The Buy Box

That's what I do this for. I get the most fun out of it. Absolutely.

There's a lot to make fun of. Yep. Okay, this week's subject, the buy box.

Yeah, so the buy box. This is how people judge you in your businesses, right? So this is a potential buyer's looking at you from afar saying, do you fit this box? Are you a round peg in a square hole or not? So this is a great topic for if you ever want to sell, this is how you get judged in the Miss Universe pageant that is for business owners. Paints a different picture there, but yes.

Hey, we've got a good looking listener crowd. Yeah, I'm imagining you in a sash now, unfortunately. Oh God, please don't.

I love this subject, and I know you and I, with the businesses that we assess, are regularly meeting and discussing the buy box. I think there are so many things when you're looking at businesses and you're engaging with them to try and understand value. When you really get into the numbers and crunch them down, you have a specific set of criteria to assess them on.

That's when we're going to get into this. Then you really get a solid picture. So I love this topic.

I'm excited about it. That's why I picked it for the second part. This is John's topic, everybody.

John's topic. But I don't get to be the expert. I just get to ask the questions.

You mentioned it. If you are considering selling one day, this is why you should care. But it's not just for people that are selling.

Shouldn't the average owner be aware of this? And should they care as well? Oh, absolutely. I mean, when you get your business ready to sell, it's just a good business planning. It's good business practice.

Everything we talk about. If you have a sellable business, you're not on the treadmill. It's not owner dependent.

There's no customer concentration. You can go to little league games and dance recitals and have a life. That's why this is important is that you can build up to the things that will get you there.

Awesome. Walk through it. What does a typical buy box look like? I mean, you just talked about how your organization could benefit from it.

But what are the numbers that are in there? What are people filtering on when buyers are looking at things? And I know we're going to bounce ideas back and forth here because we're looking at these every day. What are they filtering on? So we're going to get into who your buyer is. But every buyer, PE firm out there, they operate from a literal shopping list, right? It's not like we're looking for good businesses.

There really is a hard checklist. So your business is getting judged before you even know it. They use six filters.

There's a revenue range. And I know we have an episode on revenue. Is this the vanity number? But they are looking for a revenue range, EBITDA, floor.

They're looking for a margin profile, if there's customer concentration, recurring revenue percentage, and also how you fit within your industry. Most owners think that selling works like this. A buyer shows up.

They make you an offer. You negotiate like the old days, a little horse trading here and there, bada boom, bada bing, you got a deal. And that is not how it works.

It only works in Hollywood. They sound Italian there. Hey, forget about it.

That's your mafioso restaurant there. That's right. Buying and selling.

That's right. Today's episode is brought to you by Napco Painting, Inc., based out of Napa, California area. Full service commercial and residential painting in the kind of place where the houses cost more than your business.

And the paint had better be perfect. Napa's a real place where real people live, John. And most of these people, real people, own wineries.

That's exactly why Napco fits this episode perfectly. They're the professionals you call when you actually want the job done right the first time, not the third time, after you tried it yourself on a Saturday because YouTube told you it would be easy. I've done that.

Of course you have. I think we all have. The shirt told me.

Here's why Napco fits the buyer side of this episode too. We're about to spend the next 40 minutes talking about what buyers actually want when they shop for a business. Recurring commercial contracts, repeatable crews, predictable margin, real equipment, and a customer list that doesn't all live or die on one giant account.

That's exactly the profile a strategic acquirer or roll-up sponsor circles on a list. Genuinely, yes. Skilled trades have been one of the hottest M&A categories the last five years.

But you shouldn't call them because of any of that. You should call Napco because your office looks like it was painted in 2004 in the meeting with your investors on Tuesday. Napcopaintinginc.com, tell them from bought out to burnt out, all the way around, from burnt out to bought out, sent you.

Buyers are going to shop, right? They have analysts whose entire job is filtering out companies through that checklist before anyone, a senior, sees the deal, right? If you don't fit in the box, some unknown random person kills it before you even know the deal was dead. You'll never get the call and you'll never know why, right? It's kind of like when you open up your business the first time, right? You open up, open sign, and there wasn't a flood of customers that came in, right? That's the same thing with selling your business that you're just trying to sit there wondering when the offers are going to start showing up and you won't know why they aren't. So by knowing the box, it's the difference between building a business and building an investment, right? Same thing when you renovate a house, you buy a house, you renovate it.

It can be a home, but it can also be an investment, right? You can sell it for more money than you bought it for. So that's the thing that we're going to be discussing today is making you aware of the box and where you fit in and how you can do something about it. Awesome.

Yeah, and we can shed more light, being buyers of businesses, we know exactly the numbers we're looking at. If there are numbers that ping in a certain column, the multiple, the purchase multiple, it would be one that we look at on a regular basis. I think you mentioned that, EBITDA and the price of the business.

Understanding how much, how quickly you get your cash in and out of the business as well are the things that buyers are wired into. And those things, we put it into our buy box and I can run through some of the columns. I've got it up here on another screen.

I can run through some of the columns that flesh out some of the metrics that you just mentioned. But when we see those numbers, we go, oh, okay, this looks like a really good opportunity. So yeah, shed a bit more light on the multiple because people, and we've mentioned this before in previous podcasts.

While I pull this up and pull up a couple of other different columns, the multiple is the number one, right? Well, John, there's six filters that they go through. And the multiple is a derivative of all those six filters. The multiple is the end product.

Okay, so what typically happens is buyers are looking for a revenue range, right? Is your revenue going up? Those kind of things? No. What they're looking for is each specific buyer has their own range that they're looking for. So institutional PEs who are lower middle market want something between $10 and $100 million in revenue, right? Most funds won't even look at you if you're less than $25 million, right? If you're below $10 million revenue, you're not on most radars at all, right? Strategic acquirers, though, can kind of flex in that lower range if there's a synergy story and it's strong, right? Pun intended, right? And then they also look at the EBITDA floor.

So what you're talking about, then that's the real gate is, you know, PE institutional companies in that lower market tend to want between $3 and $5 million. There are funds that want higher, right? And then the higher your EBITDA, the higher the multiple can be, okay? If you're under $2 million EBITDA, you're looking at $3 to $6x, maybe $7x depending on what's going on here. So when you're looking at, you know, $1 or $2 million EBITDA, your buyer selection is far less, right? And then if it's below $1 million, it's more of an independent sponsor or a search fund and it's definitely not going to be in a PE range, right? And so diligence will cost the same on a $4 million deal as it does on a $40 million deals, right? Same lawyers, same accountants, same operational partners, but the bigger deals win every time.

They're the ones that get the most love because there's the more action there and the payoffs, you know, better. 1% of deal to want 2% of deal, whatever that is, $40 million versus $4 million, you do the math. Third one is margin profile, right? And they're really looking at how you compare to your peers, right? If your industry is 18% but yours is at 8%, right? They're thinking, well, what's broken or what are you hiding, right? So even profitable businesses get penalized for being below comp margins.

So again, revenue range, EBITDA floor, margin, all those play into also the, you know, the multiple. Then we get into the last three, customer concentration, right? Nobody wants the 40% customer, the client, right? Hey, my cousin Vinny, you know, he's 40% of my revenue. Don't worry.

He's good for it, you know, for another couple of years, that's a big risk that they're going to take. So if you have a high customer concentration where a few people make most of your sales, the buyer's either going to walk out or he's going to build a huge discount on that. And that could be a multiple or two, like you alluded to.

And then we're looking at recurring revenue. So this is the gold standard. This is where we can put it to the bank.

There's contracts, there's maintenance, subscriptions, there's all kinds of things. So if it's above 40%, you're really attractive to buyers. So you're going to have a big multiple versus a transactional, the company where you always have to get another project, always have to get another project, those kinds of things.

Those also get discounted. And the last one is that they're looking at your industry or subvertical. So, you know, we're rolling up commercial HVAC companies in the Southeast.

If you're not an HVAC company in the Southeast, you could be the bell of the ball. They're not looking for it because it doesn't match their thesis. It doesn't match their buy box.

Gotcha. Awesome. That'll do it for this episode of From Burnt Out to Bought Out.

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