What do acquisition entrepreneurs look for in buy-side deals? Serial entrepreneur and investor Ron Skelton joins Laurie Barkman on Succession Stories Podcast to discuss his approach to buying existing small to medium sized businesses. Listen in as they discuss deal criteria, why not all buyers are the same, and the importance of transferable business operations when you’re ready to sell.
Listen in to learn more about:
- Top things to consider when selling your business
- Aligning business goals with potential acquirers
- Risks around business transferability and impact on purchase price
- How recurring revenue models drive value
- Finding red flags in deals
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About Succession Stories Podcast
Succession Stories is an award-winning podcast hosted by Laurie Barkman, the Business Transition Sherpa, guiding business owners through the process from “transition to transaction.” Learn more at https://thebusinesstransitionsherpa.com
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Transcript
Laurie Barkman:
Welcome to Succession Stories! I’m Laurie Barkman. As an exit value planning and M&A advisor, I call myself The Business Transition Sherpa. This podcast guides entrepreneurs from transition to transaction- from building value in your business to letting go.
What do I do when I’m not hosting a podcast? I work with owners to maximize business value with my firm, SmallDotBig. And as a Certified Mergers and Acquisitions Advisor with Stony Hill, I guide you through the complex process of selling your company.
Tune-in to Succession Stories for weekly insights to reward your hard work and avoid succession regrets. Hit subscribe wherever you listen to podcasts, and sign-up for our newsletter at successionstories.com. Here’s to your success!
Is this the year to sell your company? Don’t leave your exit to chance. Stony Hill Advisors works with entrepreneurs like you to get ready for what may be the biggest transaction of your life. Learn what your business is worth by visiting stonyhilladvisors.com/podcast.
Intro:
Ron Skelton has been a serial entrepreneur for over 35 years. Ultimately this has led to partnering with, buying, or investing in privately held businesses. Ron is the podcast host of How2Exit and I was recently on his fantastic show to talk about mergers and acquisitions in the small and medium business space. I encourage you to check it out. On this episode of Succession Stories, we talked about Ron’s experience as an acquisition entrepreneur, what that means, and his approach to preserving the owners’ legacy after the sale. You’ll see why he calls himself an “M&A Dude with a Heart.” Enjoy this episode about buy-side deals with acquisition entrepreneur Ron Skelton.
Laurie Barkman:
Ron Skelton, welcome to Succession Stories. I was so excited to be on your show, How to Exit, and I appreciate coming on your podcast and I love talking to podcasters. I know you love telling your story and this is going to be a really interesting one because it’s going to continue this series of talking to people in mergers and acquisitions, and not only want to learn about your experience as a serial entrepreneur, that of course, we’re going to spend time talking about transition talking about your transition, and what you do to see successful exits for entrepreneurs, so I’m excited to have you welcome.
Ron Skelton:
Oh, thank you for having me.
Laurie Barkman:
Let’s jump in with your background. I saw in one of your bios out there somewhere, that you’re an M&A dude with a heart, which made me laugh. Does that mean that other M&A dudes don’t have a heart? I mean, come on.
Ron Skelton:
Oh, there’s a lot out there that’s all about the numbers. My favorite thing to do is like, sit down with the business owner, try to figure out where they want to go and see if I can help them get there, and if I can, and it works for me, that’s great. If I can’t, I’ll introduce them to somebody else. I did the same thing in the real estate space. When I was doing real estate, I honestly think you can be in this space, be honest with people, work with them, help them get where they want to be and not have to be a ruthless business guy. You don’t have to be the ‘Blue Horseshoe Loves Anacott Steel’. You don’t have to be the greedy, cutthroat, M&A guy that everybody thinks that’s out there. I just don’t think you have to be that guy.
Laurie Barkman:
You weren’t always that guy. You started out in your career, where? Where did you get started?
Ron Skelton:
Well, I did some time in the military, got out of the military, did defense contracting and the .com world. Always been an entrepreneur, I think, since early childhood. Unlike a lot of people, like they kind of stumbled into business and stuff, I got told I was not old enough to work for my father at a young age. We lived five miles in the woods, I grabbed the push mower, pushed it five miles into town and was mowing lawns and when he realized I was willing to do that work that hard for $1, he let me come work for his painting business. That was one of my first ventures into just being an entrepreneur. Like if I need money, I’ll go get it.
Laurie Barkman:
Your dad had a painting business and I think I read somewhere you ended up working for him for four years. Is that right?
Ron Skelton:
Yeah, I actually ran it for four years when I was, that was probably 12 or 13. When I was safely able to climb a ladder I was working for him and then at some point, he said, “You know what? I need to take some time off. I want to do some other stuff. Why don’t you run this?” so at 16 years old, he handed it over to me and I ran the three crews we used to paint the houses and stuff. My first day there, I remember going up to some people there, the crews that were about two or three people per house per crew. I said, “Does anybody have a problem working for a 16 year old?” and one of my, actually one of my own friends raised his hand, and I was like, “Hey, you’re done,” and I let him go.
Laurie Barkman:
Are you still friends after that?
Ron Skelton:
Oh, yeah, we were friends a little bit later. Not that day. He’s like, “I ain’t working for you,” and we’re friends. I was like, “Okay, well, then you’re gone.” I ran that. Towards about 20, I realized that I was making a lot of money, but I wasn’t getting…I didn’t feel like I was getting where I wanted to get. I thought a college degree was the solution to that. I wasn’t saving enough money for college so I joined the military, did military intelligence for the Air Force, and got my college degree, my first couple college degrees there.
Laurie Barkman:
You’ve done some digital marketing work. You’ve been a marketing executive, you’ve worked in startups and Silicon Valley so you’ve seen what it looks like on the front end of getting a business off the ground but now you are looking to acquire businesses or invest in businesses that are well-established. I can relate to that. That’s a space that I’m familiar with. Let’s talk a bit about that. How did you get from where we were talking about in your past to this idea that you want to be in M&A and buying companies, well established companies?
Ron Skelton:
A couple of partners and I were running a real estate investment group and the market turned on us. We were doing short sales and buying houses out of foreclosure and stuff and the market kind of dried up, the regulatory stuff became really difficult. I decided to move on from that and I didn’t know if I was burned out. At the early stages I couldn’t tell, “Am I burned out or I’m just not performing as well in this business? Or has the market really gone soft on us?” So I brought in a performance coach and one of the things he said was, “Man, you should be playing a bigger game.” We would close a house where there’d be 30, or $40,000, moving into the business account, not my personal account, but to the business and I’d have that voice in the back of my head, “But you should be playing a bigger game,” so at this point, I had already been coaching other entrepreneurial real estate investors and stuff, encouraged three or four of my friends to move from single family housing to mobile home parks and apartment complexes and I kept thinking, “Man, if I move into that space, I just told these guys that moved in, I’m a marketing nerd by trade, I’m going to just dominate this space like I did the foreclosure space and I’m going to be hurting two or three people I really like,” so I started looking at what’s next. Once you do like apartments and mobile home communities, what do those guys graduate to? My wife and I were talking about moving and living abroad and the thing that caught my eye on the mergers and acquisitions is in some countries, it’s easier to move there and live there for more than 90 days if you actually own a business there so I started studying that and I started falling in love with the idea of ‘let’s just buy a business that’s already working and generating revenue’ and that’s kind of what started up and so I hired a mentor to study some courses, read everything I get my hands on, and I got busy after it.
Laurie Barkman:
Did you end up buying a business abroad?
Ron Skelton:
No, not yet. Funny thing is, we bought quite a few actually, we did one of the courses there and some of these courses you can take the course is brilliant, it teaches you stuff, it gets you your foundation, but it’s like a good school, the real value you’re gonna get from that is the network you make, the people inside of the program and in one of those programs that are out there, we grouped up about seven or eight of us and started acquiring marketing companies. We did what we would refer to as a roll up. We’ve worked on it for a little over a year, and put it under contract, under LOIs and with closing, doing the closings on just under $100 million worth of marketing agencies. One of the partners and a couple of advisors offered to buy the rest of us out of the thing and continue on and it was one of those… They made a good offer on it for where we were so we did that in December and in January, I started looking for another project and just got really busy with the podcast and some family life issues. We got family members who had passed away and stuff so just about to kick off another big project here probably in May or June.
Laurie Barkman:
That’s exciting. Can we rewind and talk a little bit about this consortium? I know there’s a third rail, you and I talked offline, I’ll try to stay away from it so help guide me there, but can we talk about some of the dynamics? There were seven or eight of you in that group? That sounds like a big number to me.
Ron Skelton:
It is and. I’m a big believer that a company needs one great leader and then you might have two or three that have strong leadership, but if you’re a company and you had eight alphas, female or male, I use that as a gender neutral term, but if you have high performers who expect to be the boss, it ends up being almost like you’re managing every decision by committee, because everybody has a voice and everybody is strong enough to voice their opinion and stand their ground and it slowed us down so that’s one thing. We were hanging out together, we were in these meetings and networking and we came up with the idea together and the way we picked the eight was like, “Who wants to play a role in this?” Everybody that raised our hand we took, so we didn’t really vet their resume or whatever, we just figured this is gonna be a big enough project, we find something they’re good at, they do it and then they’d all taken one or two courses from one or two of them, the mentors, so they’re either in our program or competing one that’s really good, so we knew they had the skills, the knowledge, and we needed the manpower so we took everybody, and I won’t do that again.
Laurie Barkman:
Do you have the manpower theoretically, what about the financing? Was that something that you were able to more easily secure because of the resumes and experiences of the group?
Ron Skelton:
We had a couple of members in the group that had some recent exits, and they funded a big portion of it. We kept the finance needs down quite a bit. It’s a very unique play, and the roll up, we weren’t like the P&L model where we’re offering cash. We set up an entity and we’re offering an exchange. I can’t really go into the details of that, it’s really proprietary what we set up at that part of our structure. It was probably what we spent the first six to eight months with, we literally went to attorneys and said, “We want to do A, B, C, and A is a good idea B and C, probably not,” and we just kept working on a system that would be low tax impact because of some of these things., when you’re doing roll ups, if they issue stock exchange, you got gifted some stock and have to pay taxes on that so there were all these terms and stuff, waterfall effect and everything that we had going on, kind of stock options, options to purchase, and the lawyers had it figured out, but the first six or eight months was just designing a system, “What would keep our capital requirements low?” We still paid for lawyers and attorneys and accountants and that type of stuff but we were doing an equity exchange in the realm that we weren’t like issuing multimillion dollar purchases.
Laurie Barkman:
Okay, gotcha, so it wasn’t like you were going out securing commercial loans or anything like that. In terms of finding the right opportunities, you mentioned you were doing a roll up or you did a roll up on marketing services firms. How did you go about the search view collectively as a group? How did you go about the search process, and maybe you could share some of the criteria you were looking at at the time?
Ron Skelton:
I would say 98% of our search was done through LinkedIn. There were two or three of us to kind of give you a scale of this, there were two or three of us that were very actively using our LinkedIn accounts to meet the CEOs of marketing agencies. We would meet them under just a, “Hey, we like to connect with the marketing agencies, here’s what we’re up to,” and we’d hear their story, their origin story, and how they created their agency and then we would show them what we’re doing and ask them if they wanted to be involved and in a matter of probably just shy of 200 days, depending on who you ask on the start date, when we officially started talking to agencies, might be 200 to 215 – somewhere in there – days, we talked to just shy of 200 agencies about 190 something. That meant one hour conversations and the interesting thing was more of them said, “Yeah, we’re interested. Let’s do this.” Than we agreed we were looking for world class agencies so the criteria was six figure EBITDA in the upper closer to the million, the better. We were looking at some that were very unique in what they do, so they were under the million dollar EBITDA, but then we were looking for a world class aspect of their business, meaning they might be the best SEO on the planet, or they might be the best social media, where they have the best internal tools, but for every agency we were looking at, we were looking for something that was world class, because we were bolting these around and we were primarily focusing on the US, but we had calls with agencies in the UK, Dubai, Australia. We weren’t turning them away for the other countries. We even had one and I forgot somewhere now, but just a little country in the middle of nowhere four guy company, but they were just brilliant at what they did.
Laurie Barkman:
When you got them on an initial call, did you ask them what prompted their interests? Why were they interested in talking to you? What was the most common answer, did you find?
Ron Skelton:
It’s interesting as marketing agencies are a very unique breed in the fact that the path through their growth almost always has mergers and acquisitions in it. There’s a a false ceiling or a glass ceiling and marketing agencies, you start an agency, you start acquiring customers, you start training your staff and then as you grow, there’s this point where you’ve got the people train where they’re ready to do maybe a Coca Cola or a BMW, like they want a big client because they’ve got the skill set and they don’t have…the agency itself is too small to even bid on those type of projects so they run into this problem where either they grow by acquiring other agencies or they’re big enough, or they end up getting acquired so that their talent can grow and they’re constantly losing their top talent to bigger agencies, because they train these people and have them ready to handle those accounts, but they can’t land them so the agency owners were very open to talking to us about mergers and acquisitions activities. They’re just used to it.
Laurie Barkman:
They’re used to it and it wasn’t retirement, it was really a growth strategy. They wanted to stay in the business, right? Or were they intending to transition out?
Ron Skelton:
It was a big combination of all of them. Our program was three years so from start to finish, if you got in on day one, we expect you to be there for three years, until we went through the liquidity of it and then we expect you to tell us early on in the first few months, whether or not you’re staying or going so that we can plan that and have a succession plan for who’s taking over your role so we did have a mix of people who are staying and who are going but it was just full communication along the way. We have to imagine, the interesting thing we were doing was we had an overall arching brand. I can’t say that on here but under the agreements we have, when we sold, I can’t tell you what we created, we had the overarching brand, but we’re allowing every single agency, and we really wanted them to keep and maintain the brands that they were operating under. We were offering they keep their business card on one side, it looks exactly like it always has, and they flip it over and it’s the parent agency, so if you were wanting to go bid at your local, normal, businesses around there, you just use that brand you’ve always used, everybody knows loves and trust, but if you get told, though, on a bigger deal, you can say, “Hey, I’m part of this bigger conglomerate of agencies around the world,” or, “X number $100 million agency, we have all the resources you’d ever need,” and they could bid as that so that was the approach we were taking.
Laurie Barkman:
Gotcha. You and I had a great conversation on your show and of course, now I flipped the mic on you, but you had asked me some questions about business transitions and what do I see, as I’m out there talking to business owners, and I think I’ll ask you kind of the same thing, as you talk to a lot of business owners, and you get to know them and what their motivations are in the process, and at the same time, let’s be clear, you’re also trying to figure out if it’s a fit for you. What are some of the first questions you ask? Doesn’t have to be meeting number one but certainly in the first one or two meetings. What are some of those things that you’re asking them to get to know whether or not this is a fit for you?
Ron Skelton:
I always want to start with the origin story, “Tell me how you created this,” and then one of my favorite questions is, “Out of all the people you can be talking to today, why are you on the phone with me?” What is it that I can do to help you out? There’s a reason why they’re on the phone talking to somebody who’s either seeking to invest in or acquire their business, and kind of need to get to the origin of that, so like I said earlier, I like to be the M&A guy with the heart. My goal is to figure out what they’re trying to accomplish and see if I can help them get on there.
Laurie Barkman:
What about transferability? You and I talked about that quite a bit on your show and I have a lot of thoughts on that. What do you see, literally, if a company is more or less transferable? How do you ferret that out? How do you try to understand, and then what type of impact is that having as you think about the potential value of that deal?
Ron Skelton:
Absolutely. In a lot of cases, you’re talking to business owners, and they’re carrying three, four or five hats, and they haven’t taken the time to filter those out and one of the toughest conversations I have with business owners is like, “Look, you’re pulling at 90 hours a week, I don’t do that and I don’t know that I can hire anybody that will because the reason you’re doing it is you own it, so when you leave, I don’t have to replace the CEO and X number of dollars, I need to replace the CEO at that figure and then I got to bring in a top sales guy because you’re the top sales guy.” There’s one, it was a machine shop, and the guy was the mechanic, he fixed all the heavy duty machines, so if one of the big lathes or… I don’t know what else they have out there, I know they have presses and lathes but I don’t know machine shop all that much, but if something broke, he would literally change his hat, put on some whatever, and head out there to the shop and get greasy and fix the machines, and I’m like, “So I gotta hire a mechanic, a sales guy and a CEO to run this,” and it was more than that, but a lot of business owners don’t realize how many they’re wearing, and how hard it is to transfer the business when you’re wearing that many hats.
Laurie Barkman:
Yeah, and you might take a look at that machine shop, but you’re certainly not going to pay a premium for it and you might even pay less for that business than someone else might be willing to.
Ron Skelton:
That particular one, he would have had to double the revenue we had in order for me to afford to bring on the team it took to run that business and so he would have to almost double in size. He was at a point where I could replace him and maybe the sales guy, but it was going to be lean and eat up every bit of their operating cash flow to keep those people employed, and I don’t know anybody that – you’ve heard of fractional CEOs and fractional chief marketing officers – I haven’t heard of a fractional mechanic, so I don’t know that you could do that, and it’s not just him. There’s a lot of that. We talked a little bit. I own a pest control company. The first reason I hired mentors as my first purchase was a mistake. I bought something way too small but as I talked to the other guys, I haven’t acquired a second one because I’ve seen ones with 10 techs out on there, six or eight trucks, and the owner is still owner operator, he’s wearing 2, 3, 4, 5 hats and they don’t see when you start trying to do the math and move like, “Okay, we’re gonna have to hire this guy, your profit really isn’t what you say it is.” Because that one guy is working 100 hours a week. I’m 50 and have two kids. I have no interest in working 100 hours a week. I did it when I was in my 20s in the tech industry. It’s hard. It was hard in your 20s. I have no interest in it now.
Laurie Barkman:
Well, and when’s the last time they took a vacation? It’s a great question. When’s the last time you took a vacation? By the way, did you check email and do phone calls all day? Or did you really disconnect? That’s a telling question, if people are anticipating that, I actually asked that, like that.
Ron Skelton:
They don’t even get why I’m asking a lot of times like, “Hey, what’s the last time you took a vacation?” They’re like, “Oh, cool. What did you do? Where did you go? Alright, was it fun? Did you get interrupted or anything?” I am intriguingly interested in their vacation, but the underlying score I’m looking for is, “Yeah, I got to go to the Bahamas for three weeks and nobody bugged me.” Most of them, like, “I went up to the lake and worked when the kids were out at the water stuff, I was on my laptop doing stuff.” Like, that’s not vacation.
Laurie Barkman:
How do you value a deal? You mentioned EBITDA as a typical factor in some of these smaller businesses, are you doing normalized net income, and what might move that number up or down?
Ron Skelton:
It’s an interesting thing, I talk about this a lot. If you look at all the different models, I think, the running joke is like MIT has 140 plus valuation models. I use multiple EBITDA and before everybody sends you messages and tells you that’s a really bad idea, it’s really soft. For me, the first thing I do on the phone when I’m talking to a business owner, if they bring up numbers right off the bat, I disagree with whatever they say. If they say they want 1.5 million for the business, like, “Awesome, let’s see how we can get you there.” It’s exactly how I answer it, because I don’t know anything yet. I haven’t seen their financials, it’s just awesome to see how we can get you there. Sometimes to get you there you need to double your income, your revenue before we can get you there. I have a rule of thumb, and it’s kind of like the same thing in the real estate space, if I can make the deal work and it makes sense. The reason I like 3x models, I know that the money comes back within the first three years, if you I can see a path to profitability, and it’s really going to work and in a three to five year frame, I’ll pretty much work with any other business owners and I do that multiple of EBITDA plus hard assets, because I like real estate, so if they own their building and stuff, I want to acquire it too or I want to use that as part of the deal.
Laurie Barkman:
What might be some of those reasons that you’d move it up or down? We talked about transferability, we talked about the role of the owner. What are some other things? You mentioned niche businesses, like the marketing companies that you referred to. What might be some other factors that could move that number up or down?
Ron Skelton:
I love the recurring revenue model, I think it may be because I have a real estate background. If you’ve got a high base and really solid contracts that have paid you month in and month out, you do repeat work, that’s one or if you have a recurring model, like a subscription model of some sort, where they’re expected to pay you every month, those get higher multiple and I don’t know of any mergers and acquisitions guys that don’t pay higher multiple for that. Other things for me is how well is it managed. How many hours a week is it going to take? I do everything pretty much from zoom or stuff. I’ve got interest in businesses here in town that I haven’t been to in two years. They’re five miles away, we do everything on Zoom, because I travel a bit and I don’t want them to expect me to come running over to the shop every time something happens. I’ve never even stepped inside the pest control. I’ve never even seen the storage facility where all the trucks and the equipment sit. I have an office over here where I keep the paperwork and I go to my office and they send me photos and I know it looks okay, but it’s 10 miles from here and I just never went over there in two years.
Laurie Barkman:
What are red flags that would make you walk or run away from a deal?
Ron Skelton:
I think to me an owner has to be easy to work with. I have kind of a no jerks policy. I use a different word on my own show but I have a no jerks policy, so if you’re not easy to work with, I know that once I buy this, especially if I’m buying something I haven’t run, I probably need to call you, occasionally say, “Hey, this just happened,” or, it would be easier if I could and I don’t want to buy anything from somebody who’s just constantly being hard to deal with or unpleasant to deal with. I’m just not interested. Life’s too short for that. The other one is, I get it, I used to have the expectation that you’ve cleaned up your books and stuff but I’ve had a couple of people on my show recently who had shown me the fallacy in my ways. These business owners, a lot of them are what he referred to as accidental business owners and I’ve adopted that phrase. They had a great product, people bought it, they grew a business around it, but they were never taught accounting and all that other stuff. They did what they needed to do to do their taxes and keep themselves out of trouble but for me to come in, even if they’re at the million dollar and above mark, for me to come in to a company that’s got 10 or less employees, or 15 or less employees and expect you to have perfect books is kind of a false narrative. It’s just not going to be there unless somebody has been grooming them for sale and a lot of times that grooming cannot be accurate either.
They’re trying too hard to put their best foot forward so I’ve changed that. I want clean books, I want to be able to understand it, I want to be able to see your three years of your tax returns, three years of your bank statements and know where the money’s going. I’m currently redesigning part of my little team here, so that if you’ve got your tax returns and your bank statements, I can construct what the profit and loss should look like, and the balance sheet should look like. If you have them or not, I’m okay with that. I know people… I’ve met people in the last year that are running a business to earn 2 million a year and they’ve never created a profit and loss statement for anybody. They don’t know what a P&L looks like and they got good at building what they’re building, put their head down to start building them, selling them and next thing you know, they’re making more money than they thought they would with it, and it’s getting close to time to do something else.
Laurie Barkman:
Any particular deal terms you usually work with? Say earnouts or any long term agreements, anything of note that you found are more or less acceptable to business owners, and what they’re looking for?
Ron Skelton:
It’s interesting. I told you I’m interested in ones that are not perfect, yet. One of the biggest push backs I’ve ever seen was I put a clause inside of mine on the LOI that says I have 45 days after the due diligence process that if skeletons pop up or whatever, I can unwind it. I can basically hand your business back and expect what monies I’ve put forward back. Just for the ones that left some questionable stuff. You just don’t know how they got where they are and I got a lot of pushback from that. A lot of people were like, “I don’t want you at the end of the spectrum. I’m done.” They’re like, “Don’t give it back to me,” and I was a little shocked. I actually had an offer that went out. It seemed like I had a $1 offer on a $13 million company, I offered him $1 down and it was to take over four and a half million dollars of their debt and just because their books were so thrashed, I thought it was gonna get thrown in my face. As a matter of fact, the Marine Corps friend of mine, prior Marine, just tough as nails actually, that performance coach told me I should be playing a bigger job. I mean, playing a bigger game. I brought him in on the deal and he’s really good with keeping people’s heads straight. When I slid that offer across the table, he puts on his mask, jumps up and heads to the bathroom like kind of green and he thought they were gonna wad it up, throw it in my face. Dollar down, $30 million a year run rate revenue on a concrete company and I offered him $1, don’t take over their debt because their books were just thrashed, and we couldn’t put them back together and they weren’t given a certain thing so I was like, “Okay, we’ll take this on,” but we put a 90 day unwind clause in there and she was really concerned that I was gonna get in there, start cleaning up things and hand it back to her.
Laurie Barkman:
Yep, didn’t want that, so did they successfully take it out of the agreement, or did you insist on staying in?
Ron Skelton:
No, I insisted upon it and they actually gave us a verbal okay and then because some of that debt was that I said it was four and a half million dollars of that. One of them was a federal institution and the other one was their bank so they owed over a million dollars and they owned another company, I mean, another federal institution. I gotta be careful because you can deduct it. This is Oklahoma. The people listening can probably figure out who this is but they owe one of the federal government entities nearly a million dollars and when they told them that we were going to take over the debt, both the bank and that particular three letter agency said no so they had to fix their financials so the deal didn’t go through, not because they didn’t say no, I mean, they didn’t say yes, the deal got stopped because both the bank was a little more interested in it than the other entity, but they were like, “We’re not letting you off the hook for liability of this, you created this mess.” I’ll be honest, we had already hired an attorney and we’d already retained an attorney to negotiate that one way down, because they’d never had it reviewed and never had their their financials audited and they’ve never challenged that amount that was owed and I know an attorney here in town, that’s what they do.
Laurie Barkman:
Okay, well, that’s a good thing for I think, listeners to hear. There may be third parties who have input on a deal that you need to consider. Other examples that pop up are landlords, for example, or if you’re a franchise, the franchisor so what you just shared is a really good example. Ultimately, what I do sometimes when I start working with a client is, let’s take a look at all of your assets and maybe they’re tangible or intangible. What are those things? Are they transferable? If you have a lot of contracts and that’s what makes your business valuable and why someone’s interested in it, how transferable are they? That will also impact the type of transaction. Is it going to be an asset sale or an entity sale? In that situation you were just talking about, you’re going to assume the debt so that was going to be an entity sale? Correct?
Ron Skelton:
Right. We were going to take over the entity and the debt on tha. It was a hybrid. We were going to do an asset transfer. They had quite a bit of equipment so we were going to do an asset transfer for a lot of them. They had 50 something vehicles. 26 acre facility. They had semis, they had a transportation unit, had an 8 or 10 semi to move concrete items around and so we were going to do an asset transfer. Then what you said, the entity transfer, the one reason we weren’t going to do that is… there’s some reasons, there’s some justification for splitting up that company. Day one, we were going to split it into a welding shop, because they had a full staff 24/7 that made all the hinges, doors and everything, and they had the opportunity to make some stuff for other people and then they had the concrete and then they had a transportation company with multiple semis and stuff and that transportation company had some issues, they had auto accidents so the liability of that to separate it off into its own entity was kind of where we were headed.
Laurie Barkman:
Gotcha. Then there’s also different tax treatment in those two different types of transactions. That makes sense. As we start to wind down here, I want to ask you, what’s one thing that you would advise people thinking about selling their company one day? What’s the one thing they should be thinking about?
Ron Skelton:
I think the one thing you want to think about is, it’s not an overnight process. You decide to sell your business today, we’re going to look at your July last year track record. I call your last three years’ track record. Tax returns, financials, bank statements for the business, something to give us a longer term view, at least three years’ view of where you’ve been and where you’re going. You can’t just start packaging up today and slightly decide to sell unless you’ve been running well for the last couple of years. The other thing is, I learned this last year, I always thought people sold to the highest and best offer. I would say more than probably 80% of these deals don’t go that route. They’re looking for the safest pair of hands so understand what you want in your buyer. If you think it’s money, I think when you get down to it towards the end, you’ll figure out that it’s not so much the money. The money will probably be close between the top two or three potential buyers, but there are things out there that you’re going to want more than money like are your employees safe?
Laurie Barkman:
That’s a great takeaway. A lot of times we do think it’s a myth that it is gonna go to the top buyer with the highest price. I do hear that often also, that it’s more about fit or there’s other reasons that make that deal interesting to the seller, and it’s a good message to share so I appreciate you sharing that. If people want to get in touch with you and maybe also, of course happy to help anyone wanting to talk about it with me as well, but if they want to reach out to you directly, Ron, and they have a business to sell, what’s some of the criteria you’re looking for whether or not it’s a fit at the get go?
Ron Skelton:
Okay, so I want you to be really well run. Usually that means you’ve got 10 or more employees. If you employ something like EOS and you’re really good at it, I’ll look at a smaller one. Revenue is a million dollars a year or more and you have a general manager in mind or somebody who can take over the day to day operations. Or you’ve got it set up to where it’s documented what you do on a day to day basis, because I’m not an owner operator, when I buy it, I’m going to be the chairman of your board, I’m going to pick somebody externally or internally to be your general manager. Those guys will report to me on a weekly basis, after we build trust, probably bi-weekly or monthly, and then we do big quarterly planning sessions, so the cleaner you have it, and the more ability that has to run with the team that’s there, that’s what I’m looking for.
Laurie Barkman:
Gotcha. Any industry, any geography?
Ron Skelton:
I love home service businesses, and I’ll probably do them just about anywhere. That includes everything from fairly large cleaning services, I own a little pest control, probably not pest control in other states because of the regulatory but if you can think of fence companies, pretty much anything that has to do with the home services I’d be interested in, especially when I can cross sell and upsell them so a fence company and a pool cleaning company would be a great fit if I can find them both in same market, every time the pool cleaner goes, he sees that fence. Every city has requirements for safety standards and zoning requirements on the fence that goes around swimming pools, so there’s an easy cross sell and upsell there. Same thing with yard and yard maintenance, landscaping, that type of stuff, those three would go together so I’m interested in that. I have some guys who are working together in the auto space. Auto repair, towing, just like boring brick and mortar type companies. They’ve been around, keep jobs in your local market, those kinds of things. I’ll tell you what I’m not interested in, like restaurants. A lot of work and a lot of passion has to go into owning a restaurant. If you’re not passionate about that restaurant, it’s gonna be a tough one to run. These historically have a low profit margin. Anything highly regulated, not interested in, so veterinarian services, that type of stuff, where you have to set up specialty entities that I’m not interested in.
Laurie Barkman:
Gotcha. Okay. Well, I ask all my guests if they have a favorite saying or quote about entrepreneurship or leadership? Is there anything that comes to mind for you?
Ron Skelton:
Yeah, I’m gonna butcher it. I know I am. It’s Zig Ziglar. If you can have anything in the world you want if you help others get what they want, that’s the gist of it but I truly operate with what I refer to as a heart of service. I answer my phone on a regular basis, “How may I be of service?” I get off the phone even after I get off this podcast, like the question I asked myself, did I really provide value to them? I do that, after every podcast I have on my show. How can I further their game? How can I be of service getting people what they want? I truly believe Zig Ziglar, I don’t know if he got that quote from somebody else or where he pulled it from or how he came up with the idea but to help other people get where they want to go will get you anywhere you want to be. I’m a big fan of that.
Laurie Barkman:
I’m a big fan too. That’s awesome. How can people connect with you? What’s a good way to find you?
Ron Skelton:
I think the easiest way is LinkedIn. If you go to LinkedIn, it’s linkedin.com/in/ronskelton. If you look up Ronald Skelton, I’m probably the only real bald headed guy with a lungo tee that’s doing M&A on there. I’m pretty good.
Laurie Barkman:
Bet you are.
Ron Skelton:
I have a distinct enough look. When I first got into M&A, I actually had – my beard was a little longer and one of the guys in that marketing roll up, said, “He kind of looked like a biker, like the guy shows rolls up on a Harley,” and so I shaved it way down nice and neat and clean and I realized it didn’t make any difference whatsoever so this is about as long as I’ll let it get but it was longer.
Laurie Barkman:
Well, just one question for fun. What’s one thing that I would be surprised to learn about you?
Ron Skelton:
It’s been a while. I taught martial arts for 18 years, so it’s hand to hand combat and I used to think it was fun to go work in nightclubs to see if it worked so I’ve worked some rugby bars and worse places, been stabbed twice and had guns in my face and the goal was never have to put my hands on anybody or never have to swing at anybody I should say, but got old, got lazy, I guess, blew my knees out and gained a bunch of weight but I was an adrenaline junkie as a youth.
Laurie Barkman:
What kind of adrenaline?
Ron Skelton:
Motorcycle racing, motocross, skydiving, bungee jump, and you name it, I’ve done it. Freediving in Hawaii for three years in the middle of night with tiger sharks swimming around.
Laurie Barkman:
You are an adventurer.
Ron Skelton:
I got old. I turned 50. I joke around, I’ve had 60 surgeries and I gained a bunch of weight. I tell people, I’m twice the man I used to be.
Laurie Barkman:
Yeah, Ron, you’re great to talk to. It was a pleasure to be on your show and again, thank you so much for coming on Succession Stories and sharing your words of wisdom, your experience with us. I really appreciate it.
Ron Skelton:
Awesome. Well, I appreciate being here and if anybody ever needs anything, I’ll finish this off, it’s like, how can I be of service?
Laurie Barkman:
Listeners, thank you so much for tuning in. You can always catch Succession Stories on any of your favorite podcast players or YouTube. Don’t forget to like and subscribe to the show! If you want to maximize the value of your business and plan for future transition, reach out to me for a complimentary assessment at meetlauriebarkman.com. Tune in next week for more insights from transition to transaction. Until then…here’s to your success.
My objective is for you to have a lucrative and successful succession. If you want to understand the value of your company today, the potential net proceeds of a transaction, and your financial needs after you leave the business, that’s a great place to start. The sooner you understand these numbers, the more time you’ll have to close the gap, if there is one. Take the next step by requesting an initial meeting to begin planning for your business transition and strategic exit today. Request a call with me at meetlauriebarkman.com.
