Growing Through Acquisition And Positioning To Sell Your Business with Terry Lammers

Acquisition and positioning are significant when selling your business, as well as knowing your cash flow before buying another company you are interested in. In this episode, Terry Lammers of Innovative Business Advisors discusses techniques and ways for you to be able to sell your business or buy another company effectively. With your company, it is not about sales and net income; instead, it is all about gross profit and especially cash flow. He elaborates to you the reasons why, as he also emphasizes how having the right business advisors and team is crucial in helping you successfully buy or sell your business.

• Why you might consider acquisitions in your industry.
• The importance of the right relationships to do deals
• Why “seed planting” is important to deal origination
• Which advisors you need on both acquisitions and dispositions
• The importance of recurring revenue
• How Terry Lammers helps companies on both sides

About The Guest: Terry Lammers

Growing Through Acquisition And Positioning To Sell Your Business with Terry Lammers

As some of you loyal subscribers know, one of my favorite topics is the area of mergers, acquisitions, deal-making, exits and everything that has to do with that.

I've covered these topics on a handful of episodes in the past or as we call them here on the show episizzles, because they’re way hotter than an average podcast episode.

This is near and dear to my heart because I have been on both sides of transactions of both buying and selling a business. I've been on the smaller side for some of them. In some of the deals that I work on in some of the other companies, I've got a few bigger seven-figure acquisitions.

I've always found this to be one of the most exciting parts of the business, which is finding people who have assets that I can acquire instead of building from scratch. We all know how hard a startup is. It's as exciting as it is. It's risky and difficult. Here is the detailed description of w9 vs 1099 that explains which to choose as it completely depends on the nature of the business.

If you can utilize your business acumen and marketing strategies and you step into a business, you can oftentimes get a great headstart, whether that's buying a business that you want to run, growing your business through acquisitions, or buying them as a financial investment.

On the flip side, where most entrepreneurs I know have made significant wealth is on the exit and disposition of an asset that they've spent years of their life working, honing and getting good.

We are in an unprecedented time with the Baby Boomers generation who's starting to retire. There are a lot of business owners there and they're starting to need people to buy their companies. This is a tremendous opportunity for people on both sides.

There are a lot of buyers out there. There are a lot of sellers. However, there is not necessarily as much training and education on how to do this correctly and not get burned. As sexy of a strategy as it is, it is also fraught with things that you don't know.

Most entrepreneurs and business owners get into the business to operate their business and to provide a service, a product, or a good for somebody. They didn't get into the business to position it for sales. They didn't get into it to know what to look for when they're going to buy something.

The more education I think we can all receive, yours truly included on this, the better we are. That's why I invited Terry Lammers onto the show.

Terry has got a great story. He grew up watching his parents run their own company in the fuel and lubricants industry. He eventually became a full-time employee in the early ’90s, only to take over as the President of the company.

In several years, his company, Tri-County Petroleum, had purchased and grown through acquisition eleven different companies. They've grown his family business from $750,000 in annual sales to over $40 million when the company was sold in 2010.

He is a Cofounder and Managing Member of Innovative Business Advisors, where he taps into his financial expertise and his hands-on business experience.

He advises and guides both prospective business owners who are interested in buying as well as current business owners who are looking to sell their enterprises.

Terry also has a great book out called You Don't Know What You Don't Know. It's all about an in-depth examination of the process of buying, growing, and eventually selling a business. Terry, welcome to the show. It’s a pleasure to have you.

Thank you, Brad. That’s very flattering.

Your story fascinates me. There are two real sides of this, like playing the piano, left hand or right hand. There's the acquisition and then there's the disposition. In the middle, there's obviously the operation.

On this conversation, I don't want to talk as much about the operation of a business unless it adheres to operating your business in a way that sets you up correctly for sale. There are things that people do from operating the business for cashflow and increased profit.

There's another way to operate your business so that you're hitting all these key performance indicators that allow you to eventually sell your business and not get steamrolled over some stupid mistakes that you've made.

I want to follow this linearly. I want to talk a little bit more about the story you hinted at before in the oil and gas company and how you grew through acquisitions. $750,000 in revenue to $40 million in revenue is an amazing jump.

I'd love to hear a little bit more of that story about you starting as an employee with your folks’ fuel and lubricants business and how you got to the point in deciding that, “We're going to buy some of our competition or somebody else in order to grow.” Take me back there.

It was a wild ride. I grew up in the company. I was driving a gas truck when I was thirteen years old. I came back to the company in 1991. I jokingly say, “It was me, my mom and dad. We had two trucks. It was a good day if they both started.”

My starting salary was zero. I left the banking position with credit card finance. I've always been a financial person, but I knew we had an opportunity to buy another company. I knew if we bought that company, it would put my dad's business back in the black.

Was this company a competitor?

 

It was a friendly competitor. It was obviously a small company. You bought a company at 100% owner finance. That's exactly what we did. I was only 21 years old.

My dad's company wasn't bankable because it was in rough shape. I knew this would put us back into the black and it's exactly what we did. That was in 1992.

You start out, you're working on the company, you’re the doer. In 1995, we bought another company. In 1996 or 1997, we bought another company. It started steamrolling. In the year 2000, we bought three companies in one year. After that, we were on a roll.

How challenging was the integration process after purchasing the company? I know I've purchased a couple of businesses and I thought it was going to be a lot simpler than it was. This was probably, to me, not leveraging at the right resources.

When you go buy another company, closing the deal is only the beginning. You have to make sure it's integrated well and managed well. How did you handle that?

You're going back before email and all this other stuff, but we would send out a letter in the company that we acquired in their letterhead, in their envelope saying, “I chose to sell my business to this person because it's a fair deal for me. I'm retiring and I want you to give them a shot.”

We would have a letter behind that saying, “We want to help you.” There’s the old 80/20 Rule where 80% of your business comes from 20% of your customers. The key was confidentiality.

If we get the deal done before anybody knew about it and we'd go around with that owner and hit those top 20% customers, we were successful in converting and keeping about 95% of those customers.

It was a deal where there are no contracts or anything in place. They're free to go buy their fuel from somebody else if they want.

Was that one name or was that another independently owned company where you owned them but they operated out of the same brand? Did you loop them in?

Every deal I've done was an asset purchase and looped under our name. We bought eleven different companies, but there are a lot of situations where you buy a company and you see issues going on. It's like, “We’ve got to change that.”

Don't do it right away. Give it a little bit of time. Let the customers get used to you. A lot of times, for us, it was about earning your trust.

We’re in fuel and lubricants. We’ve got hoses, nozzles, filters. Maybe it was giving them a filter, putting a new hose on their tank or something to show some good face towards them.

That worked. You’ve got to be patient. Don't go in blazing saddles and trying to change everything right out of the gate because you're going to offend them. They don't know what they don't know. It’s going to be a little bit slow.

On all those deals, you said you always made asset purchases. Were all the acquisitions eventually then enveloped by the parent brand?

Yes.

Were you buying a lot of physical assets or were you buying customer lists, processes, and things like that? People think about the assets of a business. Assets of business are everything from your URL, customer lists, processes, IP, etc.

It's almost 50/50. There were situations where we strictly we’re buying a customer list. It’s 80% goodwill. My company was a fuel business that sold lubricants. Lubricants business was growing and I needed a new facility.

I bought a lubricants company that sold fuel. The facilities he had for lubricants, if I had to build it, it would probably cost about what I paid for the company, so I got the customers with it.

There are other companies that I bought that put us a physical office or a bulk plant which is a petroleum storage facility in a geographical area that we're not in. That was a great way to expand that way also.

I don't know if you've ever seen a bulk plant before, but they're not glamorous assets. They're valuable if you're the one that's using them. We bought it at much of a discount and getting the cashflow with the customers with them.

Did you end up having to take over the management of it or did you retain any of the existing managerial, whether it's the owner or the number two or three people, in order to help the continuity of it?

That was key because customers loved the drivers. When I sold the company, I had three former owners working for me. I never bought a company that we let an employee go. I was fortunate from that standpoint, especially office staff and stuff like that.

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I've bought businesses anyway you can slice it, from 100% owner financing to 100% bank financing to a mixture of both. I’ve bought companies that were distressed. We paid them a percentage of the gross profit from what we got to keep of the customers that transferred over.

My fastest company ever bought was in three days. I found out about it on a Wednesday and closed on Friday. I found out about it, called them and said, “What's going on here? I heard some rumors.” He was like, “We’re closing the doors on Friday.”

I was like, “What are you doing with your customers?” He said, “I tell them to go someplace else.” I was like, “Hold the phone. I'll be right there.” I got the deal. I gave him 25% of the gross profit for one year for the customers that we kept.

I put that company in my computer system like a salesperson. I printed him off a monthly report and wrote him a check. It was a super fair deal. It was great for me. I did that in the year 2000 and I still had 95% of those customers in 2010 when I sold. It was all commercial accounts.

If you're a business owner out there and you want to grow your company, you have to consider acquisitions. It's a great way to grow your company.

You buy assets. You don't have to buy an entire company. You don't even have to buy all of somebody's assets. You can sometimes buy a portion of their assets especially it all depends upon the situation that somebody's in.

If they're going out of business, you've got like a yard sale. You can pick and choose if you want depending on the situation. Buying somebody's distribution channels, maybe buying somebody's product, IP, customer list, etc. is huge.

That was a creative deal. Were there any other creative deals or structures that you did that stand out?

I got one that was funny. We bought Bowen Oil Company in Vandalia and its competitor was right down the street. It was a deal where they were friendly competitors.

Pioneer Oil Company was down the street. Ron came up to me and he said, “If you bought him, you're buying me too. His facility sucks and mine are much better. We'll work this out. We'll combine the two companies.”

Those two guys were still working for me when I sold the company. I bought them a few months apart. We worked out of Bowen Oil Company’s facilities for a while. I bought Ron's customers. A few months later, I bought his real estate.

We structured a deal with Pioneer Oil Company that my payments would be such until I paid off the Bowen acquisition. I would increase my payments to him to get him taken care of. It was part bank-financed. It was simple but complicated.

The other thing that made it complicated in my situation is the working capital requirements to run an oil company. You have to pay for the fuel in ten days, so that’s your accounts payable days. Your accounts receivable days run around 27. You get seventeen days of funding there.

When I sold the company, my sales were over $250,000 a day. Take that times seventeen, that's a lot of money versus if your sales are $100,000 a day, you’re doubling the thing.

It’s something that I didn't know back then which is the basis of the book, You Don't Know What You Don't Know. It was a struggle with banks, even though your profitability is growing and everything else. We were sucking working capital like crazy. Until I got bigger, that was an issue. It was hard.

I could paint you many a picture of a company that goes broke, not because they're not profitable, but because they flat ran out of cash.

That's one of the biggest issues in a lot of businesses that are often unreported. You don't hear about that when people are talking in business interviews, articles, and stuff like that.

I've got a lot of friends in the physical product eCommerce business where they become a victim of their own success. If you do 100 units or 1,000 units this month and then you're growing to 2,000 units next month, you have to finance the inventory.

There's that entire cashflow crunch that can eat you alive if you don't know how to take care of that. Personally, that is not my specialty in knowing how to solve those problems easily. I don't think there is an easy solution to that.

It's one of the things when I do public speaking that I talk extensively on. I'm still friends with my banker from back then. Some years, we were growing 100%.

He kept telling me, “Terry, you’ve got to slow down.” At that age, you're like, “I don't know the meaning of the word. Full speed ahead.”

The price of fuel is going up. This is true. He'll tell you because he remembers the exact number. On one day, I was $750,000 overdrawn in my checkbook, and they covered me.

He got a call from the CEO of the bank which was in a different state going, “Do you know this Terry Lammers guy?” Those are stressful situations.

In order to cover those cashflow crunches, were the right banking relationships the most critical thing? Did you go out and raise external funds?

The right banking relationship is absolutely critical. I would have been dead in the water if he hadn’t stood behind me. The key to solving the problem, and it's another You Don't Know What You Don't Know, is I always had a line of credit but it was a specific amount.

Let’s say your line of credit is $500,000, but you're growing the company. What solved the problem is when it put me on a borrowing base certificate.

A borrowing base certificate doesn't give you a top line of what you can borrow, but your line of credit is based on 50% of your inventory and say 75% or 80% of your accounts receivable. In my case, the accounts receivable is ramping up.

At the end of the month, you fill out this borrowing base certificate that says, “My inventory is $100,000.” I can have $50,000 borrowed against it. “My accounts receivable is $100,000.” I can have $80,000 borrowed against that. If my line isn't over $130,000, it's all good.

That's what solved my problem. I never heard of a borrowing base certificate until he finally brought it up to me. I want to dump them on the head. “Why didn't we do this a few years ago? I've been stressing about this the whole time.” That's why it's important for growing businesses to have advisors.

When you go to start a business, you're thinking of a product, market fit, pricing, operations and employees. You're trying to make sure that you can make enough money to keep the bills afloat.

It's hard to know everything. There are so many things you do not know and those things can bite you in the ass if you're not careful.

I've always called myself a big little company when we sold it. At $250,000 a day in sales, if my account receivable days went up by two, I'm not collecting my money as fast. If my accounts payable days went down by two, I'm paying my bills faster.

$250,000 times four is $1 million. That's $1 million in cash that is gone out of the company. It has absolutely nothing to do with profitability as a company. If you can't fund that, you're SOL.

We can talk about this from your experience in that business. I know you've got a lot of experience past that. I've got a business that we're going to be trying to acquire some of our competitors and roll up, etc.

When it comes to sourcing your acquisition targets in order to grow through, I would think that this can be pretty tricky. If you approach somebody who's a competitor, you’ve got to get them open to talking to you about potentially selling their business.

If you approached me and we're even slightly competitive and you're like, “I want to buy your business.”

If we come up with a preliminary number that might make sense, I’ll still think, “How do I know you're not coming in here to learn everything you can about my business and take off and steal some of my trade secrets?” I could see it being a sensitive thing in order to grow through acquisitions.

What insights do you have on that? If they’re competitors, that's not hard, you know who they are. Approaching them and getting them into those conversations to where they felt open to having the conversations with you.

I called it planting the seed. If you're interested in acquiring other companies, put it out there. Tell your insurance agents. In our situation, there were only a couple of insurance agencies that insured fuel companies.

By telling them, “I'm interested in growing by acquisition. A couple of my leads came from them. Sylvester Petroleum is interested in selling.”

I would also go around to my competitors. If I wanted to buy them, I go and introduce myself. Business owners fall into the trap of, “That's my competitor. He's my enemy. I'm not talking to him.” They are people, too. They're getting older. Introduce yourself. I call it planting the seed.

I wouldn't go there and say, “I want to buy your company.” I go there, introduce myself and say, “I'm Terry. I'm with Tri-County. It looks like you’ve got a great business. If there's ever a chance for us to work together or you need something, give me a call.” That's your first touch. Now, they know you.

Maybe next year, you come and say, “I stopped by to say hi again. How are you doing?” The next thing you know, it might lead to a cup of coffee. The next conversation might be getting a phone call from them saying, “Let's sit down and talk.”

I was known in the area that we were buying up companies. I had it when I sold at a company on the line that I was going to buy but ended up selling my company.

When I approached that guy to stop in and plant the seed. I knew him from another acquisition. He goes, “Don't joke with me. I know you want to buy me out so let's talk.”

There are multiple ways. The company I told you about that we bought in three days, we found out from one of their customers. It's keeping your ears open.

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I'm working with a company in Washington State. We're sending a nice letter from my company, Innovative, that says, “I have a company that's interested in acquiring companies like yours through acquisition. If you're interested, please give us a call.”

It's planting that seed. You’re a business owner, you've thought about selling companies. I think we all have as business owners.

Maybe you get the letter and you don't think of it, but it's one of those things that gets shoved in the drawer. One day, when they're upset or frustrated, they pull it out and they make a phone call.

Since you got out of the oil business, what was the first thing you did after? Did you go out and buy another company in another market? Is this when you started consulting and advising?

Owning a fuel company when fuel is $4 a gallon like it was back in 2010 wasn’t fun. After I sold it, it’s like, “I'm done.” I had to work for a company that bought me for a few months. After that, I was done. I hung around the house for a few months and my wife was like, “You're going to get a job.”

Regions Bank asked me to come to be a loan officer. They gave me a good salary and fair benefits. I did that for 3.5 years. In that timeframe, I got my entrepreneurial spirit back and that's when we started Innovative.

I got my CBA designation, the value businesses. That's how my situation went out, frustrated with it. I add some of my value to the business. They came up with a number and it's like, “If you can sell for at that, let’s do this.” I'm doing the path that I went down.

When you sold your business, what was the structure of that? Obviously, you signed it to a big sophisticated $6 billion business. Was that typically an all-cash deal? Was it cash plus maybe public stock? Are you able to divulge any of that?

It was pretty much an all-cash deal. They did hold back a significant, almost seven-figure number for one year or if I was done in a few months just to keep my attention. There were no ties to it. It keeps your attention to help you transition the business over.

I bought eleven different companies. I would say I'm a sophisticated buyer. In my thought process, all along, was to build the thing up and sell it. I reviewed the financial statements. All of my rolling equipment was all in line.

We had signed lease agreements on all the stuff we had out in the field. We had our ducks in a row. From the day we signed the letter of intent, we closed in six weeks. That's phenomenal.

Growmark was a cash buyer. It did go fast. They have their own Acquisition Department. They have their own attorneys. I had my attorney who I liked and was good. We could move quickly. There was a confidentiality breach. I sold it to nine different companies.

Growmark bought my lubricants division. They’re cooperative. Eight of their FS member companies bought my fuel side. One of the brilliant managers sent an email to all their employees that they were buying us before the purchase agreement was even signed.

That got to be a little bit of issue. Thank God it moved quickly. Otherwise, that would have been an issue. Kudos to them. They were good people to deal with.

It helped me that had been through several acquisitions on the other side of the fence. You learned how to make those business judgment decisions.

If somebody's reading who want to sell their business, don't let your attorney take over the deal. You've got to make business decisions. They're there to help you and protect you, but don't let them start and make decisions. You’ve got to do things that make sense.

Who are some of the advisors you recommend having on your side, both on the acquisition and the disposition sides? If I'm going out there trying to buy a business, whether it's growth through acquisition or I want to buy a business to be in that business.

This is one of the things you guys do at Innovative Business Advisors, are you handle a lot of this. Maybe you can cover the areas you handle and then the other players on the team that somebody should have, whether it's an attorney, the right CPA and anybody else.

That's the middle of my book. I have a chapter on bankers, attorneys, CPAs, financial advisors. When I value a company, I'm big on, “Is it a bankable deal?”

If I value your company at $5 million, can you make a reasonable down payment, go to a bank and have a good enough debt service coverage ratio? Is there enough cashflow to pay for that business?

I sadly have seen several instances where somebody bought the business for way too much money. They struggled because they paid too much money for it and there's no cashflow there. Getting a correct valuation on the business is important. Having the correct attorney is important.

That’s building your team. Maybe, it involves a broker or plain intermediary. Being an intermediary is, if somebody wants to sell you, if somebody wants to buy but they don't know how to get the deal done, we're in-between.

We do that for a much cheaper fee than outright selling the company where we have to go find the buyer. Anywhere from there, I play quarterback. I make sure you have the right financial advisor. I make sure you get to right CPA, make sure you get the right attorney.

 

A classic error that I see is people go to an estate planning attorney to do an M&A transaction, and it's bad. It is important to build your team.

I'll be the first one to put my hand up. I didn't do it right 100% when I sold my company. I didn't tell my CPA because he was also a large farmer and a customer, so I didn't want him to know. At the time when I sold the company, I didn't have $80,000 in investable assets.

With a financial advisor, you need $80,000 in investable assets. Over seven figures in investable assets are different. I didn't understand the difference.

When you went to sell your company, you didn't have the $80,000 in assets?

Not asset, just investable income. When I invested, everything was tied up in my company. It's typical of about 80% of business owners.

If you're reading this and you're a business owner and you are planning on the sale of your company to fund your retirement, get your business valued.

It pains me when people come to me and they think their company is worth $10 million and I tell them it's worth $5 million. It blows up their retirement plan. That's $5 million before taxes because Uncle Bob told them this or that. It's critically important to know the true value of your company.

It's one of those big things that you don't want to be surprised by. Get in there early and figure it out even if you're several years away or something like that. Figure it out so you’re completely surprised.

I've got a close friend of mine that I advise on some growth stuff. He's thinking about selling his business. It's almost the exact same thing. He's got this concept that he thinks he could probably get $10 million to $15 million for it. Realistically, he might be able to get $6 million.

That's a huge difference because he doesn't understand the way that valuations work and exits work. Everybody thinks their kid is the prettiest.

You've interviewed John Warrillow before with The Value Builder System. Go to their website and you can take a Value Builder questionnaire.

The big thing about the Value Builder System is they talk about some nonfinancial things that not only can hurt the value of the business but can outright make it unsellable.

I had a trucking logistics company that was cashflowing over $500,000 a year. The owner did absolutely everything. He dispatched all the trucks. Every customer called him. Every employee went to him. You're going to attract a lot of buyers with that.

The bottom line was that if you take him out of business, there is no business. It proved to be an unsellable company.

That reminds me of one of the episodes I did with a guy named David Osborn. David is in the real estate business, but he's the largest owner of Keller Williams Franchises. He owns fifteen of those.

His entire mission has always been, “How do I make myself the most insignificant person at my business through hiring, partnering with the right people?”

That’s any entrepreneur business owner who's got an exit in mind, you have to find a way, “How do I make myself insignificant to the operations of this business?” You make a business infinitely more successful.

When I came back, I was the doer. As I grew the company and got to the end, I had a management team in place. I had three operations managers and an office manager. They preferred it if I wasn't around. Let them do it.

They did a fantastic job but it takes time. It's about having enough cashflow that you can hire the right people. Eventually, that was the ultimate thing. I focused on buying other companies and had the people in place to run mine.

Have you considered any time besides the advisory or are you acquiring anything at all?

That's a hidden agenda behind Innovative. I am that hourglass that is always spinning on your computer screen. I am interested in investing in other companies. My thought process is, “I wouldn't mind being a minority investor but I have ways that that would have to be set up.”

If you're a reader and you're thinking about buying a company, it’s an excellent way to grow by acquisition. A lot of companies I bought, when I bought them, I could add products immediately to the customers that they were serving.

It's important to understand the difference between a financial acquisition and a strategic acquisition, or more importantly, a financial valuation and a strategic valuation. I talked about it in the book. It's one of the first chapters.

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My accountant and I always have butt heads. He would say, “Terry, you only pay for a company for the cashflow that it's generating.” I knew if I bought that company, I could eliminate 40% of their operating expenses and improve the cost of goods sold because I have better buying power.

Some business owners have a false realization. You hear of these huge multiples. That happens because there was a strategic operation.

If I'm an individual buying your company and I already have a company, that's going to be more of a financial acquisition and you're not going to get that huge multiple.

That's why the last business that I bought was a financial decision. I wasn't even looking forward to it. I stumbled across it. It fell on my lap. I had no strategic reason to buy this. It did not plug and play into any of my current ventures, but I got it for a reasonable price.

I was like, “This is something I think I could improve.” I gave it much lower valuation on it because I didn't think I'd be able to pull the trigger and double the revenues.

Two examples, one, when Growmark bought me. I was their largest competitor in Southern Illinois. I was a major thorn in their side. It was good for me to go away. That made me a prime strategic acquisition.

I had a lubricants packaging facility and they had bought a lubricant blending facility. They wanted to get into the bulk oil business in Southern Illinois. By buying me, they don't only have the facility. They get 500,000 gallons in sales.

I talked about in the book another deal. The Highland exit and the Vandalia exit are 30 miles apart. In between is Greenville, Illinois. It’s a high area of customer concentration for me. There was a guy in Greenville that I bought that was a small competitor. He had a bulk plant, bulk storage facility.

He wanted about $100,000 more than what the company was worth. Did I pay him that? I did because I tore down the bulk plant. If he would have sold it to a competitor, now they could have a facility right in the middle of an area that I had a high customer concentration.

From a financial valuation perspective, I was paying too much for him. He was a single operator. I was going to be eliminating 90% of his operating expenses. It was still a good acquisition.

He was a small competitor in my area, but I eliminate the possibility of a larger competitor coming in and taking over his facility.

That's the strategic thinking and thinking from a 360 degree, not like, “Does it make financial sense off the most obvious path or not?”

That's why deal makers and people who acquire and dispose of businesses, etc. is one of the things I think is so sexy in business. There are a lot of different approaches you can utilize to find leverage.

Another piece of advice I'd give your readers is if you're getting into the acquisition mode, in the beginning, it's frustrating with banks.

When you're acquiring a company, they don't want to look at that company's cashflow as far as paying off the loan from whatever apps to advance money they used. They want to look at your business's existing cashflow. That was a little bit of an obstacle.

When we grew to the size where I'm buying a company for $500,000, the cashflow from my existing business could make that loan payment without any income from the company that we were buying. That's when it took off. That's where we could start making the acquisition almost every year.

To repeat that, when the cashflow of your company can pay for the loan payments of the company that you're acquiring without any income from that company, that's when you're going to be in the driver's seat.

The other side of that is to have conversations with your banker. It's important that your banker knows what you're going to do. It’s like anybody who doesn't like surprises.

I'd sit down with my bank. Towards the end, I used two of them. Tell them exactly what my intentions were. “I plan on buying this truck. I've been planning it on trying to buy this company.”

In that way, they can help you. They're anticipating what's coming. If they get a red flag, throw it up before you get in the middle of a negotiation that you can't do.

Let’s say you want to go buy a business, you want to be in that business, I want to buy a manufacturing business or whatever it is, and I plan on getting a bank loan.

You can't rely on saying, “Look how much money this business that I'm going to buy makes.” Obviously, that's how I'm going to pay for the business. The banks don't like that.

If you're giving advice to somebody who’s more of a, “I just want to get into that business and acquire that.” They're thinking about going the traditional bank route.

 

If they're not coming out with fat cash to take care of their loan payments, they're hoping that that business does. Is there any other way around that that they should be for starting to consider to help make it go smoother?

All situations are different. It's not a deal killer. You have to have your own cashflow before you can buy another company.

What's the longevity of that company? What's the consistency of that cashflow? Do you know the business? What's your experience if you're going into this line?

More importantly, and I talked about your bankability in the book, all loans boil down to two things. “What's my collateral? What's my cashflow? Do those meet?” “If you’re not going to pay me back, what can I take to cover my butt?” from the banker’s perspective.

It was painful to work in a bank for 3.5 years. In business, you should learn to say no to certain types of customers. Banks are good at it. It was interesting to learn how they think of things on the other side of the fence. They're going to look at a lot of things that you should look at before buying.

Do you have contracts with your customers? What's the income trend in that company over the last few years? What's the future of it look like? What's the management of it look like? The level of scrutiny is obviously going to go up with a dollar amount.

Switching gears out of personal curiosity. If you weren't doing all the advising and you were going to go get into a business and look to acquire it, are there any industries, verticals types of criteria you would personally look at if you were going to buy it?

Not just buy it for a super minority, advice or whatever, but if you're going to go buy it. For instance, would it be like maybe another industrial-based company?

It’s recurring revenue. Does the company have recurring revenue? I started Innovative and for the most part, we're a brokerage company. That’s a terrible idea. Once you sell the company, I'm going to find another one to sell.

If you think about my fuel business and when we serviced a number of industries, trucking, farming manufacturing. Let's use farmers for example. Every year, farmers are going to the farm. That's recurring revenue.

Every year, your municipalities are going to run fire trucks, ambulances, and police cars. That's recurring revenue. Insurance companies sell for a higher multiple because that's recurring revenue. CPA firms, you’ve got to do your taxes. That's recurring revenue.

I like to use an HVAC company as an example. If you're an HVAC company that strictly does new construction, you're not going to fetch a higher value as an HVAC company that does mostly repair work and you have service agreements with your clients.

This is a loaded question because I know the answer is yes. A business that maybe doesn't have recurring revenue but they could with a few tweaks because that's a tremendous value add.

That is the beauty of acquisitions. You brought the acquisition to another level. If you can see things that the other person doesn't see, you can get some tremendous value.

What does it look like to work with Innovative Business Advisors? Tell me a little bit more about your company and the services you provide. You've been great on telling us about general knowledge. You got into this business for a couple of reasons.

One is to help other entrepreneurs, business owners, and people navigate this world. You help people acquire and grow through acquisition or to exit. If there's anything that's amazing and in your wheelhouse, you have the experience and knowledge to acquire it for them. It’s a great thing to have.

If I had an advisor who's helping me on this stuff, if he didn't have the confidence or wherewithal to buy my business or something like that himself, I might be like, “I want somebody who could.” What does it look like to work with you on both the acquisition and exit sides?

We can certainly help people acquire businesses. Typically, we do that on a monthly retainer. The ideal person for us to work on the acquisition side, they come to me and I want to buy other companies.

Let's use our HVAC company again. I want to buy another HVAC company. I know who to go look for. The ones that are time killers for us is somebody that comes to me from a corporate job and says, “I want to buy a business.”

Most of our clients are on the sell-side. It's nice when you get a client that has a runway in front of them. They're not looking to sell in the next few months.

I'm working with a company where they came to me and the owner got sick. They're like, “If we don't sell it in a few months, we're closing it down.” That limits your options.

In a perfect situation, I would say, it starts with a valuation. We value the company. “Who's your financial representative? If you don't have one, I'll introduce you. What’s your number? What do you need to retire out of this business and meet your financial goals?”

If we value the company and it's at a number that meets that goal, you go down the brokerage side. If we value the company and it doesn't meet your goal, let's take you down the coaching side and let's build this thing up.

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I got a coaching client that I'm working with. He wasn't going to make their retirement goal. It's like, “You're 50 and you’re not going to be there by 60 the way you're going.” We helped them open up another shop.

That's a perfect idea, but you do get people to come to you and say. “I would like to sell sooner than later.”

We do marketing. We put together. We play quarterback. We make sure that they got the right attorney, that the CPAs are on board, that they got a financial adviser to help with structuring the deal.

Here are my two mantras. With your company, it's not about sales and net income. It's about gross profit and cashflow. When you go to sell your company, it's not what you sell your company for, it's what you keep net of taxes. Those are two hugely different things.

I get so frustrated when somebody comes and says, “My sales are up to $500,000 this year.” Who cares? Did you make any more money? It’s the same way with selling your company.

I could paint you dozens of scenarios where there may be a $500,000 difference in the purchase price, but what are you getting net of taxes? They call it the first-first page.

The first-first page of my book is me buying a company that the two CPAs were at odds with because it was all over the allocation of the assets.

You establish a purchase price and then you have to allocate that to the assets that you're buying. Whether it’s goodwill or towards equipment can have huge tax implications. It was going to cost my seller over $100,000 the way I had to have it, but that's the way I had to have it.

That can cause a lot of heartburn. Those are big deals. We got intimate knowledge in bankers, attorneys, financial advisors.

If you haven't been through it, trust me. I'll guide you through it. All those awkward questions that come up like, “He wants to see a customer list.” No, he wants to see if there’s customer concentration. This is what we'll show him.

I had a phone call once. It's a company for close to $8 million that was going through due diligence.

“There are some things I wrote on the due diligence list that you don't need to know that right now, not until we're closer, not until we know the financing place, maybe not until the purchase agreement signs in 30 days.” It's all those funny questions.

Those are important. Those questions are what make or break a deal. The entrepreneur, the business owner shouldn't feel bad about not knowing the answers.

They've done well from putting the pieces in place to build an actual business. When it's time to either dispose or buy one too, time to defer to experts.

Due diligence questions are critically important to buying a company. I knew what to ask when I was buying other oil companies.

Post the oil company, I bought a property management company. I didn't know what questions to ask. We got burnt on a lot of things. The computers are shot. The employees weren’t trained on this computer software. The phone system was shot. I didn't know the right questions to ask.

We talked about non-financial things that can affect the value of the company. This conversation for selling this company, there's trucking involved. There were some huge DOT red flags that got thrown up for the way we initially answered the due diligence questions.

Thankfully, it all worked out because it's a larger company for us to sell. Had they not been compliant on these DOT issues, it could have completely killed the deal.

Speaking of questions, what is in your business? There are a lot of things that you're trying to do. You'd love to get more clients and things like that. That's the obvious stuff.

Are there any particular nuts you're trying to crack in terms of, let's say an initiative you're trying to pursue, a problem you're trying to solve, a person you're trying to meet, a skill you're trying to learn?

Anything of that nature that allows me or my audience to open our minds and be able to give back to you and help you out. It could be anything.

I told you brokerage, nonrecurring revenue. There are a lot of people out there that would pay $500 a month to learn about finances but they can't afford $2,500 a month.

I'm interested in knowing, from your readers or from you, the thought process is to create little mastermind groups and charge a fee around $500 a month. We would meet monthly.

What I'm going to provide you is the knowledge of knowing how to run your business from a financial perspective. I’ll teach you ten or so key performance indicators, financial ratios, which will be a dashboard that if you know those, you're going to have good polls of how your company is running.

 

We'll teach you what your bankability is, what your debt service coverage ratio is, what your accounts receivable days, payable days, inventory days, how that relates to your cashflow margin versus your gross profit margin.

Those are all crucially important things to know versus being a checkbook manager. For me, that helps me create recurring revenue in the business. I guarantee you it'd be worth the money.

It would have to be a confidential intimate group, say five people, and work with them on a monthly basis to help them build their financial statements in a readable manner to help them manage their business.

That's definitely a hot topic. I've got a friend and former guest on the show who's done some live events on this. I don't know if he's added a virtual thing, but it's called Know Your Numbers.

It was a one-day workshop. It wasn't ongoing and it didn't necessarily focus on a result such as selling your business or getting it with certain KPIs.

I know that it was a well-attended, heavily interesting event, especially as you start to get successful. Sales are getting taken care of everything else, but you look and you see that everything is such a mess. You're focused on the wrong KPIs.

There's going to be two types of people. The ones who know they need that help, they're like, “I need to figure this stuff out because I know I am woefully ignorant of it and I know I need to know it.” Then there are the other people who don't realize they've got that issue yet, but they should.

The one client I had, he's a banker. He doesn't know what he's talking about. It's like, “No, you're unbankable and this is why.” We got him fixed. We straightened it out.

The other thing I'll tell you that would be interesting is, I do definitely want to get into this public speaking room a little bit more. That was another point of publishing the book.

If you have a group of people, I do a couple of different talks. One on valuation, what's it worth. Another one that's cool is we look at it from a strategic valuation. What does it look like strategically to buy this company?

I run through some scenarios of talking about nonfinancial things. Say you're approaching, buying three different companies. They’ve all got the same cashflow, but each company runs a certain way. Think about that from a nonfinancial perspective of which company would you buy.

The reverse psychology of it is if you're a business owner and you're going to eventually sell your business, are you running it in a way that will make it sellable?

This topic would be tremendous on the public speaking circuit. I’ve got a handful of resources I'm happy to point you to, from some things that have worked both for me, for some of my clients, and even business partners. We can talk about that.

The whole mastermind and financial model, the way I would do that is I would go to your existing database and contacts of people there. I would offer to host a one to three-hour Zoom webinar where you're going over it.

You can also do an in-person meetup where you're going over those ten metrics and whatnot. Make that offer because you never know. You might get more than five, you could definitely get 50 people interested in that.

I think that it is critically important. People need to do it. I don't think that's offered enough. You don't stumble across that offer out there for people often.

One of my clients, she tells me every month, “I looked for years for somebody to help me run my business.” They have a diesel repair shop. They're good at running their shop but nobody's ever taught them how to run their business.

There's a way to get through it that could be fun and it isn’t rocket science. I'm not teaching how to take a gallbladder out. We're putting some simple checks and measures in place to keep you bankable and understand what the cashflow of your company is doing and ways to think about it.

If folks want to find out more about you, get a hold of you, get your book, what are some links so that they can rush off of and say, “I’ve got to learn more about what Terry has to say?”

Our website is www.InnovativeBA.com. You can find me on LinkedIn. If you go to the Media tab on our website, you’ll see a lot of business articles, other podcasts, and a video of speaking. There’s quite a bit of information there.

There’s a tab there and I encourage any business owner to take the Value Builder Questionnaire. That’s a great thing to do. It doesn’t cost you anything. I’ll be happy to reach out to you and talk to you. I’ve got a good presence on LinkedIn. You can find me there.

I'm not a Twitter guy, but I know I'm out there because I’ve got a social media person that puts stuff out there. My phone number is (618) 530-8922. I’m happy to talk to anybody.

Terry, I appreciate you coming on the show. It has been a lot of fun for me personally. Thanks again for being a guest on the show. I look forward to staying in touch with you.

Thanks, Brad.

Important Links:

• Innovative Business Advisors
• Value Builder Questionnaire
• You Don't Know What You Don't Know
• LinkedIn – Terry Lammers
• Twitter – Terry Lammers
• John Warrillow: previous episode

About The Guest: Terry Lammers

Terry Lammers grew up watching his parents run their own company in the fuel & lubricants industry, and eventually came on as a full-time employee in the early 90’s and took over as president of the company. In just 18 years, TriCounty Petroleum had purchased 11 different companies, growing Terry’s family business from $750,000 annual sales to over $40 million when the company was sold in 2010. Today, as co-founder and managing member of Innovative Business Advisors, Terry taps into his financial expertise and hands-on business experience to advise and guide prospective business owners who are interested in buying, as well as current business owners looking to sell their enterprises.

In his new book You Don’t Know What You Don’t Know, Terry provides an in-depth examination of the process of buying, growing, and eventually selling a business.

Through Terry’s guidance, business owners and aspiring business owners are sure to walk away with a wealth of knowledge and advice to lead them down the path to business success in every stage.

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