How to Build a Business Buyers Actually Want to Buy with Michael Preston

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. Today, I'm very excited to welcome my guest, Michael Preston. Now, Michael is a business broker and M&A advisor with First Choice Business Brokers here in Los Angeles. He represents founder-led companies in the lower middle market, roughly $1 million to $20 million in EBITDA, and he's a 4th-generation entrepreneur with a degree in international business, and he spent more than 25 years working inside businesses to improve their productivity and profitability and has started and run several businesses of his own along the way. He's a Certified Exit Planning Advisor and a licensed California business broker and a Platinum Award winner recognized as a leader in the Los Angeles office for First Choice. What sets Michael apart and what you're going to hear in our conversation today is really his perspective that comes from his journey Education and experience. He was doing business valuations and executive coaching long before he was brokering deals. So he reads a company the way a buyer reads it and where the risk sits, what the multiple is actually pricing into what the business is worth, and what an owner can still change before it's too late to matter. So today he works with owners at the front end of that transactional process, often years ahead of a sale. helping them understand what the business is worth now and what it could be worth and how to make it so. So, Michael, welcome to the show.

Hey, thank you for having me, Mark. I appreciate it. And thank you for the kind introduction.

Absolutely. So, I'm excited about some of the topics that we have planned to talk about. But before we jump in, give our audience a little bit of picture. What are some of the twists and turns of your career that brought you to where you are today?

Yeah, no, I appreciate the question. You mentioned it, I think probably for a lot of people that own businesses, there's a little bit of like it was in the blood. I was a 4th generation entrepreneur, um, had just kind of been around that, uh, my whole life. And, um, you know, kind of the trials, the tribulations, the benefits, like all of that. And, um, early in like, you know, after college, I got into sales and that was really kind of consultative and mobile computing and things along those lines that were really about going in and leveraging all this emerging technology to help you better achieve results. So whether that was customer experience or profitability efficiencies, like those kinds of things. And I stayed on that path for a long time, started working for myself in consulting and business coaching, you know, just recognizing that, you know, you might have been the truck driver that started the truck driving company, but, you know, and you know all about like the logistics side, but business is its own, you know, discipline, it's its own education. And so helping them sort of fill those gaps. And then I saw that, you know, people were looking to put it on the market at some point to kind of get paid for all this time and energy they'd built up, this goodwill. And in that lower middle market space, there just was really sort of a gap. Not a lot of people, a lot of the M&A advisors, and there's good ones out there, but they want the billion-dollar transactions, the $500 million. And it's not uncommon where I've had people come to me with like a $10 million, $15 million business that they cannot find somebody to take On the sale of it. And so recognizing that, kind of feeling like maybe those were my people, that's kind of where I grew up and lived, you know, within my family businesses and my businesses. I kind of moved into that space. And so to your point, like, not only am I, you know, putting them on the market, helping them find a buyer, but if they will come to me early enough, it really is about making sure they're prepared because it's often the biggest, you know, thing they'll ever sell in their life. So much ultimately relies on it. And too often they are spending more time planning a vacation than they are planning, right, like the sale of their business. So that's sort of something I hope to be a catalyst for as they go.

That's awesome. Well, and I know just from, you know, our previous conversations, you spend a lot of your time with both clients and prospects really educating them so they better understand some of the risks and ways to mitigate those risks. And I think you're actually even giving a presentation tomorrow. You and I were chatting about where you're sort of helping some of those business owners to have a shift in mindset as they transition from an operator to a potential seller. Tell us a little bit about kind of some of those topics and what that mindset shift is.

Yeah, as you might imagine, you know, and let's say rightfully so, like business owners are very optimistic and bullish on their own business.

Sure.

You know, they're constantly—

Otherwise they couldn't keep doing it.

Right. I mean, like it's kind of a necessity. Like, you know, they're always in a position where they're trying to, let's say, justify or kind of sell why you would want to work with us and those kinds of things. And so, um, selling your business is, is just different than selling your product or your service. You're selling a different product, quite honestly. You might be making widgets or have the greatest, like, you know, service known to man, but now the, the business as like an entity is an entirely different thing. It's like kind of its own self-contained unit that you have your inputs and your outputs and What does that look like? How reliable are those things? And so, changing that, shifting that mindset just to stop thinking about it like you're positioning, like, why just over your competitor? Like, I tell people often that you're no longer just competing with the people down the street that also sell widgets. You're now selling, competing with everybody that's selling their business. In most cases, there are some people that will love your business because they're just as enthusiastic and passionate about that space as you are. But these days, So many people are looking for solid income streams. They look at it as part of their portfolio. Um, and so changing, shifting that mentality, and then also, you know, starting to think about, like, uh, you know, these things happen without warning a lot of times as to why you need to sell. Um, you mentioned as an exit planning advisor, certified exit planning advisor, um, it's like 50% of all business exits are involuntary, right? Like, there, it's death. We call them the 5 Ds: death, disability, divorce, distress, and disagreement. And these things won't— nobody's going to calendar that. These things will pop up out of nowhere. And so you'll have what your business is valued at, like, at that time, really. And so if you haven't been preparing, you're oftentimes left leaving just a lot on the table that you didn't need to— time and energy and sacrifice you put in that you should be getting paid for.

Yeah, so such a great call-out there on, you know, sort of Everyone exits their business eventually. The question is, will it be on your terms or not? So often, external things force you to sell. And if you haven't done that work to prepare, then you're not really selling on your terms. Whereas, and, you know, also a certified exit planning advisor, and then the Exit Planning Institute world, we talk a lot about You know, exit planning is really just good business planning because you're sort of planning your business to be worth more. And that makes it not only so that you're able to handle some of those external influences that might force you to go to market when you're not prepared, but it also just kind of makes the business more fun to run because all of the things that make a business more valuable also make it easier and more profitable and all of those other things.

Amen. Yeah, I will tell people, you know, business that is built to sell also pays well. It's not just an activity you do for some far-off date. It really is like, if it's better prepared for sale, it's more profitable. To your point, it's often easier to manage, you know, like, because processes are well-defined, you know, the kinks have been worked out or just improving those kinds of things. And so, When I have kind of my coach's role, when I'm talking to them maybe early on, I just want to remind them that, you know, really the only— well, I shouldn't say the only— one of the very few jobs you actually have as an owner is to prepare the business for sale. Right. I mean, like, you can wear other hats in your business. You might be the sales guy, you might be, you know, doing scheduling. There's all sorts of things you might be doing. But really, when you've got that entrepreneur hat on, It's setting conditions for success and preparing for transfer. Those are, you know, and that's things like stock and make sure you have the right people on the bench. And then also like kind of the general manager ready for, you know, that sale. And so if you're not doing that, you're just not putting that hat on. And that's a disservice to the business and those that rely on you and the business, like your family and employees and all those things. I mean, that's the work you really need to be doing.

It'll be fine. So you spend a lot of time At the transaction. And a lot of folks spend a lot of time trying to understand what's happening in that transaction marketplace and understand trends that are impacting how much businesses are valued at and the things that impact that. One of the trends that we've seen is that private equity is moving from just buying big businesses to actually buying smaller, more mainstream businesses. And that private equity sort of buyer brings with it a little more higher level of sophistication and diligence that they do. They're not just checking, you know, does the bank account match the balance statement, but, you know, some of the other aspects of the business. I'm curious, what are some of the trends that you're seeing that are impacting how much businesses are worth, or, you know, maybe hot marketplaces within the space, or other trends that, you know, business owners might think about if they've got a founder exit or even just an investment round or other thing that might be— the valuation of their company might be important in the next 2 to 5 years?

Yeah, it's a good question. You know, and I always try to tell people, like, if you're really going to try to play this particular market, don't bother. Like, first, it doesn't typically move a tremendous amount, right? Like, these things are really based off of fundamentals in a business. I mean, ultimately, you know, we talked about earlier, like, people are looking potentially for something in their portfolio that's got good cash flow, good consistency, you know, sort of low risk. And so that really does not make a difference if you're in e-commerce or you're in, you know, manufacturing or you're in retail. If you can verify and kind of proof out that, you know, your formula, which is all your assets, your goodwill, all that together kind of coming together as it operates, generates you know, a result, also known as profit, free cash flow, those sorts of things, people are interested. Yeah. I would say, you know, the pandemic certainly seemed to shift things. You mentioned private equity. We would not see them anywhere near as often as we do now. My feeling on that was just, of course, there was a lot of uncertainty and risk wrapped around that time. Like, nobody really knew what was going on. And so kind of like your average business, potential business owner, just felt like, you know, too much risk. They took themselves off that field of play. But private equity, for those that aren't familiar, I mean, it's basically I'm giving you my money and you're really tasked with getting me a return. I'm keeping it out of the market or I'm keeping it out of other things so that you can go make money for me. So even when there's a pandemic, you still have like this charge to go do that. And so they started to really kind of look for additional opportunities. As a lot of things dried up, because even people took them off the market. But as they started to come downstream a little bit and see these smaller businesses, they recognized that there was some value in there. They often bring in like that management expertise or other things. And so they come in with, you know, real upside opportunity, but also like a more discerning eye. Like they often do come from bigger businesses with more established processes and systems and So they're number one, sort of used to that and want to see it because that's, I think, part of the DNA of where— what they've seen success be derived from. But of course, like, at the end of the day, like, your numbers, your balance sheet, like, these things are your truth. And so when I go and want to start to really look at the business and get a clear picture, those are the things I'm going to look at. And so a lot of the smaller businesses, like, some things you might want to take into account is there's a good chance that you are, and you don't have to do this. I mean, you would find benefit to having a more micro capability viewpoint of your business in all these areas, but you may not need to do it day to day, but you need to be ready for it when the selling side of it comes. Have the business ready to be able to answer some of these more deeper level questions. Like people wanna know, what is, you know, like customer concentration? What is, you know, are you over-relying on a customer or maybe an employee or a referral source? Or a sales channel? Where are you actually making money? Is it product A, product B, service C? Like, what are your margins? Like, you would think, like you say it out loud and you think like, okay, well, of course that makes a lot of sense. But oftentimes the smaller business owner is, you know, focused on kind of the day-to-day and isn't slicing it up this way where bigger businesses obviously have maybe a little more money to put into people doing this for you so you can do it. So recognizing that that's coming, I think, is really important. Trend-wise, I mean, I don't know if it's a trend, but anything that stabilizes the business, like recurring revenue, contractual revenue obligations, things that just minimize risk ultimately are always helpful. And of course, the subscription model is something that's become more and more prevalent over the last X amount of years. So I'm always letting people know, like, if you can think of some way to generate even some income, first, it's a good You know, hook into your client, but then also it's consistent revenue and you can start to really do a lot with that kind of stability.

Yeah, and it's so interesting that what you described is the sort of shift from kind of, you know, growth at all costs, which when people are operating a business, that's oftentimes the mindset of what do I got to do to grow? And really, you know, the prize is growth, getting more revenue. But then, as you have this sort of mindset shift, as you go into potentially selling or even taking investment, it's less about what's that top-line revenue number and more about, well, how much of that is at risk? And how risky is that revenue? We actually have seen that a business that earns more can be worth less than another business that earns less. But That earning is a lot less risky because it's on a more diverse set of customers or it's on recurring revenue or the things that are sort of less risky and have to be resold every quarter and all of those things. It's so interesting. And the other way that that sort of manifests is when a business sells, That's fundamentally a formula of how much do you generate, whether it's free cash flow or EBITDA or whatever that measure is, times a multiple. And changing that multiple can be so much more powerful than changing that top-line revenue, much less the bottom-line EBITDA. It's so hard for a company to grow by a whole percent, or, you know, a whole turn, 100% growth in top-line revenue. But by making improvements in their process or their sources of revenue, things like that, they could get a whole turn on the multiple. So, a $1 million a year business, instead of being valued at 2x, is now valued at 3x. It would be a lot harder for them to, you know, turn that $1 million into another $2 million than it is to go from 2x to 3x. What are some other examples of ways that you've seen companies sort of make that multiple change in the way that they're valued?

Yeah, it's a great question. And it really kind of gets to that crux of maybe back to like, what is the entrepreneur's job? What is the owner's job? What are those things should they be focusing on? Ultimately, to your point, What's impacting the ultimate value is that multiple. And so, you know, in that, going back to that shifting of perspective, like in the mind of the buyer, what do they perceive, right? And it's always like, they don't necessarily have to be right, but what they care about is what, you know, they're the ones that are going to write the check. That's right. And so you could be right all day as the owner, but if they perceive it one way, we have to, just like any client, right? Like sometimes we think, we forget to think of this person as like our best customer ever, right? I mean, they're going to buy our biggest product ever, and yet we're kind of not treating them often that way and listening to them and thinking like they do so that we can, you know, handle objections, be prepared to like, you know, deliver the kind of value that we want to deliver. So, you know, I would say that, you know, taking that perspective, I mean, you know, we've talked about some of the things like, you know, don't be over-reliant in certain areas. You touched on it earlier about, you know, we would call it key man risk, but having— making sure that you're not overly embedded in the business to the point where you're that Jenga piece that I pull out when you sell, that the whole thing falls apart. You know, those are a couple of areas. But yeah, it's making sure it's transferable. It's making sure, you know, one test that you can take— this one is not as Not adopted as often as I would like, but take an unexpected vacation. Take— leave your business for even 5 days. I mean, you know, tell them the day you're leaving. Don't just disappear like they're worried about you, but tell them the day you're leaving, like, oh, I'll be back on like Wednesday, and go to Cabo or go somewhere where they really can't get to you. And what you'll find is like where the stress points are, where the complaints come from, where the bottlenecks, the, you know, the, the things are. Those are areas you want to work on in your business, right? And Clean that stuff up because those are the things that a buyer is ultimately going to find or going to have questions about. And if you can't really answer it, you're impacting value at the end of the day.

So, I love that example. And I've not heard it sort of said that way before, which is, you know, oftentimes they say the sellability of your company or the attractiveness is measured in, well, how long was your last vacation? But the wrinkle that you added of, and do it without a lot of advance notice, I think is even more compelling.

Well, and it could happen anyway, right? I mean, that's the thing is like, so God forbid something does happen that way, but is your business ready? And then how do you know? I mean, it can be painful, but man, you can learn an awful lot about your business and where you focusing your time and energy can get your greatest return on investment. I mean, it just does. So it should be the sort of thing that you're able to know without doing that, but we rarely do. I mean, it's just a great rubbers meeting the road type of situation.

Well, and you and I were chatting a little before we started. It's cold season. I recently had a cold, and I actually had a client once that told me, like, They had an unexpected fall and broke a leg. It wasn't life-threatening or anything like that, but it was a major inconvenience. And it sort of impacted their ability to show up and do the work in the way that they normally do. And they later told me that that was a real wake-up call of just how much they had let the business become dependent on them because they couldn't say, I'm going to be gone to physical therapy for a couple of hours in the middle of the day on Tuesday every week for the next 6 weeks. Like, that was a real sort of shock to the business. And he was sort of like, I assumed that would be no problem. Like, we have a competent team. I've just trained that team to come back to me and ask questions. And so, that was a real wake-up call for him as he started thinking about really how transferable is this business.

There's a lot of examples like that, you know, where we just, we don't, we don't recognize like how invaluable or how, you know, and it's, I mean, when I really get into some of these things, like kind of back in the coaching days, it's like, you know, it's just, it's ego, right? A lot of that is like, I want to be that person that answers the question. Like, I feel good about that. Nobody else could do it as good as me. And in some instances, that's accurate, but really, like, 60% of 5 people is more than 100%. Of you, right? And so the math can work out that way. But ultimately, you know, even sales, which is a high return on investment activity, is not as valuable to the organization as what the owner can do. Like we talked about earlier, preparing the business for sale. I mean, if you can get like— so the amount of hours you put into something that turns, you know, you in from like a million dollar to a $2 million organization or whatever that is. Can only be done at the top, can't be done when you're meeting with clients. Right? And so new products, new services, all those things require that time. So a lot of times they're just, they're focused in the wrong place and it's helping them understand that, you know, like, I would say it's not a matter of inability, especially these days. There's so much great information out there.

Sure.

When I was doing the coaching, I would tell people, like, I'm really, I'm adjusting paradigms to improve performance. More than anything, like you have to look at it differently. You have to understand where your time is best spent. So these exercises hopefully start to give you like, oh, I, I am the only one that can sell. Okay. Well, that's, that means then all, not only can you not go anywhere really, but now your deal flow is strictly limited to one person.

Yeah.

And that's, that's a problem.

Yeah, for sure. Well, Michael, you're obviously an expert in a lot of super interesting areas and we could Spend all day, but I got to be mindful of your time. But before I let you go, sort of give us the pitch. Who do you work with? What are the benefits they get from working with you?

Yeah, well, first off, appreciate the time. Always enjoy chatting with people. I do know, like, you know, we talked about, you know, I'm in that lower middle market space, really looking for businesses that are doing about $1 million or more in EBITDA, meaning like they're taking profit home in that world. And I know it's been A lot of work, a lot of sacrifice, a lot of effort. You know, a lot of things that have gone into building that business. And so I want to make sure that you're getting the most out of it. I would also say that I've never found a buyer complain about spending a lot of money on a really solid business. Like that equation is always like, you know, make it more stable, more solid, and double the profit. People will happily pay it. So there's there's never really. an instance where you've like outgrown the market where people don't want that, like banks will finance it, those kinds of things. So there's always that opportunity out there for them to do that and being able to help them get to that point. In fact, there's probably more buyers for the bigger businesses than the smaller businesses because smaller typically means more risk. So I'm there to help them understand that. You mentioned up front that, you know, this— you really can't change the value of a business overnight. It's the sort of thing that is going to take a little bit of time for you to make some of these shifts. And so Engaging with me, like, early on, just let me give you some guidance on areas you can focus in on the business, really make that shift. You talk about those multiples, right? So if your business is worth $1 million and you can go up an extra multiple, maybe it's worth $1.5, $2 million, those sorts of things. So there's— the math will tell you that there's never a better return on investment as a business owner than really getting the business ready for sale. And so, yeah, I really help them with that. And then, of course, as we get To that time where they're going to put it on the market, packaging it together, getting on the market, whether that's the advertising, reaching out to, you know, potential buyers that we know are looking for opportunities like the one you represent, but then also running it through the situation of, you know, taking in that offer and transferring, kind of handing the keys over, which can be complex and fraught with a lot of like work and pitfalls. So having the right person kind of guide you through that's really important. You don't want to spend a lot of time and money and energy with, you know, without somebody like myself to just see it fall through. You want to work with somebody that can really help you make sure it happens and that, you know, you're able to move into that next stage of your life confidently and hand off a business that you can be proud of. And that's probably going to be successful for many years to come. And, you know, you're always still kind of a part of. So, yeah, I just, I really enjoy the work. I enjoy being, you know, it's really a nice win-win-win, right? Like where The seller gets to hand off something, that buyer is excited about a new opportunity, and everybody gets to kind of move into the future in a better spot.

That's awesome. And what's the best way to get in touch with you, Michael?

Yeah, thank you. You know, there's a couple of things. So one, I would say there's always mdpbusinesssales.com will take you to my website. And then there's also my phone number. You can always call me directly. You'll either get my assistant. Or my AI assistant, have one of those kind of working. So, his name is Max. So, that's 310-361-5392.

Fantastic. Well, 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 too.

Yes, it's been great. Thank you so much.

All right. Talk to you soon.

Take care.

Thank you. For joining this episode of the B2B Growth Blueprint podcast. We hope you've gained insights to grow your business.

If you enjoyed this discussion, please rate, comment, like on your favorite platform and share to others who will find it useful. Do you know a CEO, founder, or leader at an early-stage B2B services, tech, or SaaS company who would like to be a guest and share their story? Send us a note. Let's schedule a conversation.