Acquisition and Business Growth Insights, With Paul Lemberg

You're listening to Business Lunch with Roland Fraser. This is your seat at the table. Welcome to Business Lunch. This is Darren Clark, the producer of the show. And today we have Paul Lemberg as our guest. With Roland Fraser, Paul helps entrepreneurs become wealthy. Sounds good, right? But what he doesn't mention in this conversation is that Paul started his first company with a partner and $3,000 of credit card debt. And it sold three years later for just under $9 million. Since then, Paul's consulted with Fortune 100 companies like Adobe, IBM and Goldman Sachs. But his true passion is helping small business owners and CEOs double and triple their profits. So in this episode, Roland and Paul talk about Roland's favorite subject, acquisitions. So listen as Paul gives tips and a great insight on this matter.

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So if you love the show, remember to follow or subscribe wherever you're listening. And remember, if you want to dig deeper and go further with Roland, especially on the subject of buying and selling businesses, head over to our website, businesslunchpodcast.com EPIC EPIC. To check out Roland's five day EPIC challenge. All right, let's get started.

Hi everybody. Roland, thanks for having me and this is fun. I'll give you a quick bio. I went to art school and got out of art school and realized that I just wasn't a good enough artist to start for the rest of my life. And I had no idea what to do next. And there was this thought at the time that people who are artists and musicians. I'm a musician. Artists and musicians make great programmers. This was the thinking back in the late 70s. So I ended up being a programmer. I jumped out of the corporate world after a couple of years. I realized I was never going to get to run General Electric. So I ended up starting a software company. And as most software companies started, I was doing consulting. I ended up consulting for a lot of banks and somewhere along the way started writing software for those banks. And my clients ran some of the largest banks in the world. My business was automating European and Asian banks, farm branch networks. So this was very simple, kind of low transaction volume, very high complexity. And I got skill in understanding international banking and understanding how to figure out what people were up to. I don't know if you've had this experience, but people who really know their businesses are usually terrible at explaining it. And so when they have a problem, they can't really tell you what it is because they just figure everybody should understand this stuff. So I got good at translating and I got good at understanding what their trading problems were and their financial problems were and what their problems with their portfolios were and got good at communicating. This is probably like the best skill I have, which is communicating with the upper echelon of anything and getting them to understand really complicated stuff without making them feel stupid for not understanding it before. And that's a big thing in its day, and I don't think it's changed at all. Technology people like to flaunt their depth of understanding with people who are running big companies because they go like, wow, I have something over on them. So there's an art to getting people to understand things without having them feel like they were less than before they understood them. So I made my career doing that, sold my first software company, started another one, ultimately flipped that to a large German bank and realized that there were other things in the world besides writing software. I moved into strategy and I did strategic consulting and market research for some of the largest technology firms in the US did that for a few years. It was a job. It was incredibly rewarding. It paid well, I traveled all over, I was dealing with smart people and it had everything. Except I was like, oh, I don't really care about these companies. I found out that you could help Cisco make an extra hundred million dollars or help IBM save a half a billion, and nobody really cared. Nobody's life was transformed from it. And I had this epiphany one day that my people were entrepreneurs and that I had amassed a skill set that might be valuable. And in the mid-90s, I started doing business coaching. It didn't really exist at the time time, and I just. It was like the perfect thing. So I been consulting with entrepreneurs, small businesses, startups, in kind of every shape and form since the middle 90s. My focus is growth. I mean, it's probably every focus. If you look at it. It's like every consultant focuses on growth some way or another. But I don't really care about personnel problems. I don't really care do that much about tax problems. There's a lot of things I don't know how to do, but what I'm good at is figuring out how to enhance the revenue side of a business. I don't really. I walk into clients and I tell them, I don't really care about your expense lines. It's of no interest to me at all unless you're going broke. And if you're going broke, you probably can't afford me. But if you've managed to hire me, yeah, okay, we can look at your expenses because We've got to keep you going long enough to help you make money. So. But my focus is strictly on the revenue side, whether it's marketing, whether it's sales, whether it's products, pricing, packaging. Those are the things that I have built my work on. And it's the thing I help most people with. Somewhere along the way I started doing M and A work and I've written a lot of pms. I worked with a couple of investment banks who would send me their clients when they weren't big enough. And then we flipped that around and I started consulting on. Because the real issue in selling a business, the real issue in buying a business, is not that we want to buy it or we want to sell it and not how much revenue there is, but what the multiple is. And if you can negotiate the multiple, you can negotiate the value of that company either up or down, depending on which side of the house that you're on. And so I got really good at negotiating what the multiple should be based on the industry, but more based on the velocity and the trajectory, what the period to pay back is going to be and things like that. So a lot of people approach acquisition as if the money were the most important thing. And for some people it is. But for a lot of business owners who put their life's work into this thing that you're now trying to buy, they have a great concern that the business will be taken care of. And I know that sounds weird because a lot of us, especially if you're new at acquisition, you think, well, who cares? They just want the money and then they're out. It's just not true. The money is great, but their legacy matters for many people just as much. So they don't want to sell their business to somebody who they believe is going to screw it up. And if you haven't proven that you know how to take care of their business, they then the presumption is you're going to screw it up because you don't understand. You know, everybody has this sense, this is important. Everybody has this sense that what they're doing is special. Everybody thinks what they do is special. You know what? It might not be that special businesses, all businesses are more alike than they are different. And any two businesses which are manufacturing businesses are much more alike than they are different. Any two service business are much more alike than they are different. So the seller thinks that what they've got is unique and special. Ideally you do too. That's why you're buying it. But you need to demonstrate to the seller that you're going to take care of the thing. So you asked me, what's the most important thing to focus on or what business you should focus on? I'd say the ones where you have an edge, where you have an experience edge. So here's what exists on a spectrum is how did you meet somebody and what was your intention when you walked in the door? So if your intention when you walked in the door was to acquire them, I'm a really transparent guy. I don't believe in subterfuge. I don't believe in strategizing. In my conversations, I'm very straightforward. So if I'm looking to buy somebody, then that should be my pitch. If I'm looking to develop relationships, then coming in as a growth expert is a good way to do that. If I'm trying to find businesses to buy, that's another marketing campaign. I'm treating that as a marketing campaign. So the message of my marketing campaign should be on point. Similarly, if I'm looking for growth clients, then that's what I market. So it really depends on. It depends upon what your intention is when you're walking in the door. Either of those strategies work. So you might be walking in the door for an acquisition, and that was your stated intention, but y' all can't get together on it. Or maybe the value is just simply not there. You know, if you think about it from a seller's perspective. So the seller has the possibility of selling to you now. I don't know. Let's put some numbers on it. Just to make it easy to talk about. Let's say it's a small business, it's worth a million dollars, and everybody agrees that the thing is worth a million dollars now, and you're offering a million bucks. And the owner could say, okay, I'll take the million because I want to take my cash off the table. But the owner says, no, I can take the million. And then what can I do? Well, I can invest it in the markets, and maybe the average growth in the stock markets, in the equity markets is 7%. It's been 7% since before everyone on this has been alive. And it's just 7% compounded, kind of like forever. So I could take that million and I could vest it for a year and now have 1,070,000, roughly, plus or minus. Or maybe it's an amazing year and I could have 1,250. Something astounding could happen. Or I could roll it into Bitcoin and it could 10x my money. Oh, but I could lose everything. Maybe not everything, but it could drop a lot, too. If I take that million you've given me and I invest it anywhere else, I could get some growth. But let's say instead of taking your million now, I spend a year and I use, oh, like my Formula 5, which could double their business. It's not hard to double your business with a good model. So instead of taking your money, I can keep it in my business for a year. And now my business is worth 2 million and maybe, oh, I keep it for another year and I'm really working this thing and I get it to 3 million or 4 million. There's no other way I can get any other kind of return like that. It doesn't exist anywhere. So if somebody believes in their business, then they just want to hang on and grow it for as long as they can until they don't want to do that anymore. So I might be marketing acquisitions, and I walk in the door with the intention of an acquisition if it makes sense. But the owner says, yeah, I thought about it, I should hold on. So if I got growth skills, I could say, all right, well, let's do a deal. And now I can position a deal. That way I can flip that around completely. Is that I walked in as a growth analyst and with offers of growing the business, and the owner says, yeah, all that sounds really great, but I want to take my cash out now. So you flip. So it's all about. I find that the acquisition, the primary idea is what does the owner want and why? And so many times we don't do that. We're in a negotiation, and it's all about price. But the owner. Oh, the owner's not really worried about the price. They're worried about the stream of payments or they're worried about handling something in the future. So all of those things come into play and I walk in the door as a consultant. I'm never really sure what somebody wants, but I'm flexible about it. So look, there are cash flow buyers. If you separate them into, say, strategic buyers and financial buyers. So there's cash flow buyers, and they don't care what the business is as long as it's something they have a basic understanding of. Not a big spectrum, but they have a basic understanding. They know how to run it. Okay? They've never been in manufacturing, and they're a services business kind of guy. Stay away from that. Manufacturing. I spent a year, three years ago, I spent part of. Well, I spent the whole year, but part of my time helping a friend of mine grow a supplements company. I stepped in as CEO. I know a lot about supplements, but I've never run a manufacturing business before. In my whole life, I've never had to be responsible for inventory. I've never had to be responsible for logistics. Oh, my God. It's a freaking nightmare. It's like, I don't. I don't like bits. You know, they say bit. They say bits versus atoms, right? I like bits, and I hate atoms. It's like, oh, my God. Wait a minute. What are we talking about here? We have to ship this stuff. It's like, seriously, it wasn't my expertise, so. So it's like, if I'm on the services side, I don't want to step into a company that's a manufacturing company. I mean, me personally, I hate inventory. So it's like, why is this slowing me down? You know, I can't get this one part right now. I was reading something this morning about, if you're planning a trip, you should. You need to make sure that you got your rental car first because there's a chip shortage that's holding up the car manufacturers from delivering fleets to the rental cars. And us, like, all we want to do is travel now. It's like, okay, things are opening up. I want to go. It's like, oh, we're going to Boulder in a couple of weeks. We don't have a car now. I have to go check. So if you don't understand that business, don't buy that business. Go somewhere else. There's a lot of opportunity. Lots and lots and lots of opportunity, and your life will be much easier to the degree that you understand the underlying. So Ben Graham, some of you know who Ben Graham was. Ben Graham was the investor who is the kind of core idea behind all of Warren Buffett's thinking. This guy codified value investing, and he transferred his knowledge to Peter lynch and to Warren Buffett and people like that. And lynch wrote a book. Can't remember the name of it, read it when it came out. And the gist of Lynch's book was, was, invest in what you know, that's it. So if you understand the underlying business, you can make money as an investor. And if you don't understand the underlying business, what's likely to happen? Unless you make money because of a trend that's happening that has nothing to do with you. Rising tide lifts all boats. If you don't understand the business, you have no idea whether that business is going to make money in the future or not. And I would say the same applies in stock picking, applies in acquisition targets. It's like, stick with what you know, big deal. Big, big, big deal. So I would argue that SEO social media, which is really SEO at this point, including YouTube, including Facebook, including everything you can think of, is a great way to start a business. And I would further argue that it can't compare to paid traffic is paid traffic is the only thing that you can actually scale. It's the only thing that you can actually maintain control of from now until the end of time. That doesn't mean that the terms of service won't change. That doesn't mean that Google won't flip the script on you and completely blow you out of your business. And that Facebook will do the same. And that I can't even tell you what the next great place to put your ads is going to be, but that mastering the paid traffic side of the business will lead to incredible growth. It's the only place where you could say, I'm going to double my traffic from and be able to do it. So that's the first thing I'd say, is that turn the focus back on to how do we make the paid traffic side of the business more powerful than the free side of the business? And if you can do that, you can grow the business, I'm going to say, fundamentally without limit, just from that alone. Most people don't. Most people are, I think the word might be terrified of the whole idea of buying someone else's company as a way to grow their business. So don't expect other people to understand it. So I'll tell you a tiny story about. So the way I launched this business, I had no experience doing anything like what I set out to do, which was coach business owner. And the thing didn't even really exist at the time. I had been a consultant for giant technology companies and I understood banking. So what I did was I made a list of everyone in my orbit who I thought trusted me. That was all I was looking for. I was looking for people who trusted me. Then I sent out an email and the basic pitch. Email, I think I was fax, phone. I basically reached people how I could reach them. And my basic pitch was, I'm starting this new thing, I'm helping small business owners grow. And there was some yada yada in there, but it was like, I'm helping people do this. This is the payoff for them if you know anyone. So it was really clear that I wasn't pitching them, but if you know anybody who might be able to benefit from this, I'd love to be able to talk to them, please give me a call. And that was it. And that's how I started my business. And it was, you know, I got a few clients. And then, by the way, as soon as you have a transaction under your belt, you can talk about that one transaction. Never say anything that's not true. But it might sound like you've sold 10 companies or bought 10 companies already, because there was this aspect of it, and I helped this client do this, and then in that transaction we did that. And it's like, well, are those two things or are they one thing? And so once you get the first one, you're home free. But the thing that I would position, particularly if you're looking for people to recommend other people to you, is focus on the payoff. That's really it. I'm helping people who are looking to get out of their business. I'm looking people who want a liquidity event. I'm looking for people who have decided it's time to sell. I'm looking. Any of those kinds of words, I'd focus on that. I've been doing this quietly. And I would say that because if they go and look for you and they don't find that Nicole Holland has done any transaction, you haven't put that on your. On your resume, what businesses you bought or sold or anything else, it's like you're doing this quietly, we're doing this discreetly. I'm reaching out to people who I've had experience with, who trust me and know the kind of value that I bring. I would underscore that. Who know the kind of value that I bring, who know I operate with integrity. You know the words that. Because if you're going to make a recommendation for somebody, you don't want your own reputation tarnished as a result. This is the big reason when people don't make recommendations. That's why it's real simple. They don't want to get tarnished by you doing whatever bad things you did to the person they recommended. So I would emphasize your previous relationship and I would emphasize what the benefit of the conversation is. And I emphasize the benefit of a successful conversation, which is that all of a sudden people fulfill their life's dreams. People buy property all the time, whether it's, you know, companies or real assets, real estate, and they go, well, yeah, it's, yeah, does not performing well, but the price is great and I'll be able to flip It. So when I was buying homes for myself, and every time I bought a home for myself, you look at the things which are the noticeable, like, what is it about this place that makes me not want it? And then you say, oh, yeah, but I can fix that. And, you know, and then flip it. So the thing is, if you noticed something wrong and you don't completely fix it, the next person is going to notice the same thing. Now, maybe they're not as smart as you, but I always assume that the next buyer is probably as smart as I am. And whatever thing I saw that was wrong that I chose to overlook, if it's still there, the next person's gonna buy it or is going to see that. So. So I have this business, and yeah, the margins aren't great and the fixed expenses are a little high, but I can buy it cheaply because of that. And then I could just flip it to somebody else. That's never going to work because somebody else comes along and they see the same flaws. On the other hand, if you say, well, I can remedy that flaw and I can remedy that flaw, and I can remedy that flaw, and you can get it at a great price because you've negotiated down because of those flaws which you now know how to fix, then you're going to be in great shape. But if you can't check all those boxes, this is not the deal for you. So I'm going to say something about sunk costs. Sunk costs are a really important idea. Sunk costs are money that you spent in the past, period. That's it. Those are your sunk costs. So what happens to a lot of people in a deal? So the deal takes time and it stretches out and circumstances change and it's no longer as good as you thought it was, but it's still kind of okay, but you should probably walk away. Except you go, yeah, but I put in the past year working on this thing. I want to make it work. That's the wrong thinking. Anytime you hear yourself saying, but I've got this much invested money that you put in time, that you've put in heartbreak, that you've put in whatever it is. And it's all those things keep you going in the deal, whatever the deal is. It could be, by the way, your job, it could be your existing business. It could be a negotiation, it could be anything. But those things keep you in, even when common sense is time to get out. So the simple question is, if I were starting today from scratch, would I be interested? And if the answer is no, probably not. Walk away. Sunk costs should always be compared to, would I make the same decision if I were starting today? And a lot of times people are doing what they're doing. I did this in my marriage. I was like, I had a lot of time in to my second marriage, and I didn't want to walk away from it in large part simply because of all the time I'd had in. And at one point I was like, yeah, but I wouldn't start this all over again. And that had me walk away. So it's really. That question is really important. So if you look at her business and you say, if this was shown to me today, would I be interested? And you peek under the hood a little bit and you look at the numbers and you go, no, then walk away. That's hard. By the way, that goes against human nature. Human nature says, I got all this time, then I got to make this work. In Western society, we are taught that follow through matters. And of course, follow through does matter. But just because you put the time in doesn't make the thing better. This part about if you can't make the numbers be what you want them to be, you know that the margins are too low and you can't figure out how to increase them, or you know that the fixed costs are too high and you can't really figure out how to decrease them. You know, if I'm walking into a transaction, I'm like, okay, this is off here. But I know five different ways I can fix it. I have to worry about that thing. I know I can fix it. It's just now it's just a negotiating point for me to get the price down. But if I look at a problem in the business, I go, I don't know. It looks like they're doing the right thing, and I'm not sure what would make it better. That's not a deal for you.

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