Royce Yudkoff
speaker
143 appearances
1 recordings
1 series
first heard May 2025
last heard May 2025
Royce Yudkoff’s voice in public audio — every appearance, attributed to the second.
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Appearances
And as Roy says, it is application of the same idea, whether it's veterinary services, concierge medicine, or apparently automotive repair, or HVAC. What you're doing is allowing enough specialization for management talent to bloom.
I always focus on the ability of getting the deal done because no company is very good if you can't actually get a transaction completed. And for me, the biggest red flag is multiple owners. If you have an owner in the 70s and another one in the 50s and the owner in the 70s has been working on the sale,
There's just an unbearable probability that when the person in their 50s finds out or understands what the transaction really means, they're not going to sign. And you can go months and spend money on QV and attorneys and write asset purchase agreements and feel like everything's gone. That's great because you're only communicating with the partner who wants to sell.
Everything's gone real well until it just never closes. That's a great one. I hate that. Committed sellers are at least as hard to find as good companies. So you really, really need to pay attention. to why people are selling and whether they really are selling. And if you have more owners, you have more places where you can fall off. Here's another one.
You need to have a meeting. I like to have them on Wednesdays. The reason I like to have them on Wednesdays is you get Monday and Tuesday to cram to get the stuff that you promised last Wednesday done.
And so does the seller. And the Thursday and Friday, I actually do it in an orderly fashion. So I love Wednesday meetings, but you need to have a Wednesday meeting where you say, what's going on? Where are we at? You were going to do this. I needed that last week. The banker needs this. The lawyer needs that, whatever that is. So that's really helpful.
The other thing, though, that's really, I think, important is, and this is so hard, what I'm about to say, is you want to pay a price first. that allows you some margin of safety for due diligence surprises. Because in a lot of small firms, Royce's example was the owner perhaps being a little bit nefarious. But sometimes the owners are not nefarious. They just don't really know.
They think they have contracts and they don't really have contracts. They think they have what we would call contractually recurring revenue and they don't. They think they have all the documents. They think they have all the licenses. They think they've been paying all their sales tax.
And as you dig in, a lot of those things, the broker talks to the owner, the broker writes down what the owner says, puts it in fancy language with some pictures and produces a sim. You bid on that SIM.
If you bid a full price based on that SIM and then discover maybe revenue quality isn't as high or they've been underinsured and you have to have some higher insurance or that employees haven't had raises in five years or there's a bunch of accrued bonus that needs to be paid. If you've paid a full price, then your only choice is to go back and say, we need to readjust this price.
Sellers, when they sign their LOI, think about how they're going to spend every penny of that price. They've purchased their vacation homes. They've designed their boats. They've planned their trip around the world. And they've spent every penny of that $2 million or $5 million that you want to spend, that you plan to buy. And when you say, well, it ain't going to be five anymore.
It has to be four. They're going to go kooky. It becomes irrational at that moment. And those deals tend to bust. So I would say you want to give yourself enough room so that you can absorb some due diligence disappointments. But having said that, the LOI process is competitive and brokers want every penny they can get.
And sure, they care about whether you have funds and what's the likelihood of closing. But since most buyers are one-time buyers, they don't have a track record of saying, well, we're not the highest price, but you should take our bid because we always close.
As part of the transition into ownership of the business, they go talk to their customers and they discover that there are services and extensions that their customers are so eager to get. And the seller might have said, well, that's a lot of work. I don't want to do that. These young whippersnappers, they got a lot of energy. They say, oh yeah, we can do that. We can do that.
And they're able to grow because their customers actually want what they provide. I think the small firm space is capitalism done well. You find entrepreneurs working on their businesses so that their businesses delight the customers. The customers are thrilled to pay for the services or goods they're getting. Nothing succeeds like success.
If you have a vendor that's doing really good stuff and never disappoints, delivers on time and high quality, and when something goes wrong, they make it right instantly, and the owner gives you their cell phone number. boy, those businesses are going to grow.
That's a new question for us, Royce.
I'm going to do the rare thing of disagreeing with you. We teach a lot of theory, but we teach it in the context of practice. So we're teaching a lot about how to think about business, how to think about management, how to think about corporate finance. But we're always doing it in the context of a concrete, meaningful example. So it's not that we're not teaching theory.
It's we're teaching theory in a more digestible form, perhaps, than equations on the blackboard. There's one case we teach that just always amazes me. Every time we teach it, I look at the teaching plan and say, this just can't work. And we go ahead and teach it. And it's like, wow. And students come back and say, wow, I learned so much today. And it's an amazing case. What is it?
I'll leave the protagonist out because it's an unfortunate situation. The former students buy a business, things go badly, demand falls. It just so happens to be the moment of the Great Recession. They're aware of the Great Recession, but they hadn't thought it through in their particular business. And so demand falls, they have a sticky product and they decide to cut price 10%.
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