AMA with Christine McDannell from The Magnolia Firm

Through our slack community, InsideBiz, BuyAndSellABusiness.com recently hosted an Ask Me Anything (AMA) series with the Founder & Principal Business Intermediary of The Magnolia Firm (TMF), a boutique M&A brokerage firm helping business owners achieve the perfect exit. 

Christine McDannell is a serial entrepreneur, author, and speaker. Since its recent inception, Christine’s firm has helped countless entrepreneurs cross the chasm from business ownership to a successful exit, all without compromising their values or dream outcome. TMF specializes in helping owners achieve a 100% success rate for exits, with most closings coming in at either full-asking or over-asking price.

The topic focused on Navigating the Sale of a Small Business as A Buyer. Whether you are an experienced professional, starting your micro-M&A journey, or simply someone with a keen interest in buying and selling businesses, questions were answered. Check it out below, keep in mind this is a transcript, so excuse any grammatical errors!

What factors should I consider when choosing a buyer for my small business? 

Tip 1 is cash flow and profitability. I don't like the R word, which is recession, but probably a little bit of a rocky road is coming up here soon and a cash flowing business will be easier to survive that, right? You'll have some wiggle room, and you can make some changes. Also, I know everybody recently is asking for a recession proof business. I had a house cleaning company during 2008 that was profitable. That was cash flowing and we grew 10%. So, don't be scared and don't be so hard set on a recession proof business.

Tip 2 is an impeccable reputation. Again, that's going to get through tough times and that's the number two thing we look for when we look for businesses we're going to take on as seller listings. Go through Google reviews, go through their social media, go through the comments on the social media, see if the owner ever responded, see what people are complaining about and those might be opportunities for you to come in and fix those issues. And then I always like to go to competitive businesses in the industry I'm currently in and reading complaints because then I know what to do right in my business.

Tip 3 is a stable, real strong team in the business. And you guys just so you know, not a lot of buyers know this. You can write into the purchase agreement that they're going to be the key employees. And, you know, sometimes the seller's willing to even offer a bonus to the employee for staying on at least six months a year. It's harder to get people to stay over here, to be honest, but at least if you can get them for six months or a year, I think that's important. So again, you can write in that key employee need to stay into the purchase agreement, you can interview a few of those key employees, but right before you sign that purchase agreement. During due diligence, you can always come in as a consultant. If that owner is not quite comfortable yet, saying you bought the business, you're a consultant or you're a possible investor.

Tip 4 is the business itself is not wrapped around the owner. If the owner is still clocking 40 / 60-hour weeks, you're going to have to have them do an earn out without a doubt because that's going to be hard for you to step in, and you've got to be super comfortable that you can step into that role and you're a good delegator, and you can bring in some other team members. It's a roll up. So, maybe you are and it's great because that's economies of scale. Maybe, you already have a great manager, maybe you have a marketing team, and you could just buy this company folded in and you're not worried about the owner, and they can run off to the sunset. Otherwise, they probably definitely need to stay on 1-2 years so that you're able to kind of take the reins after that.

What's the best way to approach Due Diligence? What should buyers look for?

Buyers don't do as much as they probably should. To be honest, we have a checklist. But, I swear I do more due diligence than the buyer ends up doing when we take on a listing. Here’s what I do; I'm going to check their social media and dig really deep into the company. For example, the team financials, all that fun stuff just doing a very deep dive into the business before you purchase it. 

What is the best strategy and actionable items that the new owner could do to make it more profitable immediately?

So, from when you look at the potential business you're going to buy, I'd say from day one, you're going to ask that owner, “hey, give me a list of opportunities for growth, things that you have on your crazy to do list that you haven't gotten to yet.” Every owner has so many things they know they can do to grow their business, but they're just too buried in the day-to-day. As I dig into due diligence I'm going to add to a list from my side of my talents and things that they were unaware of to help grow their company. So, with your own strengths, make that list and then, you’ll be hitting the ground running from day one.

Now, please do not change everything. Don't fix something that's not broken. Don't make a bunch of changes that are scary. Don't fire people, lay off people etc.. just get your feet wet for those first 3 to 6 months and kind of ease into it because you're going to scare employees and clients. I bought a few spas and there were product lines that I wanted to get rid of, but of course, you know, the customers that bought those products, skin care products would have probably gotten upset. So, I just left them.

Here's a little ninja trick. You guys try to get the seller to increase their prices before you buy it. So, then you're not the bad guy. And, a lot of these sellers have not increased prices for years and inflation is just such a perfect reason. Again, the spa I ended up doing it about six months in the price increase and not a single person noticed. So, that adds to your profit overnight once you do that.

Now, software – for us, these businesses did not have any software in place or any online booking option. So, we ended up getting 70% of our bookings done online versus calling an admin and spending valuable time booking people.

What is your advice on using a Buy-side Broker?

Using a buy side intermediary adviser or broker, I never like calling myself a broker ever. I would say intermediary because the bad reputation they have. But, we're going to actually launch that division of our company and we're going to be able to start helping on the buy side to source businesses, especially for people acquiring multiple businesses.

It depends on how much time you're spending on it. It could turn into a full-time job trying to find a business to buy. I’ve heard that multiple times, it's hard to figure out where to search. 

Sometimes you got to get creative because if a business is already on the market, a lot of times it's priced higher than if you were to do cold outreach. You need to just have a very dedicated team going after businesses that aren't even listed yet and peaking their interests. 

Now, we do cold outreach on seller listings, and we just landed one yesterday who never thought about selling it. He was going to wait, and he did want like a nine-figure exit.

And we kind of brought him down to reality a bit on an eight-figure asking price. So, yeah, I mean, if you're not in a hurry, I don't think you need to use that side broker at all. A lot of them will co-broke with the seller. We don't necessarily do it, but a lot of times the buyer doesn't even pay to use that adviser broker. The seller ends up paying it out of their broker fee. So, that's another advantage. So, you can kind of check around but interview them first.

Can you please explain Adjusted EBITDA & SDE? 

The differences between EBITDA and our adjusted EBITDA and SDE, they're actually synonymous. So, EBITDA adjusted EBITDA is with the add back. So, that's a larger company, they're going to have to have EBITDA and that's similar to cash flow and net profit. Also, I know the terms are quite confusing, but the, you know, adjusted EBITDA is when you adjust in all the add backs that the owners are possibly running through the business, like travels, vehicles, etc...And then the company is usually sold on a multiple of the adjusted EBITDA. But, as far as SDE, that means sellers discretionary earnings, the same thing, that's what they're taking out of the business. That would be adjusted, let's say the owners paying themselves $200,000 salary. But truly, if you brought someone in to replace them at $60,000, then we would add back the difference of $140,000. if you were to replace them again, we're adding back any personal expenses they're running through SDE, typically for a business under $1 million dollars in net income.

Can you go over the difference between IOI vs. LOI vs. MOU?

I have a funny story when it comes to IOI vs. LOI vs. MOU? So, this industry has tons of acronyms. Thank God for Google, right? So, and IOI is an indication of interest and so that's kind of like a soft LOI. 

It's kind of saying, hey, I'm really interested in the business. I want to dig in a little bit more before signing the LOI, IOI and LOI are both non-binding agreements kind of handshake. But again, the LOI has more terms flushed out a little more specific.

Here's what I'm going to be, here's the breakdown, here's the deposit so that the LOI are usually going to put down a deposit anywhere from 10 grand to 50 grand on that LOI and put it in escrow to show that you're serious.

MOU Memorandum Of Understanding is the same exact thing as an LOI. Yeah, they're synonymous with each other. And the funny story is I got a seven figure MOU for my software company in Europe in 2018 / 2019. And, I had to Google what it meant. I knew what an LOI meant, but I didn't know what MOU stood for. And that was pretty funny.

Thanks so much Christine for taking the time to speak with us. I have no doubt that your questions have left a lasting impact on everyone who attended. Your knowledge and expertise have certainly inspired me.

Once again, thank you for your time and for sharing your knowledge with us. 

Opinions expressed here by contributors are their own.

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