This Man Helps Sell Your Business for Millions: Eric Grafstrom of ExitGuide.com – Buying Businesses – Investment Banking – Capital Raises
Hi everybody, Natum Myers here, founder of razors. com. And today I’m joined by a special guest on the podcast. His name is Eric Grafstrom and there are trillions of dollars that are transitioning from, you know, from one generation to the next and exit guide is, it’s a platform that he’s building and he found it that seems to be, you know, leading some of the charge in helping this transition happen.
So Eric, nice to meet you. Dude, thanks for having me. Glad to be here. Glad to have you as well, man. So, um, yeah, no, I just learned some really interesting facts offline and I think first, in your words, maybe introduce yourself to the crowd so that you learn about where you’re coming from. Sure, so, um, you know, like a lot of entrepreneurs people, I have, you know, an odd story.
I have a journalism major and many years ago, I started my career quite honestly at the time. I was dumb enough to webcasting to people before computers had sound cards and speakers true story would make, you know, 6 to 7 cold calls a day. Um, you know, it was a tough period, but that, that company became broadcast.
com. I was working. Yes. For Mark Cuban, Yahoo bought the company, took us to London and eventually out to the Bay area. I left before things got really challenging and Yahoo went back into startups and just kind of grew from a sales guy to a business development strategic deal maker and do an operator and did a couple of turns as a CEO.
You know, the last few years, uh, before moving to Austin, uh, in, in 2021, we. I was just, you know, coming into companies, oftentimes in distress situations and, uh, VCs were bringing me in members of the board. And I was helping companies some form of an exit. In some cases, that might be successfully getting the company transitioned and in a good state where somebody wanted to buy it.
Other times, it was at least selling off the assets to recruit some of the investment. In some cases, it was just flat out dissolution and I realized a couple of things. 1 is a really stressful way to not make a great living. Um, you know, it sounds glamorous to be Silicon Valley and it wasn’t, uh, two is, you know, because of the nature of who is back in these companies and where I live in the heart of Silicon Valley, Memo Park, California, I always have access to amazing resources that could have been on staff or outside council or somebody in my local community that knew the ins and outs of everything from intellectual property to M& A or whatever it may be.
Uh, and I’m driving down the road one day and a story comes on the radio about baby boomers who are trying to transition out of these kind of smaller main street businesses, and they’re really struggling. And I thought this was just odd. And when I looked into it, you know, we’ll talk more about this, but I had a couple of moments, but I decided to turn my attention to, you know, really these tens of millions of business owners that need to transition trillions of dollars over the next 10 to 15 years.
And helping them move through that process, um, in a way that really is kind of combination of technology and access to expert resource to to really kind of, you know, help this massive transition, um, because they just simply didn’t have access to the things that I had access to in Silicon Valley, its own little weird little bubble.
So, you know, this is a much, much bigger market with a much greater opportunity, but also, you know, much bigger set of potential problems if we don’t address it. See, that’s amazing because making a transition from, you know, the Silicon Valley mindsets to. You know, the more mom and pop helping the mom and pop type of group, it’s, it’s almost as if you’re bridging the gap from that, you know, Silicon Valley to almost Wall Street to Main Street.
So you have all the 3 corners covered. It feels good. But I’d like to say is that our customers are real people with real businesses and real revenue, which again, not not to. Speak negatively about about, you know, my my decades of experience in Silicon Valley, but it’s awesome to talk to people who have businesses that you can easily relate to that have been the fabric of a lot of communities across North America.
Yeah, no, exactly. You know, it’s more than more than just somebody talking about something that’s in the hype. It’s something that is. Down to earth, you can see, feel in touch. So we’re talking as well offline about like misconceptions and mergers and acquisitions are tons of them, especially with regards to somebody selling their business.
What are some main misconceptions that you’ve seen? In somebody who’s working on selling. Sure. Well, you know, there’s, this has become a popular trend lately. Just, you know, whether it’s through Twitter and other things where people are starting to kind of say, boy, it’d be interesting to buy these businesses.
They’ve got cash flow and other things. And some of that’s true. But let me, let me give a couple of numbers. 1 is, you know, small businesses in North America drive about 40 percent of GDP. So, it’s a huge number trillions and trillions of dollars. Truly 85 percent of them are owned by jacks and baby boomers.
So youngest is like 44 most over the age of 60. So just not to be morbid, but like the next 10 to 15 years, people are going to either want to or need to transition out of these businesses. It’s not a, you know, like, say, like, 85 percent of small business owners have no plan to exit their business, but 100 percent of them will exit.
Now, when you look at the market, it’s huge, but the reality is, is 90 percent of these businesses are worth less than 5 million. So it means a couple of things, but I think one of the big misconceptions is. You know, all these businesses are out there and they’re all viable and whatever it may be, and it isn’t totally true.
And so what you have is you have a vast majority of these businesses, which are really too small to engage people like business brokers, M& A advisors, lawyers and others for a couple of reasons. One is because this market is so big, all of those resources are going to go to businesses that are worth 10, 15, 20 million dollars and above.
And there’s going to be plenty of them, and there’s going to be more coming. Two is. Not every business owner is actually looking for a buyer. We’ve helped thousands of owners move through our platform. Almost 50 percent actually already know who’s going to buy that business. It’s going to be an employee, family member, business partner, someone in the local community telling them that you’re going to help them find a buyer is of zero value.
And it’s kind of an annoyance. They’re trying to figure out how do I move through the transaction? So, you know, the, the, the But I would tell people to remember two things. It’s a, yes, it’s a massive market, but most of these deals are really, really small and two, not every business owner is actually out there actively looking for a buyer.
Um, in most cases they’re not. Yeah. Some people may find that either heartening or disheartening, depending on what side of the equation you’re on, but that’s, I find it really funny. Well, like. The top businesses get the best resources, lawyers and so on, but then the bottom. Exactly. Yeah. And then the bottom 90 percent you’re saying don’t.
So what are some of those people that don’t have those resources? What are some of the biggest ways that they actually mess up due diligence? Yeah. I mean, look at the, the, the important. We like to tell people there’s three steps in this process. So before you decide to sell your business, I think about it as selling a house.
You wouldn’t wake up on a Saturday morning, say, let’s sell our home and stick a sign in the front yard. You would say, well, okay, we need to clean it up. We need to probably get an understanding of what it’s worth. There’s some repairs we need to make and that might take a couple of weeks. It might even take a few months.
But if I want to successfully sell my house in this neighborhood, I need to understand what it’s worth and make sure it’s going to be attractive to a buyer and that’s preparation. So. Okay. You know, 1 of the things to keep in mind, 50 percent deals actually fall apart and trend and it during the due diligence process number gets up as a small deals, you know, as you get down in price point.
And it’s simply because buyers don’t or excuse me, sellers don’t necessarily have the information they need, or they have unreleased expectations around the process. So that exit guide. People can come in, they get a free estimated range, what the business could be worth, and they get access to, you know, some information classes and articles that can help them learn about the process.
What’s the difference between selling the assets versus selling the business? If I’m selling the business, am I selling all the business or some of the business? Am I selling, you know, shares depending on what the structure is? So it’s a whole lot of questions just about like, what am I even doing that we try to address?
And they move to that preparation process, which is, look, it’s, it’s kind of busy work, but it’s important. Formation docs, accurate financial statements. You know, what are the reasons somebody would want to buy your business? So there’s things that owners need to go think about that we help walk them through.
And some of this work that’s required on their own, they really can’t outsource it. And so, you know, what we’re really trying to stress to small business owners is if you want to increase the likelihood of closing a transaction, even if that’s with someone that you already know, like an employee or find a buyer, you have to be prepared.
And that means kind of organizing the documents, having the right set of expectations and understanding kind of how to move through this process. Awesome. And so it’s interesting because from the seller’s perspective. You know, the preparation is important, but this next fax is probably one of the biggest surprises that I had when discussing with you offline, because you say that less than 10%.
Potential sellers, you know, in this niche will find a buyer and actually close. So I guess some of it may have to do with a lack of preparation. But what are some of the reasons why? Sure. In one caveat, we successfully find a buyer online. So. You know, when, when people think about this, they think of online marketplaces and businesses.
And again, these, these are valuable services that do serve a need, but when you talk to people who are looking to buy business, it will tell you that the noise to signal ratio is, is, is pretty high, or that they spend a lot of time, you know, cultivating through all sorts of things that have no interest and no appeal to them.
And so, again, let’s take a look at the market. Well, one main street largely are hyper local businesses. So chances are your buyer is going to come from your local community. So, you know, if you look at a site and they kind of, you know, tell you all about the millions of eyeballs that they’re driving there.
That’s great. If you have a online business and e commerce business or a SAS business or something to be run remotely, that’s fantastic. But if you’re running a local landscape company, well, that company is in Minneapolis, Minnesota, and you’re paying, you know, hundreds and sometimes thousands of dollars to reach eyeballs.
And someone in Atlanta, Georgia is looking at that. Chances of that person being, you know, even remotely qualified to buy your business is relatively low. So, geography plays a huge role in this. In terms of, you know who you’re trying to reach where you’re trying to source, you know, potential buyers to is that, you know, when people list their business, they may pick a price of what they want.
Well, that’s fantastic. But if your business is not necessarily worth that, because either your expectations are unrealistic, or you haven’t done the work to actually prepare your business to sell, then, you know, that deal is going to fall apart pretty quickly in terms of either what you want for the business versus what the business may be worth in the eyes of potential buyers, or once a potential buyer starts to dig in and realizes you’ve done none of the upfront work to prepare the business to engage somebody to move through due diligence.
So when you kind of start to break down the market and you kind of say, okay. 45 percent of these businesses already know who the buyer is. Take them off the table. We get a whole bunch of businesses that are probably hyper local. So they’re going to find a buyer in their local community. You know, call that another 40%.
There’s probably a whole bunch of businesses that. You know, quite frankly, they’re just not viable, meaning they’re not really going to attract a buyer, at least not now and may need to wait. So when you kind of, you know, go down to, you have to have a business that isn’t geographically constrained is completely and totally ready to attract a buyer and move through due diligence.
It’s actually, it’s a relatively small number. And it’s almost kind of sad. It’s like an orphan. But like, what were those businesses that are unable to even get a buyer? Whether they’re buyer worthy or not? What happens to those businesses? Yeah, I mean, look, it’s a good question. And when we started ExitGuide, you know, one of the things we had is, look, not every transaction Is going to lead is going to end with the successful sourcing and of a buyer and in a top dollar outcome.
I mean, it’s great. And everyone should talk about that, but there’s some businesses that will have to look at, you know, well, maybe I don’t didn’t find a buyer in my local community, a top dollar, but I want to ensure the legacy of the business and keep my. Employees employed. Well, that may look like an employee buying the business.
It may mean maybe I have to sell the assets and dissolve the business, but I can still at least, you know, pay off all my liabilities and pockets and cash. Maybe it’s not the outcome I wanted, but it’s still some form of an outcome. You know, in other cases. You know, we may work with them to say, Hey, look, if your business today is worth 350, 000 and you want to sell it for 500, 000, it may take you a year or 2 to get there.
So can you work with a business coach? And so our resources to increase your valuation. The number 1 thing that we want to make sure of is that. You know, we’re not trying to predefine a path for someone, even if it’s what they want to go do. But if what they want to go do is not realistic, want to be able to channel, you know, their time, energy and resources into what is still a successful outcome based on kind of what are the practical.
Limitations and constraints of market or what the business reality is for their own particular business. It makes a lot of sense and There are a few things that you mentioned especially at the beginning of the call like, you know, the financial statements the company information documents so what are some of the most mysterious parts of the Of preparing the transaction from the seller point of view that that exit guide Comes in and helps them.
Sure. Yeah. So, uh, what happens is when somebody completes a free assessment, take 7 or 8 minutes, they self report things like, you know, revenue and profit assets and liabilities. And then they could tell us about when, why, and how they want to exit. So it might look, hey, my revenue is 500, 000. I have net profit of 100, 000.
My plan is to sell my business in the next six months to an employee. Uh, and then we collect some other things. So at the top of that funnel, 65 percent of people report that their biggest concern is navigating the steps in the transaction. Versus 23 percent will state finding a buyer. And so you know what this means is, I think oftentimes it’s, it’s, you know, fear, uncertainty and doubt.
I don’t know what to go do. And so need to 1, make sure that your financial information is up to date. If you’ve been keeping your own books, it’d be wise to actually engage a bookkeeper or CPA to review that and make any updates and, you know, adjustments because bad data is going to lead to bad reports and bad reports are going to kill a deal.
So, really, what every buyer needs, or excuse me, what every seller needs to have ready is at least 3 years of P& L statements. Current balance sheet 2, if not 3 years of tax returns. That’s just to get out of the gate and make sure that you can engage and all those things need to be accurate. So, if you’re not ready to share that information, because it’s not current, it’s not up to date.
Maybe you have an outstanding balance with state, federal, local authority. Get that stuff cleaned up. Don’t start telling people that your business is for sale sale until that that information is cleaned up. So people move through a dashboard that starts with, you know, let’s talk about, you know, ways that you can describe your business for a potential buyer.
So they’re starting to fill out, you know, elements in the dashboard to explain their business. The next stage Financial information. We make sure that that’s up. And so what they’re doing is they’re getting effectively a very self directed way of moving through this process. So they know what to do when to do it, make sure that information is ready and then when they’re, you know, at that stage where all this information is gathered, they just simply share that what many people refer to as a data room.
Share that with their prior so that it’s everything is there, you know, neatly organized, professionally presented and ready to move through the process of due diligence. Brilliant as a businessman exposure in Silicon Valley and experience there, like, it looks like you brought that knowledge to, um. You know, sort of to the masses who are looking to sell their business.
So I like the way that you explained the, the way they did move through the dashboard and it makes a lot of sense. So, uh, so, okay. So everybody, they have their business ready. Everything’s ready to go with exit guide. Now you mentioned another shocking fact that when I heard this fact, like when we were discussing, I was, I was pretty, I was pretty, I was like, wow.
So how many businesses did you say are seller financed? And maybe maybe if you can explain what that means to the people who don’t know what that is. Sure. So, okay, so you and I agree, you know, you want to buy my, my, um. And we agree on a price of 600, 000 dollars. Well, you know, depending on who you are, the chances that you have 600, 000, you know, in liquidity is relatively low.
And so now you’ve got some options, which is, okay, how do I finance this thing? Well, one would be, you could go, you know, get an SBA loan. Boy, SBA loans are great, and there’s plenty of people out there. But that process tends to break down in a couple of areas. So one is somebody goes to the local bank. It may be a bank that is Not all that creative or familiar with SBA loans.
They do them, but they do ones that kind of are for bigger companies that fit into a box where maybe there’s already a finance person on board. But these are real, really small businesses. So, you know, financial statements may not have the depth and other information, or there may be other elements of the criteria that just kind of get lost.
And so one is people try, but they get frustrated and stonewalled with the first few steps and they just give up. Two is, you know, we’ve had, you know, people who are trying to sell a business and they’re trying to kind of get a loan and the buyer just simply doesn’t meet capital injection requirements.
So, again, you might have an employee who’s been working for you for the past 5 years that makes 60, 000 will, you know, if they rent an apartment and, you know, maybe they do a pretty good job with their finances, but they don’t have anything that is going to act as collateral on a 600, 000 loan. So, SBA lending works.
I’d recommend talking to brokers or other people who have access to a whole platform of lenders, and we try to put people in touch with those, uh, but if it doesn’t work, and both the buyer and seller want to make the transaction happen, you move to what’s called seller financing, meaning the seller is going to basically allow the buyer to pay.
him or her back over a period of time with interest using proceeds from the business. So if we agree that it’s 600, 000, you know, dollars, it may be a five to six year term with 100, 000 a year at a 5 percent interest rate. And they know that the business can support that. Right? It’s not unrealistic. And so that the buyer can actually still pay themselves, operate the business, expand the business, but then use some of those proceeds to pay the seller back over a period of time.
So, you know, sometimes what happens with these transactions is, in addition to the asset or the business purchase agreement is to have a note that outlines the, the, the payment terms and the interest rates and the payback period, you know, alongside with that agreement. Nice. And the fact that so many people have gone away from the SBA loan, is that a sign of something bigger that is happening in the market or, uh, the fact that so many people are jumping to the SBA, or sorry, are jumping to Seller Finance and are leaving the SBA loan alone?
Is that a sign of something? Well, I, no, I, I, I I’m not an expert in SBA lending. I think what I’ve seen in talking to people who are experts in that space is that the SBA 7A Loan Program is actually a great program. And I think more people are taking advantage of it. So I think that one of the biggest challenges there is just, you know, perception.
Yeah, I think actually the SBA is actually become, you know, a more valuable and flexible tool for people to utilize. But I think it’s like a lot of things is you may, you may not buy a home because you’re just going to assume you don’t qualify for a mortgage. Well, if you haven’t to somebody who’s a mortgage broker, you know, you may be missing out on the latest information.
So get educated. 1st, you can use a platform like ours. We have plenty of resources and articles on our website. You know, find other people that you can talk to actually understand the market. Don’t make don’t make too many assumptions before you, you assume you’re not going to qualify for that SBA loan because there’s a variety of programs, especially if you’re a veteran or in other classes where you might be able to qualify under certain programs that, you know, again, I mentioned veterans, you know, these great programs that are out there.
But I think what happens is, again, many of the programs are for businesses of a certain size requirement, a minimum. And so when you have all these businesses that are worth a few hundred thousand dollars, it just simply may not fit into the box. And that’s where you do need to look at it alternatives.
And so I think what’s what you’re seeing, too, is with people in fintech space. They’re starting to kind of see this gap in the market and figure out how they can kind of back these these types of loans because generally speaking, these are great businesses. These aren’t, um, businesses that are tied to kind of, you know, tech trends or other things in the market that they generally tend to be relatively stable businesses with, uh, you know, good financial history that someone can buy.
They just need somebody who’s interested in backing these types of loan environments. Yeah, exactly. And, um, I like the way you spoke respectfully of different programs out there. There are also a lot of different platforms out there, and, uh, I was looking at the exit guide platform, doing my homework for this interview, and, you know, I didn’t even know that something like this existed.
It seems to be filling a gap there. So, like, there’s a lot of hype out there in the market, especially the fact that if somebody lists their business online on a platform, people would magically fly to them from, like, all around North America to invest in their business and their laundromats in. Alberta or something.
So that’s the hype that, you know, it’s just been a question or something, but what are some other, if any, what are all the hype? Can you distinguish hype from reality for our listeners, uh, in solar business? Yeah, sure. Look, being an entrepreneur is hard in, in, uh, but I tell people it’s like, there’s, there’s different flavors of entrepreneurship.
Uh, for better or for worse, my, my journey entrepreneur has been tech startups, and that kicked off with, you know, decades ago, you know, being in many respects in the right place in the right time, but businesses I’ve worked with generally kind of start with this thing doesn’t exist in the world, and we want to go bring this into the world, but entrepreneurship can also be very stable, and High quality businesses that deliver, you know, day to day needs and services, coffee shops, flower shops, you know, appliance repair, you know, CPA firms.
And so, uh, you know, but running these businesses still a lot of work and so this is different. So, if you think about leaving your job, you know, 1 of the things you really need to ask yourself is, what is it like to work in this business day to day? There is generally speaking, you know, may not be an HR department in policies and procedures.
And, you know, small business owner, you know, oftentimes if you don’t show up, things don’t happen versus if you work in a company that has maybe hundreds or thousands or even tens of thousands of employees. You know, there’s challenges and working that environment, but there’s also a set of guardrails. So, 1, if you’re looking at buying 1 of these types of businesses, you know, be prepared to, to kind of wear many, many hats.
Um, the, the, the effort to make these businesses work is hard and you need to understand some of the crazy stories of what it takes to kind of sometimes deliver, you know, on client needs to is, is, you know, there’s a huge gap in the market. We’ve seen this with our data and everything else we’ve looked at is.
You know, people kind of guess their way through this, and, you know, it kind of works, but we’re trying to address this, which is how do you educate both the buyer and the seller about what needs to happen? And so don’t overcomplicate this. So, if you come from an M& A background, don’t expect somebody who’s running a, you know.
Uh, auto repair shop that turns over a million dollars a year to have the same level of sophistication, how they run their businesses, you know, a 50 million dollar business. And so what we’re trying to do is basically blend technology and access to what we refer to as coaches or expert resources. To allow people to move through a very simplified M& A process.
So you need to do some things because, you know, people are going to want to know what they’re buying. There are steps that we can kind of walk you through online, but we don’t want to overcomplicate this with jargon or processes or structure that is simply not needed for these types of businesses. So, you know, be prepared if you’re looking that’s out there.
Realize that it’s, it’s going to take a lot of work to find a business that’s right for you. The number one criteria I tell people is if you want to buy a small business, start with geography. If you’re not willing to live in 80 percent of the places where these businesses are going to be listed, then you need to know that before you start looking at stuff because there’s no point in going to your spouse, your family and saying, do you guys want to move to a city that’s 1200 miles away and find out that everybody looks at you like you’re insane, even though there might be an interesting business opportunity.
So that’s, it’s like, the number 1 thing that people tend to forget about because they get excited about what they can do with these businesses. And there’s a lot of well run small businesses that are out there. So. Um, you know, take the time, be humble and learn from an owner because even if there’s things that they’ve missed or not gotten to or weren’t capable of doing, they have put their heart and soul into this and probably put a roof over the heads of their family and managed to make a decent living.
So if you’ve got some ideas about how you can modify and change the business, still be respectful of what somebody, you know, generally built from scratch. You know, as you start to move through the process, you don’t want to come in and make it seem like what they’ve done is. Um, okay, but you’re going to turn it around and make it, you know, that much better brilliant because you’re coming at it from like, you’ve been in the trenches yourself being an entrepreneur, you can get your own hands dirty.
And then you’re also like, at a most elevated position where you’re seeing all these, all these people and things. So, you know, just take to the listeners. I advise you to just take that into context. And as we start to, uh, you know, I guess wrap up, I’m looking at, um. Exitguide. com and sort of the, uh, the website right in front of me here.
How can people get in touch with you if they have any business inquiry, if they want to like sell their business or anybody in general, they want to do business with you or your company, how would they be able to get in touch? Sure. So, so if you’re interested in selling your business, you want to start moving through the process.
Just go to exitguide. com. And move through our free assessment. It takes seven or eight minutes. We ask you some questions. It sets up your account and gives you an estimated range for what your business is worth. And you start to get access to kind of information and tools to kind of at least understand what, you know, is involved in this process.
Uh, if you’re kind of just generally interested in the space, you can email me Eric with a C E. R. I. C. exit guide dot com, um, or connect with me on linked in. If you do, please mention raises dot com and, and, you know, and, you know, always good to know where, where I came from. And, and, uh. Like to take extra extra care of those who come through through interviews like this.
Uh, and, you know, what I would say is, you know, reach out to us. We, we do, you know, monthly webinars. We, we, you know, did one in November about, uh, small business valuations. We did one in December with, uh, another guest about navigating the steps and due diligence. So what we do is we bring up experts who, you know, bring, you know, decades of experience.
And we just do a 30 minute conversation. We ask them questions and we do these on Zoom. We’re going to have one coming up in in January. That really is what to expect if you want to sell your business in 2024. So we’re doing a lot to try to educate people. So you can find us on Twitter. You can find us on LinkedIn.
You can email me directly. And if you’re a small business owner, just go to exitguide. com. And, and reach out or start the assessment and be happy to help brilliance and, and Eric, thank you for, uh, just make an interview really, honestly, really, really easy to do. And, uh, and yeah, no, he, he’s, he’s a great, great guy to get into conversation with and to work with.
So, yep, go to exit guide. com, as he said, follow all the links and there’ll be in the description of wherever you’re seeing this video and everyone, we look forward to seeing you in the next 1 off to the races to Eric. Thank you enjoyed it.
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