Business Broker David Jacobs

Intro: [00:00:07] Broadcasting live from the Business RadioX studios in Atlanta, Georgia. It’s time for Buy a Business Near Me, brought to you by the Business Radio X Ambassador program, helping business brokers sell more local businesses. Now, here’s your host.

Stone Payton: [00:00:32] Welcome to another exciting and informative edition of Buy a Business near Me. Stone Payton here with you this afternoon. Please join me in welcoming to the broadcast business broker David Jacobs. How are you, man?

David Jacobs: [00:00:47] I’m good, thanks so much. Stone Glad to be with you.

Stone Payton: [00:00:50] Well, we’re delighted to have you on the program. I’ve got a ton of questions. I know I’m not going to get to all of them, but I’m thinking a good place to start is mission purpose. What are what are you and your team really out there trying to do for folks?

David Jacobs: [00:01:04] Well, you know, I was an entrepreneur in a past life and I went to sell my business, sold it myself. And it’s just not the way you think it’s going to be. And after I got the deal done, which took me almost two years, I thought, you know, there’s probably an opportunity here to help other business owners put together a nice, clean deal and allow them to sell their business and go on to the next phase of their life.

Stone Payton: [00:01:28] So now.

David Jacobs: [00:01:29] Have you found others?

Stone Payton: [00:01:31] Have you found yourself gravitating to a certain type of business or a certain area of the country? Have you tried to niche at all?

David Jacobs: [00:01:41] I did. So in the business broker world. We we generally and it’s slightly different by state depending on the regulations, but in most states we can do deals up to probably $30 Million. And within that, that subset of transactions, there’s two, there’s two markets and they’re pretty distinct. There’s the main street, which is I think what most people are familiar with, and these are restaurants, bars, liquor stores, auto repair, dry cleaners. A hot one right now is landscaping businesses, just nice businesses. They earn the owner a very good income, but they’re very geographically focused. And then. And that is not my focus, even though there are people I work with that do do those types of businesses up here in Northern California. I’ve chosen to specialize in a few industries that I know a lot about and work with clients all over the United States. The primary one is software companies, so I work with software and SAS businesses all over the US. My clients have 3 to $20 Million in revenue and 20 to $50 or 20 to 50 employees. And the reason that the lower middle market is different than a main street market is the main street is very geographically focused and you’ll find that almost all the buyers will be local, whereas my buyers are usually private equity funds or large corporations, and they’re looking across the country to find good businesses to buy. So it’s a slightly different buyer mix and that’s why the markets are different.

Stone Payton: [00:03:19] Well, it sounds like it must be incredibly rewarding work, man. What are you enjoying the most?

David Jacobs: [00:03:26] You know, there’s a couple of aspects about it that it’s a lot of fun. And I keep telling my sellers that they’ve been selling products all, all their life and they want to chase after the buyers. And I keep telling them, hey, remember, there’s only one business like yours. And if we can package it and make it really clear what you’re doing and how you’re doing it and the reason that the business exists and get it in front of the right buyers, you should get multiple offers. And it’s it’s just fun to work with them. And, you know, we build a relationship and we build up the trust. And then when I when I deliver what I say, I’m going to deliver and bring them multiple buyers and they’re looking between different deal structures, it’s just very rewarding.

Stone Payton: [00:04:08] So tell me a little bit about the valuation process that and I, of course, am uneducated and uninformed on the topic, but it seems like that would be a big hairy part of the process, especially for a first time seller or buyer.

David Jacobs: [00:04:27] Yeah. So know Main Street. The main street valuations are fairly straightforward and that’s usually a multiple of which is seller’s discretionary earnings. And if you Google it, there’s lots of descriptions of it online. It’s really how much economic benefit the owner can take out of the business. So it’s a salary plus whatever kind of dividends you pay yourself. And if you run some personal expenses through the business, which most people do like a car or your cell phone, internet, all that gets added back into the stock. And then there’s a multiple applied to it, generally ranging between 3 to 5 times, depending on what industry you’re in and how attractive it is. And the multiples do climb as the businesses become bigger in the lower middle market, it works in a very similar way, but sometimes like in software, there are assets that are being purchased that aren’t necessarily the cash flows of the business. And what I mean by that is a business might, let’s say, have $1,000,000 in revenue, but it might have it might be an app or something like that with 10 million active users. And if you can find the right buyer, they might be more interested in the users that you’ve acquired and the ability to sell other products to them as opposed to the cash flow that the business generates. And that’s that’s where the specific knowledge of the industry comes in.

Stone Payton: [00:05:48] So in your world, is there is it common for there to be a delta between the asking price and the selling price, or is it usually pretty close to what what the deal ends up going for?

David Jacobs: [00:06:02] So when I work with my software clients in the lower middle market, we usually I tell them to think about a low, a minimal acceptable offer. And really this just helps me screen out all the unqualified buyers. So a technology listing will attract a lot of attention, potentially hundreds of inquiries. And I just need a quick way. If somebody thinks their business is worth $10 Million and they won’t, they won’t consider anything less than eight. And I find a buyer who only has $5 million. It’s it’s very clear that that deal is not going to happen and it’s important to filter them out. What you do find when you get down to the the 5 to 10 qualified buyers that we’ve met, the seller, there’s a good connection there. Both personal and business strategy in the offers start coming in. The offers are going to be all over the place and the deal terms will too. And that’s why I think that kind of personal connection between the buyer and seller is really important. Somebody might offer $10 Million, but it’s 5 million cash and 5 million is an earnout and somebody else might come in and offer 8 million cash and 2 million as a seller note. And you need to be able to compare and contrast the differences. And that’s really up to the client to decide which offer they want to accept.

Stone Payton: [00:07:24] Yeah, we’ll say a little bit more about that, if you would, because I’m learning from hosting this show that that deal structure, there’s a lot of different ways to get the the deal done. It’s not always just a one big check at the at the table.

David Jacobs: [00:07:39] Yeah. When these small businesses sell it’s I’ve never seen one big check where you know you hand them the keys, they hand you a check and that’s it. It doesn’t work that way. There’s always some kind of a hold back. And it’s really just to protect the the buyer from something that’s not disclosed by the seller. If there’s a lawsuit or a tax lien or something that the buyer doesn’t know about, they got to have a way of getting you back on the phone. So there’s always going to be some kind of money held back. And sometimes it’s one plus one is three. And the the seller thinks they want to sell and they meet the right buyer and they get excited about working together and the seller will sell a portion of their business. Maybe they’ll hold on to ten or 20% and they now they have a business partner and they’re well capitalized and they go off and build an even bigger company and work on an exit five years from now and get a second bite at that apple. So it it’s really just it’s finding the right people and connecting together. And then you find the right people with the right deal. The it usually happens kind of automatically kind of like dating and love at first sight. I guess.

Stone Payton: [00:08:49] So. So how does the whole sales and marketing thing work for you and your firm? Do you get out there and shake the trees or are you already working with active buyers or is there a little bit of both? How do you get the new business?

David Jacobs: [00:09:06] Yeah. So most of my clients come from referrals and they actually come from the referrer is usually a buyer for a previous listing that I had. So I spend a lot of time and effort upfront documenting the business and putting together a well structured information memorandum and. I think when the buyers see it, some of them are appreciative of how much time I’ve saved them in their initial due diligence. And when they hear of somebody else that wants to sell and maybe they’re trying to find their way and navigate all the different intermediaries that are out there. My name gets mentioned and those have always been very good clients for me.

Stone Payton: [00:09:51] So I’d like to learn a little bit about your perspective on timing. And I have a very personal, real example. My business partner and I, we own the business radio network. We’re not entertaining ideas of Exit right now, but I suspect if we were if we were, we shouldn’t be trying to get all this done now and try and try to exit next year, right? I mean, you got you got to give yourself some time to get get your ducks in a row, right?

David Jacobs: [00:10:22] Yeah. I mean, just like with any sales process, time kills all deals, right? So when you decide it’s time to sell and you don’t sell a business this week, it takes a few months to get a deal together. But you really need to prepare and get all your documents ready. You’ll need financial statements and copies of your contracts and just getting everything ready because there’s a lot more businesses for sale than there are qualified buyers. And once you get the right kind of buyers attention, you don’t want a delay where they start getting distracted on another opportunity. So being ready to go is, I’d say, key. And once you decide it’s time to do a deal, it’s time to do the deal. And you should be heads down trying to find a buyer for your business.

Stone Payton: [00:11:09] So where do these things come off the rails and not get? So it’s my impression that there are a lot of businesses, you know, are put on the market and fail to sell. First of all, is that an accurate impression? And if so, I mean, why?

David Jacobs: [00:11:26] Yeah. So, you know, the the industry floats around a number. Something like 80% of the businesses that come to market fail to sell. Ouch. Which is just tremendous. And our trade group, which is the eBay and they have a collaboration, I think it’s with Pepperdine University down in Malibu, California. They study this and they claim that of the businesses that fail to sell over half of failed to sell because the business is mispriced. And I think what happens is business owners and I mean, this was my situation when I attempted to sell my business myself. You read the you know, whether it’s The Wall Street Journal or the popular press, wherever you’re getting Yahoo Finance, wherever you’re getting your business news, and you see these articles about these high tech companies that get sold at 50 or 100 times earnings or 30 times revenue, and you think, well, they got 30 times revenue, I have a nice little business, maybe it’s worth 15 times revenue and it’s just completely divorced from reality. And the first thing that a really good business broker should do for you is to set realistic expectations by showing you past transactions that have closed and kind of what the multiples were in those deals and why why it sold for three times as the E and not five times. And it’s actually a little quirk in our industry where some of the brokers who charge retainers I do not they have a very perverse incentive to really inflate expectations in order to get the listing and to extract that retainer every month. And then at the end of the 12 or 18 months when the seller is upset because the business didn’t sell, the broker says, well, it was overpriced. And my statement to that is you didn’t set the seller’s expectations in the beginning. You extracted 18 months of retainer and did you really plan to sell the business for what you said it was worth? Or did you have some other kind of motive behind this?

Stone Payton: [00:13:31] There are so many moving parts to this. There’s the initial conversation, there’s valuation, there’s the framing, the packaging of the opportunity, there’s finding the buyers, there’s negotiating the deal. And in the deal structure, there’s the due diligence, there’s the the closing, there’s there’s the transfer of money. Do you find yourself working a lot with other trusted advisors to to help execute on some of this?

David Jacobs: [00:14:00] I do you know, I would say that the and this is what makes this job a lot of fun but also difficult and I like the challenge is you’re selling something the equivalent of an office building right it’s a 5 to $15 Million transaction so it’s a lot of money. But unlike an office building or a piece of commercial real estate, there’s nothing to see. You can’t go inspect a software company and see if the foundation strong or the roof needs to be replaced. It’s there all in. Tangible assets. So that’s that’s the challenge and the fun of this business. But as I work with my clients, we always work with a corporate attorney to craft the documents. Whereas a Main Street transaction will use a form in the lower middle market. They’re almost always customized purchase agreements created by attorney. And we usually have an accountant involved to produce the financial statements and the tax returns, because that’s that’s kind of what your what you’re selling.

Stone Payton: [00:15:06] Yeah. All right. I’d love to leave our listeners, buyers and sellers alike, if we could, with a couple a couple action items. I’ll call them pro tips. Just things we ought to be thinking about doing, not doing reading. Look, gang number one pro tip is reach out and have a conversation with David or somebody on his team. But, you know, like like if we’re really starting to to get our arms around this idea what are what are a couple of things we maybe should be doing buyers and sellers alike if you could.

David Jacobs: [00:15:38] Well, you know, in the end, I think this is really a transaction between people. So if if you meet somebody and they’re telling you a story that’s too good to be true, I’d be very skeptical.

Stone Payton: [00:15:48] Hmm.

David Jacobs: [00:15:51] But there are there are for buyers out there. There are lots of very good brokers that really want to do the right thing and help you buy a business and make it put together a good, clean deal. And there’s obviously a number of very good businesses out there, but it takes some digging to find them. And for the sellers, I would say the opposite is also true. There are plenty of buyers out there that are looking for a business potentially just like yours, and they’re willing to pay a fair price. They don’t want to overprice overpay, but they also are realistic and they want you to be happy with the transaction and help them transition the business. And they realize that a key part of having your buy in on the transaction is paying a fair price. And all of this is it just comes down to meeting people and the right brokers can kind of plug you into their existing networks because they do this all the time and it just save you a lot of time and a lot of headache and a lot of mistakes. That first time business sellers or buyers usually do on the first go round of this.

Stone Payton: [00:16:57] All right, man, what’s the best way to to reach out, have a conversation with you, learn more about these topics, whatever you feel like is appropriate. Email, LinkedIn, website. I just want to make sure folks can get connected with you and tap into your word. Man.

David Jacobs: [00:17:13] Sure. So I have a website that I run. It’s David Jacobs, business broker dot com. You can also call me for 152978562 and I live on email so that’s that’s probably best. It’s David Jacobs at ZBB Corp. Dot com.

Stone Payton: [00:17:33] Well, David, it has been a real pleasure having you on the show this afternoon. Thanks for investing the time and energy to visit with us and share your perspective and insight. This has been a very informative conversation and I certainly appreciate you doing it, man.

David Jacobs: [00:17:50] Well, thanks so much, Tony. It was it was great talking to you.

Stone Payton: [00:17:53] All right. Until next time, this is Stone Payton for our guest today, David Jacobs, business broker and everyone here at the Business Radio X family saying we’ll see you next time on Buy a Business near me.