Wrong Business Broker = 50% Loss

Business brain, episode 503 for Wednesday, November 22, 2023. Greetings, folks and welcome to Business Brain, the show where we take an idea or four, we crunch it, we dissect it, we analyze it, we squeeze it, we look at it such that we are each tuning our business brains together so that we're all living those charmed lives here. Living my charmed life in Durham, New Hampshire, the day before Thanksgiving.

I'm Dave Hamilton and this is Shanna Jean. Come to you from the Sierras on the Starlink Rocket Network today. So we'll see how this works out. Dave.

Yeah, I have my. Based on our pre show conversation, I'm eager to see what's about to happen. I'm eager to see if anyone other than you or me ever hears this conversation, AKA will this be a successful podcast episode. But if you're hearing this, folks, the answer is yes. Speaking of successful podcast episodes, we will this. I believe this is the only one we're doing this week. We reserve the right to change our minds and release one on Friday. But I don't think we're going to on Black Friday. I agree.

We'll take Black. Yeah, we'll take Black Friday off. I think it's a great idea. Yeah, yeah, yeah, that's good. But hey, so while we're here, I heard the really I listened to this other great podcast called how to Take over the World and they feature famous individuals and then they tie their lives back into kind of a business sense with lessons, which is great. And I just recently listened to an episode or two about Ted Turner. Ted Turner's dad was named Ed. Ed Turner. And one of the things that happened to him is kind of when he got everything he wanted, he kind of freaked out and unfortunately wound up killing himself after that. But one of the things he said to Ted, which I thought was great, was but I do think he got one thing wrong is it set your goals higher than you can ever achieve them in your lifetime. Because once you achieve them, then what? And it's, it's a powerful piece of advice because you're, you're especially like kind of the stage I'm in my life, I see a lot of people or a number of people, I shouldn't say a lot close to this. They're like, okay, my, my work careers changing or winding down and now what? You know, and. But I lean into this concept of rather than setting goals like that is like we talk about on the show, systems, right? And adjusting those systems over, over time instead of hitting the wall, you've either achieved it or you're in this failure state that you never achieved it. But with systems, you're going to keep adjusting over time, which I think is just a great idea.

I, I've always loved the idea of systems. I think it was, we, we found Scott Adams years ago said, you know, goals are for losers and systems are for winners was kind of the, the, the, you know, the, the backup to that. And, and I, I, I mostly agree with that. There are milestones that are valuable, I think, and, and, but, but treating them as a goal is, is dangerous, right? Because goal means I've hit it and I'm done. Whereas can, you know, contextualizing it as a milestone says, oh yeah, this is just, this is a check in point to ensure that the system is working. And this is, you know, a litmus test, if you will. If we can, if we can set up the system and if we get to this point, we'll know the system is working, which means it gets to the next point. And I think the, the difference between goals and milestones, at least in my definition, is that with goals you have one overarching goal, right? And then when you hit it, then your momentum is sapped because you have nowhere to go from there. Whereas with milestones there are multiples and if you only have one milestone, that's a goal. So set another milestone past wherever the one you have already set is, and even feel free to set one before it because those little wins can be the fuel that gets you from milestone to milestone and encourages you to keep using the system. I don't know, that's, that's how I'm thinking about it.

Yeah, I love that milestone concept because like you, I do agree, I kind of think, well, you know, there's something to goals, right. You're kind of setting things out. But I do understand the whole systems concept and I've often struggled with. It's almost like a combination works great. And I love the milestone framework because you can set those milestones daily. Like if your goal or if your system is I gotta get to the, you know, I've gotta whatever, get in shape.

Yeah.

And part of your system is getting to the gym every day. Well, that milestone could be, you know, packing up your gear and getting in the car, you know, and then getting to the gym is the next one, and then this kind of thing. So totally.

No, I, Yes, I wound up, I think I mentioned this on the show for, not for weight loss reasons last year I wound up redefining My portion sizes. It was really to see if I could stop these. I have these benign little lipomas that grow, and they were kind of driving me crazy. And so I thought, well, if I eat less fat, I will make less of these lipomas. That turns out to have been a false presumption. I still grow plenty of these lipomas, but. But during that process, I redefined my portion sizes because I hadn't done that since I was a man in my 20s. And despite my youthful vigor, here, I am no longer a man in my 20s. As it come as a great surprise to all of you, during that process, I overcompensated on my portion size adjustment and realized I was losing about eight pounds a month. And I thought, okay, well, now that I've figured out this system, what weight do I want to be at? And so I looked and I was like, what should I be at? And I was like, oh, I actually have about 35 pounds to lose. Okay, sure, fine. So I stayed on that path, and it was easy once I was on the system, right? Because I knew what my portion sizes should be, and it was no problem. And I am blessed with not being an emotional eater. I understand that for some people, this is a much more difficult thing than I am making it sound like, because for me, it was not difficult. I am sensitive to the fact that it is difficult to you. And I have to say that because otherwise, if I talk about this at home, I wind up getting hit in the face. So I don't want to get hit in the face. So I have to. Yes, right. And. But it just so happened. I couldn't have timed this better, Shannon. That Thanksgiving morning of last year was the day that I hit my target weight. What a perfect day to have to readjust my portion size system upwards. I couldn't have planned it if I tried. It's literally just how it worked out. And it truly was Thanksgiving morning of that year. I mean, I. I kind of had a feeling as we were heading into it, but, you know, the weight loss is an interesting thing. It goes up, it goes down. It's not a straight shot by any means. And so I didn't know. And then it was like, oh, yeah, look at that. I did. I hit it. And it was like I was using an app to help me, you know, manage my portion sizes. And it was like, yeah, you hit your thing. I'm like, great. But then that wasn't the end of the system. The system, in fact, needed to change because I needed to now start Eating more so that I wasn't continuing to lose weight. And then b, I wanted to maintain that. And so the system, you know, there was always another milestone, and there's. There's always. There's still another milestone. It's like, maintain this weight, which is not necessarily the easiest thing. And. Yeah, and I'm. I'm proud to say that I have been able to. It's been. You know, the graph is awesome. It just like. Well, when weight loss is a straight line, if you zoom out far enough. And so the graph is nice diagonal down until an inflection point, at which point it has been remarkably flat for the last 12 months. But that doesn't happen with a goal. That happens with a system.

That's right. And you can apply this system concept to every aspect of your business, and I would encourage you to do so and with your employees, too, because you want to.

They.

They want to better themselves. You want them to learn more. Developing systems to help them, you know, continued education, whatever it is. It's just, you know, systems are. Go up to Business Brain show and just search for that term systems. And, you know, we've just done a bunch of episodes with different takes on it that I think you'll find really.

Useful, you know, when you add it all up. Shannon and I have started over 20 businesses, and through that time, we've learned a lot. Most of it comes in the form of mistakes. And that's okay, right? Because our mistakes are our tuition. One relevant mistake I've made and therefore learned is what I've started calling the busy fallacy. We all know how to be busy. We can all make it look like we're getting stuff done. But we also know that's not necessarily always the case. And that's why a few years back, you might remember, I removed the word busy from my vocabulary and intentionally replaced it with the word productive. This has been a game changer for me, but that game changing didn't happen overnight. I needed to learn how to ensure I was actually being productive and not just saying the word. Shannon and I, we discuss this a lot and have shared many of these tips about it on the show over the years. And while we certainly love it when you go back and revisit our older episodes, we also know how important it is to actually be productive. So we have created our Business Brain productivity course just for you. And you get to try it for free, arriving in your email box every day. Our productivity course shares with you the most important tips and tricks to ensure you stay productive and that you have an easy time doing it. You never have to leave your inbox. And the course is guaranteed to teach you something new each and every day. But like I said, you don't have to take my word for it. Try the first two days completely free at businessbraincourses.com free. Go there now. I promise you won't be sorry. You'll be productive. Hey. So, Shannon, a couple of years ago I mentioned how a business that I had built that I rarely talk about the specifics of was being put up for sale. We were working with an M and a firm to. To do this. And I promised to share, yeah, I promised to share updates. And then I stopped sharing updates. And part of the reason I stopped sharing updates is because I had nothing to. To say. The market in general in the middle of or as COVID lockdowns ended and there was the war in Ukraine and there were lots of other things that sort of started to happen and that sent the market for the capital markets down and that stopped that process. And we were close. We had worked with an M and a firm for about six months. We had gotten to market maybe four months in which I now wish had happened much, much, much sooner. Of course we were talking with prospective buyers that were interested in this. What happens is your M and a firm builds a sim, a confidential information memorandum and then starts to circulate that to would be buyers or potential buyers. The ones that are interested come around, they sign an NDA. You know, there's. Or maybe they've signed the NDA ahead of time or whatever it is. And, and then if they're, if they're still interested, they, you meet with them at you as the business owner, the business seller, as it were. And we met with, I don't know, six or seven different potential buyers and they were all very interested. And then the, the markets kind of turned sideways and everything just pressed pause especially for the industry that this business is in. And that was that. And we let it sit for. Not sit. We let that project sit for about a year. We kept pushing on the business we most we knew going in. The pitfall of taking your foot off the gas of the business when trying to sell it. Right. It's very easy.

We learned that lesson.

You and I learned that lesson in a very hard way. Yes, that's correct. We had to basically kill a business because we just couldn't. We had emotionally checked out from. From deals on the web. Yep, that's right. So. So we knew that going in and mostly we adhered to that. But there were things we didn't do. It didn't hurt the sale. It was, in fact it, it was immaterial in terms of the sale. But in retrospect, it was like even knowing that and even thinking that we weren't doing, we weren't kind of taking our eye off the ball. In a sense we did, in that we didn't add, like, we didn't start new projects that otherwise we would have, you know, it was like, okay, well let's kind of leave it in stasis. But we're pushing along. We told ourselves we were pushing along and we were maybe 65% instead of 100% right. But got it fine. That was, it was, it was easy enough to ramp back into it fully. In fact, the, the, the sale kind of, that process falling flat energized us and was like, all right, well it's ours. Let's, let's. We said that if this happened, we were going to go back in. So now we got, we, we don't want to prove ourselves wrong. We got to prove ourselves right. You know.

Yeah, that's great.

That's smart. Which was good. And, and we did. And we, we, you know, gangbusters. And, and then we decided, no, we still want to take some of our risk off the table in, in that we want to diversify our, you know, our personal holdings. And so like it makes sense to, to sell this. And so we started back down that process and we talked with the M and a firm that we had initially worked with. The deal with them was a 12 month contract with a 24 month tail, that being the, any people that they brought to the table. If, if those people were to buy during the term of the contract or for 24 months thereafter, they would get, they would, you know, be the broker for it and get their commission. It's very similar to a realtor agreement is how the, the commission structures all kind of work together. And it's so a total of.

I have a question. Yeah. A total of three years, one year active where they're, they're the exclusive and then 24 months after that, if a deal comes to you, they get to be the broker of record. Is that right?

If a deal from someone they brought in their active 12 months. Yes, that's ah.

Oh, I see. Okay. So it has to originate in that 12 month exclusionary period, correct?

Yep. Great question though.

Okay. Yeah, yeah, yeah, yeah. Thank. That makes sense.

Of course. And so we felt like in again, every, you know, we, we call our Mistakes, Our tuition. We felt like there were two things that were too long about that. One was the initial period itself. 12 months was too long because it didn't incentivize our M and A firm to move quickly.

No sense of urgency.

Correct. And we paid that price. And like, of all the tuition I have paid in my life, Shannon, that one might be the biggest. The business is still worth plenty, but it's worth about half of plenty of that it would have been if it had sold prior.

Right. Like many businesses after Covid and all that stuff. Yeah, correct.

Oh, yeah, yeah, yeah. It's just how it is. These aren't sour grapes. These are lessons that I have learned. And then the second part that was too long to me felt like this tale. 12 months seems a whole lot more reasonable than 24. I don't know. You know, that's the part that I'm not quite sure of. But the 12 month thing was way too long. And so there were, we talked to. When we were selecting our M and A firm that first time around. There were a bunch that we spoke with, of course, and we wound up going with the one that we went with. And the main reason we went with them is it seemed to us like they had access to relationships with a higher caliber of buyer than the one than the other ones that we were talking with. And their projected sale price for the business reflected that. And so we essentially, to use one of my partners terms at the time, we essentially chose to take the prettiest girl to the dance.

The one that makes sense. Makes sense.

The one that said I can get you the highest price. Great. But of course, there's no guarantee in any of this. Just like when you're selling a house, there's no guarantee that the realtor you select is going to sell your house or that any realtor is. Or that your house is sellable. Right. Like there's that. You, you, you know, they, they vet it obviously before they put your business or your house on the market. But still, you know, you don't know what you don't know until you put it out there. And, and so, and it was a, it was a remarkable difference. It was probably a 40% delta between the two. So it wasn't like 5% or 10% or anything like that. You know, it was like, wow, okay.

And you would think that, you know, while that's enticing to try to get clients that way, it hurts your credibility if you constantly fail at hitting that number.

Right.

Word gets around.

I don't think that was an issue. I don't think it was. I don't think that was their mo. I really truly believe they thought they could sell it for that price. And part of the reason I believe that is they never presented a price to any of the buyers that we spoke with, which, and I only found this out retroactively, that part seemed weird to me and it seemed weird to the buyers too that they were waiting for the buyers to make an offer without there being any frame of reference. I mean there's a frame of reference, there's the, you know, the earnings of the business and then there's just multiples that are sort of known throughout the industry. And so one could get close to and, and make a, a not offensive offer for sure. But.

Right.

You know, like it I, I wound.

Up is that, is that the, the first one that throws out a number loses mentality.

I think it might have been and it's atypical at the very least as I'm finding now the things you learn. Right. But maybe it works for, I mean they, you know, this wasn't their first listing by any stretch businesses and they've sold them before and since and I've maintained a relationship with them and it's, it's totally fine and cordial and all that stuff. But when we decided to put it back on the market, we talked with, we knew, you know, there was the devil we knew and then there was the devils that we knew less. And so we went and talked to several others and we decided to go with the, what would have been our second choice the first time around. And it's been, it's been an interesting process. We very much went in knowing what we didn't want to do and so we signed a six month deal. And the six month deal, they insisted on putting a three month extension onto it, which was sort of an obvious extension. It was if we are in the process of, if a letter of intent has been signed, then the, the exclusivity extends for three months. And it's like, well, if a letter of intent's been signed, we're on.

That makes sense. Yeah, yeah.

It was like, yes, of course, sure, you know. And I actually asked them to reduce their fee by 10% as part of the negotiation. And it was really interesting what they came back with. They said, yeah, we'll do that if you'll go from six months to 12 months. I was like, really? They really see value in the 12 month period, which is interesting to me. Maybe I'm being over. Maybe this is an overreaction on my part. Right. Maybe 12 months does make sense because it was like the fact that they were willing to take 10% less on their fee, but only if they could have the 12 months. Made it clear that that's important to them. So.

Right.

I don't know. But we weren't willing to do that. So we, we kept it where it was. But we now just this week we're starting to have some meetings with prospective buyers. But I will say whether and whether it would have been this way if we did a 12 month deal versus a 6 month deal, I can't say. But. Or I don't know. But we put this on the market like we signed with them six weeks ago and now we're having meetings as opposed to the last time we did this with a different firm. We signed and it was like four and a half months later that we were having meetings.

So I guarantee you it has an impact. Of course, your whole framework is someone in a meeting has said, guys, we only have six months to close this thing.

Let's hustle, let's hustle. Yes, of course. So those are the lessons that I've learned that I can share so far. And as I learn more, I will happily share more. But I wanted to rekindle that conversation because it had been a while. So.

Yeah, yeah, it's great. We'd love to get your, you know, business brain is our collective business brain and your feedback is crucial. We'd love to hear from you about selling your business or working with business M and A firms, brokers. Feedbackusinessbrain Show. Reach out and talk to us.

Yeah. Feedbackusinessbrain show and go check it out. We've got a free course on productivity online. Businessbraincourses.com free. Check it out. Let us know what you think. Happy Thanksgiving to everybody who is there here in the United States and Happy weekend to everybody, no matter where you are and see you next week. Keep living that charm life, huh?