What Buyers See That Founders Miss | Andy Allaway, Empire Flippers

Hello and welcome to another episode of the podcast. Today I'm joined by Andy Alloway, who was the CEO of Empire Flippers, the number one place to buy and sell online businesses. How are you doing today, Andy? Yeah, really good. Good to be here. Appreciate him. All right. So in this episode, which is going to go through, what is it that prevents? What are the most common reasons really that a business can't get sold from founders who are making money, but still can't really sell the business or they can't get the multiple that they want? So from your side, what are the most common reasons why a business would be making money would be producing profit, but still isn't really sellable at any kind of reasonable margin? Yeah. So I said there's probably two big ones and then maybe some honorable mentions. You know, I'd say by far the most common reason we see is just high owner involvement, right? So owner is still very much involved in the service delivery and the sales and the marketing of the business is kind of is working a, yeah, for kind of a full time shift in the business. And you know, I always say the number one question of buyer is asking themselves when they look at a business is what happens when you take the owner out of the business, right? And if a lot of the relationships and the work being done is dependent on them, then that can be super hard for buyers to overcome. Just go at the second one as well, which is probably the big one is just like some form of bad financial books, right? And that often takes the shape of maybe business stuff and personal stuff, co-mingled, you know, PNLs that don't reconcile to bank statements and stuff like this. All of this stuff, particularly once you get over a certain size is going to be required in due diligence. And so like sellers that haven't taken the time to like really get their books in order before coming to market. Okay. Yeah. With clients, I will typically see huge amounts of founder involvement and it's kind of a mental minefield to get yourself out of that as well. But from a buyer's perspective, oh, I want to buy the business. How much profit? Okay. 500K a year. That's pretty good. How much of that is going to stay once you leave? And if the answer is not that much, then like why why someone taking the risk like it becomes a ball like, yeah, tell me more about what that looks like when that's the case. And specifically what buyers will specifically ask for and how they will ask for that as well about the founder involvement part. Yeah. So I think there's a couple of main kind of shapes that it takes. So one is that the brand itself is kind of like very centered around the owner, you know, they're kind of the face of the business. Potentially, you know, they're doing the podcast, they're doing the YouTube channels, all that kind of stuff. That can be tough to unwind. It's definitely doable, but that's one where you have to get ahead of it a long way ahead of the sale. And then there is just the, you know, the other shape of it is like, there may not be so outwardly visible, but they are very much like particularly the sales and marketing engine of the business, you know, will often see that the founders do a reasonable job of handing over certain processes and stuff, but are very often like, you know, they maintain all the client relationships and stuff like that. And, you know, so, so yeah, exactly as you say, buyers are going to kind of ask what happens when this person isn't in the business. And like a conversation I have with sellers all the time to kind of build on your example is, well, my business is making half a million dollars a year. If I hired somebody to do kind of all the bits and pieces, maybe it only be making like 400K or something like that. And I know that valuation is a multiple of my profits. So like, it's better to keep the profit high. But it's like 10 times out of 10 better to, you know, backfill yourself and be making 100K less a year because that business is just worth more, you know, the multiple goes up to reflect that and be like, you're actually going to sell it, you know, and an evaluation is no good if you're not actually going to sell the business at it, right? Mm-hmm. Yeah, typically the client will be that I work with, like they are the de facto marketing manager, they are the de facto sales manager, they'll onboard every important client and they'll, even if they have account managers for the important clients, they'll want to own those relationships as well. And they'll have personally hired every single one of the staff. And also it's kind of, it's more ego. Yeah, it's, it's better for your ego if you are extremely important, but worse for the financial prosperity of your children and grandchildren. I suppose it will be one way of putting it. Sure. Yeah, absolutely. It's funny, like, you know, to share kind of a personal insight, baseball. I mean, we've kind of been through this empire for the first, right? So we have two co-founders, Joe and Justin. And for, you know, a few years now, you know, they've been out of the business and kind of I run the business. So from a celebrity perspective, like we're in a great shape. If they ever wanted to sell and a buyer said, well, what happens when the founders aren't there? Like our business runs exactly as it does today. But like, I'm sure they want me sharing it time. It has been like personally challenging for them because so much of their day prior to that was kind of taken up with them being in the business and important and stuff like that. So like, yeah, it's an emotional thing to figure out as much as it is a structural one, right? So in addition to that, what actually needs to be true inside of a business for a founder to step out for the sale? Yeah. So I think the key thing and why we always try and engage, you know, one, two, three, sometimes years before someone is actually ready to sell is it is something that you have to start early, right? Because you have, you know, you've built a great business by being a force of nature and wearing all these different hats. It's not something that you just kind of unwind 30, 60 days before sale. And if you do do that, like, it's very obvious to buyers that like you've kind of, you know, past it together last minute and that has business risks. So you have to start early. I think like one way to think about it as well is, you know, you want to think about replacing yourself in the highest leverage role, not just the easiest one, right? So it's like, as I kind of said, it's, it's somewhat easier to, oh, I have someone that does the admin of the delivery or my bookkeeping or something like that. But that, because it was easy for you to outsource that, that's the also the easy bits for a buyer to outsource. It is like, okay, draw up the all chart, which boxes are mine as a founder and like which ones are those are the highest leverage one, the sales and marketing, that kind of stuff. I think, you know, it's really worth thinking about hiring a number two of sorts, right? Doesn't have to be a CEO that steps in and you step completely out, but just somebody who starts to share some of that higher level responsibility for you. Maybe like you say, is involved in hiring staff to some of this stuff that would have historically just been you. So that's something to think about. And then lastly, and you kind of touched on this a bit already is there's handing over processes and stuff like that. When we think about replacing ourselves, that's kind of naturally where our brain goes, who's like doing the work, but a big part of it as well is like drawing up a relationships map as well, you know, like who has relationships with the top 20 clients with suppliers, if that's relevant, that kind of stuff as well. So I think they're probably like the main lenses I would put on it when you're thinking about it. Okay. Yeah. What I typically see is they're delegating some of their activities, but definitely not the ones that feel scary to delegate. And even the tasks at the delegating that have processes which are used some of the time and are somewhere, but who has decision making authority really and ultimately a lot of time, it really is the founder. And the founder can be very efficient at doing that or as efficient as you could be at not delegating any of this and not really having any ownership, you know, they are, they have something that looks like an operations manager, but can they take two weeks off without checking an email? Okay. No. And they haven't and they haven't in years. And you know, so the idea that all right, well, if I can't take two weeks off without checking my emails or I'm terrified of doing so, what I'm going to take two years, like the rest of my life off in the business is going to flourish as a result. And so fortunately, the gold standard of operations and the gold standard of like how well streamlines you are in reality, not in theory, not according to how polished the documents are. It was like, does the business really need you? And you kind of want it to need you at an emotional level, but at a core, a cold blooded financial level, you want this business to be able to thrive without you in reality. And you can test that take take take a week off what happens, fix that, take two weeks of what happens, fix that, take four weeks off, what happens, and so on and so forth from there. Yeah. Yeah. I think that's a really smart way to think about it. And yeah, I mean, the buyers don't expect perfection on this stuff, right? You know, there's the one end of the scale, you have owner operator that's doing everything. And yeah, then you could you have kind of this utopia where you're not involved at all, but buyers don't necessarily expect that. And a lot of the buyers, you know, particularly for, let's say like up to mid seven figure list price of these kind of businesses, they're typically in the space and have some expertise and have run these kind of businesses before. So like they get it. I think once you get much above that into eight figure kind of businesses and beyond, that's when actually like know that you do need to be able to take some time out the business and it needs to run. But yeah, I think like at the price point a bit below that, like you have some flex and if you are taking steps in the right direction, you're already ahead of like the vast majority of sellers who come to market. Okay. Yeah, sometimes clients will be like, I just don't know that I could sell the business [BLANK_AUDIO] all. And generally, I would say you can probably sell it. It's just what level of a multiple you're going to get if you sold it today versus if you know you've made a real effort, concerted effort to improve the valuation of the business, which coincidentally makes the business better to run anyway. Like it's the equivalent of cleaning your house before you sell it. And you can do it. People will buy a business and it doesn't require an enormous amount of work if you're efficient about it and it just makes the business better to run anyway. Right. Hence the book, you know, built a sell and that sort of thing. Yeah. Yeah. Totally true. And you know, I even get this as a non-founders CEO and pie flippers. You know, I like to, there's a lot of ego there. Like I like to think that every decision in the company would be best if it was made by me. But then it's not practical in a company of like our size and how many people we have. And then so I get too many counter examples where decisions I won't involve in go really well. And so like, as you say, an actual fact by removing yourself more often than not actually, you actually end up building a better business anyway, right? Yeah. It's a series of personal tragedies that the business actually can operate without you. People can make decisions. The decisions they make are good. They do work. They have positive outcomes. And you just quickly slowly each decision where the business and the machine does not break without your direct input provides further evidence that you are not required directly for it, which is a good thing, but doesn't necessarily feel like a good thing. Yeah. Yeah. For sure. And you end up having with like people on your team building those muscles or making decisions and different calls and stuff like that, right? Yeah. All right. So what do you see founders waste the most time on when they're preparing to sell? Yeah. So I think anything, anything which I would class as like cosmetic changes, you know, like let's get the website looking sharp before we sell or let's do a rebrand or stuff like this. Because everyone thinks that they're what they have out in the world is like not as polished as it could be, but buyers just care if it's working, right? And in fact, if you introduce a rebrand or similar a few months before sale, you're just introducing risk and uncertainty. If anything, so I say anything like that. I also think like, you know, sometimes sellers will be tempted to throw the kitchen sink at showing some last minute growth, right? So there'll be nice slow steady growth. And in six months prior, they'll kind of just go mad to try and really pump the numbers up. And again, like if anything, I would say that just makes buyers a little more wary, like they like the slow and steady and predictable growth more often than not. And yeah, and it also can create this gap between, you know, well, my business is growing these last three months. So I want this valuation, but buyers are not going to price that in yet. You know, they're going to be very cautious with that recent growth similar to that, like adding new revenue streams, spinning up new products. You know, again, there's a time and a place for that when you're building a business, of course, but I think in the year or two prior to sale, it's more about pairing down and like really making sure the core of the business is as strong as can be. And then like the last bit I would add is probably just like timing the market. You know, and I have seen this in conversations with sellers all the time between 2020 and 2022 say we had a crazy, you know, period in our industry where particularly like e-commerce and FBA businesses, but what were very like inflated multiple wise, but a lot of businesses were and I have conversations all the time with sellers who are like, well, when's the next one of those coming? Like I'll wait for the next one of those. And I think like firstly, that was the anomaly, right? So you're kind of waiting for another anomaly. And secondly, like I run a business. I know how hard it is to like predict the growth you're going to do and then actually do that growth on a continuous basis. And so I think not just trying to time the market, but time the health of your business, X period down the line as well. You're kind of trying to catch, you know, two different knives there, I think. So yeah, they're probably the main pieces. Okay. Yeah, I think Joe was saying that, show you can time the market and the market goes up and then you sell the business for more money, but then what are you going to do with the money? Are you going to put it on your mattress? Are you going to invest it in the stock market, which is also up? Sure. So what's like, what's the point? Like what happens then next? We've we've got successful timing anyway. You end up where you were going to end up anyway. Yeah, totally. Yeah. Yeah, interesting. We've clients, they often want to set up like a business within the business, the core part of the business for a specific niche, for a specific more productized service that doesn't require them at all that they can sort of build sort of a reputation and a brand around within itself. And then the outer shell of the business can be a bit looser, can be a bit more dependent upon the founder, can be a lot less picky in terms of what it's niche is and what it's offer is. But if they have that business within their business, that's the thing that they can kind of drive through them. And clients send a one to stand that pretty well as like, all right, I'm building this sellable business within my greater business. I don't have to drop everything outside of this core focus. I don't have to simplify by burning the rest of the business down. I can I can let it just sort of naturally glide there as we have a marketing effort, a sales effort that is not dependent upon me to get these core niche clients that are someone else buying the business could also get. And yeah, they seem to like that. That's good. But the other thing to note is that you're not selling it to an idiot. You're selling it to someone who has enough money to buy your business. So presumably they're very educated. So we're like, Oh, great. You've your profit has increased for the last month. All right. Well, I know how fickle campaigns can be. I don't care. Like I can see through, but you're not selling it to a client. You're selling it to someone who has however many hundreds of thousands or millions of dollars who got it somehow and probably not because their dad gave it to him probably because they sold another business, although from equity or something like that. So from that person's perspective, what is the utility of this business when the founders not there? And what am I going to be tricked by? What am I not going to be tricked by? So yeah, it's interesting. You said the prettier marketing, who is this for like they this person's scrolling through your your org chart and your real org chart, not the not the fake org chart and scrolling through your real books, not what the books are inside of your own head. Yeah. Yeah. I mean, I just add to that as well that we, simply when you look at kind of like your average seven figure listing, we have a range of different kinds of buyers, but like a pretty good number of them are people who buy and run businesses for a living. Like they know what they're doing. They're going to do quality of earnings analysis on the numbers and all this kind of stuff. And you know, due diligence again on like a typical seven figure listing is involved these days, right? You know, it's going to be a lot of bank statements and documents and all these different things. And so exactly right. Like these are people that know what they're doing and I'm want to buy good businesses that add value. So if that's what founders waste their time on. I mean, we kind of addressed in the previous questions, but what's like one of the highest return on effort areas for not wasting your time? Where's their time best bet when preparing to sell that's sometimes they're not aware of? Yeah. So, you know, in addition to kind of the other bits we went over, like maybe the one final thing I would say on it is, you know, it's good to adopt a mindset of preparing for due diligence rather than preparing for listing, right? So when you think about like the cosmetics and all the, you know, those kind of things, they're all about like making the listing look shiny and kind of giving a good first presentation, which is important. And we help with that at Empire Flippers, but I think like if you adopt the mindset of like, okay, well, what needs to look shiny and good in diligence, right? And that's where you have to do all of the boring work of like separating out financials and making sure contracts are up today and signed and trademark assignments. And these are all the kind of, you know, less sexy stuff that comes up. And then, you know, maybe one thing I would add to that as well is, again, buyers are smart, buyers are sophisticated. Buyers also accept that like, there will be some stuff in businesses, which is a bit funky or stuff which didn't work or things like that. And the similar mindset to always adopt as a seller is just like, be upfront about your business because, you know, there's not much within kind of a decent range, like there's not much that can't be overcome in due diligence, you know, that, oh, we did this marketing spend, it didn't work, we wasted some money here or whatever, like buyers are used to all of that stuff. But the second that you try and like make something look away that it isn't or look better than it isn't, that's when like a buyer is just going to sniff that out. And then what, what kills due diligence more often than not than any specific business issues is once the trust goes, right? Buyer thinks that something is not quite as it seems. And then it's like, you're never getting that deal back on track. Oh, yeah. All right. So if you're looking to step out eventually and sell, most of that work needs to happen much earlier than people think. So if you want help getting the business to that point, removing yourself from the day to day operations, I have a link below for me. And Andy, where should people go if they're thinking about selling? Yeah. So empireflippers.com best starting point again, we love speaking to sellers one, two, three years out from selling. Our team have sold thousands of businesses at this point, can give real good advice specific to your business about, hey, these are the things to think about. And so, yeah, and bifuribus.com. I'm pretty active on LinkedIn. People are very welcome to connect with me there too. We'd love to chat to some sellers. All right. Thank you very much, Andy. Pleasure. Enjoy it.