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E97: Deal Maven CEO Discusses Benefits Of Partial Acquisitions & Reducing Risk In M&A Transactions

Summary/Abstract

Raleigh Williams is the CEO of Deal Maven and is an experienced entrepreneur who sold his last company for over $26 million. He began his career as a mergers and acquisitions lawyer in Manhattan and Dallas and quickly realized he didn't enjoy the corporate environment. He decided to take his knowledge and start his own company, Deal Maven, to help people like himself with acquisition deals. Raleigh's experience has taught him to respect entrepreneurs who put their own skin in the game and make large profits from the deals they understand very well.

The guest had the opportunity to purchase an interest in a family entertainment center - a trampoline park and escape rooms business - in 2016. Over the next five years, he was able to grow the business from a $2 million to a $10 million annual revenue with acquisitions and expanding locations. Right before the Covid pandemic, he decided to put the business up for sale and the process took nine transactions between sellers, owning real estate and a variety of businesses. Through the process, he learned a lot.

Raleigh Williams recently founded Deal Maven, a service that connects buyers and sellers of different types of assets in order to facilitate more entrepreneurial deals for those involved. This is in response to the difficulty of full acquisitions and the personal guarantee and high risk that comes with them. Ron then delves into the idea of partial acquisitions, asking Raleigh to explain what it is and how Deal Maven facilitates it. Partial acquisitions involve reducing the risk and exposure of the acquisition by dividing it into smaller parts, and Deal Maven provides the platform and resources to help buyers and sellers manage those transactions.

Raleigh Williams had a conversation with a billionaire mentor who shared an important principle for doing deals - that if you get it right, you get rich, and if you get it wrong, you don't go broke. This means that the deals you take on should have an upside that could lead to great wealth and a downside where you won't go broke. Williams has found that the assets that sellers want to offer on 100% seller financing are usually not great investments and should be avoided. He does caution that there are exceptions, and the goal should be to find those and capitalize on them, listen here:

BIG Shout-Out to Nunzio Presta and his team at https://buyandsellabusiness.com The #BossUp Let’s Buy A Business Virtual conference was a blast. Get my session Here:

For a Awesome sources of informaiton and great articles check out:  Acquisition Aficionado Magazine’s Latest Issue (Sponsor)

E98: Search Fund Expert Jan Simon On Entrepreneurial Acquisitions Journey - How2Exit

Summary/Abstract

Jan Simon is the managing partner of Vonzeo Capital Partners and the author of the book Search Funds and Entrepreneur Acquisitions. He is currently based in Barcelona, Spain. Jan has 12-13 years of experience working in investment banking and has taught around investing at IC in Barcelona. He was encouraged by his colleague Rob Johnson to look into search funds, which Jan eventually did. He had previously done his PhD on how hedge funds come to decision making and performance, persistence and investing. Jan is now using this knowledge to help people buy, sell and do search funds.

Rob Johnson introduced the speaker to the concept of performance persisting, or what could also be called skill. This concept is usually only found within venture capital and the top quartile in terms of performance. It has an incredibly high performance rate of between 30 and 35%. The speaker was drawn to the idea of backing young entrepreneurs, helping them to acquire and grow a company. This connected to his background in Special Forces, investing, and teaching. He started investing his own money and then wanted to start a fund, leading him to reach out to Johnson and another friend, Peter Kelly.

Ron Skelton asked if the venture capital funds that help searchers are school dependent, and Jan answered that they are not. They are looking for the best talent, regardless of where they come from. People who have studied at a certain school may have easier access to their peers, but it is not necessary to have studied at a school to be a successful entrepreneur.

Jan Simon, a search fund investor, discussed the traditional structure of a search fund. A searcher, or an entrepreneur who wants to own and run a business, seeks out investors such as Simon to finance their search. Typically, a search fund has between 12-16 investors, each of whom contribute 30,000 units to raise 450,000. This money is used to search for a business with the desired characteristics over a two-year period.

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This week’s “DEEPER” Dive: 

Add it back! How Addbacks Can Add Value to Your Business Flip!

Joe Valley, an M&A advisor, discusses the value of Addbacks along with other tools that will help you sell a business that you’ve built to exit.

We interviewed Joe Valley in episode 17 - Watch it here

•Joe Valley, an M&A advisor and accomplished author, discussed the importance of Addbacks for business owners who are looking to flip their businesses.

• Addbacks are owner benefits or one-time expenses that do not carry forward to the new owner. Not having a proper addback schedule can result in losing 10s of thousands of dollars in the sale process.

• Ecommerce addbacks include website redesigns while brick & mortar may include car leases, family cell phone coverages and additional rent on P&L’s which could be personal residences of sellers.

• Joe Valley gave an example where lack of adding back $600K resulted nearly 6 million dollars being left on table due to lower multiple range caused by higher expenses without considering addbacks as part off bottom line calculation .

• Adding back nonessential but seller related expenses can increase multiples significantly resulting more money from sales price than expected initially with same net income value before adding those extra numbers .

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Joe Valley, an M&A advisor and accomplished author, discussed the importance of Addbacks for business owners who are looking to flip their businesses.

Add it back! How Addbacks Can Add Value to Your Business Flip!

Joe Valley, an M&A advisor, discusses the value of Addbacks along with other tools that will help you sell a business that you’ve built to exit.

Table of Contents

IN THIS ARTICLE, WE’LL COVER:

1. IT NEVER OCCURRED TO ME TO BUILD THE BUSINESS TO SELL 

2. ADDBACKS ARE WHERE YOU CAN MAKE A LOT OF MONEY WHEN FLIPPING A BUSINESS 

3. HOW THE LACK OF ADDBACKS NEARLY COST ONE GUY SIX MILLION DOLLARS

4. TWO TYPES OF ADDBACKS & HOW TO ADD THEM BACK TO YOUR BOTTOM LINE

5. THE CAUTIONARY TALE OF ADDBACKS

It Never Occurred to Me to Build the Business to Sell 

“Just tired…worn out, tired, emotionally worn down, the business was doing well…But I woke up one day and said, I must sell this thing. And it never occurred to me to build the business to sell until that day,” Joe Valley, an M&A advisor, and accomplished author, stated.

When he got tired of one of his businesses, a light bulb came on for Joe Valley, where he came to the conclusion that he should build his business for the sole purpose of selling it.

Many people build businesses with the intention of living off the cashflow of the business as a long-term play. But what if instead of holding the business long-term, you flipped it?

Think real estate buy & hold meets fix ‘n flipper. Instead of holding your business long-term, flip it and move on to your next venture. 

In this DEEPER Segment, we are going to do a deep dive into addbacks, a tool that will help you increase the amount you can flip your business for by increasing the sales price of your business through a multiple valuation. You can find the full interview of this discussion here.

Addbacks Are Where You Can Make A Lot of Money When Flipping A Business

In our interview with Joe Valley, he defined an addback as “an owner benefit or a one-time expense that does not carry forward to the new owner.”

He went on to say that “if you don't do a proper addback schedule, I can pretty much guarantee you're going to lose 10s of 1000s of dollars in the sale of your business easily.”

When mentioning an addback schedule, he’s referring to a document that lists all your addbacks. Some M&A advisors handwrite them side-by-side on the physical QuickBooks profit & loss statement and scan it in to be emailed to prospective buyers. 

Others are a little more sophisticated and create separate spreadsheets for them.

But I couldn’t stress the point he made about their effects on a sale any more. Addbacks are where you can make a lot of money when flipping a business. 

Why? 

Because without them your business could seem a whole lot less valuable on paper. 

How?

Because addbacks increase your multiple range. 

Without getting into a deeper explanation of the various methods of creating business valuations, multiples are one of many ways a business can be evaluated for sale.

Typically, buyers or sellers will valuate a business based on a multiple of the business’s net income. 

Business multiples range between 1-10X, but some multiples are as high as 15X.

Valley said that you need to be aware of “things that will sway your multiple high or low in a multiple range,” because they can have huge impacts on the dollar amount you walk away with. 

But where do addbacks come in? Well sometimes business owners have lifestyle businesses where they may run what some would consider personal expenses through the company’s profit and loss statements as official expenses. 

Don’t worry…everyone does it. 

When they do this, they decrease their bottom line, the net income, because now their expenses are higher and because of this, the net income which is being multiplied by the multiple is lower, forcing their business to be sold at a lower price. (Say that 10 times fast!)

You need to know your multiple range because that is what will determine how much your business will sell for if using a valuation multiple. 

But if you don’t know how much your addbacks are, you could be leaving, in some cases, millions of dollars on the table. (Don’t worry, we’ll have some examples below).

I will say that not all businesses have addbacks. For those business owners who run a tight financial ship and never run what some consider personal type expenses through their business, there won’t really be too many addbacks for you to add back in. 

But for the rest of us, this is a subject worth looking into.

Some business owners and brokers are very reluctant to share their addback schedules with prospective buyers, but if the expense in question can be justified as a business expense, they have nothing to worry about. 

 Yes, in some cases it’s really money that is spent on the business owner and/or their family but shown as an expense on the P&L, but everyone does it and most know what it is.  

You’d be surprised how many business owners lower their voices in conversation when talking about their addback schedule as if the big bad IRS is tapping their call.

It’s really quite comical.

How The Lack of Addbacks Nearly Cost One Guy Six Million Dollars

Joe Valley gave an example of a client of his who had a business doing about $50M but he didn’t know what an addback was.

 In this case, the gentleman did about $50,000 a month in cash back money.

 Valley describes “cash back money” as money many business owners may receive as a discount on advertising that never makes it to the P&L. 

In this scenario, the business owner was using a common strategy called  “credit card stacking” where he was receiving nearly $50K per month in cashback. 

Well…$50,000 in cash back money x 12 months = $600,000 addback

The gentleman was offered a 10X multiple for his business, so when you do the math…

$600,000 addback       x       10 multiple      =      $6,000,000 to be added to the sales price

If he didn’t add that income back to his bottom line, he would have been out nearly six million dollars. Thanks Joe!

Two Types of Addbacks & How To Add Them Back To Your Bottom Line

1. Ecommerce Addbacks Are Not One For One

Regarding ecommerce businesses, Valley cited a website redesign as an example of an addback. 

He considers it an addback if you don’t do it every year because it is considered a one-time expense that the new owner won’t have the following year when they take ownership of the business after you flip it to them.

For those that have FBA businesses with subscriptions to Jungle Scout & Helium 10, SaaS-based tools, with a combined expense of about $500 per month, Valley says that in the case you are selling to an aggregator, a fancy word for a well-funded buyer in the ecommerce space, these expenses could be considered addbacks because the aggregator acquiring your company already has those subscriptions. 

This highlights the fact that if you have current expenses that a strategic buyer is already spending money on, you can add them back to the bottom line, increasing your multiple.

In this particular example, those two SaaS-based tools equated to $500 per month which would summate to an annual expense of $6,000 a year. 

But that $6k expense, if your business is being sold at a 3X multiple, would result in $18,000 being added to your sales price.

Do you see why addbacks are so important? 

And if you notice, addbacks are not one for one.

Depending on your multiple you could be losing $3-$7 for every $1 you don’t add back in.

2. Brick & Mortar Addbacks Can Buy You Another Business via SBA

Examples of addbacks associated with brick & mortar businesses could be:

• Car leases.

• Family cell phone coverages.

• Netflix accounts.

I’ve personally seen “additional rent” on P&L’s which also happened to be personal residences of the seller. 

Let’s say your company has $100K in net income, but you also spend $3K per month for “additional rent” ($36K annually), and $700 a month ($8,400 annually) for a “work truck” payment, but this “work truck” is a truck that you drive every day and will be taking with you post-closing (hint-hint).

And $10k annually for “company related travel” and that annual shareholder meeting that you bring your family on. 

And this year you spent $10K on a one-time expense to renovate your company’s facilities. 

The company would have $100K in net income, but $64,400 in seller’s discretionary income. It’s considered discretionary because its typically nonessential for the business and its purchase won’t necessarily affect the day to day of the business. 

But not in all cases. Sometimes, as you see, they can be one-time expenses such as renovations to a property or the purchase of a big piece of equipment. 

Nonetheless, that’s $64,400 in expenses that technically your buyer wouldn’t have when they take over the company.

Those expenses would be considered addbacks, where you would add them back to the net income.

If your company only netted $100K, with a 3X multiple, you could sell it for $300K 

$100,000 net income      X      3 multiple      =      $300,000 sale price

But if you put in the addbacks…

     $100,000 net income      +      $64,400 in addbacks      =      $164,400 net income

Now your company could be sold for $493,200.

$164,400 net income      X      3 multiple      =      $493,200 sale price.

$493,200 is nearly 1.64 times more than the original $300,000 sales price...$193,200 to be precise. 

That’s a college tuition for one of your kids. 

That’s a single-family home in some areas of the country.

 It’s also a down payment for a $1.9M business through SBA.  

It’s a lot of money and it adds up quick. 

That’s why Valley said you will lose 10s of thousands of dollars or more if you don’t do a proper addback schedule.

But what I love most about Valley’s viewpoint of addbacks is that he says that addbacks are things that you’ve got to understand and look for before negotiating your flip to your buyer. 

The Cautionary Tale of Addbacks

However, Valley is very quick to caution business owners from adding what he considers “gray things” in as addbacks. He notes that addbacks must be “addressed with math and logic.” 

Your buyers will ask you about your addbacks. If they detect you are adding expenses that realistically they will still have post-closing, Valley says, it will erode their trust in you. 

And with eroded trust comes a reduced offer.  

So, make sure your addbacks are true addbacks and a qualified M&A advisor can help you determine that.  

Furthermore, knowing what brings and plummets the value of a business is very important if you are building your business to flip for an exit.

Knowing how valuations are done is important because it will help you understand what systems and metrics need to be in place before selling.

Knowing what buyers want, is really knowing who your customers are and what they want. If you are building to exit, your buyers are your true customers.

Shameless Plug

Joe Valley has written a bestselling book, the Exitpreneurs Playbook: How to Sell Your Online Business for Top Dollar by Reverse Engineering Your Pathway to Success in order as he states to “help online businesses owners get the maximum value and the best deal structure when they seek to their own business.”  

You can buy it on Amazon here.

Valley is also a partner at Quiet Light, an ecommerce-based business brokerage that takes the strategic route of planning to execute your exit strategy 6-12 months before you even decide to sell. You can find more information about their group here.  

If you have questions about the How2Exit show, have ideas for it, would like to be apart of it or if you have a business for sale, give us a call at 918-641-4150.

About the Author, Yoseph Israel

Yoseph Israel is a staff writer for How2Exit who’s intrigued by the world of M&A. He has a small business M&A themed TikTok channel called @SkipTheStartup where he discusses topics such as Seller Financing, Negotiation, and how to do small business M&A deals. Along with real estate investing, he has successfully closed multiple small business M&A transactions.