March 9, 2019

JF1649: Scaling A Business With A Successful Exit #SituationSaturday with Terry Lammers

Growing a business takes a lot of time and effort. Sometimes, your efforts can have a negative impact if you’re not making the right moves. Today, Terry will help us understand how businesses are valued, so that we can focus on the activities that have the highest returns. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Terry Lammers Real Estate Background:

  • Co-founder and managing member of Innovative Business Advisors, advising business owners on the sale of their company
  • Had 11 different companies he grew to $40 million in annual sales before selling in 2010
  • Based in Fallon, IL
  • Say hi to him at


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday we’ve got a special segment for you called Situation Saturday, and here’s the situation – you’ve got a real estate business, and you want to scale that business, but here’s what you are thinking… You’d like to scale that business and the exit out of the business with a successful sale of the business. Today we’re talking to Terry Lammers about how to scale our real estate business and prepare it for a successful exit.

First off, how are you doing, Terry?

Terry Lammers: I am fantastic. How are you, Joe?

Joe Fairless: I am fantastic as well, and nice to have you on the show. A little bit about Terry – he’s a co-founder and managing member of Innovative Business Advisors, advising business owners on the sale of their company. He’s had 11 different companies he’s grown to 40 million dollars in annual sales before selling in 2010. Did I say that right? Help me with that fact.

Terry Lammers: I grew up in a family oil business; we were dealing with gasoline, diesel fuel, lubricants, stuff like that, so I came back to the company in 1991, took it over, and over the next 19-20 years purchased, acquired 11 other companies. Then I exited the business in 2010.

Joe Fairless: Oh, cool. Alright, thank you for that. Based it Fallon, Illinois.

Terry Lammers: Innovative is based in Fallon, Illinois, and the oil company was in Pierron, Illinois. We’re about 30 miles East of St. Louis, Missouri.

Joe Fairless: Cool. With that being said, will you give the Best Ever listeners a little bit more about your background and what your focus is now?

Terry Lammers: Sure. So a family oil business, growing that, I grew up in it; purchased 11 companies, grew it to over 42 million dollars a year in sales, sold it to Growmark, which is about a six billion dollar agronomy company in 2010. I had to work for them for six months, and then I was done. I had not planned for what I was gonna do after I sold the company, so I sat around the house for about three months, and my wife informed me that I was gonna get a job.

Joe Fairless: [laughs]

Terry Lammers: I did commercial banking for 3,5 years and kind of got my entrepreneurial spirit back, and in July of 2014 my partner and I started Innovative Business Advisors. I got my CVA designation, which stands for Certified Valuation Analyst. CVAs values businesses, and that’s a national  designation.

Innovative basically does three things – we help people buy and sell businesses; since I’m a CVA, we do a lot of business valuations, valuing businesses for a variety of reasons. A lot of the reasons we value businesses is for the business owner to know is the company worth enough for them to exit? And then we also do some coaching and consulting.

Joe Fairless: How much does it cost to have you put a price tag on a business?

Terry Lammers: We do two different types of valuations. One is per NACVA standards. NACVA is the National Association of Certified Valuation Analysts. And then we do a summary valuation. The NACVA valuation – for their standards it has a lot of write-up in it. There’s a write-up on the company, the management team, the industry, all the adjusting entries – there’s documentation why we did that, and that’s gonna cost you between $5,000 and $10,000. We charge $10,000 for it. There’s just a lot of work to it.

For the same number, you’re gonna get the same value – we’ll do the summary valuation, and that’s what most people are doing, because if you’re the business owner you don’t need to know about your management team, you don’t need to know about the industry and you don’t need to know about your company. You’re living it, right? So we kind of cut straight to the numbers, and we do that for about $2,500.

Joe Fairless: Will you say the industry again – is it NACVA? What was it?

Terry Lammers: NACVA, it’s an acronym for National Association of Certified Valuation Analysts.

Joe Fairless: Got it, cool. Just wanted to make sure I had the acronym correctly. When you’re doing the summary evaluation to put a price tag on what that business is worth, what goes into that?

Terry Lammers: It’s mainly getting to the true cashflow of the company. One of the main things that I preach when I’m doing public speaking and stuff like that – in school, everybody focuses on sales and net income, and it’s really not about sales and net income, it’s about gross profit and cashflow. Because of the depreciation and amortization, those are non-cash expenses that are on your income statement, and you need to add those back into the net income to get you the true cashflow of the company. So you’re really valuing the cashflow of the company, that’s what it boils down to.

Joe Fairless: If a company has been around a while and is not making money, but has a product and just hasn’t been able to be profitable, but has a product and maybe we’ll say they have a patent on the product, how do you put a value on that company?

Terry Lammers: That is very tough. I will tell you there are two types of valuations. We do financial valuations, so we’re valuing the cashflow of that business and determining what financial sense would it make for, say, you to buy my company. The other type of valuation would be a strategic valuation. So if I create an app that Google thinks they can buy, and spread it across the world, what is that really worth? Now, if you are a potential buyer of a company and you come to me and you say “Terry, I’m thinking about buying this company, and strategically I wanna know what is it worth”, we can sit down and talk about that – what your potential market is… But there’s no way to financially justify those types of valuations. That’s really tough. So I tell people that all the time – when I’m doing a valuation for your company, I’m doing it from the perspective of “Does it make financial sense for somebody else to buy it?”

Joe Fairless: So excuse the ignorance with this question, but it seems like it would be pretty easy to do a financial valuation of a company if you have the profit and loss statement, because it’s already done for you if all you’re looking at is the gross profit… So you just look at the financials they give you and then you put some sort of multiple on that?

Terry Lammers: Yeah, so the tricky part can be to get into the true cashflow of the company, because unfortunately people get very complacent with their financial statements… And I get them, and I’m a fresh set of eyes on those things, and I’ll find a lot of things that’s like “Why is your accountant doing it like that?” and most often, the answer is not that it’s a bad accountant, it’s just nobody has brought it up to them, and “This is the way we’ve been doing it for the last ten years, so that’s the way it’s always gone forward.”

Joe Fairless: For example? What would that example be with an accountant, why they’re doing something like the way they’re doing?

Terry Lammers: The cost of good sold is always a section where — the proper things aren’t in the cost of good sold section. Or there’s a lot of personal expenses on the financial statement… It’s fine, their own personal expenses; I hope auditors aren’t listening to this, but if you [unintelligible [00:09:00].12] through your company, that’s your prerogative, but when it comes time to sell it, you wanna be able to clearly identify those things so you can add that back into the cashflow. So you’re gonna want to add back into the cashflow any expenses that a prospective buyer would not have when they take over the company. But I’ve seen mislabeled items on the income statement. Income statements that are eight pages long – that’s ridiculously long; nobody can analyze that. They need to be condensed.

So those are the kinds of things that you start to look for. On the top side, the revenue side, there’s one revenue item, and they’re selling multiple products and they don’t have that split out. So really going through and – that process is called normalizing the financial statements – getting to the true cashflow of the company. But then one of the things – especially if the company has less than a million dollars in cashflow, so it is a bankable deal, I hang my hat a lot on the fact if I put a number on the company, can you realistically go to the bank for a reasonable down payment and have enough cashflow to service that loan?

Joe Fairless: And then once you’ve normalized the financial statements and you have the true cashflow, how do you determine what multiple to put on it?

Terry Lammers: Really I don’t say that you’re putting a multiple on it. Once you’ve come up with the value, you can determine what the multiple came out to by dividing it by the value, by the seller’s discretionary earnings, or two times revenue, or something like that, but you really don’t come to it with the approach of “I’m gonna value this business at 3x revenue.”

A common way to value a company is called the discounted cashflow. What you do with that is you’re thinking about what type of return should I get on this company. When I was buying companies, my trigger to buy a company was if I could pay for it in 3-5 years. So if I’m gonna pay for that company in three years, that means I’m getting a 33% return on my income. If I’m gonna pay for the company in five years, that’s a 20% return on my income. So if you divide 20% by the cashflow of the company, that will give you a value. Same if you divide 33% by the cashflow of the company – that will give you a value. Then from there you can determine if that value is a bankable number.

A small business – you should get a better rate of return than, say, what you could invest in the stock market or something like that. So you’re determining what rate of return will trigger me to want to buy this business. The bigger the business is, the lower the rate of return somebody will accept to buy that business, which increases the multiple of that business. So 16% would be a multiple of 6. Does that make sense?

Joe Fairless: Yeah, that does.

Terry Lammers: I’m [unintelligible [00:11:44].25] through my book – the name of the book is “You don’t know what you don’t know”, the byline is “Everything you need to know to buy or sell a business”, and I think it’s in the second or third chapter that I lay out that formula on how to do that.

Joe Fairless: And for a real estate investor who has a company, and — when I say “has a company”, they have some people who work for them, and they’re thinking “Hey, I like what I’m doing, but I want a little bit more freedom with my time, so I’d like to scale this wholesaling business, or this fix and flip business (or whatever business they’re in) and sell it to someone in a year or three years”, what are some questions they should ask themselves in order to make sure they’re prepared for an exit to make their business as desirable as possible for a buyer?

Terry Lammers: Are you specifically talking about a real estate business, or any business?

Joe Fairless: Yes, we’ll talk specific to real estate.

Terry Lammers: Okay. Specifically to real estate, one is you wanna have decent financial statements. When I sold my oil company, we had a fleet of trucks. I had a three-ring binder for every truck. So for every property you have in a real estate portfolio, where is it financed? This may sound silly, but the address, the rent rolls…

Joe Fairless: Well, I’m not talking about property, I’m not referring to someone selling their portfolio of their properties. What I’m referring to is if someone has a company where they’re wholesaling deals, or their company is to fix and flip deals; so they’re not buy and hold investors, but rather they’re investors who purchase properties and they have a business model to fix and flip deals – what questions do they ask themselves? These questions are probably the same that any business owner asks themselves for how do they prepare to get their company ready for a sale in a year or two years down the road.

Terry Lammers: Really everything comes back to cashflow, but there’s some things that I can tell you that are non-financial and financial. On the financial side, really have your house in order; do you have very accurate financial statements? If you’re flipping houses, you’re probably gonna have some work in progress, and stuff like that, so making sure that that is all cleaned up… But the profitability, having good cashflow is what ultimately is gonna value that business. So non-financial things that can really kill a business like that – if you’re the one buying and flipping houses, are you doing that personally, or do you have work crews that can do it? We coach using a value-builder system, and they call that the hub and spoke. Are you the owner of the hub of the company, meaning that all the customers are coming to you, you’re doing most of the work, you’re doing all the selling, so the company is all about you? If I’m from out of town and I’m gonna buy that company and you disappear, who’s left to run the company? So if you have a crew of people out doing that work, that’s gonna be a much more sellable company.

Joe Fairless: And with your business that you sold – it was a family business; how long did your family have it prior to you joining?

Terry Lammers: My dad bought the company (I believe) in 1975, so I pretty much grew up with it. I say it’s a family business, but by the time I sold it, there really wasn’t any other family in the business besides my wife. I was able to have three operations managers and an office manager, and I could walk away from the business for two weeks and everything would be just fine. That really helps from a non-financial standpoint of making a company sellable, that the owner isn’t intricately involved in with the company.

Joe Fairless: When you got involved back with the company in more of an adult capacity, where was it at in sales? We know where it ended up being, at over 40 million, but where was it?

Terry Lammers: Yeah. So the first year I came back it was just  my mom, my dad and myself, so it was the three of us, and I’d say — we had two trucks and it was a good day if they both started. So I think the first year back our sales were about $750,000.

Joe Fairless: Wow. How did you grow it?

Terry Lammers: My starting salary was zero. The company was in rough shape, and we had the opportunity to buy another company, and I knew if we bought that company, we would put it back in the black. I was working in St. Louis at the time for a bank, in credit card finance, wearing a suit every day, and that didn’t really fit my fancy… So I came back to help mom and dad out, and in April of 1992 I purchased my first oil company, and recreated — my dad’s company was Highland Pierron Oil Company and I created Tri-County Petroleum, and we eventually merged my dad’s company into mine, and we took off with Tri-County. That was for a banking reason that we did that.

Joe Fairless: So the growth in the sales was primarily through strategic acquisitions?

Terry Lammers: Absolutely. It really was. That’s a great way to scale a company.

Joe Fairless: And with the 11 acquisitions that you did, were all of them projected to pay all of your money back within 3-5 years?

Terry Lammers: I would say all but one, and it probably still did. The acquisitions that we did were strategic in nature; a lot of times we were expanding geographically, as much as anything… But I did have a situation with one company that was — in the later years we had grown quite large and I had two offices 30 miles apart, and there was another oil company right smack dab in the middle that wanted to sell… It was a small operation, but it had a bulk plant. A bulk plant is a storage facility for gasoline and diesel fuel, and if I’d bought the company, I was gonna tear down that bulk plant; nobody else would build a new one there, it just wasn’t economically feasible. But what I was worrying about is if the competitor bought that, now he could have a bulk plant right in the middle of an area where I had very high customer concentration. So in my opinion, the guy wanted about $100,000 too much for that company, but it was very strategic to me. So did I pay him for it? Heck yeah I paid him for it, because I didn’t want anybody else to come into the area.

Joe Fairless: You’re playing defense by doing some offense.

Terry Lammers: Correct. So what I would tell your listeners is think about that – sometimes you have to look at a deal from a strategic standpoint, and it may not make the most sense, but that is where when you hear about some of these companies selling for ridiculously high numbers, it’s because it was a very strategic operation for somebody.

When I sold my company to Growmark, one of the reasons that they were very interested in buying  it was 1) I was the largest competitor in Southern Illinois, and 2) which I didn’t know about until after I sold the company, and where I probably could have demanded a higher number, they had just bought a lubricants blending facility in Council Bluffs, Iowa, and they wanted to get into the bulk oil business in Southern Illinois. Well, they could either start from scratch, or if they purchased my company, we were selling about half a million gallons of lubricants, and had a lubricants selling facility… So by buying me, they were in the lubricants business and were able to add to what they had to offer.

Joe Fairless: Yeah, I find that stuff really interesting. Thanks for giving those details. Anything else that we haven’t talked about, that we should talk about as it relates to preparing our business for an eventual exit?

Terry Lammers: Let me add one more thing to when you’re buying a company, because I think this would apply to real estate also. Say somebody is gonna buy out another management company, or something like that – one of the things you need to think about when you’re buying another company is all the operating expenses that you’re gonna wipe out. Typically, when I’m valuing a company, I’m valuing the cashflow that that company is generating. If you’re looking at buying another company and you’re in that same industry, really look hard at those bottom line operating systems, because you’ve already met your liability limits for insurance… That’s a big one that I was always able to strike out. Obviously, you probably already have a computer system in place, so all their support expenses for their computer software system is probably gonna go out the window. So you may be able to drop 30% or even 40% of the operating expenses of that company that you’re looking to buy, which if you added that to cashflow would make the company worth a lot more money. That’s where you’re really able to scale.

So when it comes to selling a business, it’s really about getting your ducks in a row. Financially, the company’s biggest driver of value is gonna be the cashflow. But when people start looking at it and the financial statements are a mess, they’re not being done timely, that’s something that just kills me. People wanna sell their business next October, and they don’t have tax returns done from the year before. You’ve gotta get them done in a timely manner. You need to have your financial statements done in a timely manner.

All those loose ends (who owns the property?), you get into a larger company and all of a sudden there’s several LLCs, and it becomes fuzzy who owns what. It really is about getting your ducks in a row.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Terry Lammers: Read my book. The name of the book, like I said, “You don’t know what you don’t know: Everything you need to know to buy or sell a business.” It’s on Amazon for the print version, or you can download it free on Kindle. The book basically walks you through the process. I start out talking about buying businesses, then a simple way to value a business – what we talked about, with the discount cashflow; the process of buying a business, and then I talk about building your team… So there’s chapters on bankers, attorneys, financial advisors, CPAs, I talk about bankability and what makes you bankable… There’s really two sides to each loan, in its simplest for: collateral and cashflow. Then we get into building value in the company through those non-financial things that I said – really start to add value to the company. Then I get into “What am I gonna do with this thing? I’ve built it, now what do I do?” and the exit process, and the steps you need to take; I talk a lot about confidentiality. The last chapter I called “Don’t be like a dog that caught the car.” Basically, how to plan for your life after you sell your business.

Throughout the book I try and keep it humorous and tell stories about things that I did right and things that I should have done better. It’s a process, and you need to build the team.

Joe Fairless: Terry, thank you so much for being on the show, talking about how to value businesses, the two approaches – the NACVA, the summary evaluation; those are deliverables, but the two types are financial and strategic. And all roads lead back to the true cashflow of the company, so if we are looking to sell a real estate company in the future years, we’ve gotta have the good financial statements, we’ve gotta be timely, we need to have systems in place so someone can take it over when we’re not there.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Terry Lammers: Thanks, Joe, and thanks to your listeners for listening. Have a great day!

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