Paul Moon & Morgan Tate: Buyer and Seller Negotiations, Exit Planning, Valuation in Business

One other thing I would add on the landlord thing as well. I saw a deal die last year where it was purely on the landlord, the buyer and seller. We negotiated a ton of time. And this is another common seller mistake is they're afraid to talk to their landlord about the sale because they think they're going to get evicted if the deal doesn't fall through, which is usually not the case.

Have you seen any other type of content that works really well, like, to get people, like, clicking and in terms.

Of the topic of buying, selling.

Yeah, yeah, yeah.

I would say people are. People are really interested in the valuation piece, I find, because nobody has any idea how that works. So any topic around that, like, what, how much is your clinic worth? Like, that will get people quite interested. Like, you could do, like, case studies on deals. So, like, deal horror stories or the opposite, like, success stories.

Oh, there you go. That's my opening question. Why don't we get started and then we'll just kind of roll in. But just like a high level is that, like, this will probably be this, like, we should be finished in about, like, 40 minutes. And I'm going to introduce you, Morgan, and also with you, Paul. And this is kind of a regular series where I just interview, like, all these cool, like, entrepreneurs around the world who are kind of in the healthcare space. And we just kind of talk about really awesome stuff, you know, and then a lot of the content afterwards is going to be put in the podcast, but also cut up into, like, little sections where we could just, like, spread across all our different social media channels. But then we tie it back also into those weekly emails I was telling you about, those roundup emails. We're like, hey, check out this, like, episode where Morgan talks about the horror stories, like, of, like, you know, like, whatever. The seller's horror story, you know, and how he lost $250,000.

Right.

Because he didn't file a T4 return.

Yeah. Right.

But, yeah, and I think that's it. And once again, we're going to keep it, like, super light and funny and just have some fun with that. Yeah. Any questions or. That's pretty straightforward.

No, that's. That sounds good. Yeah. And you, I'm assuming, do you want to keep. I would imagine you want to keep the answers relatively concise so you can, like, chop this up into other content if you wanted to.

Yeah, just whatever you want. This is free flow. Okay. Like, Jada and her team will make us look like rock stars, you know, so. And then they. Really bad stuff. She'll Cut that out. Anyways. Right, so cool. And then. And then let's see. But yeah, yeah, I think let's start there. So. Okay, Paul, I don't think this first time we're doing a show with you, this is quite. This is quite exciting, you know, so there's probably a few people coming in because I think I gave a link to some random, like to a few people who actually have done it. So. Okay, so we are gonna go live. Welcome everyone. This is the Clinic Boss show. I am Rick Lau and I'm your Host. Grew and exit 127 locations and now a $37 billion grocery chain own my clinics. Right, Paul? So I'm on this like fascinating journey right now to learn from the top healthcare entrepreneurs in the world about getting smarter in business and in life. And this sounds like you. You're on. You're gonna love our show. So Paul Moon here is my co host. We've been business partners since 2002, right after the dot com bubble, you know, and he survived three recessions together. We built and exited the 127 clinics. And now Paul heads up, heads M and A at Clinic Accelerator and he helps clinics, you know, in our community buy and sell their practices, you know, and. And today we got an awesome guest. We got Morgan Tay. Morgan is a co founder of deal builder partner at Chinook, busy advisors, and he's helped over 250,000. Sorry, 250 businesses in selling their businesses.

Right.

And now he works with like a clinic accelerator with Paul to. To help buyers, like sell their practices. Right. So, um, Morgan, I just want to kick off, like, how. How did we. How do we meet? How do we cross paths? Like, do you remember?

You know, I think I saw some of the content for Clinic Accelerator and thought it was a super interesting niche that you guys worked in. Um, and then we happened to be. I actually came up, I met one of your team members in Victoria, of all place, Victoria, bc, at an event. And she was explaining what you guys did. And I said, oh, well, I think we need to talk. Cause it seemed like we were in the same boat.

Yeah, it was shadow, right?

Yeah. The airplane.

Or is it one of those like Andrew Wilkinson like events that you guys.

Andrew Wilkinson event. Yeah, yeah, yeah. Okay.

Wow. So. So do you know Hamza as well? Like just like an Andrew and stuff? Okay.

Yeah. Hamza was actually probably the connect because I think he brought shit to the event. Yeah, yeah. Yes.

Okay. I actually went to one of those first events in Victoria back in August and I actually saw Your name. So Andrew was there, Hamzo's there. And, and I was like, oh man, like maybe I get to meet Morgan, you know. Right, right. You know, but, but you weren't there, I don't think. Right. So. But yeah, like let's get this started. So I'm super curious. Like there's so much, there's so much things going on right now in the economy, in the news that's impacting like selling activity. Right. You know, people selling their business, there's like these high interest rates. You know, there is inflation, there is, you know, possibly the lower valuable, the lower valuations that's going on right now and then the fears of recession. Right. So Morgan, I want to hear from you, like what is like, what are you paying most attention to right now? Like given just like everything that's going on, you know, in the post Covid. Yeah. World.

Yeah. Well, I think that there's. We get this question a lot and people are very fearful of the interest rate environment. But something I can comment on is that our deal activity hasn't dramatically slowed down and it's actually, if anything, accelerated through the last two quarters. The first quarter of this year was a bit slower, but since then we've seen deals closing. The structure of the deals, which you can talk about a little bit later, has changed slightly to accommodate for higher interest rates, but it doesn't mean that deals aren't happening. I think that the most underlying element of a business sale for owner operated businesses are main street sales. So deals that are typically have an owner involved in some aspect of the operation, whether you're overseeing the operation of three or four different clinics or just your own. The bigger problem is not the deal financing. It's all about saleability. So like how well positioned is your business to sell and are you creating problems in your own practice that's prohibiting you from being bought? And so as long as you have some of these core things sorted out on the saleability side, you can still make deals happen. And there's still tons of buyers that are interested in buying clinics that are well positioned to sell, which I'm happy to elaborate on.

Interesting. So, so this, everything that's going on with like the interest rates or like, you know, like maybe in the possible fear of recession, like it has an impact like buyer activity or have you seen a spike in seller activity?

No, I've seen. I think that there's a lot of people that post Covid are maybe a little exhausted and are looking to maybe change things up or exit their clinic. After a few tough years, however, there's lots of buyers that if anything are looking cash flowing assets that they can purchase that are actually a little bit recession proof. And I'd say that, you know, health and wellness in that category, a lot of these are essential services where people, you know, if they have, are in pain and they need to go to a physio, they're probably going to cut out dining at restaurants or a lot of other discretionary expenses prior to some of these essential services. So I feel that the buyer activity really is still open to this because you're a little bit more insulated from kind of a general recession just being in the industry that everybody's in.

Yeah, interesting, Paul. And, and you know, you talk to hundreds of like owners that want to either sell or buy clinics for now. Like what, what do you, what are you seeing as the most concerning issues right now?

Yeah, I think, I think same actually same thing as Morgan was saying, there's a lot of owners that are sort of getting that post Covid fatigue. On the buyer side though, it's interesting because there's a lot of buyers out there. They're looking for opportunity. And you know, a lot of these buyers have been waiting for that opportunity ever since COVID So they built up a little bit of a cash reserve. And so they're not necessarily looking to get funding from like banks or institutions or anything like that. They actually have that capital reserve to actually go and buy these clinics. Now they are looking for clinics that may be, you know, to Morgan said, a little bit distressed. Right. So they're looking for good value, but they're buyers out there nonetheless. But if you have a situation where your clinic is operating well and it's having really good cash flow, you can still sell at a higher valuation because people are looking for quality as well. So it's sort of an interesting environment right now, especially with the high interest rates.

Wow.

Wow. And Morgan, I'm just here from you. Most of the deals that you've seen like within your, your brokerage, right, have they have it or have they been like cash or was it financed like through bank debt or something?

Almost every one of our deals is a bit of a mix oftentimes. And I, and I, and I say this to sellers all the time as well. When you have a buyer that has a million dollars of cash, typically they're going to leverage that cash so they can buy five clinics rather than just buy one for a million because they can get financing terms that even with higher interest rates, the growth of the business and the actual return on their invested capital, it still makes sense for them to finance it even at interest rates that are above 10%, which is always, I think, a bit surprising to people. So oftentimes there is a big chunk of cash that's put down. If you're looking at financing through the BDC, for example, typically kind of capped out around 70, 75% of the business value if there's no real estate involved in the transaction. And then that remaining 30 to 25% is going to come from the capital of the, of the buyer and then some seller financing. So basically the seller financing a portion of the purchase price with an interest rate where the, where the buyer will be paying them out over a little bit of time. So that's typically our common deal structure has those three elements. Cash, external bank financing, and then seller financing from the owner themselves.

Yeah. Wow. Cool. Super cool. So Paul, like there's a lot of talk in news right now about like increase. You're seeing business that have like increased bankruptcy, bankruptcy rates, you know. Right. And, and I'm just curious, like what's, are you seeing that right now with like, you know, maybe people in our community or, or even like other businesses that you know of.

To be honest, I haven't seen a ton of bankruptcies, like actual closures of businesses. But what I'm hearing more and more of, especially on the coaching side is like a lot of cash burn or people just not having enough revenue or top line revenue to actually support the business. Whether that's because of poor operations or the ability or poor marketing ability to get new business through the door or they, they may have gone through a scenario, especially with sort of lease type scenarios where they've just signed a new lease and the, the, the, the lease rates have gone up significantly. And so we're seeing a little bit of that, a lot of like lease pressure on the business itself. So. But I think there might be some bankruptcies or closures coming down the line as, as inflation gets a little bit worse. Right. Because I think I'm seeing a lot of that across the board.

Right, yeah. What about you Margaret? Are you seeing, are you seeing stuff maybe in other, in other industries like the restaurant industry where like you're seeing more and more types of like virus sales or potentially bankruptcy, you know.

Yeah, there's, I would certainly say that there were some companies in those categories that were floated with COVID subsidies to get them through the pandemic. And then there just has maybe been a bit of a change in Consumer behavior, since where those businesses, you know, did have to wind down. Oftentimes what we see is less these like buyer sales. Because ultimately if you have a company that's losing a couple hundred thousand dollars a year and you go to sell it, even if you try and sell it for, you know, $50,000 or $100,000, it's still going to be costing the purchaser money to try and do the turnaround. So I find that in most cases it's not as successful. And most owners, if they're drastically losing money or in a very poor financial position, they're usually better off winding down operations rather than trying to find a sale. Because the sale effort in a small business can take quite a bit of time. And if you're burning money, then you're just going to be burning money the entire duration of trying to sell. So that's kind of something that we see more often is the wind down rather than a fire sale.

Cool, cool. And right now if you look at the people who are selling businesses, like what are the, what are the top reasons why people are selling their, like their businesses right now? Like across all industry, whether it's health or retail or brick and mortar, like restaurants or. Or software? Yeah, yeah.

I would say I always have classified sellers into like two different buckets. One is your traditional kind of what most people think it's like a retirement exit. It's a baby boomer. They've been operating the business for 30, 40 years. Oftentimes their first attempt is to sell the business to their kids. And their kids have watched their parents, you know, grind for the last 30, 40 years. And like, I don't want to do that. So they're like, no, I don't want to buy the business from you. Then they try and sell it to their, their manager employee, but the financing doesn't work because they might just not have the cash. And they don't want to lend the entire purchase price because they want that nest egg for retirement. And then they talk to somebody like us and do a process to actually sell it. And those ones are pretty easy to explain to a buyer. Hey, the now Bob is looking to retire and it's pretty straightforward and there's not a lot of worries that they're going to start up a competitor in retirement and compete with them. The second bucket is usually what I call is kind of like your first time entrepreneur looking for their first liquidity event or exit. So they might be in their mid to late 30s, maybe 40s, they've run a business for maybe five to 10 years. They're kind of maybe tired of the space they're operating in. They want to try something new. They want to free up some capital to either like purchase a home or start a new business venture. And those ones are a little bit more tricky because then you have to kind of really hammer out the non compete issues. Are they going to stay in the same business category? The geographic region, but I'd say that's the second most common one is really to pursue another interest. And in the past, like when, you know, some of my business partners who have been doing business brokerage for about 20 years in the past, you could almost never sell a business for that reason because everyone was super suspicious. But it's actually changed quite a bit. Like buyers don't see that as a major red flag like they might have in the past.

Yeah, yeah. Wow. And Paul, like, like what do you see and why, why people, you know, who come to you say, I want to sell their businesses.

You know, it's same thing usually people who are either retiring, but I'd say the most common is exactly what Morgan was alluding to. It's like people are fatigued, they're tired of running their businesses. I mean, for clinics specifically, a lot of these clinics, they're just a little bit on the wire. And so, you know, they have a superstar clinician leave and then all of a sudden it just tanks the profitability of the business. And, you know, you can only go through like, let's say three or four months of $5,000 a month or $8,000 a month of cash burn, and then you got to start making decision. So, yeah, a lot of it is fatigue, a lot of it is financial pressure. And then, yeah, I'd say about 20% is people who are looking for that exit. And those people tend to do very well because they tend to sort of rise to the top in terms of what's out there.

Yeah. What about divorce or health issues or like a business partner fallout, you know?

Yeah, that's definitely part of it. Like when you get personal issues, put a lot of stress on the business itself. You know, I'd say that's probably about another 20, but, you know, so I'd say 60 is people who are just, you know, ready for either retirement or their fatigue of their business. And then you got, you know, 20 who are personal and 20 who, you know, have that sort of want that liquidity event.

Right?

Yeah, yeah. You know, I just spoke with, you know, a clinic, a clinic owner this, this week in Our community. And he just like left this practice, you know, and start up his new clinic. And then I asked him, I was like, you know, how did the owner take it? And the owner was like, was really upset because in that one year she lost five of these people and each person was $200,000.

Right.

You know, and so you lose, you know, five of these people that are building $200,000. That's like a million dollars. And so literally she went from doing two and a half to like one and a half, you know. Right. Like, and, and she's like, now she's taking the, the brunt of the hit, you know. Right. And it was, it was, it was a really sad moment. Right.

You know, yeah, it's. It's very sad. And I think Covet had changed a lot of people's sort of mindsets around work and, and work, life balance and all that sort of stuff. You have a lot of clinicians who are leaving to go to sort of rural areas, so that sort of, you know, decimating some of the clinics in the urban centers. So lots of like, interpersonal things going on for sure with the staff. And then that obviously affects the actual business itself.

Right? Yeah, yeah. Anything else I had, Morgan?

Well, the. Well, it's funny, I was talking to a clinic owner actually today who was trying to hire, you know, new clinicians, and there was two younger clinicians just out of school who basically, for the work life balancing, they were not willing to work more than, I think, I think he said it was 18 hours a week. That was, that was their top out. And, and it was just like, there's just no way I'm doing working more than that. And they were getting. These are two people that allegedly had, you know, a lot of student debt too, and they were fresh out of school. And so it was, you know, it's difficult, I think sometimes to find quality people nowadays. So things have changed.

Yeah. Wow. So I want to hear from you, what are some like, you know, horror stories that you see on this, on people on the sell side? People are selling their, their businesses. What, what's, what's some of the craziest horror stories that you've, that you've, that you've heard or witnessed and, and what can we learn from that?

Yeah, I could probably fill up a pretty good hour of different stories. Almost every deal's got a little bit of that one that I like to use all the time because it really leans into how important it can be to do exit planning. And exit planning doesn't have to be complicated. And this is a really good example of how just even if you are planning to sell in the next couple of years, there's some very small things you can do that can save you a tremendous amount of money. So one of the clients that we had that was actually a little bit adjacent to a clinic, but did laser hair removal and then kind of services like that, skincare and all of that, was looking to sell their business was worth approximately 1.2 million. We had spoken to this owner probably every year for the last three or four years, like, oh, I'm ready to sell, I'm ready to sell. And we pointed out a couple things. One, the financial statements that were prepared didn't look like they were prepared by a cpa. It actually we weren't quite sure what the designation was. So we said you might want to like, consider getting paying a little bit more, but getting the higher quality financial statements prepared because this will be very important for bank financing when you do decide to sell. And obviously you want to make sure your numbers are super accurate. And then we also noticed there was a pretty significant amount of cash sitting in the corporation and so on. You know, this business only did, did about 800,000 of revenue, 900,000 revenue, but was very profitable, but had about 800,000 of cash just sitting in the company bank accounts. And so without diving into the accounting side, basically they had a bunch of inactive business assets sitting in the business, which makes you, if you're above a certain percentage, you don't qualify for the capital gains exemption on the sale. Now this is a very easy thing to affix her accountant, you know, she was bragging about she only paid, you know, I think a thousand or $1,500 a year for all of her financial statements. But the cost of those financials, of that accounts advice turned to be very high because I, by not qualifying for the lifetime capital gains exemption, I think the rough math was about 250,000 she lost in taxes on the sale. That would have been completely preventable had even just a two years before had cleared that cash out of the corporation and had two financial years without it sitting on the books. Would have had to pay dividend, you know, income on it. But there was a very easy fix to that problem. And again, it was just not having the right advisors and not the right planning otherwise, you know, and a completely different outcome obviously for her in that situation.

Yeah, the tax planning, like, I think that's the big component. And just for the people that don't understand what that capital gains exemption is like, how can you quickly describe what that is? Like, you know, maybe like in a minute or so. Yeah.

So in Canada we have this really great tax benefit. As a small business owner, if you have a Canadian owned corporation owned by Canadian citizens or permanent residents, you can qualify. Talk to your accountant, obviously, to. For the lifetime capital gains exemption. And it goes up, it matches inflation. So I believe, I don't know the exact number. Let's just say it's about 900,000 right now of your sale price will be completely tax free if you sell your business as a share sale and not as an asset sale. So if you have a business and you say it's worth, you know, $700,000 and you sell it as a share sale, in essence, a lot of times your business can be, you know, all those proceeds can go to you without having to pay taxes on it. So it's a huge benefit to qualify for.

Yeah, yeah, that's, yeah, that's, that's, that's, that's super, super important, you know. Right.

I think there's another rule actually in place as well, which you kind of reminded me of where, you know, you're talking. They had about $800,000 of cash sitting in their account where, you know, if you have more than 50% of the worth of your business in your, your account that actually potentially is, I can't remember the exact ruling, but there's a taxable situation where you have more than 50% of your assets in the account, you may either pay more tax or there may be a taxable event. So that's something that you should probably talk to your accountant about to make sure that you don't get dinged unnecessarily.

And it's super common too, because I think a lot of business owners having, you know, I think all of us have, you know, maybe running a business have come close on payroll one month or had a down month and you like to have some cash just there in the accounts to keep it in case that comes up. And I've seen lots of business owners that are, you know, holding so much cash in their corporation because they don't really know what to do with it other than reinvest it in their companies, however. But it's so important to be out, like have a good qualified accountant who can kind of quarterback this and, or, you know, open you up so you have lines of credits that can be accessed if in those events so that you can still benefit. But it's quite, you know, the reason why Accountants still have a designation or profession is that tax law is not simple. And so it's why, you know, trying to figure out yourself can be detrimental for sure.

Yeah. Wow. Yeah. No, no. And, and is notice reader is good enough, Morgan.

It depends on the size of. For lending actually. So one of the common misconceptions with buyers is they're like, oh, I want to get audited statements from the seller. Well, in Canada there's different levels of financial statements. So what Rick was just alluding to is notice to reader. It's, it's, it's slightly changed names now to the compiled engagement reports is your basic level of accounting that your accounts will prepare. So if you've ever had your financial statements put together from an account account and it'll basically say at the beginning these are unaudited, you know, a notice to the reader that these aren't audited and they're just been prepared based on information provided from the business owner. Those financial statements will get you lending up to 350,000 from the BDC without having to get those statements upgraded. The next level is reviewed engagement statements, which your accountant does a deeper dive on your books. That costs more money of course, but it's advisable for companies that if you're looking at a business that's going to be worth, you know, anywhere around a million or up and there's going to be a significant portion of lending. We always advise clients get those done because you're kind of probably have to get them done anyways and it's much easier to get them done in advance. You don't have to slow down the deal process when a buyer is ready to go. And then now you have to wait a month to get your financials upgraded and then the final level is audited statements. But no, those can be over $20,000 to get done and very rarely would a bank or BDC, unless your company's of a significant size would require those. So just something to keep in mind.

Yeah. Back in our PTL days we did those audit financial statements. It was very expensive.

Yeah. And I think 20,000 is like a pretty, I think that's a pretty conservative number. I've seen it.

20,000 might be the review engagement price. And now. Yeah, financials are probably in the hundreds, but yeah, yeah, higher, higher tens. For sure.

Yeah, for sure.

Morgan. There's always, there's always this battle between, between the sellers wanting to sell it for shares and then the, then the buyers want to buy the assets, you know, and obviously like we understand you know, there's a difference between, you know, for eligibility, there's all these other reasons outside of just capital gains.

What's the.

Like, how many deals, like, do the most of these fall apart when, like, you know, like, how many deals fall apart when, like. I'm just curious about how many deals actually fall apart when the buyer's stuck with not doing a share purchase because it's in a, it's in the interest of the, of the, of the seller to have it right, you know, or is more of a bluff.

It's always something that we talk about and it comes up almost on every deal. How we present every deal is generally as a share sale. And then we tell a buyer if you're very uncomfortable. So just for a recap for, for people watching, the disadvantage of a share sale to a buyer is, is relatively minor, but it's not insignificant. So when you purchase the shares of a company, you're assuming the corporate history of that corporation because you're the new shareholder and owner of that business. So let's just say there was undisclosed liability, maybe a patient was injured, and for whatever reason it wasn't covered through insurance or addressed. If they came forward and wanted to sue the corporation, your name is now on that as the, as the shareholder. So you could be subject to liabilities. Now, there's a bit of a debate whether it actually you can get away with that if you have bought it as a, as an asset sale. Because people usually, lawyers are pretty smart about, you know, still coming after somebody with the money. But that's the fear of why people don't necessarily like to buy as a share sale. Same with like severance, liabilities, employees, things of that nature. But as a business owner, as we always, as we already talked about as an asset sale, you pay more in taxes. So our negotiation piece around that is we usually present as a share sale and then we say buyer, if you're very uncomfortable with a share sale, we can convert it to an asset sale, but you're going to have to bump up the valuation of the company to account for the fact that the client's going to have to pay a lot more in tax, which I actually just recently did on a deal where for financing reasons, the purchaser was okay with the share sale, but the BDC looks at financing from his company and he had already had a loan through the bdc. So they were saying, combined, we can't extend lending if, if it's set up as a share sale. And there was like a couple different things we had to change. And so he actually, they, we agreed to account for the change in taxation and that's how we got, you know, the deal still done was, was basically changing the purchase price and moving it up.

Okay. And, and most buyers are usually okay with that.

Like I don't know if okay would be, it would be the way. But I think it oftentimes what actually ends up happening is that we get over the hurdle of the, of the share sale and we revert back to a share sale in most cases. Because.

Yeah, yeah. If you look back at the last hundred like deals that you've done at your brokerage, what percent of those were share versus assets, you think?

Yeah, I would, I would say it's a, it's a, it's like, it's a majority. I wouldn't say it's 60. I'd say it's for like 80 that are share sales. Maybe somewhere there, maybe even upwards to 90 in Canada. Especially for smaller businesses. It's just such a big tax savings for, for sellers that even reducing your purchase price to sell as a share sale can make a big difference.

Yeah. Okay, so 90. Right. Are typical shares, right?

Correct, Correct. Yeah.

Okay, cool, cool, cool. All right, so let's talk about valuation. You know, actually before we talk about valuation let we should actually talk about like what are the. What, what are the. What are the. What needs to be. What makes a clinic attractive for a buyer? You know, if there's like five like things like what, what would, what would they be more.

You want me to take that one?

Yeah, yeah.

Certainly, yeah. So I was actually just talking about this the other day with particularly in the clinic world, I would say the biggest stumbling block I find is that the owner is one of the primary clinicians of a smaller clinic in particular and that if they were to leave, the whole kind of business falls apart. So the dependence owner dependency is a really big challenge. And so if you can slowly start to move yourself away to maybe even just working a part time schedule and having people or moving yourself to administrative role, it's much easier to replace an administrator than it is somebody with like who has a big client list that loves going to see their chiropractor because like they know that they have trust in that person. So I'd say that's, that's the biggest factor is the owner dependency. So the less involved you are in your business the better is a big one, a level of earnings. So obviously profitability is important. But are you going to be. If someone buys your clinic, are they going to make $100,000 a year and work 60 hours a week, like maybe it's obviously less attractive than, again, if they're working, you got to be working 10 hours a week and they're making 200, 300, 400,000, which obviously boosts the value up quite a diversity of revenues. So are you offering multiple services? And if so, is one making up 80% of your revenue or what you had touched on earlier? Do you have one clinician who's like the rainmaker and bringing in a majority of the revenue? If they leave, what happens? So that's going to be a fear of a particular buyer, and then something that often comes up as well is around the real estate. So are you confident that your landlord is going to extend lease terms to a buyer? Is your lease at market rate? And if you own the real estate, are you paying yourself rent? So this is a common mistake. I see business owners do. Is they. To save, obviously, the income of, you know, they don't want to pay real estate income, whatever their tax picture looks like, they don't charge themselves rent. So they have a Holdco that holds the real estate and they have an operating company that operates from that real estate, and they're not paying any rent. The problem is that a buyer is going to look at that and go, oh, well, I'm going to get free rent if I buy the business. Right, because you're not paying rent right now. And then business owners say, oh, no, no, you'd have to pay 4,500, 5,000amonth. But they haven't reflected that in the presentation of their financials. So their financials are inflated artificially in terms of higher profit margin. So it's important to one, either pay yourself market rent or, you know, manage to. To kind of. You have to continue to offer that rent going forward.

Yeah, Paul.

Yeah, yeah, I thought, I thought that was actually pretty comprehensive list. Just a couple more that I would add, you know, more specifically to your financials. If your financials aren't clean, people get like, buyers get very skittish. Like they actually want to walk away fairly quickly. So making sure that everything is sort of categorized properly in your financial statements. Having an answer like, if you have a loan on your balance sheet that's outstanding, that's a big. It might be a 200,000 loan, a liability on your balance sheet. Having an answer for, how are you going to deal with that as part of the sale? So you might say, yeah, I could use the proceeds of the sale to pay that off, or I Could pay it off now and you don't have to worry about it. But just having an answer for that. And then also, how are you going to deal with accounts receivable? So accounts receivable. Some people have. I've seen accounts receivables as high as like 800, $900,000. Most on average is about one to two months of your billings. But making it really easy for the buyer to say, okay, I have about 800, like, let's say $80,000 of accounts receivable. If you just pay, let's say 80% of that upfront, we can sort of meld that into the actual purchase price and we can be done with it. If you say that, hey, I want every single dollar that. And we're going to have to deal with that months after the closing, that's going to be a big barrier for people to want to, you know, push the deal forward. So. So just like, in general, making it really easy for the buyer and to know how the business is, is sort of situated and what the status of the business is, that will actually help you close the deal very quickly, right?

Yeah, yeah. What about due diligence? You know, because, you know, like, how prepared are you for the due diligence? Because once they, Once you start getting to the weeds of like, hey, like, I want to check this, I'm going to check that. Like, what type of like, you know, scoreboards do you have? Like, you know, like, is your banking statements, like, how important is like, due diligence and getting that ready before you go to sale?

Morgan? I would say it's massively important and also, again, to buyer confidence to what Paul was touching on is a huge factor. So I've recently, at the beginning of the year, I saw a deal die where interesting enough, the buyer submitted a LOI on Christmas Day. You know, some people choose to do their Christmas a little bit differently, but it was a, it was a. For a solid price. The buyer accepted it, I think maybe a few days after. And we connected via email. And then the buyer provided a pretty lengthy list of documents and things they wanted, some of which we had already prepared in advance. However, some of the things were a little bit more specific, and the owner ended up taking three or four months to even reply to some of those things. And the buyer was just like, I, I'm not interested. Like, this is like, clearly not a priority. I had followed up with the owner several times, and they're like, oh, I'm a little bit busy, and they're prioritizing the strange part was work like they were doing more, they're putting out more proposals and they were trying to, you know, do client revenue. And I was like, this is not the priority right now. Like you want to exit your business, you need to, you know, you're going to make a lot more from selling the business than get in your proposal. So I would say what we do generally is have clients complete a full diligence checklist where they're uploading different documents that most buyers are going to ask for.

What's on that? What's on that?

Tax returns that correspond to their account and prepared financial statements. Typically we're going to get the, even the chart of accounts. So your general ledger, like in more detail. Any leases that you have or contracts. You can redact certain information as well if you want to wait till different phases. But like employee contracts, like an example and like redacting the. Maybe the client, their name and personal details and making sure you're not actually missing any contracts. That's a common one with either suppliers or employees. Like there's lots of businesses where they did a handshake deal and then they just kind of forgot about it. That's pretty comprehensive as well. I put that in there. Having a breakdown of your different revenue sources. So if you do have various types of billings, what does that look like currently? Land and where does that expect. And then a current inventory list. If your business involves inventory, accounts receivable and payables, like being on top of that. If you're not have it in a complete bookkeeping system, that's super important as well. So those are some of the most common ones, I'd say.

And Paul, Paul, for some of these sophisticated buyers, you know, like I think that list might double what else is missing on the list for some of the sophisticated buyers, Paul, that want maybe some of the patient data and, and all that jazz.

Oh yeah, 100. Like there's several reports from your EMR, your, your billing and scheduling software that they're going to want to look at. So they're going to look at your providers, the, the people, the clinicians in your clinic. And they're going to want to look at every individual clinician and see what their performance is. Like they're going to want to look at some of your marketing stats as well. Like, you know, what kind of money you're spending on paid ads or Google, Google Ads or what have you and then ultimately what kind of conversions you're having there. And then another one that a lot of people don't think about is they're going to want to look at your lease and that contract, specifically to Morgan's point earlier, they want to see that that assignment of the actual lease is going to be sort of an easy process. I see a lot of deals, not a lot, but I'd say the handful of deals fall through because the assignment is very restrictive for the seller, actually. And so because the seller is still left on the hook with the landlord even after they sell their business, which is a little bit unfortunate. Right? So, yeah, so that's something that definitely those several things are definitely something I would look into. And then maybe lastly, if you do have a scoreboard, they're going to want to look at your weekly stats on how your business is performing. So, yeah, some sophisticated buyers definitely go deep. I don't know if you mentioned financial statements, but the last three years of your financial statements obviously are key as well.

One other thing I would add on the landlord thing as well, I saw a deal die last year where it was purely on the landlord.

One of the most frequently asked questions I get is, how can you help me grow my clinic? So every year we put together an annual event called the Clinic Boss Summit. It's basically the Woodstock for everyone interested in growing or selling your multimillion dollar practice. You're going to meet over 300 of the world's top clinic owners. The network is going to be insane. It's three days. You're going to learn everything from marketing, finance, HR recruitment and cellular clinic. And the best part, it's going to be Orlando, Florida on January 26th. It's one of my favorite cities to hang out in January because you get the sunshine, palm trees and best theme parks. We usually sell every year within the first couple of months. So grab your tickets now. Go to konic excel.com to grab more details.

The buyer and seller, we negotiate a ton of time and this is another common seller mistake is they're afraid to talk to their landlord about the sale because they think they're going to get evicted if the deal doesn't fall through, which is usually not the case. And I would definitely recommend talking to your landlord if you're planning to exit your business in advance. Because if your landlord's intention is to not extend the lease at the end of your term, you better know that in advance because it's going to make your business pretty much impossible to sell unless you find a new location. And in this case, basically the landlord, the seller had negotiated very low market rent during COVID and then that Continued post Covid. And the landlord was actually quite salty about it. And they had this low rent and was planning on increasing the rent significantly at the next renewal. And he didn't talk to his landlord until I had thought he had already talked to him. Sometimes your clients don't always tell you the full information. He hadn't. He brought it up. We were like, just been hammering out the details of this deal. The lawyers have been working on it. And the landlord basically said, like, I have no interest in basically extending the lease. And in the actual lease agreement, there was an assignment clause where the landlord basically could approve or. Or not allow the sale of the business. So sometimes it can stretch that far. You can't even sell your business unless the landlord says you can. So that can be obviously be a massive barrier to your sale efforts. So make sure you're looking through your lease carefully either when you're signing a new one or reviewing your existing one.

Yeah. And so go ahead, Rick.

Sorry.

Yeah, no, I just. Yeah, I was just.

Yeah.

So just on that note, like, what would you say, Morgan, are the top reasons that you see deals like Derell or fall apart?

One is that probably one of the most common ones is the owner. Maybe not. I don't like to use the word lying, but misunderstanding their own involvement in the business. So if you ask a business owner, like, how many hours do you work a week? They're like, well, you know, if you just count the hours between 9 and 5, I work like 40. But, you know, and then I answer those texts, oh, I had some texts last night, and I had that call on Saturday, and then I had to go in on Sunday. And then it quickly becomes like, okay, you're working a lot. And maybe the buyer thought that they were less involved. Or when the buyer starts doing some digging, it's like the. The owner has like the personal Rolodex of all the important suppliers and. And the relationships are really centered around them. So I'd say that that's like one of the big showstoppers that makes buyers really nervous is like, how am I supposed to take over for this, this owner? It's like the business is this person. The other ones is sometimes we'll catch perhaps the financial statements when they do a deeper dive and they realize all of the revenue is coming from one client. It makes buyers a little bit more nervous. And then I'd say, like, every flip it. It's not always on the seller. On the buyers is not understanding how much cash they need to make a deal work. So they think they can buy a business similar to real estate with like 10% down or less and it's just not the case. Like business financing Canada, you need to have a bit more skin in the game. So if you're going to buy a business typically even if it's like a million dollar business that's several hundred thousand and you're going to need in cash down and oftentimes they may say they can pull the cash together and then they can't and then that's what can sometimes kill the deal too.

What about like the price being so far apart? Is that one of the top reasons?

Yeah, it doesn't usually kill the deal because at that point like usually they don't get to an offer. Like if it's really far apart then that gets dispelled. The final one I'll add on there is poor advisors. So accountants and lawyers stepping out of their lane and advising on things. We've had lawyers say like oh, that business is overvalued. We've had lawyers demand crazy unreasonable things. And the biggest one I'll underline is when you're, especially with the lawyers, accountants are generally, they kind of, there's not as much of a variance I'd say but a lot of people will use their lawyer, they use to incorporate their business. I've seen people use like litigators or people that just like prepared the family will and these smaller town lawyers who have never done a transaction before are very unfamiliar with the sale process. And I've seen a number of deals die just because of poor advisors. Similar to my horror story example earlier that tax Planning problem was 100% the accountants error. So you have to use the right professionals. Yeah.

Paul, you know, is there anything else that's missing on that list that you've seen deals fall over the, over the years?

Well, just like, like unrealistic expectations for sure. Like that's, that's probably the biggest one. I will actually I wasn't even thinking until Morgan said it but the lawyer thing is actually really critical and one of the suggestions I would give to people if you, if you are in a scenario where you feel like the other, it doesn't matter if you're a buyer or seller but if you, if you ever feel like the other counterparty's lawyer is, is being too unreasonable, I would definitely ask them can you get a second opinion or someone who's actually from the industry. And I've done that several times. I've actually gone on, on calls and it's only because I have the experience of being through so many deals where I've gotten everybody on the call. Usually I don't talk to lawyers at all, but I get my lawyer, I get their lawyer and I get the buyer on the call. And it's, you know, it's a little tougher if you don't have the experience, but. But I was able to call out all the bullshit that the other lawyer was talking about, and we ended up actually pushing the deal through. So this is, to Morgan's point, if you have a great advisor or consultant that has been through many deals, it can make all the difference in the world where they can sort of mediate, you know, sort of the unreasonableness of the counterparty's lawyer.

Yeah. Our go to Saint at the office is owners and buyers don't know what they don't know, particularly when it's their first ever transaction. So you can have a buyer come in and say, like, for, like, on the working capital, which you were talking about earlier, Paul, with the accounts receivable, say like. But you have a buyer say, yeah, I keep all of the accounts receivable. You pay all the payables, and that's just how it's done. And my business partner, when he sold his business prior to going to the business brokerage, he had bad advisors who. He didn't realize that that's not true. So he was pounding the doors of all of his clients, being like, hey, I'll give you a. Like, can you pay this invoice today? Like, I'm selling my business. I need these all to be paid up in time, when really that's not how it typically goes. But again, you have no idea because you've never done it before. And if you don't have the right advisors pointing out the like you said, then it can catch you pretty quickly. Wow.

Yeah, those are. Those are awesome gems. All right, so this last question I was just thinking about this was that, like, do you have any tips on what is the best approach for a seller on negotiating, like this entire, like, deal to get the price that they want? You know, like, what would you say to a buyer, you know, sorry, a seller, you know, like, on how, how you would work with them to negotiate? Like, yeah, negotiate the price or terms.

Yeah, I would. What I often say is in most business sales, the leverage is with the buyer because you don't necessarily have multiple parties that are competing for your business. That does happen, and in that case you have a lot more flexibility. But I find that there's a misconception with a lot of sellers that they're not the golden goose they might think they are. In a lot of cases, like you might be negotiating with a single buyer and the buyer oftentimes are aware of that. They're like, okay, well you know, if you're not going to move on any of these points, I'll just keep looking like I, nobody needs to buy a business. There's, it's a, you know, they might want to buy a business, they don't need to, whereas somebody needs to sell. So that's where the negotiation leverage lies. How where I've seen people have a lot of success is extending the olive branch on smaller terms can make a huge difference on price point. So the most recent example I have is I had a seller who, they were willing to take a 50 or $60,000 reduction on the purchase price, but they were all caught up on the consulting agreement after the purchase for training and transition. So, you know, I think the buyer had proposed a $40 an hour training rate. It was only going to be two or three weeks of full time training, maybe even less. And the seller really wanted $50 an hour. It was important to them. We're talking about, I think the difference was about $2,500. And I'm like, if you negotiated the price point, just say I'll go $40 an hour but get $50,000 more on the purchase price. You know, who cares about the, the training? So sometimes people's ego gets in the way. And if you just extend like, oh, I'll be willing to stay on for an extra month post closing, that can go a really long way in building goodwill with the purchaser. And building goodwill and building a relationship allows you as a seller to get a lot more benefit out of the deal because the buyer wants. Most people are good people and they want to work with you to make something work. And it's really hard to do that if you, you know, I don't want to say they're, if you're not friendly to one another. Here's the PC way to say that.

Yeah, interesting. Anything else on that, on this, Paul?

Do you have anything from your experience?

Yeah, I, well, just a quick comment on the, on the lack of or like the buyers are really in the driver's seat. It's interesting because the, the better or the higher quality your clinic are is ironically, there's less buyers, right? Because the more money you make, you have to find the buyers with lots of money. And there aren't many buyers out there with lots of Money. So I agree with you 100% in terms of what sellers can do to maximize their, their return or maximize their sale price. Number one, don't talk about price on the first meeting, right? Like, that's like a big mistake that a lot of sellers make. I want this much money or I think it's worth this. And then literally they scare the other person away right away. Part of this is because you don't have a lot of buyers out there. You have to develop a relationship with them to make sure that they can trust you in terms, especially in the due diligence process that you're, you're, you have a good business, you run it well, you have good, you have good staff that will go along, et cetera, et cetera. And then the other thing is, you know, when you're going through this process, ultimately, you know, you want to make sure that when you do sell that, that again, like you have like an infrastructure in place where it's a turnkey clinic. And so the selling process doesn't start when you sign with deal builder and Morgan. It actually starts, let's say six months or some time before you got to prepare your clinic so that when, when the buyer comes in, they're turning, running into a turnkey operation. And then the last thing is understand their motivations, right? If their motivation is to close a deal quickly, then do everything you can to close the deal quickly. If their motivation is to have like a really strong team in place, then talk about your team and who could be a potential leader in the business going forward.

Right.

And that requires that relationship to be built up so you understand their motivations and you can really play to, to those advantages that you have and, and you know, basically market your business, right?

Yeah, that's gold. Gold. And I want to ask you that, you know, like, we've done so many negotiations and it always get to the very end where we say this is the final offer and we're going to walk away. Can we talk about that, Morgan? Like, does that happen on every single deal or is it misused?

I think it's definitely, it's definitely misused. What I find with the smaller businesses, and this is perhaps it's different in when you have a strategic, I think when you have larger buyers who are very experienced, they use that and they probably are, are joking. What I find with actually smaller business owners is that they especially, maybe it's a Canadian thing, they don't love negotiating. So what I've actually seen is if you list your business too high I've had this misconception. I hear this so many times from sellers. It's like, oh, why don't we just list at 800,000 when we think their business is worth 600? Because then someone will offer. Maybe they'll offer at 700. And then. And I'm like, no, the problem is that people just won't make an offer because they don't want to offend you. So there's like, a pretty serious thing with that. I find that, like, oftentimes people just walk away rather than trying, like, insulting the seller. So it's something you have to really be careful with. Negotiating too hard in the Canadian culture is that oftentimes people will just be like, well, like, they obviously aren't willing to. Whereas I think in the States, where my interaction with some deals in the States, people don't really care. They'll just, you know, they're fully ready to negotiate till the final, you know, step. And it's a little bit different here. So there is a bit of, like, truth to what you're saying. Not oftentimes people are, you know, sometimes they're bluffing. But I've seen people just be like, okay, well, that was my last offer, and then walk away. So you never know for sure.

Paul, anything you want to add that one?

Because just I, I literally will walk away every single time. And it's almost, it's almost no fail where 80, 90 of the time I'll get a call a week later or two months later or six months later. Like, it. They always, like, tend to come back if, especially if you're respectful and, you know, if you, if you try to actually do a deal in good faith, nine times out of 10 people will come back. And the advice, I've given that advice to many people, and they've also had people come back to them as well when, when they. They're negotiating with, with sellers as well. So. So yeah, I think that, again, to Morgan's point, like, there's not a lot of buyers out there. And so you may actually lose that deal because you're, you're, you're. Maybe your ego is getting in the way.

Right.

Yeah. Cool. Awesome. This is a great show. I think I've. Yeah, it's interesting to kind of learn, you know, from your perspective market because you're actually doing this, like, every single day. And you're seeing not just like clinics, but you also see. Seeing like, all the other, like, industries and all the different verticals.

Right.

So, Paul, maybe, maybe you could talk about this if someone wants to sell their clinic, you know, with, with like, with Morgan, like, you know, how do people find out more about like Morgan and, and, and how we can help them?

Yeah. So what, what you can do is you can get on a call with me. I'll do a little bit of a pre qualifying call and then if you, if your clinic seems like a good type of clinic that we think we can sell fairly quickly, we'll definitely pass. I'll definitely pass the contact information on to Morgan. Alternatively, you can go straight to Deal Builder and you can. Morgan, you can basically give some contact information. But maybe in the show notes, Rick, we can put maybe my calendar invite in there and they can.

Yeah, yeah. I think they go just directly to the website, you know, like just go to clinical.com and then there's a buy and sell page. If you go in there, just book a call with, with Paul and then Paul will actually. Yeah, just kind of like qualify. You see whether you're a good fit based on all the different candidates. And Morgan, how do people find out more about you?

Yeah, I post quite a bit on LinkedIn. I find it's a good little resource for some of the, some of these stories I'll put out there. So follow me on LinkedIn. Just Morgan Tate T A T E and put lots of content there. Our, our website is dealbuilder Co, which also has a little bit more blog resources and things on selling a business. And I think the exciting part about our partnership between our two platforms is we talked a lot about like the prep prior to selling and how important that is. And I think what you guys are doing is the reason why we were excited by it is that we have sellers that have their shit together, for lack of a better term. Whereas a lot of the clients that we deal with that are in maybe the H Vac plumbing are a little bit more disorganized because there isn't as many niche communities and resources for their businesses. And just having things dialed in makes a world of difference with the sale effort. So it definitely is a big important step. So I would encourage everybody, if you're not already on the clinic accelerator community to dive into it.

For sure.

Yeah.

Yeah. Awesome. And Paul, is there anything you want to wrap up with with like this partnership that we have with Deal Builder and how you work with Marmont?

Yeah, I'm really excited by it. I think it's going to be a great partnership. But one of the things that I always tell people is you need two things to make a deal. Go really well. One is, especially if you're a seller, you need a marketplace. You need lots of eyeballs on your particular business so that you get as many great offers as possible. And obviously, Clinic Accelerator, we have quite a few eyeballs on that on these businesses. But the other thing too is you need someone who can actually take you through the process of selling your business. And that's where Morgan came into play. That's not our specialty. That's Morgan's specialty. And that's why we decided to partner up with Deal Builder. And so far, it's been an amazing experience. They also have an amazing platform. And over the next coming months, what you're going to see is we're going to start really highlighting that platform. You're going to start to see a lot of listings and a lot of hopefully successful sales. And yeah, it's a really exciting time. We're already getting a ton of interest in this process through some of our marketing efforts as well.

Okay, sounds good. Awesome. Well, thanks for, for having guys this show. And we will see everyone next week on the clinic Bot show. All right. And it ends here.