4 Mistakes That Will Kill Your Deal

Anyone that's willing to do something shady to someone else is not gonna be kind to you. So watch out for that throughout this process if somebody wanted to fake something they could. If someone wants to hide things they can't. You know someone's gonna go out of their way to conceal information and hide it. They're probably gonna get away with it. Welcome to M&A Talk, the number one podcast on selling a business brought to by Morgan & Westfield, a boutique M&A firm specializing in the sale small to midsize companies. I'm your host and president of Morgan & Westfield, Jacob Oros. If you're considering selling your business and you'd like to work with me throughout the process you can schedule a free consultation at Morgan & Westfield.com or if you'd like my team and I to perform evaluation of your company for one time fee of $1,500 visit Morgan & Westfield.com or see the link in the show notes. Today we're gonna talk with Mark Fleming of owner actions. He is a by-side advisor. He's acquired 20 companies and he actually has equity in each of those companies and we're gonna talk about the top mistakes that sellers make. We're gonna talk about the top four mistakes that sellers make and Mark welcome to the show. Thanks for having me. So happy to be here and excited to talk some M&A. So we're gonna talk about the top mistakes that sellers make but before we do that what exactly do you do you have a very interesting business model? Yeah so we do by-side advisory. So we focus exclusively on the by-side in the small business space. You know typically businesses that sell between two to six million dollars enterprise value and what we do is we partner with usually first-time operators as they go to acquire their first business. So we will do the search. We will do the vetting of the business. We'll help negotiate the deal. We will help get it financed. Really everything start to finish in the acquisition. So we work alongside our partners because similar to selling most people are only gonna buy one time. So having someone along with them that can help them through that process and who's seen it before. So we're really here to help them through that acquisition process and then we stay on as an advisors. That's really unique. And an owner too right? And an owner. And we're fairly active. We had someone last week asked if we could be more active and I'm like we're yeah as someone coming in it never worked with us. We're already pretty active because you know we own the company so we want it to grow. So we in place of cash compensation we take equity in the business and then you know very quickly it's like well it makes sense for us to just help this business grow. It's easier to grow one than to go and find more. So we help our partners by you know centralizing financial management. So our team does payables, receivables, collections. We do a lot of collections. We also have an internal marketing agency that'll run Google ads, meta ads, do those types of things for the companies. You know just strategic advisory, additional acquisitions. You know really whatever it takes to grow the company because if the company does better we do better. How many companies have you bought? So we're at 20 now. So you've done 20 deals which means you've talked to probably 10,000 sellers. Yes 10,000 frogs at this point. We have. So we operate nationally. So we kind of scan around five to 6,000 businesses a month. Just kind of more quantitative screening to see if it matches with a buyer that we have. And then we dig through the financials of maybe like three to five companies every day. And then from that we probably talked to maybe two to three sellers a week. We're pretty active there. So let's talk about that funnel. So if you talk to two to three a week that's 10 to 15 a month. How many offerings you put in per month or every other month? So it goes in cycles. It goes in waves. Right now we're in an up wave. But I'd say on average per month we're probably have eight to 10 new offers, new offers. Maybe about 20, 25% of those actually turned into closed deals. Most maybe we don't win. Maybe our offer doesn't win. Somebody can come in higher. Typically we're using SBA funding so that caps kind of how much you can bid. So if someone's coming in without SBA funding they're usually going to beat us. And then you know certain deals that just don't happen various reasons and diligence. Mark let's talk about the biggest mistakes that sellers make. And he obviously dealt with thousands of them at this point. In your opinion what do you think the biggest mistake is? So I think number one is having the wrong team. And that really comes down to their M&A advisor. And really that's important because they're really the only real contacts that your buyers are going to have with your company. You know there's a good chance they're not going to meet any of your employees. They're probably not going to spend a lot of time with you. They're not going to have a chance to really dig into the softer things. Probably the things that you're proud about. The things that you're most proud about the buyers never going to see. But what they will see are the materials that your advisor puts together. You know how much care they put into it. You know are they correct about the way that they do some of their accounting and their math. You know how professional they are. And it's representation of the company that's being sold and how the advisor interacts with buyers. Why wouldn't you prefer a like yellow belt if you will versus a black belt. You're buying the company. Why wouldn't you prefer an inexperienced advisor. And I also want to say this show is 100% not scripted. I didn't even know that you're going to say that. And this is not from my benefit. Why would you not want to go against somebody less experienced that doesn't know what they're doing. Because I would think many listeners would think you could get a better deal. Well, I feel like the less they know, the more confident they are about the things that they don't know about. So that can be frustrating. And usually they actually set too high of price expectations. They probably got the listing because they promised they could get you know what was probably in above market price because you know they went through the financials and were giving credit for addbacks that you know a bank's not going to give credit for you know sophisticated buyer that's not going to be using a bank is not going to give credit for either or you know sometimes addbacks that were never subtracted. You know I just got one an hour ago with you know their distributions were an addback. A loan payment was an addback along with lots of other things. Sorry, the distributions. That was a funny one. Yeah. And so you see that you know fairly often. So it's a lot harder. So then they set the expectation that that you're going to sell that more work for you. It is. And there's an education process that needs to happen with someone who doesn't want to go through the process. And you can't go through an education process with someone who doesn't want to learn. Yeah. I go that sentiment when I was getting started in the business. I've been doing this 25 years now. But my first at least 10 years. I didn't really know what I was doing. And I couldn't properly set sellers expectations. And it's hard to do if you only have a few years in the business. And seller says, Hey, I want 10 million from my company. Okay. Fun. And it's very difficult if you lack the credibility to tell them it's only worth three or four million. And it's so hard to find clients at that point. Exactly. 100%. When you're green, you've got to do what you got to do to get a client to pay your mortgage. And that might be overpromising and then eventually under delivering. Yeah. Absolutely. What should they look for in an advisor? How would you describe the ideal advisor? So seasoned is of course helpful. You know, someone who has done it before. Someone that knows some accounting. You know, I find it sometimes it's hard when it's just a pure CPA that's never really done a transaction before. Those can be a little tricky to work with. They're much easier to work with than a green advisor. But you can get the same problem. It's very unrealistic expectations with them. Yeah. Someone that, you know, multiple is a function of size and, you know, someone selling a $500,000 EBITDA and, you know, they're applying, you know, the same EBITDA they saw in a $200 million deal. So I go, I read the paper that one of these went for eight. But someone that has some financial knowledge. So, you know, someone that has some finance background. And really, by far, I think the best that we run into often are people that have owned their own businesses and then also done it for a little while. Those can be some of the best to work with because they really understand more full cycle what's going on in the deal. Big firm, small firm, the principal, what are the associates? What do you think? I mean, size of the firm, I mean, most of what we run into, they're big firms, they're franchises. So I don't want to call anyone out by name. But those can be hard to work with because the training, I feel like, isn't very good, which is even worse. Someone's gone through two weeks of training. They feel like they know it and then turns out, you know, they really don't. So like the big firms are tough. But then since it's a franchise, right, there's going to be, there's going to be good and bad within those franchises. So you can't paint everyone with the same brush. I mean, typically, you know, the smaller firms, typically when somebody does well, they often go out, eventually go out on their own if they're skilled. So the smaller ones are, you know, typically better. Well, let me ask you this. What about fees? How do you feel about the M&A advisor charging a seller up front fees? I mean, I think it makes sense. We don't charge any on our buy side. We feel like we should. We have some reasons why we don't. I mean, you almost have to from a business standpoint in that, you know, you have so many people that are not really intending to sell. You know, we've got a deal that we're negotiating right now. You know, it's a great fit for our buyers. The absolute perfect fit. I don't know if we're going to find anything better. Like my money is that the seller is not a seller that at some point this person's going to back out of the transaction and they're just trying to find a reason why. Yeah. And if they had retained an M&A advisor paid up front fees, they might be more committed. And so I think that yeah, you have the two aspects. One, you really just have to do it to run your firm in a way to manage the cash flow. And then two, from a client perspective, is that you know that they're at least semi committed to selling the business. That's my take. Take it for what it's worth because obviously my advice is bias, but the more experience you are, the more likely you're going to charge up front fees. And generally, you only do if you can. And that's usually a good in my experience. That's a good signal. What do you think the second biggest mistake is that sellers make? So I think you know, a big one is going crazy on the addbacks. Now do you mean number or amount more than number. And so what we found is a lot of banks, you know, you can maybe get five personal expenses added back if they could say if they're very provable in both that they were paid and that they were truly not for the business. But we looked at a deal last week, we got really far along. And they had thousands of transactions that they wanted to add back. And you just can't because it has to be provable that it wasn't for the business and you can't go through line by line and prove each one. It's just it's not feasible. That's going to be a very time consuming and a bank is just going to say forget it. Yeah, I'm going to say forget it. And that's why I kind of told him like pick your top five. And we'll talk about those. But you know, it ruins a lot of credibility. And that's something the advisor should put into their sellers. You know, I've had a view and I used to work at sometimes people get scared. I used to work at a hedge fund and you know, would look, you know, we have long short and look for red flags and things like that. And you know, to say, so someone's willing to lie to someone else. They're willing to lie to you. It's a good point. Someone else is also the IRS, right? Yes. Yeah. So it's even worse when that someone else is the government. So it is, you know, anyone that's willing to do something shady to someone else is not going to be kind to you. So watch out for that. So that's a red flag and in that cell and something you see and you walk away from it is. Yeah. If there's too many will walk away or we don't we just don't count it in the cash flow. I mean, obviously there's, you know, true addbacks, you know, in this space, we do sellers discretionary earnings. So, you know, we're adding back interest, the depreciation, the amortization taxes. If it's a C corp, but it's pretty rare to run into a C corp in this space and then one owner's salary, you know, we see a lot of advisors add back three. Are there draw, like you said, the draws, the distributions, right? They had back, yeah, three owner salaries and then don't add back or replace or don't whatever the opposite of an add back is a replacement salary for the other two. I see that all the time. Exactly. And every business owner's running some personal expenses. I don't know if I've ever seen a business that didn't have anything. It's very rare. I'd say a few percentage do. What do you think when you see one of those? It's super clean. Like I'll pay a premium for it. I mean, because if they're running their business that clean, they run their financials that clean, you know, in my mind, that's a premium. It's likely a premium business and it's the same thing on the other side that you just see it's just out of control. And then they're trying to get it added back and trying to get paid a multiple on it. You know, we're going to discount it and assume that there's some other issues. And in some deals, we've gone bad, you know, I feel like some excessive use of the add backs is somewhat of a sign that you want to watch your back. I always say that because your antenna goes up when you see a lot of add backs and throughout the rest of the deal, aren't you a little bit more careful in looking for other cockroaches in the kitchen, so to speak? Yeah. The more we see the more we're on guard, we had one that interesting one walked away from after I looked through. And the dollar amount wasn't too bad, but they were adding back child support that ran through the business. And it's like, okay, that's weird. Why are they deducting in the first place? Yeah. Why are they deducting it in the first place? Like it was the owner's child support. Business expense? Yeah. Yeah. So it's what they get. It's not a business expense. It shouldn't be attacks right off. But then I just looked at it. I'm like, so they've got $850,000 of seller discretionary earnings and $6,000 of child support. And I'm just like, what? I think it's kind of weird that you're making $850 a year and you're only getting your kids six grand. That's a good point. Yeah. And I think that's because he ran so much stuff through the business that I think he probably showed the divorce attorney that he didn't have a lot of income. What are some of those in the gray areas? Some example, addbacks like country club dues because maybe out there golfing with clients and getting business. But what are some other addbacks that you're not too comfortable with? So it's traveling entertainment is always hard. And it's the most common one that we see. But it's really hard for me to tell that you're not taking out clients or that you're not going to conferences, that you're not traveling for the business. Exactly. You're going to visit a big client. That one's really hard hard for us to prove out. And that's by far, you know, the most common. We see, you know, in the construction space. Uh-huh. Yeah. Yeah. You know, cost a good soul. I did an upgrade on my home. Exactly. I was going to say, the better job they do hiding it, the harder it is to add it back. Yeah, especially materials. Like how in earth are you going to verify that? There's yeah, there's no way for me to know. Yeah, you ran materials and labor through the cost of goods sold. That one we sometimes can get past just because, you know, we'll make sure the invoice is, you know, addressed to a house that he can prove that he owned. But even then, I mean, obviously that's could fake that if they wanted to. But, you know, there's lots of different, you know, almost any instance throughout this process of somebody wanted to fake something they could. It's a good point. What about auto? Auto is common. We usually give that one back pretty easily. What do I fuel? Fuel. Yeah. I mean, there's just no way for us to know if that's a business expense or not. When you say auto, you mean car payments, insurance, stuff that's easily verifiable, right? Yeah, they're a personal car. I mean, it's just so common, personal car, personal cell phone. What about families, sellers? And that quote-unquote claim they're not working the business. Yeah, we obviously we don't love seeing that. And again, it kind of hurts. It hurts the credibility. You know, we usually do add it back, you know, if somehow we can prove it, but we're still going to discount our valuation at some point for that. And we're going to go through the process. It is one of your kind of always on the fence too, because it's like, did they really not work there? It's hard to prove. It's really hard to prove. Very hard to prove it. And what about, you're probably one of your favorites, office supplies, trips to Costco, toilet paper. Yeah, there's no way to break that out. What if they could? They said, okay, here's Costco. We only go there to buy our personal groceries. And here's all the receipts for the year. How do you feel about that? Well, I don't think the bank would go through it. No, the bank would definitely go through it. And we try to follow like, would a bank give credit for this? I'd still say probably no, because we'd have to go through every receipt line by line. And I'd assume it probably wouldn't add up to that much anyway. So at least for most deals, like, if we just toss it out, it's not going to, you know, if they've got $5,000, $10,000 of Costco, you know, if we just don't count that towards the earnings, it's not worth it, usually. Yeah, it's got to be worth it. Well, males in entertainment. Males specifically. No, we wouldn't count that. And a lot of times they'll try to add back. We buy the employees food every, like, once a quarter. And you don't have to do that anymore. Yeah, you can start trading the employees, bad. Yeah. Gift employee gifts get, you know, it's like, no, we're going to have to buy the same gifts you did. And if anything, maybe even a little better, because we're new. So that one's a definite now. Well, excellent. Price is advice. Let's take a quick break and we'll be right back. If you're a regular listener of M&A talk, you know the secret to successfully selling your business as preparation. Whether you want to sell your business now or sometime in the future, my team and I can help ensure yours prepare it as possible. We can perform an assessment of your company which includes a valuation of your business, a review of how easy your business will be to sell, a summary of deal killers that can derail your sale, a list of things you can do to maximize value, and insight into how buyers will perceive your business in the actual marketplace. The assessment has a one time fee of $1,500 with no commitments and a 10 day turnaround time. To get started, visit morganandwestfield.com or see the link in the show notes. Now back to today's show. Welcome back to M&A talk with Mark Fleming, Mark. What's number three? So my number three is not engaging their attorney to the last minute. And we see this a lot or they really try not to and they try to negotiate it a lot themselves. So we're in the middle of one right now where it's an unsophisticated seller that was refusing to let her attorney view the contracts and she was basically doing everything on her own and it's created a lot of issues in the deal. Why would you care is the buyer? Because again, you would think back to my first question on M&A advisor, would you prefer that they not gates your attorney it would be easier for you to be able to probably get away with stuff that you wouldn't be able to if their attorney was involved. Similar. I think it goes the opposite in that at that point, they want absolutely every single clause of the contract to go 100% in their favor. And you know, everything should, you know, there's market terms for most, you know, most portions of the contract. Yeah, and you don't have to explain that to an experience of Johnny. And you know, this one, you know, she wants, you know, no liability whatsoever for anything that happens while she owned it. And she wrote that it should say in the contract that the buyer had the chance to look and should have found it based on 30 days of due diligence, right? Yeah. If someone wants to hide things they can't, like, you know, someone's going to go out of their way to conceal information and hide it, they're probably going to get away with it. And, you know, to have no liability for that. And she's really kind of holding on that. And, you know, it's a stock purchase. So, you know, oh, yeah, forget it. Any experience attorney would just say, Hey, there's no savvy buy in the world that's going to agree to that. Unless maybe you'd severely discount the price by 30, 40, 50%. But even then, buyer much is say, Hey, this is really weird. This is not the market norm here. Exactly. And we're paying a pretty big premium for it too. We're bringing extra equity because we know it's going to praise for less. But our partner, it's a perfect fit for them. You know, it's right up their alley. There probably isn't going to be anything that's as good of a fit. But they want to overpay to get it. So we're paying absolute top dollar. You still working on that one? We are. I don't think that'll play out. I don't think that one ever hits a finish line is my expectation. If it does, how would it? So, and that's where we always find. So the earlier in the deal that the two legal teams talk to each other, the faster the deal happens. And you always have that kind of back and forth negotiation. And then just magically once the two attorneys get on the phone with each other, they seem to get resolved. So for that deal, it's tomorrow. The two attorneys are finally going to talk to each other. So we finally got this person to be willing to bring their attorney in. And I think that will resolve a lot of the issues. But yeah, we always say what the legal usually gets stuck until the legal teams start talking. What about the infamous my brother-in-law is a divorce attorney and he can represent me. That's almost even worse. Free help is worse than no. Free helps worse than no help from the wrong person. And when we had one a while back where it was a non-MNA attorney and he decided that we shouldn't be able to talk to each other anymore. And now all of a sudden, only we're only allowed to talk through the legal teams. That's great for communication. Exactly. We were on the same page. There was a little communication issue. Like there wasn't anything hostile. It was just like trying to get some wording right. And it's, and even the broker, he said that like they shouldn't talk to their broker, their advisor anymore, either just to him. And eventually we were able to fix that through some odd back channeling. The broker managed to get through to them and they talked to him. They're like, well, we don't want to do that. We don't want this scenario. And then their financial advisor stepped in and kind of helped kind of bring them along a little bit too. And he was an ex-commercial banker. So he knew a little bit about transactions and got it moving again. But I mean, he, that attorney effectively ended that deal for three weeks for no reason whatsoever. We weren't really disagreeing about anything. How do you feel about going head to head with a very experienced M&A attorney? So that's all I've done if they've done it for 30 years. Are you intimidated by that or no? No, I mean, I've always found them fairly easy. Here's market. And they generally go give you a market contract. And there's been a few times where someone tries to bully us in a way and say, this is what market is. And you need to agree to this amount of indemnification. It's like, well, I don't know. We see a lot of deals all over the country with lots of different attorneys. We have a really good grasp of what market is. And you know, this is very far from market. The most combative attorneys, it tends to be inversely related to their direct experience, doesn't it? 100%. Intelligence and volume are often inversely related. I think it's pretty similar. That's a good one. I like that in both the advisors and the legal side. Who are some of the not names, but kind of paint a picture or caricature of some of the easiest attorneys that you've worked with? What would they like? So it really is just someone that's probably has a decade plus of deal experience. And this really is their focus, which means like 100 companies, 50 to 100 companies at least. Yeah. And there's a lot of really good, you know, one person named law firms out there that do a lot of really good work. And you know, similar to the M&A advisors, like we find a lot of really good independent attorneys. And those are really our favorites to work with are, you know, that we hire are independent. Why independent? They're usually easier to work with. Good ones usually go out in their own, don't they? Yeah. It's the same thing. The good ones go out on their own. You know, we're usually a more meaningful client to them. Then maybe we are to someone at a big firm. And if you got a big firm, you're going to get a junior guy probably. Exactly. Yeah. And we use the same, we have about four or five attorneys that we just kind of rotate through with deals. So, you know, we'll repeat customers for them. So we get treated, you know, treated pretty well. And the pricing is usually a little better. You know, you don't have to go and pay all the firms, you know, overhead, it all goes straight into the attorney's pocket. So usually get some cost saving there. They're harder to find. You know, it took us a long time to build up our roster of attorneys. You know, only kept finding good CPAs were even harder to find. But it was tough building out our network. What are those guys charge? Most are like 350 an hour. And then of course, that's misleading. So it's, you know, how many hours are they going to spend on it? So most are at 350 an hour. You know, our average deal is kind of that 10 to 20,000 dollar range. So on the, you know, smaller side on the buy side, yeah, on the buy side. And we're drawing up most of the documents. So 30 to 50, 60 hours. Yeah. We're on there. You're probably doing more work than the typical buyer, right? Yeah. Yeah. We dig in quite a bit. You know, usually we have them do all the legal diligence, you know, drop all the entity documents. You know, they're drawing up the purchase agreements, you know, employment contracts. Usually this is what the sell side, at least in our deals, you know, they'll do the lease and not much else. What are some of the biggest sticking points when it comes to the negotiations over the contracts between the attorneys? It's usually you know, hold back fund is a big one. And especially in, you know, industries that have equipment. And you don't really get that much access to the equipment to do a full real analysis of it. So sometimes you might rely on that hold back fund that if we get a truck and find out day one, it's broken, then that funds can be used to repair the trucks because you don't want us in, you won't let us in the building to go inspect it. So that's really like the solution for that, either let us go in or give the hold back funds preferably both, but what have you found the norm to be terms of a hold back? So I mean, it's usually pretty modest. I mean, we probably should be a percentage of the deal size, but usually we do it for like 10% of the asset, you know, physical assets. So, you know, it might be 50,000, 200,000 released over, you know, three chunks in three months, but we find we get a lot of pushback on that one, which I think it's market terms in larger deals, but in the smaller space, it's not as common. So, you know, that, you know, they seem to often sell or sometimes feel insulted by it, you know, you don't trust me. I take care of my equipment, like my equipment's in great shape. I do all the maintenance, but there's no way for us to know, like again, you'll let us inspect it or we need to keep this because there's no way for us to know. I'm very curious. Do you draft your own ROI? Or do you ask the attorney to? So we use a template. Yeah, that's what I thought. You'd have a template. What if it gets pretty hairy? Do you ever drag the attorney on earth or not? We have. It's been a while since we have, we did, I think, you know, one of the first times we did a partial offer because it was just the template wasn't written for that. You know, we had them come in and write that portion, but for the most part, I mean, the yellow eye gets voided out by the purchase agreement anyway. So, you know, we're just really just focusing on kind of the high level price, financing, you know, basic overview of the transition. Two or three pages. Yeah, there's about three pages. I mean, we put in ours that the seller has to buy reps and warranty insurance, but that will pay for it, which is again, because it's not well-known within our space, especially on the M&A advisory side. Yeah, it's available now for smaller deals. Yeah, it goes down to a million. So, anything above a million, you can get the insurance. So, having bid on the side of some bad deals, you know, we'll never do one again without it. And there's, you know, there's certain portions of that insurance that the seller actually takes out in their name. So, we put in the contract that you have to take this out, we'll pay for it. What's that cost typically? That parts, it's 1% of the deal price to ensure the whole deal. Five million dollar deals with 50 grand. Yeah, and then it's another 50 for what they call like the buy side is technically in the name of the buyer. What happened in that deal they blew up? We came back to buy you. Yeah, so we had, in fact, unfortunately, we've had more than one. So, we had one where it was a pretty small deal. It was a gem that we bought. And if you're familiar with the insurance plans that they have for seniors, where they can go to a gem and their insurance company will pay for it. So, one's called silver sneakers. So, I think it's like anthem will pay. It's a great name. Exactly. They'll pay 10 bucks every time, you know, they come into the gym. And they go through and they register each time they come in. So this seller built up a liability. Well, no, what he did is anytime anyone ever came in once he stored their info. And then they came in the max amount of times from that on. So someone who came in one time, you know, he might have entered their name 100 times. And so, you know, about 30% of the revenue was fraud. You know, I guess I'll I'll soften my language. We allege that 30% of the revenue is fraudulent. And there is current litigation to dispute that on the fraud bypasses the reps and warranties, doesn't it? Yeah. But going to court is expensive and takes a long time. You know, if a business is really in trouble from a cash flow perspective, you can't afford two years. So getting something that'll pay out sooner and faster without having to go to court. Because, you know, if a business loses 30% of its revenue, which we did because we wouldn't continue that practice, that's all your profits. And you've got a loan payment to make too. So, you know, you're immediately in a pretty bad situation. How likely would diligence have discovered that? I mean, we did diligence. It's really hard. And I talked to a lot of Q of E people. We do our own Q of E. And I'm like, Hey, could you have caught this? And most say no. Because the cash was coming yet. Yeah. When they look at the cash, it's going to line up. And the point of sale systems showed the people coming in. And he had a good story about it. There is a senior home right next door. He's like, Yeah, we have good relationships with the senior homes. And we get a lot of the people that live there coming in all the time. So, you know, all the money was there. The story lined up. And so it's really tough to know, you know, in hindsight, if there was really a realistic way to catch it, you know, we even our partner spent some time in the gym. You know, even then, like, you're not going to be able to tell everyone that's walked through. How do you feel about a seller negotiating the L.O.I. and not involving their attorney in the L.O.I.? I mean, I feel like most of the time or sellers don't have their attorney involved in the L.O.I. stage, it's usually just their advisor. And then every once in a while, there's a, you know, non-brokered transaction that will do and they'll negotiate it themselves, which we've actually had really good luck with some of those that we've actually, you know, by the time they get to that point, you're probably dealing with someone who knows what they're doing. If they don't know what they're doing, we probably, you know, never get to that point that we're negotiating the L.O.I. But yeah, I think very few bring the legal team in. Every once in a while, I'd do here like, we're going to have the lawyer look it over, but because it is all overwritten and some of the more contentious stuff is in the purchase agreement, what are the most important parts of the purchase agreement to you, you personally? So obviously, in general, just making sure that the seller is liable for things that happens on their watch, that they received the revenue for and they're responsible for reps and warranties and and demnification. Exactly. And that we are responsible for everything after. The exact opposite of that deal, you told us about earlier, that you're working on now. The exact opposite of that deal is market isn't even that. Like, I mean, most deals, it's like, the demnifications capped at 50% on most stock purchases of the transaction. So even that, it's still favorable to the sell side that they don't have full liability unless there's outright fraud and, you know, something that's blatant, then that those caps usually don't come into play. But really, it's trying to make sure that it's as close to that scenario as possible because, you know, to me, it seems fair. You know, you got the revenue for the activity that caused the liability. And I see both sides because, you know, we do also do some wealth management with some sellers that, you know, people that have exited their business is kind of the niche there. And, you know, someone, if you're planning to retire off the money and for some chance for it to go away, you know, I can see where they come from, right? So, because there's no way to make it back. So, if you sell your business for $10 million, and your plan is to go retire off your $10 million, hey, you want to sleep, but you're heading to pillow and not worry about it. Yeah, there's some chance your $10 million can go away. That's going to be devastating for you. And then the buyer, if one of these things pops up, they're bankrupt. You know, almost every buyer has some form of loan. You know, they're going to go to instant bankruptcy. So, you know, both sides are kind of fighting for their lives in a way there. You know, so I do see both sides. And that's where I think the rep's and warranty insurance is, you know, a good, a great solution. It's like, well, let's just get the insurance. And they don't have to worry about it. Period. And that's why I always find it hard to believe that our sellers are typically unwilling to pay the 1%, and so we've just put it in our agreement. It's like, we don't even, it's 1%. So, like, we don't, it's, you know, I find value in it because I don't want to have to go to court with anyone. So I will buy your insurance to make sure that you have it so that the insurance pays me not the courtroom. Let me ask you this, how often do problems happen? And how commonly is that what you would characterize as fraud? Because what I'm thinking in my head is if I'm a seller, I know I've run my business clean. What are the chances that something's going to come back to bite me? I go in and I inspect the equipment. I read the reps and warranties. I do everything clean and I'm honest. What are the chances that's going to come back to bite me? I'd say it's relatively low, but, you know, one instance, you know, business we bought, it was a stock sale and, you know, construction related and there was a house fire when they owned the business. Now, that's something that, you know, came back to the seller as a liability through the indemnification. Now, it should be covered by the insurance company, the insurance that was in place at that time. So, you have certain coverages there that even if something comes back at you, you might have that. But I'd say it's pretty low. If you're doing what you're supposed to be doing, I say it's more than what 1% to ensure. If I was selling, I would make sure I would get it. Those actuaries know what they're doing. Yes, if it's 1%, you can kind of run some basic numbers on that and figure out what the probability is. Yeah, to get 99% of your sale price and not have to worry about it at all, to me, seems to make a lot of sense. Exactly. You know, there aren't many things that there isn't some form of coverage for. I'm sure there's things I don't know about that can come back. We did a whole show on that. I think there's separate reps and warranties insurance for that. I don't know what it's called. But you're right. I mean, 1% you're covered for the most part. It's a great option to sellers. I highly recommend it. Yeah, I feel like I've become the spokesperson for reps and warranty insurance. A very useful tool. Let's take another quick break. And then when we come back, we'll discuss the fourth and final is probably like 100. But for this episode, we'll discuss the fourth and final biggest mistake that sellers make. So we'll be right back. If you're a regular listener of M&A talk, you know the secret to successfully selling your businesses preparation, which can feel like a daunting experience. We've created the art and science of selling a business course that walks you through every step of the sale process, from deciding to sell to the closing. The course is 99 dollars and includes 10 easy to follow audio lessons to ensure yours prepared as possible when the time comes to sell. To get started, visit morganandwestfield.com or see the link in the show notes now back to today's show. Welcome back to M&A talk with Mark Fleming. Mark number four. What is it? So I'd say number four is not knowing what they're going to do next. And you know, we find that a lot of people, you know, this isn't directly related to an acquisition. But what we see from a lot of people when they sell their business is, you know, that business becomes part of you. You are at your businesses, you and how you're going to transition into a world where that's not the case anymore. And how you're going to spend your time and what your focus is going to go into and what your energy is going to go into. And I find that's an area that a lot of people selling their businesses really struggle with and you're never really planned for. I have a lot that have run their business for 30 years and they're just tired and that's not going to get rid of this thing. And they sell it the next day they wake up and if it's some call me and told me they've got a ball in their eyes out. Nobody was calling them. Nobody's emailing them. They didn't feel needed. There was dead nothing to do. And for many people, it's a really big shock. Not everyone, of course, but for many people, if their entire identity is wrapped up in the business, it can be a pretty traumatic event for them. I know selling your companies right up there with bankruptcy and divorce. It's a very stressful experience. What have you seen from sellers after they've gotten out and sold? So you might have someone that maybe, you know, has a hard time letting go where, you know, at some point, the new owner is going to have to come in and, you know, start putting their thumbprint on the business and get a restraining order. Yes. Just kidding. So sellers still there and they're transitioning, but now there's a new king in the castle. It's got to be really hard to step aside and just let them do their own thing. It is. Yeah. To be so used to calling all the shots and, you know, a lot of times maybe people don't even consult anyone else. You know, they just decide and the company goes and to have someone knew completely in charge. And at that new person, they need to make mistakes. That's part of the process. And, you know, their ideas might be good. They might be bad. You know, you want to be there to give some guidance to make sure that, you know, nothing's going to be catastrophic. And, you know, you probably have some financing in the deal. And most instances is the seller. You're the landlord. So, you know, you have financial incentive, but really, like, I think, especially in our space, you know, the businesses are much more personal than just the financial side. And, you know, it's your name, your reputation, it's your employees. So it is finding that line. It's like, you got to give them some room to make some mistakes, but mistakes that aren't going to jeopardize the company. And, you know, a lot of things to you, you know, the most common changes that new owners make often is more on the technology side, which I think sometimes people have a hard time seeing, you know, processes and systems change, but really just kind of supporting through that, you know, a lot of instances, it's kind of something that has to happen. I'm a messy desk guy, you know, I operate in a desk with stuff all over the place, but no one can come in and operate my system. So yeah, your systems worked for a long time, but it's probably might not be a system that's going to work for someone else to come get plugged into. It's going to have to go into a file system. How often do you see sellers getting emotional during the sale process? Quite often. And in the good sales, they do. You know, he almost want someone that cares. You know, it's the person that it's not an emotional moment that's, you know, can be somewhat concerning. I like that point, but it is that you're going, you're going to go from a hundred miles an hour to stop. And it's very difficult. You know, there's always that argument about it as a business, a family or a sports team or, you know, how do you describe it? But, you know, family-owned business becomes very family-like with the employees. And, you know, you're going to leave people that have been with you for, you know, a very long time. And, you know, you're leaving them with someone else in charge with their fate and someone else's hands that you probably don't know that well at the transition because you really don't spend that much time together. You know, you might, you have a call at the beginning, you know, you might have dinner, you might do a couple walkthroughs, but it's only going to add up to a few hours that you've really spent together before the actual deal closes. What kind of problems do you experience as a buyer? Because it's interesting that you would list this as number four or that they don't prepare emotionally and personally. But how does that affect you as the buyer? It doesn't hurt us that bad. It's of the things that come back at us. It's probably the least. But it's the thing that talking to people that have sold their business, I find, you know, their number one. So it has a much bigger impact on them than it does on us. Mark, how do you think they can prepare emotionally? So it's really sitting down and starting to think about what does your next chapter look like? You know, are you going to go coach, you know, your grandkids little league? Are you going to travel the world? You know, I find a lot of highly successful business owners, you know, I think you'll see they they're not people like to go buy, you know, Ferraris and Lamborghinis. You know, there's a few out there, but the vast majority like to live fairly modest, reasonable lives. And now you have this big pool of money that also becomes its own liability or responsibility, you know, more money, more problems. And you realize, you know, this pile of money that's going to go to your kids, you know, how are you going to deal with that? You know, we see quite often people don't want to leave too much to their kids. Then they have this big pool of money. It's like, go and go spend it. And then they don't want to go spend it. So, you know, figuring out what's going to make you happy, I find a lot of the more successful people find, you know, some boardwork to do, you know, kind of depending on their age, you know, some mix of some boardwork, whether that's non profit or for profit, it can often be a really good way that, you know, you can still engage in something a little bit. Keep them from getting bored, right? Exactly. And, you know, travel and time with the kids, but figuring out which one of those is going to be something that you like is huge before you sell. Well, Mark, as we wrap up the show here, if you had to give sellers one piece of advice, what would it be? I mean, I think being forthcoming with information is going to, you know, help you. So, there's so many different areas it's going to pay dividends. And one is when you sit down with your eminent advisor and they're setting essentially price expectation, you know, make sure they know everything they need to know because eventually it's all going to come out. So, you'd rather have it come out day one. So, that price expectation gets set then rather than having to change later, you know, the common phrase in the industry is, you know, when you're under contract with somebody and you find out something, you have to change the price so that, you know, you don't get re-traded. You know, we like to make sure that our offer price ends up as the offer price. So, hopefully, we, you know, have all the information so that we can do that. And then also, it's going to make the process go faster. So, if you provide everything up front, the diligence is going to go faster, financing is going to go faster. And the relationship's going to be better between you and the buyers. And they'll feel better paying higher price. If the more organized and up front, the information is the cleaner the financials are, the higher the price. So, you know, if you are running things through the business that maybe you shouldn't at least, and you're not planning to sell this year, it's time to stop and, you know, run the business without running anything through it, because you can lose a lot, you know, if you're running $100,000 of stuff at a four times multiple, you know, you just lost $400,000 in sale price when, you know, you stood to gain $40,000 in taxes. So, you know, you had a net $360,000 loss there. So, being forthcoming with info and running a clean company. Well, solid advice, let's plug your company. Let's name your company. So, we're owner actions. We do primarily buy side advisory, you know, we're great from two sell to you, because we have a couple of advantages that one, we're not the direct buyer or partners are. They're going to be owner operators in your business every day that they own it. They're the majority owner. So, it's, you know, an individual that comes in with a support team behind them. So, you get that benefit of an individual that is something that you don't get when you sell to a private equity firm that's going to maybe come in and turn the company over or come in and try and slash costs. You know, you have an individual coming in, wants to run the business for the next 30 years. And then you have us there supporting them and helping them and making sure they have the tools that they need to be successful in that process. And we're forever holders too. So, I mean, we think about things, you know, how does this affect the next decade, not the next quarter or the next year? What types of companies do you buy or does that change too frequently to pin that down? We find our partner first. So, it's completely based on our owner operator and their skill set, because the skills that we bring are more generalized. And, you know, they're going to do everything that's more specific. So, we always make sure that our partner has experience in the industry that they're trying to buy. Well, Mark, as we wrap it up, you have any social media profiles or contact information you want to share. We do. Our big platform is TikTok, which I know always surprises people. It's a great platform. So, we have over 700 videos on our TikTok channel. And then also, you know, a lot of our videos get posted at YouTube if you're not a TikToker. And, of course, our websites owneractions.com. Wonderful. Well, Mark, thanks again for joining us on the show that's Mark Fleming. We'll have his full contact information in the show notes. And, Mark, thanks again for joining us. Thank you. 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