How Jessica Fialkovich Helps to Prepare Businesses to Exit Ep. 45

So you have to give yourself enough time, because if you shorten your timeframe to sell, the only trick you have up your sleeve is discounting your price. That's the only thing you can do as a fire sale.

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Today, we're talking to Jessica Fialkovich. She became a first-time entrepreneur at the age of 25. Incense has been able to successfully establish, develop and sell multiple small businesses in a number of different industries. She tells us why you should be building to sell. Even if you don't intend on exiting your business, how to figure out how much your business is worth and what not to do. When trying to sell. Now, let's get right into it.

My first business was a wine store called Decanted. We started it from scratch. My husband and I were living in Aspen, Colorado. At the time it was 2009. We were working in corporate. We were financed by this little bank called Lehman Brothers. So that's going to work out so well for us.

Well, it did in the grand scheme of things, and we had these friends that had a very successful boutique wine store in. And we're like, this is super cool. Now granted we're 25 at the time. Right? So they make a lot of money at the time. We thought it was a lot of money and they get to drink wine all day.

We're like, let's do that. So we relocated back down to Southern Florida to be closer to my in-laws and we basically, you know, ripped off with their blessing. When you opened this boutique little wine store in Naples, Florida just started like not knowing anything. And then we were able actually to dive into collectors wine and we started trading wine at auction houses and you know, the US, Canada, HongKong and it became this big thing we never planned on, but that was our first business.

Okay. But what happened to that business? We sold it.

So about three years in. Our major profit area was this collectible wine. So like we're talking wine that sells for 500$ to $25,000 a bottle. Crazy! Right? But what happened was there was nobody doing this online at that time.

This is 2009 to 2012 until this guy named Gary Vaynerchuk came along. And a lot of people don't know, but Gary V started in the wine industry. That's where his background was. So a lot of wine retailers followed him online. So in 2012, we saw this glut of people come online. And really then all you can compete on is price, right?

You've got your product and you're just competing on price. So we started to see our margins erode and we were ready for something new. So in 2012, we listed and sold the business and exited the wine industry. That was a fun three years. We learned a lot in a way more about grapes and I probably ever would have said.

Okay, so did you know about buying and selling, mergers and acquisitions at all at that point?

No, I didn't and it was funny because we did know. I mean, like I said, we were young, right? So we knew we were going into this business with an exit in mind. We knew we were going to sell it and do something. But I didn't know how that would work or whatever, that was like our mindset.

But when it came to 2012 was actually skiing back in Colorado, March of 2012. And I had an epiphany that like, I just want to be back in Colorado. We just need to get out of this. So I was like, I don't even know how to go about doing this. And we're not like a company that some big multinational corporations going to buy, right?

Like total wine's not going to buy us. So how do we do this? And we asked a lot of our advisors, a lot of our friends and colleagues, and I'm like, how do you sell a small business? And it really like about three to 4 million in revenue at the time. No one knew how to do it. So we got introduced to the one business broker in town, and that was our only choice.

And we fumbled through that transaction. I mean, I look back at it now and the experience I have now in mergers and acquisitions, and we were really lucky that we fumbled through it and came out on top and we didn't make any major mistakes, but we had no idea about it. And there was really no resources to help us either.

Is that what led you to Transworld?

Yeah. I mean, that was the main precipitous. When we sold that business, we had nothing in mind. Like I was running away from our business. I was done with retail. I was done with wine. I wanted something new, but I didn't know what I was running towards. So we took about six months off.

We toured north America, the US and Canada. And we just kept coming back to like, we're kept talking about our transaction and how we felt like there was just such a lack of resources in that area. So when we landed in Denver, our current company Transworld was actually up for sale. So it was kind of like one of those fortuitous moments that -

How did you find out that it was for sale?

So I started doing some research on business brokerage in general, in the market. And like, why isn't this like a thing? And I did find out it is a market place. But it's like one of those best kept secret type things. Right. Nobody knows about it. So I started investigating a number of different national brands and solo brands, local brands and things like that.

And that's when I stumbled across the office that was for sale in Denver. And I was like, all right, this is like the universe telling me something. And then other weird things happen when Transworld's a franchise. So we're franchisees. We don't. I think now 20 or 25 territories across the country. So when I went to go meet the CEO, he's from one of the same small towns that my husband and I are from in New Jersey.

And I was like, all right, the universe is telling me like, this is the direction we need to go. Right. So that's where I found my passion was that I went through this journey as an entrepreneur where I felt really supported in my growth as of starting a business and then in growing a business. But then when I decided, "Hey, I want to exit."

I felt like there was no support there. And that's the passion that started our brokerage practice of, I wanted to really bring those resources to small business owners and really what continues to help me thrive today.

And talk to me about the franchise model. I don't know much about it specifically. You were talking about how many territories you have. Is that a different franchise license? How does that work?

Yeah, franchising is pretty unique. I think the benefits for us is that you can operate as a large company was still independently owning your own business, right? So you get all the benefits of the branding co-oping on certain like costs and things like that.

But usually how you purchase a franchise is either you purchase a location or a territory. So you, if you're buying Dunkin Donuts, right, you have a location. Specific location is protected by a radius where nobody else can put another Dunkin Donuts say within five miles. When you're looking at franchising from a more B2B perspective where you don't necessarily have a physical location, they break them up into what's called Exclusive Marketing Territories.

And that just means that no other franchisee can enter that territory and do the same business under the same brand. So it's basically. And some franchise or sell it as counties or blocks of zip codes or things like that, your exclusive right to market or own that business in that area.

Okay. Recap for me and for the listeners, you've bought the franchise for the location and then you're.

Doing well, and you want to expand, it's not buying another franchise license, but it's buying more of what do they do? They sell them in tokens?

Like, I mean, this element territories. So we've done it a couple of different ways. I mean, we started early on with our franchise brand, actually our first transaction, we bought another franchisee out.

So we did an acquisition from another franchise. And then you can continue to do it that way you can buy your colleagues out, right? So there's almost like an internal buy and sell marketplace within each franchise. The one that's most famous for it is like, McDonald's you, can't just like as a solo entrepreneur, go out and buy a McDonald's because all the McDonald's trade within the McDonald's family.

So that's what we did for a lot of our transactions and how we grew, but then you can also just buy from the franchise or this new territory that no one's developed yet. So for example, like Eastern Colorado, no one had Eastern Colorado. There's not a whole lot out there. It looks like. So that was just, we bought the franchise license or the franchise right directly from the franchise, or, but like when we entered Dallas last year, somebody already owned that office and we just acquired it from them. Like you would buy any other business.

Do you find yourself now that you know, the "ins" and "outs" of acquiring businesses with the shiny object syndrome and going, okay, I want that one. Oh my God. What a good deal. Oh, we could flip this one.

I mean, sometimes I do, honestly. I love our business so much. I love MNA. I love business brokerage. That it's really hard for me to get excited about another industry. So, I mean, I do it within our business brokerage company. Like, I don't know how many acquisitions we've done. I mean, recently we've done three acquisitions in the last 18 months. The other business brokers.

That's where I get passionate about. I was like, oh, now I can grow my business this way within my industry.

Right.

But we haven't really gone outside of our industry. We've really stayed true to what we are. You have the entrepreneurial dream, right. Or gene where like something will pop up across my desk.

And I'm like, wow, what if we just consolidated all landscaping companies in the Denver? And then I'm like, no, that's not my gig. Right.

But you did start a business or you acquired a business. I might not get it right. But I think it's modern assistance with your sister.

Yeah. So my sister, I acted as her silent partner slash financier.

We had a client come to us and she was looking for something new. It's a virtual assistant company. So we were able to acquire that almost five years ago. So things do pop up like that. We have to be careful with doing business with family and friends, but I knew my sister, I knew she knew what she was doing.

So, and if it really well into, she had a social media practice, so it really fit well into what she already had.

Right. So you have Transworld and you have the licenses for lots of territories and you started Exit Factor. Right? So talk to us about that.

Exit Factor that the extension Transworld and what we're doing in business brokerage.

So what I found over the last one was 10 years in business brokerage. People come to us and they want to buy or sell a business, but there's a lot of education and prep work to really get a deal done correctly. Specifically on the sell side, I'd say 90% to 95% of our clients will come to us and they'll say, "Hey, Jess, I'm done. I want to sell next month." And it's usually not that easy. It takes some time. It takes about eight months to get a deal done. There's some prep work that needs to be done. And we see a lot of our clients leave a ton of money on the table because they haven't designed a business that's worth what a buyer is looking to pay for.

So what Exit Factor does, is it 12 month coaching program to take people through that preparation process? We have both on the buy and sell side, but you know, preparing to sell their business and really designing it, using our knowledge of what business buyers will pay for designing it, to get the maximum value out of what the buyers are seeking for in the marketplace today.

So it's definitely to help us get some more deals done is to help our clients get more money out of their deals. Again, it kind of stems back to that whole first story with the Canada's, like that's really what I needed back when, I first started thinking about selling, I didn't understand the process. I didn't understand like how a buyer would buy my business or they have paid for.

And Exit Factor really takes our clients through that. So then when they go to market, they get more money for their business and they're more likely to sell to because not all business is sell.

I love that you created something and are monetizing it. That is actually taking away a pain point that you have in educating tire kickers or people too early in the process.

So instead of spending a lot of time giving free advice. You've flipped it. And now you're charging for this advice that people have to have in order to do a good seller, a buy, which I think is wonderful. So what are your goals for both businesses?

That's a great question. I want to elevate more small businesses getting sold.

So the stats are a little fuzzy, but like if you look at all small businesses across the US only about 13% of them ever sell. So, if you think about that, that's like 87% when they exit, that means they're going out of business. And I mean, it hurts the economy, the local economy, it hurts jobs. It hurts individual people.

So my goal is to elevate that stat is really to get that stat. And I don't know if I can take it from 13% to 20% to maybe by the time I retire 50% or hate, but at least for our clients, I want to elevate that stat and make sure that they are able to exit because it's not just about the owners getting their money.

But like I said, there's all these other stakeholders that are affected in the transaction. And I feel like by integrating the two processes of Exit Factor, getting people ready to sell, and then delivering a really good business brokerage or sales experience, we can do that. That's my ultimate goal.

You've helped me just by listening to your speech that you were developing in the course we took together, but 20 years ago, when I started Entire Productions, if somebody said, what's your exit plan? I think at 20 years ago, I wouldn't have known what they were talking about. And then if somebody said, "Oh, are you going to ever sell your business?"

Oh, I was so proud. And so young, I was like, "Oh no, never." This is what I want to do. This is everything I am. This is my baby, et cetera, et cetera. As I got older and older, even as late, earlier, recent as 2015. I was asked this question and I wasn't budging, my daughter doesn't want the business. She loved probably the profit if I sold the business.

But so I was like, no, you know, I have to do it until I retire or die, but I'm starting to understand the possibility of illness or there are some things that happen that I've learned from you that come into play. And it's usually all of a sudden you haven't planned for it. And if you haven't planned for it and you're not building your business to sell eventually, even if you're never going to sell it, you could be in trouble.

So thank you for that. And hopefully people listening to this. Podcasts will think, oh, there's a point there. It doesn't matter. I mean, it just depends on what your lens is and where you are in life and how you grow up and all these things. So I want to ask you another question about your industry. Do you know the benchmark for profit in your M and A business?

No, not really. Our industry is still a little small and I'd say antiquated in terms of sharing numbers and things like that. So I don't know. So I run our business off of scaling up, which we're both familiar with through Entrepreneurs Organization.

Just sovereign yesterday.

Yeah, benchmark against our industry or benchmark against successful entrepreneurs that I've seen across industries.

What net profit percentage would make your heart sing?

So I try and focus somewhere between 10 to 15%. And it's also like, uh, I think Greg Crabtree writes about it in simple numbers too, which is a great resource. And he talks about how at 5% the businesses like you're on the brain, right.

And at 10% you're doing well. If you get north of 15%, you need to start thinking about reinvesting. And I learned that through Entrepreneurs Organization. And that's kind of been the metric that we've been working off of. So we try and stay between 10 to 15% net every year with our business units.

It's dependent on what expenses you run through the business and how you allocate them. And I learned a little bit about that from you as well. But everything I learned, I tried to make sure that other people are getting that information because I'm like, wait, you don't know this, but stop running those expenses through your business. Because if you go to try to sell, even if they're very neatly tightly organized in a line item, it's not as powerful. Thank you. Just them.

You're welcome. Yeah. And there's ways to do it differently. Like there's ways to still reduce your tax liability. Right. Without having to run all the expenses. But I mean, we've all had accountants that at the end of the year, you make a bunch of profit and they're like, oh, well, you better spend it.

Right. So you don't have to pay taxes on it. And that's not a good strategy when you're getting ready to sell or developing value in the company. So that's a message. And again, it was one that I was told as an early entrepreneur, right. When I owned our first business, it's like, if you hold onto the money, then you're going to pay all the taxes on it.

You should just get rid of it. It's not great advice. Right.

When did you join Entrepreneurs Organization? Was it during wine time or was it after you bought Transworld.

It was after I bought Transworld. I first got introduced to EO late in 2014. So my first business, it was just my husband and I and our staff. And I did it all on my own.

I was young and like, just, probably didn't know what, I didn't know. So I was introduced to EO in 2014. I joined actually the accelerator program, which is for newer businesses and smaller businesses in 2015. And then since then, like, yeah, I've grown with the organization. I've served on the board, we've done all kinds of learning retreats together.

So it's really impacted our business a lot.

What is one of the biggest challenges you're facing right now in your current business?

I think the biggest challenge we're facing is just look, the world that we're in is changing so fast. So, I guess we're still in a pandemic, right? We're not quite out of it.

We've got a lot of different things that are changing from regulatory standpoints and things like that. And our business by nature, we're called what generalists. So like when we're doing transactions for businesses, we're not just doing one. We're usually working with multiple industries. We have 30 brokers on our team with experience.

So the hardest thing for us is keeping up with all the changes that are not as just affecting one or two of our client industries, but all of them at the same. And it's an incredible learning experience for all of us as entrepreneurs on the team, but it's also very, very difficult to keep up.

Everything's moving very quickly right now.

Why not niched down and only serve a certain type of business so that you don't have that giant learning curve.

Yeah. And it does make sense if we were a smaller shop when we do have 30 plus brokers on our team, each of those brokers do have their own niches.

But then from a management perspective, we're managing all of those. It's also not a big enough market. Like there's not enough coffee shops that sell in Colorado on an annual basis for us to make a living off of. Right. So, yeah, and our niche really in our industry, it comes down to geography. So a lot of small to midsize businesses still want face-to-face interaction, even in the days of zoom.

So being close to them matters. And then also size of company. So how our industry is split up as business brokers typically work with companies that are between, say zero and 10 to 20 million in value. Then you have boutique investment banks that come in from about 20 million to a billion. And then you have large multinational investment banks like UBS, Morgan Stanley that are, do billion dollar plus transactions.

So that's how our niches are broken down versus the traditional industry that you see in a lot of other businesses.

I want to know what your exit strategy is. We have other questions that I want you to answer, but I don't want to miss out. So what are you planning?

Yeah, so I mean, you know, I talk about in my keynote is to have exit options, right?

So it's never just like one strategy. So how do I set up my company? No matter what happens. And you brought this up. Most of our clients, most people who sell their businesses is because of a personal issue. It could be an opportunity, they had. It could be an illness, something like that. So what I've done is set up options in our business.

So our first option is, and as an internal sale, which is selling to our brokers and our employees, and we already do have some shareholders in our company that would just be able to take that. So that's our first option in the business. Our second option is to sell to a third party, which would be taking it to the marketplace, which hopefully we can do that fairly well, considering that what we do for a living, but setting up certain processes, procedures, you talked about numbers that would make it attractive to a third party in the marketplace.

And then the third option, which I talk about is a very viable option for a lot of business owners is just to wind it down. So we would sell off pieces of the business, kind of just get what we could for it. And we'd take all the cash that we can out of the business. And we'd shut it down. Obviously that's my option C right.

But I've designed systems that like, here's how we're going to execute option A, option B, option C, and we can put that plan into action anytime. So it doesn't matter what happens to us tomorrow as a husband and wife. And we have it also like in our life insurance policies and our buy sells and things like that.

So we've been really strategic about it, probably more so than most business owners would be because of what we do. But that's what I tell a lot of people like just to have some options on the table.

Sometimes though, Jessica people that provide the service as their business, aren't great at having that service for themselves. So good for you. And what multiple would in you're a service-based business. What multiple would you be looking at or selling?

Our industry's hard? So our industry wouldn't sell like as a traditional multiple, they would definitely look at our client base and we probably sell more as a percentage of revenue and it's highly negotiable.

So one big problem with our industry. It's very transactional. So a lot of buyers want some type of recurring revenue and we're not talking about. Netflix memberships that hit your credit card every month, but they want some type of predictable revenue. Right? The hardest part in our business is that most people don't sell multiple companies over their lifetime.

There's a few, right. We have a few recurring clients, but we're usually out there hunting and killing everything we need for every next quarter, which is going to hurt us from a multiple perspective. So we can't really sell on a traditional multiple. So if we took it to the marketplace, it would be.

Highland negotiable, depending on our pipeline, all that kind of stuff. And I say, number the buyers is number, and then it just comes back to who's the best negotiator at that point.

Right. So business valuation, I know that this is a burning question for pretty much any entrepreneur. How much is their business worth? Speak to that.

Yeah. It's the number one question we get. So besides what I just said, almost all industries will sell for multiple earnings. And your multiple of earnings is usually defined by a number called EBITDA, which is your Earnings Before Interest Taxes Depreciation Amortization. So basically your net profit plus all of those things added back.

If you're a really small business, sometimes we'll add back the owner salary too. And that's what was called Seller's Discretionary Earnings. So that's your earnings number, then a multiple is applied to that number based on your industry, the size of your company, and then a bunch of qualitative factors.

Right? So if I run a comp report and we have these private databases where I can see, tell me what restaurants are selling for in San Francisco. The last 10 years that do between one and 5 million. And you'll come up with a range. So let's say that range is two to three times. EBITDA. What makes you a two versus a two and a half versus a three is the qualitative factors.

That's where we pull in the stuff was like, what are the buyers asking for at this point in the marketplace? Like right now we talked about recurring revenues, important on longevity. And some stability is super important, especially what we just went through. Like show me, you can still be profitable through something like a pandemic.

And it's usually about profit. It's not about revenue. And then we've seen that a lot in the last, you know, 24 months.

Well, that would be good for me.

Yeah. It's a lot of buyers they're focused on the profit, because if you think about it, if you put yourself in the buyer's shoes, you're buying something, you're making an investment, right.

And you want to return on that investment and that's in profit. You can't spend revenue. If it results in $0, the bottom line. So buyers are really focused on profit. So that's what you have your earnings number. You apply the multiple, and then that multiple ranges is going to depend on honestly how well the company is run.

Like what's your competitive advantages in these companies? So that's the overview evaluation. I do tell people, you have to be careful, not everything on the Internet's true. Unfortunately. So it is well worth. If you're thinking about going down this path, or even if you just want to have a baseline getting evaluation done, most business brokers will do that for you for like $2,500 or less.

I know there's companies out there that charge way more than that, but you can get that baseline done fairly inexpensively and you can get a full comp report of what other companies like yours are selling for.

Very good information. Okay. This is one of the questions that you said you could talk about, and these are two random, there's so many questions that we have that actually people that are listening, Jessica can answer basically all of them, but what are the mistakes to avoid when selling or preparing to sell a business?

Yeah, I mean, first is it giving yourself enough time? I had a client come to, I'll say a prospect come to us today. Cause I don't know if we're going to be able to sell it and we're sitting here, it's like, mid-October right. And he's like, I want to sell by black Friday. Like, okay. That's nearly impossible.

Right? So like I said, it takes about eight to nine months to get a deal done. There's just a lot of moving parts. It's not like selling a house. So you have to give yourself enough time, because if you shorten your timeframe to sell, the only trick you have up your sleeve is discounting your price. That's the only thing you can do as a fire sale.

So that's the first one. The second big one is removing the. So I've got a book coming out, actually in Q1 of 2022. When we talk a lot about this in the book, but like removing the business as like your baby, the businesses is like financial asset that you've built and you can't be so sensitive about what's going to be said about the business.

So I see a lot of business owners get tripped that on ego or taking things too personally, through the process. It's a trying process. Like you can feel like people are picking apart your business. And I felt like this too. Like you have brokers like going through your financials and attorneys and CPAs, and then the buyers doing this whole due diligence process.

And if you take it personally or get defensive, it can turn a buyer off and kill some deals. And we see that. The last one too is like, and this is mainly with our older clients, but like don't stake your entire retirement on a business sale. There's a lot of things that can go wrong. There's a lot of things which will make a deal, not happen.

And I've seen way too many entrepreneurs sink everything that they own into a business in hopes of I'm going to have that giant exit one day. Well, that's a unicorn and unfortunately it's not going to happen for most of us. So, saving along the way. And then if you do have a nice exit that's great. But it's a sad day for our team.

When we have somebody come in, that's older that has no retirement savings and whatever we can get them is all that they're going to have. So those are the three big mistakes. I see a lot.

Jessica is a treasure trove of information and an incredible resource for those wanting to know how to get their businesses and shaped, to sell. For more information, please go to the show notes where you're listening to this podcast. Want to know more about me, go to my website, OfficialNatashaMiller.com. Thank you so much for listening. I hope you loved the show. If you did, please subscribe also, if you haven't done so yet, please leave a review where you're listening to this podcast now, I'm Natasha Miller and you've been listening to FASCINATING ENTREPRENEURS.