In this episode, host Bob Preston and guest Dylan McGrath discuss how to prepare a property management company for acquisition, what is involved in the process, and various valuation models. If you have ever wondered what it would be like to sell your business and what steps would be involved, this episode is a must-listen!
- Costs to engage a business broker
- Models for valuing a property management business
- Structuring of a property management business sale
- Due diligence and information exchanged
00:00 Introduction and Dylan’s background
04:54 Getting started in selling a property management company?
08:42 Fees paid to a business broker
12:14 Due diligence process and information exchanged
16:23 Valuation models for property management companies
21:11 Structuring the purchase arrangement: asset sale vs. stock sale
25:58 The current state of company valuations
32:05 Steps involved in closing the sale
46:49 Clawback provisions in an agreement
49:20 Closing comments and how to connect with Dylan
Connect Dylan McGrath: https://www.linkedin.com/in/dylanmcgrath
Episode 82 Featured Sponsor: RentScale
RentScale is the largest sales consulting and coaching company in the residential property management industry. Over 400 residential property management companies in North America have trusted RentScale to craft their custom sales playbook, install a repeatable selling system, and train their team to attract new property owners at profitable rates. (https://rentscale.com/)
Our Industry Icon Sponsors supporting the show:
VPM Solutions (https://www.vpmsolutions.com)
APM Help (https://www.apmhelp.com/)
Upkeep Media (https://www.upkeepmedia.com/)
Second Nature (https://www.secondnature.com/)
Connect with Bob Preston
This episode is always available for listening, sharing, or download at Property Management Brainstorm. Subscribe to Property Management Brainstorm on Apple Podcasts, Google Podcasts, Stitcher, Spotify, TuneIn, iHeart Radio and YouTube.
Transcript of This Episode
Intro and Episode Opening (00:00)
Bob Preston (01:27)
Hello, Brainstormers. This is Bob Preston, your host. I am happy to be here today broadcasting from our Property Management Brainstorm Studio in Del Mar, California. If you're new here, please subscribe for ongoing access to our great episodes. And if you like what you hear, please pay it forward with a positive review. Before we start today, I would like to shout out to our fantastic industry icon sponsors for helping support the show. Upkeep Media, SureVestor, VPM Solutions, Second Nature, Showdigs, Blanket, Latchel, APM Help, LeadSimple, and today's feature sponsor, RentScale, who you will hear more about in a brief mid-roll about halfway through the episode.
It's no secret that much consolidation has occurred in the property management industry over the past few years. Whether you want to be acquired or not, as a property management consultant, I always advocate with my clients that they have a succession plan or exit strategy. This provides a roadmap for the business owner to prepare for a transition at some point in the future and also provides staff members with the assurance that the company will be in good hands for many years. Preparing your property management company for acquisition is a significant task that involves various strategic, financial, and operational considerations. I know this because I've been through it. Today's guest on the show is an experienced business sales advisor, Dylan McGrath of SD Business Advisors. Dylan has been a business broker since 2010, advising companies on selling their businesses. He and I will discuss planning for an eventual sale of the business, preparing your company for a possible negotiation, and the steps involved when going through an acquisition. This is a great episode, so take your time and listen.
Bob Preston (03:06)
Hey Dylan, welcome to Property Management Brainstorm.
Dylan McGrath (03:09)
Hey, Bob, thank you. Good to see you.
Bob Preston (03:10)
Yeah, very good to see you too. I've been looking forward to this conversation today because there's been a lot of consolidation in the property management industry. I know you and I chatted about that over coffee a few weeks back, and I'm sure many of our listeners want to understand how selling their property management business would work, right? So this is great, and I always ask my guests to start by introducing themselves. So, let's roll with that. Why don't you tell us about yourself, your background, your company, and your business practice?
Dylan McGrath (03:40)
Sure, yeah, I'm happy to do that. So yeah, Dylan McGrath. I've been selling businesses for over 13 years now. The company I work with is SD Business Advisors. We're based here in San Diego. We've been in business for about 16 years now. So, we have a great team. We're up to about 18 different advisors who do what I do. I think there's strength in numbers and experience, right? Versus working for a one or two-person shop. There are a lot of advantages that I don't think we need to go into right now. Maybe those are things we can share with a potential client down the road. But yeah, that's just a little brief intro to me.
Bob Preston (04:20)
Terrific. Now you work on the company sales side. And I will use a term that our property management and real estate people will understand as the listing agent, right? I'm so euphemist, but it's like, is that an accurate description of what you do?
Dylan McGrath (04:35)
Yeah, that's right. We represent the seller exclusively in most of our transactions.
Bob Preston (04:40)
Okay, all right. And you've worked with many companies in selling their business. When someone comes to you and says, "Hey, Dylan, I'm thinking about selling my company. Would you be willing to represent us? What's the first conversation you would have with them about that?
Dylan McGrath (04:55)
Yeah, great question. You know, the first conversation I always tell people is very informal; of course, it's confidential. Is it a two-way interview? I'm not interested. Maybe we'll cover this question later. So perhaps I'll get it out of the way right now. I always tell people I only list businesses if I feel there's an extreme probability I'll be able to sell them. Right. As much as I love what I do, it's fascinating. I enjoy it. It has its challenges, ups and downs, and roller coasters. That's part of what makes it interesting and exciting for me. But, you know, we don't charge any monthly retainer. It would be very different if I knew I was getting monthly money from my client, right? So, since that's not the case, I'm highly incentivized to take the business to the closing table and go through that whole process.
Otherwise, I'm working for free, right? And I've got a wife and four children, and just like everyone, I have bills to pay. And so my first kind of conversation with them is, first and foremost, trying to learn more about their situation. Is there a genuine motivation to sell first and foremost, and what is that?
And then, second of all, I'm going to ask them some operational questions about their business. I want to learn more from a 30,000-foot view of what the company looks like and whether I can find a qualified, capable buyer interested in acquiring this type of business.
So yeah, that's in a nutshell. The first conversation is a two-way interview. And the first question that I always ask myself is, do I even like this person? Right? Do our personalities jive? Up to this point, has their communication flow been good, or has it been very intermittent, and they don't respond to my emails? And you can see the writing on the wall, I think, in business from someone if they're going to be an excellent fit from the outset. And so, indeed, I will pass on several opportunities because they don't fit my criteria.
Bob Preston (07:13)
It ultimately makes sense. And again, it's not too different from those of us in the property management industry, who are brokers or agents or property managers who must be careful about the clients they pick up. I remember, gosh, this goes back about 12 years ago. I tried to buy a business that was a little bit up the road from us in San Clemente, California. And we got far into it, and the seller just got cold feet, and the broker who was representing was so upset.
She just walked away from the whole thing, and he was very frustrated. So that would be, I guess, the worst-case scenario. Someone changes their mind, right?
Dylan McGrath (07:50)
It is. I mean, yeah, it's a kick in the butt, right? I've invested a lot of time and money, especially when you bring an excellent, qualified buyer who makes a fair, reasonable offer, and then the seller gets cold feet. Yeah, it's very frustrating. So I'm not trying to tell a seller, hey, sign on the dotted line. Let's get this up and running. Like, there's no rush on my end. I want to ensure that we've checked all of the boxes leading up to it, that the sellers showed to me and committed that they're motivated to sell if I'm capable of doing what they're hiring me to do.
Bob Preston (08:30)
Okay, you mentioned, " Hey, I don't get paid unless the business closes, right? " So what are the typical fees, and how does it work in representing the seller? I mean, how are you paid, and when are you paid?
Dylan McGrath (08:37)
Great question. A lot of business owners don't understand. They think, well, when I sold my house, I only paid 5% or 6%. Or they think, " I know there are discount brokers out there. " We aren't a discount broker. For businesses under $1 million in my industry, the industry average is between 10% and 15%.
And that's based on it being a success fee, right? So essentially, we're getting paid 0% if we're incapable of accomplishing what we're tasked to do with our engagement. We are right in the middle. We charge a 12% fee. Of course, this is 2024, right? If someone's listening to this podcast in 10 years, industry rates may go up slightly, I would imagine, as with everything. But for businesses under a million dollars, I charge a 12% fee. It's 100% success-based. Once you get above that range, we're reasonable business people. We work on some sliding scale. So if we did an evaluation, we engaged with the client, and it was, let's say, a million-dollar sale, we might say, hey, we'll charge you 12% on the first million, 10% on the second, 8% on the third. Or if it's a $10 million business, we may say, hey, let's do 6% or 7% across the board. It has to make sense to us and the seller, where we feel it's a win-win, right? I'm not here to gouge people. But if people don't see the value in the service and the expertise I bring. And their main thing is trying to beat me down on my commission from the get-go. That's one of those things I can tell. I don't know if they're so worried about the fee and don't see the value in bringing me in to make this process happen, then maybe I'll think twice about engaging with them.
Bob Preston (10:34)
Yeah, that makes total sense. And what about the written agreement between you and the seller? There's got to be some contract. What does that look like? And is there a typical time to sell the property, right? Is there a timestamp on the contract?
Dylan McGrath (10:47)
I think it's very similar to selling a home, which more people can relate to. So, we do not have a formal listing agreement or an engagement letter. Depending on the industry that the business is in, how motivated the seller is dictates the timeframe. I will always ask for a minimum of six months because it takes a while to go through this process. It's not as simple as listing a home, right? If you're in a good neighborhood, you have a home that shows well.
You know, it's priced right. You put it on the MLS, and you will have multiple showings and likely an offer within the first 30 days. Assuming the market is, you know, all things considered, it makes sense to buy that home. For businesses, the process does take a little bit longer. So, if it's a business that I feel is a unique industry that I don't personally within, it's my buyer database or our company's buyer database. We feel like this one, we don't know. It could sell in two months; it could sell in 12 months. I typically ask for a nine to 12-month engagement on those businesses.
Bob Preston (12:05)
Okay, all right. Now, you alluded to being careful with who you do business with, who you represent, and who you bring to market. How much due diligence do you perform in assessing the industry before, I guess, taking it on and putting it out for sale? And which aspects of the company are you looking at? Like financial, operational, legal, their client contracts, and their scope of services, right? I mean, these are all things that a buyer would look at. So do you take time before you take on a client and do that, or is that done after you've already signed and on your?
Dylan McGrath (12:36)
No, it's done before, right? Because, like I said, when I'm analyzing an opportunity, the last thing I want to do is rush into a listing agreement and jump into a working relationship with the client only to find out later that there are things that are going to pose concerns or red flags for buyers. So, once again, on that initial call, I'm asking more of those operational questions, right? We also have a buyer complete, or sorry, a survey that will tell us more or maybe more of an intake form, you might call it, that asks many of these simple questions. We will ask if you have any pending legal actions against you. If there are, well, tell us more about that. We need to investigate that a little bit more. Maybe they need to clear things up before we want to put it out on the market because good, savvy buyers don't want to leave any, you know, stones unturned as they're going through their due diligence. And so naturally, since I know that I'm not going to be making any money and accomplishing what my clients, you know, hiring me to do unless we make it to the closing table on these initial conversations, I've very much come to the table with my buyer's hat on, right? Essentially, I am the buyer. I'm asking questions that I know buyers will be asking.
General questions and also, if it's an industry that I'm familiar with and have sold the business in, more industry-related questions, correct? So, I'm doing my due diligence. Once I go through that initial conversation, if they pass the initial sniff test, if you will, and they want to take the next step, the next step in my process is to assemble a business valuation. At that point, I'm requesting financials.
Typically, we look three years back to see a little bit of the business's history and assemble the valuation. So, at that point, I put together a financial review where I will go through their P&L or tax return line item by line item to identify if any one-time expenses will not be recurring to a new buyer. Are there any personal expenses or owner benefits, whether that be an officer's salary or you're paying for your spouse's, you know, a car payment, right? This is not a business expense, or maybe you pay for your family's health or medical insurance. We're trying to identify these things in the valuation that aren't if you want to refer to it as an actual business expense, and then we add those back. So, in our industry, as we're doing valuations, we refer to those as ad backs, and we're going to add those back to the business's profit to come to what we refer to as either the seller's discretionary earnings or the company's EBITDA. And then, typically, we're going to base our valuation off of some multiple of that seller's discretionary earnings or the EBITDA.
Bob Preston (15:50)
Okay, all right, terrific. One thing, Great segue, is all before you've signed a contract. Would you do your initial evaluation?
Dylan McGrath (15:55)
Correct, we need to ensure we're on board with the price. If my valuation comes in at $3 million and the seller thinks they're not selling for less than $5 million, that's a big gap. At that point, I would decide, hey, unless they come down to reality or their motivation level changes, they're not a client for me at that time.
Bob Preston (16:24)
Okay, and typically, is that the model you will stick with the sort of EBITDA times some industry multiple you're applying?
Dylan McGrath (16:30)
For the most part, yes. And the reason is that buyers look at acquiring a business as with any investment. How much will it cost me to secure this investment or buy this business? And how long will it take me to recoup my money on that investment? So, if you're looking at it solely from a revenue perspective, you can't answer that question, right? If you're based in on that, there are specific industries where, and, you know, within the property management industry, I've sold the, I mentioned to you, I've sold several property management companies over the years. I've done dozens of valuations, you know, for property management companies. And it depends on the buyer. If it's an industry buyer who already knows their costs, right? If they're doing a million dollars in revenue, they have a ballpark idea of their fees and bottom line profit for that business. So, an industry buyer may be more concerned with that top-line revenue and base their valuation on that. Or some buyers base their valuation off of, you know, a multiple of for property management companies, a multiple of your recurring, you know, revenue. And so, there are a few different methodologies. I would say 90% of the time, um, you know, across the board industry-wide, you're looking at, people are looking at that bottom adjusted net profit. And they're applying some multiple of earnings to that figure.
Bob Preston (18:10)
Yeah, absolutely. So you know this about me. I've been through it. I sold my business to a company called Pure Property Management. I talked to everybody that I could in the industry who I knew was acquiring companies. These national property management companies were rolling up doors, so it was slightly different. I would say, um, at least half were using the EBITDA model that you described. Right. Others were like, well, look, we'll worry about your profit and loss and efficiency later when we have your doors on board because we know, being in the industry, we have processes and procedures that can gain efficiencies, and we'll take care of that maybe a little bit later. And so some of them were just based on revenue, like top-line revenue, so they put a multiple on that. So it's exciting. And then others were like, oh no, we want your doors, we're just buying your contracts, we'll pay you X number of dollars per door per property contract.
So that was the other thing I found: those three methods. But I think the most common, you're right, is the EBITDA model, right?
Dylan McGrath (19:09)
Yeah, and once again, the property management industry is fascinating, right? There are other industries that I do a lot of work in as well. I tend to work a lot in service-related companies, right? And so I've sold several IT service companies, which is the same thing. There's a big recurring revenue model there, right? Especially for managed services providers. Janitorial commercial cleaning type companies. Same things, you have these contracts that you're going in, whether it's an office building or industrial space, you're charging them X amount of money every month. So, there's a recurring revenue model. I like that because buyers like that. And there's a lot of buyers out there. So, that's why I tend to specialize in specific service-related companies. And with these types of models, it's becoming, you know, less and less common for a buyer to come in who's not an industry buyer, someone who's, you know, maybe their ex-executive, and they've made other companies a lot of monies over the years. And they're at the point now in their career where they're, you know, maybe 50 years old, and they're like, hey, you know, over the last 20 years, I've made good money. I've stashed some money aside.
I've had experience in marketing. I've, you know, I'm a good manager. I'm good at customer service and a well-rounded person who wants to jump in and become an entrepreneur and buy a business. For them, it isn't easy to compete with a good industry, like you said, maybe a national property management buyer, because the transaction is so much easier with the larger company because they know exactly what they're looking for. They're asking all the right questions. And they're just, in most cases, a more accessible buyer to work with.
Bob Preston (21:02)
Well, they're probably a faster sale for one thing, right? And then I'm curious: Are most of your transactions asset sales now? Or do you ever do like the full, you know, stock sale buy the whole company, the entire corporation?
Dylan McGrath (21:18)
I would say the majority of the time, they're asset sales. It's hard to say seven out of 10 or nine out of 10, but some are in that range. I'd say 75% are asset sales. Often, if you have a larger company, like I mentioned, a property management company, where you have contracts in place, buyer and seller may decide, hey, it's just easier to do a stock sale. That way, we don't have to reach out to every one of our clients and have them sign new contracts before closing. So, in industries like a property management company or a couple of the other ones I've mentioned where you have contracts recurring revenue, maybe it's more of a 50-50 where you see more stock sales happening. However, we see more asset sales than stock sales in smaller business spaces under $20 million in revenue companies.
Bob Preston (22:17)
It might also be helpful for our listeners because we're using these terms; we know them, but our listeners may not be used to them. So, maybe describe the difference between asset and stock sales.
Dylan McGrath (22:27)
Yeah, I'm happy to. I found that, too. Sometimes, you don't know what you don't know, and that's fine. The definition, I guess, of a stock sale is when a buyer comes in; there's the company. They're doing business as, you mentioned, pure property management. But they're doing business as a corporation, whether that's an S-corp, C-corp, LLC.
Is the buyer buying that entity suitable for a stock sale? They're buying the business, entity, or stock within the company. One question you may have, so maybe I'll just kind of chime in here, is, do I see buyers sometimes just saying, hey, we want to acquire 90% of the corporation, and we want the seller to have some ownership in the company still?
I think that was one of the questions I read. The answer is that it's rare that we see that happen. Most of the time, the buyer doesn't want to allow the seller to retain ownership because they're strangers, right? And they don't want to jump into bed or into business with a stranger where they don't know what that relationship, a working relationship, will look like.
And so that's a stock sale, right? With a stock sale, the buyer often doesn't want to do a stock sale because they are inheriting the corporation's liabilities. So, and with an asset sale, in an asset sale, a buyer typically creates their corporation or their own LLC.
Then, they use that new corporation or entity to acquire the business. So it's a fresh, clean start in most situations. The buyer's opening up a new bank account under their new corporate name, and then they're buying the company's assets, including any tangible assets, of course, whether there's equipment or inventory. But in addition to that, they're acquiring intangible assets, goodwill, customer base, and anything else. So those are the main differences.
Bob Preston (24:22)
Yeah, they might pick up some limited liabilities, too. Like, for example, personnel. Is that suitable? The staff comes with them if they want to keep the staff, maybe the office or the store location, maybe their automobiles, these kinds of things, right?
Midroll Commercial: RentScale (24:40)
Bob Preston (25:56)
Okay, what are we seeing today regarding valuations compared to a few years ago? Interest rates were lower a couple of years back, and maybe there was better access to capital. Is there a difference in the valuations you're seeing?
Dylan McGrath (26:00)
You know what, it's interesting. It's, you know, my industry is a very interesting one. Like I said, I've been in it long enough that I've gone through a few different cycles of interest rates and, you know, good economy, bad economy. Our industry seems to be pretty reasonably stable. Even over the past year or two, interest rates have jumped from, you know, seven, six, seven percent to 10 to 12 percent. I found there's always going to be buyers out there looking to buy, and there's always going to be business owners looking to sell, especially where we're at now with, you know, a lot of, you know, baby boomers. I would say, you know, 70% of my clients are looking to sell and retire. So they typically don't say, well, I know interest rates are slightly high. Maybe there's not a buyer out there. I will wait another two or three years to see what interest rates do. No, they need to sell now. They're ready to move on to that next stage. So, I haven't seen our deal flow slowly because of higher interest rates across the board and company-wide.
Bob Preston (27:33)
Well, I guess the deal flow, the deal flow may not slow down, but I guess if, you know, some of the, it's funny, some of the things that scenarios you're describing to remind me of myself, cause I went through this too, right? I wanted to retire and do something different but got a pretty reasonable valuation. I wonder if I had waited or would have gotten the same one today that I got two years ago. So, I guess that's what I'm talking about. That might be a reason to wait as if, in today's market, you're getting a, you know, I will go three or four times EBITDA versus maybe five or six times EBITDA, right? So I guess that's what I'm curious about.
Dylan McGrath (28:18)
Yeah, and I guess the short answer is no, I have not seen valuations slump significantly.
Bob Preston (28:20)
Okay, perfect. Okay, so let's fast forward. You find a client, things look good, you've done your due diligence, come up with a valuation you agree on with the seller, and sign a contract. Now, how do you go about looking for a buyer?
Dylan McGrath (28:28)
Yeah, there's a few different ways. Um, you know, we're burdensome in, into marketing, and going back to what I mentioned, I think that's one of the advantages of working with a larger company who has the budget to really kind of, you know, put that money into marketing. So we're big on that. I would say we have, uh, three different marketing problems. If you will, we have, first of all, my personal buyer database that I've accumulated over the years.
Our internal company buyer database is where anytime someone signs in on a disclosure agreement; they automatically go into our buyer database. And, you know, we send an e-blast to over 15,000 people every two weeks. Now, are all of them active buyers? Of course not, right? But we try to go through that and keep it to people within the past like two or three years. So, right out of the gates, when I get a new listing to bring to the table, there are many people that we're blasting the unique opportunity out to just from our internal buyer databases.
The second prong is more of a general approach where we market or advertise the business to the general public, right? And I assure my clients that they sign off on everything we deal with the general public, right? Confidentiality is paramount to us. And so if we were to sell your property management company, we want to provide enough information on the opportunity. Hence, buyers have a pretty good idea of what they're inquiring about.
On what they're inquiring about. But we will leave out the name of the business and the exact location. So, it's all marketed confidentially. And before we put anything out there on these different, we don't have a centralized MLS system like real estate agents do. But there are half a dozen business-for-sale websites, which most business owners aren't familiar with. Because, once again, you don't know what you don't know.
Unless you've done a Google search, you know, by a property management business in San Diego, you know, when you do that, these different websites are going to pop up. And we have subscriptions with these sites where we advertise our listings. As I said, the seller first approves everything we put out there, so they know exactly what's being put out there. They're comfortable with that. That's our second; it's more of a mass marketing approach; I guess you could refer to it. Then the third marketing approach is more to those strategic buyers, who, whether we pull a list of industry buyers, it'll be more of a strategic or targeted marketing, you know, campaign or approach to buyers who are already in the industry, seeing if they're looking to expand via acquisition.
Bob Preston (31:29)
Perfect, yeah, not too different, in parallel to the property managers that are listening, not too different than, all right, when you pick up a new property, you list it, you mentioned MLS, you might list it there, you might put it out on Zillow, you might tap into your database of investors to present the property to, it's interesting, there's a lot of parallels for sure. So, I know that each business sale is unique; we've already touched on some of the intricacies of some of the things you look for, but are there typical steps in the sales process? So you find a buyer, and the buyer seems interested. What are the steps from beginning to end and working a deal?
Dylan McGrath (32:08)
Sure, maybe I'll back up just briefly. Right, so once we start marketing the company, we will have buyers inquire. As part of that process, we will have them answer some initial vetting questions, and if they sound like they could be a potential fit, we'll send them a link to a non-disclosure, right? Once they've signed the NDA, we provide them with a confidential marketing package, or many people refer to it as a sales deck and secret information package, whatever you want to call it. Not until this point does the buyer know the company's name. They're seeing some initial financials and P&L statements. I always include a long list of frequently asked questions I see a buyer will ask, which they appreciate. My goal that I tell the seller is, hey, let's put some leg work in on the front end before we go live with the listing so that when a buyer inquires, they sign the NDA, we send them the package, we've already answered hopefully 75% of their questions. It makes the business owner look organized. It makes the business look good.
It doesn't matter whether I look good, but it makes it look like they hired a professional who spent the time to assemble a professional marketing package. Once a buyer reviews that, either they're not going to have interest, and that's fine, but if they do, what's the next step? Typically, they're going to have some follow-up questions for the seller. Those usually all flow through me. And then, if they like what they see beyond that, they want to meet with the seller. And so, the way that I do it is I typically don't; I want to be very respectful of everyone's time, including mine. So, with technology now, it's very nice to hop on a Zoom call or a Google Meet call, a video call where they can do an initial meet and greet. I always have the buyer tell the seller more about them, their background, and what caught their attention about this opportunity.
And then we have the buyer kind of jump into, you know, a list of questions. Sometimes it's five questions. Sometimes, it's 50 questions. I try to limit that kind of buyer-seller introductory calls to 45 minutes. If they're interested beyond that, you know, once the buyer's digested what they've heard and learned on the call, the next step is that you know, we would, you know, walk them through kind of what does the offer process look like if they're willing to make an offer.
I want to ensure the buyer feels very committed and comfortable before they make an offer, and we potentially lock down the business and take it off the market for a particular buyer. And then, if the seller and buyer can agree on an offer, typically, people start with a buyer, start with a letter of intent, and then that transfers over to a purchase agreement. But a buyer will then say, here's a list of our due diligence requests. They'll go through their due diligence process. A lot of kind of nuances and working parts, as you go through the due diligence process, there's a lot of different things going on, right? We open up escrow.
Buyers are working on securing new insurance. Escrow is doing its bulk sale publication to ensure the business will be free of any liens or encumbrances on the company. And it is just that everyone has a buyer and seller; everyone has the pedal to the metal. We're going through this checklist to get it ready to close.
Bob Preston (36:01)
Okay, and from the buyer side, who's typically involved? Is it typically just the business, the person who would ultimately be the owner? Do they have representation themselves, lawyers, CPAs? What's on the other side?
Dylan McGrath (36:11)
So, my business is very different from what a real estate agent is used to. I sold real estate for about three years before getting into business brokering. Having a listing agent and a buyer's agent is very common. In my industry, it's far less common. I would say over the past 13-plus years, I've probably worked with less than 10, you know, brokers who are representing the buyer exclusively. So typically, what we do is, you know, with the buyer, we have the buyer sign something, letting them know, disclosing that we represent the seller exclusively, right? So, as a courtesy, we have the seller's best interest in mind. We're happy to offer them a letter of intent or asset purchase agreement template. And, you know, we are the one who quarterbacks the transaction, but were the liaison between the buyer and the seller, um, you know, educating the buyers, you know, here's what the next step is, but not giving them, you know, any treatment as if we're representing them. Every once in a while, I will, like, I'm working on a transaction right now for a, you know, commercial cleaning company where the buyer has, you know, um, basically hired a company where they're not a broker per se. They're more of a business consultant, if you will, who is walking, who's helping them through the due diligence process. They have their kind of internal team of CPAs. They have their legal term, and the buyer's paying them as they go, like an attorney, right? You pay them as you go. But yeah, that's pretty rare. And in most cases, I would say that I interact directly with the buyer.
Bob Preston (38:02)
That's interesting. Okay, and then what about the level of documentation that gets exchanged? I would imagine it's pretty in-depth. In the case of property management companies, you've reached your client contracts, you've got your financials, you've got maybe other obligations, you've got contracts maybe with technology partners and things like that. What are they looking for? What do you want from the seller, and what will the buyer want to see?
Dylan McGrath (38:28)
That's a good question. And that's very much a varied case-by-case scenario. Sometimes you have a due diligence list, and there's only ten things on there, you know, that's great. That's typically coming from either an industry buyer or someone who's, you know, been a serial entrepreneur, and they know the ten things that are most important to them, right? You know, other buyers who have never gone through this, searching a Google search, like what should I request? I'm buying a business. What should I be asking for in due diligence? And then you get a five-page crazy list of questions that 50% of them don't even apply to that particular business they're inquiring about. So, in that situation, typically, I'll hop on the phone with the buyer and go through them and try to weed that, narrow down that list to, hey, what are the most important things you want to see?
But yeah, I mean, you already mentioned a lot of them. They want to see financials. They want to see; a buyer wants to see bank statements. They want to see insurance policies. If there are contracts, they want to see contracts. They want to see and generate reports from QuickBooks, like a sales-by-customer summary, to identify customer concentration. If an SBA loan is involved, that takes it to the next level of questions, right? Because you have bank underwriters, who are asking even more in-depth questions. You have business appraisers whom the bank hires to do the appraisal. They've got to understand that if they're expecting to sell their business, especially for a good chunk of money, there will be work required on their part to make a buyer feel comfortable to take it to the closing table. Just because you get an offer does not mean it's a slam-dunk deal. There are a lot of steps, as you know because you've been through this process before, that need to take place before you make your money.
Yeah, and I don't get paid. I don't think I answered this question. You asked it a long time ago: When do I get paid? I don't get paid until the seller gets paid at closing.
Bob Preston (40:44)
I would imagine, too, that it depends on the kind of buyer and the kind of their makeup and attention to detail because somebody might be buying property, you know, a business with their saving their savings. And I imagine they would be slightly more nervous about making a transaction. It might be the only business that they're ever going to operate. Others might be buying up multiple, you know, businesses through a particular industry or something and be more willing to take some risks. So that's got to be fascinating to sit in on some of those conversations.
Dylan McGrath (41:12)
Yeah, it is fascinating. I can quickly determine how business savvy the buyer is, just based on the questions they're asking. If a buyer is asking specific questions right out of the gate that, you know, really aren't that important for them to know right now. Right then, I can tell they're probably a less experienced buyer, which is fine, right? Everyone has to start somewhere. And, you know, I don't, I'm always respectful of, you know, every buyer and every seller that I work with.
I understand, especially if this is their first time going through this process, they're leaning on me for my expertise because I've been through this many times. And I do my best to walk them through the process, educate them, and give them a heads up on the steps so there aren't any surprises, right? In life, especially in significant financial and life processes like buying a business, it's a significant life change. No one likes surprises. They want to make sure they're being educated along the way. So, I try to provide service that makes the buyer and seller feel comfortable with what the next steps are going to be. We're working together to get this to the closing table.
Bob Preston (42:40)
Okay, so then, how is a deal typically structured? Is there money upfront? Is it deferred? Is there a percentage, a split? Please help me understand that.
Dylan McGrath (42:45)
I hate saying a case scenario, but as you can imagine, it is very much the case here because when you're buying a home and most people need a loan to buy a house, not always, but you're working with a bank in most situations on a home sale. So you're confined to this little box. That, hey, if the bank doesn't like it, then there's no deal. With business sales, and that's why it's so crucial for me to really kind of gauge the motivation level of the seller, is that if we bring a buyer in. They don't want to get an SBA loan, or maybe for whatever reason, we don't think the business will even be bankable, right? So, our only option is how much cash the buyer has to bring to the table.
And then how willing is the seller to carry a note, assuming we bring them a good, qualified buyer they feel comfortable essentially being the bank for? We're talking about property management companies today for businesses with a lot of recurring revenue, so we'll stay in that industry. Most sellers, and it depends on the size of the management company, too. If you're a smaller management company and you're the leading salesperson and the face of the business, that's not ideal for a buyer, right? Because maybe they've liked working with Bob, you know, over the past 20 years. But when Dylan comes in as the new buyer, will they even like me? Everyone has a different personality, a way of interacting, and a way of doing business, and not all personalities jive. A higher attrition risk occurs if the owner is involved in day-to-day client interactions. Buyers are going to go through and analyze that as well. What is the risk? If I feel like the risk is pretty high, and I'm the buyer, I will say, hey, Bob, I know you're asking a million dollars for your business. Um, you know, I've got 700,000 to put down. If I'm a buyer bringing in 700,000 of my own money, you know, there's a firm commitment, you know that I'm going to do everything in my power to continue to succeed in the business. I'm going to seek your guidance. I'm going to seek your advice as the seller. But if I ask you to carry 300,000, you will also want to do your due diligence on me as a buyer. How solid does Dylan sound? And in that situation, if you're carrying a note, I mean, most buyers want to ensure the seller will be around for proper training and transition. And so there may be specific payout periods where I'm coming in with $700,000 down now, right? And either I'm going to pay you fixed monthly payments with this X percent of interest rate, or I'm going to, after 12 months of the acquisition, we're going to look back and look at the clients that I bought from you at that time a year ago, determine where's my revenue at with those clients one year later. If we've lost 10% of those clients, we'll lose that revenue, and you'll only get paid 90% of whatever that balance is after those 12 months. So, there are a lot of creative ways that you can structure financing deals. It all comes down to, once again, really matching up a good, motivated seller and a motivated buyer who are both looking for an actual win-win scenario. And if we can find that, we can be flexible and make it work for both parties.
Bob Preston (46:41)
Yeah, that 90% payment if you lose so many properties is commonly referred to in our industry, and property management is kind of clawback, right? Listeners may have heard that term. And then, acquirers typically want some non-compete so that you won't sell your business to them, and then turn right around, use the money to come in and start an identical business.
I'd love to keep going here, but in the interest of time, we want to wrap things up. I know you have another appointment coming up here. I think, you know, one of the most significant recommendations I like to make. I'd like to see if you agree with this; you touched on it already, so I assume you will agree. Owners who are considering selling their business ensure the company can run on its own, right? You can't be still entangled in the industry, to your point, right? If the clients are used to working with Bob or the owner of the business, and that owner leaves, that's not a good scenario for the new, you know, for the buyer, right, for the new owner. So, I mean, make sure you're working on your company, not in your company, and that it's running efficiently and could survive without you being present daily. Do you agree with that?
Dylan McGrath (47.48)
I do agree with that. And I think you would agree that that's easier said than done, right? Because you need to scale the business to where you can get your first employee under you. Continue to rise so that you can hire a second employee and continue to build your staff so that they become the business's safe face. And when a customer calls in concerned, Bob's not answering every time, right? And so it takes time to do that, right? It takes time, too, and you don't need to remove yourself from the business altogether. A lot of business owners, you know, they're in business because they like it. And so maybe they only want to come in and work one or two days a week, but even if they don't need the money, they like to be there. They like the culture. They want the people they've hired just like the energy of running a business. And I think that a lot of the fun thing for entrepreneurs is that running a small business can be fun, but yeah, you're exactly right. The more you can remove yourself from the business, the more desirable it will be, and the higher the multiple or valuation the buyers can be willing to pay because the business is not 100% dependent upon your efforts as the owner.
Bob Preston (49:05)
Correct, and I think mainly if you feel you're getting ready to want to sell your company, those are some of the things you need to work on. You know, also tidying up all the documentation we talked about. All right, listen, this has been great in the interest of time. We need to wrap up to get on with our days here. So, if someone, Dylan, wanted to contact you to learn more about selling their business and what you do, how would they get a hold of you?
Dylan McGrath (49:27)
Yeah, you know, the best way they can look at our company's website is SD, as in San Diego, biz.com. So SDbiz.com. You can learn more about our team, our process, and how we sell businesses. And my contact information is there. They can always reference it here. I don't want to do a commercial ad and say, call me at, here's my phone number. Or you can find me on LinkedIn. You've got my name here. You've got my name here on the screen. And send me a message. If someone's looking at the possibility of an exit within the next three years, you need to be talking with either me or someone like me, right? So that we can do that valuation for you. As you go through that process, you receive free education, essentially. Do you understand how the valuation is being arrived at? And if my valuation comes in at a million dollars now, and I want to sell it for $2 million in three years, what must I do to get to that stage? Some business owners wait too late, right? Where they don't have any energy, and in their mind, they want to be done. And that's fine, too, right? I get that. But if you have time and are looking at selling, let's talk now because I can often identify certain things a business owner can do over the next two or three years, maybe just minor tweaks to make it more desirable for a buyer. And as we know, every seller wants to sell for as much money as possible. So, if I can help you prepare for that a year, two, or three years in advance, I'm happy to be a resource for anyone who wants to chat.
Bob Preston (51:17)
That's a great offer, and I will put your LinkedIn link and profile in the episode notes for everybody listening. Indeed, if you start early, the other thing is that it avoids the potential for a distress sale if something terrible happens to the company or the people involved. So start early. I think that's an excellent recommendation. Hey, great conversation today, Dylan. I appreciate your time. It's been a fantastic episode. Thank you so much for being on the show.
Dylan McGrath (51:44)
Yeah. You're welcome. Thanks for your time, Bob. Take care. All right, bye.
Bob Preston (51:45)
Okay, man. Thanks. Talk to you soon.
Episode Outro and Closing Comments (51:50)