Ep 358: The Silent Deal Killers: What You’re Ignoring When Buying a Business with John Martinka

Hi, I'm Jaryd Krause, host of the Buying Online Businesses podcast, and today I'm speaking with John Martinka, known as the Escape Artist, who is a veteran in the &A advisor business strategy space.

He, as a co-founder, was a managing member of Nokomsky or Nokoms advisory services, and now, at Martinka Consulting, he's guided over 150 businesses on the buy-sell transactions and analyzed over a thousand companies. And with more than 25 years of experience, John helps executives escape the corporate grind by buying businesses the right way.

And he also coaches business owners to exit their companies with style, grace, and max value. He's a prolific author and has four businesses. I mean, sorry, four books he's authored. He's a speaker passionate about reducing owner dependency in businesses, building systems, and setting up companies to scale and exit profitably.

In this pod, we talk about so much on the acquisition side, on the buyer side. Where do first-time buyers fail? What are the things they do, like putting blinders on, selling themselves a dream, where they trip up, and the mistakes they make?

We also talk about how to become an attractive buyer, why building relationships is so important, and how to do so when you're a buyer. We talk about deal terms, negotiation structures, offering, earn-outs, why they're typically not so popular versus other sorts of structures that are…

And then we talk about the mindset for growing businesses once you've bought the business. And John shares a really good example of one of his clients who bought a business and scaled at 75 % in under a year with one small tweak, which I think is fascinating and super valuable. So let's dive into the pod before we do.

If you are buying a business, make sure you get my due diligence framework. It's what I use, and all my clients use. It takes the guesswork out of buying a business. It's made millions of dollars and helped save people millions of dollars in acquisitions. Get it at buyingonlinebusinesses.com for that's free resources. Let's go.

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

Yeah, glad to be here.

Absolutely. John, you've been doing this for 25 years in the M &A space. Wow. There's a lot of knowledge, a lot of expertise there. I'm just going to ask just a, there's no lead or like warm up into this. So let's just dive straight into it, and then we can ask more questions based on your answer. But what would you say, you know, for buyers and sellers are the top sort of three fatal mistakes you see first-time buyers make?

When acquiring, looking at acquiring a business. Yeah, first-time buyers.

One, I would think, let's see, one would be getting buyer fever, finding something, thinking this is it. I love it. Yes, I know it's overpriced, but man, this is for me. I can't see doing anything else in life. And then finding out things like, I can't get it financed or, you know, as I dig deeper, there's a reason I felt it was overpriced.

That would be one buyer fever, and if it carries all the way through, you know, it can stifle and put a stranglehold on the business post close because there isn't the cash flow.

Yeah, I call this, I call this that they've sold themselves the business, and they've already bought the dream, right in their head, they've mentally bought the dream of what it looks like to own that business and how they can live that lifestyle of being a business owner with that amount of cash flow that is reported.

It may be not yet completely ordered and accurate and reconciled and the P and L may not have been rebuilt, but they've already bought the they've already bought the lifestyle in their head and they're dead set on on getting that and can just put the blinkers on right the blinders on and disregard some risks and reality of the business and the situation. Is that similar to what you're talking about with the…

Yeah. So the second would be for buyers when searching, finding something they like, and stopping their search. The search doesn't stop until closing. It goes on.

We'll call it sleep mode once you're in due diligence, because it's really hard to get due diligence done while you know and search at the same time because diligence and deal structure and you know working on the transition is and learning about the business can be a full-time job it's in itself but they find something they say hey this is a cool business I like it and stop searching keep searching.

Yeah. I would love to hear from you on why I want to add one reason why I think it's valuable to keep searching is that it provides you optionality if something else pops up, and you are less emotionally attached to the price, you know, acquiring the business when you have more options. Yeah. Definitely helps with mindset, right? What other reasons would you say keep searching?

Well, just cause you don't know what's going to happen, just cause you like it, it doesn't mean there's going to be a deal. Right. The seller could be the seller talking to other buyers until there's an exclusivity clause. And let's hope they're not talking to other buyers after that.

They're talking to others, and someone comes in, and they're a better fit than you. They have more money. The fit should come first. I mean, a business seller should be thinking, who's the right buyer in my price range, not who's going to give me the most money. And I know someone right now who friend who sold their business a year and a half ago, from when we're recording this.

And they went to do the working capital adjustment, and they're still fighting because he's, he did not sell to the right buyer. He went for the guy who offered him the most money by a few hundred thousand dollars. And you know, it's a mistake he's paying for,r you know, stress-wise, emotion-wise.

Tell me more about that situation. He's the working capital. What happened specifically with that? Whyis its stressful for him?.

Well, don't know the details, but you're arguing over a couple of hundred thousand dollars, that, yeah, and his side of it is the buyer has put some different numbers than what the CPA had prepared pre-close. It's trying to, you know, doesn't want to have as much working capital left. Wants more working capital left in the business than what he says should be.

Okay.

Yeah. Right. And so that's the couple of hundred thousand dollars that they're arguing about that wasn't fully agreed upon through the contract of sale.

Well, yeah, normally there's a spreadsheet that tracks what the working capital should be based on. This was based on an average over the previous 12 months. And as I understand it, again, I haven't seen anything is that they put this. The buyer has come up with different numbers,s and they're arguing. They've been arguing for over a year now.

Hmm. Yeah. Yeah. And this is why it can be so valuable to not just go for more money, but somebody who has similar values to you as the previous owner of the business,s and somebody is going to look at the business and grow the business in a way that you feel you would have grown it, or operatesimilarlyy. Or maybe not even that, but at least have the same values where you can not be paying.

He's like,e what he's actually doing right now is what's costing him $100,0,00 is stress. Yeah. And that's a stress. Yeah, that's a stress expense that he could just get rid of by not, you know, for a couple hundred K. I don't know how, what the, what the scale of the business compared to this hundred K.

But, you know, if you've got somebody that you're going to sell to, whose trust is not going to be arguing over, over that. And you can meet in the middle,e then it's hard to predict that too.

Six million or so US dollars deal. I am guessing the buyer is stressed over cash flow and wants every dollar. Cause he did pay more than other offers, and someone financed it. And sometimes you get a bank that will or bank and banker that they don't care as much about the buyer growing the business as they should. And they just want to make sure they make the loan.

Yeah, absolutely. Which is an interesting way to look at the business itself and the person, you know, as a lender. I guess, I guess we can dig into that a little bit further. Want to ask aroundfor some other reasons why you think buyers fail to close on deals.

We did talk about there may be a higher offer. There may be a more attractive buyer. What would you say, though, is often the real deal killer that you know, why buyers would fail to close?

I'm going to just say, I don't see too many that once, once there's an LOI signed that don't close, because if it's a fair deal and if I'm working for the buyer that, know, they've uncovered things, if I'm working for the seller, we are presenting everything open kimono, no hidden, no secrets, nothing hidden, no massaging the numbers.

I don't know what you see, but you see a lot of small businesses, and the owner is running personal expenses through the business or claiming to. These days, you don't see as much of owners saying, I get cash, and I don't report it because so many businesses don't take cash. It's all card, ACH.

Well, I'm all online businesses, right? So there's no such thing as having ETF payments, but yeah. Yeah. I mean, it's all transactions that are tracked, you still have the, you still have the…

That's right.

I mean, I'm looking at a deal now that we probably won't go through with. I'm just trying to confirm a few answers and questions before we fully disregard it,t though. The ad backs are a few ad backs that are significant, like internet and phone,e being far more than what it probably should be in terms of an expense that's being put as an ad back. Youu know, if you know.

This is why you need a good advisor or somebody on your side understanding these before you even go to LOI, so they can be removed as ad backs or negotiated through an ally.

LOI is less of an ad back, which prevents a deal from closing or prevents a failed close once an LOI is signed, right? I'm the same as you guys. Something's rarely going to not come out on top after an LOI.

Yeah, a buyer has to be cautious if there are too many addbacks. What's the chance they're all legitimate? And is this really someone, you know, they're out there cheating the tax authorities. I know you work all over the place, but in the US, I mean, the tax authorities are feared pretty much. And if you're cheating them too much, who are you dealing with?

Yeah, absolutely. Absolutely.

Yeah, I would say, but you asked about what causes deals to fall apart. And besides buyer fever, maybe offering too much or thinking you have a deal, but you don't because you haven't signed it yet. And as we talked about, ut the seller is still looking for buyers. I would say the business isn't what it's marketed as.

It could be marketed at, and you get into it, you get into the due diligence,ce and you find out things like there's one main supplier and that's risky in and of itself, but maybe that supplier is changing their focus or, you know, they've presented it. There's no customer concentration, but you find out, yes, there really isa customer.

All the contract ends within six months, and they're not going to renegotiate the contract or big one, ifthere's really no one behind the owner. The owner thinks I'm important when I do a lot for the business,s when it should be. I'm important when I don't do a lot in the business.

Love that reframe. Yeah. And the reason they're more important when they don't do a lot for the business is that they're the ones that have set up those growth systems to work without them, which is typically far more valuable than running around, putting out fire,s and doing the work in the business.

Right. Yeah. Right.

There's a difference between a business not having the right processes and systems and a business that doesn't have them, but the owner does almost all of it themselves. If some other people are doing it, it's just not sophisticated; that's easier to fix.

So much easier to fix when you've got a little bit more team and the owner is spending 30 to 40 hours a week in the business. And you can say, all right, this team could easily absorb those tasks and those systems could be, you we could plug up a few holes and remove owner involvement where it's not necessarily tied to their career or their expertise in the space, which is a really good value add for a business when you're looking at acquiring a business is that if you can see that you can remove the owner without too much risk and remove them in a shorter period of time than a longer period of time, say a couple of months versus a year or so, you can buy the business for lesser than maybe somebody, somebody else by trying to work out that problem.

That's a gross strategy and a risk mitigation strategy once, once acquired. Yeah. Yeah. I do see your fatigue can, you know, between LOI and clothes can cause some issues for sure. Have you got any examples you'd like to share where you've seen maybe a deal fail because of just over-lawyering, creating deal fatigue,e or I don't see too much over-lawyering, just haven't seen it kill a deal in a long time, but I have seen it get people really frustrated on why isn't this closing?

You know, I came up with an expression many years ago for, for, to business sellers, just when you think the buyers asked every possible question, the bankasksd more, and then they're like, okay, ask any more questions. And then the bank comes in,n and I'm not saying they're bad.

Never thought he needed. Yeah.

They're just usually much more detailed. Yeah. If you can't blame a bank, they're going to lend the money. They want to be paid back.

Absolutely, absolutely. And, for a seller to try and walk on that halfway through a deal, because of a lender, they typically, and it's a very general statement, are gonna run across this same issue if they go back to market with somebody that's gonna use finance as well. So it's kind of, they're kind of in a position that they should write it out anyway, especially if they know their numbers work.

Look, if the buyer and seller have a great relationship and a relationship like this, I call it the number two thing in getting a deal done. The first one is not price or terms, but it's, it's motivation. If the seller is motivated and the buyer is motivated, that's a big step.

But once you have a relationship and the seller sees the buyer as the right owner,r and the buyer sees the seller as yes, I want to run his or her business. Deal fatigue is a lot less prevalent.

Absolutely. And that's what the building relationshis comes into becoming an attractive buyer. I share a lot about this in my education and course, how important it is that sometimes you can foster a relationship more easily with somebody than others, right? Yeahh. You know, and that's just a natural thing.

This is pure nature. But then sometimes you can do some manufacturing of how you come into building a relationship as well with, with other parties. Are there some things that you prep or pre-teach some of your acquirers that you're advising and how to, how to build a relationship and how to, how to build trust in the deal before even LOI?

Do a little bit of that, but I will say when we work with a buyer, screening them, part of it is, are they good with people? And people just couldn't, couldn't do it. They looked at it. Well, show me the numbers, and that's it. And they don't realize this is that person's, you know, baby, you know, whether they bought it or founded it.

Yeah.

It's part of their life. It's created a lifestyle, and it's very important to them. And I will say that, you know, in this small mid-size deal market, taking care of the employees is probably the most important thing for 90% or more of sellers. The legacy of this business will continue is just as important or close to it. Money is important, but I have seen many deals where the seller sold to someone who wasn't the highest offer because they were, they're the one.

Yeah. And I think it comes from the what I feel and I've found is the better buyers have this trait where they can put themselves in other people's shoes quite well and understand the position of the seller and why they're selling and what they would like the acquisition to look like and then work out how can I sitting in their shoes, how can I give them what they want that also allows me to get what I want through the deal as well. That's a very good trade.

That's a good way of saying it. I think when we work with a buyer and when we are screening buyers for a seller, but say we're working with, you know, a potential client as a buyer, we do not want to work with the young. Just got an MBA. Have two years of experience doing data entry work while I got my MBA, and I want to buy a business.

And, we want to work with the seasoned person who knows because they've had to build relationships as they've grown in the corporate world. They've had to build relationships with customers, with coworkers, with managers, and with leaders.

Yeah.

And so that part of that is done already. It's intuition for them.

That's a really good point. I'm working with a couple of people in sales, and they are great listeners, and they're just going to be so good. They're just very attractive buyers for when the right deal pops up for us that we want to buy. I definitely believe that we are going to come out on top because of their soft skills, really.

Uh, so something for people to definitely think about as how to become an attractive buyer and lean on their soft skills that you've built throughout your career and life, guess. When this also leans into coming into negotiations and deal terms and earn-out structures, retention strategies, and all that sort of stuff. What are some of the things you do to coach your buyers when it comes to negotiations and deal terms, or help advise them on that?

Can allow them to reduce risks as a buyer.

Well, I think the biggest thing is when you talk about reducing risk, knowing what you're getting into. It's not necessarily the negotiating, but it's realizing what you're getting into. That means do enough analysis upfront before you make an offer. There are too many people these days who think I got a Russian LOI.

And those are the ones that can tend to collapse a lot more often. And if you do enough analysis, I just mentioned before about customer concentration. Well, it's really easy to say, well, is there any customer concentration, and get an answer? No, not really. Okay. Well, in your analysis, and this is the difference between analysis and due diligence.

And we're assuming this is B2B, because B2, C, you don't necessarily have. But even your online businesses, a lot of them are B2B. And you want that recurring customer. And then when you getto theo diligence stage, you get the names of the customers. And you can apply that same theory and methodology to any part of the business.

Get the information upfront. Don't get the secret sauce, which in this case, my example, is the names, but verify here's the list of customers, here's the list of suppliers. Is there one dominant supplier? I've seen banks perform diligence on suppliers when it was really a heavy, top heavy loaded supplier to a company.

Why wouldn't they? That makes sense, right? Like so much revenue coming from a single supplier. Likewise,e what's the contract like the B2B contract look like? What's their business look like? Yeah. Makes sense.

Even if there'no a contract, are they financially sound to keep going? We ran into a company a couple of years ago,o an, on the surface, a nice company. He got an amountfixedd in his head, even though he had two customers, totaling 60 percent. Sales.

Had a dominant supplier, and he had that dominant supplier cause he switched from another one because when there was a supply chain issue a few years ago, his main supplier said, you will buy this much at this price over the next year, or you won't get any. he went from very profitable to losing money and then later back to profitability.

Yeah. It's, it's hard to know. It's hard to know that if there's a contract, if that's not in the contract as well, you know. And yeah, I mean, that's something you could try and bow out. If you do contractual DD or a lawyer does that, you know, but you can bow out then, but it's hard to really know before through the analysis pre-LOI, something like that.

But to that seller, and this was before he was selling it, if he doesn't have backup suppliers, which he didn't, what is he going to do?

Brought. Exactly.

Definitely still had price constraints because he sold to some pretty big organizations, and you don't just go to huge corporations and say, get my price range, I'm raising my prices by 30%.

Yeah, this is, this is something I, it's wild. This is something I share with people who are buying e-commerce businesses now with the tariff issues and change,s or, you know, the possible changes is if you've got a, even if you don't have single source dependency, like 60 % or 40 % of revenue coming, you know, or 40 % of products coming from a single manufacturer.

It's still worth having in a spread across a few; it's still worth having some backup suppliers and knowing what, you know, your quotes are before prior to closing, you know, just to know what your options are. Worst-case scenario, if you need to lean on something else.

That's good advice.

What are some of the other things that you share and advise people on when it comes to deal structures and terms and. And no, with so much equity, whatever it is, so many different models.

Well, first of all, for both buyer and seller, don't trip over dollars to save a dime. Yeah, just be aware of the big picture. Okay. Keep in mind, you know, if you're buying a business and it's growing a lot, grow, and I learned this from the president of a major corporation. And he said, growth hides a lot of operational warts. And then you grow, and then you fix the warts.

But don't try to fix every little thing; grow. Sellers should want to grow the business. Buyers should want to grow the business. You talked about earn-outs. A lot of people throw the earn out out there a lot. Well, earn-out is not a way to get the seller a price that's too high and say, I'll pay you.

You want 100 for your business. It's worth 80. I'll do an earn-out to get you to 100. You know, you're just growing the business to pay them. It's also not, on the other hand, it's not a way for the buyer to protect their butt. In other words, I know your business is worth a hundred, and I'll give you 60 in cash and 20 in a note, but another 20 in an earn-out.

And if I'm as good as I think I am and as good as you, you'll get your full price. So an earn-out has to be something like, well, I need to sell my business. There's a really good reason. It could be health or something, but we just came up with a new product line. We've spent a lot of money on that.

And, you know, an earn-out can allow the buyer to not pay for potential or air, and it allows the seller to get that if that new product truly is saleable at the right margins. That's a great reason for an earn-out.

Yeah. Yeah. And it's, it's rare. Ase you said, the last thing I don't want to, I want to pick your brain on is how the mindset shifts. Thiss, that are the things that you share with your acquirers on how to shift from the search mode of, and just buying a business, to once they've acquired the business, how they move into growing, growing the business, building a scalable and valuable company.

Well, it starts by being the right buyer for that business, but also a good buyer in general; they have experience,e and they know how to manage people, processes, money, and enthusiasm. You can create a good culture. You've got a lot of upside if you can. I'll give you a quick example.

A client I've worked with on five acquisitionsthinksk he's bought seven companies by now. And his second one waan s online business, selling industrial equipment online nationwide in the US and maybe even Canada. And we noticed in the due diligence how low the pay for the people there was. So the owner was into it, wanted all the money. So my client went in there.

He put in a new comp package, and this was also, this was online. Was in, and it was inside sales for online also. It wasn't just online. They did have to talk to people and explain the technical things. And then they bought it online, shipped it, and put in a new comp package with the bonus structure. And it took off, and he grew at 75 % in his first year. And that was the major change he really made show me the incentive. I'll show you the result, right?

It's, it's so like, I love that. I absolutely love that. And I think it's the best way to grow the business. As it is, it's all internal, and people are being rewarded. One thing that this last deal that we closed on with the two clients, they bought a business,s and they just immediatelyincreasede everybody's paycheck by, I think it might've been either five or 10 % straight away.

And then they promoted a couple of people and gave them better jobs with incentives to just build the business. Like I'm looking at another business now as well that has a bunch of salespeople.

And all you need to do is just give them, you know, a better incentive. And it's not like you're losing, you're actually gaining because the more money that you give them, and is only because you're making more money first anyway.

Right. The sales manager who says I want my salespeople making more than me because if they're all making more than what I'm making,g my bonus is to get me up there.

Absolutely. Absolutely. John, so much wisdom. Might even have to get you back on. Thank you so much for your time.

Okay.

Yeah, yeah. Looking forward to speaking to you soon. Where should we send people to check out more about what you're up to? Just get them to jump on your LinkedIn.You'vee, mean, you've written books, you've got.

Go to websites, and yeah, the books are available on Amazon worldwide. Gett little, very little royalties from Australia, Europe,e and all over.

Yeah, okay.

Nice, nice, yes. Congrats on what you've done in this space, and I look forward to speaking to you again soon.

Yeah, let's keep in touch.

Yeah, absolutely.

All right.