Welcome to the Creative Dealmaker podcast, where host Carl Allen interviews experts and shares insights on buying and selling businesses globally. In this episode, Carl speaks with his business partner, David Gerault, a seasoned entrepreneur and legal expert. David shares his journey from practicing commercial law to becoming an entrepreneur, discussing his experience in finance, asset-based lending, and consulting CFO roles. The conversation covers key topics like the complexities of SBA loans and how creative deal-making strategies are becoming more accessible.

David and Carl discuss the intricacies of SBA loans, highlighting recent changes, such as the introduction of earn-outs and the flexibility in ownership requirements. They emphasize the importance of understanding personal guarantees (PGs) and how non-bank SBA lenders are increasingly stepping into the market. David explains how navigating SBA loans requires patience and awareness of new rules that lenders may not be up to date on, but ultimately, they offer opportunities for new dealmakers to secure funding for acquisitions.

The conversation then shifts to the challenges of selling businesses, particularly why most small businesses fail to sell. David compares it to house flipping, where businesses need to be “move-in ready” for buyers. He highlights the importance of optimizing businesses for sale by systematizing operations, reducing owner dependency, and preparing for due diligence. This is where their upcoming program, Exit Hunter, will help business owners get their companies ready for successful exits by closing the value gap between expectations and reality.

Carl and David also dive into the legal aspects of M&A deals, noting the importance of due diligence and the pitfalls sellers face, such as maintaining proper corporate formalities. David shares examples of sellers neglecting legal documentation, which can complicate deals. They stress the value of stock purchases over asset purchases, as they provide more flexibility and protection for buyers, though they require more rigorous due diligence.

Lastly, they touch on upcoming plans, including masterminds and events related to their programs. David shares personal anecdotes, including his daughter’s career at NBC, and Carl discusses the launch of his new book, which will be followed by a cross-country book tour to connect with proteges and continue spreading their knowledge of deal-making.

Full Transcript:

To talk to a bank that has an entrepreneurial brain, that just thinks the way we think. Right? Banks normally don’t behave like that. They’re not supposed to be for British people. They’re supposed to be for American citizens or green card holders.

When I first came to the States, I looked at the SBA program, and I saw them as, like, the lender of last resort. It’s really funny talking to the SBA lenders. You kinda have to remind them about the new rules. They’re kinda set in their ways about this is the way the SBA does things, and you can go, “Oh, actually, have you read the new rules from last November or last October?”

If you watch anything on reality TV about house flipping, the way you get the value for the house up is you go in and remodel the house, redo the kitchen, paint, and re-sod the yard. You give an appeal to a buyer who’s making it move-in ready. If that house isn’t move-in ready, it’s not gonna sell for the top dollar. The same is true in businesses.

A very warm welcome to the Creative Deal Maker podcast. I’m Karl Allen. I’m your host, and I’m gonna be interviewing expert guests sharing investor strategies that will completely and utterly disrupt the market when it comes to buying and selling businesses all over the world.

Hey, guys. Karl Allen. Welcome back to the Creative Dealmaker podcast. Got another very special guest on my podcast today. Got another one of my business partners, the absolutely amazing David Gerault down in South Texas. How are you doing? Thanks for coming.

I am fantastic, Karl. How are you doing out in South Florida? Or, yeah, central Florida today. Can’t complain. I will see you a week tomorrow, right? Yep. Yep. See you a week tomorrow, and then Sunday soon, we’ll both be in Texas together. We’ll both be Texans. I’ll be two hours away, and then a bit more because you’re down in McAllen. Right? Yeah. I’m down in McAllen, so it’s about five hours by car.

But, hey, we now have a direct flight on Delta from McAllen to Austin, so it makes it easy for us to go. I’ll be able to spend a lot more time with you. Then, yeah, I’m excited to see you for the three days at the Oppress Law Mastermind that we’re hosting in Pigeon Forge, Tennessee, which starts a week tomorrow.

But, anyway, let’s get into kind of deal chat and all the cool things that you and I are doing and what we’re seeing inside of our community because I know you’re partnering with a lot of the protégés inside of the community. But just for the benefit of my viewers and listeners, just give us a few minutes about your background and what’s brought you up to where you are today.

Sure. I’ll give you the Reader’s Digest version. Otherwise, we’ll have to break this into two episodes. So, yeah, background. I’m born and raised South Texan. My family’s been along the Texas-Mexico border since before there was a Texas-Mexico border.

Went away for college and law school. I had degrees in accounting and law. Came back and practiced commercial law, complex commercial lending. Our firm, that I joined after law school, represented all of the larger community banks in our region, and all of their more complex transactions got sent to us. So I’ve been in the deal-making world and in the finance world for more years than I’m willing to count now. Because I’ve actually got a couple of years on you.

I thought I was the oldest person in the world at fifty-three. No. I’m fifty-five. Oh, wow. I didn’t know that. You look better than I have. Well, how’s that happened? It’s this nice South Texas heat. It helps things grow.

So, I practiced law for about seven years and then decided that I wanted to be an entrepreneur, rather than a lawyer. I’m not sure which is better now after thirty-five years. Went off and started an export company with a partner, exporting food commodities into Mexico. We grew that to just shy of a hundred million dollars in revenue in four years. It was a crazy ride. But learned a lot about complex finance and asset-based lending in that journey.

Sold that to my partner, then subsequently ended up in litigation over the seller note. So I’ve learned some lessons there. Went off, did some different things. I’ve done some stuff in real estate development, done some stuff in the alcoholic beverage world, was in a wine store franchise. The way to make a small fortune in the wine business is to start with a large one and work down. But drinking all the profits was a lot of fun.

Then for about ten years before I came across your organization, I was basically working as a consulting CFO. So working with Main Street businesses, the same businesses that we work with every day now in the deal maker world, helping them source growth capital. So over about a ten-year span, I put together over a hundred million dollars in financing for small businesses to grow and restructure post-2008 recession.

I realized that doing all of that, the main thing I had to sell was my time, and that was very limiting. So I started looking at ways to build wealth, and ran across this crazy Brit who had this ninja acquisitions program. That crazy Brit. Yeah. He’s an American now, really.

So, yeah, started following you about five years ago. Started trying to do some deals, and then, of course, as every entrepreneur does, a shiny object came by, and I got distracted by that for a little while, and then came back and, literally, I think I told you this story. About two years ago, in March, I kind of was at a point where projects I was working on had come to an end, and I was kinda scratching my head about what to do next. And I thought, “You know, I was gonna go buy businesses. I wonder if my login still works.”

And so I literally tracked down the switch from Ninja to DealMaker, found the DealMaker website, plugged in my saved password, and it got me in. And then you came in too, right? And so then, found out about the program and joined. You and I, I’ve got the privilege of being right at the end of your initial cohort of about thirty or forty folks. So I got the one-on-one call with you that folks don’t get. I remember that. I remember that vividly. Me and Joanna. Right? Yeah.

You and I, we kinda hit it off. You, from a big Wall Street world, me from a Main Street world, but we have a very similar background in terms of deal finance and things like that. It’s been amazing. Right?

So Protege is, gosh, summer of twenty twenty-one, I think I launched it. Right? So it’s three years old this July. So in about two months, it’ll be three years old. We’ve tracked nearly six hundred and fifty million dollars worth of acquisitions inside the community, which is pretty amazing. Right? I never thought we’d get to a billion dollars worth of deals, but I think maybe by the end of next year, I think we will.

Yeah. I think I don’t know if it’ll take that long. I think with the momentum going, I mean, we’ve got, you know, with my partners that I’m working with as advisors to folks in Protege, we’ve got close to fifty million dollars in transactions that we’re working on as advisors.

Yeah. All in the Protege world. It’s amazing, right? One of the other things about Protege that’s really surprised me, in a good way, is when we first started it, everybody was silent. Right? So everybody would be going off, doing their own deals, and that’s fine. But what I’ve noticed is that, in the first six months of Protege, about six percent of deals that were closed were partner deals. Now it’s closer to sixty percent. So more than half of the people doing deals in the program are buying them together. It might be an operator partnering with an integrator. There are capital partners, as you know now, in Protege, investing in other people’s deals.

Someone like you, who’s got the trifecta of skill sets—you’ve got the financial skill set, the legal skill set, and the deal-making skill set—I know you’re in very high demand to partner with other people’s deals, which is why I’m partnering with you. Right? We’ve got two cool things that we’re doing right now. Obviously, you give your time every week inside the community, teaching proteges the ins and outs of the legal stuff, which has been a game changer for the community, I have to say that.

But, like, you and I are doing a deal on the growth and exit side. We’re looking to launch something called Exit Hunter. We’ll get into that in a little bit, which is really cool. That’s a huge passion of mine. Massive. And we’ve got a call on that next week, and then we’ll meet at the mastermind to get that up and running.

And then one of the other things we’ve been talking about is the fact that, normally, when you borrow money from somebody to buy a company—whether it’s a bank or, most commonly these days, in the SBA program—they want you to sign something called a personal guarantee. And outside of surety bonds, which are very expensive and very difficult to get to protect you against that PG, there’s no real personal guarantee insurance market like there is in the UK. In the UK, where I used to live, that’s a huge market. It’s very commoditized, and it’s cheap as chips to get that kind of cover. But there used to be companies in the States that did it, but they kind of fell away before COVID. So I think for us to do something in that market would be amazing. Whether we have to buy an existing insurance company or create our own, I don’t know.

Yeah. We’re making some solid headway on that. You and I haven’t had a chance to catch up in a while, but we’re pursuing several different paths—whether it’s creating our own insurance company, which we may have to do, or finding some larger insurers to partner with. I’m learning as we go, and this is kind of a segue into both worlds. You know, we talk about in DealMaker about staying in your lane and about really understanding the nuance of the business world in a particular industry or sector. And when you get outside your lane, you’re really kind of lost and wandering around. And I think for both of us, insurance is outside of our lane.

So I’ve learned a lot about the insurance world, and we have a subject matter expert who’s our partner guiding me through it. There are some interesting nuances and regulatory nuances that we’re having to weave through to make this work. But I think we’ve got some solid plans for how to do that.

Yeah, and I think that’s gonna be game-changing because, you know, what’s really interesting about the SBA? There’s never been a case, to my knowledge, of the SBA ever calling in a personal guarantee. You know that if you take an SBA loan, let’s say you buy a business for a million bucks, you put a hundred k down, borrow eight hundred thousand, and have a hundred k seller note, the SBA will have you sign a personal guarantee for the full eight hundred thousand. Yet they have the federal guarantee, so if the business fails, they’ll just come to you and ask for the money. If you say, “No, I haven’t got it,” they’ll say, “Okay, no problem,” and then they get the money from their own insurance policy—the SBA guarantee, which you actually pay a fee for when you take their money to buy a business.

So why do they have you sign a PG even though they know they’re going to get their money covered? Is it because they want you laser-focused on making the business successful?

Yeah. I think it’s that. There are a couple of aspects to it. Number one, it’s important to understand what the SBA is and what it isn’t. It’s not the bank. It’s the federal government, and it’s a program they’ve created to encourage banks to make loans in certain boxes. The SBA guarantee is not a guarantee of the borrower’s obligations. It’s a stop-loss for the bank. So it’s a promise to the bank that you won’t lose money if you make these loans.

And so the way the government has set this up—I’ll reveal a little bit of my politics when I say this—the SBA program was put together by bureaucrats in windowless offices in Washington, D.C., whose closest relationship to the private sector is buying a Slurpee at 7-Eleven. So there are a lot of things about that program that I think the folks in government have made assumptions about how the real world works, and they’re just not correct.

That’s one of the reasons for the personal guarantee. But I also think they’re looking for alignment. They feel like if you’re personally vested in the deal, with all your personal assets tied up in the success of the deal, that’s going to make you successful. If you don’t have those assets tied up, it might make you less motivated to be successful. There’s probably a strong correlation there.

Then the other thing is that banks have to play a game of following the rules of the SBA in order to maintain their guarantee. So the SBA has set a rule that says, “Bank, in order to get this guarantee, you have to have the borrower completely tied up eight ways to Tuesday.” The bank is required to check a box on a government form to get those guarantees. If and when that transaction goes sideways, the bank can’t call up the SBA and say, “Hey, send me my money” until they’ve checked a bunch of boxes, one of which is attempting to collect on the PG.

Perfect. The SBA was started in the fifties, wasn’t it, under a different name? It’s gone through lots of different iterations, but they’re doing everything they can, in my opinion, to make it more accessible to people like us. You know, I’m already at my five-million-dollar SBA cap, but I’ve heard they’re increasing that to ten million sometime later this year. I’ve done three SBA loans now, so I’ve borrowed the full five million dollars, which is kind of interesting because they’re not supposed to be for British people. They’re supposed to be for American citizens or green card holders. I’m neither. I have an E2 investor visa. But there are loads of ways to kind of work with the SBA using warrants, profit-sharing partnerships, and other creative approaches. Some of the major changes I’ve seen in the past six months are incredible.

So, number one, now they let you have earn-outs in deals. They let sellers stay in the deal if they want to. Sellers can earn up to twenty percent and earn out over a period of time. They now don’t mandate that, as the buyer, you have to, a) go and run that business day-to-day, and, b) put all the money in yourself. Those were always concrete rules. But now you don’t need to have any money to do an SBA deal. You just need an investor partner that buys the deal with you. And if they own nineteen percent or less of the business, then they don’t need to sign any of those guarantees. But then, you can now be an owner-investor when you buy one of these deals, like I am. You don’t need to be an owner-operator and fly to wherever and go in and run that business. You can have a GM or an operating partner that runs that business for you.

So I think they’re doing everything they can to make it accessible capital, with the guarantee. And, you know, now I even see non-bank SBA lenders coming to fruition. I see debt funds, family offices, and even hard money lenders, all doing SBA deals and getting the guarantee. And I know why they’re doing it, right? Because we know there are two and a half million businesses for sale in America today. You’ve got ten thousand baby boomers retiring every day. If they don’t solve the problem of giving capital to entrepreneurs to do deals, you’re going to have three, four, five million businesses for sale that no one’s going to buy.

And we know that baby boomer business owners hold up to eighty percent of the total net worth in the world tied up in their businesses. If they can’t liquidate that, they can’t retire, and it’s a major problem. But I do like the SBA. When I first came to the States right after COVID, I looked at the SBA program, and I saw them as, like, the lender of last resort. Like, if all else fails, go and get an SBA loan. But now they’re very, very popular, right?

Yeah. Yeah, they are. And I totally agree with you. The ship is turning, but it’s a big ship, and it’s a slow turn. But I think they’re definitely making strides to try to make the programs more accessible.

One of the things we see, especially with SBA loans for our clients or deals we’re partnering on, is that it’s really funny talking to the SBA lenders. We’ve probably talked to a dozen or so, and you kind of have to remind them about the new rules. They’re set in their ways, thinking, “Oh, this is the way the SBA does things.” And you have to say, “No, actually, have you read the new rules from last November or October?” And they go, “Oh, let us get back to you.” They go back, talk to their folks at the bank, and come back saying, “Okay. Yeah, you’re right. It is actually that way.”

So, yeah, it’s a slow process. Banks are not notoriously the most risk-embracing businesses in the world. But we’re definitely seeing more success with getting SBA deals done. I think the SBA is a great tool for new dealmakers and for people doing their first deal or smaller deals to get those first one or two transactions under their belt. Then they can start playing in, as you say, the “big boy pants” world. Once you’ve gotten that five million dollars or so of transactions under your belt, you can go out and have the credibility to talk to the banks. You’ve got the size of business to talk to the market folks in the banks, which is where the creative deal-making happens in the banking world—beyond the small business level.

Absolutely. And like two of the other big things that I’ve seen change recently: I don’t deal directly with the banks or the SBA, not because I’m lazy, but because I’m too busy. So I have a broker—you probably know David Marcantonio, very, very good guy. He’s done my last big SBA deal, and he was incredible. Partners with ReadyCap, they were absolutely incredible. They were so entrepreneurial, right? It’s so rare to talk to a bank that has an entrepreneurial brain, that just thinks the way we think. Banks normally don’t behave like that.

I’m not knocking any of the other banks in the program; they’re doing an amazing job. But when I came across ReadyCap, I just thought, “These guys really get this.” I’ve seen now that if you own an existing business and you want to do an SBA loan, if you’re buying a business that’s in your industry, in your NAICS code, the SBA will do a ninety-ten deal structure, so you don’t need to put any capital into the deal, although they’ll put a lien over your existing business and the one you’re buying.

What I’ve also seen is if you own—if you want to be a portfolio business buyer and you want to buy a company in a totally different NAICS code, you still have to put the equity down, but the five-million-dollar cap moves. They’re playing with the NAICS codes on how they apply the cap. It doesn’t encompass all of your deals. You can have a five-million cap in one industry and another five-million cap in another, which is about to go to ten. So when it goes to ten mil, you could literally use a hundred million dollars of SBA money or bank money covered under SBA if you buy deals in ten different sectors. It’s crazy, right? It really is nuts.

It really is. Let’s talk about one of the other things that is very dear to both of our hearts. Let’s talk about what we’re going to be doing with Exit Hunter, right? One of the things that I think doesn’t frustrate me—it does frustrate me—but it’s a massive opportunity for us as dealmakers, is why most small businesses that try to sell fail to do so. You know, you look at the industry stats: there are about two and a half million businesses for sale today, and there are about a quarter of a million businesses or less that actually sell. About two hundred and twenty-eight thousand deals were closed last year across the whole range of deal sizes. That’s about one in eleven.

So we know that if you go to market to sell your business, you have a one in eleven chance of selling. Bear in mind, all your net worth is tied up in that business if you’re retiring. You can’t retire until you liquidate that business. And, unfortunately, sixty-two percent of Americans who do exit just close the doors, turn off the lights, and get liquidation value of their balance sheet.

We’ve been talking for a while now, and we’re launching a massive campaign against this with our program to arm and tool business owners with what they need to do to become the “one in eleven.” Ultimately, I want to change that to three or four in eleven by helping the people coming through our program. And it’s not just the fact that we have thousands of buyers in Protege that we can connect them to, right? But it’s more about getting their business optimized so that it’s going to have true value for whoever wants to buy it.

You’re absolutely right. You know, that same frustration you see, I see as well. It’s often that brokers go in and say, “Oh, yeah, you’ve got a great business. You’ve made x dollars in profit, and we can sell it for four or five times that.” But then they haven’t done anything to really get the business “seller ready.”

If you watch anything on reality TV about house flipping, the way you get the value for the house up is you go in, you remodel the house, redo the kitchen, paint, re-sod the yard, and get curb appeal. You make it move-in ready. If the house isn’t move-in ready, it’s not going to sell for the top dollar. The same is true in businesses.

And there are so many businesses that are not move-in ready for a buyer.

And if the seller hasn’t done their work, done their homework, done their prep to fix up, you know, remodel the kitchen of the business and paint up and spruce up, and, you know, make sure that the business is optimal. Because there’s so many businesses for sale, it’s a buyer’s market. There are so many more businesses for sale than there are buyers out there. If it’s not a well-prepped and well-positioned business, it’s really hard to sell.

So that’s really a lot of what we want to attack with Exit Hunter—making sure from, I think, approaching the exit space. There’s a lot of exit coaches, exit planners, exit advisors out there, but they’re not active dealmakers buying businesses. And I think that’s what makes us unique is that we’re in this world of buying businesses every single day of every week. We know what makes a business viable because we’re saying yes and no to businesses on a daily basis.

And so, I think it gives us a unique perspective to help coach, guide, and advise sellers to get their businesses signed for sale.

Yeah. And I’ve been studying this for years. Right? And what blows my mind is, like, when you talk to business brokers—and I’m not knocking business brokers—but most business brokers will only look at a business through one lens. They’ll look at financial valuation. They’ll say, okay, here’s your EBITDA or your SDE. We’re going to recast it because we know businesses have two numbers. Right? They have tax numbers, and they have real numbers. We recast those numbers, which we can probe and vet, and then we’re going to apply a multiple. And that’s it. That’s all they do.

They don’t think about seller psychology and how that impacts a deal. They don’t think about deal structure and how that impacts a deal. Obviously, the more money you put down at closing, you want a discount as the buyer because you’re taking the risk. Whereas if you’re doing it over a seller financing deal, the seller’s taking the risk, so they want a premium. Like, when you lease a car versus buying a car, you pay more money.

But then the one big gap in the market that I think we’ve done a lot of work inside of Protege and even built the model I unveiled this week about how to calculate it, is when you vet any business, you’ve got to understand what we call the transfer value. You’ve got to understand that a business will have a liquidation value, which is, say, eighty percent of its balance sheet, then it has its financial valuation, which is the multiple you apply to the recasted EBITDA.

And then the difference between the two is the goodwill that you’re buying. And goodwill, as you know, is the business’s ability to continue to operate and generate revenue and profitability. But we can now vet that goodwill and see whether or not that’s really valuable. Right? So I’ll tell you a quick story.

So I was looking at a deal. It was a steel engineering company, made a lot of components for cars and all those different things. And I went to look at the business, one of our other proteges. And this business was doing about three to three and a half million in EBITDA, for example. I had a look at the business, asked a lot of questions, vetted it thoroughly, and then went back to see the seller.

And he said, “So, Carl, how much is my business worth?” I said, “Well, how much do you think it’s worth?” He said, “Well, I called my CPA, again, not knocking CPAs, and I’m doing three, three and a half million dollars of EBITDA. He tells me that my business is probably worth a seven times multiple, and then I’ve got some cash on the balance sheet, which is surplus. So he told me it’s probably worth twenty-four to twenty-five million dollars.” I went, okay. He said, “How much do you think it’s worth? Think it’s worth more than that?” I said, no. I think it’s worth nothing.

He’s like, “What? How can that be? How can my business not be worth anything?” I said, well, it’s worth the liquidation value of your balance sheet. The only way you’re going to sell this business is to close the doors, turn off the lights, liquidate all your assets into cash, pay down all your liabilities, and whatever’s left, that’s your exit.

He’s like, “No. I think I’m going to go with my CPA. Tell me why it’s not worth anything.” I said, well, how many customers have you got? He said, “What?” I said, okay, you’ve got one customer. Have you got a contract with that customer? “No.” Who’s the customer? “It’s my brother-in-law.” Okay. And your brother-in-law’s about to sell his company to somebody else, correct? “Yeah, that’s correct.” I said, okay, I buy your business. You’ve got one customer. It’s an arm’s-length transaction with your brother-in-law who’s about to sell.

What do you think is going to happen when that new owner comes in? They’re going to want to renegotiate all their other contracts, right? They probably already have a supplier. They’re probably going to use those people. They might not use us. So that business is going to have no value overnight if that were true. So why would a buyer put money down on that deal? You need a hundred customers, not one.

And that’s just one example. You have crazy high customer concentration, no recurring revenue, and this owner, he was the business. Right? He did everything. Every single thing that happened in that business, he did. So for him to sell and walk away, there’s nothing left. There’s no value.

And that’s, you know, what we see. That last part of it, obviously, I mean, customer concentration—one customer, and it’s your brother-in-law, and he’s selling his business. Kind of an extreme example, but that other piece of it is huge. How integrated folks are. I know you asked a question. I ask a little more extreme version of the question, but every time we’re talking to a seller, I ask, “Look, imagine that your best buddy called you up this afternoon and said, ‘Guess what, Carl? I just bought a sailboat, and I’m going to sail it around the world. I want you to come with me. We’re going to be gone for six months, and we’ll have no communication with the outside world while we’re gone.'”

That’s a good point. I want you to come along. How’s the business going to look when you come back?

Yeah, and I do the extreme example. I think you would ask, you know, could you leave for thirty days or whatever? I kinda do the extreme example to make the point. And ninety-nine percent of the sellers we’re talking to go, “Oh, well, I could be gone for about a week.” But I’d have to call in every day.

Yeah. So you can’t sell that business. No one’s going to buy that business unless there’s a big long tail of seller financing, which locks the business owner in. A business owner will say, “Yeah, but that’s fine. I’ll give you a seven-day handover or a thirty-day handover.” You can’t get all that stuff out of their head in thirty days and create systems and processes around that.

Yeah, exactly. Our two big deals that we’re doing with our client in the heavy civil construction space, we’ve got a one-year handover with both of those. And we’ve got a very systematic plan of how we’re going to transition over that one year, and we’ll bring in a GM, and really, the GM will take the reins at about the six-month mark.

Perfect. And then we’ve got Andrew, you know, and his ninja skills. I describe him now as being like Mister Spock. He’ll come in and do the Vulcan mind meld, where he’ll suck all of the processes out of the owner’s brain and put them on paper. Because that’s the key. And that’s what we’re going to do in Exit Hunter, right? It’s basically getting those businesses that can’t really sell or have a real number for what their business is worth that’s far from what they need to sell for to retire. And basically, doing those two things to bridge that gap.

If you systematize the business, polish it up, and give it all the curb appeal, not only is that going to make the business sellable, but by doing that, you’re going to close most, if not all, of that value gap by going through that one to two-year process.

Correct. Right, exactly. Because you’re going to get them…you know, the multiple for your industry is market-driven. It’s finance, outside-world-driven. Software companies trade for huge multiples. Construction companies don’t because that’s just how the market views them. But then within that industry, there’s best-in-class and not-so-best-in-class businesses. And they trade for a range within that multiple.

What we want to do is get these businesses to where they are best-in-class businesses, where they have the systems and processes, and where they are prepared for the due diligence process. We’re going through it right now with one of our construction companies. “Okay, great. Here’s your equipment list. I need proof that you own all that equipment.”

“Oh, well, there’s a hundred pieces of equipment.” They’re having to go back, dig through the files, find the bill of sale, and all that equipment documentation. Well, if you’re really going to market, somebody—broker, accountant, somebody—should have told you, by the way, you need that information at your fingertips.

In the data room.

In the data room. Yeah. You set up the data room and have it all done. You talk about best-in-class versus not best-in-class. So on our red light, green light calls that we have weekly in Protege, you and I, we’re vetting student deals. Best-in-class deals, we call golden buzzer deals—high green light deals. The low red light deals, the really bad deals, we call those brown buzzer deals. Right?

Do you remember the pet rental company that somebody pitched?

That was, unfortunately, just before I joined. That was about three or four months before I joined Partizan, but I did go back and watch the video. Just so I could experience it.

Somebody wanted to buy a business that rented out pets to people. Like, if you want to go on a date and your date had a dog, you could rent a dog for an hour or a day. What a crazy deal. And I talk about it all the time as the worst deal I’ve ever seen, and then I’ve seen some really good deals. Obviously, a lot of those good deals get closed.

But we’re talking about deals…one last thing I want to deep dive into, and I’ll let you get back to all your due diligence and things, is—obviously, you’re adding tons and tons of value in the community these days with the legal side. Right? And you talk a lot about the anatomy of an M&A deal. You’ve done a legal transaction for me quite recently. I had to buy into a company to get my E-2 visa. You handled the legals, did an amazing job. And that stuff gives me brain damage. Right? I’ve probably read a million pages of law in my life.

Literally, I’m buying a forty-million-dollar recon business right now, and my attorney sent me, this is an econfolio, the attorney sent me—it’s one of our partners, James—he sent me the SPA, the last term. And the sellers are private equity, and they’ve got a big Wall Street legal firm handling the sale. And it’s like a thousand-page document. I’m like, I can’t read this. It’s going to make me ill. Right? Just highlight the bits that I need to know.

So, he just highlighted the ten sections in yellow that I needed to know. But back to kind of smaller, normal deals, like, what are some of the key things that you see in deals from a legal perspective that, you know, could cause issues for people if they’re not aware of them?

Yeah. So, one of the big issues we see is, on the seller side, the seller just hasn’t maintained the formalities of the business. We’ve got a deal we’re working on. It’s a construction business, been in business thirty-five years, I wanna say. They filed their corporate charter with the state—it’s a corporation, not an LLC—filed a corporate charter with the state thirty-five years ago. They have no corporate records at all for the entire thirty-five-year history. It’s like, really? Not one.

Not one. Yeah. As you know, they normally have minutes—they don’t even have seconds. There’s just nothing. So, you know, we’re working with the seller’s counsel and doing some of what we call an omnibus resolution where they just kind of ratify everything that’s been done ever in the past so that at least we have some corporate formality.

Because financiers would have a problem with that, I’m guessing?

Yeah, yeah. You know, that’s one issue. Another one is just making sure we do…and we’re kind of in the dealmaker world where we like to do stock purchase things. Whereas most advisors, I think, in the US, really, their knee-jerk reaction is you need to do an asset purchase. And I think, honestly, the best reason for that is for the advisor, the due diligence is way easier. So it’s less work.

Not to, again, knock on my own profession, but a lot of times stock purchases make more sense because of contracts and things like that. But you still gotta look at all those underlying contracts and make sure they don’t add any restrictions on changes in ownership or control.

Yeah.

Some new stuff that’s just come up the pipe, and we’ve covered this on our legal calls the last couple of weeks. There’ve been some changes in federal law in the US about non-compete agreements, about overtime, and the way you determine if someone needs to be paid overtime or not. Those rules are all in flux right now. And so, when you’re doing your due diligence, you need to make sure that…I would think it’s safe to say when it comes to wage and hour law in particular, I would bet that ninety-five percent of small businesses in America get it wrong.

Yeah.

It’s really rather nuanced, and it’s not as simple as, “Oh, I pay them a salary, therefore, I don’t have to pay them overtime.” And so, if you’re buying the stock, then you have to pay attention to those things because you are buying the liability of that seller having done it wrong in the past.

I’ve only ever done one asset deal in my life. I bought a marketing agency in Fairbank, California. So, it was an asset deal, creative transaction, and the seller needed to do an asset deal because she had some shareholder loan thing going on, and it was a tax-efficient way of doing the deal. Right?

So, we closed the deal, and then, obviously, you gotta open your new bank account, you gotta set up your own LLC, you gotta tell your customers that you just acquired to pay the new bank, and a lot of them don’t. So, I’m looking at my cash flow, and I’m thinking, “Where’s all my money? Where’s all my cash flow?” And my customers were still paying the old bank account. So, when I called the seller, I said, “Hey, you owe me like a hundred thousand dollars.” She said, “Oh, knock it off my seller financing.” I’m like, “No, I got payroll in three days. I need that money.” Like, it’s crazy.

So, unless absolutely necessary, I won’t do asset deals. Stock deals for me or equity deals—they’re always the way to go because you know, you do care about the credit rating of the company, all the contracts. You’ve gotta do more due diligence, and you gotta have reps and warranties and all that stuff in the stock purchase agreement, but it’s worth it. Right?

I had a fun one come across my desk. The sellers that we’re advising with, they had another deal that fell through, but they’ve already paid their lawyer fifteen or twenty grand, so they want to try to use the same documents that they had on the last deal. I said, “Well, I’ll be polite. Send them over.” It was a seven-page share purchase agreement that basically said you have thirty days to do due diligence, and you’re buying the business “as is, where is.” Zero reps and warranties, zero obligation of the seller post-closing.

So, I called our clients up and said, “Yeah. No. I don’t think we’re going to do it that way. I think let’s just buy form instead.”

Yeah. That’s the great thing about buying a business. Right? You’ve got a warranty. It’s like when you, you know, buy an iPhone—you get a warranty. If it doesn’t work after a period of time, you get another one. Same with businesses. If you can get a warranty when you buy it, and if you don’t buy what you think you’re buying, then there are mechanisms for clawing money back from sellers, especially if you’re doing a creative deal like we typically do, where there’s some portion of the consideration in seller financing or earn-outs, then you don’t have to pay that if something goes wrong. Right?

But to your illustration of your company out in California…you know, if I’ve got a problem that I’m facing today in the business because of a breach of the rep and warranty, if the response is “We’ll take it off the end of my seller note ten years from now,” that doesn’t work for me. So, you still have to be careful with it, but, yeah, it does add a lot of flexibility to the deal structure to be able to build in that clawback opportunity and offset that with money that’s owed to them.

Perfect. Well, hey, David, Gerald, thank you so much for your time today. It’s been a really interesting conversation. We’ll get this uploaded onto the podcast channel. Look forward to seeing you a week tomorrow in Gatlinburg. Bring your swimmers because there are hot tubs there, and bring your sneakers because we’re hiking in the Smoky Mountains.

Oh, cool. Are you any good at cards? Can you play blackjack or poker?

I’m okay at blackjack. I suck at poker. I’m so bad at poker that I screw up everyone else’s game because I so don’t know what I’m doing that they can’t figure out what to do with me.

We have a casino night on Sunday. So, we’ve got the mastermind—meet and greet Thursday night, mastermind all day Friday, all day Saturday. We’ve got loads of guest speakers and stuff coming. You’re doing your thing.

Yeah, I’m on the agenda at some point. Chris got me for a slot, and I asked full day or half day, and he said, “No, just one hour.”

Yeah, just an hour. And then Sunday, we’re going to work the morning, have lunch, and then we’re going to go on this big hike. It’s not crazy—it’s not like hiking a mountain. And then in the evening, we’ve got these casino guys coming in, putting the tables out in the big lodge that we’re renting, and we’re going to be playing some cards. You don’t have to use your own money, but the winner…

I’m going to be signing copies of my new book, I think, next week. I’m just waiting for an update from the publisher.

Yeah, and you’ve gotta let us know when you’re going to do your little event in Austin because we’ve got a whole bunch of Texas proteges that all…

Oh, yeah. You can bet. We did a little gathering in Houston last month, had a great time, and everyone’s like, “When’s the next one?” And I said, “Well, I’ll tell you what, I know Carl’s book is coming out, so let’s do the next one around the book signing in Austin.”

Yep, we’re actually going to do a little book tour. So, you know Jared that works on my team, right, on my enrollment team? His dad used to drive these massive big RVs. So we’re going to rent this huge RV, and we’ll actually start in Houston because that’s a couple of beds. You can come on the bus if you want. We’re going to drive city to city, and we’ll be doing the meetups during the day, and Jared’s dad’s going to drive us overnight.

I think we’re going to go Houston, Austin, LA, Dallas, Nashville, Atlanta, and then Orlando. I don’t think we’ll get up to New York. We might fly up there and do one. But we’re going to have, like, a week-long tour crisscrossing the country.

Fun, fun. Well, you know, I did the Texas to LA stint a couple of months ago.

I know you did! But it was in a U-Haul truck with your daughter, right?

Yeah, I took her to her first job. She graduated college last year, and she got a job in LA. So, we moved her out there, got her set up in her house. In fact, I was just out there this weekend visiting her and checking up. She’s living her own life now. She’s working for NBC, so if anybody is a fan of The Voice on NBC, she’s gotten to work on set with the photography crew. She got to meet Reba McEntire, John Legend, and some others—living her best entertainment world life.

That’s amazing. Perfect. Well, hey, great to catch up. Thank you for coming on the show. I’ll see you next week.

So guys, hope you enjoyed the latest edition of the Dealmaker podcast. We will see you soon for another episode. Until then, bye for now, everybody.