How Can You Maximize Your Business Value Before Selling? with Randy Katz Video

Welcome to the B2B Growth Blueprint podcast, where we talk with entrepreneurs, founders, and leaders at B2B services, tech, and SaaS companies to learn the systems and processes they've used to create success for their business. And we'll also learn from marketing and sales experts to provide insights to help you grow your business. I'm your host, Mark Osborne, and the podcast is brought to you by Modern Revenue Strategies and their 10x ROI B2B Growth Guarantee. Schedule a free diagnostic call to learn the fastest path to double your B2B revenues in just 90 days. Hello and welcome to another episode of the B2B Growth Blueprint Podcast. I'm your host, Mark Osborne, and today I'm very excited to welcome my guest, Randy Katz. Now, Randy is the founder and principal of Senesis Advisors, an M&A advisory and business brokerage firm that guides owners of privately held companies through the sale of their businesses, the lower middle market deals often underserved by traditional investment banks. He's a CFA charterholder and has been advising on the lower middle market M&A since 2011, consulting with hundreds of business owners on their exit plans and walking both sellers and acquirers through the transaction process. Before becoming a business intermediary, he spent 7 years on Wall Street as a financial analyst researching and valuing companies with market caps ranging from $100 million to well over a billion. Randy is a past president of the California Association of Business Brokers and an active member of the International Business Brokers Association. He founded Senesis to bring high-end client-focused advisory work to the Main Street business owner. So, Randy, welcome to the show.

Thank you for having me, Mark.

Yeah, I'm excited to get into some of the topics that we've got planned to talk about. But before we do, why don't you give our audience a little bit of background? Like, tell us the story of what brought you from Wall Street to Main Street and all of those twists and turns.

Sure. So, You know, you mentioned it, that my former life, I was a sell-side research analyst and, you know, moved out to New York City to get on the street. Work ultimately brought me to San Francisco, and the industry is great from the perspective that it's financially rewarding and you learn a lot, but it also sucks the life out of you.

Yeah.

And, you know, I knew that I wanted to do something different. I didn't really know what. As a sidestep, you know, my father had his own business as long, you know, my childhood and his, 3 of his siblings had their own businesses. I mean, other family members with their own businesses and To me, it was just normal, it was what you did. And I figured at some point I would start something. It just so happened it was late 2010, back end of the Great Recession. I got laid off in August and was, you know, walking out of the office kind of celebrating, like too hard to look for a job when you're working 70 hours a week. Right. Now I can focus on what's next. And just so happened it was my great aunt's 85th birthday party like a week or two later. And

I

was there. My cousin, who interestingly enough did work as an investment banker as well, had just bought a business.

Okay.

And I thought, well, gosh, I always thought I'd start something. Maybe I could buy something. And so in speaking to my cousin, I started talking to business brokers, M&A advisors with the idea that I might buy a business and pretty quickly realized that when I laid out the criteria for what I wanted to buy, which might be something to leverage my background, something that had a secular growth trend. And of course, we think of business or baby boomers retiring. You think, gosh, there'll be a lot of deals coming to market, financial upside, be a trusted advisor. I realized, gosh, maybe I don't need to buy a business. Maybe I should get into the business of selling companies. So that was late 2010 and then started doing some planning the back half of the year and January 1st, 2011, I launched and started selling privately held companies.

That's super interesting. So, and, you know, a trend that a lot of, you know, other folks, myself included, have noticed, which is, you know, as they say, the silver tsunami or all of the, you know, sort of baby boomers that will be transitioning those businesses to the next generation and certainly something that's reshaping a lot of sort of the economic system in America where so much of the economy is dependent on small businesses and Main Street businesses. And I know that you've really sort of carved a niche for yourself in taking that expertise and that level of rigor and analysis that $100 million, billion-dollar companies use that you perfected there working on Wall Street and bringing that to the lower-middle market. companies that maybe haven't gotten that kind of expertise or guidance in the past and really helping them with that. Tell us a little bit about sort of this idea that some businesses are maybe not big enough for a large investment bank that might run a deal, but they are too big for a broker. What are some of the sort of misses that happen if they rely on advisors that aren't really ready for them? And how do you fill that gap?

Yeah, I mean, I think that a great place to start is just talking about that ecosystem, right? Because you have your traditional investment banks, right? Your Goldmans, your JP Morgans. So when we think of big investment banks, they're not touching anything under $100 million, certainly.

Sure.

And those deals might be small. So you've got your traditional investment banks dealing with very, very large clients. Clients. One step below that, you have your lower middle market investment bankers or M&A advisors. And generally speaking, they're looking at the $10 to $100 million, $20 to $100 million, and the numbers can move, right? Should I call it $10 to $200 million?

Sure.

Generally speaking, that low end of the range is really a function of how big do they need to be to truly be an enterprise-level company, right? That they have enough cash flow that they've been able to reinvest it into a middle layer of management and systems that are necessary for that business to really be around for a long time.

Yeah.

So you don't generally have enough cash flow in the business to develop that infrastructure until you're at 10, 15, 20 million.

Sure.

So you're gonna have your lower middle market guys focused on that space. Totally on the other end of the market, you have your owner-operated business. And, you know, I don't know the current numbers, but there's 25 million plus or minus of those businesses out there. And frankly, a lot of those aren't truly businesses. They might be high-paying jobs that can never sell, but they're still self-employed individuals. Those businesses can do very well. They're very often, you know, one call away from catastrophe.

Right.

The owner loses a big client or a key employee, or maybe it's a family issue and the owner can't put the attention to the business that it needs to drive the business.

Right.

There's a great market for those businesses, right? I mean, hey, if the first American dream is to buy a house, you know, the second's to own their own business. But, you know, the type of buyer for those types of businesses are different. The valuation of those businesses are gonna be dramatically different. And of course, You know, the advisors of who's doing diligence on those deals, whether it's the accounting teams and the attorneys, they're gonna be different. So similarly, the person who is an M&A advisor selling the business is probably gonna be different. I don't enjoy selling bars, restaurants, and cafes. I don't enjoy working with I like advising clients. I like holding their hands, but they also have to have enough level of sophistication to recognize that I want, I need, and my friend said, like, doesn't go very well when you're engaging in these types of deals.

Right.

But I'm also not going to go compete against an investment bank that You know, has a team of 10, 20, 50 people, has greater resources, in some instances greater expertise and tools that I have as well. So I've just found that, you know, where I humbly think that I do my best work is, you know, the $5 to $10 million revenue business that they're just not big enough for sophisticated investment bankers, revenue advisors to work on. But they're real businesses. They might have, you know, multiple channels, whether some is, you know, wholesale, some is retail. They might be manufacturing product, importing product. They might have massive lease agreements, maybe multiple lease agreements. You might need to analyze recurring revenue portions of their business and non-revenue recurring portions of their business. In many instances, we're dealing with very sophisticated buyers. Sometimes it's private equity, family office, strategic buyers. In other instances, we're dealing with individual owner-operator buyers. And so I find that within that space, we can offer very, very high-touch, high-level service that bigger parties, they just don't want to touch it, and smaller parties may not have the expertise. And I can make the economics of the deals work for my own firm as well as for the client. And I can do that for the $1 to $25 million business. You know, I find that a $5 to $10 million is really a great spot for both of us.

Yeah. And so we've talked a little bit about, you know, some of the things that are important for businesses of that range that maybe not everyone thinks of, but that you do. And it really sort of demonstrates a lot of the sort of strategic thinking that you And one of those things that we've talked about is sort of the idea of thinking through not just, well, we're going to put the sign in the yard and we're going to see who drives by and wants to place an offer, but actually thinking through strategically who is the buyer likely to be. And then based on that analysis and coming to that understanding, that shapes some of the things that you do. is sort of either sort of bringing the business to market or preparing it to go to market. Talk to us a little bit about that and how you think through that.

Sure. So, let's start here.

Okay.

So, business owners will come to me and they say they want to sell their business. Now, oftentimes they do. Many times that's not really what they want, right? Okay. Oftentimes they come to me and they say they wanna sell their business. What they're really saying is, I lost my biggest client, my key employee. I'm burnt out. If I can sell for twice as much as the business was worth, I would sell.

Sure.

Right? But that's different than, I would sell for the fair market value of my business. Right. And, you know, I think that many M&A advisors, investment bankers, you know, myself included, I think I'm really good at bringing the high end of fair market value. I'm not gonna make miracles, right? So, you know, let's start with the idea of an owner wants to sell their business. Well, that's the supply side of the equation, right? What's the price at which they're willing to take their business to market? And we need to compare that to what do I think the market will bear for your business, right? So I want to help the owner. I want to help analyze the business for the owner to say, here is what is likely going to happen. And in order to do that, I have to look through the lens of are you going to sell to an individual owner-operator? Who is gonna leave Google and they're gonna get an SBA loan and they're gonna buy themselves a job. And keep in mind, SBA limits are up to $5 million in debt. You can get traditional commercial financing on top of that, plus whatever equity injection that you may have. So you can have that type of buyer for a pretty good-sized deal in the $5-6 million range. You might have that type of buyer. On the other side, you've got deals that are going to be more larger strategic buyers or private equity type buyers. The kinds of valuations they might give for a business can be much larger, but of course the business needs to fit what's attractive for that type of buyer and have enough infrastructure in place. And so if we're helping them value it, we need to understand who is the likely type of buyer, how are they going to value the company? And we can illustrate for the seller what's the demand side of the equation. And step 1 is, do those lines cross? Right? If we can bring the owner the kind of deal that they would want, great timing to go to market. If we can't bring the owner the deal they want, and when I say we, if I don't think they're going to get it with me representing them or anybody else representing them, Then they should probably reset their expectations, and the conversation would then change to: What are you really trying to accomplish? And if you're gonna sell, what is it that you need out of a deal? Is it that you want to retire by a certain age? You want to get the business to a certain value? And you know we can determine. Should you be polishing the edges where you might get 10 or 20% more in a deal? And you can probably do that over the course of 1 to 2 years. Or do you need to make some large investments and changes into the business, which now is going to take much more time, much more risk? You might need this to play out over the course of 3 to 5 years. Are you willing to do those things? You might be able to dramatically change the value, but not without You know, other challenges along the way, and which path are you more interested in taking based upon, you know, your personal needs, your life needs? And those are some big picture discussions we have before guiding a client about what should you do.

That's right. Well, and I also imagine that based on, you know, who, even just if they make the decision to, well, let's polish the edges. Based on who that likely buyer is going to be, you would polish different edges or polish them in different ways based on if you're selling to one type of buyer versus another, right?

I think some of that's true. But, you know, you're gonna start with, you're gonna start with very similar things. Regardless of who that type of buyer is, you know, it's always gonna start with, you know, what's the quality of my accounting?

Right. Are the books really clean?

Yeah. It's gonna be very difficult to maximize your valuation if a buyer doesn't know, you know, how much money that they're going to make or how much money you have made, I should say.

Right.

That's at least a a proxy for what the future might look like. You know, understanding the quality of your contracts, both the duration, the assignability. You know, have I been around for 10 years and I have evergreen contracts and my pricing hasn't been raised in 8 years? And, you know, I've got 7 different types of contracts now with different pricing schemes and mechanisms. And it's just difficult to manage, you know, my client base. I mean, oftentimes you're gonna start with some of the same issues. Yeah. You know, more bigger infrastructure changes, if I'm trying to be enterprise level business, are gonna be different because just by definition, if I'm an enterprise level client, I have to invest in different things than if I'm, you know, an owner operated business.

That's right. So other than clean books and, you know, sort of legal infrastructure. What are some of those things that, you know, make businesses sellable and make them more attractive in this lower middle market section? And have you seen any, you know, sort of change in that over time, or are there, you know, things that are also, you know, likely poison pills or landmines that people aren't thinking about?

So, I mean, let's think about a very simple principle of what drives value, which is a buyer is gonna be thinking about how much money do I make, right? How much money am I going to make? What's the risk to me that that amount is going to change? Certainly, what's the opportunity? But, you know, I don't just want to have ideas of opportunity. I'd love to see actual growth in my numbers.

Right.

That plays into the variability of my income stream, you know, and if it can shut off at some point, there's no residual value. I can make a lot of money in the short term, but if there's no residual value, you know, that can change things. So, you know, you're always gonna be thinking about these risk factors. So, you know, if I'm an owner-operated company, you know, what's the owner dependency on new business? What's the owner dependency on the existing business? Do they have all the relationships with the clients? And if they're gone, the client says, gosh, Mark's not there.

Right.

You know, maybe it's time for me to You know, put out an RFP for new business. So obviously, you know, if I'm transactional in nature, I could have very large years, I could have very skinny years. So the more recurring my business, you know, may be, that just plays into the durability of the income stream. Yeah. So, you know, those are some, I think, Pretty, pretty simple things that we would think about. You know, if we're thinking like an enterprise-level business, we're really looking more into what are the, the, what's the infrastructure and the systems that will allow the business to continue, right? So what's the— actually, this plays quite well into your work, Mark, right? What's my revenue strategy? Right. If I'm relying completely on referral business, that might be great, but you may not know where your next piece of business or deal's coming from. Completely different than if I know how to buy traffic from, you know, using SEM with Google. If I have a social media strategy, an email marketing strategy, a telemarketing strategy, if I know, if I have business intelligence, how do I actually measure my customer acquisition costs, the lifetime value of the customer, who's the most profitable customer, and actually have a strategy that I can layer in to go after them, right? We talked accounting systems. What about my CRM system? What about thinking about a system with my team about how to hire and train appropriately? That plays into, you know, my HR and my culture. Having a good middle layer of management. I need to be thinking about comp structures. So I can keep my employees a long time, advance them through the business. The more that I have this infrastructure, the more I become an enterprise-level client, the greater the durability of my revenue stream and income stream and the higher my multiple is going to be.

Yeah.

Now, not every business owner wants to get there, nor can they get there, right? I mean, it does take Time, expertise, financial investment, and frankly risk on the part of the seller, because now you're taking on more corporate overhead. So as you're making these decisions, you gotta be right. So I'm not suggesting that every business needs to grow into an enterprise-level company. I mean, these are really discussions with the owner about what is your time horizon, your risk tolerance, your needs in the deal, and your needs out of the business. And I've met lots of business owners who are thrilled to make $300,000, $500,000 a year, live the lifestyle they want, not take on excessive risk. And of course, their business will commensurately be worth less at the close, but that's okay. They live a balanced life that makes them happy. And in those situations, I can advise them on how to do the little things around accounting contracts. You have a lease agreement that you're personally guaranteeing. It expires in 3 years. Does a buyer want your lease? Are they going to want to get rid of it? Right. What's their source of capital? Are they going to need to get an SBA loan where they're going to require a 10-year term? And do we want to think about renewing now? Do we renew later? Maybe there's multiple lease agreements. We're thinking about the seller really managing all of their risks, all of the little things that come along with day-to-day decisions, but aligning with the exit plan. Totally different depending on their needs, size of business, and what they want to grow into.

Yeah. Well, that's so interesting to hear you talk about it because so often we hear, you know, business owners who are thinking about, well, I want to, you know, I want to sell for as much as possible. And so I got to my top-line revenue. And that's sort of the vanity metric that they have in mind and that's driving them. But as you described, it's really that relationship to risk that determines the multiple. And on a lower top-line revenue number, a less risky business because they've built some of those systems or because they have sort of grown it in a way that's more sustainable, that less risky business can get a whole turn of the multiple more, which can be worth a lot more than just, you know, sort of driving on that top-line revenue number.

I mean, you know, you'll hear people talk about the quality of the revenue, right? Yeah. Is that revenue going to be recurring or non-recurring revenue?

Yeah.

You know, you and I were talking, we've had multiple occasions where we were talking about, you know, businesses in the trades, you know, and if I'm a plumbing or an HVAC company, is my revenue tied to service business or is it tied to new construction projects? Am I gonna be generating the relationship on my own or am I the subcontractor where they have to win a bid and then pick me to be the sub? And so when we think about quality of revenue, it's gonna be how, you know, how repeatable is that income stream? What's the margin of that piece of revenue? Correct. So I can grow my revenue, but if, you know, I have lower cost, lower gross margin, right, a higher cost of goods for my margin, that could be labor, it could be product cost, but also to service a piece of business. I could have 1,000 small clients that require a ton of service and operating costs that totally different than if I have, you know, 50 very large clients. So there's gonna be a lot that plays into how a buyer evaluates the company. And certainly revenue's gonna be a leading indicator of your profitability, but your profitability is gonna matter a heck of a lot more than just the top line.

That's right. That's right. Well, Randy, you're obviously an expert in a ton of interesting topics, and we could talk all day, but I got to be mindful of your time. But before I let you go, kind of tell us exactly who do you work with and how exactly do you help them? What are the benefits of working with you?

So, you know, my client, I gave you the headline earlier, which is We draw our Venn diagram, right? Middle market investment banks or lower middle market investment banks, traditional business brokers. So if we draw circles, I overlap 15% with the small guys, I overlap 15% with the big guys. Yeah. So I have the expertise to deal with large transactions, but I can make the economics work for that small million or $2 million business. So, and I mentioned to you that Sitting firmly in the middle is that, you know, $2 to $10 million business. And I mentioned, I humbly think that in that $5 to $10 million space, that I don't know how you can find someone with my background and level of expertise that can not only do the work, but there's a soft side of deals, right? Sure. There's the holding the seller's hand and educating them along the way and playing therapist. So I think that in that space, I'm a— in terms of that service model is where someone can say Randy's a great fit. I do a ton of work within service distributions and service distribution and manufacturing. And when we think of service, there's a wide range of service, right? IT services, healthcare services, property management, the trades, accounting services. So pretty wide range of businesses. I'm a generalist by nature. I live in California. So just by nature, most of my business is in California. But, you know, we do business all over. So, you know, I find that, you know, unfortunately people come to me thinking maybe I wanna sell my business now and In a perfect world, they'd probably come to me 3 years ahead of time so I can help them just think through what are ways that you can maximize value in the deal and help them figure out what should the timeline really be. If you go to market, you're really a deal taker. If you do some of this planning, you can set yourself up for success in a deal. So You know, hopefully that gives you a sense of size, sense of industries, a sense of when, you know, when they should come to me.

That's great. And what's the best way to engage with you? How do they reach out, Randy?

So my phone number, which I can, you know, provide now if you'd like, or if you have show notes that you want to provide it there.

Yeah, we'll put it in the show notes.

You know, my direct line, 415- 712-1315. My email address is harder.

Okay.

rkatz@synesis-advisors.com. Excuse me, rkatz@synesis-advisors.com. See, it's even harder. So r-k-a-t-z at s-y-n-e-s-i-s dash a-d-v-i-s-o-r-s dot com. And, you know, when people hire Me, they get me. I have an excellent business partner as well, Matt Cohen. When they hire Matt, they get Matt. So, you know, it's not that I'm pushing someone down and then they, you know, get what they're not expecting. We're a very small boutique firm. I'm gonna, you know, I'm gonna lead 5 deals a year. Matt's probably gonna lead 5 deals a year. So we can really afford to give high touch, high level of service. And you know that we're gonna take on projects that we can close because if we're gonna be low volume, we have to be successful, which means a lot of education for clients, a lot of making sure that they're making the right decision. And if it means that we think they shouldn't go to market, we're gonna tell them they shouldn't go to market. It's not a good use of anybody's time.

Yeah. Certainly aligned incentives there. Well, Randy, thank you so much for taking the time to join us today. I really enjoyed our conversation, learned a lot. I'm sure our audience did as well.

Thank you for having me, Mark. Really enjoyed it.

All right, talk to you soon.

Bye-bye.

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