Ep 340: $5M – $50M Business Exits & What You Should Know with Anthony Franco

There is no such thing as an easy exit or acquisition. There's always hair on the deal.

Hi, I'm Jaryd Krause. I'm the host of the Buying Online Businesses podcast, and today I'm speaking with Anthony Franco, who was a seasoned founder, operator, and deal maker who's built and sold seven companies, six of them successfully, including two publicly listed firms. After working closely with the team at OneReach.ai, he realized that traditional frameworks like Lean and Agile just don't cut it in today's fast-moving environment.

AN AI-driven world, and that insight led to the creation of the Wiser method, a new approach that has helped founders build smarter, scale faster, and exit more strategically. He's also a licensed business broker and on his own podcast, How to Find Out, he shares real-world strategies for building businesses that are easier to repair and more valuable to sell. In this pod, we talk about that. How do we get your business prepared for exit and have a better valuation?

We talk about structures, how to minimize your risk as a seller. Also, how to minimize your risk as a buyer with these different types of structures. We talk about what can go wrong in a deal. Anthony says there's always hair on the deal. And we share some examples from his side and from my side of what can go wrong and how you can be prepared, and also be an attractive seller and attractive buyer to make sure deals don't go belly up. We talk about taking your foot off the gas if you're a seller through an exit.

How bad that can be, and the opposite is true as well. Having your foot on the gas whilst you're going through an acquisition. Of course, you need a happy medium there. And lastly, we talk about AI, how it's evolving in business, how it's going to be changing our lives, and then we get quite philosophical too about it. Now there's so much value in this podcast episode. Obviously, it's not the only way I can help you for free. We do talk about buying, selling.

So due diligence is a massive part of that. If you haven't got my due diligence framework, it's saved people millions of dollars and made people millions of dollars. You can get that at buyingonlinebusinesses.com for free resources. There'll be a link in the description as well. Also, if you're looking at acquiring a business anywhere from 500k up, I do work as a buy-side advisor. If you're interested, reach out. I'm here for you.

Let's dive into the pod.

Anthony, welcome to the pod. Thanks for your time.

Hey, thanks for having me. This is going to be fun.

It's going to be great. You founded a bunch of companies and you've sold them. People can go and find out a lot more about the companies that you have founded. What's the main reason for the exits? As a founder and entrepreneur, everybody's different, right? Sometimes people give very different reasons. What is it for you?

For me, I exit companies when it's obvious that I'm no longer the best fit to take it to the next level. So I started, I'm a go-to-market guy. I love starting from zero and hyper-scaling, and the amazing, creative, exhaustive energy that it takes to get there. And then when a business turns to…

Needing operational efficiency and incrementally growing revenue 5 % year over year, and decreasing costs 2 % year. That's not my passion. It's certainly not my skill. So usually a year or two after I should, I take a look at, okay, it's not, this is, I'm in the wrong spot now. So let me, let me transition that to transition to a new owner that can take it to the next level.

Yeah, absolutely. It's a great reason that people don't realize because a lot of people ask me, like when they find out what I do, work as a broker, they're like, why would somebody sell a good business, like a good online business?

Like, what's the point? Well, there are so many reasons, and one of them is that they've scaled the business for their skill set and their level, and it's better off handed to somebody else, right?

Yeah, know thyself, right? So you have to know what you're good at and what gets you up in the morning. And some entrepreneurs do that well, some don't.

Absolutely. When you come to your first exit, were there some of your biggest takeaways and lessons that you've applied now to your other exits? And now you're a broker as well. You help people exit, too. What are some of the first timers that have just stuck?

Going to have a very boring answer here, but the traditional blocking and tackling things really matter when you're going to exit. Things like having really clean books, nothing exotic in your chart of accounts. Having systems in place so that the new owner isn't risking you leaving the business by taking the business on and growing it.

Key person dependency removed because you've got those tasks that spread between the team and the system.

Yeah. Then, know, I'd flip it. If you're an owner looking to sell, why would a buyer buy your business? What are the risks that the buyer is going to take on? You want to mitigate those as much as possible. So one is clean books so they can understand the money. What you're telling them is true. That you want to exit. So what does that mean? Is that a risk? How risky is that business for you to exit?

Or you can also position that as it's gonna be good for the business when you leave, depending on how you, depending on your position. It's also another thing, another critical thing that I see buyers look at all the time is revenue concentration, where how much of your revenue is dependent on a handful of customers. And if one of those customers leaves, what does that mean for your business? So revenue diversification, channel diversification are also very important to buyers.

Yeah, single source dependency on traffic, revenue, clients, and people.

Or product, vendors. All of those things matter.

Yeah, like 90 % of revenue coming from one product. What happens if that product and it's not your product that you're manufacturing, and you can't get it manufactured again like this, your business is gone, right? Which decreases the multiple. What was maybe your least attractive and fun exit versus one that was seamless? And why would you say that's the case? Would you, and is it to be boring again?

Yeah, exactly.

So I'm trying to think of the seamless one. It's funny, from the businesses that I've sold and businesses that I've helped other owners sell, there's always hair. There's always hair on it. There are always questions that you weren't expecting from buyers. Buyers are always looking to get a better deal.

There hasn't been a circumstance where an offer made is what an offer kept, especially in the LOI phase. So, I don't know, maybe I'm sick in the head. I enjoy the chaos and the randomness of it. The fact that there are no answers to how it's supposed to go. It's so different every time that any advice on that level, like how do you make it go smoothly?

Anybody who tells you how to exit smoothly has never been through an exit.

Right. The unpredictability of like, we need this document, or what's this supposed to mean? And that can be bigger than the deal itself or expected. And once you dive i,n and there hasn't been an explanation from the seller or the buyer, a nd you're like, well, okay, like didn't realize that this thing would slow down the Right.

Yeah, there's always something. The mistakes I've seen owners make in this area are that they take the questions personally, like it's an attack on them. Right. They treat it like, they treat it like, instead of just treating it like the buyer just needs to know, they're trying to mitigate their risk. You would do the same thing. You probably would ask the same question. So you don't have to be embarrassed by the answer.

Absolutely. Yeah, it's more about both sides putting themselves in other person's shoes, like the buyer putting themselves in the seller's shoes and understanding like, okay, maybe it's their baby over 10, 5, 10 years and it may feel like a personal attack, but let's word the question in a way that it doesn't feel like it. We just like, you'd be asking the same question as well.

Yeah, you could always tell a sophisticated buyer by the way they ask the question, where they'll caveat it like, Hey, there's no judgment in this question. Once they say, Okay, I recognize they've been through this process multiple times. They know what this looks like.

What are some other things? Because a big part of somebody who's like a first-time acquirer, I like to teach them how to become an attractive buyer. What are some of the other things you've noticed in sophisticated buyers?

I'm sorry, say that, what are some things that I noticed?

insophisticated buyers that some of their traits are compared to somewhere that's pretty green.

It's a nuanced thing, what to care about and what not to care about. You're There are certain things on a balance sheet or a P and L that should cause concern. And there are certain things that, like you have to understand, like most of the businesses I deal with are, they're not a hundred-million-dollar businesses, right? There are five. What is that? Yeah, they're, you know, between five and $50 million in revenue.

There's always some wonky stuff as you're getting into it. And to essentially give the buyers that give the owners the benefit of the doubt on how things are a little bit wonky, because even the smaller the business gets, the more there are pieces in the business that are just not being paid attention to. And that doesn't mean it's a bad business. Just means the owner.

The owner was focusing on what this thing was that grew the business instead of this thing that wasn't really that important to the survival of the business. So that's one thing. It's just having the intuition to know what matters and what doesn't. Go ahead.

Yeah, I've got a perfect example. We just closed an idea last Friday, and there were some product cost variations. So what happens is the client buys their product, and then the product needs to be serviced by the company that's being bought. There was a bank up of product costs that needed to be used to be, you know, the services needed to be done. And there was like a couple of hundred K worth of product costs that needed to be transferred to the new owner.

And in the short period of time, in like a month before the close date, the sellers had their teams service a bunch of the products to take the liability off the books, which they used up those funds for the product costs. So the new owner didn't have the liability of having to service those, you know, and they're going to get the money for it anyway, but they didn't have to have the liability of it.

But where we could have got stuck on the buyer side is like, well, isthata.tIsis that we're too strict on that number when we can see there's going to be variation. When we take over at this, those little things like when does the money start to be, is ours from revenue, and when does it start to become yours as a new buyer? We have those dates and stuff put in place, but there's a variation around it.

The relationship throughout the transaction needs to be built to have the trust to know that each side's going to do what I would bubble that up into a broader perspective, I've, and that is you're not buying a business that's standing still. And due diligence takes a while. And so you have to expect the business to operate like it normally does and maybe even be on its best behavior during the due diligence process.

There's nothing nefarious about it. It's just they're doing the things that they would do to normally operate the business. But now that somebody's looking over their shoulder, they're doing it like they always think they should, but you know.

Decided to go home early once in a while instead.

Right, right. It becomes dangerous for somebody selling a business when the deal can drag out a little bit longer than expected and they take their finger off the pulse and then, you know, the deal's an extra two, three months down the line and their finger's been off the pulse and the buyer's like, well, what's going on with these, with the revenue figures? It's pretty important not to get exhausted or just give up before you even cross the finish line, right? Is that something you teach and go through?

That's very relevant to a lot of businesses that are selling, where the analogy y, ou put was perfect, they take their foot off the gas because they think they're going to exit next month. And then due diligence takes three months, or it falls through, and now you're back on the market again. You an't do that as a business seller. You have to go through the entire process believing that your business isn't going to sell.

Operating as though you're not for sale, operating as though you're gonna be in this for another five years or at least one year

Yeah, it's great. Mindset to have. I mean, because like you want to keep it growing because what happens if like you don't, you do the opposite of putting, taking your finger pulse and your foot off the gas, nd you're on that it's growing over, you know, how long a deal could take six months. And you, go, okay, cool. This seller is really not, you know, in it, or the buyer, sorry, is not easy to deal with.

And we've got locked in on something that we don't know if it's worth that much anymore, and they're not ready to come to the party, you could go back to market and be like, well, we could get so much more for this business now because you've forced them ahead, right?

Yeah, exactly. So you want to be in a weaker, stronger negotiating position when it's time to sign the deal, right? Like that's fundamental to what it comes down to.

Absolutely, absolutely. What are some typical deal structures that you use to help your sellers when you're working on the sell side to minimize their risk, and or are there other thingarethat outside of deal structures that you help them with? Yeah, for sellers.

Specifically for sellers. Well, the best way to mitigate risk is to know how much cash, like to know what's the cash off the table? It's all about how much cash they're going to see on the deal close. The best-case scenarios for sellers are more cash. Typically try to, soTypicallys, we see a lot of deal structures with seller carry, meaning the seller has to carry some of the note for the acquisition.

That's fairly typical, especially if you're talking about SBA-financed acquisiSBA-financedso see attempts to do like rollover equity, where the seller will get some equity in the new entity. We'll see an earn-out, out, companies wanting to, so the seller note is basically a guaranteed loan. An earn-out is a performance-based contract that you're getting.

Absolutely.

And a rollover is a bet that the company is going to continue to grow. And you can participate in that growth. Here pursue with as a minority shareholder, everything but the cash is risky. All of it is risky, but the cash. The, for me, given that I have six exits under my belt, you know, as you get older or as you get closer to where you don't want to participate, you don't want to put like, I'm taking chips off the table.

So I don't want to leave any chips on the table. I just want to move on to the next thing and not have to worry about it. So cash is the game.

As a seller, if you're exiting your business, you want to exit your business, you don't want to be typically tied to it for too long unless you've got a lot of trust and belief in the buyer and you want to keep,p some money in the game and on the table because you don't

Yeah, and there are circumstances where owners continue on with the business. They're not exiting because they want to retire. They're exiting because they want an influx of capital for the business. They want a strategic partner to help them grow it. And in those circumstances, you're willing to risk. You're willing to leave some chips on the table as you collaboratively grow the business together. So mitigating risk is such a personal decision. Where are you in your life?

You know, what do you want to take off the table? What do you want to leave on?

What's your spouse going to say? You know, all of those things matter.

Yeah, it's, and what do you what do need the funds for, where they're going, to go maybe some

You're gonna do it.. That's another great question. What do you do with the cash when I get it?

Yeah, exactly. Yeah, it's like we're going to go into a retirement fund, is it going to go into ETFs or property, and where is that money going to be best put, invested, and what's the RO, I'm on that? Does it know,tooo? It does well as it is another example that we should do. Do you want to get paid out all of it right now and cop more of a tax, or if you're going to reinvest that money and skip paying?

Some capital gains tax because you reinvested it in the same structure, or there's so many different questions that need to be answered for a seller.

Yeah. You need, so to help you with taxes, you don't need a great broker. You need a good CPA and a good financial advisor. That's really you. That's so need somebody who really understands tax laws and tax mitigation when you exit your business, because it can literally make the difference between a $2 million exit and a $1 million exit.

Yeah, I mean, when you're making an exit and you're getting the money, need, want to, for tax purposes, you want to allocate those funds to different, different assets or different allocations of where those funds will go within the business operating expenses, marketing fixtures, fittings, cash, to make sure you can decrease your tax based on your own personal situation and you really need a CPA.

Been a part of exits, like where the CPAs just don't know much about exiting and M&A,&A, and aren't able to help on the sell side as much as what the seller would actually need.

Yeah, and there hasn't been a transaction I've been a part of where I wasn't surprised by a strategy from a CPA. Like, didn't even, there's so much, so much available to business owners existing that you just need an expert to help you with that.

So, do you have before you work on the sales side mostly, before you work on a client, obviously you want to check their books, and you also do s, I prep stuff, but a part of that is helping them build the right team for the, nd where does that fit in?

So with the clients that I have worked with in the past as an advisor, as a broker, the ones that I'm actively trying to participate in selling, they're ready to sell. They're not in the mood to grow the team. We do some consulting around, I'm thinking about exiting in five years from now. So what do I need to do in order to prepare for my business? So some of them, but it's fairly minimal.

Would you be able to give us an example of somebody who comes to you as like, we want to exit in three to five years? What does that look like? Like like in terms of like, is it first l, let's look at what the goal is for your exit, and then work backward from there with the timeframe that we have. And then also, you make the business more attractive to a buyer. Like, what's the typical?

So there's some standard blocking and tackling stuff that's true for everybody. And we talked about some of them, right? It's like, clean your books up, diversify your revenue. A really big one is to get all your personal expenses out of the business. That will go a long way to increase your valuation because those personal expenses

Subjective ads that don't need to have a specific

Especially if you're going after buyers that are going after an SBA loan, the SBA, like you can't tell the SBA, no, I was trying to save on taxes by putting my truck in the company. The SBA doesn't care. They're like, No, your tax returns are what matters, not what you tried to cheat out of the government. Exactly. So yeah, all of that stuff is kind of standard blocking and tackling stuff.

Then you really get into the quality of earnings, the how variable, what are the systems in place to make sure that you can continue to grow revenue? Exceptionally important. The team that's going to stay behind, exceptionally important. If you have that employee or distant cousin that's working for you that's kind of on the books that you're like, I just haven't gotten around to letting this person go, but I need to, like, probably time.

Mm-hmm.

And then it's the systems. So again, your safety meetings are lined up and you have your standard operating procedures documented and you're following,g them. And the things that you know you should be doing in your business that you're not, those are the things that you need to be doing so that an acquirer doesn't have to figure that out for themselves. There's a lot of that.

Consultants that come in and tell you the things that you know you should be doing, but you're not doing. So just do those things and you'll be a much more attractive acquisition.

Pretty, it's pretty common sense, right? Yeah. So you're big into tech and big into AI. What are you most excited about in terms of the scaling of companies now with AIA, and why? That's a very broad question.

Yeah, it's I don't think so. First of all, I don't think AI is coming for your job. I don't think AI is coming for jobs. ThinkAI is coming. Think crappy work that we have to do.

Yeah, just-

Yeah, exactly. It's the stuff that you don't want to do. That's what AI is going to be good at doing. But a lot of companies, their differentiator is doing the crappy work well.

Yeah, organization basically, right?

Yeah. And so when that piece of it comes commoditized through AI, now you have to be good at something else. So I am looking forward. So now it comes down to product and distribution. So AI basically commoditizes everything else. And to a certain extent, it commoditizes the product because you'd be able to iterate on the product a lot faster with AI than you could before. Yeah.

Lovable, there's this story right now that Lovable just got a, what is it, a 1.2 or $1.5 billion valuation. For those of you who don't know, Lovable is an AI coding platform. So you can build apps with AI using Lovable. And there was a blog post that somebody used Cursor, or excuse me, Cloud Code, to rebuild Lovable from the ground up. It's better, and it took him 75 minutes.

Yeah, we're far less resources. There was another version of that-

It was him and a $20 Cloud Code subscription, and he rewrote the entire platform. So then you go, well, so what does Levelable have? Well, they have distribution. They have Levelable. They have a great domain. When I say distribution, they have a lot of awareness. So awareness distribution really becomes incredibly important as AI becomes more mainstream within organizations.

Absolutely and unfortunately, there's so much fear around AI, and it's coming in and disrupting things. When it comes to business and our lifestyles, it's going to make our businesses easy to run and our lifestyle easy to run," said, then you've got, I mean, yes, we're going to have a level of competitors, but if you're a competitive person, you're going to be on top of it anyway.

Yeah, I don't know if easier is theBut yeah, you're because if it's easier, then it's easier for everybody.

Right. You don't want to build a replica or business that somebody could just create with a $20 app in a day. Exactly right. Yeah. Nobody's buying those businesses. Well, I mean, they got an evaluation on it, but that evaluation would have been disrupted a lot by this use case of that other app, right? So, of course, then you need to, like you said, you've freed up some time and some space.

Exactly.

And then you can put that into building distribution, like getting a larger audience and increasing your channel and your revenue.

Yeah, you double down, triple down, quadruple down on selling, getting good at selling.

And even selling the company faster as well before CopyCat can come in and do that too, right?

Very potentially, you're right. So when you decide to sell, faster is better than selling slower. For sure. For sure. If I could say anything more obvious than that. The sky is blue. There you go.

It's cheaper to

Yeah, absolutely. Yeah, so I mean, there's a lot of but it's going to uplevel everything really, including us to make sure we're focusing on the right things,

Yeah, so getting back to AI, AI is, it's moving so fast. So the long pause is because it's so hard to predict how AI is gonna impact us. I tend to be an optimist, I hope I'm right, but I do believe what Elon Musk says, and that is it's gonna be the age of abundance. So AI is gonna be the multiplier of human creativity. I totally believe that.

Already seeing it, like, it's already proven it, right?

Yeah, but but but will the will the advanced the increased this is getting really philosophical now, but will the will the increased acceleration of technological improvement be so disruptive so fast that the economy doesn't have a chance to keep up with it? I don't think so. But I don't, I don't know. I don't think anybody knows.

Yeah, well, mean, if the economy, it's only going to go as fast as the weakest link, right? And if that's the economy, then the economy will slow it down to a certain extent.

Yeah, and maybe governments will try to regulate it. I don't think they'll be successful. They'll try to slow it down too.

Which I think that probably you're doing right, like I mean, if you think about, Elon Musk and his electric car, like in Australia, you can't have the cars that self-drive yet, you know,o w like

Yeah, there's, only a couplthere ares here that they permit in the Uere's only a couple of cities here that are allowing it right now as well. Yeah, if you just look at how AI is going to impact transportation, it's significant. And so how many trudrivers rs is it going to displace? In the US, a lot, but they're also having they're alsoing truck drivers.

So maybe it'll displace it at the pace that they don't need to hire more truck drivers, and maybe it'll work out. Maybe it won't, but maybe it will.

Right, right. And it's the same with like food, know, Uber EEatsand all of that stuff, know, like being delivered. But the thing that I think will slow it down again is like obviously regulations, right? Like it's going to take one truck crashed for it to crash ccrashthe adoption maybe.

Isn't that funny? So you're not wrong, but that's not the right way to

Yeah, because the proof is that it's going to be, I mean, the proof is that they make fewer mistakes than humans.

Is it safer than humans driving? And the answer is already a definitive yes. But you're not wrong. So somebody's going to point out, see, it was the cyber truck that caused that crash. So we need full self-driving. Therefore, we need to ban full self-driving. It's like, no, it's still safer than, I would still rather cyber. Yeah, for sure. For sure. They already are. It already is happening, even with just assisted driving.

Yeah, exactly.

Lives are going to be saved with all the tools.

It's had a profound impact on safety. And so if we, so you take that and extend that beyond transportation, AI should make things a lot better.

I'm with you on that. Thank you so much for your time, Anthony. Where can we send people to find out more about you? Definitely mention your podcast.

Yeah, so my podcast is howtofounder.com. It's, talk to other founders about tactics for growing and scaling their businesses. And then I'm also working on an open source project called AI First Principles. Just visit aifirstprinciples.org and and you can just show you and u, it's open source. There's nothing to buy there. Just show your support on that website. And we're trying to grow a community of folks who want to help.

Ensure AI is safe and effective, especially when operationalizing it in an enterprise. So those are two places you can find me.

Awesome guys, there'll be links to those in the show notes. Again, Anthony, thank you so much for coming on.

Appreciate you.

Thank you, thank you.

Everybody, thank you for listening, and I'll see you on the next one.