Acquisitions Anonymous - #1 for business buying, selling and operating - How to find the expected benchmarks and KPIs for your industry? - e64

Episode Date: February 1, 2022

This episode is a group discussion with special guest, Mitchell Baldridge (twitter: @baldridgeCPA) CEO of Baldridge Financial (https://baldridgefinancial.com/).  How to find the expected benchmarks and KPIs for your industry?We'd love your feedback on this episode!  THANKS TO OUR SPONSOR:  David C Barnett Small Business Podcast - If you're interested in learning about buying, selling, financing and managing small and medium-sized businesses then you should check out the David C Barnett Small Business and Deal Making Podcast on YouTube and all the major podcast apps. David is offering our listeners a FREE copy of his book; 21 Stupid Things People Do When Trying to Buy a Business.  You can find links to download your copy here:  https://dbarnett.gumroad.com/l/21stupidthings/aapodcast-----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on twitter @acquanon Learnings about small business acquisitions and operations.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#62 Two Landscaping Businesses for Sale - Mike Loftus CEO of Connor's Landscaping#66 Analyzing Software Businesses for Sale with Steve Divitkos, experienced industry CEO#42 $900k Moving and Storage Company / $500k Rural Mini-Storage#61 Two Manufacturing Businesses for Sale - Brent Beshore - Founder and CEO at Permanent Equity#24 $5mm pool services and lifeguard staffing co / $2mm septic services business -  featuring baller @WilsonCompanies as a special guest!#45 $800k/yr cleaning business in Midland, TX / a $565k/yr window cleaning business in San Antonio, TX #48 Two Landscaping Businesses for Sale - Mike Botkin of Benchmark Group--- Support this podcast: https://anchor.fm/dealtalk/supportSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

All right, welcome to another episode or another version of Acquisitions Anonymous vignettes. We are experimenting with publishing more frequently, and we are doing these interstitial episodes where we bring a guest on and we talk about topics, interesting topics that have been submitted to us on Twitter about things people experiencing in real life as they try to buy businesses or run them. And our topic for this week is an interesting one, was submitted on Twitter. And the question is, as I'm talking about it. trying to learn a new industry or a new target business, how do I figure out what metrics matter

and what levels are, quote, unquote, good for those metrics? You know, you might wonder, you know, what are good gross margins for this industry? And this person says, but every time I ask, I find everybody in the industry is cagey and doesn't want to share their metrics with me. So when I enter a new industry or I'm indulging a new business, how do I learn what metrics matter and what benchmarks I should be using for kind of market in those metrics. So that's going to be our topic for today. Michael, you've been not on your head vigorously. I think you have thoughts or tricks.

It's just because I'm just excited to be here. That's why. So I have a bunch, and I've done a bunch of these. So I'll just throw out one to get started. One of the ones I like a lot for metrics and benchmarks is actually, if you can go find a public company that's parallel to what you're doing. So, for example, when we started an education company eight years ago, One of the things we went and did was look at all of the public company filings to understand

what percentage of revenue they were spending on marketing. And it was actually ended up being like double what I thought was high for us. They were all spending close to 20% for some of the more aggressive ones. So that's trick number one. Like if you can go find a parallel public company that's already doing what you're doing and see what they're spending on it, that gives you a great kind of leg up to start with those types of numbers to see what their KPIs are. Now, if they're public, they're probably a lot bigger than you.

So you have to take that with a grain of salt, but it gives you a good place to start in terms of researching things. Yep, the old public comps and that we learn on investment banking, if they're junior investment bankers listening. One of my favorite tricks to get somebody to talk

is if you approach anybody in an industry and say, what's your gross margin? They're going to go, I don't think I want to tell this guy. What are his purposes? What's going to use this information for? He's going to use it to compete with me, etc. So instead, you should frame it as

Hey, Mr. Operator Guy, I've looked at a lot of businesses in this space and I find that the best ones have gross margins of 80% or more. Does that jive with your experience? Now, you don't actually have to have any inside information at all. You can pick that number out of thin air because if his gross margins are better than 80%, he now has the opportunity to brag and say how his margins are better than the best ones that you've ever seen in the industry. If his margins are worse, he now has the opportunity to tell you you're stupid and have bad information. Either thing is very tempting, right? To tell you you're wrong or to brag about their own business.

So now you've kind of set up this Sophie's choice where he's got to tell you and won't be able to resist. So that's how you frame it to get people to leak. I love that one. You asked the question without actually asking the question. So there's another one, which I also like. And then to be a good host, I'm going to let Mitchell actually talk. But the other one is to do a version of that on Twitter,

which is you go to the old school, write the wrong answer on Twitter, and see what people tell you. Because, shockingly enough, some of those anonymous accounts actually know what they're talking about on Twitter. So I'm a huge fan of one of the things I've done to learn about industries. Like, we started a coffee business and incubated that in 2020. I learned a lot by just writing stupid stuff on Twitter. And people come out of the woodwork.

And I found stuff about case studies on Dutch brothers and all this different type of stuff that I never would have found unless I was being public and stupid. So highly recommend that as another technique to find about the kind of industry norms. Yeah, it just bade people to correct you. People love to correct other people. They love it. I would say one thing I was listening to an episode and Mills was talking about how he approached the leader of the entire trade organization of roofers. in America. And I mean, if you can go find somebody like that, you can go look in trade journals.

I mean, we have the CPA Journal of Accountancy and we have society of CPAs. And I mean, they've put together pretty well-funded, exhaustive studies with tons of participants that create kind of really long reports about, you know, how CPA firms, work and the metrics of the inputs of employee numbers and gross margins and costs of every sort. So I mean, I know that's a simple answer, but the other thing you can do is beyond going to public comps, you can go start looking at private comps, Biz by Sell and Microacquire and all of, there's more information available today than there's ever been of what competitors

are selling for and what their financials look like. Yeah, sites of NDAs, look at their financials for sure. Yeah, then be quiet about them. Then shut up. Yeah. Hey, everybody, Michael here. We have an advertiser for today's podcast. It's the David C. Barnett, small business, and deal making and M&A podcast.

So David is the distinction of our number one Canadian, Canadian sponsor. And it's a podcast all for people who are interested in buying, selling. financing and managing small and medium-sized businesses. And he focuses on a lot of really, I think, great tactical and strategic issues here, buying in an industry when you don't have any experience, broker commission, when there's a seller node and all that kind of stuff. So thanks to David for supporting the episode today.

And so David is doing a special deal for our listeners. You can get a free copy of this book, 21 stupid things people do when trying to buy a business. And you can download that when you go to the link in our show notes, and it's on his gum road site where he has some stuff around that. And so check that link below. And thanks again to David and his podcast for sponsoring our podcast and our never-ending quest to break even. So have a great day.

Another fun, tricky one where you can find the information is, and sometimes it's dated, but, you know, Stanford Graduate School of Business, all the case study-centric business schools are routinely publishing case studies on industries and businesses. So, you know, you can find really special businesses like the Shimano business or Dutch brothers, but then they have random ones on like, you know, Joe's shoe manufacturing. And it can give you a lot of history around those things as well in terms of the KPIs that matter and what's one of the industry norms and what best in class. Also, if you're going to go as far as to go buy a business out there, you're looking to really spend that kind of money or that kind of, that kind of

effort or make that commitment. It's like go to a coffee shop, close your eyes, pull out a sheet of paper and start drawing what you think the business might look like and everything you could imagine would go into it and figure out how right you are. And then start looking at other opinions and just to your point, Bill, of what a public, you know, companies, PE will look like could be very, very, very different than what a small businesses PE might look like. So it, you have to just go, hey, we want a million dollars of revenue. And to do that, we think we need office admin and this person and that person and just start roughly drawing out costs. And that's the dumbest way to get there that will actually almost get you there sometimes as well. But, you know,

Yeah, I think it's so much easier to go to somebody and say, I think this is the answer. Can you help me dial in the real answer versus what's the answer? Right? You go to somebody and say, what's the answer? Not only do they think you're lazy, they wonder if you're pumping them from information or, you know, whatever it might be. But if you go to them and say, I think it seems to me most businesses in this industry, you know, turn their inventory six times a year. Does that make sense? Are most better or worse?

Like why? That's a specific question that someone can answer. I think you'll find people much more receptive. The other people that are really total blabber mouse besides the industry association people are the suppliers, especially supplier salespeople. So like I learned very quickly that food service supplier people, they are some chatty suckers and they will tell you everything. It's fascinating.

They're like, oh, so-so is doing really. well here, they're doing poorly here. You know, it's just like, and what should we price this? They'll be like, oh, yeah, I have an opinion on that because I don't know why. They're just nosy people all up in their customers' business. Maybe their bosses are telling them,

look, to sell these cups, you really need to understand and get in the head of your customers. I don't know why it is, but they will blabber like nobody's business. You just got to ask and listen, it's fascinating. Then you've got to figure out which of stuff they're telling you is total lies.

Which that's another thing. Yeah, hearsay or they don't know. Yeah, that's another thing you'll learn very quickly. There's like a definite fog of war in business. And, you know, like this idea that a good 75 or even 50% of the stuff you hear is going to be total crap. So you should just be really cognizant if you hear from one person like, oh, you know, 90% gross margins and 150% annual growth are pretty standard in this industry. Like, if you hear that, like, get it corroborated. I was thinking that, Bill, when you throw out the 80% gross margin and the guy's actually

40 and it goes, yeah, yeah, 80, that's it. I have one of the best businesses, 80, you know, but there is that. And sometimes it's unintentional. You ask somebody like, oh, what's your gross margin? And they'll tell you, like, oh, it's 20%. And really, they're just calculating it wrong. It's really 80% or vice versa. So, yeah, you got to just totally listen to what the source is. So I have another one that works incredibly well, is going to find like the old gray hair in your industry, somebody who did it for 30 or 40 years and knows everybody knows where all the bones are buried. They're the ones that'll tell you like stories from the 70s.

Like, you know, oh, like we used to go crazy and that, you know, getting those permits and stuff like that or we used to have to go in person for things. Like those are great folks that they're happy to help and a lot of times they know stuff. And they're, a lot of them, if they're retired, they got nothing. but time. They'll sit down and help you and tell you what you need to know about stuff. They might even pull out like old P&Ls and those sort of things to be very useful. Again, the danger there, you got to watch out what somebody learned doing business when, you know, fax machines and telexes were, you know, were the rage is totally different than

today's kind of modern environment. So you've got to just be mindful of what you're hearing and interpret it appropriately. All right. Well, no need to blare the point. So I think there's a bunch of good tips if you're trying to get a new industry. Or always just go on Twitter and tweet people. People love to tweet. And so do we as you can find us on Twitter at Aquan, or each of us, Bill Dea, Mitchell Baldrish and Michael Berl. We'll see you guys in the next episode.