Podcast episode 169 transcription

​Peter Beaudoin Hosts Brad Gaulin

[00:00:00] Peter Beaudoin: So thanks Al. Hi, my name is Peter Beaudoin and I'll be your host of today's Rainforest podcast. Usually on the show, we talk about the innovation ecosystem, but today we want to discuss a different segment of companies, the existing service sector and delve into what are some of the upcoming opportunities and challenges of this large segment of the economy.
So today's guest is Brad Gaulin. He's the CEO and founder of MExit, a Calgary based firm that helps businesses sell and exit their companies. So firstly, Brad, welcome to the show.
[00:00:30] Brad Gaulin: Thanks Peter. I appreciate you inviting me.
[00:00:33] Peter Beaudoin: So let's start off with, you know, what problem does MExit look to solve?
[00:00:37] Brad Gaulin: What we're looking at is really, there's a, there's a huge demographic shift happening right now in the, in the world of business.
And BDC actually, their latest forecast. They estimate that approximately 40% of small medium businesses in Canada are going to transition ownership in the next five years. So this is in a sense, a potential tectonic shift in the demographics of business ownership. So, you know, change is an opportunity.
It's also a huge need. So helping the, the boomer generation, the generation that's, that's basically on their way out. And I think the current economic situation, that's it, it's more positive. It's more upbeat. I think. A couple of years with COVID people have just thought of survival and now, you know, we're going to survive and people are thinking, okay, now it's time.
You know, the market's not horrible. And, and if I sell, I'm going to get a decent price now, because you know, things are just a lot more optimistic. So, you know, if you think about it, these businesses with all of them coming down the pipe when you start to learn some of the statistics and some of the data what's really scary about it is the research through the the Exit Planning Institute, EPI out of the US and the actually Stats Can
supports a lot of same data, only one in 10 business owners, exit successfully. And when I say exit successfully, I just mean they exit as they have planned, you know, they, they get the value for their business. They were anticipating or are hoping for the, the transition, you know, happens effectively and fairly smoothly, the cultures match all that kind of stuff.
So when you think about it, one in 10, and actually for small businesses, the stats, the data shows that two thirds of small businesses just shutdown. And you think of that under 10 employees type of businesses, that's, you know, that's roughly 85, 90% of the businesses in Canada.
[00:02:46] Peter Beaudoin: Yeah. Cause, cause let's explore that a bit because you said the first step was 40% of 50% of owners in the service sector want to retire in the next five years.
That's what they're, they're thinking of transitioning their businesses. Correct. That's what I'm. Come back that first step. So, I mean, let's, let's look at that. So what are, you know, what does these typical type of companies, cause you mentioned that there, these are about 10 people. I mean, they've been in business a few years.
They are going concerns, right. These have been there for a long time and they're going, so can you give us a scope of what is one of these typical businesses look like?
[00:03:17] Brad Gaulin: So a typical one might be a dry walling company and they've been operating for 22 years. So I'm not going to name names. Cause off the top of my head, I'm describing a company we're working with actually.
And really it's, you know, the, the owner is, is just tired. You know, everything's changing, everything's been flux, it's been just a roller coaster ride the last five, 10 years, you know, up and down. And now he's kind of looking at this and going, it's time you know, kind of burnt out next generation of workers coming in, think and operate differently.
And, you know, he's having a hard time just kinda keeping up with all the changes and, and it's time from his perspective. It's, it's time to kind of hand on to the, the next generation of leaders and that type of thing. And he's, he's not sure exactly. You know which way he wants to go. Cause you know, he cares about his people.
He cares about his customers. He, he, he cares about the community that, that his business works in. He's, you know, he's well known in the community, that type of thing. So he's, he's at the point, he just knows that it's time for him to move on, but he really doesn't know why or how, or, you know, which, which way to choose in terms of which way to get out, because he could sell it to his employees.
He could look for a strategic buyer. I mean, there's, there's a few different options. You know, kids are one option, but he's kind of ruled that one out.
[00:04:51] Peter Beaudoin: And that's usually the case. Yeah. I know a lot of business owners who just got my kids don't want it. They're not interested in the business they've gone on and have their own interests or they might've done it in college and et cetera.
But, but let's look at that. I mean, I guess is when you see, you know, you just mentioned two thirds of the companies that don't sell simply shut down. So are these, these are people, you know, they're small shops, but they just go there's, there's no opportunity for them to sell? Are they simply. Because in some ways to me is, is, well let's, let's, what's the top reason these companies don't sell then?
[00:05:23] Brad Gaulin: Actually, ironically for small companies, the two biggest triggers for exits are illness and unexpected offers.
So an unexpected offers really only tend to come to the companies that, that tend to be in the in the higher performance level, in terms of their, their niches in the areas they work in. So people like to buy shiny things or there's people looking for a bargain hunting and, and this, you know, there's, there's whole companies now setting up in the, in the U S I haven't seen in Canada around this, you know, there's opportunities to go grab a business for free, because there are so many people who don't have an exit plan, and then they get.
Something unplanned for happens, you know, they, they have to move, they have to look after their kids, something happens. And then, you know, when it comes to push, comes to shove and. They don't have anybody that they've groomed within their company to take over. You know, the financials of the company are okay, but typically, you know, the person who owns the company is the breadwinner.
They're the one who brings in all the customers. They're the one who has all of the relationships. And when they walk away from the business, you know, as much as somebody else might want to take in on, quite often, they just don't have the...
[00:06:46] Peter Beaudoin: the key relationships walk out the door at the same time. Yeah. So, so can I ask, I mean, the size of those businesses that we're talking about, what's the value of these types of organizations?
Are they in the million range, the 5 million range? What's the size of these typical companies?
[00:07:00] Brad Gaulin: So usually, I mean, you can kind of take out. Rule of thumb. So I know, depending on the sector in engineering, I need to, to make roughly $300,000 per employee. So if you do the math on that for a little engineering firm, that means a 10 employees that need to be earning about $3 million dollars.
[00:07:19] Peter Beaudoin: And then what's the sale. Yeah. The sale value of a company of that size. Yeah.
[00:07:23] Brad Gaulin: So a company that size, ideally, if they're being fairly well, well-managed. Their EBITDA, their earnings before income tax depreciation, et cetera. They should be grossing. If they're earning 3 million, their EBITDA should be somewhere in the, I don't know, let's say four to 500,000 range, and then they might get a multiple of anywhere from four and a half to seven.
[00:07:47] Peter Beaudoin: So four to seven times, their 500,000 is what we're saying, right?
[00:07:51] Brad Gaulin: But really when we, you know, there's a lot of factors and we say what's their value. Saleable value is really kind of split between the financial stuff and the financial stuff. That's, that's typically, you know, how a thumbnail evaluation be done.
What's your multiple of EBITDA you know, comparative sales, there's this whole services that will give you those. The thing that they don't tell you is that what comes actually time to sell the value is not purely based on the financials. There's one, this exit planning Institute, probably one of the best sources for data.
So according to their research, they say that at the end of the day, with actual sales, only 20% of a company's appreciated value is attributed directly to financials. So think of, think of that multiple of EBITDA as being the upper limit, 80% of that upper limit you can kind of take off the table based on what's called four C's.
So first C is human capital, people. If you don't have the people in place who can look after the company and a culture where they're effective as a team, they perform well, you know, you can take off 20%. Social capital. If they don't have a good brand reputation position, the market market share, you can take off another 20%. Customer capital. Their relationships, agreements evergreen agreements, master service agreements, those kinds of things, that kinda show consistent, reliable revenue that you can take off another 20%. And then the last one is called structural capital, which is really business processes, business systems, you know, the whole key to actually having a sellable business.
We call it the vacation test. You know, I ask a business owner "can you go on holiday for six weeks and your business not be hurt at all, you know, financially?" And if the answer's no, then you don't have a sellable business because if you walk away or get hit by a bus tomorrow and you'll, and now we're going to lose you're the main decision maker in the company we're going to lose our, our most loyal customers.
We don't have anybody. Who's, who's got the relationships to bring in new business or more business. And we don't have systems and processes in place. So if we lose people that the company can still keep functioning, or I could quickly bring in and train somebody because we've got good processes and systems and structures, and each one of those are risk factors that the higher the risk, the lower the price.
[00:10:21] Peter Beaudoin: Cause on that then. I mean, cause when you think of, you know, selling it forward, these are companies where 2 million-ish in the, you know, they're, they're small companies, which is great, but I mean, in some ways the owners are leaving significant. If they close, you know, if they had a going concern that they could better structure, they could be leaving money on the table and correct me if I'm wrong.
I mean, if you have a Canadian controlled private corporation, your first 800,000 is almost tax-free right. If you sell a Canadian corporation, you essentially walk away with your first $800,000 of, of the value to the owners. Is tax-free, is that correct?
[00:10:54] Brad Gaulin: Yeah. The federal government changed some of the capital gains exemptions a few years ago.
So this is one where we actually advise, depending on. If you restructured shares, how long have you owned your shares, there's a number of factors that are involved in this. And, and actually if you're smart and you've structured properly, then there's ability to set up holding companies shared amongst your family and actually multiply your family's capital gains exemptions to be able to to take money off the table in terms of taxes so,
you know, this is again, one of those things that the worst thing that a business owner, any business owner can do is, is basically leave their exit planning to the last minute. Because if you, if you don't structure properly You know, you may lose. Cause companies we advise are just the kind of seasoned long-term service companies, that type of thing.
We talked to a lot of startups as well, because one of the first things you get asked as a startup, what's your exit plan investors ask you what's your exit plan and, and for any company you know, the key to having a great exit is build a great company, build a great company. You know great culture where you've got, you know, all those four C's are kind of looked after.
You've got everyone, is, is mentoring and growing the person to replace them. Cause it, you know, it allows them to, to go onto more interesting work and move up the food chain, or it allows the people below them to reduce the risk to the organization, build processes, build systems build diverse customer bases always be looking at growing.
You know, there's, there's a lot of things you can do, if you give yourself time, because whether you're a mature company, even a mature company, your point was bang on. If you just kind of throw it up for sale and hope, cross your fingers, you're probably going to leave huge money on the table. As a, as a matter of fact, the research shows that companies put up for sale that are transferred or internal or asset sales companies actually put up for sale.
Typically. 80% of companies put up for sale don't sell. And this is from the brokers Institute because brokers want to sell easy to easy deals. But you don't want to sell fixer uppers.
[00:13:10] Peter Beaudoin: Is this because these companies haven't been, they're just being put on the market. Cause you mentioned, you know, it's illness or unexpected, if someone's ill and they go, okay, I've got to go.
I got to exit. They're just, it's in a way a fire sale, which, you know, fortunate way to look at it. But these are companies that are trying to go to market fast who have not prepared. Correct?
[00:13:28] Brad Gaulin: And sometimes the owners have kind of thought about it, but they haven't really actively done a lot to get it better prepared.
They thought about it. And, and I know one of my clients, he had run numbers and he'd done all economics and he figured he had it pretty well nailed out in terms of what he thought the company was worth. But again, the stats show that companies that do that and just kind of throw it up for sale. On average, they get about 50 cents on the dollar of what they expect.
Because if you haven't nailed every one of those, we've got systems and processes and procedures and all that other stuff, and you, haven't got redundancy in your team and you know, then somebody is, is, you know, they may make an offer, but it's not going to be your number.
[00:14:15] Peter Beaudoin: So if you, if you think about, or I guess the question is, is I would ask you is.
If I'm an owner and I'm thinking of selling, right. I have a service company midsize. I've been in existence, you know, 20 years. How long should I start, okay, I want to sell, should I be thinking about this five years out, three years out, like what's a reasonable amount of time to prep and make sure I've got my systems in place and make sure I'm ready.
I've got, you know, these processes and people and capital in place. What's the timeline?
[00:14:41] Brad Gaulin: So the typical timeline we advise and there's, there's three phases. So the timeline there's three major phases in the deal that you have to actually plan for. So when you think of your timeline, it's, it's not how long before I sell there's three phases.
So the first phase is, how much time do you need to maximize the value or get your company so that it's a really shiny penny that is going to sell, and it's going to sell for a price that you like. So typically you need at least two years because our philosophy is, if you want to maximize the value of your sale, you've got to grow it to sell it.
You've got to show a company that has growth potential, because what buyers are hungry for the best purchase price you're ever going to get is called a strategic purchase. That's where somebody looks at your business and says, holy cow, you've got great systems. You have great people, you know, now with the talent shortage I've been hearing in the M and A world they're buying companies just for talent.
[00:15:41] Peter Beaudoin: That's the value. That's where the value is. Yeah, yeah, sure.
[00:15:45] Brad Gaulin: To put all of those pieces in place. Typically is, is a fairly major transformation in a lot of cases. And it takes a minimum of two years. Like the longer you can do it in advance, the more of a premium you're probably going to be able to attract. Because what you want to really show is the people who are staying with the business, have the skills and abilities and the culture to grow the company, regardless of ownership, because that's, what's really attractive to buy.
You know, there's a team here and I think they'll stay here if I treat them well...
[00:16:18] Peter Beaudoin: and reward them and yeah, you've got it. Yeah, sure. Yeah. Yeah. So, so on that, I mean, if we, an earlier stat, you mentioned two thirds of the companies don't sell and they simply shut down. Right. As the owner retires, can we save those companies?
Are, is there something there we can save? Cause I think of, you know, all these small companies that there are going concerns. They are making revenue. They, they, you know, they have employees, are they, can you save them? Can we save them.
Possibly. And again, to your earlier question, timing is timing is, is always so key in terms of, can we save them because the first phase is prepping for the sale.
The second phase is. The we call it transact for values. So our three phases of an exit, you need to maximize value, which is the preparation you do for the deal you need to transact for deals. So you need to select the best option and structure the deal so that it gives you the best post-tax after tax dollars to keep in your jeans.
Because if you know, it's not the pre-tax value of the company, that's gonna. That's that's really a value to you personally. It's the after-tax value. What do you get to keep for your retirement to start your next business? Whatever it is you want to do. And then that typically takes a year a deal on average takes eight to twelve months. That's how long a deal takes.
[00:17:41] Brad Gaulin: From the time they spot you and you negotiate and you close, you get your check and yeah. And that, just to clarify though, Brad, that would not include the earnout time, right? Because if they say you've got to work another two years and help us manage the transition
[00:17:54] Peter Beaudoin: That that's the third phase, we call that transfer value phase.
And that is exactly that. That's your earn-out, that's very rarely do you get, you know, a check and a door to walk through and walk away. Typically there is some sort of golden handcuffs, some sort of arrangement where the buyer's going to want to suck every last bit of value out of you. You know, relationships, processes, systems, anything that you haven't set up.
So honestly the better you set up in advance and prep for all. The, the faster is going to be your, your exit and transfer value period. If you do it really well, then quite often, they may just keep you on as an advisor you know, for six months to year and, and, you know, there'll be, part-time on demand, whatever.
If you do a really bad job of it, I've seen ones where they, they can tell you up for two or three years, you know, and, and like you said, can you rescue those? Usually the, the less prepared. The more, the onus is on you to fix the business before you get to really exit it.
And some of these are lifestyle businesses, right?
It's a one person show and they have just a couple of employees, they make decent money, but they've, you know, yeah. It's just depends what they want. Right. So, but I always find if you're exiting, even to sell a two or 300,000 is still money in your pocket and you get that product, you know, you get your tax it's tax-free in a way.
Right. You know, so I just see that there is opportunity there.
[00:19:21] Brad Gaulin: Well, and quite often, like you said that when you're last minute and say it's a health issue, then can you rescue it? Well, your, your best chances are rescuing it. Are either a, you know, a direct competitive sales. So some of the you've been competing against you.
You basically, you know, when you're, when you're ill and you're, you're up against a wall, then, then you're kind of left with desperate options. Because if you just shut it down, then what's the impact for your family. And your employees and your suppliers and your customers and the community that you, you know, you work in.
Cause if, if suddenly you lay off 10 people and there's 10 unemployed people, especially when you're in smaller communities, it can be devastating for the community.
[00:20:04] Peter Beaudoin: No, I have a family friend who doesn't want to sell their business because they know if they sell to a major corporate, they're going to restructure and probably lose some of the people.
So they're saying they want to sell to another small business owner who will give it the same support to the local community. Right. So 10 jobs in a local community can be a lot. Right. So, yes. So Brad, I guess I wanted to ask, I mean, I mean, obviously MExit, that's what you guys do, you help owners exit successfully.
So what do you see? I mean, as some of the biggest challenges, so when you go in and. And what are some of the challenges you see and you start dealing with on day one when you come to these organizations?
[00:20:41] Brad Gaulin: Well, actually the biggest challenges is getting them organized and getting, getting them structured and get, get them into planning and, and kind of a strategic mindset.
So the first step is, is really making them realize that if they want to have a, a great exit, they really need to have two plans. Not one plan. They need two plans. So the first plan they've got to get organized and prepare is their personal plan, their owner's exit plan. Because when you think about it, the owners of the business it's intended that the business will survive beyond the owner.
The, the, the business is always an ongoing concern. So when you're planning an exit, recognize the owner has two completely separate hats. They have to, they have to see and, and strategically plan for completely differently. Cause my, my getting out of the business, my considerations about, you know, what I want, et cetera, et cetera.
Those are absolutely unique to me. And it's not typically owners don't sit down and chat with their employees about what they want to do, and when they grow up type of thing, that's, that's something quite personal. So th the, the personal exit, the owner's exit plan is first, there's kind of a personal life plan.
What do you want your legacy to be? How much money financially do you need to support what lifestyle? So, you know, you need to define what's the legacy for your family? What's the legacy for your employees and your customers and the community? How do you want to be seen? So you need to get clear on what you want that to look like.
[00:22:20] Peter Beaudoin: So it's not just the business. It's all. Yeah. What do they want is their legacy. Okay, so that's one component. Yeah.
[00:22:25] Brad Gaulin: You get to choose that. And then the other thing too is what is it you want to do afterwards? Because one of the, you know, it's interesting. There's another stat. I keep throwing stats at you. 70% of business owners who sell a year later have post-sale regret.
[00:22:41] Peter Beaudoin: Their bored, they want, they it was the buzz of the business, right? Yeah.
[00:22:45] Brad Gaulin: You know, it was it. Well, and it's, it's the big thing is purpose. Cause a lot of people say, oh, I'm just going to go golf. That's ah, yeah, I I'm laughing. I love golfing and that's what I'm going to do. And then six months into golfing, they go, I'm going nuts. Life, you know, there's the Dan Pink stuff. What makes us truly feel fulfilled? And it's autonomy, mastery and purpose and, you know, you've got control of your retirement, but when you don't have a purpose, you don't feel like you make a difference in the world. And I'm sorry, but golfing everyday does not make a difference in the world. Then people start to get depressed and they start to look back and then they start to wonder if it was the right decision.
So getting clear on what it is that is going to make your life meaningful and full after the sale is critical to know before the sale. Otherwise you're probably, you know, I've actually seen people back out of the deal because they got cold feet the last minute going I'm probably going to die in six months because I'll have nothing to do.
[00:23:46] Peter Beaudoin: Moving to my cabin in the woods it's not as fun when you, when the reality is there.
No, absolutely, absolutely.
[00:23:51] Brad Gaulin: You know, and then, so you've got to, you've got to do that. Then you've got to do a personal financial plan. What are all my sources of. You know, in terms of what do I have in my house? What do I have in RSPs? What do I have in in revenue properties?
So you really have to look at what are all going to be in the next phase of my life, what are going to be all my sources of income, what are going to be all my expenses, what are going to be, you know, legacy costs that I want to support a lifestyle, those types of things. So you really need to engage with a personal financial planner.
One of the keys, I think for exiting is getting a team of expert advisors to advise you on the critical stuff. You know, a lawyer who knows what they're doing around business structuring, you know, around estates, around these kinds of things an accountant who can help you do your, your financial planning forward looking for the business forward, looking for yourself, those kinds of things, a tax specialist who can help you structure you know, an M and A specialist who can advise you on, you know, what's hot in the market and what kind of stuff people are looking for now, those kinds of things.
You need a personal financial planner, so that you don't have this guess of how much money you think you need, you know, for a fact that I need to get X million dollars out of my business to have the retirement or, to be able to go on and start the next business I want, or whatever it is you want in your life. You've got to get that nailed down and clear not just hope and guess.
[00:25:24] Peter Beaudoin: So MExit will actually, I mean, you, you, you're not just, you have your contacts and network to help bring these, these business owners. Cause it's not just you coming in, you bring in your community, right. You have a community. And as you said, you're not the accountant, but you bring in accountants, you have these contexts who you bring to the table.
[00:25:41] Brad Gaulin: Or we work with theirs. You know, if they've got. Exiting is a team sport, because then the next thing in their personal plan is they need to come up with a business financial plan. So now they're kind of putting on two hats. They got their, my hat and their business leadership hat, and they need to actually do a financial look forward on what's the business worth today.
So you need a business valuation today as it stands. And typically those will get risk assessed as well. So they'll, they'll, you know, they'll do a business valuation today and they'll look at all the factors, you know, do you have processes and systems? You know, how, how skewed is your client base, et cetera, et cetera.
How much of the business depend on you and you'll, you'll get an adjusted business valuation. Here's what your business worth today. But then with that, they'll also give you a here's what your business could be worth. If you fix all of these things. The dependency on you, systems processes, you know,
[00:26:43] Peter Beaudoin: It's like an audit in a way audit of what the Val potential valuation is. Yeah.
[00:26:47] Brad Gaulin: So with a business financial analysis that you need personally, that'll give you an idea on here's what my business is worth now here's my business could be worth. And then at that point we do, what's called a gap analysis. So then you've got to figure out what are all those things to close that gap between what it is and what I want it to be worth.
That's where the real value in engaging with somebody like ourselves, an exit planner, and more importantly, an exit executioner, because you might put together a plan. We need to do these 18 things to, to get the sale value we want. But that doesn't mean that you necessarily have the skillset to drive those changes.
'cause a lot of times, if you could have driven those changes yourself, you already would have. So, you know, that's where quite often you, you need help because again, it is so often, and this is the biggest challenge we see. A lot of business owners, they've been driving their business forever. And they've trained everyone to be dependent on them to drive the business.
So trying to retrain everyone with that kind of business can be really, really difficult. And especially when a lot of business owners, because, you know, that's the personal plan, this, what do I need? What do I want, et cetera, et cetera. What's a business worth to me. What do I want it to be worth to me?
You need to come up with a completely separate plan to fix the business. So it's ready for sale, but you're not going in and telling everyone, oh, I'm leaving the business. Let's get this fixed because that's going to side track everyone.
[00:28:13] Peter Beaudoin: People leave. Yeah. There's all sorts of issues there.
[00:28:16] Brad Gaulin: So you really have to kind of take a completely, this is where the second plan comes in.
So now I know what I want. I know where I need to go. I know what, what it could be worth what I need it to be worth. And I know of, here's a bunch of things that I need to fix. Well, the next stage is to actually come up with the business growth plan because you want to grow it, to sell it, to get that premium price.
And that's a whole engagement with your leadership team or to build a leadership team. And that's a completely separate piece of work. So in this case, you know, the owner has to take off the owner hat, put on the business leadership hat and basically get everyone excited about, you know we're coming out of COVID and it's time to take this business to the next level.
And you guys are going to do that, you know, and, and you've got to really kind of engage and sell the team. I frame it as just taking the company to that next level.
[00:29:11] Peter Beaudoin: There's a lot there. A lot there Brad. So, so w when we started this, we didn't know if we could almost fill a show. I think we could almost fill two shows with this, but look, I did want to say, look, if listeners want to know more about yourself or MExit, what should they do?
[00:29:26] Brad Gaulin: Yeah, we can just reach out to MExit.ca. That's our website. Every week we put up articles and reference material in our blog there. We also repost that through our LinkedIn site. So those are probably the best places to to get ahold of us and see the kind of stuff we do.
And, you know, our vision is every business owner deserves a great exit from startups to, you know, to third generation business owners. They all deserve it. They put their lives into it. And the other aspect is we actually license our toolbox because our toolbox really focuses around the how to do it.
There's there's tools and stuff out there telling you what to do. And lots of consultants specialize in exit planning, telling you what to do, but it's your ability to execute. I find, you know, that's, that's been the kind of work I've been doing last 14 years. It's can you execute? That will determine your success.
And, and so that's a toolbox we built, we use, but we also license it to other consultants because you know, the need is going to be so big. We, we really got to hold hands with as many business owners as we can and, and get them through this so that the next generation of business leaders can take these businesses over and make them thrive in the new normal. Yeah.
[00:30:39] Peter Beaudoin: Okay. Well, look, Brad, I do want to say thanks for your time today.
[00:30:43] Brad Gaulin: Thanks. Peter was a lot of fun.
[00:30:45] Peter Beaudoin: So if you liked the episode, please subscribe to the podcast. Thanks for listening.