What Challenges Make Business Valuation So Complex with Kresimir Peharda

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, Kresimir Paharda. So he is a battle-tested dealmaker with over 30 years helping business owners sell, buy, and value companies with over 60 closed transactions totaling more than $2 billion in value. He brings a rare dual perspective. He's a former M&A attorney turned business broker. That combination gives his clients legal, financial, and strategic firepower that most sellers never really have access to. His focus is on lower-middle-market companies doing $3 to $50 million in annual revenue, and his clients range from professional service firms to technology, healthcare, food distribution, and real estate. He's also founded and grown 3 businesses of his own, which means he doesn't just advise founders, he's been in their seat. He's known for educating sellers so they don't walk into the sale feeling like a high school quarterback facing an NFL linebacker. He's committed to getting owners the best possible deal, protecting them from unqualified buyers, and making the right deals happen. He holds a BA from Harvard and a JD from Pepperdine, and he is, in his own words, the adult in the room when it's time to sell a business. So, Kreshmir, welcome to the show.

Thanks, Mark. Thanks for having me.

Yeah, so you obviously have an interesting path and you've done a lot of things along the way. Why don't you give our audience a little bit of background of Sort of the path that you took and how it led you to where you are today?

Well, I think it was more of a zigzag than a straight line. So coming out of college, I wasn't sure exactly what I wanted to do. I had a sense that I had an interest in the law, but I also wanted to be involved in business. So I went into the transactional world of basically corporate finance. Corporate law, M&A law, and securities, and thought that I would eventually turn that into a more business-focused role, which I did when I went into the startups that I was involved in. So I spent, well, more than a decade in the private legal profession working for various law firms, and then Thereafter, I started looking at businesses to found, and that's when I got involved in one of my earliest startups, which was a real estate fund for real estate in Croatia.

Oh, interesting. And is that— did you spend time in Croatia or were you—

I did. Yeah, I traveled back and forth, spent a lot of time in London, spent a lot of time in the ground. And what we were doing is basically Being kind of the middlemen between local real estate developers and real estate investors who want to get exposure to real estate in Croatia and some of the countries that at the time were not yet in the EU but had some promising sort of indicators in terms of profitability and potential for growth.

Wow. Navigating those international lines certainly leads to a lot of complexity. Tell us a little more about what you're focused on today.

Yeah. So today I work with owners of privately owned businesses, usually from a couple million all the way up to $50 million. But the average is usually below about $15 million. And those are people looking to exit for a variety of reasons, whether it's health, whether it's retirement fatigue, or in the case of some younger owners, just wanting to pursue other things professionally, get into other businesses and other industries.

Yeah. So you and I were in a networking group where we were talking about, you know, sort of like annual planning. And it was end of year at the time. This will probably air sort of more beginning of the year. But as, you know, folks think about, you know, sort of that end of year or start of year or kind of strategic advice, you had some really interesting perspectives there on things that you see are more important than sort of an end-of-the-year wrap-up or even a start-of-the-year kickstart. Share a little bit of that advice with our audience.

Yeah, I mean, I, I think it's understandable, but I think, um, too many owners are focused just on the budget for next year, uh, the next quarter, the next 6 months, whatever it is, the next, uh, you know, the next cycle, whatever that is, assuming they're doing planning. And the issue with that is you never look up and say, okay, what's the transition when I, when I get tired, when I get sick, when I get bored, whatever it is, you never ask yourself, okay, is this a business I can hand off to my children? Is this a business I'm going to sell? Do I have employees that could take over the business? Am I just going to shut it down? There's a surprising number of people in their 70s and 80s who just decide they want to run their businesses till they pass, and that's their vision. Well, and that's okay. It's just the point is to really think about that above and beyond just the next planning cycle, the next budget cycle, because it does take time to get yourself in a position to execute on those choices once you make them.

Yeah. Well, and you make choices in your business every day that can have different impacts depending upon which of those kind of exit strategies you have in mind. How do you— what are some simple ways that business owners can start to think about, well, what really do I want? Do I want to just kind of run this forever? Or if I was going to sell, who would I sell it to? Are there some simple ways that they can kind of start to To think about that, that it isn't, you know, a, you know, giant exercise?

Yeah, well, I mean, the simple ways are, I guess, combination of looking inward at their company and understanding, okay, is this something that children could take over? Is there anybody interested in the family that's shown interest? Anybody working in the business in the family? So that's clearly one way. In terms of, you know, selling it, That would probably involve a discussion with an M&A advisor, business broker to get some indication of value, you know, just a rough guide. And then taking that information. And of course, I should say also, if it's a bigger organization with employees, you know, considering are there qualified employees that could take over and what would that process look like? That usually involves setting up an ESOP and creating a transition period so that the so that the ownership slowly goes out to the employees. And then the other piece of that is once there's some data, is talking to a wealth advisor who can look at the owner's current lifestyle and try to match that with potentially the value or the sort of the income stream they'd be getting by choosing whatever path they're choosing. And then that would create a rough picture of what might make sense.

So we hear, you know, a lot that people sort of have a mistaken perception of what their business is worth. And that comes from, you know, a lot of different sources of misinformation. Tell us a little bit about what you see there and maybe peel back a little bit of that mystery for some of our audience who's like, I just sort of always assumed it would be worth 10 times my cash flow because that's what I hear people get. How do you really go about that kind of valuation conversation and removing some of that mystery?

Yeah. So obviously, there is a lot of misunderstanding about valuation. I mean, ultimately, valuation is about what a reasonable buyer is going to be willing to pay for that business.

Yeah.

And that's tricky in the private world because nobody has an established market.

Yeah.

There's no trading stock. There's no financial information for the last 5 or 10 years that you can easily access. So it's a lot harder to pin down a number, but clearly that has to be tied to some sort of objective reality. What I would say is there are clearly objective data— revenues, net income, sellers' discretionary earnings, EBITDA, earnings before interest, taxes, and amortization— and multiples of those. And then there are more subjective criteria, such as the reputation of the business. in the community, the kind of competitive moat it has, the, the competition or lack of competition, the, the systems, the procedures, the technology that's in place. So there are a variety of kind of subjective and objective criteria that need to get measured, and those have to be put into the correct sort of industry category. Because as an example, You know, certain industries, whether it's a SaaS or technology company or investment advisors, will have very high multiples based on either revenues or EBITDA. But the flip side is other businesses, even in professional services, will have significantly lower multiples based on revenues or earnings. So you can't compare those 2 businesses, even if they're doing the same sort of numbers, the valuation would be vastly different for those 2. And people don't take that into account. And that's, it's not me saying that, those are sort of industry standards.

Yeah. Well, you hit on something there that I think is worth kind of double-clicking into a little bit more, which is, you know, part of what goes into the valuation is the processes and systems that they have. And one of the things that I've seen pretty frequently is without systems and processes, the business just doesn't even appear to be transferable. And without transferability, there's sort of no potential for sale at all. And I've heard this startling statistic that 70% of businesses that try to sell never do, which means they just have to close the doors and sell it off for parts. What are some, you know, ways that you've helped businesses sort of recognize that lack of transferability, you know, in their business or even sort of adapt to that?

Well, I think, well, there's a good reason why they don't sell. Partly they're not sellable on their own. And secondly, they don't work with an advisor of any kind. They don't have a wealth advisor. They don't have a good tax CPA. They don't have an M&A attorney. They don't, you know, so they don't have a deal team that can help them through a process. That's part of it. But I would say the other thing is, you know, many of these businesses could sell at some price, but they may not be able to sell as a business. They may be able to sell as something less. So a client list or a customer list or customers. Which of course implies a much lower valuation. But there's probably a way to do it if there's alignment between the advisor, the owner, and the buyer. So there is a way forward. It's just that then the owner, given that assumption, has to be willing to take a really big haircut. And in many cases, they're not because they've run the business for such a long time and it's their baby. And they don't want to hear a buyer is not going to, you know, be willing to pay for this as a business, but will only take your customers.

That's interesting. And you raise such a good point about having that team of advisors, but also about just sort of the creativity that comes from having that team of advisors. I was chatting with someone the other day and they specialize in, you know, sort of real estate assets that businesses own. And they have this wealth of knowledge and information about different ways to get the most value out of real estate, whether you own it or rent it or control it, or, you know, it's in some way part of your business. And it was so interesting just to see how many more levers to turn of creating value existed by having an expert there that could bring that. Are there other, you know, sort of interesting things? You see so many deals, you know, from, you know, a really interesting both legal background as well as that, you know, sort of M&A and brokerage background. Are there other sort of unexpected levers? You talked about sort of the value of that client list or maybe the, you know, the value of maybe people working within businesses. There's oftentimes that sort of acquihire that you hear about. What are other sort of levers of value that you see companies overlook or not even think about?

Well, sometimes, especially in Southern California and California, there's a real estate component. So there are owners who perhaps bought a building and are tenants in their own building. Maybe they have other tenants. A lot of times for those businesses, the real estate is worth much more than the business. I had that issue come up. You know, come up a few years ago, and it's it's a bizarre but but you know interesting thing. And so, to your point, what that means is well perhaps not only do you need you know an M&A advisor broker, but you need a real estate expert to come in and say okay. So you're you're trying to sell the business, but you have this real estate, and your real estate is worth more than the business. So how do we you know what's the right combination? How do we do this in a way that makes sense? You know, is there is there a sale lease? Like, what is, what is the right formula? So it's, it is about getting good advice from a variety of professionals when it's not completely obvious what the right way forward is in terms of maximizing the value of what the owner has.

Yeah. Well, and you and I were chatting about, you know, what does readiness mean? And then you had this interesting you know, sort of perspective that it's less about documents and more about sort of decisions and trying to, you know, sort of move through that. And I know a lot of, you know, sort of operators, owners, founders, they're like, oh, it's such a, you know, it's more of a sort of, you know, documentation hell of, you know, getting all my financials in place and, you know, showing all of these things, whereas you have a perspective that it's It's less about that and more about kind of making decisions about where they want to go. Talk to us a little bit about that and sort of help us shift that mindset.

Yeah, I mean, of course, you know, any sales process is going to be document intensive because the buyer is not going to buy on faith, right? They need proof of all those things, of your leases, of your customers, of the revenues, your tax returns, and all of that. But it's, it's, it's, I mean, it starts with really the, the commitment to a sales process, and that may include, you know, an alignment as to realistic market valuation. Once I think the owner's there, then all the other things are easier, because the reality is, if you haven't done documentation for 5 or 10 years, You're not going to fix that in a 3 to 6, 9-month process.

That's right.

You're going to have to patch things together as best as you can. But the point I think that resonates with me is having that commitment to sell and go through the process and understanding what that means, which for most of these owners means having 2 jobs, running their business and also running a sales process, which frequently is overlooked. You know, but owners that do get into it realize, wow, this is a lot to take on. I'm running my business, talking to employees, but I'm also talking to my advisor. I'm talking to the buyer, other advisors. I'm providing documents. I'm asking questions. I'm having meetings. So it maybe doesn't double the workload, but probably close to for a lot of owners. And so that's why that initial decision, that commitment to sell and Understanding that requirement of all the work that goes into the process is so important.

And also why advisors sort of earn their keep in shepherding businesses through these times. You also talk a little bit about though that it doesn't have to be so overwhelming from the perspective of got to lay out everything that I got to solve. forever to be ready to sell. And instead, it can be more of kind of mini preparation rather than this giant roadmap. Talk to us a little bit about how you think about that.

Yeah, well, I think that starts with talking to advisors and getting some input, third-party input on the business. So the input might be, you know, you have too much client concentration. Well, so an owner could spend some time trying to bring in, you know, more clients, diversifying the client base. That would be a pretty big fix.

Yeah.

You know, the other things that might come in were things like you need to increase spending in a couple of categories to to be in line with kind of the industry standard and to see if you get a return on that, you know, or your costs in this area are too high. You need to lower them to be closer to kind of industry standards. But the only way you get into that and have those discussions and have those mini projects is you talk to an advisor, you know, typically a business broker, you know, an M&A advisor, could be an investment banker for bigger businesses. So you need that outside objective take on your business to give you some homework so you can do these projects and work on them and, you know, then come back to the table. And the reality is that a lot of owners are going to say, oh, these are 5 projects, I can't do them all.

Right.

I'll do maybe 1 or 2, and that's fine. But, you know, then, then that owner has to accept that. Okay, well, you didn't do all the work you could have or should have to get that price that you really wanted. So you're going to have to accept that. You're going to have to accept a slightly lower price because you weren't able to do that work.

Yeah. Well, and also it's even prioritizing which of those projects to do where an advisor can bring so much value. And we There's this great story of, you know, this roofing company that had a, you know, very thriving, profitable business. Um, but, you know, it's a roof, it lasts for 10 years. And so they do it once and then they kind of can't go back to their customers. Uh, so there's not a lot of recurring revenue, which puts a lot of risk on the new buyer of, man, I got to keep selling new roofing contracts in order to make any money. And, you know, they sort of saw through the process of, you know, preparing for exit that, wow, just a little bit of recurring revenue would make us look so much better than all of the other roofing businesses that are thinking about selling at this time and really elevate us in the marketplace. We've got all the ladders. So they added on and did a slight change to their business model of instead of a you know, a new roof for $10,000, and then I don't see you for 10 years. How about we do the new roof for $800, and then you sign a 5-year contract where we'll clean your gutters and windows every, every 3 months for you, maybe put up Christmas lights or, you know, whatever it might be. That recurring revenue gave them a whole extra turn in the valuation of their business. So their $5 million a year business Turned, you know, at, you know, sort of a one-turn, uh, one-time multiple at, you know, $6 million, you know, at a two-turn multiple, that's a $10 million, uh, business now. So a $5 million, you know, growth opportunity unlocked just through thinking differently about how they're already running their business today. Yep.

Yep. Yeah.

But those types of, a lot of folks, yeah, again, are so deep in running their business. They can't see that forest, but bringing in an outside advisor really gives them insight to that. Yeah.

I mean, one of the things that is very common, especially for the smaller businesses, is having somebody stay behind when the owner leaves. Yeah, that's a common problem you see all the time because buyers rightfully get nervous. They say, okay, well, I like your business, looks good. But if you leave, who's there to help in the transition?

Yeah.

After you're gone, you know, who knows the clients? Who knows the work? Who knows the relationship? Who can help? Because that's a risk. And so I think one of the things that's important for owners to understand is, to the extent possible, at times you do have to put yourself into the sort of mind of the buyer, right? Because they're coming into something that they feel like is all risk. And so the advisors and the sellers have to de-risk the transaction for them. And one of the ways you can do that is to have a, you know, right-hand person, GM, whatever the term is, who stays on with the business once the owner leaves, because that's, that's the anchor that will provide comfort to a buyer. That things won't just fall apart once, once the training period of 6 weeks, 8 weeks, 12 weeks, whatever it is, uh, you know, expires.

Well, and so many, you know, business deals have some sort of earnout associated with them, and so there's a lot of value in that. And not only that, just from a purely emotional perspective, most business owners don't want, want to see their new owner drive it into the ground or Let the wheels come off of it. They want to see it thrive and be successful, both for the employees that they built relationships with, with the customers they built relationships with. They want to see it grow and thrive.

No, absolutely. And it does help having a GM right-hand person helps in that space as well because it's more likely for things to be stable once the owner leaves because there's somebody who has history. And so can continue doing hopefully what was working well and maybe can help improve things going forward. So that will also help the seller in an earnout situation because it's more likely that things will perform more or less, you know, in the same way unless we have like a COVID, you know, or, you know, some black swan.

Yeah.

In which case, you know, who knows? But in more normal times, yes, extremely helpful to have that person in place.

Well, Kreshmir, you're obviously an expert in a lot of interesting topics and we could spend all day talking about them, but I gotta be mindful of your time. But before I let you go, tell our audience a little bit about like, who do you work with really and how exactly do you help them?

Yeah, so it's owners of lower middle market businesses, usually revenues with at least a couple million. I do go below that in areas of special focus, and those would be professional service areas. That would be accounting firms, bookkeeping firms, physician practices, and dental practices. So there's a lot of interest in those spaces. A lot of buyers are active. It's just matching the two is not always so easy. It really is a kind of business dating. To get those people together.

Yeah. Well, and for folks that are listening, what's the best way for them to get in touch?

The best way to get in touch is email. So my first initial K and then Peharda, P-E-H-A-R-D-A, at bizx.net. Awesome.

Well, Krushmir, thank you so much for taking the time to join us today. I really enjoyed the conversation. I'm sure our audience got a lot out of it.

Thanks, thanks. It's been my pleasure. Yeah, it was fun.

All right, see you soon. 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 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.