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In this conversation, John Martinka discusses his journey into the M&A world, the importance of preparation for business owners looking to sell, and the emotional aspects of the selling process. He shares insights from his recent book, 'Exit with Style, Grace, and More Money,' and emphasizes the need for business owners to be ready both financially and emotionally before selling. The discussion also covers current market trends, the impact of AI on businesses, and the challenges posed by the aging baby boomer population in the business landscape. John provides practical tips for maximizing business value and shares real-life case studies to illustrate key points.
takeaways
- John Martinka emphasizes the importance of preparation for business owners looking to sell.
- Emotional readiness is crucial for both buyers and sellers in the M&A process.
- Many business owners make impulsive decisions to sell without proper planning.
- The current market favors sellers with mature and profitable businesses.
- AI can enhance business operations but won't replace core functions.
- The anticipated 'silver tsunami' of baby boomer business sales may not happen as expected.
- Only 10% of businesses are ready to sell for maximum value.
- Good financial systems are essential for business valuation.
- Reducing dependency on the owner can increase business attractiveness to buyers.
- Growth can mask operational issues that need to be addressed before selling.
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Creators & Guests
What is The Exit Plan: Mergers and Acquisitions for Creative Entrepreneurs?
The Exit Plan is for business owners that are interested in learning more about how to sell their business. Each episode Barnaby Cook interviews someone who has bought or sold a business - either a creative agency, or a production company. The conversation gets under the skin of why they wanted to sell, or were looking to acquire, how the deal was structured, how they agreed upon a valuation and what lessons they learnt along the way.
On today's episode of The Exit Plan, I talk to John Martinka who discusses his journey into the M and A world and the importance of preparation for business owners looking to sell and the emotional aspects of the selling process. He shares insights from his recent book, Exit with Style, Grace, and More Money. Hope you enjoy today's conversation.
John Martinka:I'm John Martinka, AACOMAS Advisory Services. We work with lower middle market businesses, to get them ready, but really to have them exit. Company is myself and my daughter, Jessica, and we have one other associate. And we're based out of the Seattle area, although we have clients in almost 20 states.
Barnaby Cook:Right. And tell me a bit about your background. How did you how did you get into the NA world?
John Martinka:Serendipity. A person I became a good friend with from a, rotary club I was in many years ago. We were back to back presidents. We were he well, he's a bit older than me. We were younger than many of the other members, and we hit it off.
John Martinka:And one day, he said something along the lines of, I've always thought you'd be good in this business. And one thing led to another. He knew I liked but didn't love what I was doing, and this has been great. I help a lot of people buy and sell companies, change their lives, and fairly rewarded for it.
Barnaby Cook:Yeah. And how I'm always interested in family businesses. At at what point did your daughter get involved?
John Martinka:Jessica's been with me about 6 or 7 years now, learning a lot. COVID hurt her. She's, very outgoing and loves to get out and meet people. And, of course, there's a couple years people didn't wanna meet. We make a good team.
Barnaby Cook:Nice. And so, yeah, tell me a bit you've written a a book recently.
John Martinka:Recent book. Yeah. Five books. The most recent one, and Jessica collaborated on it, is called Exit with style, grace, and more money.
Barnaby Cook:Okay. So what gave you the idea to write the book and some kind of talk me through the sort of main the main topics that you cover in there.
John Martinka:Okay. So the idea is to let's face it. It's a it's a marketing tool for us. It's not gonna be a best seller like, Daniel Silva or Stephen King or anything like that, but it does prove expertise. And it's a it's actually a follow-up to a book I wrote many years ago on prepping a business for sale called, if they can sell pet rocks, why can't you sell your business for what you want?
John Martinka:Which is a lot on what do you do up until it's time to to sell. And this one covers a little bit on the preparation and then what is the process. What do you have to watch out for? What yeah. What's gonna frustrate you?
John Martinka:What's gonna thrill you? And I'll I'll share the first chapter. It's very, very important, and it does talk about very little, if anything, about the business. But the owner of a business, whether it's gonna sell for a $1,000,000, 10,000,000, 20, 30, they need to be ready themselves. They need to have talked to a financial advisor.
John Martinka:They need to know what they're going to do when they sell. And if the selling is retire and not do much, does their spouse want them around 247?
Barnaby Cook:Yeah. Yeah. I mean, I think, you know, so much of so much of this world is is about the people and the relationships that they build and, you know, the the impact that the process has on them. And I've certainly known quite a few people who've gone through the sale process and have come out the other end, and it has not been the way they expected it to be at all. You know?
Barnaby Cook:Sometimes we've really struggled, you know, despite having kind of made some money, and kind of, you know, by society's sort of, you know, view of things been successful. But I've seen it time and time again that that doesn't that doesn't actually translate to how these people end up feeling about these things. I don't know whether you've you've you've experienced similar things.
John Martinka:I have seen that. I I can share that with we screen people pretty well, and we wanna make sure they know what's upcoming. And too often, it's an impulse decision. I like to use the analogy of too many owners, and I don't care if they're in Europe, the US, or anywhere around the world. They don't get up one day and say, I think I wanna sell in 3 years.
John Martinka:Let's raise the dimmer switch, make the business bright and shiny for a buyer. They say, this was a bad month. Flip the switch. Let me sell. And that's when you run into seller remorse.
Barnaby Cook:Right. Yeah. Because you end up you end up yes. You haven't you haven't taken the steps that you need to get the business into Right. The shape.
Barnaby Cook:So so is the book kind of is it based on a series of case studies or or or how have you kind of structured it?
John Martinka:Like my other books, it is filled with little vignettes, stories of what people did right and what people did wrong.
Barnaby Cook:I'd love to I'd love to hear some of those. Have you got any to mind?
John Martinka:Well, one that always comes to mind is the client who hired hired me. This is before my daughter was working with me, and he had couple couple qualified people approach him to buy his business, and it was worth as I recall, it was worth high 7 figures. And we are talking to him, and they made an offer. And he's all of a sudden he says to me without them there, he says, I guess I better tell my wife. And that did not go over well.
John Martinka:Not because he was selling, but because he didn't trust her to talk to her about it as he was going through all these conversations, which took over a few months.
Barnaby Cook:Yeah.
John Martinka:He was at the point he was burned out on running a business and working. He wanted to go fishing more. We actually sold it to his general manager 5 years later at a much reduced price.
Barnaby Cook:Like, what what do you think affected the valuation, you know, at the time where he got that first offer and then where he ended up selling it to his general manager.
John Martinka:He wasn't paying attention to the business. And and he had brought this general manager in a couple years before the general manager bought it, and general manager was helping at fixing it, but he had just lost lost interest. And, again, would sooner be fishing, and he had made a lot of money. He was still making decent money. You know, just human error.
John Martinka:Yeah. He didn't do the things he had done before.
Barnaby Cook:So when so when it comes in that situation, when it comes to selling to an employee, how did how was that deal structured, and and how did the how did the general manager kind of raise the funds to be able to to buy the business?
John Martinka:General manager had some money, and then he he used a bank loan. Right.
Barnaby Cook:Then would that be an SBA loan?
John Martinka:Or It was an SBA loan. Now if this owner had sold to the parties prior, it would have been out of the SBA range here
Barnaby Cook:Mhmm.
John Martinka:And would have been a different kind of financing, or there would have been bank debt, of course.
Barnaby Cook:Yeah. So in terms of what you what you do, is it is it the which other which other kind of specialist do you bring in? Like, how much of the process do you run, and and who else do you work with?
John Martinka:Week quarterback things, for 1. We match make things prior to that, maybe, or conjunction. I I can say with just a little bit of a smile that, it's sometimes I think of myself as a quasi therapist. It's a very emotional journey for both buyers and sellers. And, actually, that brings me to another quick story.
John Martinka:We had matched a seller with a buyer. They hit it off so well. I mean, this is a relationship game in small businesses. I I will tell you as a little sidebar, almost everyone we work with and a lot of owners out there, legacy taking care of the employees is just as important as the money. And these guys hit it off very well.
John Martinka:Very successful executive, successful business owner. The friendship actually became too much because the deal was stalling. They were having too much fun together, playing golf, etcetera, etcetera. We sat down in a coffee shop, and I said to I said to the buyer, it's really hard to find a good, mature, profitable business that's fairly priced, and where you can relate to the owner and you have one. I said to the seller, it's really tough to find a buyer who can run your business, has the money, and you trust to preserve your legacy.
John Martinka:You guys need to get it together and get the deal done. The buyer said after a little bit, think we can get it done by the end of the month? This was, like, 15th. They said, nah. That's a little too fast, but end of next month, and they did it.
John Martinka:So so that therapy, you need to you need sometimes it's pushing. Yeah. Sometimes it's pulling back.
Barnaby Cook:Yeah. Yeah. And have you ever seen it kind of it break down? Have you ever seen kind of deals fall apart? And
John Martinka:Anyone in my business just says they haven't is not telling the truth. Things happen. Financing gets in the way. Business doesn't keep performing as it has been, so their numbers aren't what they were when the offer was made, or a key customer lease or deal fatigue. Mhmm.
John Martinka:You know, just it's taken so long. And whether it's the diligence or the seller if the seller doesn't respond promptly, they still blame the buyer for delaying things. So the buyer says, I need these 14 items. They get them 10. They keep bugging him or her, and they don't get them, but the seller blames the buyer for stalling.
Barnaby Cook:Yeah. What do you think the market is like right now in in the small and medium business arena in in in the US?
John Martinka:Right now, it's pretty good. We don't work in the, what I call, the main street micro businesses. No delis, no dry cleaners, florist shops, things like that. So it's mostly b to b that we get our clients. They're they're gonna be valued anywhere from a few $1,000,000 to 20,000,000.
John Martinka:We stay away from what the investment bankers are doing, and we stay away from the mainstream. We don't wanna do what the mainstream brokers do, which I think is always a vibrant market for people buying a cut. Truly buying a job, not the job of a CEO. And it's pretty good. It's good if you have a mature profitable business.
Barnaby Cook:Yeah. Yeah.
John Martinka:And it's always a seller's market for a good business. It's a buyer's market.
Barnaby Cook:Well, I was gonna ask that. Do you think it's more of a buyer's market or a seller's market at the moment?
John Martinka:Yep. Sellers always will be and has been a seller's market for a good business. It's a buyer's market for a lousy business. You know, someone who just has to get out.
Barnaby Cook:And what kind of industries are you do you kind of are you industry agnostic or in the business? Yeah. You said sort of b to b, but kind of which which which
John Martinka:industry agnostic. Yep. We don't do we don't do doctors and dentists and things like that, chiropractors. But that's a separate you know, some of our more recent deals are a general contractor, which was a tough one, but we found a perfect match, a digital transformation company, a really good sized manufacturer wrap business. We're currently working with the with a company in the recycling industry.
John Martinka:Okay. A manufacturer, we'll just call it a job shop contract manufacturer, machine machine and coatings, and a proprietary product manufacturer. So all before.
Barnaby Cook:And so the digital transformation physics, so they so a lot of my listeners were in in the creative agency, and marketing world. So I'm interested in that digital transformation business and what they did and who they ended up selling to.
John Martinka:Well, they ended up selling to a group of 3 people. It's an interesting story because the seller said from the first meeting, we met over a cup of coffee. I have 10 employees. I'm making a lot of money. I don't wanna manage any more people.
John Martinka:I can't do it. Don't like it. He ended up staying on. We had lunch a few weeks ago, and he said, yeah. There's been a few few little hiccups, but I'm having more fun than I've had in years in business because I'm doing just what I want to do, which is customer strategy, generating customers, not doing HR and all the administrative stuff.
John Martinka:His company so if I I wouldn't. Someone like me would not go to them and say redo my website there. They would be overkill. They are doing a lot of things for large large medium to large companies mostly. A lot of sensitive information or specialists in sensitive information like medical.
John Martinka:Information here. It's in the States, it's called HIPAA, which is, you know, if you have someone's medical information, it had better be secure.
Barnaby Cook:Yep. Yeah. Okay.
John Martinka:Robust shopping sites, things like that.
Barnaby Cook:So the so so the so the seller in that instance was just motivated because he'd ended up in a position where he wasn't doing the work that he loved anymore. What kind of impact do you think the the sort of upcoming AI revolution is having on business owners? Do you think that it's something that that people are concerned by and are therefore thinking of perhaps selling before all things change too much?
John Martinka:Well, there's a lot of businesses AI is not gonna drastically change. AI is not gonna build a widget. AI is not gonna build a build a Yeah. It does it does help with, like, the digital transformation business that they can do more with the same amount of people or fewer people. And there are so many uses for it.
John Martinka:We will use it to get ideas on things and then refine them because it's all right there. You don't have to think what are what are the top ten things about this. You put it in AI, say what are the top 15 things. You can pick 10 or add a couple they didn't come up with and just change the language because they most people can tell if it's written by AI.
Barnaby Cook:Yeah. Yeah.
John Martinka:Versus a human.
Barnaby Cook:Yeah.
John Martinka:But we've we've used it to give us the base of an of an ad and marketing pieces to sell a business. Okay. And Yeah. They did a really good job on one of them after we took out all the sales language. It sounded like it was from the 19 sixties.
John Martinka:You know, the best deal ever.
Barnaby Cook:What's your view on this idea of the silver tsunami, this idea that, boomers have kind of owned businesses, are coming up to retirement age, and, you know, that there's suddenly going to be a kind of flood of businesses available on the market because they can't find sellers for them. Do you have a view on on how realistic that is?
John Martinka:Oh, definitely. And I'll go back in time because it was about 2,007 or 2,008 that the Wall Street Journal had got a number of things on this, and they they said that, number 1, only 10% of businesses are ready to sell for maximum value. We can talk a little bit about what goes into that. But they also said there's going to be, like don't know the exact numbers in that one, so let's just say about 70% of me small, medium sized businesses are gonna change hands in the next 10 years. You fast forward a few years and, 3 or 4 years, and there was something where remember exactly where they were, said the same thing.
John Martinka:Like, 2 thirds of businesses are owned by baby boomers, and they are going to sell in the next 10 years. And then a few years after that, it was the same thing from another source. And what got in the way of that that tsunami, and I actually I got sucked in a bit, and I actually wrote an article for my alma mater's business magazine on the tsunami of businesses for sale, and it never happened because the the great recession in 2008, 9, 10 delayed things. And then I think if you were to go back to right before COVID, we had about 10 years of really strong business. And, again, I somewhat jokingly will say if you asked owners in 2019, early 2020, how'd you do during the recession, many of them would have said, recession?
John Martinka:What recession? Memories are short. And since COVID, yeah, it's picking up. I don't think we're gonna see a tsunami. I think we're just gonna see a steady increase in businesses that owners are gonna have want to or have to sell.
John Martinka:Age gets in the way. Health issues, a spouse saying, I wanna see our grandkids more, and they live quite a ways away, etcetera.
Barnaby Cook:Yeah. So what are your what are your kind of top tips on things that people can do to maximize the value of their business.
John Martinka:So if we go back to that, you know, 10% are ready, 90% are now look, there's a lot of information out there, about what are value drivers, what does it really mean, and, you know, I could make a list of top 20, but I I I focus on 7. And number 1 and, actually, I'll say number 1 because it's so important. Most of them in any order. Have good financial systems so you have accurate financial statements. And part of that is don't blend the business and personal check.
John Martinka:Yeah. So we were working on a deal couple years ago, and the our client had a facility in France. And what I learned in France is that in France, the government has access to your accounting system all the time. There are no fun and gay funny games played with writing off your spouse's car or track taking a trip and writing it off with the business, Buying things for your full.
Barnaby Cook:Happen very much in the UK either. Not yeah. I think it does a little bit, but compared to the US Yeah. It's a completely different sort of mindset, I think. And in the US, people are much more willing to run a load of personal expenses through a business.
John Martinka:Yeah. Our last three clients our last three deals had no funny business in their financial statements at all. I think the the only thing one of them had a top heavy pension plan, which we are allowed It can happen here, but it's so explainable that it you know, it's nothing nefarious. Mhmm. Our current clients let's see.
John Martinka:No personal expenses. No personal expenses. You know, one of the clients said, I I can't. My controller won't let me if I even if I wanted to, so that that's a good seller. K.
John Martinka:So you wanna have act accurate statements. Another another big one is reduce the dependency on the owner, which means build a management team, delegate, you know, the the last thing any buyer and I've seen it in I was at a presentation earlier this year, and there's a company that sold for about $70,000,000, and one of the owners said, we realized when we started the process, we were too important to the business at that size. Delegate, get people. Another one is grow. Don't just say you can grow.
John Martinka:Show that you can grow. Buyers are skeptical by nature. After a while, you hear every story.
Barnaby Cook:Yeah. Well, there's that sort of, you know, 20% top and bottom line should be the target for any business, 20% growth year on year, and 20% EBITDA.
John Martinka:Yeah. Hire and retain great people. Again, ties into having a good management team, but also below them. Have good people who are looking to grow and elevate their careers with you. Talked about owner dependency.
John Martinka:Another one is just dependencies in general. Don't have a key customer at, like, 20, 25, 30%, 3 customers, or 80%. They said we're too big for you. He was in a world of hurt. Did he learn his lesson?
John Martinka:No. Because a number of years later, he called me and said help me again. He had one key manufacturer who decided they were getting too big for him. Landlord can be an issue. Yeah.
John Martinka:You don't. No no buyer wants to have a loan longer than the lease because the landlord kicks you out, raises the rates tremendously. What are you gonna do? And there's the the I call it the 3 i's, I IT and incentives. So take care of your IT, cybersecurity.
John Martinka:Use get IT you can use. I'm on the board of a company, and the ERP system has been a bit of an albatross since they put it in a few years ago. They don't use it anywhere close to what they could, and, that's money out the door. And, of course, IP if you have intellectual property, and then incentives. We talked about stories.
John Martinka:The good one is, a deal. The owner, you know, Nice Guy really was into, you know, making every last dollar, and I know that the buyers that bought his company is a good sized deal, came in, revamped the incentive program and compensation program for the employees. It was mostly inside sales, and they were able to make more money, and they grew at 75% the 1st year. This guy left a lot of money on the table by worrying about a few dollars. And then finally, see the big picture.
John Martinka:Know where you're going and how you're gonna get there. And, you know, we talked about growth, and you said 20%. I know someone who was a, he was a president of one of the divisions of Expedia, and I remember him saying, growth hides a lot of operational warts.
Barnaby Cook:Yeah.
John Martinka:Get the growth going, then fix the warts.
Barnaby Cook:Nice. Well, that that feels like quite a nice note to wrap things up on.
John Martinka:Yeah. That's been a pleasure.
Barnaby Cook:Thank you very much for listening to the Exit Plan podcast. If you enjoyed it, please leave us a review to help other people find us. If you would like your question answered in m and a q and a, or are wondering what's next for you and your business and want to chat about an exit plan, drop me an email on barnerby@foxcogroup.com, or get in touch with me on LinkedIn.