 Hey, good afternoon everybody Tom Stewart here. I'm with Liz Trotter and this is smart business moves. Our guest today is judge Doug Eintzema He's a financial planner does strategic planning and is very active in the M&A world Does a lot of work with franchises. We're lucky to have him here today. Hey Doug. How are you? Great. Thanks for having me. I appreciate it This is gonna be fun. We're gonna learn we're gonna a lot of things that are of interest to Cleaning business owners for sure, especially in 2022 going into a new year. It's always nice to have some ideas to what your business might be worth in the event that You know, you have an eliquidating opportunity as they say or or need Question you said M&A. What's M&A? mergers and acquisitions I'm and a ah, okay. I got you All right. I don't know why I First I heard you say M&A, but Doug really does not look like Before we jump into that now Liz, do you know what today is Joel's report? It is Yeah I don't know. I just trying to keep track of this stuff now Something that you would look at since you're thinking about all the time Evaluation is this do you ever look at the Joel's report? I am not familiar with that Well, you will be after today Tom. Let's do this little thing. Okay. I'm just trying to figure out how to make my computer work How's that? You're gonna zoom in though Tom because you know my huge screen. I still can't see anyone. Oh my goodness, okay There we go. Yeah Now we can see so basically With this is telling us the number of job openings month over month, so You know from an employer perspective in the residential cleaning industry, you know, we've been talking about being supply constrained for As long as I can remember You know, there's been a been a labor shortage and too much demand not enough labor and This is one of the metrics that we look at that The thinking is the fewer job openings. There are the better chances There are that somebody looking for a job will take the job that you have so The number and they're always a month behind so they just released the October number numbers today and it's 10.3 million down from 10.6. It was over 11 million a year ago And the other part of this is the unemployment number how many people are looking for a job and that's around six or so six million the last time I looked and Job numbers are gonna be coming out Friday for it for November. So Just still like over one and a half jobs out there for everybody looking for a job, which It's moving in the right direction, but it's not In an awesome place yet. You go down here to like leisure and hospitality Which could be a market that that we'd be drawing from Food service could be another The jobs actually openings actually went up in food service. They actually are flat Leisure and hospitality. So while the job openings are going down in some industries Maybe not necessarily in the industries that would mean the most to us Yeah, they are all of them are down over last year though same time Yes, yes, they are which is good. That's good news Better than them being off Yeah, the complaints from the hiring standpoint with sellers is is definitely starting to turn around a year ago It was it was really that was the number one reason people wanted to to sell their businesses They were just tired of a labor market Oh, wow So that seems to be improving surprising should it And no last year was tough Yeah So Doug Introduce yourself to our audience and just tell us a little bit about yourself and what you do Sure. I'm a business broker and what that means is I help Buyers and sellers come together on business opportunities And I've been doing it for quite a while and kind of fell into a specialty of franchise resales. So I'm working with owners of businesses to Help them prepare for sale and then Mark at the business. It's a little different than a non Franchise business as far as you're having to Not only find a buyer for the business and put that deal together, but you also have to get them approved to be part of the franchise So there is a little bit of Expertise in that area. We work with a lot of the major brands and and typically we'll have quite a few for sale throughout the country And because we have a lot of them for sale, we we get to talk to a lot of buyers. So It's helpful for us to really understand that market. I happen to love the cleaning service businesses Um when people are looking to to buy a business a lot of times they're leaving corporate america Or they're reentering like maybe they had, you know, family that they're raising their kids are a little older It's a nice business hour job. Uh, you know, you don't have the hassles with Calls in the middle of the night and having to have retail and Inventory and you know all the different things that can go along with with different franchises Um, and you really don't need to be a brain surgeon. I'm sure your viewers probably feel differently, but it's it's not a complicated business. It's really Keep your employees happy. Keep them staffed. Keep the houses clean and you're gonna have great reoccurring revenue I've I've sold businesses that I've had customers for over 20 years Is that the pitch you give perspective buyers? I do I do because uh a lot of times they think I don't want to clean a house You know, I I don't want to do that but in a lot of them the franchises That's not what you're doing You have you know teams that go out and clean and you're really recruiting and and handling the business and You know, you get them out in the morning and you bring them back in at night And it's really uh, I have a lot of people that will work 20 30 40 hours a week Uh owning their own business and be still be able to take time off because of the of the staff So it's a it's a pretty easy business to get into Um, I think the franchising part of it helps. I don't know how many people in your audience are independents, but When somebody's going to let someone into their home, they feel a little more comfortable with a with a national brand Yeah, we have a mix. I mean there's independent companies and there's franchise Brands both that are very active in the industry and you know, watch our show as well You know, it's it's interesting that that you mentioned the the nuances of of Doing, you know, brokering uh sales with it with a franchise brand because the perspective buyer I guess has to meet the criteria of the Franchisee that's selling the business as well as the franchise or so there's A longer approval process. I would assume there is and We find that a lot the brands that we mean mainly work with Validate very well and what we mean by validate is you don't want a buyer to be excited about the numbers But scared to death because they hear horror stories about the brand Um, and that's that's part of of the value of your business is Being part of a brand that has been around for a while has a good track record It's going to validate while they're going to be able to talk to other owners and for the most part We don't run into a lot of problems with that because of the the industry. It's not a super complicated complicated industry So it really comes down to that they feel that the paying the royalties are going to be worth it to be Part of that brand and get that assistance That usually helps helps put the deal together. It's not just about the numbers I'm curious. Who do you typically see wanting to buy? cleaning businesses It's pretty large spectrum Most of the time it's people that want to leave corporate world or they don't like their job And they want to be self-employed We get a lot of people who are later in their careers, you know early 50s And don't want to put in another 10 or 15 years into working for someone else Potentially want to work with a spouse or a partner in growing something and they're attracted to this type of business because When you buy a new franchise you have to take the time to build that up and you know There's not only the investment for the franchise, but then you have to go out and and build your teams and everything And when you're when you're buying an existing franchise, you're going to have that immediate cash flow So on day one If you have 200 houses that you clean every week that that's going to be cleaning that same week So if you come in, you know upset the apple cart, you're going to have a nice steady cash flow So people are looking to replace their income and be able to to earn a good living and sometimes their turnaround situations a little bit more for a variety of reasons including health and That's when someone like me comes in and Talks up the brand and has them talk to other owners that are successful within the brand Or in the industry to just talk to them and and have them better understand what the potential is So if i'm hearing you correctly you're selling for example a mary maids franchise, right and they're struggling to the the buyer is Nervous for whatever reason and then you would have them speak to other mary maids franchise owners. Is that correct? Yep, so we go through the franchise disclosure document and we go through the discovery process with corporate But we also look at the industry as a whole and look at You know where they should be fitting in that range Franchise disclosure document. I don't know if people are familiar with that But there's there's different fees that are associated with the responsibility of the franchisor is And they also have earnings claims and you want to go, you know that those it's a legal document And people are really scared of legal documents And they're sometimes not that well done So you really want to you the first question anybody asks when they're looking to buy a business It's how much am I going to make? Yeah, how much am I going to make how much am I going to make? And we can't give guarantees on that nobody can because who knows how that operator is going to be So what we do is we try to look at the the data that's available and show them the potential and the other part about buying and existing businesses There's a cake recipe and if you follow the recipe if they're successful Just follow that recipe don't come in and and upset everything and change everything, you know If if a seller of a business is doing well Then do that if they're not doing well then talk to the brand on what they need to do and other owners to find out What they're doing to be successful and then copy that I'm just writing my little questions down here No problem All right, so I I have a bunch of questions actually So Let's say that somebody wants to know how you know, how much money am I going to make? And do Do like what are some of the typical answers that you would expect look at so here's here's why i'm asking this question So many times when I have seen people buy businesses or we ourselves bought businesses that You lose a good chunk Of that you can expect to lose a good chunk of those clients Over the course of time. Do you run into that situation when you're dealing with franchises? um, so We try to look at a three-year financial history And it's not just the tax returns what we look at are the overall owner benefits So we take the profits of the business along with the salary That the owner owners are taking if we would have to replace one of those owners if somebody came in We'd have to make replacement wages for that We add back in amortization depreciation One-time expenses that may come up that aren't ongoing to try to really create a picture like Okay, they're average sellers discretionary earnings and typically what I see um our businesses Our average sale is is you know, probably around 150. I'd say is kind of what what they are. I've had cleaning franchises sell that are Way higher than that on earnings and you know, we get some distressed ones where they're making 50 Yeah And and you you you were describing is is owner benefit some of the value that the the Fee paid for them for the business would be some multiple of That owner benefit. Exactly. So we we get that three-year average and we say here's Where we are and then we can look at the fdd averages and say are you in? Bottom third right in the middle or the top third I'm sorry. What type of average the ftd? Yeah, the from the fdd. There's earning claims in there so Disclosure documenting got it Or just in general if it's not a franchise We we look at that three-year average to decide where you are what the upside potential is And then what is it going to take what sort of investment would be required to get there? And then that helps you decide what how to structure and offer but typically cleaning franchises will sell Anywhere from one to four times that seller's discretionary earnings depending on a lot of factors including location brand Whether the sales are going up or going down or whether there's an easy explanation as to what happened Maybe the seller got sick or lost a key employee or something happened So we do our best to really dig into the financials to be able to tell the story to buyers You mentioned brand. I mean, I'm not going to ask you to like give me names or anything, but Are all the numbers being equal or just some brands? Demand a higher multiple than others just based on the the the name Mmm There's there are better brands than others But that's not really as much of a factor is the trajectory of the sales Okay, um in and things like locations. So I'm getting Uh, the heart of the labor market some of the states that had bigger bigger covid shutdowns and things like that If there's high regulation areas people get a little bit more nervous than Um, if it's in a state that might be a little bit easier to do business in so This is california. Oh, yeah, so And then we get into minimum wage and you know every everything else that goes with it I mean, it's not a surprise with with cleaning companies Um with labor, um, it's always a it's always an issue and one of the interesting things We've seen and I don't know if you've noticed this But we had a lot of sellers that were extremely nervous about increasing their rates Um, because they didn't want to lose the the the customers Um, and we found out that we got very little pushback on that people were really pretty much, uh Understanding that cost of labor went up and we didn't see the drop off of people just saying i'm not paying that increase So it was a pleasant surprise of the industry. I think have you seen that? Yes, are you talking about like this year? 15 months. Yeah. Yeah, absolutely. Absolutely So that's kind of helped the the bottom line, you know, it was kind of a year ago It was kind of going a little squirrely in in august of last year You know, we were getting a lot of calls that I can't get anybody to show up because they're walking across the street and getting a higher wage And yeah, some of those have have kind of started to wash out a little bit and you know, it's it's always been a need And um, I think it's going to continue to be And i'm surprised by the demographics of the age of the customers that are You know, we're getting a lot of From our from the discussions with our with our sellers that they're finding a lot of the younger people with families Even are paying the paying the dollars to to get their house clean professionally twice twice a month or once a month Yeah, um, but on a regular basis. So I think once those you know, you get somebody in their 30s Or 20s that are having a cleaning service. Are they all of a sudden going to change their mind and decide to do it themselves? So even more reoccurring revenue for for down the road so Good industry We're just talking about that on a call yesterday That if if you're having a lot of customers that are telling you that It's that they have to cancel service because of money. You need to hit those people hard because Nobody that's had their house cleaned for the last year is going back to clean in their house themselves Whether they think they will or not, right? Exactly. They believe what they're saying. That's not happening and I had a one brand sell and She was she was a very very sharp operator, but when she bought she bought an existing franchise brand and raised the rates like a lot And she said i'm not going after Everything I want to be able to pay my employees more than anything else for their time And if we get fewer customers it'll wash out in the end and It was this it was amazing what her numbers actually grew to and she's since resold the business, but um It it wasn't a deterrent So you sometimes think the best business model is to have the best prices And sometimes it's not always the case now. She was in and she had a demographic that had a large supply of more wealthy people, but she kind of Said I'm not the cheapest when they'd call, you know, she was calling him it was and it worked out. So The other thing about franchising is you can kind of network with other owners and understand what they're doing Yeah, I mean it's it's it's a calculation, you know, if you're doing a rate increase of a certain percent and You can estimate what percent attrition you're going to have off of existing customers and You know if you do it, right you wind up making more money and cleaning fewer homes doing it, right? That's really the sweet spot Yeah, you know, it's it's all really about she was very good at Coaching and mentoring um, the workers There's a franchise brand out there It's in the jump calling space, but they we do a lot of resales for them too and it's um That's a similar labor pool Uh getting people who want to pick up junk and and throw Their back outlifting furniture. It's it's a high turnover industry um, but they've developed a very good program with Having a very clear path and in the seller That did very well on her resale Did the same thing she had when they came in to interview. This is your first step Then you're going to go to the you're going to be a team leader Then you can go to this and she had a path and then she paid very well with bonuses For recruiting family and friends and then she paid them retention bonuses so if that employee stayed for A certain amount of time that person got a spiff and the employee got a spiff and And her you know, I was shocked at her tenure of Employees she had something that were there 10 years, you know stayed on after she bought it um, so there's always creative ways to go about it But those those are the kind of things that When you look to sell it's it's the it's the cash the number of contracts and the quality of your employees in the That they're buying future cash flow So the more we can assure them that it's a really well run franchise the higher multiple So It's the owner benefit That is kind of the heart of it, but other metrics. I guess such as employee turnover, maybe customer churn You know, what is the growth rate been over the last few years? There's a lot of other numbers that go into as well. So If I'm thinking about selling my business and some of this would translate into an independently owned business as opposed to a franchise as well I guess you probably need to start planning for that A couple years in advance. You just want to wake up one morning and say I think I'm going to sell my business Yes, so you never know what the economy is going to do um, and I think education is very important and some of the brands We do exit planning webinar similar to this they can Show the people that are thinking about selling But some of the key things to to look at is steady financials and growth and then understand that How how valuation takes place in what we add back And then from there if you if you just use the very simple metric of three times that So, you know, you might be a little bit less depending on what's going on Or it might be a little bit higher But I'll have people call and they say I want to retire and I want $850,000 for my business And I'll say okay, you know, what do you think your seller's discretionary earnings? So we walk through a process to to calculate that and they'll say 150 That business is closer to 450 than 800. So if they want to get to 800 They're gonna have to get another hundred thousand to that bottom line And that, you know, isn't always what they want to hear Because they want to they want to cash out, but that that's pretty much the reality. So If someone's thinking about Exiting it's frustrating for them when they're making 150,000 a year to say I could make that in three years. Why would why would I sell that? And I say well, that's good. Keep it another three years then But don't burn yourself out and start making 100,000 because then you're only going to get 300 and you lost 150 and had it for a longer time So that's where it gets interesting our particular program We are month-to-month contracts So we sometimes have a valuation that comes in a little lower than the people we're hoping for And we go through the valuation process and give them an idea and then we can go to market And if we're not getting the offers they want in two years, they can pull that back And then In a year or two when they're ready, we just have to update everything and we can jump right back on the market again But it's a nice way to test it And not get stuck in In having to sell Because nothing speaks More than than how many offers you're going to get right? So Sometimes we'll we'll tell our valuations I think are better than a lot of Just asking your accountant Because your accountant isn't talking to buyers You know, I I talk to buyers every day and I know what they're thinking and what they're concerned about And it's not a magic three times Your sellers discretionary earnings, which a lot of accountants and valuation people If the sellers I really want to get 800. They'll say, oh, yeah, I think you can get that You know, they don't care So our valuations come in We were at 86 percent last year within the high medium and low range On the on the businesses we sold What does that mean? So when we give a valuation We give them a high medium and low range and we suggest the medium Okay And it feels that closed we were within that range Oh 86 percent Many times out of 10 Okay So it's it's valuable for sellers to really understand How the selling process works And what we're going to get for it Can you explain a little bit better about you had said that you're going to kind of use the the three times just A benchmark but you had said earlier that it could be anywhere between one and four times What How do you what what would be the difference between one? Somebody that's getting one time and somebody that's getting four times so um The the multipliers are always considering debt free and um no cash So no money in the bank or anything like that So we're straighting we're starting just on what is the what is the likelihood the person's going to make every year? so some of the some of the reasons that we have a lower one is illness Where they're they're sick their employees are gone. They've gone from 300 houses to 80 And they can't they can't do anything and and they tell me I need to get this sold in 30 days or 60 days Or i'm going to be closing the doors and get nothing Then we try to make it as attractively priced as possible if it's a distressed sale It almost comes down to an asset sale and a lot of times distressed sales like that will sell for less than what somebody would start a new one for but People are apprehensive because the sellers will say well the the territory alone is worth 75 The territory alone is not worth 75 if you only making $15,000 a year. Yeah We're buying the cash flow. They're not buying What it would cost to start over so there's a different mindset that people have to get into um, but things that can drive the value closer to the four are Solid numbers earnings, you know where it's better than a job earnings because people want if they're going to spend the high dollar on A multiplier they want a very good return for that extra investment and some brands have autos some don't So if you have a fleet of 15 Toyota Corolla's out there that are already all branded and everything you're you're gonna have a little bit more value Add it on to that multiplier than if you don't sometimes we'll have real estate involved Where I want to sell my building too And then that that definitely will dramatically increase them Those are it's it's really difficult to ever say This is the average because there's so many circumstances that Can fall in if you're if you're a passive owner Um, you're working five hours a day or a five hours a week Just kind of doing payroll and checking in and you're spending six months in florida Yeah, you're going to probably get a three or four times multiplier because everybody wants that Right If I could make a hundred grand a year paying a manager and only working 20 dollars a month Yeah, I'll pay extra for that So it's it's a lot of circumstantial with each business to to really kind of hone it in So you're talking about deals that you know can be multiple hundreds of thousands of dollars, you know Oh, yeah, I guess there's some buyers out there who Have access to that type of cash and they can just show up and do that, but I imagine you have other buyers who want to own A franchise cleaning business, but they need some sort of financing to help them do that So could you speak to a little bit how? Financing what financing options there are in in some of the transactions that you do sure to be happy to Um This gets back a little bit into the multiplier question Uh the sba, which is backs a lot of small business loans. They underwrite them for banks that write the loans um If if a company is losing money or not making making very much money, they won't lend So when you take the the ability to get a mortgage out or a loan out of this scenario You're down to cash and that can that can force people down to that lower multiplier also if you are Very good cash flow and we can service the debt So remember our our calculation of seller's discretionary earnings does not include debt Okay, so if you currently are paying a loan on your business That's something that we add back into that seller's discretionary earnings because we don't know what the buyer's loan is going to look like And then we do what's called recast it with the bank. So if you're making let's say a hundred and fifty thousand Without any debt and you're now going to have a $30,000 a year payment now you're making a hundred and twenty thousand a year So the cash flow has to be there and if the cash if the numbers work out like that There's it's very easy to get lending the other way to buy a business is Using retirement funds Which a lot of people will do because then they don't have that debt service and they have increased income right away And the other way is to do a combination of cash down Some loan and then maybe seller financing And people get very nervous about seller financing initially But I always tell people to keep an open mind about it because you're doing the buyer a favor And when you do somebody a favor you're going to get a higher price You are taking on a little bit more risk, but you'll be getting some interest income on that and Potentially spread capital gains out over a period of time which can be advantageous And look you're going to get to know the buyer during the process So somebody comes along and says I want to I want you to carry 20 or 30 or 40 percent as a seller known over three years And you meet them and you think they're going to run them into the ground You don't have to do it But if you meet them and say this person is perfect corporate loves them I think they're going to be awesome. Then you're much more willing to do that So there's lots of different ways to finance A business most buyers will want to come in with as little down as they possibly can There are net worth requirements from some franchisees that they have to meet and we pre-qualify those So we're we work very closely with the brands And we know what their requirements are and and when we're pre-qualifying the buyers we we talk to them And it's the same with independence. There are a lot of people out there who don't want a franchise We advertise our our listings blind, which means it'll just say Cleaning business for sale and whatever state Here's the earnings. Here's the asking price And sometimes a buyer will fill out a non-disclosure agreement to get the information and they'll say sorry I don't want to franchise. You know, those are independently minded people So there are people that you know, if you're if if you aren't part of a franchise and you're thinking about selling Um, there are people that are looking for those types of businesses. They don't want to be part of the franchise Could you speak to that a little bit because I always Find that topic interesting. You mentioned that, you know, the franchisor has a as I say in this process as well and You you mentioned that there's financial requirements some objective things that they're looking at is there more of a A psychographic component of this as well where they're trying to figure out if From a values and in a motivator standpoint that this Candidate would would would be a good franchisee in our our system yeah, yeah, and um We coach the buyers as well as the sellers um They're being interviewed to become a franchisee So don't just go to the franchise and say where do I sign or what do I have to do or get me this or? I don't like these terms because they can say no It's a relationship. You're going to be with that franchise or for a long period of time and Yeah, you have to get approved by the franchise or but They all you know the franchisee also has to be comfortable with with them So when when we introduce people we give them tips on on Which question what questions to ask and then also to present themselves in the best light because You know if you come in and you say I want to run the business five You know completely passive and I don't have the net worth requirements And you have to give it to me that that doesn't go over well with the with the with the brand so um You know, there's a little bit of coaching that has to happen on both ends to make sure that everybody's doing what They need to continue the process do their due diligence, but get it over the finish line And let's face it some people are abrasive You know, you know, they're not you know, they're not going to be good when you interview them. Nobody's going to work for him or her Yeah So the franchisee say no and it could be it could be upsetting to stop or the franchisor say no that And that could be upsetting to sellers because they feel like they got stabbed in the back by the franchisor You know here. I had a buyer and I was finally going to be able to retire and they got in a way Oh, yeah, I didn't even think about So the franchisee is protecting their brand. Yeah, that's why dealing with uh, you know, it's a shame really that There's not more education done by the franchisors on how to exit Um, it's just not their focus and I I don't know why Um, I think it's a selling point when somebody buys a new franchise is to tell them Run this business for five or ten years and you're building a valuable asset that you can sell Um, it's a reason to buy that franchisee and for whatever reason When somebody says they want to sell and they call it these franchise orders the franchise orders just say We'll find a broker and let us know when a buyer comes and they're not Legally allowed to do a lot of Valuation calls and things like that. So I understand part of it but it puts the franchisees in a bad situation where they You know google business broker near me And find a guy in their town or a girl in her town That's a sales that you know as a business broker and they don't They may sell car washes and Restaurants and a million other things They don't understand franchise resales So find someone who knows franchise resales All right, most of our people are not going to be hey germ wizards Uh are not going to be um franchises, but Definitely still want someone to understand the business right understand the industry, right? Yeah All right, so it's um, you're speaking to one of my questions here Is if somebody is thinking that they want to sell Their business, what are some of the things that they need know that you know? They need to do or to get into place That they need to be thinking about before they call a broker um, we have Website um and I can give you the url later, but it's called the franchise readiness assessment Yeah Now it's just the link on our website, but it's a series of questions that It's like real quick and tom will look it up. He'll post it real quick the um our our website is smallbusinessdeal.com Okay, um, but once we talk to someone that's when we send them this this questionnaire There's no cost for it, but it gets them thinking about what how buyers are going to look at their business Okay, with the planning tool And it asks Some things about the upside and the in the downside Um, you know this our website. We have a very large mergers and acquisitions. So I focus on the um franchise resales, but we have a lot of different businesses that we represent um But the idea behind that assessment is to get them to understand the process So first of all understand what they need to do and one of the the biggest things they can do is have very good financials um and Know what their expenses are Be able to document them a lot of people will do will do owner benefit things like cars, but they'll Look it in with the other cars or they'll have travel um, or they're you know buying home supplies and stuff that can potentially be a valuable owner benefit but they're not separated clearly in the financials and uh If financials are are hard to understand and justify It causes doubt in the buyer's mind and in the lender's mind on what the actual cash flow is So number one take away of anybody who's thinking about selling is Keep extremely good profit and loss statements and when a buyer calls and says what is this bill for You have to know what it was for and then we can decide if it's going to be an ongoing expense or not So we need clean numbers So somebody's thinking about it. Just make sure that they're working with an accountant to keep everything very clean and Be ready to be able to provide those numbers the the higher multiply business is the ones that sell for the most are They have clean tax returns that match their profit and loss and so many times I'll get a tax return that shows negative 15 thousand dollars because they wrote every single thing off But they're telling me they made a hundred thousand Um, and I'm not saying that you shouldn't take away tax advantages It's just clearly show what those tax advantages are and how they're not going to be a new ongoing expense For the or a continuing ongoing expense for the owner So clean financials is one um Thing that they should do the other is to go through the valuation step where they are now Um to get an idea of what they think it might be worth And then if they have a number in mind that they want to sell for We can tell them What they're going to need to do what kind of numbers they're going to have to hit to be able to get that multiplier um That those are the two most important things is to to Under have very clean financials and sometimes we got to do a lot of cleaning up before we can go to market Because it's just there's too much too much doubt In and you mentioned earlier Doug sometimes the deals that you do with the lowest multiples are The stress sales so you know I'm sure you you you see that more than than anybody would want to and would you See there's a lesson to be learned there that you None of us are going to be running our businesses forever And we really don't know when a day might pop up that we need to sell our business. So Do you recommend that we're always thinking about keeping these records and Keep it as clean as you can because it doesn't you never know what's going to happen And The number one cause for a business not selling or selling Extremely low is bad record keeping So if you think you do your next 10 years still keep the records clean Because the longer you can show steady cash flow the better and I mean I We could do a whole other hour on on the chicanery that owners get up to with in their in their books But when there's a big surprise you might be might be going down the road and They're gonna they're gonna they're gonna uncover you know different things that people might be trying to to Add back let's say so I had an owner for instance. He put his Child support payments in as something else and wanted to add those back in And how did we know how much they were actually spending in advertising when he's saying that he spent $36,000 of the advertising budget was for The child support payments. So, you know, he wanted to add those back in Yeah, and then he didn't have any of the records to show how that was and then You know, I'll it just can get really Really complicated for buyers and lenders and You you have to be able to show what that future cash flow is going to be in a very clear way to get the highest result so if you're planning just Take the extra time to make sure that Everything is clearly separated. Don't lump everything into one thing. Don't You know, I'll have people that will put ask my accountant And they'll have a a box of those and then we can pull those up and and look but Don't have three categories payroll Advertising and maintenance Because it's you really need to know well if you have 130,000 in maintenance. What is that for? And if you have to dig through and and You know really try to figure out which ones which and it's it makes it very complicated It's part of what we do in the initial valuation stage as we go through and we try to look for things that are going to be questioned And we get the answers ready before we go to market. So when a buyer asks the questions, we know the answer So So this is a little bit different question one of the things that we talk about a lot with the Business owners that we work with they always want to know Where their money should go When they're filling out their you know How do they classify their money the money that they take from the business? and what we usually tell them is If you are working in your business and you are are actually Filling a job like if you're acting as the general manager, for example, then the amount of money that you take For that job should be included as part of the expenses, but it should be Approximately the same amount that you would pay a general manager So if you're pay if you're taking $300,000 a year, but you know that you would only pay a general manager maybe $110,000 We usually tell them take put the 110 as expenses and take the other couple hundred from your From your not profit. Is that wise? Yeah, yeah, and I'm not an accountant. So I don't want to I don't want to Always always double check what everybody says but um, what we see typically is uh Lower payroll salary and then a lot of our Companies are escorts and there's a lot of tax advantages to be in an escort And then you can have that pass through income. So you're not paying Social security on that um, the other thing that is good about having it priced Approximately to what the replacement manager is is it's easier to calculate What the income is going to be if you if you take that out of the equation So one of the things with the seller's discretionary earnings is You take the earnings of the business and the payroll and combine those along with some other things to get the seller's discretionary earning Is it's real easy to say I'm paying myself 110, but we think you could get somebody to be a manager for 80 Yeah, we would only add back in that 30 000 dollar difference to the to the earnings and then the expectation would be That they're going to have an employee in there and that would alter the cash flow a little bit And if they want to be the manager and continue to take 110 then so be it Then they'll learn more and they might be willing to pay more for it Okay, that makes sense, but cream books valuation um steady employee steady sales one of the things that happens with People who aren't prepared or thinking about it and they do get an illness. It's probably the number one distress type thing or a divorce happens um Or the economy turns and you have to you have to get rid of it um If you don't have clean books and you don't have an idea of of what your business is actually work It creates a lot of doubt and fear in people and then they don't decide to move forward and list it And then it just continues to deteriorate. I can't tell you how many times I've talked to owners that Had really nice businesses, but didn't like the valuation we were giving them and then Their situation just continued to to to get worse whatever the situation may be whether it's employees or market forces or or what have you and then unfortunately, they They end up not making Can you speak to COVID has impact because um, so many people are you know, everybody's record's like different right now because they're getting PPP loans and you know, they're just they lost business. They were shut down for six weeks or whatever How is that impacting things? so the banks are We have to take PPP money out of the cash flow Um, so if you if you got a PPP loan, we have to take that out But what we try to do is normalize it and we're through the pandemic now and what we like to see and what lenders like to see is 2018 the sales were here 2019 the sales were here 2020 they were here and now 2020 they were back up pre-covid That's a very good. That's a very good sign. So then they'll they'll take that 2020 and say more than likely Since 1718 and 1921 are all similar or they're heading the right way We won't wait as 2020 as much um If you have 2020 and you had a terrible year don't think that it's gonna it's gonna completely hurt you as long as you rebounded I had a lot of people You know in different industries that have not Been able to get back to pre-covid numbers Um, I would say that was the case for a while in the cleaning business But in the last six months the I've seen that Uh, the numbers returning a little bit more steady I think people are more comfortable having people in and out of their house again As the industry and as a whole You know covet in the long run might have helped because people are more conscientious of keeping their houses clean Um, a lot of people work from home now and want to have it cleaner You know sort of they're more So yeah, 2020 and covet did impact the industry, but we're coming out of that So as long as your numbers are trending in the right way, you're gonna be I Like people are kind of giving a pass to 2020 Yeah, they are now But it was it was scary for for buyers For a while there because you know really frustrating for sellers because You just didn't know what was going to happen um, but overall the the sector is bounced back very nicely and um, there's certainly demand For cleaning especially, I don't know if you guys get into janitorial stuff, but those are They'll sell very quickly. So how is the MNA market for residential cleaning companies compared to you know, maybe 2019 2018 is What can you say to this the supply and demand for for cleaning businesses? um I think due to the reoccurring revenue feature of it, um, the only real Negative that people are concerned about and you touched it on at the very beginning is is employees Um, and as that improves, I think the overall demand is going to continue to Stay strong. It's it's probably towards the top of Our franchise resale demand we get a lot of A lot of uh requests about it because you can have so many different people Get involved. It's not like you have to have a real special background um And the hours are good, you know and when somebody's looking at a restaurant franchise You better know what's happening and be able to run it because restaurants can go sideways quickly um, this is a business that you can get into and You know have some assurance of what your cash flow is going to look like They're not one-offs. You're not constantly hunting the next sale You know you once you get a client you can count on that so Because of that feature, um, it's very attractive. So there's there's good demand For the the industry right now for sure So do you when you're doing the valuation then dug? Do you separate out the recurring revenue from the Like the one-time revenue or do you even? Yeah, so if you go go to go to our listings page And then go to business for sale um Down in there. You should be able to check Cleaning companies if you go up. Well, just let's just stop on one here. Let's There's one right there profitable west Michigan cleaning company if you click on that Read more. Yep So if you go to the right there, and I don't know if it's too small but up on the right You'll see what they're asking and then what the cash flow is on it that cash flow is the seller's discretionary earnings so they're they're taking home a hundred and nine and They're they work the business quite a bit themselves So the revenue is 289 they're asking 225 and it hasn't flown off the shelf Anything that has right around that hundred or less cash flow are a little trickier to sell than if you're north of 150 There's a little bit more room for error And still be able to pay your bills when you have higher cash flow So those those tend to be a little bit more but this is a typical ad that we have This is a really small one um But that's that's normally what people are going to see when they're looking at business brokerage sites And it doesn't take long for a business buyer to to do start doing the math Oh, oh, this is a hundred grand and they're asking 225. It's a little over a two times multiplier If they if they see the same ad here and it says i'm going to make a hundred and they're going to be $400,000 they want they're going to say oh, that's not as good and they're going to just move on And that's where those there's some stickiness to that that right around two to three range We are at the top of the hour. So We've taken your you are around and we've dropped it in chat if anybody He wants to know more about your services, you know, would would you be willing just to have a conversation with somebody? Yeah, that's what I do So, um, I don't know if you want to put my contact information in there too They can they can give myself on a call or shoot me an email and i'm happy to You know give them we usually talk to someone before they we go through the the resale program or the resale assessment tool But that is free. Um, so if they reach out to me, they can they can get a hold of me there too That's our that's our corporate number. My my cell phone is probably the best way to get me. That's a direct line Okay, what is that? It's 616 2 9 9 0 222 And the uh, my email address is dug at small business deal dot com Okay And yeah, we I I have a way to book book calls and we can talk about it and if it's just planning or just questions Um, it's a long process. We don't you know push anybody to make any quick decisions on this, but Um, it's if they do have individual questions and and want to learn more about the process. I'm happy to help them out awesome Okay, Doug. Thank you so much for Thank you. Appreciate it with us. You know your knowledge and expertise in this area I think this is the first time we've been doing this for a few years This is the first time we actually had somebody on our show that Isn't the business of of of doing m&a and the residential cleaning space. So It's part of uh owning the business. You're you know, the the days of the kids taking it over are gone. So You know, you have to you have to have that as part of the equation and I find that You know owners of cleaning businesses are usually pretty organized People and like to plan. So don't be afraid to start thinking about things like that For retirement. It's a valuable asset. It really is So it's not something to take lightly when you're Someday I'll sell it, you know, you want to you want to put yourself in the best position to to get the highest price Start today. No matter when you plan on selling boxes Folks, yeah Okay, thank you again We'll be back next wednesday five o'clock eastern till then everybody take care. Bye. Bye y'all