Meeting the Seller (Updated)

March 21, 2023 | Issue #81

Big Deal Small Business: Meeting the Seller (Updated)

March 21, 2023 | Issue #81

If you’re new to this newsletter, I am the owner-operator of a tree service in Seattle, with a background in private equity. I’m currently updating some old posts to better reflect my learnings after completing a search (and now 1 year into running a business).

I do have a favor to ask of you - I am moving into growth mode with the business, and to that end would love to get in front of building owners, property managers, maintenance managers, etc. in the Greater Seattle area.

Single Family and Duplex/Triplex MF is our bread & butter, but we do a lot of work for larger commercial buildings as well.

If you have any connections in that field, I’d greatly appreciate introductions or pointers in the right direction. Given the scale of the business, I’m the Chief Marketing Officer, Head of Sales, and sole Biz Dev Rep as well!

Thanks for considering it — now let’s dive into today’s post, which is about the first meeting with a potential seller.

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Set Up

So you’ve spent exhausting nights of poring through BizBuySell. You’ve completed an NDA and convinced a broker you have money. You finally get to have a call with the owner of a small business.

If you’ve never been through an owner/seller meeting, it can be intimidating. On the other end of the line is a grizzled veteran who was repairing HVAC systems since literally before you were born.

They took that skill and turned into a business over 25 years that now employs dozens of office staff and service technicians. They learned your skills (finance, management, growth, marketing, etc.) along the way – you can’t replicate what they did, but they’ve already replicated you.

(By “you” I clearly mean “me”, someone with no handiness or ability to trade-related work. Please don’t take it the wrong way if you’re actually a plumber or landscaper or similar, but the average reader of this newsletter is obviously pretty unskilled when it comes to the trades).

Anyway, that’s the set-up. Now you, a 20 to 30-something-year-old, are going to grill them, grizzled veteran, about why their business is worth buying.

So, what’s the best way to make this meeting useful?

Purpose of the Meeting

There are three questions I’m trying to answer in the first owner meeting:

• How does the business make money?

• How complicated is the business to run?

• Do I get along with the owner?

It’s easy to get derailed by discussions of growth potential or the gory details of recent issues facing the business. The conversation will take its natural course, but I generally try to keep it focused on these three questions.

I never touch on valuation in the first call unless the seller/broker pushes in that direction.

Let’s dive into each question.

How does the business make money?

Be upfront about how little you know. There’s no point faking it. Instead, I try to make it clear that I’m here to learn, that the owner should start from the basics.

My first question is always some variant of “can you please just walk me through how your business works, from finding customers to completing services for customers.”

I usually include a brief description of how I think they make money based on the CIM/website, just so they know I did my homework, but I try to avoid leading the witness.

My goal is to understand the business process from start to finish – here’s an example for a tutoring business:

• How do your customers find you? Is it through student referrals or parent referrals? Are you using any forms of outbound sales or advertising?

• When a customer reaches out to you, how do you onboard them? Who handles that first call / email in?

• Who handles scheduling the time & location for the tutor and student?

• When do the students pay you?

• How much do you charge?

• Who handles billing?

• How does your business ebb and flow with the school year calendar?

An important note — as much as possible, as you learn the steps in the business process, ask WHO handles it. That can be illuminating. It’s how you learn that the owner’s wife, whose salary was an addback in the CIM, is actually doing all the bookkeeping for the business.

These are all ways of unpacking how a business makes money. Step 2 of diligence will be assessing if the business deserves to make money and truly has a reason to exist, but that’s for a future meeting or newsletter post.

How complicated is the business to run?

This is a subjective question. I’m not an operator by background, so for me, basically any complication was a barrier to running the business successfully. That said, there are certain complications that are more palatable than others.

For example, I looked at a sprinkler installation business that requires all installers to learn how to use specific machinery and have certain licenses. By contrast, an SAT tutoring business requires being facile with numbers & language, being patient with students, and being a good teacher.

The latter isn’t easy by any means, but it’s more accessible to me than the former. If your background is in landscaping, you may find the sprinkler installation more natural to you than the tutoring business.

The key for the first meeting is assessing exactly how complicated the business would be for you to run.

Questions I ask to assess this include:

• Walk me through the “calendar” of the business – what are you (you the business, as well as you the owner) doing each month of the year?

• When do you take vacation? How often & how long?

• How long does it take you to train new employees or technicians? What does training them entail? Who does the training?

• How long do you think it will take you to train me to take over your role? What will be the most challenging parts of the transition?

• Walk me through the roles you as the owner handle today? What’s the hardest part of your job? (Side note — owners really struggle to answer this question on the spot. It’s easier to ask “who does this” to each specific process step, because they can just say “I do”.)

• Have you considered hiring more managers? What’s held you back from doing that?

• How often do you as the owner provide services in the field yourself?

• How often are you talking to clients directly? In what capacity? Do they generally know that you’re the owner?

We’re not here to waste anyone’s time. If the business is too complicated for you to run, better to find out now and move on.

Do I get along with the owner?

Look, you and the owner don’t have to buy a timeshare together. You’re not going to name them godfather to your firstborn child.

But, to be crystal clear, the Seller will be your most important business relationship. Not the top customer, not the top vendor, not the key employee. Every small business (and big business, for that matter) is held together by prayers and duct tape. The Seller is the only one who knows where that duct tape is, let alone how to fix it next time it breaks.

When things break, as they inevitably will, I want to be confident the Seller will pick up my call even if they’re sipping pina coladas in Aruba.

You can try to manage this with financial motivations in the form of seller notes, earnouts, rollover equity, etc. That’s all well and good, but the Seller will have just received a life-changing amount of cash on the day of closing.

Ultimately their choice to pick up your phone call is a function of 1) their personal character, 2) how much they care about their business legacy and 3) how much they care about your success.

Assessing those three items can take weeks or months of working together through diligence to assess. So on the first call, I’m just looking to exclude people I think will be difficult or unlikely to work well with me post-closing.

There’s no formula or list of questions here, but I try to assess this by asking open-ended questions about how they got into the business in the first place. This allows them to ramble and tell their stories.

The way they explain how the business has grown and evolved will tell you a lot about how they approach business and life. The way they talk about their business mindset should mesh with yours to some extent.

Your core values need to be consistent, even if you come from different generations, cultures, or backgrounds.

Questions I ask myself after the call while reflecting on whether to pursue the deal further:

• Did they understand the subtext of my questions? Did I naturally understand their answers?

• Sellers might be reasonably tight-lipped on a first call, but how open and generous were they with information & details on their business?

• How did they talk about their employees?

• Do I feel confident that their reason for selling is legitimate and well-founded?

• What does a successful sale process look like for the Seller, and does that match what I’m looking for?

By the way, this is an area that I don’t think I ever nailed down throughout my search. If any readers feel like they’ve got a good process for assessing sellers as post-closing partners, I’m all ears and happy to share back in future newsletters.

Conclusion

I was always hyper aware that the idea of me questioning a 30+ year business owner about their business is….a bit silly?

To brush that aside, I focused on learning. I would lean into the skid by admitting that I am inexperienced, that I’m here to learn, and that I want a safe, stable owner transition period to protect their legacy.

By focusing on 1) how does the business make money, 2) how complicated is the business to operate, and 3) how do I get along with the Seller, I can make a reasonably quick judgement call as to whether or not to proceed into further diligence. Growth & investment thesis comes later; answer the threshold questions first.

If you have other strategies or frameworks, I’d love to hear how you handle initial management meetings. Hit reply to this email or post/DM me on Twitter.

And one reiteration — if you’ve got connections in Seattle area real estate, I’d appreciate any intros!

Thanks,

Guesswork Investing