1778 – Boosting Business Value in M&A with Christine McDanell

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0:58with us right now it's christine mcdannell christine you are an m &a consultant and you are the principal and founder of the magnolia firm your website is the magnolia firm.co christine thank you so much for joining us josh thank you for having me i love your energy well thank you I like yours. Christine, you're based in San Diego. Tell me a little bit more about the work you're doing and who you're working with and the impact you have in the world. Yes. So I have been a entrepreneur. I started my first company 20 years on December 7th. It will be 20 years. I cannot believe that. Lots and lots.

1:36I had 10 startups. I had another 10 to 15, you know, acquisitions, roll ups, business flips. And so I've been an entrepreneur all my life. I I love every minute of it. And I did most of my own transactions. And so a couple of years ago, I was like, well, why don't I start my own M &A business brokerage advisory firm? And so I help people with the biggest sell of their life, typically, which is exiting their company. Yeah. So how is that world lately, the world of mergers and acquisitions? Yeah. And we even sell. So we do, you know, now that we're up market, a lot of them are acquisitions, but we also do private buyer sales.

2:15So it might be somebody that is in corporate, you know, had freedom during COVID, had to go back to corporate, they hate it. And so their first time business buyers, they'll go get SBA loan, you know, they qualify for one, or they'll pull from their 401k or their house has equity in it, they can pull from. So yeah, that it's a hot, hot seller's market, Josh, I'll tell you that much. And I'm not saying that. But the key, the one magical word is for profitable companies. For not profitable companies, it's a horrible market right now. But for profitable, even with the interest rates so high on the SBA terms, the business is servicing the debt.

2:51So maybe you can buy less of a business, but you're still getting this amazing cash flow that actually replaces your corporate salary. Yeah. Can you share just a bit, because that was going to be my next question is talking about what the current market is like for lending. and through the, you know, the SBA, by the way, is such a great program, such a great, I am so grateful for the SBA. I mean, years ago, we used some funding to get us to where we are today. And you talk about ROI on that debt is like the biggest no-brainer, which I'm going to get maybe have you talk about maybe a hypothetical or how this works.

3:28So let's kind of address the opportunity of buying a company today, and then we'll kind of get into some seller strategies. Yeah, I love that you said that about the SBA because there were, they did do a great job stepping in during COVID with that EIDL loans, those COVID relief loans. And what's, we've been able to do some ninja things because my seller is like, you know, they have a$500 ,000 loan on like a 3 % interest rate for 30 years. They don't want to give it up. That's like free money. So sometimes, not every case, sometimes we're able to let the seller keep that loan and then the buyer buys the business.

4:05Other times we've had the buyer use that towards the purchase of the business. So it's pretty cool what we can do with that. So let's give a hypothetical on a business purchase. So let's say you find a business listed for a million dollars. It's cash flowing even as$250 ,000. You're in corporate land that you hate and you're making your salary is$200 ,000 a year. so you're going to replace that salary so the SBA right now is asking for 10 to 20 percent down we've been seeing 10 percent down recently I think because that's compensating for the rates going up because yeah the rates are about 10 to 11 percent on an SBA loan that's a 10-year loan they're going to want 10 percent down which is a hundred grand so okay you just put a hundred thousand down to get a million right and to get this 250 ,000 a year profit so that's a no-brainer the SBA loans do take a little longer, but they've been quick.

4:59So I personally had one in 2017. I sold a company in 2017. They told me it would take 45 days. It took 93 days to close. Imagine how stressful that was. Every week, the SBA is like, oh, we need another week. We need another week to push the past three months. But for us, I've just had two SBAs back to back, closing within seven weeks, which is really fast. SBA made some changes back in May, which sped up the whole process. Luckily, it's kind of taken the government, which slows things down a little bit more out of the process and the banks are handling more of the process. Yeah, it always is going to take a little bit more time than you think it is.

5:41I mean, that was absolutely our experience. But listen, if you could be patient, it's the gold standard rather than some of the other lending options that are out there that could be, you know, not as awesome. And so, I mean, with the SBA, again, generally, you're going to be personally involved in some way, like there's, right, the principals are usually going to either contribute cash, or they're going to use their personal credit along with that. Yes. So a couple of things, you do have to do a personal guarantee. So that's important. Second thing is you need two or three years in that industry, right?

6:13So you can't have any, you know you've never worked in technology you know nothing about marketing and go buy digital marketing agency they're not going to hear that you're going to have at least a couple years of experience in the field and then i'll also say this too which is great i mean they have only a two percent failure rate right and that's why they're so strict about you know lending the money in the first place is that only two percent of the people fail on paying back that 10-year loan which is amazing so you have like a 98 success rate you know which is inspiring because everybody We know startups have the opposite.

6:47Yeah. 2 % success rate. Yeah. I mean, they're really like, let someone else get through the attrition, you know, and prove it out. Okay. So I want to switch to kind of talking about, because I think a lot of folks that are listening to this are probably in that, you know, they're the founder of a company and they're saying, all right, Christine, I probably am interested in exiting at some time in the future. what should I be doing today so that I can get great valuation and I can get a really great multiple? Great question. So a lot of things, but I'll do like the top three. So obviously your net profit is like the number, that multiple that you just mentioned.

7:25It's usually based on your cash flow, EBITDA, the net profit at the end of the day with all your ad backs. So that, in the beginning, you're pumping back, all the money goes back into growing the business, obviously. So that in the beginning you might not have any profit we get it first year three years but then when you're getting ready to want to sell in the next year then you need to just be like slicing expenses and just making like a well-oiled machine so i'd say profit first reputation second make sure you have a bad reputation is very hard to fix so reputation is huge that adds a little bit of extra value on that multiple um team don't have a lot of like turnover on the team uh don't have high customer concentration.

8:09So no buyer ever wants to see, you know, 80 % of your revenue represented by one person. One client. One client. No. Yeah. It's like game over. As a consultant. Yeah. I mean, it might be fun at the very beginning when you land that big deal, but you don't want to be there for very long because then you live and die by that one client. Exactly. So that's a big one. Or even a very specific niche or something like that that could take, I would imagine, you know, again, just any, you know, client diversity is going to be pretty valuable. And then in terms of like where that revenue comes from too, I would imagine that, you know, if you can show a lot of recurring revenue, that's just kind of like, it's just locked in and baked in.

8:52It's, you know, that guaranteed revenues coming in month after month, after month, after month, that's got to be attractive, right? No. And that's the other one I was going to mention. Yeah. It's just these R words, right? like remote base, relocatable, recurring revenue. Like these are some of my favorite R words, right? So remote base is huge. So if you can have remote, if you have contractors versus employees, it doesn't matter anymore. It's kind of funny. You would think that a buyer would want like employees, but nowadays there's so many people using contractors instead that that's totally cool, no problem.

9:24Back to the recurring revenue, my wellness spy started 2012. This was before massage envy or any sort of monthly spa membership. There was no such thing. And my mentor was like, you've got to get recurring revenue. And I'm like, no, but it's a spa. And people coming for massage just, you know, not regularly. And from day one, we put it in, thank God, these spa memberships monthly and annually. So when I sold, I had 32 % of my revenue. And it was a lot of revenue was recurring. So trust me, my multiple was above average when I sold that thing. Yeah. All right. So let's talk about multiples. Maybe some best case scenario, like some of the highest multiples, and maybe what were some of the unique things involved in that versus these are pretty standard, pretty common.

10:09Yeah, I mean, we have right now, we have, so AI is really sexy. Everybody knows that. But AI is so new. So those companies aren't really exiting yet, right? They're just hitting their stride, which is fun to watch. And again, we only deal with digital-based businesses. So I haven't even really thought to go after them. However, we got one just three months ago. So from start to finish, from when he was listed, he's 27 years old. I'm so excited for him. And then from the day he closes is three and a half months, which is so fast. It was priced very high, but it was AI related. So dealt with the CRM integrator agencies.

10:43So essentially, you know, somebody putting Salesforce into a huge company, right? Like a massive organization, Fortune 550 company even. They need that AI. There's an AI component right now to Salesforce called Einstein. And that's what this agency, his agency does that. It will come in and actually install this part of Salesforce. That's the AI generating process with Einstein and he's killing it. And so, yeah, that's super hot right now. AI. Yeah, for sure. Take me through where you come in, Christine. So when you're working with someone that how far general are you, you're representing the sellers, right?

11:21Exactly. Okay. So when do you usually come in and what does that total engagement typically look like? Yes. Great question. A to Z. So from the day they, most of our sellers are young. Again, we're dealing with tech, right? Youngest 21, oldest exit 47. Most of them are in your early thirties, which is very young for people to be exiting their first company, but it's exciting. And so they come in, hey, I want to sell. But for them, they're like, I wanted to sell yesterday. You know, these aren't planners. These are serial entrepreneurs. They're ready for the next venture. Yeah, they're not exit strategy.

11:55But then again, as entrepreneurs, there was never an enter strategy. It was just like we jumped off the deep end and started the company. There's no enter strategy. I don't even run an exit strategy either with my businesses usually. If I do, it's a very short one, like six months. So yeah, they get to me. We list them. We go to market. We package them up, market them, go to market. LOI offers come in, purchase agreement, money wired in the bank. That's very high level. there's a bazillion steps in between that, but I'm literally the person doing A to Z, which is so much fun. Yeah. So I think a seller, one thing that they're probably going to be pretty keen on is where do I find the buyers?

12:36Yeah. So, so again, we're listing that and we're actually publishing Get Acquired is our book that comes out next month, December. Oh, congrats. By the time this airs, our book will be out. Yes. We can send you anybody a free copy. If you want to reach out to me on LinkedIn, I'm very easily reached there. And it will literally be the book, physical book that A to Z, you could sell your own company. You could take this book. We didn't hold back. A lot of people have written these types of books, but they're, you know, keep the secrets out or they're like, hire us and we could do it for you. Yeah.

13:07Right. Right. We got enough work. We're not worried about that. We're a boutique firm. And so we wanted to publish this book to help people we couldn't help. And so, yeah, I mean, they would, you know, you could publish your business for sale on all different sorts of platforms. Make sure you don't put the business name, keep it very confidential, get them to sign an NDA. Here's some tricks. Let's say you have a key person in your company. They're like your right hand. They love the business more than you do. And I've had those managers. So I will always go to them first because I hate to sell it.

13:39And for them to come back and say, Christine, why didn't you ask me to buy it? I would have bought it. but you have but you don't want to scare your employee yeah and that too i've made all the mistakes in the 20 years um so what i would do is after i learned my lesson is i would say you know hey michelle i might bring on an investor or partner i'm starting to think about it would that be and this is during the business right before i'm about to sell and would that be something you're interested in because based on her answer can she go get capital can she go get money you know that and she'd be like wow i would really like that let me go see if i can find money then you can change the conversation of like oh wow maybe would you be interested in buying the company so you have to do it very gently same with the competitors hey here's the other trick hey if i ever thought about exiting the future would you be interested just because i can call you first again you're saying the future you're not saying you're about to list okay um because they can steal your clients they can steal your employees and i've had that happen too so yeah There's some little tips and tricks for people that might want to sell their business on their own, which is totally fine.

14:44You don't have to use an advisor or broker. You know, and one thing I do know, right, is it's so valuable to use a broker, if nothing else, for the due diligence. Because the due diligence oftentimes can reveal some landmines that if you're not an experienced seller or you don't have a good team in place to help you with that process, you know, things can blow up. You cannot get anywhere near where maybe you should have been able to get because you didn't discover something. What is that side of it usually like for you and your team? Yes. As a firm, we do something unique where our data room, again, we're going to have to have a conversation.

15:23So they're going to see a deck with no name on it, right? It's a pretty deck about the company, no name. Then they sign an NDA or no, then we have a call just to make sure they have access to capital, they're qualified, they're a good person, they could be a good buyer. And then that quick conversation gives them access in NDA, digital NDA to the data room. What we do differently is our data rooms are very extensive. We put a lot of stuff in there on purpose. So then they write a very comfortable LOI where they're like, wow, I saw a lot of stuff I'm writing the LOI. And then the due diligence goes a lot smoother because they got a lot of it up front.

16:02The lawyers, of course, we're hands on the whole time. But if the due diligence gets a little tricky and the review of the purchase agreement, they need, my seller needs representation just for that part, the review of the purchase agreement. Maybe a little due diligence, but typically we're doing all that. Yeah. All right. Christine, your website, themagnoliafirm.co. Let's talk about where someone goes from here. They've been listening to our conversation and they're like, I like Christine. I definitely want to have a conversation, start, you know, might be a little early, might be imminent, but where do they go from here?

16:39Yeah, I mean, for me personally, again, if you want to reach out to me and connect, I love connecting with people on LinkedIn. So for sure do that. Christine McDaniel, I'm easy to find on there. And then, yeah, the Magnolia Firm, you can go to our website. We've got all our current listings there. So if people are listening, not want to acquire a business, right? We didn't really talk that side that much. But, you know, our listings there, the previous sales, success stories, testimonials, we're great about keeping our website very, very updated. So yeah, that'd be great. And on all the social media platforms.

17:08So Instagram, Facebook, all those fun ones. And I play a fun character called Broker Bob, where I make fun of all the brokers. One day I'll get in trouble, not yet. You know, because it is, you know, I hate even calling myself, technically I'm a business broker, right? But I just say M &A advisor, business intermediary. I don't want to be in the category, but yeah, if you guys want a good laugh, you can check out Broker Bob and other stuff on our social media. Christine, you mentioned your book. Now that I believe it should be published by the time this episode airs, share just a bit about the book.

17:39Yes. So on our website, we have the link to get acquired. So yeah, we can send a free PDF. It's also going to be published on Amazon. So you can purchase it there. Yeah. So get acquired is what it's called. Awesome. Well, Christine McDaniel, again, you're an M &A advisor and the founder of the Magnolia firm. Your website is themagnoliafirm.co. Christine, it's been a joy having this conversation with you. Thanks so much. Yeah, thank you, Josh.

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