#234 The 5 Cs That Make a Business Valuable with Mark Sims

I think it's so important to understand where you fit in the market and how you differentiate yourself in the market. What's your positioning? Are you the low-cost provider? Are you the market leader from a product and brand perspective? Are you super high-touch and great customer service? But where do you sit within your market? Do you really understand why you choose not to play there? And so much of that is important from a value creation perspective.

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When people think about value creation in a business, they always short-sight things. I know I did this when I first got started. It's a little short-sighted when you need the money or you want the growth or you're excited and you want that new buildup in the business and you want all the excitement and hopes and dreams that come with it. And sometimes we forget to build the business with the end in mind, which would be, well, where is it going? What could it end up being and what kind of intrinsic value it can have in In terms of how the business is structured and how other people structure the business and their finances. And you have a framework in place, Mark, that kind of helps us go through the 5 C's of what that should look like in terms of how to value and grow a business and create that intrinsic financial and otherwise the greater reward of a business activity, right? You want to align us on some of that, maybe clarify some of the talking points. You want to go, you know, back in time and talk a little bit about yourself?

So, you know, my background, kind of have a background that I grew up in management consulting, Morgan, Bernstein, Young, and some other boutique firms. Went into industry, working for Scotts Miracle-Gro, had a few different roles there. I was the chief information officer. I was the head of strategy and M&A, and then went and was CEO of a company that they had invested in. Came back to consulting. And so now I'm helping companies really kind of, as we call it, transition and transform. Mainly, you know, kind of smaller companies as they look to grow their businesses and/or sell their businesses or go on an acquisition spree to grow their businesses through acquisition.

Yeah. Acquisition's a great strategy once you know the business. I know there's a lot of people out there that believe that, you know, acquiring a business as some sort of almost what I call almost automated income or more passive style, you know, business model for investment is a smart move. What's your take on that? I know there's two sides to that idea. You know, be the operator and then acquire or go ahead and acquire and learn the business after acquisition?

The, you know, buy then build is kind of a common theme that we see nowadays. And again, that build could either be organic growth. Maybe you're taking a business that's been a bit of a sleepy business. Maybe you've been run as a lifestyle business. They haven't been attacking new geographies, new markets within their industry. Or to your point, you know, as you buy a business, you learn your kind of competitive positioning in the market. You start to see where the opportunities are, maybe where there's other kind of businesses that are being run more as sleepy businesses that you see an opportunity to take them out, to build a much larger entity that gives you scale, gives you scope, and allows you to kind of ramp more quickly than if you're trying to do it organically. And I think to answer your question on, you know, which is better, again, I think, you know, the strategy's going to be, you know, somewhat industry geography and person dependent. There's no kind of one-size-fits-all model. I think really it's kind of understanding again, your strategic position within the market and kind of what's the best way for you to create value with the assets that you have.

Yeah, it is going to be specific to the person or market. I particularly wouldn't go buy a home services company even though I've done some plumbing in the past because the operational, the controls, the management, the being onsite, just the components of that business doesn't fit my mindset, my life, or my growth, even if it might fit the financial side of it. So there's definitely a matchup in terms of, you know, experience and knowledge of operations as well as understanding the financials, the growth and the market share. Those are a couple different things. I just know some people who've bought companies and then completely, you know, got bombed out of it. They didn't know how to run it. Guys who were running it knew they didn't know how to run it. And so things just kind of started to spiral out of control. So, you know, I was just curious what your, what we would normally advocate for.

Yeah. I mean, sometimes you do, To your point, you see challenges with founder-led or owner-led businesses, right? Where it, you know, and it gets in and we can jump to my 5 Cs, but it's one of the 5 Cs around capability. And, you know, if all of the capability needed to run the business is vested in the owner-operator, not that saleable of a business.

Yep.

Because once that owner-operator is out of the picture and you just wrote them a big check, And maybe they say, sure, I'd love to stick around, but now they have a boss and they didn't have a boss before. And it's maybe just not as attractive for them anymore. You now have a challenge to run and operate that business because nothing was ever written down. You didn't kind of develop the back office, the front office capabilities needed to sustain the business when that, you know, kind of primary owner-operator What was no longer in the picture.

Yeah. And that's, we ran into that experience before where, you know, there's just boredom and sometimes because it's been going on for so long, you know, I've been at this for 7 or 8 years and it's like, man, I can't really stand this anymore. So at the moment they got a chance to run, they kind of run from it. But then there's that opportunity to, of course, create something and start something up and build something, you know, what we call with the end in mind, what we refer to as our Platinum Principle. Let's cover it from that angle for a second. Where do your 5 C's, capable obviously falls into that. What are the other C's?

One, I've already touched on competitive positioning. The other one is cash conversion cycle. The other one is clean and trusted financials.

Yeah.

And the last one is concentration for you. Let's start at the top with competitive positioning. So I think it's so important, and I mentioned earlier, to understand kind of where you fit in the market, meaning in how you differentiate yourself in the market, what's your positioning. Are you the low-cost provider? Are you the, you know, kind of the market leader from a product and brand perspective? Are you super high-touch and great customer service? But where do you sit within your market? Where do you choose to play? Where do you not choose to play? And do you really understand why you choose not to play there? And so much of that is important from a value creation perspective, because if you have kind of a solid competitive position in the market, You get pricing power, so that can help increase your, expand your margins, increase your EBITDA. You have downside protection that you're not commoditized, that you're somehow going to see your market share eroded to competitors. So, so much of that is not necessarily, you know, first thing is just plotting where you are within the market. And if you're happy with that, then, you know, continue. But, you know, so much of these tools are helpful to say, where am I at today? Where do I want to be tomorrow? And then what do I need to do to move from where I'm at today to where I want to be tomorrow?

Yeah, no, those are great insights. And those are, those speak to, you know, kind of the 3 levels of a business person, the startup person, the mid operating, building, optimizing person, and the person who's probably at that scale or growth side headed towards an exit, right? Which looks at the value of the company. And where are you seeing those exits in that process, that capable process, that cash flow process? Where are you seeing the better side of the exits right now as we head into 2026? And where are you seeing some challenges that operators listening to this today should be aware of?

Yeah, I think the biggest thing, and it probably hits on the third one I touched on, which is the clean and trusted financials, right? I think so much of this, and I preach it to my clients, is don't make it hard. Like remove the friction from the process. Meaning, you know, a lot of what we talk about, clean and trusted financials, A, those are great for you to understand, you know, where's all the money going in your business? Do you understand kind of what the true margins are and the profitability of a given SKU, a given category, a given channel, a given customer? That's just going to help you make better decisions as you grow your business in place, right? But when you go to exit, it's so important that you can just hand over and you can confidently say, I know this is how my business makes money. And here's where we've got Great profitability. Here's where we're challenged from a profitability perspective. And again, you can tie it back to the competitive positioning. Maybe there's more competition in a certain category or geography, which is why you see, you know, maybe that margins aren't as healthy as you want them to be. But so much of that helps from an EBITDA perspective because you're running the business more effectively, right? So that's kind of the one half of the equation, EBITDA. And the other half, you mentioned it today, top is the multiple.

Yep.

Right. And so from a multiple perspective, you know, there's no challenges that, you know, a buyer can push back on to say, well, gee, I don't trust these numbers. And there's some kind of a discount because they don't trust the numbers. There's no retrading as they dig into the numbers versus what you had at the high level, as you said, kind of what your margins and revenue is versus once they dig into the detail, it maybe gets a little murkier. So, so much of this I think ties to having kind of a good set of numbers. And again, it also aids in the speed of the transaction, right? So you asked kind of what we see in the market today. A lot of times we see a lot of time and effort has to be put in by the buyer to get a true, clean, and trusted set of numbers. And that just elongates the process.

Oh my God. That due diligence period can be ridiculous. We've gone through, I don't know, 50 of them in the last year. And in those 50, we found basically 48 that were worthless, you know, what I would call vaporware numbers that were put together. And when you got down to the due diligence, it either started to look better or it started to look worse. And by the time it started to look worse, you're like, there's nothing here. This is just vaporware. They're selling an idea. There's nothing really substantial or tangible about this. And people are asking millions of dollars for these businesses and trying to pawn them off on very ignorant people, honestly. who don't know the numbers, don't know the difference between EBITDA and seller discretionary earnings, and don't know what a forecast or planning sheet should look like. And it's pretty easy to pass that by an inexperienced person. And somebody, you know, they're not stupid, they're just ignorant. And hopefully you guys are listening to this today. Take us through some of those experiences. Maybe you've had one or two yourself. Ready to escape your grind? We help entrepreneurs build real wealth with private label brands. Visit voltage dm.com to start now.

Yeah. So from the standpoint of, again, a lot of this just comes down to either someone might still buy the business, right? So we have examples for clients, but there's a big haircut that somebody takes both from an EBITDA perspective because somebody's trying to make adjustments to say, hey, these are not kind of ordinary expenses. These are kind of one-time expenses and they're unique to me owning the business. So when you own the business, you won't have these expenses. And there's a lot of those things that are kind of no problem. There's the ones that, yep, no problem. There's the ones that are, I don't know, that seems like a recurring charge of the business. And then there's the things in the middle. Well, if you can't kind of clearly define what those things in the middle are, people aren't going to trust them and they're not going to pay you for them, right? And then as I mentioned, we also see challenges on the multiple side where people want to, will say, okay, I'll trust your numbers or I'll take your numbers, maybe not trust them, but I'm going to cut the multiple because there's just not a lot of clarity between kind of what you've told me and what I can actually prove based on, you know, the general ledger.

Yeah. Buying a business is not like going to CarMax where the number is the number. It's a negotiation. It's always a first shot. Of what multiple they think they want to get out of the business. And then of course, as you do diligence and get down to the process, you will always change that multiple anyway.

And I think, I think the, yeah, sorry. I think the other part of it too is, you know, we talked about kind of frustration on the buyer's side. A lot of times there can be frustration on the seller's side where maybe they're like, I'm a trustworthy person. I've run this business for 20 years and this is, you know, this is how I run my books. And so when the buyer pushes back and the buyer, you know, gives feedback that I'm not following the numbers, that can lead to frustration on the seller's part to the point where they may want to walk away or they get super emotional about it. But I think that the key for everyone to always understand is it's just math, right? Like the way that the buyer is going to value your business is really looking at, as we talked about, the earnings of the business and we use shorthand as EBITDA. But they'll look at that and then they'll look at a multiple, which a lot of it is their market multiples. Like what is this type of business trading? And those multiples kind of ebb and flow and bankers and brokers have those numbers, but really it's just kind of a function of those 2 factors. But both of those factors, obviously EBITDA, we talked about adjustments and then we've been talking about how the multiple can be impacted both positively and negatively on kind of How attractive the business is, and you know how trustworthy and clean the data is that people clearly understand where this business is, how it competes. You know, kind of my second one: cash conversion cycle. How does it convert? You know, cash that I invest into you know labor or you know raw materials. How long does that take for me to actually you know sell into the market and then collect the cash? What is that? that overall cycle? And do I have a good handle on that so that I don't starve the business because I'm not investing enough capital or I'm not all of a sudden kind of hit where I've got, it's hurting my growth because I don't have the capital to be able to invest in the business for more materials, et cetera. And some of those things tie back to the capability piece I mentioned, where are you invoicing your customers in a timely fashion, right? So I see that with a lot of small businesses. Where they're busy running the business, right? So they think about the front office, hey, I'm out with customers, I'm delivering a service, kind of trying to sell more, but I'm not paying attention to the back of the house. And if I wait, you know, invoices that should have gone out on the 15th don't go out till the 28th, that's going to impact your ability to collect cash in a timely fashion. Yep.

Cash flow.

It's just going to hurt the overall Kind of cash conversion cycle and, and lead to, you know, differing working capital.

Or making that a more difficult business to buy because, you know, as we're buying businesses, we don't necessarily wanna buy a job. It's somebody else's job. And so one of the best things you can do is optimize your business, your workflow, your SOPs, and replacing yourself and making it as easy as possible for you to step away from that business. And for those listing, that usually means, can I go away for a day or 2 or 3? Could I get away for 5? Could I leave the business for, you know, 2 weeks and it still runs without me? And until you can, you know, do those things, that is going to be a negative checkbox in my world when it comes to buying a business. If you can't walk away from a few days of the business and not have the whole thing fall apart, you know, that's where the owner-operator and the difference between team building and growing and scaling a business really comes into play in terms of the value of the company and its valuation as well for people.

Well, I think there's also a component of that is, In, during due diligence, you mentioned it, as you're talking with the hopefully management team, not just the owner-operator, right? You're talking to that team.

Yes.

And people on the management team have an ability to talk to all the topics that you want on commercial diligence, financial diligence, et cetera, operational diligence. Because again, that gives the buyer a warm sense to know that If the owner-operator isn't here, I've got some capable individuals that understand the business and how the business operates. To your point of if the operator is no longer in the picture, the business can still be sustained and still operate without kind of a heavy lift on my part and try to figure it out. And, you know, as we go.

Yeah, there's a confidence in the feeling of talking with those individuals when, you know, they kind of have their stuff together. And, you know, there's people that are around them that have their stuff together. You just get that sense the more and more you talk to those business owners. And I'll tell you, and this is part of, you know, the transition component of a business due diligence to a, you know, potential buy offer is making sure that the, you know, the phrase that comes to mind that you can't do a good deal with a bad partner. And one of the worst ways to get a business sold or dealt with is the brokers who sometimes get in the middle of it and can screw the whole thing up.

True.

A broker can literally tank a really good deal when the seller and buyer are trying to get something done. I've seen this before. Where have you experienced that in your process or how do you guys mitigate those kinds of problems?

Yeah, I mean, there's any number of ways to screw up a deal, right? But certainly there could be communication breakdowns, whether it's with the broker, whether it's with the investment banker that there's not a good clear line of communication between the seller and buyer. So I think it's always important to make sure that you've got kind of the main channels, but you also have secondary channels to make sure that people are talking and communicating so that there's no kind of misunderstandings as to why I'm asking for specific information, why there's a delay on my end, you know, again, why I've requested a meeting, whatever it might be. I think, you know, that's, you know, maybe a 6th C, right, would be communication as it relates to getting a deal done.

That's probably one of the most biggest. Biggest components of it all, honestly, is that know, like, and trust relationship between the buyer and the seller conversation that doesn't get necessarily interrupted by others as they're trying to build that, that relationship of trust and, and, you know, in the deal process. Where, where do you sit? Which side do you sit on? Are you buyer side, the seller side?

Typically we do buyer side M&A advisory. We will do some, we will do seller side at the time, but the majority of it is buyer side.

Yeah.

That's a good focus. I mean, that's, I think that's probably where a lot more of the money's made. I mean, sellers can obviously do well in this market, but, you know, you're gonna work with buyers who have a, a certain understanding, an investment strategy that kind of know where they're going. Whereas on the seller side, you would probably, in my experience, be working with a lot of new sellers who've never sold the business before and really don't understand how to put all the pieces of the puzzle together.

Probably all those things. That's 100% right. And, and they may do the, this once, if they're lucky, they'll do it once in their life and it'll be a, a great outcome.

Close out and move on.

Right. Right. And so I think, you know, so much of that when we, when we work with buyers is, again, goes back to communication. But I'd say a subset of that of education. And I mentioned it earlier, but, you know, clearly communicating this is how I'm valuing your business and why.

Yeah.

Right.

So, so not kind of throwing some, you know, quote unquote lowball number, but there's some explanation behind it and there's a discussion to say like, Again, this is the math I'm using for, you gave me your adjusted EBITDA. Here's where I, you know, here's where we come out of adjustments that we think are valid and ones that we don't think are valid. But as it relates to that, it's really kind of having that open dialogue on it and talking about it. So even if you agree to disagree, the seller is clear as to why they're coming up with the offer that they're coming up with.

So from the buyer perspective, you know, those who might be listening to this thinking, well, can I sell my business? You know, what would I get? And is anybody even buying? Since you're on the buyer side, where are you getting institutional capital? Home offices, private investors, all of the above? And if you are, which components are moving, you know, right now? Which ones are not moving as much? And what are you buying? It's kind of a 3-part question there, I guess.

Sure. Yeah, no, I would say from a, we primarily work with private equity firms, kind of middle market private equity firms. We do have some family offices that we work with as well. You know, what's been— I'll call it in, you know, different PE firms have different focuses. Some focus in energy, some focus in manufacturing, some focus in services. I'd say overall where I see a lot of folks, you know, the blue-collar services space was pretty hot in 2025. So think electricians, think HVAC. But really what we're kind of seeing You know, when I think about, you know, where we're helping today, it's kind of across the board. It's services, it's manufacturing, and it's, you know, some professional services as well, not just blue-collar services. So I, you know, as I sit here today, you know, in January, I'm pretty bullish on 2026. But if you had asked me a year ago, I would have been really bullish on 2025 that we'd see a tremendous amount of M&A activity. But I think with interest rates coming down, I think with kind of the age of the assets that are within many private equity companies' portfolios, I think we'll see quite a bit of M&A in 2026.

Well, that's good. I appreciate it. Sorry. I appreciate that and I appreciate your insights and where it's going. So if anybody who is considering deploying capital might want to think about what they could buy or might be in the interest in the buy side, I would definitely have you connect with Mark. Go talk about that, you know, understand where, you know, different capital deployments to different locations can be met. Do you guys do it like a pool or is this a, you know, project by project? Are you taking up multiple investors in private equity who are, you know, going towards—

So our, yeah, we're, we're, we're an advisory firm. So we have, you know, multiple clients across the spectrum and it's project by project or, you know, kind of engagement by engagement. Time and materials is typically how we We'll price things out. So yeah, absolutely happy to give anybody a look and some counsel, upfront counsel to see if we could be helpful in achieving whatever goals they have.

Yeah.

So if you guys, if you are on that side of the house, you're considering buying, you are bullish too, because I am in the markets that we're seeing today. As the water goes out in some locations, as Warren Buffett would say, you're being exposed. But as in other locations, we see money going out really fast. It just may not be near you at the moment, or it may be coming into your opportunity, but I'm definitely seeing a lot of opportunity in 2026 for expansion and growth. So I am bullish in the markets that we're in for the direct-to-consumer markets and brands.

Well, and one thing I'll mention, it may seem counterintuitive and maybe something that not everybody would be up for, but, you know, let's say there is someone who's thinking about, you know, selling their business at some point. There is a notion that if you get, you might want to get bigger before you sell. And from that standpoint, we have a lot of clients that more on the kind of the owner operators that they know all the players within their specific industry, whether it's geography, whether it's the industry, and they may be a great aggregator of those businesses, right? So You know, I want to sell my business, but before I do, I'm actually going to buy out 2 of my competitors. So now I've got, you know, a larger EBITDA, larger revenue. You know, hopefully I've got some synergies that I can build out in the back office, taking costs out, enhance kind of my product line, whatever it might be. But by taking a little bit of time to become a buyer, it makes you a much more attractive asset. Maybe larger. And larger assets with higher EBITDA will oftentimes get a higher multiple, right? And so that's one of the things to think through is before you sell, would it be an interesting case to buy to aggregate and you pocket all the value that you think is within your industry before turning it over to the next guy?

Yeah. Great insights, man. Mark, thank you so much. If you could Just, you know, summarize for me, what was maybe the most valuable point you want to take away from this call for everybody that's listening? What would you tell them?

Sure. I think the biggest thing is a lot of what I've talked about is just being kind of pragmatic and organized. So when we talked about kind of the clean and trusted financials, having SOPs and documenting kind of how things work within your business, a lot of that is really just around getting organized. It's no more sophisticated than that. And kind of demanding as you run the business that things are are written down, that you've got a clean set of books that you can look at every month. And if you have that in place, whenever you go to sell the business, and maybe that's never, but whenever you do, you're going to get value out of that because you're going to be able to run the business more effectively.

Yeah. Well said, my friend. Thank you for coming on and sharing a good word with us today, man.

Hey, thanks so much, Neil. It's been a lot of fun.

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