[Dave Lorenzo] (0:00 - 0:41)
Are you ready to sell your business? Well, if you're not, this is the perfect show for you. But if you are, there are things that you've forgotten or didn't even know you should be doing.

You're going to want to join us for this edition of the Inside BS Show. Hey now, I'm Dave Lorenzo, the Godfather of Growth, and this is the Inside BS Show. Today, we've got a fantastic interview for you.

But before we get to that, I got to bring in my favorite person, my partner in business. And if I was going to commit crime, she'd be my partner in crime. But then she probably turned me in because she's really honest.

Here she is, Nikki G. Hey, Nicola, how are you?

[Nicola Gelormino] (0:42 - 1:23)
Dave, I'm doing great. I'm really, really excited for the show and today's interview. We have someone who just has a wealth of information about selling mid-market businesses coming on.

Before we get there, I just want to share that it's been so timely for us to bring on our guest at this time. You and I have been presenting, we've been having a lot of conversations, particularly with Main Street business owners, entrepreneurs, those that are working in the business rather than on the business, and helping them figure out how to get to those next steps. So to move up that ladder and to eventually get to become a mid-market business, to become a business where they're the CEO and they're thinking more like an investor for their own business.

So I'm really looking forward to today, Dave, how about you?

[Dave Lorenzo] (1:24 - 2:08)
Oh, absolutely. I think anytime you get to speak with an expert, somebody who's done many, many transactions in the mid-market space, you're always going to learn something. And for those of you who are listening or those of you who are watching at home, if you're not within a three to five year exit window, you need to pull your car over or get a notepad and pen and sit down because we're going to give you the formula for getting more value out of your business, for having the most options when you're ready to exit, because your business today is going to be guided by how you're prepared to exit the business down the road. Nicole, let's not wait any longer.

Why don't we why don't we bring in our guest for today?

[Nicola Gelormino] (2:08 - 2:37)
I agree. I can't wait to get him on the show. So our guest today is David McCombie III.

He is the founder and CEO of McCombie Group. McCombie Group is an M&A advisory firm. And what they do is they help mid-market business owners sell their life's work for the highest and the best price and terms that they can.

And David is also a recently published author, which we will be getting into with him here this afternoon. Welcome to the show. It's such a pleasure to have you join us.

[David McCombie] (2:37 - 2:42)
Absolutely. It's great joining you guys, and I'm looking forward to having a lot of fun with you guys.

[Nicola Gelormino] (2:43 - 3:00)
We do have a lot of fun on the show and we provide great insight into what people do. So we're really looking forward to it as well, David. So I am given a bit of a description about what you do.

Why don't you tell us really what our audience, that is, what an M&A advisor does and then a little bit about your background, how you even got into this.

[David McCombie] (3:01 - 4:19)
Sure. So an M&A advisor essentially functions to do three key roles with a client. The first is they are going to end up doing due diligence on a client themselves so they can really familiarize themselves with the materials and be able to really be an effective advocate for their client.

They're also going to produce the corresponding marketing materials and the data room and all the stuff that will get relied upon by buyers. The second is they essentially will go and identify a universe of buyers and approach them to essentially run a competitive sales process so that they can maximize price, fit and terms for their client. And so there's a lot of different derivations of what that process looks like, but essentially holding the buyers honest through competition.

And then the third element is essentially helping the actual transaction to close. The reality is that less than 50 percent of signed LOIs actually close. And it's the unsexy elements of making it easy for the buyer to say yes that really differentiate between whether you get that wire transfer or whether you're going to have a big legal bill and a lot of frustration, but nothing to account for it.

[Nicola Gelormino] (4:21 - 4:28)
So tell us, David, how does one get into this? Like what background generally lends itself to being an M&A advisor?

[David McCombie] (4:28 - 5:29)
Yeah, so I actually started doing M&A in Wall Street and my background is as a lawyer. I ended up taking a little bit of a securitist path and ended up doing strategy consulting, but started the firm almost 15 years ago. In fact, it's about three weeks away, my 50 year anniversary.

And in a lot of ways, without necessarily having a grand plan, a lot of my different experiences led me to this. I actually started before this as a private equity investor. So I was backed by a couple of different family offices and I successfully found the deals, raised the capital and made different investments of which we've successfully sold all of them except one.

But I realized over time that I was a much better fit as an advisor. You know, I'm a valley investor. I didn't really feel comfortable stretching really far in prices.

And I figured if I can't beat them, join them, help people get the best possible outcome for themselves.

[Nicola Gelormino] (5:29 - 5:47)
David, I think that's great because you really bring such insight into what you do as an advisor, having been someone who was on the private equity side, involved in it, truly understood it, lived it and became an entrepreneur yourself, which I think really helps in providing business owners with advice when you have walked the walk.

[David McCombie] (5:47 - 6:29)
100 percent. And one of the big things that differentiates my role from when I was in Wall Street is, you know, when you talk about a middle market owner, they're both economically and emotionally invested in their business. What I mean is it's probably 80 to 90 percent of their net worth wrapped up in it.

They may have personal guarantees and they probably consider it their baby. So in this segment versus in Wall Street, where it's just about the answer and every client has an MBA and probably four more investment bankers on their team, it's really around education and psychology. And so for me, aside from this being a really fun industry to be in, I get a tremendous amount of fulfillment being able to help these entrepreneurs get a dramatically different outcome than they could have, you know, on their own.

[Dave Lorenzo] (6:30 - 7:21)
David, talk to us about since you brought up how it's different and you're you're working with somebody who's emotionally invested. I was particularly struck by the part of in your book where you're sitting across the desk from somebody who comes in and they want to sell the business for you and you describe how you're, you know, as an intermediary, you're helping them remove the emotion from the negotiating process. How do you condition people when they first walk into your office that this this process, if you thought entrepreneurship was a roller coaster ride, this process is really going to be a roller coaster ride.

How do you prep them for that? How do you prepare them for what's going to take place over the next? And this is the other thing, right?

Six, eight, 10, 12 months or more.

[David McCombie] (7:21 - 9:39)
Sure, sure. Look, I think having them be aware of it is half the battle, right? And so one of the things I spent a lot of time up front is really helping them understand that throughout this process, their judgment will often be clouded with emotions.

What do I mean by that? Well, you know, you have a set of conditions that is very different than pretty much any other event that they've had before in their life. First and foremost, it's probably a sum of money that's an order of magnitude larger than anything else they've ever dealt with in a single event.

The process is physically exhausting because you're running your business full time and you already have enough on your plate, but you're going to add a tremendous additional amount of work that gets added on top of that. You know, often the due diligence process is because it's so scrutinizing, it often puts entrepreneurs in a very defensive posture, which is not their ideal state. And for many other people, it's also emotionally exhausting to keep a secret in front of so many close colleagues and friends that got them to where they're at.

And, you know, the last thing I think is that, you know, every aspect is ultimately new and is something of which they generally don't have an area of expertise within. So they're reliant upon their advisors, they're reliant upon their attorneys to help them understand things like the purchase agreement, a 100 page legal document that they have no clue really what it says. So you put all these things together and even somebody with ice water running through their veins often has anxiety during the process.

And so it's really important that we spend a lot of time explaining this up front. Similarly, we often find when we go through the process that about 50 percent of business owners will exhibit some type of self-sabotage behavior when things start getting real. And so by us at least calling it up front and saying, hey, look, this is something that might happen to you.

It often happens to people similar to yourself. It puts us in a much better position to, you know, to be able to call it out and to address it when it happens in the middle.

[Nicola Gelormino] (9:39 - 9:52)
Now, David, you are describing kind of the overall process that every owner goes through when they're selling their business. And I want you to describe to our audience how long is the time frame? What is the general time frame that they go through all of this that you are now describing?

[David McCombie] (9:53 - 10:44)
Sure. So look, the statistics say that a mid-market business will sell in about nine months. The fastest you potentially could get would be somewhere around five months, maybe four.

But there are a significant number of transactions, particularly if the seller is not well-prepared, where that could extend and get drawn out. And I've seen things and I've had deals that have taken almost two years to close. So it is definitely something that, you know, most people would like certainty and clarity in their life very quickly.

And unfortunately, that process, particularly if you're going to get the best possible outcome, you need to let it unfold and you need to allow yourself to have the maximum leverage in the negotiations. And so that often means that, you know, it takes a lot longer than what most people would like. But, you know, this is part of the process.

[Nicola Gelormino] (10:45 - 11:14)
Yeah, I think that's something. So let me pause and just say, first of all, congratulations on your book, because I think this is a must read for anyone who's a middle market business owner who's selling their business. I think you did such an excellent job walking through what the process entails so that you leave no surprises.

Surprises in the sense like this is what to expect when you're going to enter into that process. And I think you leave the owners with no surprises as to the process itself. But of course, there are surprises that arise along the way that you have to deal with.

[David McCombie] (11:14 - 11:39)
Yeah, I like to describe it as, you know, before I had my first daughter, we went through birthing class and it didn't make the process any easier. But at least we weren't freaked out that my wife was going to die at every stage of the way. And so similarly, this is going to be a hard process one way or the other, but at least you're aware of what's going to happen and ideally some of the likely reactions that that you'll have as an entrepreneur.

[Nicola Gelormino] (11:39 - 11:54)
I think that's such a great analogy, David. I was thinking the same thing. So I'm glad that you said what to expect throughout this process.

So tell me, since you touched on it, what are the most common issues owners face when they're when they're going through a sale process?

[David McCombie] (11:54 - 13:15)
So I think one of the biggest areas that are missed opportunities is really around preparation, though, from my experience, probably less than a quarter of business owners will actually do any preparation before selling their business. And it's my interpretation that what's going on is two things. One is the urgent pushes out the important.

And so it's hard for them to get around to really what's important. But the second is, you know, when you, you know, I've had discussions with people say that they're not planning to sell for years. And all of a sudden I see them and they sold their business and you say, well, what happened?

And typically it's some derivation of there was a big life change that occurred. You know, somebody close and passed away. They just got fed up and decided enough with this.

And so ultimately, my interpretation is that a lot of business owners end up selling impulsively, which really is a huge shame because it's a missed opportunity. One thing you can't control is when you go to market, you can control the preparation. And by failing to do that, you often are selling at a, you know, a significant multiple less than what you could get otherwise.

So the ROI that you can achieve by making those improvements is probably one of the highest return that you could get on any activity that you're doing within your business or perhaps even within your life.

[Dave Lorenzo] (13:16 - 13:49)
David, when a person comes to you and they're interested in selling their business and they don't have a time horizon, let's say they don't that they're not planning on three to five years. They're just coming to you and they're going, hey, you know, I want to I want to check out my buddy sold to a private equity fund. I want to check out what's out there, what opportunities are available to me.

Do you go through and do at that point a thorough due diligence process? What triggers your first steps in your process?

[David McCombie] (13:49 - 16:08)
Yeah, so look, we and pretty much any other competent investment bank will provide market guidance of what the valuation of a business is. So if somebody came to us, we would definitely give them actionable advice around what we think the business is worth today and things they could do to improve that business. Once we're engaged, we then will go through that full due diligence process in much more depth.

You know, ultimately, when somebody is coming and saying, look, I just want to see what my business is worth, we help them through thinking through the process of when is that right time to sell? And the way I like to think about it is, you know, at the center is really personal factors. And there's a lot of different things that if it's your time, it's your time.

Right. But then, you know, in terms of timing it, there's things around where is your company in its journey? How is its profitability been over the past few years?

There's elements around the macro economic environment, interest rates, how much private equity activity is occurring, whether the M&A market is up or down. And then there's also elements around the industry environment. Right.

Things such as is there a lot of consolidation that's occurring in your industry? Or perhaps most importantly, you know, where are you in the life cycle of private equity within your industry? Because what we find is when private equity enters an industry, the multiples pretty much instantly go up between 50 and 100 percent relative to where they were before.

And so you need to see where you are. If that institutional capital is available, that window may be something that you should seriously consider because they generally go in cycles. So private equity is a herd animal and essentially they only make their money when there's an exit.

So if they fear that in the future, when they go to exit, that there will be less buyers than there are today, often there's a there's a pullback. And so we often will coach people thinking about all these different elements, not just about what is your business with today, because for some people they'll say, you know what? Yeah, I'm worth X, but I can be worth 20 percent more by doing these different things.

And, you know, we're we're going to be one here, we're going to be here one way or the other. So if they want to take the time to work on the business, that that's great. We'll be we'll be waiting.

[Dave Lorenzo] (16:09 - 16:38)
We're talking with David McCombie. The name of the book is Selling Your Business with Confidence, a practical playbook for mid-market owners. So, David, before I start to dig into mid-market and private equity versus strategic sale, define mid-market, because if I meet five people, right, and I ask that who work in this space and I say, oh, you work in the mid-market, how do you define mid-market?

What is the McCombie definition of mid-market?

[David McCombie] (16:39 - 17:16)
So it's a fair question. The reality is, you know, 10 people, you get 10 different answers. The way we defined it was 10 million to a billion.

What we're trying to say is it's not the mom and pop coffee shop and it's not the Fortune 500 company, but it is a company that has some sophistication. It has a management team. And so it's not just a job.

And so there are big differences, both in terms of what these sellers confront, both emotionally and psychologically relative to the big guys, but also relative to the smaller ones that essentially have a job, not really a business.

[Dave Lorenzo] (17:17 - 17:43)
All right. So now, thank you for that. Let's talk a little bit about private equity versus sale to a strategic buyer.

We spend a lot of time talking to our audience about what a strategic buyer is, but give us the definition of a strategic buyer and tell us what your thought process is when you're advising an owner about a sale to a strategic buyer versus potential private equity sale. Or do you look at all of them?

[David McCombie] (17:44 - 20:34)
So the technical definition of a strategic is essentially an acquirer, a business that makes acquisitions not for financial returns, but for strategic concerns. And ultimately, they typically are making a distinction between buying versus building. So in other words, their alternative to buying this business is to go and organically build it themselves.

And they're going to say, I'm buying this in order to minimize the risk and the time it would take in order for me to replicate something similar in my business. Private equity, on the other hand, are financial buyers. But where it gets a little bit tricky, if you will, Dave, is that, you know, by and large, almost all of private equity strategies, what's called buy and build, or people know it often as a roll up or consolidation strategy.

What that means is they generally acquire a large business that they call a platform. It's a business with enough scale and resources and financial wherewithal that it can consistently and sustainably go and acquire smaller businesses, almost like a Pac-Man. And so the interesting thing is, while that initial investment by a private equity firm is as a financial buyer, that roll up that's occurring, that's backed by the private equity firm is a strategic.

And so when we go to market, you know, we typically will go out to a wide variety of different options. The first question that I ask clients is, you know, what is your goals and expectations in terms of staying afterwards? Because that does have a large impact in terms of what the universe of options are.

But, you know, once you say, OK, I would like to go to both, what we often find is that private equity backed strategics are often the most aggressive because they've got capital that's ready to be put to work. In fact, private equity firms typically lose the money if they don't use it and spend it. And so they often can provide the best of both worlds in that they can both achieve some of the synergies between combining your business and theirs.

But they also have the need to invest like a private equity firm, because the challenge with most traditional strategics, whether it's public or just a private business, is they're not in the business of having to make acquisitions. They've got their day job. Right.

And so in many ways, an acquisition is a distraction. It's a additional challenge that they may not have the resources to do versus the beauty of private equity is this is their only job. It's to put money to work and to invest the money.

And therefore, you typically find that they're much more aggressive and that they can react in a much faster time frame than their counterparts in some of the larger and private organizations.

[Nicola Gelormino] (20:35 - 20:53)
David, and I think I have the statistic right, but I think you say that over 50 percent of mid-market businesses sell to private equity in your book. So if I have that statistic right, that number, tell us what are private equity firms typically looking for for investment targets? What makes a good business for them to acquire?

[David McCombie] (20:53 - 23:12)
Private equity basically has a strike zone. And if you're within the strike zone, you'll find that there are literally hundreds of private equity firms that would be interested in the business. Conversely, you could be outside of the strike zone, have a very profitable business, and you'll have very little interest.

Right. The textbook example of what private equity wants is figuratively a cash machine. Right.

They want something with low risk that sustainably produces profits. Right. And so the factors that typically they're going to want to look into and prioritize, one is recurability of revenues.

Right. The perfect poster child of this is if you looked at car washes for the longest time, they barely would sell, likely sell to a local person. And then you had a couple of creative entrepreneurial private equity guys that essentially said, look, let's put subscription pricing into this.

What that allowed was it allowed lenders to lend aggressively against the business. And ultimately, you're seeing valuations in that in that car wash space, particularly the tunnel car wash space of almost 20 times. Right.

So one is recurring revenues. Customer concentration is a big one. Right.

You know, ultimately, you have to remember when you sell to a private equity firm, you're engaging with individuals that work for the private equity firm. And there's no quicker way for them to lose their job than to basically put their neck on the line and pound the table for an investment. And then when the thing closes, a big customer gets lost and and essentially half the value is gone.

And there are a variety of other elements within it. You'll find that many private equity firms tend to specialize in certain industries where they find that they have both expertise and that they believe has good growth tailwinds. At the end of the day, private equity wants growth in the business.

It's how they can generate how they can sustain high multiple high returns while still paying relatively high multiples for the business. And so those are three factors. We can obviously go into more depth if you if you'd like.

[Nicola Gelormino] (23:13 - 23:27)
David, you're speaking our language. We're constantly speaking about recurring revenue and finding a way to add it into your business. If you don't have it, knowing that investors, including private equity, are focused on that.

I know Dave loves this topic, so I'm going to let him pick up on that.

[Dave Lorenzo] (23:28 - 25:20)
Well, I listen, I completely agree. You're you're singing off of our song sheet with recurring revenue and diversity of revenue as well. Customer concentration is another thing where when you're running the business, you're thinking to yourself, oh, I have three customers and they're all in the same industry.

So there's economies of scale in my purchasing and I only have to go to the industry conventions for that industry. And because I got a great reputation in that industry sector, it's really easy for me to acquire new customers. So operating the business, it makes total sense to be concentrated in an industry silo and focused in one area with maybe two or three big customers.

But then when you go to sell, you turn around and it's like, oh, my gosh, what happens if one of those customers goes away? Or more likely, you're hit by some type of economic event that's specific to that industry and they all cut back. If something happens and one of them goes out of business, a third of her business is lopped off.

And, you know, it strikes me that I know I don't do enough harping on this. The way you run your business may be a detriment to when you're going to sell your business in the long term. If somebody comes to you and they're, I don't know, 10 years away from a sale or they're just they're just coming to you for for business strategy consulting, what advice do you give that person who says everybody in the industry knows me?

It's easy for me to acquire clients. Why do I want to go somewhere else? Do you get them to look like five years, 10 years down the road, or do you just say to them, hey, listen, you got to have a hedge somewhere, maybe get 10 percent of your business from a different industry.

I mean, what's your counsel to those people? I mean, they could be watching or listening to us right now.

[David McCombie] (25:20 - 27:44)
Look, from my vantage point, a more marketable and sellable business is a better business to own anyways, right? It improves your cash flows, it reduces your risks. It makes you more financeable if you wanted to go to the bank and probably gives you a better lifestyle.

So I think it's a no regret move to address that, because I personally would sleep better at night if I didn't have all my eggs in one basket. Right. And then basically having, you know, you over a barrel.

You know, it's easier said than done, obviously, to quickly change an issue with customer concentration. I think it really goes towards playing the long game and trying to work backwards, right? Reverse engineering your way to success and saying, OK, I know that I'm going to be much more marketable and a much better position.

You know, if I have this diversification, what does that look like? Where are the segments that I should go? And ideally, rather than shrinking back in the areas that you are overconcentrated, trying to grow in all the other areas.

And, you know, ultimately, when you say, OK, well, where do I grow? We'll think about where the where the puck is going, not where currently is that. And so, you know, thinking about where you believe that there will be outsized growth and profitability for the coming years is probably where you want to, you know, spend your time and energy, obviously, to the exclusion of that company that drives the overwhelming majority.

That said, there are some situations and some industries of which there is no alternative. So, for example, if you are selling certain types of CPG, you know, consumer packaged goods, Walmart and a couple of the other big box guys are probably going to be, you know, more than 50 percent of your revenues. So there are in some industries a natural extent, but the alternative is to say, OK, how can I make them indispensable?

How can I make myself indispensable? What can I do so that it's virtually impossible for them to get rid of me? But the general underlying philosophy is still the same, which is you need to think about that worst case scenario and in particular how a buyer is going to look at it.

And they're always they don't know your business as well as you. They're always going to assume that that worst case scenario. And so leveraging that, how can I go and de-risk the business as much as possible to to allow me to do well, regardless of the outcome of any individual client or customer?

[Nicola Gelormino] (27:44 - 28:19)
Yeah, David, this is something that you also mentioned in your book that really stood out to me. And I thought that we teach it in ESL, but you said it in a way that was so succinct that I'm going to repeat it. And then I want to hear a little bit more from you on it.

You you provide the advice of build a business today as if you will own it forever, but could sell it tomorrow. In other words, like let's drive up the value of that business, even if you don't have the exit in mind. And we're talking about some of those principles now.

And I want you to elaborate on that kind of what are some of the drivers that you look at when you say really focus on building these up and they apply to any business?

[David McCombie] (28:21 - 30:07)
Yeah, look, at the end of the day, I think that, you know, there's gimmicks and hacks and all these things around selling your business. But that's not a sustainable way to create value, right? You might do better, but to the extent that the market isn't, you know, taking it at that particular moment or whatever, you really have a lost opportunity.

So, you know, to me, you need to run your business, assuming that you're going to continue to own it, which means running it the right way for the long term, right? If you play that long game, plant the seeds across customers, plant the seeds across team members that could future, you know, in the future, join you, all these different things that sets the foundation for a successful business. And if you think about what are the businesses that get the most interest of private equity aside from, you know, the characteristics that we talked about, it's often the quality developments, right?

It's a business with a strong culture. It's a business with a performance, high performance mindset. Those are things that, you know, don't happen overnight.

And it's not like you can just, you know, snap your fingers and get it. You have to live it day in, day out to build that type of business. And ultimately, that results in your business not only being more marketable, but generally selling it, you know, at a premium.

You know, I personally believe that you should sell on your terms from a position of strength and having a business that's sale ready will allow you to do that at any point in time, even if, God forbid, you were to, you know, have some life event that were to occur. You know, you got sick or whatever, your business being in tip top shape allows you to have alternatives and to attract as much possible interest as possible, which gives you as much leverage as possible.

[Nicola Gelormino] (30:08 - 30:26)
David, I'd imagine that you have difficult conversations sometimes when business owners walk into your office and that business has some real concerns from an investor viewpoint. So, you know, and sometimes you got to ask the tough questions of you, like, how do you counsel someone to do that when the best advice is really to take a step back and to work on some of those improvements?

[David McCombie] (30:27 - 31:50)
Yeah, look, believe it or not, about 50% of the time, we recommend that people don't sell at any particular moment. We think that it makes more sense for them to regroup, to pull everything together and to be able to present themselves in the absolute best light possible, right? But it doesn't make that conversation any easier, right?

Everybody thinks that their, you know, baby is the prettiest. And so it definitely takes a lot of, you know, tact. You know, ultimately what we try to communicate is, you know, it has nothing to do with the amount of effort that you put in.

It has nothing to do with your value as an individual. The market, though, at different points in time, values different things. And as I mentioned before, you'll often find that certain industries will go in favor and will have dramatic spikes in valuations, and then they'll go out of favor, of which those valuations will decline.

That has nothing to do with all the hard work you put into your business. And so, you know, what we try to do is to help them understand that, you know, we're not here to, you know, to try to call their baby ugly. But it is important to be objective about what the market looks at and how somebody's going to look at their specific business, because they can use that to their advantage as something that they can go and work on.

[Nicola Gelormino] (31:51 - 32:03)
Yeah, this is something we see a lot, which is the business owner's perception of the value of the business compared to what is the market perceiving that business to be valued at, which is really what matters, right? After all, it's what will the market pay for that business?

[David McCombie] (32:04 - 33:22)
Yeah, and if I had a nickel for every time that somebody told me, oh, in my country club, somebody told me they got 10 times, but the reality is that those valuations are so hard to really compare apples to apples, aside from the fact that, you know, most of the time there's a lot of exaggerations and lying that people, you know, will be saying. But there are so many different things of which it's hard to know whether there is an apples to apples, you know, was that adjusted numbers or was it not? You know, was it based on last year?

Is it based upon projections for next year? You know, there are so many different, even just the accounting treatment that they have, where you could legitimately, even if that statement was correct, you could be off by almost 50%, you know, without really digging into the numbers. And that's why, you know, when somebody comes to us and says, well, what's the multiple for my industry?

The answer really is, look, I need to spend the time looking at your numbers and looking at everything. And even then, it's only going to be an educated perspective. Because at the end of the day, there is very little publicly available information of all the different transactions like there is in real estate, where there's a lot of efficiency.

The only way we're going to know for certain what your business is worth is when we go to market and have a discussion with a large number of competitive buyers, where we'll really get to see based upon all the unique attributes of your business, what it's truly, you know, going to be worth.

[Dave Lorenzo] (33:23 - 34:27)
All right. The name of the book is Selling Your Business with Confidence, a Practical Playbook for Mid-Market Owners. We're talking to the author and specialist expert in helping you increase the value of your business and ultimately complete a transaction for your business, David McCombie.

So, David, another debate or point of contention that we have constantly is price and term. Right. So you can get maximum value for your business.

You can get a bazillion dollars if we spread it over 100 years. Business owners don't seem to understand this. Talk about this.

I envision like Lady Justice and the scales of justice. Right. And price on one side and term on the other.

Explain that to the business owners who are listening and watching the relationship between price and term, like what you get right now and what you're going to take over the next X amount of years and how those two relate to each other.

[David McCombie] (34:27 - 37:26)
Yeah, great question, Dave. And, you know, there's an adage in our industry, which private equity guys joke around about, which is you set the price and I set the terms. Right.

So there absolutely is a relationship. And, you know, ultimately, when somebody does give you a letter of intent, they're going to try to highlight it with the biggest possible number. And really, the fine print really does matter.

You know, ultimately, what you're what you're getting at is, you know, typically, the more certain the cash that's coming up, the lower the price. Right. So you can say, well, I don't want any earn outs.

I don't want anything contingent, etc. But that ultimately is going to mean that you're typically going to have a much lower price. Conversely, if you want to stretch really high in price, you're probably going to have to be willing to accept whether it's a seller note or some equity that you may have or an earn out or whatever else it might be.

But I think this actually brings up a relevant topic that for me, I'm very passionate about, which is fit is the third variable, which in some ways is even more important. What most people fail to realize is when you sell your business, it's not like a real estate transaction where you walk away. Right.

You typically have a tail where you're associated with the buyer for a period of three, but generally five to 10 years. Right. And we're talking about earn outs.

We're talking about equity. We're talking about loans that you may have provided to the buyer, which are all very common in the middle market. And what that means is you essentially have a financial marriage or a financial spouse with this other side.

And what I tell my clients is you're going to be financially independent one way or the other, but life's too short to deal with somebody that you don't trust or you don't like. And so just like with a spouse, you should be asking questions like, are we going to have children or what religion are we going to practice or whatever it is? Those same questions really need to be asked amongst the buyer, because if you ask it, it doesn't guarantee success, but not asking it almost guarantees that it goes south.

And so too many people try to say, well, let's just run a competitive process and go to the highest number. But that is basically rolling the die and saying it's equivalent to saying I'm going to marry the tallest woman that crosses the street over the next 24 hours, and that's going to be the best spouse for me. Well, it could be, right?

But statistically, it's highly unlikely. What we personally advocate is that you choose who you think is the best fit for you and use the competitive process to get them up as high as possible. And then ultimately, you have a decision to make.

You can say, look, this person is offering me $2 million more, but I know that I'm going to have somebody that I'm going to have three years where I have to suck it up and I'm going to have to do these things. But at least you're fully informed because the alternative basically is setting yourself up for dissatisfaction afterwards. And life's too short to do that, particularly when you don't have to financially.

[Dave Lorenzo] (37:27 - 38:16)
So let me follow up on that and explain to the folks who are with us, explain to them why, if they get an unsolicited offer, they need to run, not walk, to your office. Because we've seen people make big mistakes. They weren't planning on selling and they get this offer, which is a number that's way more than they ever thought they were going to get for their business.

They don't know the market. They don't know what's going on. And they think to themselves, I don't need an advisor who I'm going to have to pay fees to.

I don't need to work with somebody who may get a contingent percentage of what I'm selling. I can just work on this myself. These guys really want me.

That's the number one time when you need an advisor. Explain to people why.

[David McCombie] (38:16 - 41:20)
It's a great question. Ultimately, going back to my prior premise, that your goal when you sell is to sell from a position of strength on your terms. And by definition, when you're responding to an unsolicited call, you're not doing that.

You're not fully prepared. You're not going to be showing them the absolute best foot that you can. And so it's important to think about how do you get that best?

Well, it's through being intentional, preparing ahead of time, and surrounding yourself with a team of professionals. The reality is, yes, you as an entrepreneur, you figured things out your entire life. You could sell your own business.

The question is, could you sell that business as well as a professional who does this daily for a living? Remember, all the buyers are repeat professional buyers. They all have the best that money can buy.

And so the reason why private equity firms do these cold calling efforts, and it actually costs them quite a bit of money. They pay finder's fees to the people that are successful, that connect the dots, and all that is because they buy cheaper. There's various studies that show that without investment banking representation, people sell at about 25% less than they would with representation.

By the way, it also shows that the close rate is significantly less. And it's particularly interesting because when you look at private equity themselves, they almost always use an investment banker themselves to sell the business. And the reason is, is that there's actually elements that structurally the principal or the owner of the business can't do in a negotiation.

What do I mean by that? You can't go and outreach to multiple people confidentially and still keep secret that you're selling the business, right? You can't also be able to negotiate with limited authority, right?

When you go and buy a car, it's not a secret that the manager never comes out to negotiate directly with you. The salesperson always has to go check with the manager and come back out. Why?

Because he doesn't have the authority to make the concessions, but he's able to push the ball forward in terms of the negotiations. And so there's a variety of different small little things that make even private equity, who obviously is not in the business of charity, induces them to hire representation and investment bankers to do the sales process. The same should occur with a middle market owner.

This is the first time that they're doing it. And the other thing that's important is the time and distraction that each of these failed discussions takes often sets the business back considerably. On average, it takes us about a thousand hours every time we sell a business.

And so if you're thinking about somebody going down the rabbit hole, what type of distraction is occurring amongst their core business? God forbid that transaction weren't to go through.

[Nicola Gelormino] (41:20 - 41:46)
Yeah, David, just because you can does not mean that you should, especially in this space. In other words, business owners, this is not a do-it-yourself space. David, you've picked up on a number of these points as to why you should use an advisor, but I want you to highlight, tell us what you are doing as an M&A advisor throughout that sale process for the owner.

Hit on some of the key points where that's not their role and those are things you are doing based upon your knowledge and expertise in the space to advance this transaction.

[David McCombie] (41:46 - 43:51)
Well, I guess unique amongst my industry, but we actually have a transactional accounting team within our firm. So we go and go through the entire process and adjust all of their numbers tied to their general ledger and all their accounting statements. We have an individual who used to run at Ernst & Young, their transaction advisory department that does that.

So we do that. We also do a lot of the analytics of preparing the information as well as project managing, because in a lot of ways, our goal is to take as much off the plate of the business owner as possible, right? Their best possible use of time is to get the best possible numbers that they've ever had as a business owner during that sales process.

Because if the numbers slip, you better believe that the buyer is going to come back and ask for a pricing change. So it's absolutely essential during this process that they've got their eye on the ball. And it's not easy because they will have some additional tasks on their plate, but it's going to be a lot easier if they have a partner who does this day in, day out that will help them preparing all the different materials.

And then, you know, there's a lot of other things that we often do from a coaching standpoint to help them prepare through the process. So we have different worksheets that we'll sit down and have them introspect around why do they want to sell? What are the reasons that they can then refer back to, you know, five or six months later if they get cold feet?

We coach them before the management meetings and we do a lot of role playing to help them reframe their answers in a way that will be perceived best by buyers. So there's a lot of different things along the way that we end up, you know, doing. And that, you know, ultimately is part of the process of both improving the price that they're going to receive, but also making sure that they actually will close.

Because, you know, the biggest challenge is you do all this work, you spend money on legal fees and other fees because they're going to get paid whether you close or not. And the transaction doesn't actually get consummated.

[Nicola Gelormino] (43:52 - 43:57)
Yeah. In your experience, what's the biggest mistake business owners make during the sale process?

[David McCombie] (43:57 - 45:46)
I mean, interestingly, statistically, it often is trying to do it themselves. But we already discussed that. One thing that I will throw out is, you know, it's interesting that often the DNA that makes entrepreneurs successful in building their business hurts them in the sale.

Specifically, most entrepreneurs I find have this bias for action. And that's great, right? They want to do things yesterday.

But at the same time, it often leads to procrastination, right? They want to go to market early. They want to go as quickly as possible, get the answer as soon as possible.

But if you're not ready and all your materials are not, you know, produced, the numbers reconcile with each other, you ultimately are getting to market quicker. But you're going to lengthen the time to closing significantly and potentially threaten the actual transaction if there's mistakes. Often what happens is, you know, business owners push to go to market too quickly.

And what they're essentially doing is they're shifting a very time-intensive process of producing all these materials from a period before they go to market where they have the luxury of time and additional support and all of that, to a period of which they're under the gun. They already have a million other things on their plate, and they've got a very finite time limit. And what ultimately often happens is mistakes occur, things don't reconcile.

And what that ends up translating into is often the buyer digging in, asking more questions. Well, a month has passed, let's see the next month's financials. And so you basically have this dragging, you know, slower deal, which is the opposite of what you want, which is you want momentum, you want desire on the business buyer's part to want to buy this asset, not, you know, a long drawn out process to get it over the goal line.

[Dave Lorenzo] (45:46 - 46:22)
All right. The name of the book is Selling Your Business With Confidence, A Practical Playbook for Mid-Market Owners. David, it's been an absolute pleasure having you with us.

We could continue to ask you questions for another hour. Tell us, how can people get a hold of you? Obviously, they can go to Amazon or wherever books are sold and get the book.

We're going to put a link down in the show notes for them to get the book. How can they get a hold of you if the time is right for them to think about selling their business or if they just want a reality check to see if their business is sellable at this point? How can they get a hold of you?

[David McCombie] (46:22 - 46:42)
Probably the best would be through LinkedIn. David McCombie is the name. They could also send me an email, which is dmccombie at mccombiegroup.com.

And whether they want to sell today or in the future, we're happy to be a resource. Ultimately, that time will come and we're confident that it will be a great solution for them.

[Dave Lorenzo] (46:43 - 47:19)
All right. Thank you so much, David. We will put a copy of the book up on the screen right now.

You can go to Amazon or wherever books are sold and get this book. It's a fantastic book. It's so you will be you will be tempted to read this book and think to yourself, OK, I'm just going to use this book as a checklist.

But this is the magician telling you how he does the trick. You haven't done the trick a million times. You shouldn't try to do this yourself.

Just like you could read a book about flying a plane and you can't fly the plane. You need the guy who wrote the book to help you. David, thank you so much.

It was great to have you with us.

[David McCombie] (47:19 - 47:22)
Absolutely. Thank you, guys. I appreciate it so much.

[Nicola Gelormino] (47:22 - 47:23)
Thank you, David. What a pleasure.

[Dave Lorenzo] (47:23 - 47:41)
All righty, folks, that'll do it for another edition of the Inside B.S. Show. We will be back here tomorrow with another edition of our show at 6 a.m. Join us every Wednesday for another interview. Until then, I am Dave Lorenzo, the godfather of growth, and she is Nikki G.

Thank you, folks. We'll see you again tomorrow.