Read The Transcript Below:

Steven (00:53):

Hello everyone, and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and excited to have a fun conversation this week. Joining me on the podcast is Ted Jenkin, who is the president of Exit Stage Left Advisors and works with all things around business sales. So Ted, welcome to the show.

Ted (01:13):

Yeah, thanks for having me on. Looking forward to a good discussion here today.

Steven (01:17):

Yeah, no, as we record this, the tax summit hasn’t quite happened yet, but as it gets released, we’ll have just finished an incredible summit with lots of great discussions around this topic along with some others, but wanted to make sure we got this on the podcast as well because I talked to so many advisors who themselves are business owners or are building a book of business that has value associated with it. They work with clients who have businesses and it can feel like this big abstract concept that, hey, someday I might sell a business. So Ted, give a little bit of your background as to why anybody should listen to what you have to say on this topic, what makes you the expert, and then let’s talk. Then we will dive into why most valuations are just utter bs.

Ted (01:56):

Yeah, well, I’m a serial entrepreneur as it is, but for the advisors that are watching this or listening to this, I also built a multi-billion dollar practice myself, and I exited myself in 2019. So I had a big eight figure exit and they’re always nice to have. And I also built a social media company where I sold many, many of the advisors that may be watching this. I sold social media services, something called the social media black book. I actually did marketing for more than 2000 financial advisors through my company called Chat Social, and I grew that and I also sold that business as well. So what I ended up doing is I ended up starting an m&a business, really helping financial advisors have an extended m&a arm to their business because most advisors, they basically want to get the business owner’s life insurance and they want their 401k plan. And as you know, most business owners don’t have any liquidity until they start really cash flowing their business. But the biggest amount of money an advisor could bring under management is helping their client sell their business. But yet advisors never think about it. So I come in as that arm to sell the business and then make sure all of those assets and insurance, it boomerang back into the practice.

Steven (03:17):

Yeah, that’s great background. So I love hearing the different stories about things you’ve been involved in. And then I’m starting to know more and more advisors who have worked directly with you to help sell their businesses and have been having great experiences. This is this huge moment in a person’s life because not everyone turns into a serial entrepreneur. For some people, this is the only time they’re going to go through this. For so many people, it’s certainly the first time they’re going to go through it. And I think a big mistake that gets made is people waiting until it’s time to sell to think about what selling looks like, whether that’s understanding what their business is worth, that’s finding someone who can help ’em through the process, understanding what the tax implications of selling a business is going to be. So as you’re listening to this, whether there’s clients that are coming to mind or you’re thinking for your own situation, yeah, I probably need to talk to Ted because I’m ready to sell, or that’s years in the future, it’s still a conversation worth having. So Ted, maybe to kick that off, I mean, what are some of the things you most commonly see business owners having never taken into consideration when it comes time to sell?

Ted (04:15):

Yeah. Well, we can talk about our industry after this, but in general, when you look at any business owner that is going to sell outside of financial services, it’s super important to look at what’s happening to the revenue and EBITDA in the business because in general, it’s very difficult to send a business that’s flat or very difficult to sell a business where the revenue and the EBITDA is trending down. And so a recent relevant example, there are a lot of businesses that did well because of covid and they grew, but now they may be at their peak, right? And they may actually be headed in a different direction or there may be some businesses that are dependent upon the economy. Look at the real estate market. When you think about roofers and plumbers and people that are all in new construction right now, what happens if new construction slows down? So it’s super important, first of all that you look at the trend lines of the business because anybody that buys one of these companies is going to want to continue to see a path that it’s going to grow and double or triple over the next five to seven years. That’s why companies buy them. They don’t buy them because they want to run ’em like a franchise. They buy them because they want to grow. So that’s really, really important. Two, most owners have kept a terrible set of books. And this is true not only in our industry, but it’s true outside of our industry because in the end, what you are selling is sellable EBITDA. Now that may be different than what your tax returns say to the IRS. You might say to the IRS, I only made a million dollars last year. But the truth is when you add back the wife, the kids, the cars, the dues and subscriptions, meals, entertainment, maybe your true EBITDA is 1.4 million, but are you really keeping track of that in a very significant way? Because if you have too much of that, you add back in because you’re trying to beat the IRS, it can be very difficult to sell what is the real EBITDA in the business? Because an owner can say, wait a minute, your tax returns say you made a hundred grand, you’re telling me your business made 2 million. How is that? So it’s super important that you keep a set of books. Three recurring revenue even we know about that in our business, but in all businesses is if it’s not recurring revenue. I like the term re-owe curring revenue, which if you think about it in our business, if you sell an annuity with the 6% commission and then you sell another commission six years later for 6%, that’s kind of reoccurring business, not recurring. But you can say every six years when I’m at a surrender charge, I do a new annuity and there are a lot of people that do that business, but if you have an agency that does marketing as an example, you may be on a project basis, but you can prove that Chick-fil-A use your agency every year the last five years. So having those spreadsheets to prove reoccurring business is very important because if you’re in a business that’s all at one times sales and there’s no path for it to repeat, it can be challenging for somebody to say, is this the kind of business that I want to buy? So that’s just a precursor, but most owners just simply don’t look at all this until the day they’re ready to sell where the truth is a year or two out, a financial advisor could be super accretive to their client, charge more consulting fees, bring in somebody like me to help them with that to help their business owner get ready so they can maximize the multiples of the business. And then finally, negotiation is everything. You can fill the air in the balloon a hundred different ways when you do a deal. Truth is, you’re right. If it’s the only time an owner ever sells their business and they don’t have good representation, are they going to know a where all the buyers are? And two, are they going to know how to fill in the balloon to minimize the taxes they pay the IRS and maximize the cash in their pocket as they extract the best deal?

Steven (08:00):

So much good stuff in there. Ted, there’s a couple of things I want to draw out. I think for a lot of people who’ve never been through a business sale, and I hear this commentary from business owners, from advisors, the only thing they really have to compare to is buying or selling a home, which is not remotely the same thing. You want to sell a house. There’s endless people who will line up to help you do that. You can go to Zillow and pretend like you know what your house is worth. There’s all these different things. Buying and selling a business. It’s its own thing. If you haven’t been through it, absolutely an area where you want someone who can come along like Ted and tell you that, hey, years in advance, not months or days, years in advance, you need to be looking at things like, do I keep clean books and records? And I appreciate that you brought up that. We talked about this as a tax podcast. You talk about tax things all the time. Tax planning is almost never the primary reason we do something. We want to make good business decisions and then figure out the tax efficient way to do it. So having clean books, this is why I see people including advisors get caught on all the time. They’re like, ah, it’s not that big. I’m the only owner. It’s not that big of a deal if I use this as a slush fund, if it’s not real clear, it is a big deal because if you wait until the month before you want to sell your business to try to start cleaning that up, you’re not going to clean it up. Well, when you get to the negotiating table, that’s one more hurdle you’re trying to talk your way around. We don’t want to have to explain things to people. We want to be able to document, Hey, wait, here’s the EBITDA. I love all the different shirts and things you have that talk about EBITDA because it’s such a crucial piece that people miss that we want to be able to support and demonstrate that growth trajectory, that path. We don’t want to have to be constantly putting the asterisk on everything and say, oh, well it says EBITDA of this, but really what I mean was it’s this over here. Having those clean books and records can make all the difference.

Ted (09:44):

Well, first of all, anybody who’s on here, we’ll get my email to you and if you email me, I will send you a, what’s your EBITDA T-shirt? You don’t even have to pay for it, but my commitment to you is if you wear it twice a week, I don’t care if it’s your kid’s baseball game or you wear it out to dinner, you will pick up one client. So I will get you a new client this year if you’re watching this by simply wearing that shirt 100 times over the next year. It is such a calling card because the only people that ask you about it are people that own a business or they’re in and around helping business owners. Now, let me just tell you, for most advisors that the hardest expectation is set for clients are your clients who make sub 1 million in their business. Case in point, they may own a heating and air conditioning company and they make a nice living. They make 400 grand a year. In the owner’s mind, they’re thinking, well, I’d sell this thing for $4 million, but because they have no reality about the multiples of small market companies, a lot of times what they’re going to get for the business is not going to be enough to solely replace the income they’re making from the business. And that can be challenging because that owner may be making 400 grand, somebody might pay them $2 million for the business and they go, gosh, by the time I pay taxes and everything, I’m only going to have 1,000,005. That million five, I can’t make 400 grand a year. This is the reality of the marketplace because I’m not a big fan by the way of business valuations. To me, it’s just like going on Zillow. It’s like, Ooh, my home is worth $2 million. No, it’s not. No, it’s not. Put it on the market that’ll tell you what it’s worth. And the same truth businesses, I also would caution advisors that have clients that own a singular franchise reselling franchises are very difficult because usually the franchisor has a first right of refusal, usually in a franchise system, they don’t want multiples to get out of control. So you’re going to have tamed multiples. And the only way to really make any money in those businesses is to be a multiple franchisee, right? You’ve got to own multiple units in one system, but it’s very difficult to sell to a private equity company because they can’t see a path to make their money back and get out. Meaning if you’re part of a subway, they’re not going to let you take those 10 shops and make ’em TED subway shops. You’re not going to be able to get ’em out of the franchise. So there are a lot of your clients too that may be thinking about buying a business or starting a business and your ability to become more astute as an advisor, not only as to what the entrance is into the business, but helping them think through eight years from now when you exit this, this is going to be a bad idea to start this business. Not that having a coffee and be shop on Main Street doesn’t make sense, but if you’re thinking you’re going to grow it and sell it for millions of dollars, ain’t going to happen. Not going to happen 10 years ago. Ain’t going to happen now. So these are things that advisors consider themselves to be astute, but in the business market, I’ll tell you not as much, and obviously we can assist on both ends of that.

Commercial (12:40):

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Steven (13:01):

Yeah, valuations is always an interesting topic to me. I’ve been a CPA for a long time now. I’ve seen a lot of different valuations on paper and I’m to the point where the only valuations I care about are the ones where value was actually exchanged. I don’t care what model you use, I don’t care where your assumptions are. Sure, it’s neat to know information, but until someone has signed a check or has signed over equity, whatever that consideration is, those are the valuations I care about. And so I definitely care more about what a person’s opinion is, who is actively dealing with those actual types of sales. So that’s why talking to you, Ted about the transactions you are actually seeing the contracts you’re actually signing because there are times where Zillow might get it right, but that’s more because they’re dealing with such a high volume and broken clocks can be right twice a day, right? I mean, that might be a little aggressive towards Zillow.

Ted (13:53):

Well, I’ll give you a case in point that people don’t think about, and this may also be dependent upon where your practice is, but we recently had a client who had a great business up in Fargo, North Dakota, wonderful city, big business doing $7 million in the flooring business of EBITDA challenges. Even companies that really love the business, great margins, super business, could not figure out how they be able to get it grow because of the geography. Thinking about the macro population of what’s going to happen in North Dakota, what’s going to happen in Fargo. And so that kind of buyer isn’t going to be a family office. It isn’t going to be a private equity company because they can’t figure out how to extract a 20% IRR out of the business. It might be somebody locally that wants to take it over, but you’re not going to get the same multiples as you would if you were selling to a bigger entity. So geography matters in these things. Like I said, things that are very cyclically tied to the economy matter. And the key word I hear today for advisors, they should remember this, all these companies love businesses that are mission critical. I never like using the words recession proof because I’m not sure anything’s recession proof, but I recently took to market a sanitation company, a waste management company. They love that business because good times are bad times. You’re not going to not take out your trash. I listed a pest control company. People love pest control because people change their pest control as often as they change their financial advisors. It happens once every 10, 20 years, great business, but if you’re in the roofing business, more challenging if the business got built solely because you’re dealing with builders that are building new construction in your area. It may look great on pen and paper, but to sell it, what are you selling? If new buildings slows down, you got to a real problem. Those are the kinds of things that are good to be thinking about.

Steven (15:49):

Ted, we’ve brought up Zillow a couple times, which brings up real estate. One of the questions that I get from people who haven’t been through this process before, and it’s similar to with you’ll hear people endlessly complain of, well, what am I paying my real estate agent for? So talk a little bit about, we’ve alluded to the fact that you’re obviously a business broker. I know several people who have used you and love the experience, but talk about Ted, how do you earn your compensation?

Ted (16:12):

Well, to answer your first question, I don’t know a lot of times why you would pay a real estate agent unless they could really add value. And in fact, look at the laws on how they’ve changed on the buyer’s agent side. Now, recently here, legislation’s passed because it’s like, why am I paying 6% if I found the house myself and the seller maybe should make three, but not six. It doesn’t make any sense. I’ve always thought what an agent should be doing is helping me figure out how to maximize the value of your home. Often what you find from agents is they either beat you down on price if you’re selling it or they want you to pay more. If you’re buying it, it’s hysterical. So we are only success fee based. I take on a case, I charge no consulting fees, no hourly fees. I charge an exit fee and say on average that exit fee is 4 to 6%. It can be higher if the business is smaller, but we’ll typically average in that range. And there’s a lot of work that goes into that. We’ve got to find all the buyers. We’ve got to build the confidential information memorandums. We’ve got to do an internal quality of earnings reports because all these companies are going to look at that. Then we’ve got to run all the meetings. We’ve got to negotiate the deals. We generally have to fly people into the town or city. It’s a year process to sell a legitimate million dollar EBITDA business. It’s going to take a year. And so we bear all the risks that if it doesn’t happen, we don’t make any money. What I can tell you is I’m batting a thousand and getting owners multiple offers. I’ve never had a case where I haven’t gotten them multiple offers. And our average right now has been 38% above what the owners asked for asking price. So we feel that we’ve got a tremendous track record and we’re industry agnostic. What we don’t do is sell businesses below a million of EBITDA. I can’t sell your clients ice cream shop in the middle of Main Street. It probably makes 90 grand. And there are companies that do that. I’m primarily sitting that founder led a million of EBITDA to 20 million of EBITDA space. We are masters of that above 20 million too much. There’s either a cap stack of investors, there are investment bankers, but a $5 million EBITDA founder-led company, family-owned business, we crush that all day long.

Steven (18:33):

I always love it when people can talk about who they don’t serve because anybody who comes to me and says, Hey, they’re a great fit for everyone. I’m calling BS in a move it.

Ted (18:41):

No, you know guy’s got a laundromat in the middle of town, a dry cleaning, not me. I got referred to a restaurant the other day. I went to see the guy. He’s like, he is an Irish pub. He makes 300 grand a year. And I go, this is a great business. It’s not for me to sell, but it’s a great business. He goes, what do you think I can get for this? And I go, well, first of all, whatever the market’s willing to pay. But when I told him probably a three X on EBITDA, he goes Only 900 grand? And I go, you got nothing here. There’s nothing recurring, right? You got a bar. And so people have these visions of grandeur sometimes about what their business is really worth. Let me tell you, the hottest sector right now of all sectors, financial advisors, neck and neck with that, veterinarians. Yeah, veterinarians, the multiples for financial advisors and veterinarians dwarf other industries, leave tech out of it. Tech. Super weird. But most companies that are reasonable size will trade mid-single digits.

Steven (19:42):

Yeah. Well, it’s certainly not the accounting industry. I know that, that we’re not pushing CPA firms are not pushing the multiples higher for anybody.

Ted (19:49):

A tough one.

Steven (19:50):

Yeah, that’s a tough one. But yeah, I’m talking in fact, Ted, and that’s how you and I originally got connected was because some article had come out about a deal you had helped do and someone that I may or may not be related to, raised their hand and said, well, that’s total bs. This Ted guy can’t possibly know what he’s talking about. And since then, we’ve very much learned that you do in fact know what you’re talking about when it comes to this.

Ted (20:12):

Yeah, I want to just mention on here because I know you’re a tax guy.

Steven (20:15):

Yeah, yeah, please.

Ted (20:16):

And I know a lot of advisors claim that they do tax planning for their clients, but it’s super important that you get in front of the bus and knowing when your client’s going to sell. Far too often, even when I was an advisor, your clients don’t see you being in the m&a business. So they hire a broker, the broker gets really tight with them, and sometimes you get cut out of the money because it ends up at Morgan Stanley or UBS or wherever it is because of all the banking, et cetera. But more importantly, the kind of tax planning that you do pre LOI and what you can do post LOI matter. Because the way that NewCo gets structured, or if they do an reorg, you may say, I want to set up a CRU for my client. But some of those things like that have to be done pre LOI and not post LOI and certainly can’t be done post transaction. So this is why what we’re doing, it’s like if you want to think about bringing in big assets, look, you can do dinner seminars all day long. You can throw client appreciation events and hope one of your clients bring some millionaire and stuff like that. But you have business owners in your client base already when it makes sense to say to them, look, the day that you’re ready to go or shop the market, we’ve an extended m and a firm and we can help you sell that business. And that way, it’s all done in-house, and you can sit on every damn appointment with me if you want. You can learn what we’re doing. It is super, super interesting first of all. But then you can control the flow of your own AUM. Listen, I wish I had done more of this when I owned oxygen. I really do. There are a few times my own owners escaped me. It wasn’t what I did. I didn’t even really think about it. I thought, yeah, I got the defined benefit plan. I got the 401k, I got some assets, I got buy sell agreements, I got life insurance. But the real money when they sell, if you’re not there in the beginning, you won’t be there at the end.

Steven (22:06):

That’s such a great point. If you’re not there at the beginning, you won’t be there in the end. And especially for people listening to this podcast, I mean, there’s already a huge emphasis on how else can I help be part of my client’s financial life. That’s why the interest in tax planning and coordinating with CPAs for tax preparation, but like you said, I mean for non-business owners, taxes might be the single biggest expense of their life. And that might still be the case for business owners, but business owners have this added wrinkle where, and for most of ’em, it should be an exciting wrinkle. At some point they’re going to have an exit and either we talked about that early and often and it had a good plan for it, and the advisor keeps that seat at the table and helps make sure that not just the exit goes well, but what happens before and after goes well, or you sit back and don’t say anything and cross your fingers and hope for the best. And that seems like a losing strategy to me.

Ted (22:54):

And I think what advisors wouldn’t track to begin with, but we do, is that you’ve got to follow the money. All these companies that are out there, many of them that buy businesses, they raise capital. Some of you may invest in these private equity companies that are raising capital when they raise the capital. I’m not saying they’re like a drunken sailor, but to achieve a 20 to 25% IRR for their clients, they’ve got to deploy the capital to work. And so sometimes a deal isn’t necessarily just about the business, it’s about what money is chasing. And so people think interest rates are the only thing that drive price, but also capital flow drives price as well. If I’m an aggregator of HVAC companies and I just got a slug of 200 million, I could be a little bit more aggressive on the multiple because I want to get the money working for me now than four years into the fund. I can’t make that money. So we track all these things now because selling a business isn’t just about the business, it’s also about the market as well.

Steven (23:57):

Ted, I want to make sure we didn’t completely skip over earlier when you said that you would send people T-shirts if they reach out to us, so advisors at RTS Tax, but we don’t take this beyond a T-shirt. I would love to see more of those shirts at conferences. So obviously someone who currently, whether it’s the advisor themself that knows that they are thinking about selling or that’s something they need help with in the near term, or they have clients who are in that boat. I mean, who else should be thinking about, I mean, what are other indications? Hey, it’s time for me to reach out to someone like Ted and start these conversations. You probably don’t want to talk to somebody 10 years before they want to sell or maybe you do. Who should be reaching out to you?

Ted (24:36):

Here’s what’s interesting about this. I say this being nice. I’m being nice. Now, if you’re an advisor, do you think you can do math? And I know that the logical answer is yes, but it’s a more convoluted equation. And I say it this way, most advisors think about selling when they’re near the end of their life. I’m 65, my kids aren’t coming in the business. Or maybe they are, but I’m thinking about getting out. But if you’re 55 and you’re making a million dollars a year and you’re looking at your own tax planning and accretive wealth, are you better off making a million a year at ordinary income for the next 10 years till you’re 65 or are you better off that if somebody wrote you a check today and you netted $10 million to have that 10 million at the bank, you got paid to run the practice and part of that 10 million was in a stock that could grow faster than the stock of your company. Here’s what advisors still don’t understand In our industry, if you look at the stock in your own company and you compared it versus the stock of the top hundred RIAs in the business whose stock is going to grow faster, now, I’m not saying you have to be with one of the top hundred RIAs in the business, but what happens is the bigger a firm gets, the higher the multiple on EBITDA is as an acquirer would buy you in the industry, which means somebody who does 500,000 of revenue, they might sell it to seven x. If you’re doing 2 million of revenue, you might be able to get an 11 x on EBITDA. But if you were doing 200 million of revenue, you might be at a 20 x on EBITDA. The point of it is, is that every advisor thinks they’re going to lose control when they sell a minority, or they sell all together. And nothing could be further from the truth. What you should be thinking about is the glide path that’s best for the kind of business that you’re running, but also is most accretive for you as a business owner. And advisors just aren’t trained to think that way, right? We’re block and tackle. Go acquire clients, do a financial plan, invest some money, segment my clients, serve them, rinse, repeat, rinse, repeat. I’ll get referrals. But you got to start thinking about whether are you an advisor or are you a owner? And if you put the business owner hat on, you might think more accretively about you’re spending all day. My point is helping other people build their net worth. Isn’t it smart for you to sit down and say, what’s the best way to build my net worth? Or are you going to be the cobblers kids that have no shoes, which are a lot of financial advisors by the way, because they don’t think about how to maximize the value of their business.

Steven (27:08):

Ted, I really appreciate that. So it’s such helpful context for how advisors should be thinking about this. And with that advisors@rts.tax that’s where you can reach out either both to get your shirt and for us to get you connected with Ted so that you can take this conversation we’ve had, which has been great. I really appreciate your time, Ted, but obviously this is a 30 minute conversation at a really high level. If you want to know how this applies to your specific situation, whether you’re in Fargo, North Dakota or in somewhere else geographically, time to reach out and get connected. So advisors@rts.tax , let us know that you listen to the episode with Ted. We’ll get you connected. We’ll get you a shirt. We’ll make sure that you can learn how to make sure that you don’t end up like the cobblers kids that you are taking care of yourself as well. So Ted, thank you so much for being here. Thanks for all the stuff that you’ve been helping us do recently. We love the conversations, love everything that you’ve got going on.

Ted (27:55):

Thanks so much. Wear that what your EBITDA shirt a hundred times during the year, you’ll pick up a new client.

Steven (28:00):

Love it. For everyone listening, thanks for being here. And until next time, good luck out there. And remember to tip your server, not the IRS.