon
And it's just a wave coming down of people that can't sell their business. So that being said, one of the misconceptions that I had, even meeting you early on in the days was, how long do you really want to start talking to somebody before they're ready to exit? And I was actually very surprised by the fact that you really want to get integrated in that conversation immediately, even if part of what you're telling somebody, just like you've already alluded to, is you probably don't want to sell for five years, three years, six years, whatever the number is. But it's like a state planning, almost. It's like go to work, determining what you need to do before you're forced to do it. So if you don't mind, give us a better understanding. Give me a roadmap of what you would suggest somebody does, even if they've started the business today. How should they begin thinking about what they're doing in a relationship like yours or maybe even with a team like Yes.
[00:44:45.160] - JT
Let me give you an example. I think it'll go a long way, not only for the two of you, but for listeners. I like people to care about their business. And let me rephrase that. I need them to care about your business. And this is going to sound crude. If you as an owner, don't care about your business in the road ahead, then why should I? I can't make you care. I can suggest, I can cajole, I can give you examples, I can tell you what you're in for and how bumpy the road is going to be. But if you don't take action, then I can't take action. So some of the best conversations that I have are, I'm five to eight years out, maybe even 10. I don't know where I stand. Let's go through this process for those who are new to you or to me. I go through a process called evaluation and analysis, and it's pretty thorough. It lays out a lot of variables and gets really educated, and they get to put on their buying glasses and how buyer is going to view their business. And I love modeling. Okay, let's say I'll give you a real life example.
[00:45:42.950] - JT
I valued one of the nation's largest franchises, and I won't say who, but let's say they're doing 40 million a year, okay? And I put them, let's say, at a 35 to 38 million dollar value for this particular model. And he said, We're several years out yet, but now what should I be doing to improve the value? Well, there was a short laundry list. We'll say not a long one, but there was five or six things that they could do right away. They could add seven to eight, nine, maybe $10 million in value. Then he came to me and said, Our organic growth is about 14 % a year. So now what would we be worth at the end of this year, the end of next year, and the end of '26? I love running those numbers. And it doesn't take long. Once the model is set up, I can easily go back and say, With your organic growth, here's what you're going to be worth the next three years. And better yet, they were talking about starting a new profit center and one more location. And if they did this profit center, and if they started This is our new location, here's the estimate of what you'll be worth then.
[00:46:47.850] - JT
Well, there was another seven, eight, nine million dollars on top of that. Well, now there's real tangible numbers. And granted, it's hypothetical, but real tangible numbers based on a very predictable business. And they got back to me and said, great, we're going to work with our CPA and our state planner. We're going to bring them in the loop on this, do some tax planning, and we'll be back in touch. And that was a last week conversation. It's perfect. They are setting the stage for the road ahead, so there's no surprises. And when there's tens of millions at stake, and I don't care how big the business is, maybe it's 500,000 at stake for some people. It's a lot of money to those involved. So plan accordingly, or you run the risk of not recovering that at all.
[00:47:27.840] - Brandon
So one of the things I am leaning harder into, I guess, we're buying, is this idea of, I think people are quick to assume they need a CPA relationship. I think they're quick to determine they need an attorney relationship. And I think we falter on, and I think our ego kicks in. Of course, I'm biased because we're a consulting firm. Nobody needs to act as if we're not or whatever, right? But they're not diligent in creating a relationship with a coach or a consultant. Whatever that looks like, smells like, I don't care. And they often don't start a conversation or a strategic partnership with a broker early. I think the downside to that is that we assume, it's funny because we're just now starting our prep to begin doing our annual planning with our client book. It's a topic of conversation. As powerful as the annual planning is, as powerful as doing a reboot on mission vision core values, where are we going? Why are we going there? It is important, and it's a vital part of the annual process. But I think what ends up inevitably happening is that we're not going the pace to actually create where we're headed, literally looking at all the fundamental elements of our business.
[00:48:36.060] - Brandon
I think the picture you painted was, if someone can begin modeling the enterprise value of their organization from the very beginning, and they can look at that in a five-year time frame, they can backwards that, they can see what it's going to be in a year based on estimate and projections, and they have this consistent outlook of this real data-driven number that It should be driving decisions today. So if you did that and you've gotten really clear with a broker and they've given you a very sound roadmap in terms of what are the things you have to have in place, rock and enrolling at full tilt, meaning separate your life from your business. If you got 400 grand in personal expenses in your company, maybe start building a plan to get those things out of the business or make sure they're isolated in such a way that they don't work against you. I'm just thinking all these things. Sure. The consulting partnership where you start road mapping. If that's what you want in five or 10 years, what are you doing today to put it in a place? Instead of waiting. I feel like so many operations, they grind their faces off.
[00:49:42.040] - Brandon
We put in five, 10 years of really hard work. And what I feel like we do a lot of times is we've ignored the energy bleed that we put into all these areas because we didn't want to pay a fee to have a relationship or a consulting relationship in our annual spend. But then I'm like, dude, whatever this annual fee is, is nowhere near what the two commas are that are out on the horizon. Let me give you an example.
[00:50:09.490] - JT
You're spot on, Brandon. And let me give an example. To me, consultants are like therapists. We all need one. We just don't realize it, right? I mean, most companies out there can benefit, not a little bit, a lot by using a consultant. And there's blind spots that we all have in our business. And And some people don't even know that there's blind spots because they don't even acknowledge them. And when the floodlight guys come around and say, here's what we can work on, or when the extra strategy guys come around and say, hey, you want 10 million for your business or 30 million? Here's the four or five things you All they need to do in the next five years. But to be clear, none of us are on anyone's timing committee, and I can't drive that point home enough. People think when they call me, I'm going to push them to sell. It couldn't be further from the truth. It is always what's best for the client. The only time I've encouraged someone to sell, and I've had it happen maybe seven or eight times the last 15 years, is when I get a call from a hospital parking lot, and they say, I met you three years ago, or I listened to this podcast, and I know who you are.
[00:51:14.580] - JT
I've been meaning to reach out. I just got some tough news. Get me the hell out of here, and then can you do it by Friday? That's where I jump into action quickly, and nobody wins in that situation. And so it's not about pushing anyone to sell. It's about being intentional and making an educated decision. And that's what you're trying to do. That's what I'm trying to do. And I'll say it again, you've got to want those answers. And if you don't, a consultant to myself, any advisor is going to be a complete waste of time. And that's unfortunate, because this industry right now is really dynamic. And with the squeeze happening, every percentage point, every margin you can bring to the bottom line, every addition to that margin is golden, and it significantly affects value.
[00:51:56.010] - Brandon
One of the things that came up today, we were having a conversation earlier with a serial entrepreneur, and he made the comment that, I've always believed in paying 25% more than I have to to get two times the result, is essentially what he summarized. And so basically what he was alluding to is that, look, I've done the math I've seen it through experience. I pay people more and I have less bad people. I have only good people. And surprisingly enough, they do twice as much work. So I'm a net return of 75% on my investment. I think the other thing that we see in this relationship where we're hiring professionals to help us guide our decision making is that in the moment, it feels like it's that decision we're making to spend 25% more. And we're getting, though, that we have the opportunity to get two times the production out of our organization for that spend. I just encourage people on that. And look, I'm not saying any of this to pitch. We have a consultant. I likened it to this. Our team has had some internal jokes about it is, look, they're not going to do the job for us, and there are no silver bullets.
[00:53:02.450] - Brandon
But you know what they're going to do is they're going to tell us which wall to hammer our head against so that all the hammering that we do to put in the reps and earn our stripes is a fucking wall. And I think that's the opportunity for people to hire a broker partner, someone that can guide them through this process to talk to guys like us or other restoration consultants as consultants is just make sure you're beating your head against the right damn wall. Then that way you know you're making forward progress.
[00:53:29.380] - JT
Because When it comes to- We don't. Yeah, I want to make one point, and that is people call me and say, I'm struggling with this, do you know a consultant? And I'll say, yes, I know several. However, what are you struggling with? And they go into more detail and they'll say, yeah, I don't know that I can afford the 2,500 a month or the 3,000 a month, whatever it is. The consultants, a lot of them are different. And I'll say, you can't not afford to go down that road. You have to go down that road. So somebody spends 20, 30, 40, 50,000 dollars a year to solve a 200, 300, 400, all your problem. You can't not go down that road and explore solutions. And that's come out of my mouth a lot the last year as the squeeze has happened and efficiency is the top of the heat when it comes to conversation.
[00:54:12.690] - Brandon
Yeah, it's so interesting. I think we got into this, but then we've gotten maybe a little bit trailed out. So, okay, you hit at a high level some of these core things to be considering in terms of the business. Can we get a little bit more granular? Sure. Let's get into the financials, specifically. I don't know why, but we've had a slew recently of conversations where we're begging people to invest time and energy in getting their books cleaned up and getting... I don't know how this happens. I'm laughing because there's probably been times where I've allowed this to happen in businesses that we're associated with, too. But somehow we're forgetting that prioritizing things like working financials are important. I don't know. But let's take in that pocket for a minute. I think there's a couple of pocket subjects that we'll get in on, but I want to hear some more detail from you. In the financials, what are the foundational things that we need to be building out, preparing or leaning into so that we don't get blindsided with deductions later?
[00:55:11.960] - JT
Well, let me start here. From 100,000 feet, the financial story and the numbers have to match the story that a buyer is being told. The verbal story, when they interview you, they interview a GM, they spend several hours with you before they really take a deep dive into the numbers. Those stories have to match. And the problem is so many times they don't. What owners think is just fine and normal in their world is not normal to a buyer. And that's where the disconnect happens. They'll say, well, I've been doing it this way for 35 years. That doesn't make it right. And I'm not saying they have to change, but we have to highlight some of those things. There's got to be a paper trail, little things like the mobile offices and the RV that so many restoration contractors have, and the paying of the spouse, whether they work in the business or not, the personal vehicles, the 401(k)s, all the ways we as business owners run money through our business. There's got to be clean, efficient paper trails. And what happens so often is those paper trails get really muddy, and they It's a bit muddy to the point where the owners don't even know where the funds are going.
[00:56:19.040] - JT
Here's an example. I'm working on about a $40 million facility services company in Southern California right now. And there's so many different adbacks. There's One example, there was a one-time lawsuit that involved a couple of employees. So there was a $120,000 legal fee attached to that. This spanned three years. In one year, it was put into professional and legal. In another year, it was put into legal. In another year, it was put into administrative overhead. When I started asking about these funds and where they were, they couldn't even tell me. The controller had to go back and look. And 10 days later, I got my answer. Those are the types of things that sound really simple on the surface, but they It has to be figured out ahead of time, because we don't want a buyer coming back saying, oh, we've got your CPA copy. Here's where those funds were, you were wrong. The story wasn't as you told me. It's now what we're telling you. And I'll tell you, the egg on our face, if that had happened, it'd be really something. So sometimes sellers get a little frustrated that I have to get all these ducks in a row and make the financial story line up.
[00:57:25.150] - JT
But without that story lining up, we don't have a deal. So it's worth doing a little due diligence on our own ahead of time to make sure that our stories align, because if they don't, the chances of a company selling are minimal, minimal to none.
[00:57:38.040] - Chris
It seems like when those sorts of things happen, the biggest impact is it really erodes the blue sky value, the brand value, because they start to put so much... It's like, oh, well, if they hid this or didn't understand this, how many other problems are we likely to find? And it just starts to erode the overall perceived value of the business.
[00:57:57.980] - JT
Is that- Exactly. Broken trust is the biggest deal breaker that exists in my world. And it's not, hey, we said this 2023 van had 19,000 miles on it. It really had 24,000 miles on it. We didn't update our records. That's immaterial. In the scheme of things, okay? It's issues like the financial cleanliness and where dollars are placed. I had a client years ago. We were two weeks within the closing table, and he says, by the way, JT, this is... I mean, we're definitive docs are almost done. He says, JT, they're going to make me the GM of this business. I got to share something with you in private. I said, okay, what's going on? He said, I was in prison in the '80s for four years for securities fraud. And he said, Do I need to disclose that? And I said, Well, you are not a salesman. You're not an ops manager. You're going to be the GM. They will do a background check on you, and they will do a background check on you. They're going to find this out. So we need to disclose it. We disclosed it, the whole deal fell apart because we didn't disclose it early.
[00:58:59.960] - JT
I found out about it, and about six hours later, we had brought the buyers into the loop. So there are things that can simply rip a deal apart. They absolutely can. But the key is material changes, and everyone defines material differently. And so when it comes to, I always challenge owners to say, if it's material to you, it's definitely material to them. And they're going to find 50 more items that are material to them that aren't material to you. So So please follow my lead in saying, let's get our ducks in a row here. Because without it, I get paid to sell them. I get paid very little to put a company on the market and get to the closing table and fall apart, accept it off and fall apart. It's a grind. It's emotional exhaustion to do that. So I want to put that business in the best light possible. And sometimes I get a little pushback on that. And if there's too much pushback and the ego start to take hold, then I just part ways. It's not worth it. Net business will never sell, unfortunately. I hate to be so black and white about that.
[01:00:03.280] - JT
But there's enough people who want to sell and want answers that I just can't try to convince people to do the right thing.
[01:00:10.510] - Brandon
Yeah. So just I think in an effort to summarize some of these buckets, I got another one on point here. On the financial side, it's a matter of, look, you have the freedom to run your business the way you're going to, and that's okay. But make sure that we're doing something proactively to be able to isolate, highlight, support, talk about in specifics what that thing is and what role it has in a material manner at the close of a deal or when we begin negotiating a deal. Because I'm just thinking for all the entrepreneurs, a lot of us don't want to pay taxes on absolutely everything. We do a lot of things in partnership with our CPAs to ensure that we're using expenses and leveraging those kinds of things in our favor.
[01:00:52.580] - Chris
That RV parked in the warehouse.
[01:00:54.050] - Brandon
The RV. That's right. That, right. We just got to have a way to unwrap that when it comes to be super transparent in the deal. We're not telling people, Don't use the business the way you created to use it. Be cognizant that you can unwrap that not when it's time so it doesn't work against you long term, right? That's right. The thing that I heard you highlighting is just the matter of we have to be telling a very clear and consistent story of what we're spending to produce the work, what we're spending to earn the work, what we're doing to earn the revenue. There's just got to be crystal clarity. Here's the... I would just hammer on this, too, is for some of you with larger business, this is really obvious. But for a lot of entrepreneurs, if there's cash in the bank, we're feeling pretty good about what we're doing. And the reality of it is when our hair is on fire and we're doing the thing, it can be hard to slow down and prioritize these things that are very hard for you and I to create value around when they see a million dollars in their checking account.
[01:01:51.880] - Brandon
To them, they listen to what we're saying and they're like, Well, dude, I don't fucking care. I got a million bucks. I know what's happening in my business. Okay, so I'm I'm telling you then, if you're ever going to exit that thing, your checking account is not enough. And second of all, guess what else you can't do when you run everything out of your checking account is that you can't compel people to be accountable to their performance or help lead your organization because you wouldn't be able to tell them how they're performing anyways. Because at the end of the day, our number one measurement device is the financials of our institution is what tells us if we're performing or not performing. And so you didn't say it exactly like that, That was very well said.
[01:02:31.350] - JT
And the only thing I'll add to that is between the three of us, we have to help owners understand their numbers. When I come along and say, last year, your margins were up, let's say your cost of goods margins were up, we'll say, higher by three and a half %. And this year, they're up another two and a half %. And I look at them and say, why are your cost of goods margins higher, 6 % higher now than they were in '23 or '22? And when they shrug their shoulders and go, oh, I had no idea. That's not a good answer. 20 out of How many buyers are going to ask that question, and 15 more just like it to drill deeper into the reason why. You've got to understand what's happening with your numbers. And so between consultants and someone like me, we help prep you for those conversations that are coming. And in the meantime, we help you get an exit-ready business that's well-run that in theory, you can enjoy for a few years and be strategic in before you sell.
[01:03:23.820] - Brandon
Yeah, maybe you change your mind, right?
[01:03:25.460] - Chris
You know what? Hang on that cost of goods and just general overhead and so forth. These single-digit percentage points. You and I talked about this training module we were creating around this subject, and I thought we probably don't talk to people enough about this, right? This idea of cost of goods, consumables, pricing going up and so forth, is that I think a lot of business owners, as they're growing, they start to lose track of those details. Those details hold a lot of value. You think about a $3 million business. If your cost of goods goes up by three and a half, four and a half, five, six % over a period of time, that's a big number that's going into your pocket that's not dropping to the bottom line. We think in this industry, most people, the benchmark that most people are working towards in terms of EBITDA figures. Everybody argues about this, but let's just say 15 to 25 %, right? It should be that bottom line number. Well, if your cost of goods has gone up three and a half %, that's a huge impact on that net figure that you're growing towards, right?
[01:04:29.940] - JT
And it gets worse, Chris. I mean, you put a multiple on top of that. Oh, man. Let's say you're doing 10 million and you're three and a half % off. So that's three and a half %, 350,000 that should be on the bottom line that isn't. Now hit that with a multiple of six, let's say. Well, there's $2 million or thereabouts that should be in value that is not there because of that three %, that three and a half %. And So when an owner sees that $2 million of value is missing because their cost of goods is up three and a half %, you can see that light bulb go on. And I've challenged many owners to say, if you fix this, there's another $3 million in your pocket. And it's like they can't get off the phone fast enough to go find that answer. And I love that.
[01:05:19.410] - Brandon
It's huge.
[01:05:19.830] - Chris
I love that, too. And I think you have a really awesome point, which we probably don't talk about enough. And I think it's worth even our team, reminding ourselves and bringing this up to our clients is, where do you find that three and a half %? How do you deal with cost of goods increase? Is, well, I think oftentimes during our growth, we forget about our buying power. If three years ago, we were at one and a half million and we're buying 50,000 of goods from this particular supplier. Well, now, three years later, we're buying $800,000 worth of goods from the supplier. We've got leverage. And so oftentimes, you remarked on this that sometimes that three and a half % gap can be closed in a period of weeks or months, simply by going back to our suppliers and saying, Hey, we're doing 5X the business now with you that we were doing two years ago. We want to optimize pricing, and we're going to go shop this out. And that three and a half % gap might be closed in a period of weeks.
[01:06:15.010] - JT
And if you ask most business owners, can they bring another two and a half, three, three and a half, four % to the bottom line if they watch their fees and cues, 99 out of 100 will say, yes, I can do that. Yeah. Well, guess what? Now is a good time to do it. When they see it attached to value, enterprise value, it's a great time to sharpen the pencil and get it to the bottom line.
[01:06:34.200] - Brandon
All right. Another bucket. Because I feel like if we don't get into this bucket, we're doing a disservice. Okay. I think many, many companies, and we hop on this, obviously. And again, we've not done this well all the years. We had pockets where we were killing it, and we've had plenty of pockets where we were falling on our face. And what I'm talking about is systems process. So a lot of organizations, they are way over dependent on owners and a handful of key leaders, let's call it. This is true for big organizations and small organizations. It is universal in who it is. It's this, we get swept up in this cycle of it's just faster to do it myself. And then we mirror that for the one, two, three people in our team that we trust enough to hand responsibility to, and then they begin acting the same way. And so we got department heads and GMs and finance directors that are It's quick to jump in and become part of the production cycle because in quotes, it's faster than training, equipping or building a system in a process. The other thing that we see firsthand is it is grueling to work on process when your business is already left the shipyard.
[01:07:45.200] - Brandon
It's grueling. And we think that we're going to come to an experience and start dedicating 60, 70, 80% of our time of quotes working on the business. That ain't fucking reality. One of the things that we've been talking to teams about is this idea of, be honest with how much bandwidth you have to give to strategy. If it's 10%, when we create a roadmap of strategic initiatives in your business, you need to remind yourself that only 10% of your time is going to even be levied at these initiatives. But Again, if I started giving the 10% today, by the end of the year, maybe it's now 15% I can give. By the following year after that, maybe I'm up to 20, 30% of my time that goes to this. If I do that over five years, I have an exit-ready business and I get the valuation that I want when I leave. I think I get frustrated when I'm trying to get business owners to commit to giving some version of time and commitment to systems and processes. It is like, anyways, I'm going to start crying and whining to myself, woe is me. It's crazy how hard it is to get people doing that time and energy into this.
[01:08:53.330] - JT
But what did we hear for years, right? Especially before the interest rates went up and the industry was on fire. I can't find good help. Can't find help. Nobody wants to work as hard as me. Well, guess what? You're the owner. Someone's making 25 bucks an hour. They're not expected to work as hard as you as an owner. They're just not, okay? I have the exact same discussions, Brandon, and I get into delegation. And I have drawn a line, not to sound cold, but I've drawn a line between can't find good help, effective leadership, effective delegation, because what I'm being told is I can't find good help. Well, sometimes that translates into you're not delegating very well. And I've heard people say, I've told them how to do it. I can delegate. Well, there's a lot more to delegation than telling somebody how to do something. And that's frustrating for me. Just the ability of an owner to trust their team is big. It's really big. And there should be consultants should have whole profit centers around trusting their team and developing that trust. Because if they can do that and learn how to replicate themselves, I've said for decades, the hardest location is the second one.
[01:09:59.370] - JT
You So the second one, you've got to learn how to replicate yourself. Three, four, five, and six are easier because now you've had to trust your team. If you can delegate and trust a team, growth is unlimited. It absolutely is. But to get there, it messes with people. It really does.
[01:10:15.620] - Brandon
Yeah. But from your experience, I mean, that whole from LOI to real cash in a check, you had mentioned a lot the integration or the level of the owners playing in terms of production and contributing to the business obviously plays a big role. But give us some examples of where this comes to light, where it's like, no, that person has not spent the time to create systems and processes and learning to build leaders. The business operates on their back. What happened? What do you have a story that you could share with us at the finish line where it's just like, wow, that's a disappointment.
[01:10:48.290] - JT
Yeah, and I alluded to it earlier. Fair question, Brandon. When you're in a smaller business, let's say sub 5 million in enterprise value and it's an SBA-type deal, that owner is likely wearing 10, 15, 18 10 hats. What the buyer has heard throughout the month or two leading up to an LOI is that that seller is wearing 8 hats, 10 hats, not 15 or 20. And in due diligence, it comes out and usually confirms their suspicions that they're wearing a lot more. Then the question is, is that individual replaceable? What does the business look like without that individual or without their spouse? A lot of successful restoration companies out there with, not to stereotype, but He running production and operations. She running all things office and collections. Very effective teams, right? Everybody's looking out for the money, owners handling a lot of the bulk of material communication. And what does the business look like when those two people or one key person is pulled out of the business? Instantly, it's high risk, right? So you've got to be able to minimize the hats that you're wearing. Now, as the businesses grow, let's say you're 8, 10, 12 million or not, and up, and those buyers, whether you're an industry strategic or...
[01:12:02.890] - JT
You can do a large SBA deal up to about eight million with some Bridge financing, et cetera. But let's say it's PE or industry strategic, and it's eight, nine million and up. Chances are you're going to roll a little equity. Chances are you're not going to retire at the closing table. You're going to put in a year, two or three, as mentioned. And if you're wearing 15 hats, you're going to continue to wear 15 hats for a while. Now, back office is going to pull some things off your plate. They're going to pull some reporting and some KPIs, and some or all of the accounting. There's things that the back office from a buyer can make your life a lot easier. They really do, because they want you to focus on what you're good at and where you can add value. So the larger the business, it's not as critical. The smaller the business, it's highly critical. And I think I mentioned this to one of you over the last year. One of the things that nobody looks at is the tenure of your team. I always ask, how many key employees are there? Let's say it's a company doing 10 million, you're throwing off a million five, two million, nice company.
[01:13:03.660] - JT
And let's talk about the tenure of your team. And let's say you've got five or six key employees. What is their average industry experience? And how many years have they been with you at your company? Well, here's two ends of the spectrum. What if the average industry experience is 15 years, but the average tenure with you is 18 months? That's not great. What if the industry experience is 18 or 20 years, but they've been with you on average 10 or 12 What might that say about their level of leadership, their pay structure, their management philosophy, their ability or not to micromanage, their career paths? You get that tenure crunched to one or two For three years, it opens up a myriad of questions about how that owner works, and buyers dig deep into why that tenure is so short. That conversation never happens. And as consultants, you need to be having that. Not to tell you how to make sausage in your factory. But when you're talking to owners, you've got to be able to have that conversation, and it may lead to pay structures, and incentives, and compensation plans, and the culture, and career paths, and uncomfortable conversations that these owners need to have.
[01:14:16.270] - JT
Because up to that point, it might just be, now we're going to let so and so go. It's easier to do that than rebuild what we're doing. But as a buyer, I need that tenure there.
[01:14:25.560] - Brandon
It's so interesting that you said that because, again, like point back to a conversation we had a couple of weeks ago with Rocky Hensley from One Tom. He was, again, alluding to that pay scale. He's not afraid. He pay more than what the competitors are. That's right. They do a thing where around their shop, they have a jersey for five years and longer. Being employed with the company, you'll get a jersey with your name on it and the things. And then there's 5, 10. There's a series of these jerseys that you get, right? And he said, of a staff of 47, 26 or 27 folks have a jersey on the wall. That's awesome. It's awesome, right? And so what's interesting, think this combo. He pays 20 to 25 % more than his competitors. They tow a very hard line against standards. Non-negotiable. They fire you if you miss two on-call calls. He's had to let somebody go that was there nearly six years. They tow the line. They pay more. And yet their tenure and their culture and their profit margin is higher than the average bear across all measurables in their organization. So to me, and guess what?
[01:15:29.180] - Brandon
He doesn't need to sell Icahn anytime soon. He has zero stress. He said the fact that he often will take 2-3 months off a year where he's gone out of the business, and yet all these successes are happening in the organization. Ultimately, what we're talking about right now is building an exit-ready business. Those are the funnest to run. I think in a lot of ways, he's showing that when you do it, it actually you win across the board. If he wanted to sell tomorrow, he could. They're not going to negotiate him down because his business does not need him. There are systems, process, measurables, tenure. Got all the boxes checked, man. And so whether he keeps it or sells it, he wins either way. I think the message that I want people to hear in our talk is, exit ready, businesses is the playbook. It does not matter if you sell tomorrow or not. It's just fucking more fun to own one, period.
[01:16:22.270] - JT
It gives you a quality of life and a balance that you can't get any other way. And I've had 40-year-olds call me and I've been in this business for 10 years. I don't recognize it anymore. I need out. And I'll say, listen, it's throwing off 500, 800, a million dollars a year to you. What if we reduced your stress? Got you back down to 35, 40 hours a week instead of 70. Would you keep it? Oh, yeah, that'd be great. I'd love to do that. They just don't know how. So sometimes selling is not the only option. Let's get you cleaned up and get your sanity back, then make a decision without all the emotion. Emotion, they make great consultants and bad decision makers. So let's keep emotion where they belong. But don't let them make key decisions for you.
[01:17:05.580] - Brandon
Dude, I love it. I think that's a great place to wrap. I think that we had a chance to get into some of the nitty-gritty that I think not everyone's been talking about and or just serves as a great reminder for the things that are most important for us to spend our time and energy on. JT, obviously, we appreciate you being a guest on the show. If we're directing somebody to then go out and add that third tool in the toolkit and in terms of strategic partners, where do we send them to begin working with you to establish a plan and a program around being exit ready in terms of you give them the advice on what they need to do, man? Where are we sending folks?
[01:17:43.310] - JT
Well, the first step is my cell phone or website in a confidential conversation. People will reach out and some people don't even know where to begin. They'll say, I've never done this before. What should I be asking? Just start talking. Those are great conversations. I love those. So a confidential conversation goes a long ways, and there's no pressure I've said it once. I'll say it again. It's just an education. I want to give you the tools. You want to give them the tools to make good decisions. That's all we're doing here. And everybody wins in the end.
[01:18:09.040] - Brandon
So best way to reach out to you, I'm going to assume DM on LinkedIn, right? You're rocking and rolling on LinkedIn. And the website.
[01:18:16.330] - JT
Exit strategy is 360. It's exit strategy is the words, and then the digits 360. Com. And the cell phone, which you can pass along to people. That's all confidential. I'm a one-horse show. Everything, there's no one else in my office. So it always comes to me. Everything in my world is 100% confidential, and we keep it that way.
[01:18:32.690] - Brandon
That's good. Well, we'll add your contact info into the show notes for those that listened and want to start adding that into the toolkit and building a relationship. And of course, guys, you know what we do. We're the counterpart to what JT is describing. So if you want a battle buddy in the trench, you want an accountability partner to help you build the things out to make your business exit ready and give you all the options at the end of the day, that's what our team is here to do. So thanks for hanging with us. JT, thanks, man. All right. I appreciate you, man. Thanks, man.
[01:18:58.320] - JT
Thanks, Brandon. And thanks, Chris. Take care.
[01:19:02.010] - Brandon
All right, everybody. Hey, thanks for joining us for another episode of Head, Heart, and Boots.
[01:19:06.770] - Chris
And if you're enjoying the show, if you love this episode, please hit follow, formerly known as subscribe, write us a review, or share this episode with a friend. Share it on LinkedIn, share it via text, whatever. It all helps. Thanks for listening.
