Cameron Hemphill hosts the “Medical Millionaire” podcast, featuring Ben Hernandez, CEO of Skytail Group. Skytail specializes in management consulting and investment banking for multi-site healthcare businesses. Ben discusses the importance of having a clear vision for business growth, whether through debt or equity financing. He emphasizes the value of a quality of earnings (QoE) report to ensure accurate financial representation. Ben also explains the process of preparing for an exit, including creating a pitch book and understanding the implications of an LOI. He highlights the importance of choosing the right buyer and the role of investment bankers in maximizing business value.

Transcript

This is medical millionaire the podcast, helping your Med Spa increase in status, visibility and profitability. Join your host as he dispels myths, shares trends and gives you actionable steps today that will take your medical practice to the next level. Here’s your host, expert marketer and founder of growth 99 Cameron Hemphill,
hey everybody. Cameron Hemphill, here your host for medical millionaire. Hey, first off, thank you so much for taking the time to tune into the podcast. Our goal is to give incredible value and insight for all practice owners out there. And so we talk about how to grow your practice, how to get into esthetics really like how to take your practice from point A to point B, whether that’s working on marketing or finance or anything, and where we can give you value in terms of taking your practice to the next level. And so, guys, I have an awesome guest that I’ve been invited to the show today. We’ve been trying to meet for forever. I want to welcome Ben Hernandez. Ben is the Managing Director and CEO at skytail Group. Ben, welcome to the show, my man.
Cam, thank you so much for having me. As you said, we’ve been trying to do this forever, so I’ve been looking forward to this. Thank you.
Yeah, absolutely. I know that you’re super busy, and we’ve been busy over here, and we’ve had to schedule a couple different times, so I really appreciate it, like, let’s talk about that. I know that you guys are just super busy. Talk to us about what sky tell group does, and a little bit of history about the company the audience would love to hear about it,
of course. Yeah, so skytails History merges a little bit with my own, so I’ll tackle both, and I’ll be brief on mine, and we’ll focus on the firm. But my background is primarily in finance. That’s where I’m comfortable in clearly and skytail my background out of school. I did investment banking post MBA, worked at a hedge fund, and then it was in 2015 and I know I’m aging myself here. Cam, so I hope you still hang out with me after knowing that. But it was 2015 I went to tax accounting consulting firm to lead a consulting department that I stumbled into by dumb luck. Basically, multi site health care. Founder owned businesses, and I just completely fell in love with whether it were a provider or a doctor, whomever, who was wanting to scale their business, grow their business. Didn’t go to business school. I just found it fascinating, and that’s what we set out to do at that firm. Now, the other piece that I noticed was, for those who were successful in doing so, then what you have an exit, you sell your business. There weren’t really that many investment banks or brokers in the spaces that knew how to deal with financial sponsors. So think private equity or family offices, and that’s really the genesis of where skytail came from. So moving into the firm, that’s exactly what we do today. We do two things. We do management consulting, where we help our clients grow and scale their businesses, and we do it through strategy, typically through a financial and or operational lens, and they’re wanting to grow, they’re wanting to scale. They have a certain vision, and we plug in to really just become a part of their team and whatever it is that they need. The other thing that we do is investment banking, and what that means is we basically take our clients, businesses or organizations, and we sell them, typically to private equity or family office or their actual portfolio companies. So the actual platforms that they create as they start accumulating all these practices. So that’s a little bit about what we do in the space.
It’s really, really cool. I mean, I have a a huge just love for what you guys do. I don’t have a financial background or investment banking background, but, you know, I’m a business guy. I’m an entrepreneur, and, you know, scaled businesses. I’ve been involved in exits, I’ve consulted for companies to kind of get positioned for an exit when it comes to, like, having the right processes and tech stack and those things, and so, you know, the finance side is always fascinated me when it comes to, you know, everything that you guys do when you’re looking at, you know, EBITDA, when You’re looking at multiples, when you when you’re really valuing a business. And so I think that brings up a good point. When you guys are, I know that you guys help on the consulting side, so let’s, let’s talk about that for a sec. If somebody is looking to, let’s say, grow their business, their practice, how can you guys help them? Is that? At all like raising capital, but through debt, or talk with us a little bit about that,
of course. Yeah, great question. And you know what? Cam, the grass must always be greener, because you can ask our team here. I’ve actually been fired from marketing at skytail, but I love marketing. I’m terrible at it, but it fascinates me, especially when you get to buy cool swag. But so I also MVU for whatever that’s worth. As far as how we help our clients, we help them in a multitude of ways. So I think first, we really aim to be a true management consulting firm, which means that we can do a multitude of things to help whatever the issues may be. So typically, for founder owned businesses, the issues that they come to us with because they’re wanting to grow, they’re wanting to scale. So maybe it’s they’re at location three or four, and those are different pain points, and when you’re at location one. So yes to your specific question. Oftentimes we do hear, hey, I want to acquire a new location, or I want to prop up a de novo. How do I get capital? Does it have to be debt? Can it be equity? What are the advantages and disadvantages of both? And our team absolutely walks alongside them to do either or and talk to them about the pluses and minuses. Of you know, would you or should you raise debt, or should you give up equity, and what are the consequences of both and the results of both? So yes, our team will go out to trusted banks to obtain debt or investors if they need an equity infusion. And I think you know, as we model all of that out, we also have discussions on an ongoing basis of what is your vision, right? Cam, if you’re if you have three locations and you want to grow to 10, you have to really understand where is that, that banking funding wall and the ceiling going to hit. So how do you stay beneath some of those ratios? How are we going to continue to reinvest in our business to ensure growth versus take out distributions? So really, it’s mapping out the entire future of your business. We like to ask our clients, you know, you have a painting in your mind. Paint it for us. What year is it? How big are you? What’s your why? What’s your DNA of the organization, and our job is to really make sure that all of those things are executed upon. Other common questions or pain points for our clients might be, hey, my physician or provider in location four wants to talk about partnership. Should I partner? If so, how do I structure it? How do I go through with it? So we walk them along that side. We talked about acquisitions. If they’re acquiring a practice, we’re actually by their side, negotiating on their behalf all the way through closing of that new practice. And then what happens after you acquire right? There’s an integration portion to it that’s not the overly exciting part, but you have to integrate successfully to be sure that this asset that you just bought continues to be healthy as you grow into 50 people, 100 people. Bonus modeling comes up quite a bit. So it’s just a multitude of pain points at different inflection points where our team tends to help.
Well, that’s well said. And, you know, I like how granular you get. So for the audience, I mean, you know, if you guys are looking to go from, you know, let’s say just a single site, or multi site, three or four locations, you know, Sky tell group Ben and his team, they are phenomenal to connect with in terms of scaling the practice, scaling the business. And what does that look like today? What does it look like in a year, two, three years, you know, I think you know to your point, Ben, it’s important to know, like, where do you truly want to go? Who are your partners, and how does that model out long term? Right? Because, like, on the consulting side, it’s a different approach. It’s, it’s, Hey, do we raise debt? Do we raise capital? Do we make an acquisition happen? But all of that has to framework into what is the end result, right? Like, is there an exit play, you know, when does that happen? Or are you looking to just keep, you know, cranking out location after location?
Yeah, you’re exactly right, Kim, in fact, you mentioned what does the end look like? Our first thing with our clients is we always like to start with the end in mind. I think that’s extremely important, because it allows you then to know exactly where you’re going. That’s kind of your North Star, if you will. And otherwise we would be driving our clients aimlessly. So the very first meeting we have is actually, let’s start with the end in mind. I mentioned painting that painting that’s in your mind, and we whiteboard it all out. We whiteboard their vision their future. What does it look like? What team do you need to support it? You don’t need the team today. Okay, but maybe in four years, you’re going to need you know a top level COO or CMO, whatever it may be. Those are things that you need to know today, so you can start planning for that. And so you can start, just as importantly, waterfalling it down to your team. And oftentimes what you’ll see cam is you’ll actually be poking holes in your own vision to be sure that you really make sense of what it is that you have in your mind as you put it on the whiteboard. And I think the most fascinating thing is you do that, and you know, we do it in our business too, is if you do that for whatever reason, what you put on the whiteboard, it comes true. And it’s not because it’s a magic whiteboard, right? It’s simply because it there’s empirical evidence already that proves if you write down your goals, and the more frequent, the better you do reach those goals, because you have a very focused point of where exactly you’re going, and especially if you’re able to waterfall that down to your team, if all of you can be going to that same north star that we’re kind of comparing it to, and everyone knows exactly where they’re going and why that’s a really, really powerful organization that you can build.
Yeah, I completely agree. I mean, I love that quote, you know, I think it was Stephen Covey his book, right? Begin with the end in mind. And I completely agree. And I mean, sometimes the end shifts a little bit, right, but you bring up a good point talking about, you know, goals, and in the whiteboard, writing them down, and in, you know, having the vision to execute on those. And I’ve seen that actually, in my personal life, I’m a big believer of goal setting, big believer of visualization of those goals actually happening. And so some may think it’s, it’s kind of silly and in, you know, but hey, there is something very powerful out there, you know, in the in the universe that can, you know, lead you to that North Star, if you will. And I’ve seen that actually, you know, come full circle for myself. And so I think, you know, to your point of goal setting, you know, putting it down the whiteboard, visualizing it, going over it, you know, every single day. You know, it’s interesting. I’ve actually wrote down exact figures on exact dates, and that’s happened to me so, and that was all from learning from, you know, other entrepreneurs that have been through that experience and exercise,
yes, agree 100% and you bring up a good point cam, that sometimes the goals do change slightly, and your vision changes slightly. And I think you should allow yourself to do that every year. You should be doing this at minimum, every year you should have a big is this still my goal? In six years, seven years, whatever it may be, and adjust if needed, that’s perfectly okay. Actually, here we at this firm are we’re calling it vision two. It’s a little bit different, because once you hit a certain peak, you might look and find that you want to climb other peaks. And you know, you mentioned that, it may sound a little bit, I forget what word you use, but I’m thinking esoteric, etc. And it’s not it. You get very, very specific with it, and you touched on it cam like there’s a difference in my saying skytail needs to be at x in five years. But as you work backwards to that. It gets all the way down to, what does that mean? From a, what team do I need? Level? From a, how am I going to get to certain revenue goals? How much am I going to spend in marketing? What’s my expectation from that? It really gets down to where you’re really modeling out at the micro level in order to get to that eventual end.
Yeah, yeah, you’re absolutely right. And same, you know, that’s for the practice owner too, right? I mean, it’s a wonderful exercise for any practice owner at any stage shoot, even if you’re thinking about getting into the industry and you haven’t opened up, let’s call it Location One, you know, and you’re thinking about, you know, doing it like you need to have a plan. You need to have a model, work backwards, you know. And I actually have a dedicated episode of, you know, why your why is so important. Because I think a lot of times I’ve seen people get into, you know, business in general. And you know, being an entrepreneur and a business owner, it’s not easy. I think, you know, there’s, there’s some interesting stuff on social out there that says, hey, I want to get into, you know, owning my own business, because I want to work my own hours. Well, you quickly find out you’ll be working all the hours, right? And so it’s, it’s, you know, it’s a challenge. Being an entrepreneur is super hard. But if you’re going to get into esthetics, right, or you’re going to get into healthcare is becoming a practice owner, I think modeling that out, taking the time, what does it look like? Year two, year three, year four, and that may be hard for people to vision. They’re like, shoot, I don’t even have a website. I don’t even have my logo. But you know, if you’re gonna, if you’re gonna do it, modeling that out, it’s gonna be important, just to keep you. Knowing and understanding why you did it in the beginning to just move through those, those challenges that will come up.
Oh, yes, absolutely. And we have people call us with with just that profile that you mentioned of, hey, I have a dream to found my own medical esthetic practice, and we walk them through. Okay, exactly what you said. You need to have a plan. Whether that’s a full, built out business plan to be determined. It depends on whether the bank wants you to do one or not. But certainly some pieces within that you should have, you know, demographic studies. Who are you targeting? What type of practice Do you want to be, and therefore, am I in the right location? And then what type of services do I want to offer day one versus year two? And why and how am I going to get there? And in order to get there, initially, who do I need to hire the first X number of months? And at what point am I going to hire, let’s just say an additional injector. Is it when capacity for the first one gets to 65% or so in a decently growing practice, I would say that’s when we would then add another one. And then you figure out, how long does it take me to break even? And then, before I even open, how much am I going to spend on marketing and so forth. So therefore, what you’re doing, Cam, if you’re just about to start is you’re really making sense of, okay, is this a viable business, and am I funding it correctly? Because before you get to break even, you’re going to spend x amount of dollars, and then you should probably add a little bit of cushion to that, even though you’re going to be conservative, ideally, when you build out that pro form of what it’s going to look like. But when you have that, it really allows you to, every single month, go back and double check your actuals to the pro forma on the financials, and then, from a KPI level, it allows you to double check, okay, am I hitting all of these KPIs? And if not, it allows you to right size, or it allows you to just update the pro forma for your new normal. So I so agree with what you said of ensuring that before you open those doors, you map out as much as you can with the business is going to look like, yeah.
Well, Said, I appreciate that, and I know like things are going to change, right? So like we may think we and you don’t have to have a perfect business plan, you know? Sometimes I see people just like, not go where they want their dream to go, because they get held up in the minute details, you know? And so it’s like, hey, take action, and things will will align. So that brings up a point I want to ask you what, what type of available, like funding is is out there that maybe some, you know, new practice owners or or folks that that what type of funding is out there that we may not know about, besides, just like your traditional, you know, bank funding,
yeah, I think ideally you still go with The bank funding. I think within bank funding, one interesting one to look at for small business zones is look for an SBA loan. Those are typically a little bit easier to obtain for what we’re trying to do here. But then we do still find the bank that funding is still the ideal way to go, because you’re paying, you know, a traditional, I mean, even not, not now maybe, but you’re, you’re paying a traditional interest rate, which in this inflationary environment, is a little bit high compared to, you know, previous years in the recent past. That’s still our favorite. But then you can even go into, if there’s an individual investor who’s wanting to invest in you. You can look at what’s called mezzanine debt. You can look at like convertible notes that have a debt and equity component to it depending on performance. And I wouldn’t recommend this unless it’s a strategic partner. But you could also look into some sort of equity give up as you found your business. And the only reason I say I wouldn’t recommend that day one is equity is expensive, especially as you’re starting to build. Maybe give up some equity when it’s a more mature organization and the valuation is up. But that’s also another way to get up and running and and I would say I’d make exceptions on the equity piece, if it is a strategic partner that’s going to actually add some sort of value to what you’re building beyond capital.
Yeah, that’s, that’s a great point. I think sometimes we are so eager to get into business, and we’re like, Yeah, I’ll partner with you, or I’ll give up equity if you can, you know, do this and this, right? And so it may, it may sound easy initially, where you don’t have to go apply for an SBA loan, or you don’t have to go raise capital through through private, you know, investors, or whatever the case is, but you know quickly to find out, let’s just take, yeah, I see some in. Actors that have been at a place, a practice, for a long period of time, and they want to go out on their own. You know, whether that’s a good thing or a bad thing, it’s, it’s, it’s their dream, it’s their vision, however they want to map that out. You know, I think it’s important to to understand, like, how fast your your practice and your business can grow and and and you made a good point. It’s expensive. And it may sound easy on the front end, but it can be. It can come back and bite you in the long term, for sure,
yes, agree, if you build a business that’s significantly valuable three, four years down the road, you know, I think one of my fears is always for whatever that capital infusion was, for whatever percentage of your organization it was. Are you going to look back three, four years from now with a little bit of bitterness or regret that you did that I would always try to look forward? Okay, this is where I’m going. Am I okay giving up X percent for this dollar amount? And if the answer is yes, yes, then maybe that is for you, but, but, you know, oftentimes I think what you’ll find is maybe not. Let’s try to find some debt. I’m always a big fan of using other people’s money, right, and keeping the equity myself. Uh
huh, absolutely no. I totally agree. And that comes down to, you know, confidence, humility, understanding your plan, executing on your plan, having a goal is having visions. It comes back to that. So I think, I think, you know, some people that may are not, you know, just have as much experience in the business world, are sometimes fearful of taking, you know, other investors money or banks money, because all of a sudden they have debt, they have a loan, and they have an interest rate, and they’re obligated to that. But at the same time, if you execute on your vision and plan, oftentimes it’s going to actually be the far more cheaper route than giving up equity upfront is. And I sure you would agree with me on that.
Oh yes. Agree 100% Yeah. So
Ben, I want to talk about what an exit looks like like over the past. I would say shoot. I mean, several years now, but I’ve you and I go to several conferences. We the the exhibit hall is crazy. We speak on stage. We have a lot of mutual friends in this space and industry and specialty, the word private equity and exit just seems to consistently come up in this vertical now, and it’s becoming very attractive for private equity. And I know there’s reason behind it, but I think you know, for the audience, it would be really cool to understand, Okay, I’m a practice owner, and I can basically tell you what my 2024 we’re recording this in like late 23 so I can tell you what I’m going to do next year. Let’s just call it a mature practice, right? So, and I’m thinking about preparing for an exit when I’m when that thought comes up in my mind, what should that practice owner start doing, what should they start thinking about? And talk to us a little bit about that?
Yeah, so if I’m a practice owner, and I have a mature, maturing practice, and I’m thinking, as you mentioned, Cam, you know what it may be time I’d at least like to explore it. I know what 24 is going to do, because I’m a mature practice. If I’m a business owner, I would educate myself. And we’ve been fortunate, as you know, to kind of be in the middle of all this consolidation with our investment banking team. And the first thing that we do, if someone like that calls us, is we put together what’s called a pitch book. And the reason I bring this up, is what a pitch book is, is it’s simply, if you were to call me Kim, and you are that practice owner, we basically ask for some light financial data and some historical company data, when were you founded? So on and so forth. And we go through the financials, and we get to adjusted cash flows. You know, technically it’s adjusted EBITDA to really figure out what is the true profitability of the organization, and we would then give you a value of what we think that your company would go for market. So that’s one piece of it only. So let’s say it’s a ten million valuation. Okay, great. Now you know what your organization is worth, but just as important is we start discussing. And these are things that you know you can do at home now, which is why I’m taking you through this pitch book experience. We start discussing, okay, what does 10 million mean? Does it mean that I write you or a buyer writes you a check for 10 million, and you go to Bora. Bora, well, not really. We start talking about deal structure then. So for the ten million valuation, middle of the fairway, call it 7.5 million. Would be cash at close, or 75% maybe 2.5 million or 20. 5% would be rollover equity, which means that you’re taking some of the value, and you’re actually buying shares into the buyer’s company. And then where are you buying the shares? Are you buying them at the top? Are you buying them at what’s called the JV level? That’s a bigger discussion, and that’s very buyer dependent. And then you also need to understand, not only do you not get to go to Bora, Bora, they’re going to typically ask you to stick around about four years. It’s typically three to five years. They’ll ask you to stick around four years. And then the question we get is, why? And the answer is that, if you’ve built this organization, Cam, you’re probably, if you’re the founder, Owner, key to this business. And some people have managed, in fairness, to become not very important to their business, which is actually a compliment, by the way, that’s that’s a sign of a really valuable business, yeah, one that can run without you exactly, that’s firing you from everything. But most of our clients, they’re still important to the business, whether it’s because they’re still producing as providers, or whether they’re part of the cultural makeup, whatever it may be. So they’ll ask you to stick around four years or so, and then we start discussing, okay, now remember, you’re rolling 25% of your equity. That’s a significant amount. That’s a fourth of your business value that you’re entrusting to now your new partner, the buyer. So it’s very important to know who am I entrusting with my equity, with my business, with my team, and not every buyer is the same, like we have it. We have a magic wand moment, if you will, where we compare side by side different buyers, and we go down the list of okay, how long has this academic example private equity? When was it founded? Has it done healthcare? Has it done multi site? Healthcare? Great. If all those things are there, then what are the returns that they’ve given to their limited partners and their partners who have sold to them, and what are their experiences with this buyer. We also ask for a list of, hey, you know, I want cam to talk to some of the people who you bought so he can, you know, see behind the curtain a little bit as to what his experience is going to be. And then maybe another buyer was doing HVAC a year ago, that might be a little bit riskier of an asset if that’s a buyer that you like, and you’re comparing those two side by side. So these are the kind of things that if I’m thinking of selling, I would educate myself on. And the last thing I’ll say is I would definitely work with professionals to actually steward you through the space, because there are a lot, as you mentioned, Cam, that’s all people were talking about. Like, I think our buyer list is up to 207 serious buyers in the space. That’s a lot. So you want to be sure that you pick the right partner for yourself and for what you want. So those are some of the things that I would do. I
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Yeah, no, that’s that’s very well said. And I think you know what happens is you hear the 10 million valuation number, and all of a sudden, you know, you see dollar signs, right? And you’re like, oh my gosh, I’m going to take off to Bora. Bora, this is going to be great, wonderful. Which, hey, I mean, yeah, like you said, if they’re paying 75% up front, you get a nice little check for 7.5 million in this, you know, use case, if you will, which is great, right? There’s going to be, you know, there’s going to be some capital gains on that. And I’m not a CPA or a tax you know, advisor, but there’s taxes on that. And then you really want to know who you’re becoming, like, who your new partner is. And I think a lot of times is we feel like we don’t have the ability to ask like, or maybe we’re just not educated enough on asking the question. On who the buyer? You kind of get blindsided by the dollar signs and by the all of the weight lifting off your shoulders, if you will, of running this business for the last many, many years and building it to what it is. And so I think you bring up a really, really good point. Ben is conducting buyer due diligence as a seller, right? And so what deals have they done? Were they in HVAC? And now they want to get an esthetics. And if they have done deals, I think it’s really important to talk to the people that they have acquired, like you said, to understand what the experience is. And if you’re going to give up, you know, on a 2.5 million equity role, how does that look? And so, you know, I couldn’t agree with you more. I think, you know, a lot of times we’ll sell a house, right? We’ll hire a real estate agent, you know, they help us out. Yes, they take a cut of the Commission, which is a lot of times you’re going to net more money, like most of the times. I mean, depending on the economic state we live in. But getting a professional firm involved. If you’re going to sell your business, this is going to be, this is a life changing event, and you want to have your ducks in a row and understand who your new partner is going to be. Because, yeah, you’re going to, you’re now working for, you know, the practice owner as as as more of an employee and by far, less equity.
Exactly. You’re spot on. And it’s funny what you just mentioned, and we’ve compared it to house as well, you know, except we add on that. By the way, you’re not just turning over the keys. You’re living in that house for a few years with them.
But you’re right. I mean,
people do ask us, Well, we have to pay you a fee, and obviously I’m incentivized to say this, but that’s also the reason that I got into investment banking, is I business owners are my heroes, right? You and I are business owners cam, and I want to see them get full value for what they’ve built. You know? I mean, there’s been a lot of blood, sweat and tears that go into this. And we also like to remind them that beyond the valuation, you know, this is a top five decision for most of us. If we ever sell our business, most of the time, it’s the one shot we get at it, and it’s almost like you’re selling, not selling your baby, but, but it does. I mean your business does feel like your baby. So it’s a top five decision point for most of us, so make sure that you do it right, that you’re very educated and on the valuation piece, it’s interesting when we have people call us like, Hey, I have an LOI in hand. Like, why would I pay you guys to do it? You know, every deal is different, but on average, we actually increase the value of that original loi to the one they signed by 44.5% we actually keep these statistics so we can actually answer people like, well, you know, hopefully we’re not costing you money, if you will, because we’re we’re adding to the value. But then even beyond that, we’re trying to protect your time. I think this is important to note. You know, we’ve talked about cam picking the right partner, you know, the HVAC versus private equity group that’s focused on healthcare, example, etc, we’ve talked about all of those things. But then, you know, this is a long process, and it takes a lot of mind memory to do this, and it’s emotional for most sellers. And the reason I bring that up is buyers throughout are going to be asking our sellers for updated financials. This is a multi month long process, from the time that you start discussions to the day that you close. And if there’s any dip in the business whatsoever, you know, they’ll bring you back to the table to Retrade you and say, Hey, Cam, you know, we were actually planning to pay you that 10 million because you told us you were going to, you know, perform this way, and it was an up arrow, and now you’re actually performing, you know, flat to lower than expected. So we may need to talk about 9 million. That’s another thing that we protect you from is we really try to protect our clients time and remind them to keep pushing and run their businesses if they’re never going to sell. Yeah,
that’s and that is a very hard thing to do from a mindset standpoint. Is, you know, business as usual. You may be under loi, but it’s business as usual, you know? And so I think I’ve seen this happen to other business owners outside of esthetics, but, but just being in business a long time is I’ve seen, you know, folks go under loi and they see dollar signs in a light at the end of the tunnel, and they start to retract a little bit. They start to kind of get a little bit, hey, you know what I’m I’m good, like things are coming and all of a sudden, sales dip, or revenue dips, or something changes, and that deal can can quickly change. If you don’t, you know, keep your numbers up. And what I would suggest. And again, I’m just going off of, you know, my experience. Guys like, you know I’m not. I do not live in Ben’s world at all. But if I would encourage you to step on the gas when you’re under loi and that’s the time to maybe not take vacation, that’s the time to really just, like, crank it out and just think of it as you’re never going you’re not selling. Because the the mindset is, it’s, it’s Wow, it’s interesting. I’ve been there and I’ve experienced it. It’s, it’s difficult.
That’s it. I may record what you just said, Cam and just play it the day of signing an LOI. Because, yeah, you’re exactly right. I think you need to keep in mind that, you know, the people that got us to the LOI are typically, you know, business development folks, and of course, they had to put the LOI together with with a certain investment thesis. But as things go go along, you have the buyers Investment Committee continuously looking at it. You eventually are going to have a credit facility or a bank looking at the deal as well make sure it makes sense. So you just want to make sure, as you set a cam to keep pushing and not take your eye off the ball, that that’s that’s usually not a good discussion.
Yep, absolutely, absolutely. And Ben, you brought up a good data point that I want to bring home for the audience. Because, you know, I think when people are saying, Okay, I’m gonna, I’m gonna engage with a group, whether it’s skytel group, or whoever you know there’s, there’s obviously, you know, there’s a reason why we’re all in business, and it’s to help others and and we should be compensated for doing so. But I am blown away that when you see someone with an LOI, you are able to get 44% more equity value than what the current loi is, dude that is massive like that is not a small figure. Congrats. That is, I mean, that alone is that’s just because bringing the professionals into the table, knowing how to ask the right questions, knowing how to look at the the numbers, the details, the margin, you know, all the stuff on the P and L, the balance sheet, and having a, I think it’s different if somebody’s gonna, like, sell their business with just a business broker. You guys are dialed into this space and understand how to really look at the numbers and increase the
value. Yes, yeah. And, you know, a lot of it is also, you know, logic. So I can’t take full credit for all of it, Kim, but thank you. It is exciting, by the way, seeing the Lois that we have when we’re, you know, discussing with what, then is a lead, and when they turn into a client and the one that they sign and close, it’s extremely gratifying, because it’s millions of dollars that they would have left on the table, you know, sometimes 10s of millions. So So on a personal level, it’s super gratifying seeing our clients get full value for what they’ve built. But then, yes, I agree. I think, you know, from a logic perspective, there are buyers who we know, if they’ve sent an LOI to our lead, it’s probably going to be a pretty strong one. To be fair, there are buyers who who their initial loi, even events unsolicited, is going to be, you know, relatively competitive. We’ll still bump it from there, but we know that. And then there are other buyers that we see, and we know that we’re going to at least double their offer. So that’s the other thing to keep in mind, is if you’re not doing this every day as a seller, you don’t know which one of those two buyers is contacting you, right? And so you want to be sure that you truly understand what is the value of my business. And by the way, if you call an investment bank like us, you know, we’re going to be completely open on that pitch book. In fact, we try to be conservative. Cam to where, if someone did have a $12 million offer on the table, and it was a legitimate offer, and I we, we’d put a pitch book together, and if it says 10 million, I mean, we’re obviously letting you know, Kim, like you have a really good offer in front of you, right? And I don’t know that we’ll beat it. So, you know, we’re simply looking at, what do you have cash flow wise, and what is the market paying for that? But yeah, I think a lot of it has to do with just a competitive process. I mean, we’re showing a typical deal, depending on size, to about 50 buyers. So just that competitiveness of it is going to drive value to what we consider to be market value. I think that’s one of the really important things to note. And then the other one is, you did note it cam is, you know, we’re an actual investment bank, which means we have a broker dealer, so we hire actual investment bankers who are licensed, so they absolutely know exactly. You know what the value ought to be. We don’t publish it or anything, but they know, you know, you know what the cash flows are, what the future forecasts are. And buyers trust those, because we try to be very, very accurate with it.
Yeah, absolutely and, and I want to talk about something. That’s, you know, maybe a little bit more technical before I let you go, that I think is really important. So talk to us. What about a Q of E, like? What is a q, a V? What does it mean? What does that process look like? Should I do something like that before I go to market?
Talk to us about that? Of course, yeah, Q of E stands for Quality of earnings. And what it is, is it would be basically you as a business owner, hiring an accounting firm that’s going to take all of your data, all of your accounting, all of your GL, etc, your numbers, and they’re going to turn it into typically, accrual accounting. Most of our small business owners are on cash accounting. And what that means is, if I pay you $1 you’re going to put it as revenue, whereas accrual accounting is, if I pay you $1 for a service that you’re going to perform in two months, that dollar isn’t going to be recognized until you actually perform that service. And that’s a very important distinction, because this is what buyers can whenever you do go under loi, if you sign an LOI, the buyers are going to do a buy side quality of earnings. So if the numbers are off, and if you think about a number being off, if we’re saying a business has a million of EBITDA, and the business comes in at 900 of EBITDA, and someone was paying a seven times multiple on that. Well, all of a sudden the deal goes from 7 million right to 6.3 million. Well, that’s a $700,000 difference that the buyer’s going to look at it and ask, okay, do I need to come back to the table here. So you want to be sure that buyers are very confident in your numbers. So back to the quality of earnings. They’re basically restating your financials to accrual. They’re also making sure that if you have any personal stuff in there, like if you’re going, if you’re putting your gyms through there, or if you’re paying your kids to do like modeling for tax purposes and putting pictures of them out on the wall, any of that gets added back, if you will. Meaning that’s not going to be a normal operation, so they’re going to adjust for that you as the business owner also are paying yourself a certain way. So let’s say that you’re an injector owner of an organization. You can pay yourself however you want, and take distributions off the balance sheet. The way they’re going to look at you is they’re going to say, well, what if injector, one owner gets hit by a bus tomorrow? How would she be compensated? And they would put that as the PnL line for that. So what they’re doing is they’re getting it to true normal operations, and they’re giving you the true cash flow of the business. Some other important pieces to note here. Cam that in our industry certainly are affected by this are things like gift cards and prepaids, those things are going to be adjusted for because a lot of us have those big annual events, and if you bring them in a million dollars under cash accounting, you’re going to account for that however, you haven’t actually performed that service. So that really shouldn’t be revenue until you perform it. And buyers are going to adjust for that. And the reason is because this, this is a big discussion with a lot of our sellers. The reason is, yes, you sold it. You already have that cash, though, someone’s already paid you that. But if I buy your business cam, then I now have to pay for that service, right? I have to pay my providers to service the people who already paid you the money. I’m not going to get paid for that. You’ve already been paid. So we need to adjust for that. So those are the type of adjustments that a quality of earnings report will account for to get to true EBITDA, we highly, highly recommend it with our sellers over a certain point. I think if you have a business that’s on the smaller side, you could probably get away with not doing it, as long as you work with someone who understands how to, you know, primarily, adjust for a lot of those things. Once you get into significant deal size, I would highly recommend doing a quality of earnings. It pays for itself. Yeah,
that’s a great point then. And I think, man, you bring up a wonderful topic around the the cash versus accrual on the gift cards and memberships, right? And that’s, that’s a very big like revenue generating vehicle inside of this, this specialty, in this industry. And so that’s a wonderful point, you know. And I’ve also heard, too, that you know, people that do a Q of E before you know, going to market, the buyer has a lot of respect for that, right? And it should speed up the due diligence cycle. Is that right?
That’s correct. Yes, with our deals where we go to market with a quality of earnings. Things. It allows a buyer to really more confidently put forward an LOI that they can really stand behind. You know, we talked about retrading earlier. Cam if things were going sideways, nobody likes to do that. You know, you may have naughty buyers, but, you know, our buyers tend to be really good buyers. They really want to stand by their LOI. So whenever they see the quality of earnings has been done, I think it gives them a greater level of confidence as to what they’re really bidding on, and allows them to put forth an LOI that they’re confident of. And it also pays off when you’re doing buy side quality of earnings. After you go under loi, they’ll still do quality of earnings. We, you know, we don’t have issues. Whenever we have a sell side quality of earnings and they do a buy side, we haven’t had any issues. And if there are any questions, the beauty of it is, you can put the two quality of earnings firms together and allow them to discuss exactly what each side was thinking. So it makes it for a much easier process, and it also allows you, as the seller, to know exactly where you stand and what your value should be. So it kind of helps you sleep at night, and it drastically reduces that risk to close right? The last thing I think anyone wants to do is go through this arduous process and then all of a sudden it falls apart because of something like value misalignment, because we didn’t present correct books.
Yeah, yeah, that’s a great, great, great point. I, I feel like it’s like, it’s like an appraisal on the business, on on steroids, right? It’s, I mean, we could also say, you know, okay, here’s the sales, here’s the revenue, here’s the EBITDA, here’s, you know, the margin. And then we could put a multiple and come up with a valuation, but, you know, and coming back to the to the house and analogy, I mean, you could look at comps and comparables and what’s sold, but, you know, after you do an inspection, if you will, right, like, it’s almost like the inspection and the appraisal process of buying a house, and if you have all that stuff done, I think it just really creates, like you said, a very confident buyer in, you know, creates transparency, and things don’t, you know, come up that you don’t want to at the final hour, which is important. So hey, there’s a couple acronyms that that were thrown out here, just for the audience. Ben, if you could, just before I let you go, if you could just what is an LOI?
Yes, great question. I try to stay away from acronyms. I still have work to do. It seems loi is a it’s a letter of intent. So that is an official offer that after the buyer does some diligence, they’re actually putting something in front of you in this letter of intent. Think of it like a term sheet, and it should outline it’s usually, you know, somewhere around two to five pages, depending on the buyer, and it’ll give you information, such as, the buyer X is buying seller y, and this is the valuation. It’s 10 million 7.5 cash at close, 2.5 is equity. And then there might be some other, you know, financial terms within it. It’ll have employment agreement terms like, we’re going to ask you to stay on for four years, and this is how we’re going to pay you. It’ll have non compete, non solicit terms like you can’t, you know, buy or compete with us when and if you leave within 1015, miles. So it’ll have some of those terms in it. The only legally binding piece in an LOI is going to be exclusivity. Exclusivity in our space is typically 90 days. If you get more than that, I would, you know, negotiate that back down. But what that means is, when you sign that loi, this is the one legally binding piece there is a 90 day in this case, exclusivity period. Think of it like we’re engaged at that point, right? Like I, the seller have decided to marry you the buyer, and we’re going to do this deal within 90 days of closing the LOI. And usually that means when you sign it, it’s financial diligence, legal diligence, regulatory compliance, and you sign a bunch of paperwork, you know, even more than when you buy a house, and then you close and celebrate. So that’s that’s what an LOI stand sand sworn some of the makeup Gotcha.
Thank you so much. And then the other one was EBITDA. We just give us a quick rundown of what EBITDA, EBITDA means, and what that what that looks like. Of
course, EBITDA is Earnings before interest, taxes, depreciation and amortization. So if you’re trying to do a quick back of the napkin. Basically, what you do cam is you go down to your net income, and you add in those other pieces, interest, taxes, depreciation and amortization. The reason you add those back is those are like accounting decisions, right? Like you might depreciate something within five years. Dollars, and I might choose an accelerated two year depreciation, right from a buyer perspective, that’s not a cash flow issue that should not affect value, so that’s why they add that back. EBITDA is a very rough, dirty way to get to how is this business cash flowing? So that’s the reason why that is a fairly popular metric when trying to determine how to value a business. Awesome, awesome.
Thank you so much. Ben, I really appreciate you. You jumping on. You give so much value to the industry to me. I mean, you’ve taught me many things over the years, and I want to have more conversations with you, man, I know that I see you. You know, throughout the shows and events, we go together, and I know we’re super busy and and you know, it’s an interesting world that we live in with with this specialty that we’re focused on. So buddy, thank you so much. So somebody wants to find you or your firm. Where is the best place for them to go, certainly. And
thank you as well. Cam as you know, I like picking your brain as well, and I mentioned how much I love marketing. So you might see an application from me, since I’ve been fired here.
But if someone wants to reach us, our our website is skytail group.com s, k, y, t, a, l, e group.com and then if someone wants to reach out to me, my email is Ben dot Hernandez at skytail group.com
Awesome. Thank you so much. There you have it, guys. Uh, Ben Hernandez, CEO, founder, Managing Director of skytel Group. Ben, thank you so much for joining. Go check him out. He’s a true class act, guys and Ben, thank you so much for joining. You. Have a great day, and I’ll be seeing you soon, my man,
thank you cam. Look forward to seeing you again, and thanks so much for the opportunity to hop on. I enjoyed it.
Thank you so much. You