009 | How to Maximize Value When You Sell Your Businesses with David Barnett

Episode 009 | How to Maximize Value when You Sell Your Businesses with David Barnett

Patrick Lonergan: Welcome back to the Vital Strategies podcast. I’m your host, Patrick Lonergan. And today we’re going to take a look behind the scenes of what it takes to buy and sell a business with David Barnett.

David has been working with entrepreneurs for 25 years. He currently consults with people looking to buy or sell a business. He is an author and has great content on his YouTube channel.

David also has developed tools for entrepreneurs to guide them through the process when looking to buy or sell a business. David is an expert and is here to answer all of our questions around business transactions.
In this episode, we cover what it takes to put together a great deal that is a win win when buying or selling.

You won’t want to miss when we cover the different levels a business can grow to and what those levels mean when it comes time to sell. Make sure you listen to the end to learn how to position your business to maximize the value. and make it attractive in the marketplace. This episode is for any business owner that is considering one day selling their business or could be in the market to buy a business.

Let’s get started with today’s guest, David Barnett.

David, I really appreciate you joining us today. I’m excited to dig into this conversation around, I think both buying and selling businesses, you consult and have some resources for people there that, uh, I think just from my time digging in and, uh, watching some of your YouTube videos, you’re clearly an expert on this topic.

And so I’m really looking forward to this conversation. We’re going to get into. A number of different areas of planning that we look at. We typically talk about five areas of planning. There’s tax, legal, cashflow, investments, and insurance. And I think those first three will probably come into the discussion today.

Uh, you know, businesses don’t like to pay a whole lot of tax. They need cashflow to be profitable and, legal structures matter. So we’ll be talking about those. How are you today?

David Barnett: I’m awesome. Thanks for inviting me. I always love to, have a chat about this kind of stuff. It gets me going.

Patrick: So I think we can start out if it’s okay, you, you consult with people with small and medium sized businesses.
Can you just define what that means? Cause that, that can mean different things to different people.

David: Yeah. So, it’s great that you bring up the topic of definitions because You know, we hear this term small and medium sized business all the time. And the reality is, is that different people in different parts of the, you know, business, uh, ecosystem are going to have different definitions of what that means to them.

If you ask somebody, for example, in government agencies, they, they might define small or medium sized businesses based on the number of employees, for example, because that’s going to have a bigger, sort of relativity to the like programs or things that the government’s trying to do. In the world of, you know, investment bankers and things, they’re going to have a very different idea of what a small business is versus what I consider a small business.

So for example, there’s a book out there from Harvard business review called the HBR Guide to Buying a Small Business in the forward. They describe a small business as one having $10 million of revenue. And, you know, if you think about the people at Harvard, you know, the, They’re often talking about Wall Street stuff.

That would be a small business. I rarely, you know, meet people in everyday businesses that I deal with who would have $10 million of revenue with, with a few exceptions. And so, I don’t like to use revenue actually as a measure of business size. I like to, I rather focus on cashflow and here’s why.

Is that you could have a small business with a few million dollars in sales with a EBITDA cashflow of half a million dollars. And you’re talking about a small owner managed business that, um, may have a dozen employees. At the same time, you could have a fuel oil delivery business that does $25 million in revenue, but because of the cost of what you sell, the oil is such a huge percentage of your, your selling price.

It’s still, guess what? A small owner run business with a dozen employees. And so those two businesses, even though they have vastly different revenues, uh, are going to have a lot in common with, with how they operate, how they’re structured, what kind of systems or processes they might have in place, et cetera, or, or of course the lack thereof.
So I like to call businesses with. With under half a million of EBITDA, main street, and I’ll call the ones that are above that. I’ll refer to them as lower middle market. And once we get up to like one and a half, two million dollars of EBITDA, that to me, that’s squarely in the space of mid-market and that things change dramatically.

When you start to go through these gradations, in particular, the buyers that are active, what they’re looking for, what resources they have, but most importantly, that the access and cost of capital. So different kinds of people are operating in different parts of this sort of ecosystem.

Patrick: Yeah, no, that’s fantastic. And I never really understood the conversation around, Oh, I’ve got a $5 million business. I’m like. I don’t, I don’t really care about your revenue. You could be losing money every year, running a $5 million business, or if you’re operating like you were talking about at a 25% profit margin, it’s like, all right, great.
You’re making a million and a half dollars a year that are million and a quarter. That’s fantastic. Good for you. So those are really good distinctions. Could you talk a little bit more about the difference between that main street and the sophistication it sounds like goes up. Could you talk about the difference between these two areas? Yeah, that’d be great.

David: Sure. So, on main street, typically we’re talking about businesses that are going to be owner managed. And those are typically the sellers. So the sellers are going to be the person that goes in there day to day, typically. And there’s always exceptions to this, right? But typically it’s more owner managed kind of business.

And the owner is going to play an important role in the day to day decision making that happens there. And the way that these businesses are valued is they’re typically valued using what’s called seller’s discretionary earnings. Which is a number which combines both the profit of the business as well as any salary or wages that the owner is taking.
So it’s this combination that answers the question to a buyer, who is in a similar situation, who’s going to step in and take over as a day to day manager, it answers the question. If I buy this business, how much money is available to me to spend? Now that’s not profit. It’s not money that goes in the pocket because out of that seller’s discretionary earnings, we have to cover a lot of things. Debt service for bank loans, taxes, something for the owner to take home to support their family. Uh, capital expenditures are not included in that either. So if there’s a lot of equipment in the business, that’s got to be taken into account when the buyer analyzes those numbers.

But we’re looking at that discretionary cash flow number. When we cross over that half a million dollar mark, and this can vary by industry. In some industries it might be a little higher or lower number. But when we cross that line, We start to look at businesses more with respect to EBITDA and the difference between EBITDA and the seller’s discretionary earnings is that fair market value of a manager’s wage.

Because once we get into that lower middle market, we are more likely to start finding businesses where the owner is not the day to day manager, where there’s some other paid professional manager that’s operating the business. And the buyers tend to be more sophisticated as well. Um, even if they see the owner is the day to day manager, they’re going to normalize or carve out what the cost will be to replace that person.

And they’re more interested in the investment return that the business is going to generate. And again, EBITDA is not a real number either. If anyone listens to Warren Buffett and what he says about EBITDA, um, the reason we use these cashflow determinants. It is because it’s just a tool that allows us to compare one business versus another.
So, when I’m helping someone look at, you know, I don’t know, uh, an electrical contracting firm, I can go into databases of private sale transactions, and I can look at other electrical contracting firms and compare them, side by side to see what other people may have paid for a similar kind of business.

Patrick: That’s great. And. Just to highlight a distinction, I think you made there that the main street business would be more like, for lack of a better term, buying a job, right? Like I’m paying for this thing, and it’s going to depend on my time and energy to produce the income necessary to support my lifestyle and all those, those pieces where the middle market is going to be like, I can make a real investment here and maybe not have to spend so much time and energy in the business.

I’ve got key people operating the day to day and it allows me to very much, like you said, look at it from a return on investment IRR perspective, like, okay, I can, I can put some dollars into this. I can maybe see how this would either fit into my current operation, you know, that, uh, there could be some synergies there, some efficiencies that could be created that allow it, all allow of us to grow faster. Uh, would that distinction be a fair one to make?

David: Well, I definitely think there’s something called buying a job, but I think you have to look at the main street space and kind of carve it up even more. And buying a job should not be considered a derogatory, I think, because a lot of the people who are out here looking to buy a business in the main street are literally looking for.

To buy a job and make an investment at the same time because they want to leave their day to day job that they don’t like and they want to go and do something every day in a business they own where they can apply their own skills and talent to then grow and improve that business and take it to the next level.

So if, for example, we look at. You know, I don’t know, a smaller business with a discretionary cash flow of $150,000 a year, and the normal wage of a manager in that industry is, you know, $90 or a hundred grand. If a person bought that and then they had their debt service and taxes and Capex, et cetera, come out of that discretionary cash flow, yeah, they’d be left with the wages that someone would expect to earn in that industry.

And so. Who typically is the person that is going to be that buyer. It’s actually going to be people who, you know, for some reason may not be able to get that job in the normal employment market. And this is why we’ll see certain kinds of businesses, for example, that. You might notice in your community, Hey, how come all of these kinds of businesses seem to be owned and operated by this kind of person, maybe newcomers to the country, right?

And so, if you think about a person that’s immigrating to the country, they might have all kinds of professional credentials. In their homeland that are not recognized here. And so, to them, buying what we might call a job is actually a wise investment because they’re acquiring that personal income that they wouldn’t be able to get from the labor market.

If we look at something a little bit bigger. So let’s say that you have a landscape construction business that earns you a million dollars a year. There could be someone out there with a landscape construction business that has a discretionary cash flow of half a million. So if you were to buy that business, you know that you’re not going to run that business.

You know that you’re probably going to have to maybe hire someone to manage it for you. Or you can simply fold it in with its customer facing employees and everything into your own organization. Maybe you can even reduce some of the overheads that that target company has because you’ve already got systems in place for your payroll and answering the phone and all that kind of stuff.

And so, this is what we would call a bolt on. And so there are a lot of. Mid-market companies that are out there acquiring these main street businesses and from their point of view, it certainly is an investment because what they’re going to do with that target company is going to be very different from what the current owner is doing with it today.
Patrick: That’s fantastic. I want to go back to something else you were talking about as far as like the EBITDA goes. A little background. We do a lot of tax planning and sometimes those tax moves, um, and you have a great video on this for like holding companies and setting up subsidiaries under there. So let’s say we’ve got a real estate entity that owns the real estate and then there’s the operating company and the operating company is paying.

Rent back to the real estate company. Okay. Now we want to be is sometimes we want to be really aggressive with that rent. And so we, we see that inside of the operating company and it’s like, okay, this, this might be a wise tax move year to year, but that would affect EBITDA in a way that maybe isn’t great.

And I could talk through a few other like opportunities. Sometimes the QBI deduction is a great deduction for, you know, our owners. And. It can make sense in certain scenarios to raise their wage up dramatically, which again, brings down the EBITDA number when we start looking at when a buyer starts looking at the P and L. Is there opportunity to add some of those pieces back into that? How are those typically handled? Because I’m trying to understand if we, if we should be, you know, if we’re looking to sell, if we start dialing those things down, we stopped doing those, you know, for a year or two before the sale, or if that’s okay to keep You know, sort of the income tax bill as low as possible, and we can, we can resolve that.

David: Yeah. So, when, when we look at a business that someone wants to buy, when I’m working with a, with a consulting client, we start with tax returns, financial statements, whatever kind of information we have available, and we know full well that these documents were not made for the purpose of evaluating a business for sale.
Tax returns were created for the taxman to assess the taxes due. Internal financial statements based on the tradition of CPAs are supposed to be informational for the ownership of the company to understand really what is happening in the business. And so we know when we’re looking at these numbers that we, for the purpose of buying a business, that they weren’t made for us.

So we have to go through something called a normalization. And what that means is we go line by line. And we asked the question, how would this be different if we had bought this business three years ago, or if some stranger had bought the business and was running it in this quote, unquote, by the book scenario.

So for example, if the holding company was charging an excessive rent, we would just adjust that. You know, you might want to talk to someone who might let us know what a reasonable fair market rent might be for that type of property in that area. But yeah, if we see there’s an aggressive rent, we would just adjust it.

And so that extra money would fall down to the bottom line. And we go through this line by line with everything. With the case of an owner’s salary, in a lot of cases in the world of small business, owners are taking less than they should. So the, you know, automotive repair center manager owner might be taking, you know, 60 grand out of his company and leaving the rest of the money in for other things that he wants to do with it.
But in the fair market, if he were to hire someone to replace himself, maybe it would cost $90,000. And so we’ll go back and make that adjustment too. And so that normalization process is important to go through before a buyer even makes an offer because they really have to know what kind of cashflow is available to me once I start operating this under my own circumstances? And there’s two levels to this because a buyer is going to look at it and say, what’s the normalized performance, but then a buyer may go even further to say, now, what other advantages do I happen to bring that no other buyer could have?

What more could this be worth for me? And so I mentioned earlier about a mid market company buying a main street company that might have its own processes and over, you know, central head office functions in place. They might be able to buy that main street business and then maybe even remove some of the people that are in the office.
They’re typically not going to make an offer based on those added advantages. But they’re certainly going to calculate them because it’s going to be part of their understanding about why it makes sense to pursue and make an offer for that business.

Patrick: Yeah, that’s fantastic. Now, you’ve brought up two things I want to touch on.
The first is, let’s talk about multiples. Do the multiples change when we go from the main street to the mid market for the same type of industry?

David: They do. And where they change and how much they change and at what levels, it’s going to vary by industry. It has more to do with who the buyers are and the way the companies are run than anything else.
So, a very small business is going to be highly dependent on its owner and the buyers of that very small business are going to be people maybe who’ve got some savings and they maybe have some home equity and they’re going to get an SBA loan, for example, right? And then as you get bigger and bigger, you’re going to meet more sophisticated, more complex buyers.

The companies themselves are going to be bigger and more sophisticated. You’re going to have companies that have this middle management layer. So, all of a sudden, we have these redundancies and how the business operates, it’s less and less dependent on the owner because there’s other people now in the organization that can run the day to day.

Right. And so, as the company gets bigger, it’s seen as being less risky. So, the buyers are willing to pay a higher multiple because. It’s got more economic momentum. It’s got greater customer base. It’s got, you know, uh, more asset value in just the stuff that it owns, for example, but on the buyer side, you’ve got these bigger and bigger buyers who may have very different types of capital available with different cost structures.

So, you get these. You know, private equity firms and all these other people, you know, in the very small end of the market, people struggle with the down payment because you’re often talking about an individual person, maybe borrowing from family members and things like this to try to gather together that down payment money.

Whereas when you get up into the mid-market and lower mid-market, you’ve got like private equity groups who’ve. Done a fundraising round with high-net-worth people and they can just write a check for the business. They might then go and lever it up after, but the way that they access capital and the rules that they play by is entirely different.
And so, if they really feel that there’s something extremely valuable that they can do with the business, they’re free to go further than what a buyer might be able to do in sort of those smaller size businesses. And, um, you know, a common strategy, uh, is what we call doing a rollup. So someone will buy A several smaller businesses at a lower multiple.

Pull them together and create a bigger company with the hopes that this bigger company then sells at a higher Multiple and so they didn’t get an order of magnitude increase in value and it’s a very simple strategy to discuss and understand It’s a super difficult strategy to actually execute and make it work and there’s all kinds of literature out there about how you know The difficulties can come about and maybe you can’t properly integrate the cultures of some of these different companies you put together and all kinds of stuff like that, but That’s what, you know, a lot of these private equity players are attempting to do.

They, they want to, uh, gather together a bunch of smaller businesses at a lower multiple, the Holy grail of this, of course, would be maybe to take something public, right? And then when you bring it to the stock market, then of course, as you know, you get those stock market evaluations, which, you know, we get into the double digits.
Patrick: Sure. And I think you’re, you’re absolutely right. There’s two things that have to happen to make a business work, right? Like the numbers have to work, but I’ve seen plenty of deals on a spreadsheet that look fantastic. But the execution is the critical piece. Like you have to have the operations that can.

And the know how to take that business and how it’s currently operating and either continue it or, or increase those things. And it’s definitely a challenge. We’ve seen clients that have grown organically very quickly, and then they’ve made some acquisitions and those acquisitions definitely help. But you mentioned a key thing about integrating in the cultures and that type of thing. And those have posed some challenges like. Oh my goodness, I didn’t realize it was going to be, you know, so hard to add these 10, 12 employees into our 50 employee mix, but It does, you know, and they just do things differently. And so it can be disruptive, but at the end of the day, and maybe we could talk a little bit about the multiples. Cause I know you do a ton of research on what companies are selling for, uh, your updates of the market and, and where things are really good. People should check out your YouTube channel. All I did was just. You know, when, I knew you’re on YouTube, I searched David Barnett, YouTube, and you come up and all of your, your stuff is fantastic.

So, people should definitely check that out. Can you talk a little bit about just, and maybe there’s not a rule of thumb, but where are businesses trading and it could be industry by industry, but the main street, what are those trading at? Is it two or three multiple? And then where’s that middle market?

Are they more of a? 6, 7, 8, where you’re, where are you seeing those multiples at?

David: Yeah, sure. So let me give you a sort of a little footnote or caveat about this stuff first, because many of the databases that are collecting this information, the way that the databases were initially set up. May have been a little bit simplistic.

And so you can hear all kinds of chatter about the multiples that things are going for. And someone might be discussing, for example, an asset sale that may not have all the operating capital included. Another conversation that you overhear might be discussing a share sale in which the company is properly capitalized on closing day.
And so it’s not always an apples to apples comparison, even though. Someone might say, well, these are all the companies under a certain SIC code. Even the, the individual records can have these differences that can kind of skew things overall. In general, down in the main street, when we’re talking about a service business with very little barrier to entry, you know, it’s at the high ones.

You know, 9 times that discretionary cashflow. The overall average for all businesses in that small main street space is like 2.3, 2.4. And then if you have some kind of real competitive moat that, you know, would prevent someone from coming in and really, uh, competing well with you, um, you might push it up to like 2.6, 2.7. I’ve listened to a lot of podcasts where people describe paying three times STE for a small business, and there was a time perhaps in 21 when those could have worked because money was so cheap, but I can tell you if you really look at these deals and if your buyer is informed and looking at the cost of capital expenditures and taxes and everything, it’s really hard for anything to work at three times STE in the main street space.

When we get into the lower middle market, we start to look at multiples of EBITDA and the old standard rule of thumb for EBITDA is 3x, right? And if we start to get into a business that’s more capital intensive, more machinery, more equipment, like a manufacturing kind of business or a company with a fleet of trucks or something like this, we start to push up into that 4x.

And traditionally, if you’ve got some kind of real IP protection, so if you’ve got a patent on a certain thing that you manufacture or a great trademark or brand that actually delivers value, and we can talk about this in a minute, um, you could push up, you know, 5 ½ , 6x. Now, that being said. I’ve seen private equity groups pay seven times for things, uh, just because I guess they really, really, really wanted to have it. And sometimes there are people in the market that don’t behave rationally. And this is also something that can kind of skew the perception of how things work from the part.

On the part of entrepreneurs, because you’ll, you’ll go somewhere and you’ll hear someone say that they sold their business for a certain amount of money and maybe a certain multiple of EBITDA or something like this. And you’re like, how did that happen? I see some of these examples in the data where someone pays a crazy high price for a business.

And in the main street, it typically happens when someone sells the house in California, they bought 30 years ago and they’ve got a million dollars burning a hole in their pocket and they just go and do a deal that doesn’t make sense. But they never had to have debt service, right? Like they, you know, people can do silly things in the world of private equity the issue that can sometimes happen there is that these firms that gather money from investors, if it’s sitting in a bank account, they typically don’t earn anything on it. It’s got to become assets under management to start generating a fee. And so if they’re in the market looking for something and they, they can’t find something that makes sense, there’s a tremendous pressure to do some deal because then all of a sudden the funds become under management and they can start collecting their fee.

So those are just examples of, there can be players out there that are kind of irrational. Does not make sense, in my opinion, to base your exit strategy on trying to find an irrationally exuberant buyer. It makes more sense to bring a deal to market. That’s going to make sense for several buyers.

And if they want to compete for each other and kind of bid up the price, I think that that would be a great thing to take advantage of, but it’s got to make sense. And, and oftentimes what I’ll talk about with, with business owners is I’ll say that business owners have a great deal of empathy and understanding for their customers.

Because they think all the time about what the customers want, what, what service do they want? What product do they want? What are they willing to pay? What other things can we do to help make it easier for our customers? So they’ll be more loyal, et cetera. But then when we think about selling our business.

All of a sudden people become very self centered about it. They’re like, Oh, I’m going to get a million dollars and I’m going to spend it on this, that, or the other thing. When you go to sell your business, you are still in the business of selling something. It’s just that what you’re selling now has become the business.

You need to take into account. That buyer and what their scenario is going to be. I like to draw the analogy with a car dealerships, you know, uh, to buy a car today, you need about $50 grand probably to get most cars and car dealers know that most people don’t have $50,000 in their bank account. And so when you go into that dealership, they’ve got those problems solved. There’s a finance person there who can help you with a loan, with a lease, whatever it’s going to be. They’re going to talk to you about the payment plan. They’re going to help you solve, as a car buyer, your financing problem. And business sellers need to take the same attitude.

You’re trying to sell something very expensive. It’s got to make sense from a financial point of view for the buyer, and you are likely going to become part of the solution for that. And, and most of the time when businesses are sold, the seller ends up being paid some portion of that amount of money over time.
And, you know, here’s a little secret, just for your audience, Patrick, make sure that nobody shares this. Sellers that participate in the financing work that the buyer does, often end up with more successful buyers. So, I can tell you a quick story if you want.

Patrick: That’d be great.

David: I sold a family-owned commercial bakery. I helped someone sell a family-owned commercial bakery near Chicago and the buyer made an offer and there was some negotiation. They finally agreed on the terms and the price. And then I said to the seller, I said, great, find out when the buyer is going to meet the banker and join them. And he said, what?

And I said, yeah, find it when the meeting is at the bank and go there because the bankers going to give the buyer a whole list of stuff that they’re going to want from you. It’s far easier for you to show up there and actually say, hi, I’m the seller. I’d love for you to have my phone number. Um, please feel free to call me whenever you want.

I’d like to be a part of this conversation. Let’s look at this list of things and I’ll get everything to you as soon as I can. The, the seller is helping to participate. It’s becomes a collaborative effort. Buying and selling a business is a very difficult thing. It’s a, it’s a challenging thing with all kinds of different moving parts that can fall apart at any given moment.

And so, you need to approach it from a collaborative point of view. The buyer and seller are working together to make this difficult thing happen. And I’ve had so many people get a much faster resolution to the process by having that sort of attitude, uh, with respect to the buyer.

Patrick: I love that. And, you know, I think about negotiation.

There’s a great book out there. It’s called Getting to Yes. I think it’s exactly what you’re talking about. Like, Hey, let’s. Figure out how to put a win win scenario together. Let’s work together to figure out, because oftentimes we, you know, we use the analogy of an orange, right? Somebody wants to fruit and somebody wants to peel like, but oftentimes we can be fighting over the orange in general.

And, so I, I think that’s wise counsel there. And it leads me to another thought on like value. You, you talk about a lot of owner financing is happening or, you know, as a part of the transaction. And I’m going to give you an extreme example, right? So, a business might be worth $200,000, okay? But I could give you a scenario where I’d be happy to pay a million dollars for that business.

And that scenario is you owner finance it, you charge me a dollar a year for the next million years. Now I can’t sell that business, but it’s going to cashflow like crazy for me, right? You know, and I can just soak up that cashflow for a really long period of time. So, are you seeing When we talk about some of those multiples of, you know, $1.2-1.8 on the main street side and some of the owner financing coming in, are you finding owners and buyers skewing the price higher or lower based on those terms?

Because that’s often like how the car financing works using your dealership analogy. People are much more interested in What is the cashflow? What is my monthly expense look like versus the price of the vehicle? So yeah, how is that factoring into the pricing?

David: And that’s why we have 96 month car loans now, right?

Patrick: That’s exactly right.

David: So, the answer is yes. You know, sometimes we’ll have sellers that will have what I and other people call aspirational prices. So, you know, in the case of the, you know, $200,000 business, but the seller wants half a million dollars, for example. So what? I will usually coach buyers to do is I’ll coach them to figure out what is it worth to you under what we call a cash basis.

So, this is your traditional 10% down, go get an SBA loan, ask the seller to hold a 10% note. But what makes sense under this scenario? And then we’ll say, how could we change this if we allowed the seller to finance this deal instead? And so we’ll have a much larger seller note and usually at a lower interest rate.

Uh, and we can get a higher purchase price and then we can get. a little bit crazy. We can say, what if we just made a down payment based on the value of the tangible goods in the business, the machinery and equipment. And then we offered the seller something like a percentage royalty of sales for a certain period of time.

Like, could we do something else to get that price even higher? And then we’ll present that to the seller. We’ll say, look, we we’ve looked at the business, we’ve looked at the numbers. Here are different scenarios we’ve come up with. That would be all suitable for us. Some of them may not be as agreeable to you, but depending on what’s more important to you, either a higher price or more money on closing, we could go this way or we could go this way.

And it’s actually starting to, I’m getting feedback from other people in other venues that I attend where I’m seeing this more and more. I was on an Educational webinar for people in the business brokerage community and an accountant in California was saying that the last three deals that he saw, uh, that he helped work on the seller financing notes were getting much larger over longer periods of time with fixed interest rates, sometimes as low as 3.9%. And so what’s that about? It’s about that aspirational price. It’s about people wanting to hit a certain number and the seller finally realizing they’re going to have to bend in a lot of other different ways if they want to be a
ble to tell their buddies at the golf club that they sold for a certain amount of money.
Patrick: So, I’m going to go back to something we talked about earlier with cash flow. And, and my guess is the books. Matter like how, how clean the books are, especially with the, I think about a business with inventory and some of those other pieces, like the, the accounting can get fairly complex. And I, we’ve seen owners be all over the place with how great a job they do keeping their books.

Can you talk a little bit about how important it is to have good records, good books to be able to, again, put together a win win deal where you’re communicating because that’s going to be one of the main ways you’re communicating with the. The buyer of your business is, is getting good data to them.

David: Yeah. So the buyer has to have confidence that what they’re seeing is accurate and realistic and. If they don’t have that confidence, what’s going to happen is one of two things. They’re either going to say, hmm, this is riskier than I thought, because I’m not as sure, not as certain, and they’re going to either want a lower price or it’s going to affect the terms.

They’re going to want a higher seller note, which is subject to offsets. Meaning if later it turns out the business isn’t as good as you said, they’re going to, they’re going to ding you for it. After the fact, and you won’t collect all your money. And so let me get, let me just give you some quick things that I see quite often.

So number one cash based accounting Is not for serious business people. It’s for, you know, hairdressers and one man auto repair businesses, right? It’s if you are in a serious business person, you need to be on accrual accounting, and that means you need to have serious systems around things like inventory, because you need to do your inventory on a regular basis to understand what your actual cost of goods sold is in the period that you’re operating.
And so I’ll give you an example that I often see is a business owner won’t do inventory for several years in a row. They’ll just make up a number and give it to their accountant at year end. And then when the business goes to be sold, the inventory somehow is off by hundreds of thousands or millions of dollars.

Okay. So then the seller often says, okay, I admit, I haven’t been counting inventory for the last couple of years. Well, that deviation from what the balance sheet says versus what’s really in the warehouse. That represents an error in the cost of goods sold. But if we haven’t counted inventory in three years, which years actually did the error occur?
So now we absolutely don’t know what the real profit was at all in the last three years. Right. And, and so, so now as a buyer, I’ve been basing my decision based on the, you know, the story you’ve shown me of increasing profits and revenues year after year for three years, let’s say. And now that entire story is thrown into question and we don’t know anymore.

Right. And so that’s bad. That’s, that’s not going to be a good thing. So yeah, you have to take the bookkeeping seriously. We also want to make sure that you are able to really manage your business from your financial statements. Most, most business owners don’t They have some kind of system in place that they feel comfortable with the numbers that they’re looking at.

You should be getting your financial statements reconciled every month with the bank account very quickly. You should be looking at them every month and you should learn to be using them to help you manage the business. So, another common error that I’ll see. Is I’ll see a business that has eight different lines of revenue in their internal PNL.
So maybe, let’s come up with an example here. Let’s say a music store. That sells instruments, accessories, and also gives lessons. So this music store has three revenue lines. There’s a revenue line for instruments, one for accessories, and one for, for lessons. And then in the cost of goods sold, which is the direct costs, we’ve got one line.

With all the purchases of instruments, accessories, and the payments to the individual lesson teachers all lumped together in one group. So now I’m going to ask you, what’s the gross margin on these three different categories or lines of business? And you have, you can guess, you can tell me what it should be.

You can say, well, we mark up the instruments 50%. So that’s a 33% profit margin, but you have a year end sale. And you have a black Friday sale and you, you know, so this being there’s discounts being applied, which means you’d never are going to hit your target. It’s going to be somewhere in between, but you can’t tell me because you’re not keeping accurate enough records.

So those three revenue lines should be matched with three different costs of goods sold lines. And then every month you should be looking and seeing what kind of margin you’re actually achieving. Because what happens, especially here over the last couple of years with all these supply chain and logistics problems we’ve been having is your costs creep up and you may not be increasing prices at the same rate.

And so your margins might be shrinking and you may not even realize it. Right. And, and so these are the kinds of things that a buyer is going to get into. People who sell a business off and start to really have issues with a buyer’s due diligence and the level of examination that they do. It’s going to be worse than anything a proctologist could ever put you through.

The, the buyer, like look at it from their point of view, you might have a business, let’s say that’s generating $600 or $700 or a million dollars worth of profit to you every year. By the time that business gets into the buyer’s hands. They’re going to have applied all of this leverage. They’re going to borrow money there.

They’re going to have huge debt service payments that you do not have. There’s going to be very little leftover at the end of the day for them. And if the business has a small decline in revenue, a 10% decline in revenue, for example, that depending on what your margins are like, 40% decline in profit.

That one little bump in revenue for certain businesses could mean the buyer can’t take home a paycheck. Buyers are keenly aware of the risk of what they’re doing. They’re, they’re buying a business because it’s less risky than starting a business. But if they don’t do it right, they can be in every bit as risky a position as a new startup.

And so they’re going to verify, validate, et cetera, everything that you ever tell them. And if there are things that can’t be verified or validated, they’re going to deal with that risk through the deal structure, which means that you’re going to end up holding a bigger note. I recently had a meeting with someone who was looking at buying a business, and one customer represented 80 percent of the revenue in that business.

And so my advice to the buyer was number one, let’s just look at this business, you know, as though there weren’t a customer concentration issue. Right. So we looked at the business and I said, okay, here’s the value. It was going to be about a quarter million dollars.

And I said, now we have to structure this in case we lose that customer. And so the structure simply was, we’re going to give a small down payment, like 10%. The seller will finance 90% of the business and if we don’t make a sale to that customer for 45 days in a row The balance of the note is forgiven That’s the offer because without that one customer. we didn’t really buy anything that there was nothing there and that seller You know, from their point of view, they’re probably thinking, I built the successful business. I want to be paid for it. It’s worth something, but the reality is, is that they built a business on the point of a needle on a pinhead, right?

It’s very precarious. It’s very risky because they built so much of their business on this one particular customer and the seller might have a fantastic relationship with the customer. They might be very confident in that relationship. Uh, they don’t perceive the problem. But from the buyer’s point of view, the first thing a buyer thinks is, oh, is there something wrong with that customer?

Is now the time, is that the reason you want to sell now? Right? Uh, very, very paranoid group. Yeah, business buyers and we need to help them feel confident in our business. And, and we do it through things like good information and understanding when they ask for things like a seller note, subject to offset why they’re asking for it.

Patrick: Yeah, that’s great. And oftentimes we talk about in business. Even if we’ve got great financials, right? Like we, we look at our client’s financials and we love lying in it, lining it up month by month to see if anything pops up like, Hey, why is this, why is this thing changing? You know, so we can catch it, catch it early.

But in general, we feel like when we’re running a business with all of the variables out there, we’re walking through the fog, right? Like we can make the right next step and then we just try to keep moving forward, hoping that it all is coming together. Well, when you think about it from a buyer’s perspective, The fog’s just that much more dense, like, Oh my goodness, there’s I’ve not been running this business for years.

I don’t know everything that’s going on. I don’t know what’s happening in the economy. I think I do, but I’m not 100% sure. So it’s like it sort of underlines why, why they are a little skeptical of all of the information they’re getting, so.
David: Yeah, and it depends on the type of business you’re selling and who the buyer is.

So, you know, if you are selling a business and the buyer happens to be someone with management experience in that industry and another business, they’re going to have more clarity of understanding what’s happening, but with proper business systems, one of the, you know, you, you invest in systems and operating procedures and everything to make your business easier to operate today so that it runs more efficiently and there’s more redundancies and everything’s easier.

We’re all told one of the big benefits of doing all this work in our business is to make it easier to sell. And here’s how it becomes easier to sell. If you don’t have any of the systems, you basically need to find a buyer who already understands your business and industry because maybe they’re already in it someplace else.

And there’s just very few of those people compared to all the people. You know, if, if you, if you have those great systems in place, then someone who has no particular industry background. Uh, but an interest in business, if they can come in and see your systems and how things are documented, it’s going to give them a lot more confidence that they’re going to be able to take over and operate the business.

Patrick: Yeah, that’s great. So. I’m curious your thoughts on two things, like an earn out and how, I think he touched a little bit about on that, on the, you know, having the. But concentrated customer situation. Could you talk a little bit about earnouts and how those maybe come into play?

David: Sure. So, earnouts, seller notes, royalty payments, all of these things, we can lump them together in one category called simply payment after closing.

And then the next question that we ask is, is the payment after closing a fixed and known amount? Or is it something that, um, is variable according to the performance of the business? And then that kind of creates two new categories.. All of these things can be crafted or dreamed up in different ways, depending on what the buyer and seller need.
I’ll give you an example. So, so I might say to you, Patrick, I’m going to buy your business, but because I’m uncertain about the future, I’m going to give you half a million dollars and I’ll give you 4% of sales for the next five years, right? That would be a, a, an earn out right now. Or I could say, I’ll 10% of sales.

Over and above your current level of sales, because you’ve told me how great the future is, and I’m only going to pay you extra if it actually plays out. So that would be an earn out to both of those examples. However, the SBA loan program in the U. S. forbids earnouts. And so we wouldn’t be able to do that deal for me to be able to get an SBA loan.
So what people do instead is they say, I’m going to pay you a certain amount for the business, and I want you to hold a seller note for another $300,000. And if over the next three years we don’t hit certain targets, we’re going to forgive parts of the note. So it’s basically an earnout dressed up like a debt.

So that it looks like a debt and it meets the criteria of the SBA loan program. And, and so there’s a hundred different flavors of this. And it really depends on what the negotiation is between the buyer and seller. So, I’ve seen things, for example, where a seller will hold one promissory note paid over a few years.

It’s very common for banks to require that sellers, uh, notes be held off or postponed for a period of time. So you might have to wait a year or two before you can start collecting on your note. Sometimes certain other criteria have to be met in the eyes of the primary lender, the, the, the senior debt holder or the bank. in those cases.

Sometimes we’ll have a scenario where, um, so a great deal of time will go by. And then if a certain condition is reached, then another amount of money will become payable. So, you know, if I hit this target of sales in the next three years, then I will owe you this extra $50,000. You can also make that more complex by spelling out how the $50,000 will be paid, right?

You know, seller notes can be paid. Quarterly, monthly, they don’t always have to look like loans in the traditional sense. There’s certain seasonal businesses that I’ve been involved in helping people buy and sell, where in the off season there’s interest only payments, for example. It really is completely up to negotiation between the buyer and the seller.

If you think that the future of your business is incredibly bright and you see growth and you are choosing the right buyer that you think is an ideal candidate, you can create a deal where you end up with a lot more money for your business. If you are open to these kinds of things, because a buyer thinks about it this way.
They look at your history and they see the business under your stewardship. They see how you led the business and the results that you obtained. And now you’re saying that the business is going to go even further and make even more money and the buyer’s thinking, yeah, but I’m the one that’s going to have to lead the business and achieve all that work and do all that stuff.

Why am I going to pay you for all that? Right? And so that’s a common pushback for someone who wants a lot of extra money for their business versus the performance it has today. And so if you say, well, you know what, I’m willing to enter into some kind of deal where the extra money to me is conditional upon these things happening.
It’s almost like you’re guaranteeing the buyer is going to see this success. And, and this is where some sellers start to hesitate a bit because then they start to say, well, well, wait a minute, how do I know the buyer’s going to run the business properly? How do I know the buyer is going to be as good at it as I am?

How do I know this person can deliver? And this is a great thing to think about. And here’s why. One of the things that I teach buyers is I say, if a seller isn’t willing to do any kind of seller note or seller financing or earn out of any kind, it can be because of one of a few things. Number one, they simply don’t know about how businesses are sold.
That can be number one. Number two, uh, they don’t think you can run it. They have no confidence in you. Um, number three, there’s something wrong with the business. They’re not telling you. So they have no confidence in the business. Uh, or number four, there’s something wrong with the market. Or they have no confidence in the market or the customers and they’re not telling you.

So buyers who hear that you have no confidence in them at all, and you’re not willing to invest in their venture or extend them any kind of opportunity, you know, putting your, your money where your mouth is for a lot of buyers, that alone will be all they need to walk.

Patrick: Yep. So. One other thing you talked about was systems and processes and that being a critical piece of the business being successful moving forward for somebody not in the industry.

How often are you seeing owners involved in the business beyond closing to help transition? Now, I can see both sides of that. On one hand, I could see that making no sense. Like, let’s get the owner out of here. You know, uh, they’re going to want to do things their way and it’s now our way. Uh, but I could also see there’s a ton of wisdom there that they can help transition. Can you just talk a little bit about how those play out?

David: Yeah. So there’s a, there’s a bunch of different ways that you can do it. It really depends upon what the seller wants and what the buyer wants. And if there’s some kind of. Actual technical skill that, you know, maybe lacking in the part of the buyer.

So in a typical sort of deal with a small main street business, there might be a transition period and this is normally part of the deal. And the one that I usually counsel people to do is to have a certain period of time where the seller is present with the buyer to sort of teach them the ropes and then the seller goes away.

And is available by telephone or maybe some other meetings to come in and help them over the course of the following year. So if you think about any new job you’ve ever had, after a couple weeks, you probably learned the job pretty well and you started to be functioning. But then every once in a while, something new came up and you needed to go back to someone who, who could advise or help you.

And so the same kind of thing happens in business ownership. Immediately after you spend a few weeks learning, you can then start to function as a new owner, uh, but then some weird government form that only comes around once a year shows up and you want to be able to talk with the seller about filling that out.

And so, so you’ll be able to call them back. I’ve had a few cases where sellers have wanted to keep working in the business typically can cause problems unless that owner, that seller is understands that they are going to be in a specific role, that they’re not the boss anymore. And it tends to work well if that is not a leadership role.
So I’ve seen business sellers stay on as salespeople. I’ve seen them say on as craftsmen or people that have something to do with manufacturing, like a shop foreman, for example, where they’re not functioning as the leadership. It’s very clear to the rest of the employees who is now the boss. So that can be okay.

I’ve also had people do deals where they bought less than 100% control of the company. Or they’ve made an offer to a seller, which included stock in their own new entity. So they make the seller part owner or investor in what they’re doing. And what that achieves is it gives that buyer a long term connection with the seller and the seller, a long term interest in the success of the business.

And a lot of the times that does not involve the seller actually being in the business. But they’re around, you know, if you kind of imagine a board of directors, you know, they’re, they’re, they’re giving their input, and me creating that connection with institutional memory, you know, what happened 10 years ago kind of thing.

Patrick: So, I want to shift gears a little bit. Uh, we’ve talked a little bit about, uh, some intellectual property. And one of the things I want to talk about is. We’ve got clients that have brought up this, this concept of the QSBS, the qualified small business stock, and when that’s done inside of a C corp, and there’s some rules around that, you can get capital gains tax free.

I believe it’s up to $10 million and that can be levered up some different ways if you use trust and family members and whatnot. But I’d like to just stop there and just ask, are you seeing? Sales happen that are using the qualified small business stock. And the issue there is we have to make a stock sale, which means all of the liability comes in that stock sale versus an asset sale.

Could you just give us some insight on how you see those, those things playing out?

David: Yeah, sure. So, um, I, I have not. Ever had a client do the qualified small business stock transaction. Uh, and a lot of it has to do with just the size of businesses and the clients that I’m typically working with. However, uh, this question comes up every single day in Canada.

Because in Canada, every single small business owner has an option of getting a capital gains exemption on a certain amount of the sale price of small business stock. And so the conversation about selling shares is one that we have all the time. So most of the time an accountant will tell their small business client, Oh, to get best tax treatment, you need to sell the shares.

And so people go out into the market and say, I’m selling my business as a share sale, and then buyers come along and say, I love your business, but there’s no way I’m buying the shares. And furthermore, the buyers understand. The tax consequences for the seller, the fact that there’s a tax advantage in selling the shares.

And so what will happen is this, there’ll be a negotiation back and forth with price and terms, and the format of the sale will become part of the negotiation. So I’ve seen people make an offer as an asset purchase, and then the seller will come back and say, well, the only way I’m going to take that price is if you buy the stock.

And it just becomes a function of, of the negotiation and it goes back and forth. Now, when I do see share sales happen, even in the smaller business space in the U. S. it usually has to do with some really sticky reason why an asset sale won’t work.

I’ll give you a quick example. I’ve got a client who’s bought several janitorial businesses. He’s bought them all as stock sales. Because a lot of the janitorial businesses that he buys have contracts with Like fortune 500 companies, some of them in their contracts will have a change of authority clause. Or, you know, an assignment blocking clause or something like this. And so in order to keep the contract with say IBM, for example, he’s got to buy the stock or maybe a government contract with the county courthouse or something of this nature.

And so he’ll end up doing that because of the contracts. We also see it happen in things like construction. Where bonding companies want to see that long lived EIN number. They want to see that history, um, in order to be able to, to provide the assurance guarantee for big contracts and things like that.

And so some industries, there’s going to be a real reason why the stock sale is going to be more favored. If your books are a mess and there’s obviously liabilities and problems with the way you’ve been doing things. It’s going to have to be fixed and time is going to have to pass. Um, you know, if you’re, if you’ve got these problems in your business and you want to sell one day, today’s the day to make the change.

Patrick: Great, very good. And then, just to piggyback on that, we’re always looking at tax advantages, okay? So, uh, one of the strategies is there’s charitable remainder trust that can own your, your business and I’m curious if you see any trust structures put in place before people want to sell to help mitigate some of the tax.

Now, personally, I think those come with a lot of strings. I don’t know if I like all those strings. If I had to pick a trust strategy, there’s an installment sale trust strategy that that can come into play that the cash can come into the trust. But it’s a Treated as an installment sale back out to the seller to spread out the capital gain.

So that that strategy can be worthwhile. But are you seeing trust involved in? And, and typically these need to be put together before, you know, the buyer and seller are, are coming together. But yeah, are, are you seeing anything like that?

David: I haven’t had a lot of experience with that, but what government retirement funds, registered retirement funds, IRAs and 401ks, and this kind of thing are kind of forms of trust, right?

Because the money has certain rules attached to it. And there’s something out there called a Rob’s Corp. Um, and what they’re considering when they look at these Rob’s corpse things is they’re looking at how they can use that money in order to buy a business and they, they like it maybe because they, they don’t have to borrow as much money from a bank or something like that.

And one of the things that I will often say to those buyers is that I will say, great, now I want you to, you’ve, you’re talking with all these advisors, advisors, your CPA, maybe an attorney, maybe a company at one of these trustee companies helps to manage these companies. You’re talking with them about the setup.

Now have the conversation about the unwind. What then happens if you are incredibly successful and you end up selling the business? Does that mean that the entire capital gain you’ve created is now inside your 401k? And now it has to come out as income in your retirement years, right? So, what would that mean as far as the tax efficiency of this plan, right?

And, and because many people aren’t considering the out, the back end. And so, I mean, whenever you talk about very complex structures, that’s always my, my, my thing is talk with your advisors about what the unwind looks like. Because some of these things may be great for tax deferral today. And I understand there’s a philosophy that, you know, a dollar of tax deferred is one that you can play with and use for your own advantage until the day it has to be paid. But you just want to know what is on the horizon and what you can expect.

Patrick: Yeah, absolutely. And we actually had a client that used that strategy to get into a business. And then they figured out that they needed to get it out and they paid the tax and the penalty to do that. And it sort of worked, but you know, uh, they did that before they got to us.

I don’t know if it would have made sense to do like a Roth conversion, you know, so you. Could avoid some of those issues, but there’s oftentimes more complexity than, than people realize, uh, when they, they get into strategies like that. So, uh, I think that leads us to having good advisors matters. You know?

David: Yeah. And in the team, right? Sometimes it’s hard to build that team because it is difficult to get all that information in one place.

Patrick: For sure. So. Uh, over my shoulder for people watching on video, it says do hard things. And, um, running a business is, is a hard thing, but the thing that I, I think back to our team’s point of view, you know, there, there’s going to be a dip, it’s going to be hard and we’re going to have to decide, you know, whether we’re going to get through that or not.

I think wise counsel can help make those dips, uh, a little shorter, a little less deep, David, I see a few different ways people can engage with you. Simply they can go to YouTube and just see your level of expertise and get to know you there. Then I believe you’ve got some, some courses out there. You’ve got both for the buyer and the seller side.
There’s the business buyer advantage. Obviously, if you’re buying you, people can engage in some of those resources. And then there’s how to sell my own business. com people can go check out that as a resource as well. And then you also and I’m, I’m a firm believer in this. I like to have who’s in my life.

You know, this is a concept from. Uh, strategic coach who not how, like, I’m a business owner. I don’t have enough time or energy to figure out how you can give me the how, but I would prefer a who that can guide me through the process. So if people want to who in their lives to help navigate this, can you just talk a little bit about how you consult with people buying or selling businesses?

David: Yeah, sure. So, you know, I spent many years as a business broker, um, doing a full service for sellers, finding sellers who wanted to sell, preparing their business for sale, doing an evaluation, helping them set the asking price and then finding the buyer. And, and that whole business model is based upon a contingency payment to commission when the business is ultimately sold.

And the issue that, that came about in that business was that, um, Number one, not every business gets sold. Uh, number two, as a result of that, the commission rates are quite high in the world of business brokerage because the people who sell their businesses, they’re, they’re compensating the broker for the time they spent on the files that never got sold.

Right? And then number three, when buyers would come to me, I felt a little bit conflicted because I would only get paid if they bought something. And so, you know, I knew that there was, I managed it as best I could, but I knew that there was this conflict apparently. And so when I ended up reformatting kind of the way that I do business, I thought, I’m going to take a page out of the book of attorneys and CPAs.

And so what I did is I broke down the process for both buyers and sellers into a series of steps. And I offer them like a menu where you can have me help you with an evaluation, packaging a business for sale, the advertising of the business, helping you talk with the buyers and from the buyer side, we look at analyzing businesses, et cetera.
I just do that one piece and I charge my client a consulting fee for doing it and I have no ultimate financial tie to the outcome of the transaction. And so what that means is, um, I’m no longer, no longer conflicted in any way. Um, a lot of times when I deal with buyers, my advice is, you know, this isn’t a good deal.

A lot of times when I deal with sellers, it’s, you know, here’s what you can reasonably expect in a deal. I’m not trying to over inflate their expectations in hopes of signing a listing agreement with them, for example, which is something that happens in this world. You know, in, in a competitive market, especially if there are three or four business brokers trying to list your business for sale, there’s an incentive for one of those people to kind of tell you they can get more for in some magical way. And then as soon as you’ve listed with them, then all of a sudden they have to try to undermine that expectation because they know they can’t achieve it. And so, I just believe in, in fair dealing and giving people advice and giving people the heads up.

I’ve got a lot of business owners who’ve met me over the years and I’ve done an evaluation to show what their business would likely sell for. And in doing so, we notice sometimes some low hanging fruit, some things that are out of alignment. I’ll be able to say, for example, you know, did you know the industry average gross margin is this and you’re three points lower.

That means you’re not charging enough or you’re paying too much for supplies or, or what have you. And I’ll kind of point out things that they can address in their business to try to improve it. Some of those owners come back every year with their new financial results and we update that report kind of creates a scorecard for them so they know how things are progressing.

And we can also then take a look at big questions like, should I invest this huge sum of money in the new machinery or equipment or the second location, or, you know. What would happen to the value of my business If this was my result next year? We can do that as well with the modeling system that I use.

Patrick: That’s fantastic. I have to say, I love the structure where you’re removing all the conflicts of interest. We try to do something very similar with our advisory. Uh, we’re not charging you based on assets under management or trying to sell you life insurance or whatever. We like sort of a fixed fee.

And if we’re showing up and providing value every single month, you’ll keep engaged with this. And if you don’t. That’s perfectly fine. So good for you for seeing that opportunity in the marketplace and going, how can I show up and serve people in a way that brings a bunch of value and I don’t have to put my interest at odds with theirs. So that’s, that’s great stuff.

David: Well, it it’s working and people have enjoyed it. It’s been eight years now that I’ve been doing it this way.
Patrick: Yeah. Fantastic. Very good. So if people want to learn more about your, your consulting services, what’s the best place to connect with you?

David: It’s sort of the central place where you can find contact information and links to all those other resources that you mentioned would be davidcbarnett.com. That’s my blog site and everything is kind of based out of there. But for people that are just curious to learn more about buying, selling, financing, and managing small and medium sized businesses, YouTube or any of the podcast services, just look up David Barnett’s Small Business and it’ll come right up.

Patrick: Fantastic. That’s wonderful. I feel like I’ve got another hour’s worth of questions, but, uh, we are running short on time. We might have to have you back so we can wrap those up. But David, this has been wonderful. Thank you so much for just being a wealth of knowledge for buying and selling businesses.

David: I’d love to come back. Thanks so much for having me Patrick, this has been a lot of fun.

Patrick: Thank you for listening to the Vital Strategies Podcast for links to the resources mentioned in today’s show. See the show notes of this episode at vitalstrategies.com/episode9, follow the Vital Strategies Podcast, wherever you listen to podcasts.

And don’t forget to rate and review the show. We look forward to having you back next week, where we will help you pay less tax so you can build more wealth and live a great life.