Businesses Are Failing! What's Happening With Acquisitions?

[00:00:00.540] - Rich Veltre

All right. Hello, everybody. Welcome to another episode of Books and the biz. I'm Rich Valtry, and I am here with my Superman operations cohort guy, Dan Paulson.

[00:00:21.820] - Dan Paulson

Hey, Rich, how are you?

[00:00:24.050] - Rich Veltre

I am doing fabulous. Doing absolutely fabulous. I am really happy that we are talking today because I had something going on this week that feels like an epidemic. And I really wanted to talk to you about this.

[00:00:38.090] - Dan Paulson

Do I need to wear a mask for this?

[00:00:43.810] - Rich Veltre

No.

[00:00:44.530] - Rich Veltre

I said epidemic.

[00:00:46.140] - Rich Veltre

Epidemic, not pandemic. We didn't start with a pandemic in the business world, although maybe. Who knows? Who knows? But just diving right in really quickly. I have been talking to you clearly over the last several episodes. We've been talking about the flipping of businesses as owners of small businesses that are getting older. They're coming up with succession plans. They're coming up with a wave of transactions that are going to happen to change ownership in small businesses or potentially put some of them out of business because they don't really have a succession plan. So we've been focused on the seller side. This week I got hit a bunch where I was winding up talking to a bunch of the buyers.

[00:01:40.350] - Dan Paulson

Oh, interesting.

[00:01:41.570] - Rich Veltre

There are a lot of people out there who have come across teachings, et cetera, that talking about entrepreneurship through acquisition. So you come out of school with an MBA and you basically say, hey, guess what? I'm going to go buy one of these small businesses that's for sale from these people that are aging out or getting to the where they want to retire. And so they think this is the greatest thing. They have an MBA. They're business super people. So they're going to come in and they're going to buy a business. And I think it's great. I'm actually a huge supporter of the ETA community. I love seeing people who are that entrepreneurial and seeing that the whole country is supported and has been for years by small businesses. So in set up for this whole thing, I'm these conversations with people. I feel like there's an epidemic going on because conditions have gotten harder.

[00:02:39.940] - Dan Paulson

Definitely.

[00:02:41.120] - Rich Veltre

The ETA, basically the whole premise is you use the small business administration's loan program to go and actually buy these businesses. Now the interest rates went from 6-7% up to 13%. There's upfront cost, there's prepayment penalties. So it's not like you could just get in and find another way and then you're all good. So it's become more difficult. And I think the epidemic comes in because the people that are trying to do the acquisition become focused on the acquisition. And they forget why they're acquiring. And so I've come across a few examples of people that are calling. And I'm saying it's such a short period of time that we're having this conversation. And there's so many of them. I feel like everybody's falling apart here.

[00:03:36.620] - Dan Paulson

Well, I think you've uncovered one of the biggest faults that I think most people, including entrepreneurs, fall into. And that's any buying decision tends to have some emotional reaction to it. And you point out a good example of a lot of these people are coming out of their MBA programs, they're probably in their mid to late 20s at best. But don't have a ton of business experience per se, and it's the excitement about making that first purchase, like buying your first car or your first home, you tend to get really excited about it. And in that process, maybe that payment or that amount you're willing to pay for the car or the home increases. Of course, the salespeople just love to see that because once they get you hooked emotionally, they know they got you. You see it at pretty much any auction you go to, when somebody gets emotionally invested in the thing that they're bidding on, all of a sudden those prices go up and it's interesting that you're seeing that.

[00:04:37.790] - Rich Veltre

Yeah. And it goes against everything that I've been taught over my career. I have done over the years, I have done a lot of turnaround and restructuring work, things that basically say, Hey, this business isn't doing so great. We need to improve the value. We need to improve the plan.

[00:04:57.180] - Rich Veltre

And.

[00:04:58.160] - Rich Veltre

There was a turnaround CEO that hired me to do some work. And one of the first things she told me was never fall in love with the business you're working on. It is 100 % has to be third party, neutral, arm's length, all these things that come out of all the training that you've ever had. All of a sudden, it's all on the table.

[00:05:22.500] - Rich Veltre

So.

[00:05:23.500] - Rich Veltre

I think that you're right about the emotion part of it, because I think once you fall in love with something like that, you are willing, number one, to upbid because you want it so bad that you'll just go crazy and then it comes back to bite you. And that's the thing that scares me a little bit. Yes, there's a harder challenge to getting around interest rates, et cetera, and the cost of financing and the cost that it's going to cost you when you get into the business. But you really still have to think about this ahead of time with a clear head because the biggest thing that you need is a plan. I had someone ask me yesterday, what's the one thing that if you're going to come work with us on this acquisition, what's the one thing you want to see? I said, the plan. I don't care about the financials as much. I mean, if you're asking me to do the diligence on the financials, absolutely. But I want to know what the plan is. Does this have a hint of anything showing that there's going to be a success at the end of the day?

[00:06:23.140] - Dan Paulson

I think the assumption is you're going to make money because it's an existing business. Relating to what you're talking about, I did have a client that did acquire a company. And we're going through and talk about, well, as you're merging these two, what do you need to do? And they checked a lot of the boxes. They did a really good job. But what was interesting is we worked through their financial models in the beginning, and then it's like, okay, well, we bought the business. Now let's just go do business. And they never paid attention to the financial models that we discussed after that, other than the top line revenue. Top line revenue, they're tracking strong. They should be printing money. They're having trouble making payroll because they didn't pay attention to the numbers. They didn't see how one company was managing their finances versus another. And and they didn't merge the two. They kept them separate. So one is digital, the other one is still a lot of invoicing and handwritten notes and stuff like that. And we're going through it and it's like, well, where's everything going? Well, we miscalculated on this, and we miscalculated on that and then we don't know where the rest of it is.

[00:07:34.120] - Dan Paulson

Okay, well, we should have been staying on top of it and work the plan as we had committed to. And you guys get so busy in the business, you're not spending any time working on the business. And I'm guessing that's probably what you're seeing and hearing on your end too.

[00:07:51.660] - Rich Veltre

Yeah, that's why I'm laughing because it's so the same. It's exactly the same. It's like, hey, we bought a business and we're now working in it. And you're a hundred % right. Great thoughts to actually you have to work on it. You have to work where it's supposed to go. I have a couple of quick examples. I have someone who bought a business that was doing the Peloton type thing. It was online video demand services for cycling and exercising. And they bought this business. And every time you ask them a question of what are you seeing? What are you seeing you're going to do going forward? There was no answer. And then on top of that, they were asking the old owner, who was still involved in the business, they were asking them, so how are we tracking? Are we tracking the way you did last year? You should be tracking better because you bought the business because you want to do more. You have another avenue. You have something else you want to do. You're six months down the road of owning this business. And there's now debt on the books more so than they had before.

[00:08:56.190] - Dan Paulson

Yeah, you actually have to do better. Because if you don't do better, you can't cover that loaded operating cost that you piled on unless you paid cash for it. And most people I know don't pay cash for a business. They're going to finance it. They're going to leverage it in some way. So you've got to take on that extra debt. And we've talked about this in the past too. You probably have extra employees that you now have to pay salary because that owner is now out of commission. There's a lot of extra weight that you're carrying there that you really have to upload the sales.

[00:09:28.590] - Rich Veltre

Yeah, absolutely. You take that into account and you say, This was part of the plan, or it should have been. You know the numbers at closing. You knew the numbers before the bank gave you the financing because they wanted to know what your business plan was. I guarantee you they wanted to know what your business plan was. So what's the business plan? And you can't come in now later on and say, Well, we don't know. Another example, the people that I was working with that did dental rollup, they ultimately showed me a plan. And I'm looking at it going, your executive team is so expensive and they're starting in year one right after you acquire your first practice. You have no plan on how you're going to see that cash. Because as it was, the plan should have been adjusted immediately when you went to closing because the bank cut your financing by 20 %. So you didn't have extra working capital for anybody. You didn't have extra working capital to get registrations done and insurance payments coming in before you were going to start paying other people. So the plan already was busted. It was broken.

[00:10:49.180] - Rich Veltre

So when you change it, you realize all these people that were doing work for free waiting for you to get to the point of launch, it went bad. You didn't have the money.

[00:10:58.920] - Dan Paulson

So it's going to be interesting to watch these dental practices because there's a lot of contraction going on in the dental space. I know this because I work with a number of dentists. There are a lot of DSOs, and I believe that's dental service providers or offers or whatever it might be, but they're coming in, they're gobbling up these small mom and pop practices, single dentists or maybe a dentist and associate type thing. And the philosophy is, well, these things are profitable, they should make money. What they're finding out, though, is as they're buying these practices up, they aren't as profitable as they were or even as they might have thought they were because they didn't do enough checking in it. The challenge has always been in the dental field. Typically, we joke that even a bad dentist can still make money. So that tends to hide a lot of problems. Banks know because dentists tend to be profitable enough to pay their bills that they'll lend out the cash, as you point out, is tightened up a little bit. But these dental service offices are just they're going to suffer because of what's going on here.

[00:12:12.770] - Dan Paulson

I see it time and time again. In fact, I had a client that bought away a practice that had been acquired and within two years had pretty much been run into the ground. He got it for a song. I don't even want to guess as to how low the price was compared to what it was bought for. But that's just an example of what's going on here and why you need to be so careful no matter what industry you're buying into on how you spend that money and how you put that plan together.

[00:12:39.690] - Rich Veltre

Yeah. And I think adding to that, you and I have spoken about it before. With the medical field, it comes down to user experience. Exactly. People will stay with their dentist forever if they love the dentist. So the minute you make major changes, that's when people start thinking I should change. People don't like change, so they'll stick with an office for a very long time. Even moving to the hand-picked successor of the dentist, they'll stay with the office because they're going to assume they're going to get the same user experience. It's amazing how people don't recognize the fact that there is a user experience. We're not talking about website building. We're not talking about UX. We're talking about user experiences getting the service from the particular office, et cetera, that you're getting it from. So it has an impact.

[00:13:35.060] - Dan Paulson

It's really about that value add. And that's where I'm talking with a lot of even my clients right now because things are... We're seeing a lot of financial change going on, and that restriction is going to cause people to spend money differently. Regardless of what business you are, you really need to look at what is your user experience. How are you adding value to the customer? Because that customer is either going to cut back on what they're spending or leave altogether, depending upon what they deem is important. If you're not providing enough value, they're going to walk. If you're not ready for that, it's going to be a very painful experience for you, especially as a new business owner. If you've rolled your capital into something and expected it to make a payoff for you and you're going to be this successful entrepreneur, all of a sudden things are turning around and you don't have the resources to keep sales going, it's going to hurt.

[00:14:28.170] - Rich Veltre

And the thing is, it's not really that hard to see. You should be able to actually see it just by looking at the numbers and setting up a metrics off of what your numbers are showing. So there was one conversation we were talking about where someone was arguing that service businesses don't typically show a cost of services or cost of sales. So they don't split things between the actual services being provided to the patient and the back office. And I argue that it was very important that you should know it. You should actually split it up and go through the exercise if someone's giving you numbers of a business that you're going to acquire. And in that analysis that they give you, you can't see what's being spent on the actual providing of service versus the overhead. You don't really know what you're paying to get that user experience. On top of that, treat it like just a normal break even expense. What would happen if I close the office tomorrow? What does it cost me to keep the office open on a day that I don't have people or patients?

[00:15:37.580] - Rich Veltre

I.

[00:15:39.240] - Rich Veltre

Think it's important to actually know that because it's going to tell you, is your overhead high? It's going to tell you what it's actually costing you to provide the patient with the service. And a lot of times what you'll see when you go through the analysis of I want to buy this business, there might be efficiency in there that you know the day I buy it and the next day if I cut this person's hours or I take out an additional person and it's not going to affect my user experience, I make more money on day one.

[00:16:09.320] - Dan Paulson

Yeah.

[00:16:10.280] - Rich Veltre

I mean, that's mergers and acquisitions number one. And this is what I full circle to what I originally said. You don't want to just make the same as before. You're buying this to do something else with it to make it bigger. If we say that five times earnings is what I get when I buy it, I want it to be worth 10 times earnings day 1. That may not be feasible, but it should be the goal. The goal should be, how am I going to get five times earnings to 10 times earnings or five times earnings to this much, but earnings went up by a million dollars. So now five times a half a million dollars versus five times a million dollars. That's where the head has to be. If you're focused solely on getting the asset and doing the transaction, you're not paying any attention to that.

[00:17:05.270] - Dan Paulson

This is why it's so important to get that business plan done as you're doing the due diligence, because you should be as you're uncovering the numbers and learning about the business processes and who's handling what, you should be already preparing for what changes you're going to make on day one. And so many companies don't do that. I think the larger M&A guys who are working off venture capital and whatnot really often don't have a plan until they get in there. And then it's like, okay, now that we caught the car, what are we going to do with it? It's that whole issue of, well, we're going to work out the buying process and then we'll figure out how we're going to get this thing to make money after the fact. That's where a lot of these companies lose money for the first couple of years if they ever make money at all.

[00:17:53.110] - Rich Veltre

Well, that's a whole other scary topic.

[00:17:56.640] - Dan Paulson

For another day, right?

[00:17:58.620] - Rich Veltre

But it's true. I mean, just to allude to it, I don't want to create another whole other conversation point here, but alluding to that, you're spot on. There are so many people out there who just think, Well, we got these investors and they gave us a million dollars and we can just go do whatever we want. And then when it runs out, we'll go get another million dollars. I don't know. It's not going to happen. I don't know where the mentality comes from that you can go back to somebody and say, Well, I spent your million. I need another million.

[00:18:29.000] - Dan Paulson

Actually, investors get quite upset if you come back to the well too many times looking for more money. They're like, Where's my money? When am I going to get my money back?

[00:18:37.710] - Rich Veltre

Yeah. What's the return? And here we go. Well, what's the plan to get me my money back? You see that word plan again Yes. Where's the plan to get me my money back? You gave them a plan that told them what you were going to do with the money. Now they're going to ask you what did you do with it? Why isn't their money in the bank? You said there would be enough. You said you had working capital figured out. So you made all these statements to your investor and now you're conveniently forgetting that you made them. And that's a no-no. It's just not allowed. Don't do that. So maybe that's another topic for us one of these days.

[00:19:16.690] - Dan Paulson

I think for another day. But meanwhile, what's your takeaway from all this, Rich? You've had several examples here.

[00:19:24.430] - Rich Veltre

Yeah, I think it really comes down to people have to wake up a little bit to get out of the bunk of getting locked in the transaction and get away from being pigeonholed or having your blinders on that you're only looking at get the deal done, get the deal done. Get the deal done, but have a plan to execute after you do get the deal done. There has to be an immediate pivot. And that's the part that scares me a little bit that people are not actually making that pivot into full-blown operations and financial monitoring from day one. There is no lag. There is no delay. That basically says get the transaction done, but immediately put your feet out there and execute the plan that you said you're going to execute.

[00:20:17.450] - Dan Paulson

Yeah, for me, it's really emotion kills sales and profits. That's what this is all about because we're so focused on getting the deal. It's the thrill of the kill. It's focusing on the hunt, not the... Not what you do when you catch it and what you're going to do afterwards with it. It's really about slowing the process down, making sure you are getting that plan in place early on. That way, when you finally close the deal, you hit the ground running and you turn something what could be a major loss to you into a profit center and achieve that future growth, achieve those target numbers that you're looking at. Rich, if they need help working through this on the financial side, how do they get a hold of you?

[00:21:00.120] - Rich Veltre

Best ways by email, rveltre@veltregroup.com. And if.

[00:21:03.910] - Dan Paulson

You need help on the operations side because that plan is not just about numbers, it's also about process, feel free to get a hold of me at danpaulsonletsgo.com. Let's set up a meeting. Let's help you make sure that acquisition is going to be highly successful. Rich, thank you for your time today. Great subject. We could talk about this for hours, but we don't have hours, so we'll wrap it up here today and add more to it in the near future.

[00:21:27.880] - Rich Veltre

Sounds good, Dan. I'll talk to you later.

[00:21:29.630] - Dan Paulson

All right. Thanks. Take care.