655: Building a Business Worth Buying with Erin Fenstermaker
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Have you ever thought about what happens to your business when you’re ready to step away? In this episode, Erin Fenstermaker, certified exit planner and pet industry veteran, breaks down the key elements that make a pet business valuable and sellable. She discusses the importance of recurring revenue, documented systems, and building a team of employees over independent contractors. Erin also explains what EBITDA is, what influences it, and how emotional readiness impacts a successful exit. Whether you’re brand new or 30 years in, this conversation offers a roadmap to long-term value and future-proofing your business.
Main Topics
Exit planning and unplanned events
Employees vs independent contractors
What makes a business transferable
Understanding EBITDA and business valuation
Emotional aspects of selling a business
Main Takeaway: “Exit planning is simply good business strategy.”
Whether you’re thinking of selling or not, building a business that can operate without you creates value, freedom, and peace of mind. From documented systems to employee-led teams, what you build today impacts your options tomorrow. Even if you never sell, you’ll gain a stronger, more resilient business that supports your lifestyle. So don’t wait until it’s too late—start exit planning now, because it’s really just smart strategy.
About our guest: Erin Fenstermaker is a certified exit planner and business consultant with over 20 years of experience in the pet industry. Through her firm, EF Consulting, she helps pet service businesses improve their operations, convert from independent contractor models to employee-based teams, and prepare for acquisition or sale. Erin also works with larger pet product companies through Birdseye Advisory Group and brings deep knowledge of market trends, business valuation, and strategic growth. She’s passionate about building sustainable, scalable businesses that are both profitable and people-centered.
Links
Erinfenstermaker.com - Pet industry consultant & certified exit planner (CEPA)
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Disclaimer: The views and opinions expressed by our guests are their own and do not necessarily reflect those of Pet Sitter Confessional, its hosts, or sponsors. We interview individuals based on their experience and expertise within the pet care industry. Any statements made outside of this platform, or unrelated to the topic discussed, are solely the responsibility of the guest.
A VERY ROUGH TRANSCRIPT OF THE EPISODE
Provided by otter.ai
SUMMARY KEYWORDS
Exit Planning, pet services, reoccurring revenue, documented systems, team building, business value, independent contractors, employee model, market trends, business transferability, financial analysis, customer loyalty, business growth, service diversification, emotional readiness.
SPEAKERS
Erin Fenstermaker, Collin
Erin Fenstermaker 07:06
I have. I have been in the pet industry for over 20 years, and about the last 12 I have been doing both consulting in the pet industry and selling pet product companies. So I know most of your listeners are pet service businesses, but there's a heck of a lot of overlap in what I do, and most of my consulting work is in on the services side. So so there's a lot of knowledge, hopefully that I can bring to some of your listeners today. What I typically have been doing is on the consulting side, I work with pet services businesses to help them with some of the biggest challenges that they might have, like their financials, converting from independent contractors to employees, maybe evaluating an opportunity for them to buy another business or to sell their own business, because I do have expertise. I also sell pet product businesses. Most of those businesses are doing at least $2 million in EBITDA or above. So they're quite large, but the fundamentals of what makes a business attractive are the same, regardless of the size. So so I like to to educate the people that I work with about some of those things, so that if they are looking to sell and or looking to acquire a company, they know some of the fundamentals to be focused on.
Collin 08:23
Well, no, we're talking about selling there. But I believe there are a couple different ways to possibly exit a business, which I think is kind of interesting for some people, because we have a lot of listeners who, you know, they're they're just getting started in their business in their 20s, and so the idea of Exit Planning, what are you talking about like? This is, I don't even know what's going to happen tomorrow, and it's right, yeah. So from your perspective, like for you to talk about, kind of what Exit Planning means for a small business, and if, from your context, if there's anything unique or different for the the pet industry specifically,
Erin Fenstermaker 08:57
that's a great question. So Exit Planning is essentially answering all of the questions personal, financial and operational around the process of selling a business. So let me jump back up because you said something that really tugged at my heart strings. Most people don't are running their business. Have no plans to exit, but 50% of all businesses across all industries sell because of an unplanned event. They call them the 5d and Exit Planning, death, divorce, disagreement, disability and distress. So you could have one of these five things happen. You get disabled by a car accident, you have cancer, you have a disagreement with your business partner, all of these kind of things, or maybe you're in financial distress because you were overpaying your your your team members, all of these kind of things. Can force a close or a sale of your business at any time. So if you know the average business out there that's running. Today in America has a 50% chance of one of these 5b happening to them at any time. Wouldn't you want to run your business so that if any of them happen to you tomorrow, that you would be ready to sell at that time? So that's essentially the mindset to think about. Is Exit Planning is simply good business strategy. Is My Business transferable to someone else, and if so, what makes it transferable? And why is my business not transferable versus somebody else's business who may be transferable?
Tori L. 10:33
And so let me give you an example. A
Erin Fenstermaker 10:35
lot of small people, smaller businesses that start in this industry start as you know, what we call solopreneurs. You know, they start as out as a one man band. I, myself am a one man band. I choose to be a one man band on purpose, but I know I have the opportunity to bring on team members as some of the pet service professionals that listen to this show. And so if you are simply a one person band, then essentially you don't really have a business. You have it. You've got a glorified job that you have created for yourself. But essentially it's not a transferable business, because a transferable business has policies and procedures, has people that could step in for you at a moment's notice, if necessary, and continue to run the business just like you were there. So when you think about it, as a business owner, say, if something happened to me tomorrow, if I wanted to go on a two week vacation, would I be able to do that? And would do I have people that would come in behind me and be able to actually perform all of the functions, from soup to nuts, from payroll to scheduling to insurance, to all of those things. If the answer is no, I don't have that, then your business is not transferable. So it's not really sellable until you get it to the point where you have all of those functions reproducible by somebody else. Does that make sense?
Collin 11:58
It does. Especially, I think a lot of us think initially of, well, I'll have employees to do the dog walking, to do the pet sitting, so now I've been replicated. But the thing that I know that Megan and I have realized more and more of like, well, if I'm still the one doing all the scheduling, all the admin, all the hiring, all the firing, all of the phone calls, all of the marketing, all this, well then the business still relies on me to run. And what you're talking about here is it's a, can you fully step out? Because then, then, then the business can run completely on its own, without you being the bottleneck, or it's you being the
Erin Fenstermaker 12:35
areas that you have mentioned, you know, because typically this means that I'm going to really be able to start thinking about, you know, being able to, quote, replace myself in these areas, I reach a certain level of scale, because then it just doesn't make sense to have you don't have the extra income to hire somebody to do those things. But that's really the goal. If you want your business to be sellable, you need to get it to the place where you could, in theory, you know, maybe you outsource your marketing and social media. Maybe you have a scheduler that comes that you know works part time. You know, maybe you have, you know, another advisor you can piecemeal. Does that be one person you know that's replacing you in totality, but you have to have backup plans for all of those areas, and even if you don't have some of those areas with about with a person in mind that could do them, having the processes of what you do documented is equally as good and important. Because again, if somebody, Lord, you know, have mercy, you know, you stepped off the curb and got hit by a bus, would somebody have a roadmap to step in and do your job if you were not there. And so it really is a process of doing the documentation to have to have all of those. This is the how tos are running the business and or the bodies to do that work, whether they're outsourced contractors, you know, third parties that have their own businesses, or somebody that you pay on a part time or full time basis.
Collin 14:02
What are some of the more common misconceptions that somebody may have about or around selling a business?
Erin Fenstermaker 14:10
Well, I would say the number one is always the value of their business, the concepts that I just described as to what makes a business sellable and the fact that it has to be transferable and duplicate duplicatable by somebody besides you, most people don't think about their business from that perspective. And thus, you know, as a result, they may inflate the value of their business, because they think, Well, gosh, I'm doing all of this. And, you know, I make this much money, so my business has to be worth a lot.
Tori L. 14:41
Maybe, maybe it is, you know, but in most
Erin Fenstermaker 14:44
cases, you know, the the transferability aspect that I mentioned is kind of the first test of how easily could somebody step in and do your role, based on the processes that you have set in, into place, or because of the other people? That you have that know how to do it.
Tori L. 15:01
That's those are the kind of the first tests.
Erin Fenstermaker 15:04
So because of that, you know, if people don't have that and they think they're the business, their value, the value of their business, is quite high. You know, unfortunately, I have to have some conversation sometimes at the beginning to say, Well, no, your business isn't going to be a lot of value until you can do one of those two things. I would say that's probably the biggest The other thing that I think is really important in our industry in particular is because is to think about who is going to buy your business one day. Because there are really two types of buyers in a pet services business like ours, there's what we call an internal buyer. And an internal buyer is somebody that you know already. Maybe it's a client, maybe it's an employee that works for you. Maybe it's just somebody that has seen your business and admires it and says, gosh, I'd love to have that business one day if you're ever interested in selling it, but they I call it an internal buyer, because that buyer wants to buy the entire business. They're going to buy the name, they're going to keep your website, keep your social media. They're likely going to keep the entire team your prices. Don't change your schedule, nothing changes. You simply have a new person running the business. That type of buyer is going to be the highest value buyer that's going to be who's most likely to pay you the most amount of money for your business, because they need everything that you have built, the policies and procedures that you have set up, the website that you built, that all of those things you've already done that so they are going to pay a little bit higher, most likely, in most cases, for your business,
Speaker 2 16:46
those buyers are
Erin Fenstermaker 16:47
often difficult to find. You know, if you're not looking for them proactively, which I think is part of the exit planning processes, look around you. Who do you know that you think might be a good person to buy your business one day that that you think shows some of the same sort of skills that you have that would make them successful. But if you don't have such a buyer, and maybe a business broker can help find that person for you, the second type of buyer is an external buyer, and that's typically going to be a competitor in your area, somebody that's already doing the same services that you are doing. So they they already have, you know, dog walking and pet sitting. They already know how to run that business, but they don't need your website and your company name and and maybe their prices are different than yours, and maybe their employees and your independent contractors. And then you start maybe they use time to pet and you use precise and you so you look at all of the things that are potentially not aligned, because you run your businesses differently, because you know you can choose to do that, but as a result, the risk to the to that buyer in taking on all of your stuff and trying to convert your clients over to them goes up, because they're going to have to have to change a bunch of things you're you know. So you're going to have to try to convert all your your team members over to their team, you know, their pay might change, hopefully for the better. Maybe if they're independent contractors, now, they're going to turn it change to employees. Maybe you're going to have to raise some prices so not all the clients come over. You think about all of the potential things that might need to be changed in that kind of a scenario, and that increases the risk to the buyer. So the buyer should pay less because of all the risks that they are taking on in potentially taking your business. But that buyer is way easier to find. You can just look them up on Google see who your competitors are, you know. So I mentioned those two types of buyers because you can't approach a buyer as the same. Those two buyers are very different, and the price that they would pay is different because they come to the table with different risks that they would take on. So that's something that's really important to keep in mind when you're thinking about, well, what is my business worth, or what to who?
Collin 19:06
Yeah, I got. It's kind of like when you go for the right home buyer too, right? If, are you going to sell to somebody who wants to have a move in, ready home and keep everything the same, well, that price is a little bit higher and not as negotiable, versus somebody who's going to come in and completely flip it and destroy and tear it down, right? Like, and so it's interesting to know that that same thing exists in selling a business. And so, yeah, that's and to know that, okay, well, so if I'm selling my business, I really have to know who I'm talking to, and sit on their side of the table and go, what's motivating them? What are they going to do, right? Like, I'm just thinking of going, well, how valuable is my Google Business Listing to that person? Well, if they are already doing what I'm doing, and in my same area, it's not that, yeah, it's not at all, right?
Erin Fenstermaker 19:50
Yeah, exactly. And so, and that's where most people, most most business owners in this space, aren't thinking about it from that perspective. And, you know. I can tell you that the I have, one of the things that I do is I'll advise people in this space that are considering selling, or they're considering buying, and they just want to, you know, get my input about, am I paying too much? What should I offer? You know, what are those kind of things? All of those scenarios can be very, very unique based on the circumstances. You know, there's, there's about probably 15 or 20 questions that I typically ask about who the target is, you know, and say, Well, let's talk about all of these things, because the more aligned that you might be. So let's just use an example here. Let's say there's a there's a company that wants to sell and they happen to have a competitor in their market that's pretty aligned with how they do business. Maybe their pricing is already pretty close. They're both employees. Maybe they use the same scheduling software.
Tori L. 20:47
The more things that are aligned, the better for the price, because that means less
Erin Fenstermaker 20:53
likelihood of turmoil. And you know, every opportunity that a client or a employee has to leave because something changes, you know, is a risk, right? So that's one of the things that I always look at, if you are looking at that maybe making an acquisition in the industry, or selling your business to somebody that's acquiring is how similar are you in those areas? You know, do you have similar pricing? Do you are you both employees? Are you both independent contractors? Are using the same scheduling software? You know, start you know, how are you paying your team? You know, are they totally different? Are they the same? You know, the more things that are the same, the higher likelihood that's going to be a good acquisition and that that it will be successful. You know, as long as you put some things in place to make make it happen, the more things that are better off and that are different, the more risk there is, and that's the price that that should be paid should be lower.
Collin 21:47
When should a business owner start this process?
Erin Fenstermaker 21:51
Well, you know, I said, you know, they should start the day they open. They need to the day they open. They need to realize what makes my business valuable. So I'll use myself as an example. You know, I opened my business back in 2013 and I made a conscious decision at that time that I did not want to have employees, and so I knew that meant I'm not going to be able to sell my business. I'm essentially, I have a business, I have a shingle, I have a website, but I essentially, I have, I have created a job for myself. I have not created something of value that is duplicatable by others. So part of it has to start on day one is, what is your intention with the business? Your intention is simply to have a job for yourself. Fantastic. That was my choice, and I'm happy I made that choice. But for other people, if they think, no, I really want to sell this business one day, maybe this is going to be help fund some of my retirement. Then, then what they are are going to be tasked with doing is very different than what I would be tasked with doing in my shoes. So if I you know, so I know I need to be transferable and duplicatable. Well, then I need to make sure I'm running the business on a daily basis to make my business more and more that way.
Collin 23:02
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Speaker 3 23:07
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Collin 23:28
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Collin 23:40
well, because making something transferable doesn't happen overnight, and I think that's really important to know is like, start day one, day zero, maybe, so that you have years to work and build up and get the structure, as opposed to going, oh, like you said earlier, like 50% close, and you have, because of an unforeseen event, right? Going, well, I can't just convert all independent, independent contractors to employees within three days, and I can't write all of my SOPs and policies even with chat GPT. That's not possible.
Erin Fenstermaker 24:10
I think intention. It has to start with your intention. What is your intention? When you started your business? It changes over time, because that happens as your life circumstances change, but once it's clear to you that you want to be able to sell this business one day and and have it be as valuable as possible, as soon as you know that, you need to start thinking about, how am I going to make it transferable to somebody else, and make sure I'm starting to do all of those little things that are required to do that
Collin 24:39
I know you talk about, in other places, about this thing called to accelerate value in a business. And like for you to expand a little bit about on this and why it's so important. Yeah, so
Erin Fenstermaker 24:51
there's a term in Exit Planning called Value acceleration, and basically what that is, and the process of accelerating value. You typically happens sure somebody like myself does an analysis of your business. So let's say somebody hires me to do to analyze their business and where they are, because they do want to sell one day, and they want to make sure that they're creating something of value. And they want to know maybe how much it's worth that you know, in its current state. So in that process, I'm going to look at everything from the from both an external point of view, like your your your brand, your pricing, your margins, how long you've been in business, your online reputation. I'm going to look at all these external things, and then I'm also going to look at at what's called your exit readiness, which is all of looking under the hood. So I'm going to look at your HR practices, I'm going to look at your policies and procedures, I'm going to look at your employee manual. I'm going to look at all of the internal things that that signal whether you are ready to transfer that business to somebody else. And then in that process, I make a list of recommendations of all the things that they're that you're doing well and what you're not doing so well at and giving you a list, essentially to do list of things that you need to work on. Once you have that list, you know, I also can give you an average value of your business. So let's just say, I'll pull it out of the sky. So your business is today, worth about $100,000 let's just pretend. And I said, but you need to work on, you know, these seven or eight things. If you work on these seven or eight things, I believe that will increase your business value by 50% or whatever the number is, depending on what what I find. And so the value acceleration is, I'm going to work on all of these things, because it's not just your revenue that determines how valuable you are, that that's one component. It's we call it an Exit Planning. There's four intangible capitals, other things that do not show up on a financial statement that are really important about building value in a business, and they have to do with your team and with your customer list and with your products and things like that. So things that aren't going to show up on a financial statement, but are equally as important, and so those things are typically what's going to help grow your value. And if your systems aren't, aren't any good. If you have no systems, you know all of those things are going to detract from your business value. So value acceleration is taking the list and actually taking action on it, and then it accelerates the value because typically, you just continue running your business, you're just adding in these layers of new things that need to get done or be systematized
Tori L. 27:39
as part of running your business.
Collin 27:41
It's very interesting talk about those intangibles in the business and the value, because I know many people may have this perception. I know I still did for years of, oh, well, all you do is you look at the revenue of the business, and then you multiply that by like three or four or five, right? Insert random number here, and that's, that's how much your business is worth. For those listening to the podcast, Erin is shaking her head vigorously.
Erin Fenstermaker 28:11
Is, you know, there's actually a visual example that I have in a particular presentation that says, Here are two businesses. And it says, you know, they both, from a financial perspective, look the same. You know, they their top line and even say, let's say their net income is the same. But then you look at all of the intangibles, you know, who's got great company culture, who has a great public persona? You know, we go on Google and on the reviews and, you know, people are raving madly about them. You know which which business has been in in business two years, and the other one's been in business 25 years. There's so many things that are that set you apart that have nothing to do with your revenue number and that those are important things. I don't get you wrong, but even your gross profit number, the number one thing that I see the biggest mistake I see in businesses in this industry is what is their cost of goods sold? Number in terms of what they are paying for their dog walker or pet sitter to do the visit. That is the number one problem. Most companies overpay their their team members. And so, you know, I'll see particularly independent contractors, tend to those models tend to be kind of the biggest violators of the of the healthy rule in that respect, where I've seen anywhere between, you know, 55 and 70% is being paid to the contractor. That is not a tenable business model over time, that in a healthy range with employees, you need to range between paying between 45 and 55%
Tori L. 29:46
of whatever the service is to your team member. That includes the 7.65%
Erin Fenstermaker 29:53
payroll tax that the employer pays. So that means if you're charging $25 Let's say, as an example, for a service that you're probably you need to be paying, and you have employees, you need to be paying around 10 or $11 to the team member for that service. And that overpayment is what is, is one of the biggest things that that lowers the value of your business, because if you have no money left to do advertising and to have good insurance and to improve all of the if you're an employee based business, to improve the value of what you are able to deliver to your employees and what you can deliver to your customers, you don't have any money left for those things.
Speaker 2 30:39
Well, let's
Collin 30:41
talk about that from a from a sellable, transferable business. From your perspective, you know, independent contractors or employees, which one's going to help me maximize the value of my business?
Erin Fenstermaker 30:51
Absolutely, employees. I mean, I can tell you, I've been in the industry since 2000 and late, 2007 2008 a long time, and I personally have chosen not to work with companies that use the independent contractor model, because I fundamentally don't believe that it's the right model to perform the best level of service in this industry. I think employees is really the only way to go though. I do work with people that are choosing to convert from independent contractors to employees, because I think that's a it's a it's a challenging thing to do, and I am more than happy to help people do that, because it's, I think it's so important to the longevity and the professionalism of the industry. But having employees is, to me, is a mandatory because if you're going to be able to provide the best level of service, you've got to be able to train your employees. They have to have processes and policies and procedures around what they do and the service that they perform. If you using independent contractors, you cannot do that legally. And most companies that I have seen that use independent contractors are not following the independent contractor legal guidelines and are in violation of the law in their whether it be in their state or on a federal level, I'd say the bulk of them are so so, you know, it's unfortunate. I know that it's easier to have an independent contractor model, trust me, I get that it's way easier, but the employee model is really much more attractive, and frankly, is has less risk attached to it as a result, because I can tell you, most companies that use independent contractors today, if they were audited by their state or by the Department of Labor, they would fail the audit because they are providing guidance and are training and or giving too many too much guidance around how To do the job, which is the legal definition of an independent contractor.
Collin 32:44
So does the lower valuation from the independent from using independent contractors? Does that come from? I mean, I guess it sounds like it's coming from a multiple, multiplicity of factors, like one you talked about the increase payroll per person, right? Those margins are cut into because they're paying a higher percentage, and then also just the attractiveness and risk to the potential buyer of what they're taking on. Correct.
Erin Fenstermaker 33:07
Because the thing about most independent contractors, if you actually follow the law to the letter, it says that an independent contractor can work for other companies doing the same thing. So that means that they can work for rover, they can work for WAG, they can work for another local competitor. And unfortunately, as we, as many of us, know in the industry, the propensity to steal clients when you have that model is pretty darn high. And so you know it's not, you know, when you look at the loyalty that an independent contractor has to their employer. It's typically lower than if you are an employee of a business and are receiving benefits, perks and training, you know, as part of your employment
Collin 33:54
there, right? We've mentioned some of the intangibles. I did want to come back to a little bit of the revenue, of the impact that that plays on a business, is there a difference that the kind of revenue that we get plays into that? Of, like, if we can prove that we have reoccurring revenue, of, oh, we get the same X number of dollars every week from reoccurring dog walks or whatever, versus, like, a truly, I guess it's more like business models from in this world of going, Okay, I've got pet sitting who? I've got really high highs, low lows, kind of no guarantees versus this reoccurring, oh, I've got daily dog walks. I'm doing these things that are poop scooping, whatever that is. How does that influence the value
Erin Fenstermaker 34:32
of a company? That's a great question. Reoccurring revenue is valued at a higher rate than the unpredictable pet sitting revenue. The challenge, though, is this is, if you really look at what the macro economic trends that have happened since covid, covid Unfortunately decimated the the reoccurring walks space because and culturally changed how people go to work because the. The introduction of this hybrid workplace, or frankly, more work from home, has dramatically impacted the number of people that are looking for reoccurring walks or looking for them. They used to have them every day, and now it's only one or two or three days a week. So unfortunately, what I've seen over the last five years since covid is that even as covid, you know, kind of petered out, and people went, quote, back to work, the number of walks did not go back to the heydays that were prior to 2020 when it was, you know, blowing and going and growing exponentially. It's really been a stagnant market ever since, ever since covid. And so I have seen a lot of the clients that I have worked with have really had had some tough moments trying to decide, you know, particularly from a couple of different reasons. There were some companies that are out there that that's all they did was, was recurring dog walks. Those companies unfortunately got really hurt during covid, because it was a very feast or famine situation, because that was the only thing that they had to bring in revenue. The companies that I work with that have a combination of dog walks and recurring dog walks and pet sitting fared a little bit better because they had they spread out their risk when it came to the types of services that they had. They have more types of services. So if dog walks went away, they could potentially try to promote their pet sitting a little bit more. So what I have seen is that
Tori L. 36:26
the post covid, the companies that do
Erin Fenstermaker 36:30
both dog walking and pet sitting and or do more pet sitting, are doing better than the companies that are just doing dog walks, because there are fewer dog walks out there, and everybody's fighting for the same the same client, and so the competition is really high. That's not to say that some people, you know, one company in a market might be doing great in it, but if you look at the health of the overall market, it's way harder to get those consistent, reoccurring walks, because everybody wants them because they're they are great for having consistent revenue and consistent work for your team, but they're harder to get than they've ever been,
Collin 37:07
and that plays back into the Do we understand our our market too, and not get caught up in Hey? You know, what are people in Chicago doing, or what are people in Dallas doing? What are people in my what are people in LA doing? What we really have to it takes us understanding our local business and our local economy to know what's driving here so that I have a business that fits, because the last thing we want to do is be following trends in another part of the country that don't match our local trends, and then we don't have a business right
Erin Fenstermaker 37:35
clients that will say, you know, I personally this is just my personal preference. If I was going to open a business today in this space. I would not do a dog walking only business. I would absolutely do dog walking and pet sitting, and I would probably add training and poot scooping. I would want to defray my risk across a number of services. That's my personal just because I'm risk averse, right? But I have some people that said, you know, I really want to run my business Monday through Friday, and I don't want to have to do a lot on the weekends or at bats hours. And so I'm going to, I'm going to suck it up and hope that that, you know, I'm going to still be successful. But you know, to me, that every business owner has the right to make that decision for themselves. They just simply need to understand the market dynamics that are going on because, you know, I'm going to tell you, I wouldn't necessarily make that choice because of what's going on, unless you want to work way harder on the marketing side to try to get to convert more clients that are looking for recurring dog walks. And if that's not your area of expertise, then don't expect your business to continue to, you know, to flourish. If that's the case,
Collin 38:38
well, and I love how you said, like you've got to work harder to get those fewer clients. And so if you just look at that balance sheet, I'm going back to your example of look, these two businesses look the same. They're both, you know, $300,000 in revenue, but one of them has to spend $80,000 in marketing, right to get so how? What value valuation like? So that that's all stuff that we have to consider as we look at the health of our business and the transferability of it. And I that's just really cool. I'm I'm taking lots of notes. Erin, okay,
Collin 39:15
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Collin 40:22
I know a word that gets thrown out, or, I guess some letters that get thrown out when we talk about mergers and acquisitions in this we're in this kind of realm is, is EBITDA and I made, I don't know if that did I pronounce that correctly. I don't know if. Okay, cool, okay. You know, this is a term that I hear thrown out a lot. I'd love to, like to for you to talk about kind of what that is and why it matters when we sell a business.
Tori L. 40:44
Okay, so
Erin Fenstermaker 40:45
EBITDA is Earnings Before Interest, tax, depreciation and amortization. So what that essentially means is, and let me back even back that up one step further, because most people that haven't have used an accounting system to manage their financials of their business are familiar with the term net income. And so, you know, this is where I am, you know, I trust no numbers until I dive into them, you know. So somebody says my top line revenue is this and my net income is this. What is my value? I'm like, you know, I have to ask more questions, because I can't just say that. I need to know more about how your business is constructed. So, as an example, even the net income number doesn't mean a whole lot unless I find out from that business owner, how do you pay yourself in the business? Because, for example, if you as a company that has employees choose to pay part of the owner's compensation via payroll, then that's going to show up on my profit and loss statement. If, as the business owner, you only take a draw where you don't pay payroll taxes to yourself, you pay them later, it shows up on your balance sheet, which is a different financial statement. So I and the number one expense in all pet sitting and dog walking businesses is the compensation to the owner. That's the biggest expense there is. So I have to know how you're booking it. Where is it? How do you self, until I know that I can't tell you if your net income is good or not, because I have to compare. I have to the way I look at it is I compare whatever in my mind I'm comparing to every dog walking and pet sitting business that I've ever seen, you know, and I have to normalize them and have them all look like apples to apples. But based on how you pay yourself, your financials might look very different. And so I say this because net income, by itself, is not just the holy grail number that you start with with EBITDA. I want to know, how are you paying yourself, as the business owner, if you're paying yourself via payroll, then your your income amount is subtracted before you get to your net income. If you're paying yourself on a draw, it's not showing up on your net income at all, and it's the number one expense for a business in this so I have to know that in order to calculate EBITDA,
Tori L. 43:15
because it's a factor
Erin Fenstermaker 43:17
in at least comparing business to business most companies. And to answer your question, EBITDA is usually used as the number to multiply against in an industry. So for example, I might say, you know, it's very typical in our industry to take EBITDA times four or five, the number four or five as the value of a business. So you first have to have your net income, and then you have to add back interest, tax, depreciation, amortization, and you get a new number, whatever that number is, and then you multiply that by four or five. That typically is an average range for your business. Sometimes you can use a multiple of revenue, usually, point seven, five, maybe one. Sometimes I look at both of the numbers, and then I look at all the factors that don't show up on a on a your financial statements, like your longevity. You know your classification of your team as employees or contractors. What are your gross profit margins? Are you in a healthy range and not healthy range? Or you've been in business two years or 20 years. How long has your team been with you? Is everyone there three months? Or you've got bunch of people that have been with you two three years. You know? How long have your clients been with you? Like, I look at all of those kind of things to help determine the value of
Tori L. 44:39
what I'm seeing. So
Erin Fenstermaker 44:42
you can can't just look at one place. It's one place that is the right starting point, but you know, it's as an example, if I say, Oh, you're three to five times this number, everyone automatically says they're the five
Speaker 4 44:56
three. Obviously
Erin Fenstermaker 44:59
I'm. Talk about you gotta slow your roll here for a second. You might be a three because of all of these things. So until I know all of these other things, I can't possibly tell you where you are. But that's one of the reasons that you know. I can look at a business, ask a bunch of questions and do some analysis of where they are, and I can get a pretty good value as of what their value is today, if they went to market for whatever reason, and if that number isn't the number that they want, they want to hire one, well, then I can give them the roadmap for what they need to do to improve the number that they to get to the number that they want
Collin 45:35
for for the the EBITDA, what's one of the, maybe some, or a handful of the biggest things that influence that specifically in the service based into businesses. Well, it
Erin Fenstermaker 45:46
starts with what you're paying your team, because the first thing is what the owner is paying themselves. That typically is the largest expense. But then the second is, how much are you paying your team? If you're paying between 45 and 55% of revenue to your team that's a healthy range. I bless that business and say you're you're doing great. You're in the right healthy range for a business of this industry. If you're paying more than 45 to 55% of every dollar to your team members, that's considered unhealthy. And so that just means you're going to bring less to the bottom line, you're less to your EBITDA because you're giving more of it to your team. Okay? So, you know, that's where really looking I'm a very big advocate of looking at like price increases, just willingly price increases. I like to look at what's going on in the market, what's going on in the economy, and try to be judicious around when when to do a price increase and that sort of thing. But, you know, don't be afraid to raise prices to to fix those things. I mean, that's one of the number one things that I work on projects to do is, is to evaluate. Give you an example, I'm working with a company right now in California that was using independent contractors, and they need to convert to employees. They were paying their independent contractors between 60 and 63% of every dollar went
Tori L. 47:13
to their contractor. So they're outside of
Erin Fenstermaker 47:16
the healthy range before we even calculate employer payroll tax before we calculate workman's compensation, and in the state of California, you also have to pay mileage and cell phone reimbursement. So we have to do a lot of the number crunching to figure out how we were going to be able to get them in a healthy range, be able to pay their team what they were getting paid, and or more, just with the taxes taken out, and increase the pricing to their clients. So we had to do a lot of modeling around that to figure out what what was going to be realistic based on what they were charging today. And we were able to figure out, and have been successful in doing the conversion. But it's, it's a lot to look at. There's a lot of moving pieces into parts, but it's a really important exercise, because you want to make sure, once you do it, if you are going to take on the conversion from independent contractors to employees, you want to make sure you come out the other side in a healthy place, and that you're happy with how how it went, even though there was a lot of, you know, stress and, you know, sleepless nights along the way, it's really a great decision for your team and your team members.
Collin 48:30
Well, I know that a lot of that can cause some anxiety in that conversion, because it can, it can influence not only how much people are charging, but even the kind of services that they were offering. I know a big one, are like overnight services, right? And that one, all of a sudden, you go, I've got an employee. Well, what are my state regulations for pay over sleep? How do I handle overtime? Oh, you know, how, what does that look like? And then sometimes, if we, you know, we have certainly seen businesses who go, you know, overnight care is 70% of my business, and I want to convert to employees. Man, you've got to make some really, really tough decisions there and figure out how you're going to make that work.
Erin Fenstermaker 49:10
Well, that's a great example, and that's one of the you're correct when, when I've worked on on these conversion projects, overnights tend to be one of the biggest stumbling blocks. And you know, there's several ways to handle it. There have been, and let's talk first, from the macroeconomic level, because where people, where there is growth in the pet industry, has come from the high end of the pet industry. If you actually look over the last five years since covid, it's not that there were people all throughout lower, middle and upper income adopting pets. It was primarily in the medium and high income. So it was people that had money, that already had pets, that were getting more pets. So they're spending a lot of money on their care, on services their you know, supplement. Minutes vet care, because they want the absolute best for their furry, furry friend. And the reason that's important is because how that translates into our industry is that that means people want more time. If I'm a client going out of town, I don't want 20 minute visits once or twice a day. I want hours. You know, I want overnights. I want more, because my babies are important to me, right? So that means you really have to look at legally, what you can can offer. Mean there are some people that will be able to pay, you know, extra high prices on overnights, but that's not the bulk of people. And this is where I also think, you know, services like what I call almost overnights, where maybe there's a two or three hour service that's performed in the evening and then the sitter goes home and then returns in the morning. So you can repackage it into a slightly different format. But again, it still speaks to that customer who wants more and more and more time for their for their baby. I think the other, the other thing that's that's brand new. And frankly, where our industry, the locally based businesses, have not gotten jumped on board yet. And I think should is really looking at in home boarding. Because if you look at rover as an example, while I don't love the business model for rover, by any means, I have to respect the fact that they are growing at 25 to 30% each year, and most locally based businesses post covid are not growing at that pace. So if so, I have to look what are they doing that's different than what I'm doing. And one of the things that they're doing is they're offering a lot of in home boarding. And think about it. That makes sense when people want their more and more care for their animals. So I actually think that's one service type that should, should really be evaluated to see if a business is comfortable figuring out how they could offer that on a locally, on a local
Speaker 2 51:55
level, as
Erin Fenstermaker 51:56
an alternative to overnights, because of the things that are, that are kind of built in detractors of doing that, if you're using an employee model business,
Collin 52:06
yeah, and for that, it definitely is not just, how am I paying people, but do does my city or county have licensing and inspection requirements for kennels, things like, am I living in a good spot? What's my neighborhood a lot like, there's that all of a sudden gets into that side of things, of because I know, like in our state, like, if you want to offer boarding for pay overnight, well that's a kennel license right away, and that inquire requires inspections from the Department of Agriculture. Like, if you really want to do that, buy the books and so, like you said, like, that's just but that's something that as a business, if everything's on the table, if you're following market trends, what does that mean for how I shape my business? Because I like to
Erin Fenstermaker 52:43
look at what is going on. What are the bigger factors going on that should influence what I choose to offer as a service? I know that there are a lot of people on the higher end of income that have more pets and they want more service. They want more time when they're out of town or they're traveling or what have you. So I have to figure out how I'm going to choose to handle that. And you know, everybody, every business owner, is going to be a little bit different in terms of what they choose and what they're comfortable with offering. But knowing that, you know, even if it's a matter of, you know, there are some services, or some businesses I've seen as an example that just offer 20 and 30 minute business visits, I'm like, where are the 45 and the 60 minute visits and the multi hour visits? To me, those are huge areas of opportunity if you if you want to grow your business, because that is what the trends are saying. Is happening is pet parents want you to spend more time when they can't. So they will buy almost anything. Within reason, of course, but you got to think about that and make the right decision for you and your own business.
Collin 53:50
I know we've talked about selling a business and kind of this Exit Planning and everything involved. How do you walk business owners through the emotional side of this process. Because if somebody's had a business for 1520, 30, and we know people who've been doing this for 35 years, and all of a sudden it's time for them to step away, you know what's How do you help people kind of walk, walk that line, versus just sitting down and calculating EBITDA on what my revenue? Like that?
Erin Fenstermaker 54:18
That's a great question, and such an interesting one, because I know, because I have seen the impact of people's selling their businesses, I've sold their businesses, and I've seen what happened afterwards. I'm very happy to say that in most cases, they were very happy endings. But there's a lot of cases that it's not. And let me tell you why. You know one of one of the reasons can be, you know, the first thing that I always am going to look at and ask when someone says that they want to exit their business is, I want to make sure that they have enough money to live on. Have they done all of the math that they needed to do and talk with a financial advisor to make sure that whatever number it is that they think they're going to walk away with? Is that enough?
Tori L. 54:59
Because. Because if it's not enough and you didn't know,
Erin Fenstermaker 55:03
or you don't even know what that number is, what the number that you need,
Tori L. 55:07
then is this the
Erin Fenstermaker 55:09
right time to sell? So I would first cover that, because that can be problem one, because nobody wants to go back to work after they've retired. Right?
Speaker 2 55:18
No. And then I would say secondarily,
Erin Fenstermaker 55:23
the, I would say, by and large, the the business owners that have the softest landings when they exit their business are the ones that have something that they are looking forward to doing. On the other side, those that have nothing, they don't have hobbies, they don't have trips to take. They don't have, you know, maybe a spouse that's wanting to go blah, blah, blah to these different places. You've got to be growing towards something besides your business. Because think about it, one of the saddest days that a lot of business owners say is, you know, I used to be the center of the world for 10 or 15 people and all these clients, and my phone was ringing constantly, and the day after you settle, those aren't your problems anymore. Those calls are going to somebody else, and suddenly your really full life and all these personal interactions that maybe you didn't even value or see how much they were adding to your personal you know, day to day Zen, and suddenly those are gone, and you don't have anything to replace those relationships with. Those are the folks that potentially are going to have a harder landing, post, business, sales. So I like to make sure and ask, what, what do you want to do after this, if they can have much to fill in the blanks, then that's when I really start saying, Look, I know that that is that is problematic to to go from, you know, most people running a business in this space are really busy people, so to go from running a million miles an hour to zero overnight is not usually the best recipe for most people. So what is it that you're going to fill your time with that in particular, that you're looking forward to, that you maybe you couldn't do because you were tied to your business and tied to staying in town? You know, more often than you wanted, find those things that are going to fill
Tori L. 57:16
your cup up before you exit
Erin Fenstermaker 57:20
and start and make, make plans with them for right after, so that you immediately have some things that you can immediately step into and start transitioning into whatever that new life is going to be. Those are some of the things that I've seen. And then, of course, it's always scary, you know, you depending on who's buying the business? You know? You know, there's uncertainty. You know, there's your team members that you are going to miss, you know, but, but I think it's, it's smart to ask that question and to place equal emphasis on it, as much as the number that you're going to get if you do so is how you plan on spending your time and and what are you looking forward to?
Tori L. 58:07
That that you're going towards, the more people that have
Erin Fenstermaker 58:12
a tangible answer are going to be the ones that are more are happier with the exit than those that can't answer. I can't fill in those blanks,
Collin 58:22
another reminder that our whole life, while it may feel like it is our business, it's not whole, it's not who we are entirely. And to start hanging like what, as you look at going a how transferable is this? What systems can I build in? What else am I filling up with my cup and for who I am? Because there's going to be a day where this business isn't around anymore, or I'm not involved in it. So what does my life look like? And to know that, yeah, numbers are important, structures are important, policies are important. Having employees is important. But me too, what am I doing and how am I taking care of myself? And it's just from beginning, middle and end of the business. We have to keep that first and foremost. I just, I love that so much. Erin, yeah, and
Erin Fenstermaker 59:03
it's funny, you say we talked earlier about having two businesses that whose financials look the same, and I've even had a client that, let's say, you know, we did some work together, and maybe the financials didn't change, but what may have changed that didn't show up on the financials was they took a vacation for the first time, and weren't on the phone the whole time. And, you know, they they, or maybe they chose to work only three days a week, or 30 hours a week, or whatever, whatever the changes that they wanted, but the financial stayed the same. Would you call that success? I certainly would, especially if that's what they were trying to to get out of the work that we did together. Because, you know, everybody, every owner, is different in terms of what they want and what they want to prioritize, and how they want to live their life. And so, you know, I want to listen and hear, okay, what is it that you want? Then let's figure out how we can make it happen.
Collin 59:53
I love that. Erin, I want to thank you so much for coming on the show today, for walking us through these really important topics that. Even if we aren't looking to sell right now or in the future, it still helps build value and gives us a better life right at the end of the day. I know this is a really big topic. You do this for a living. Is talking about this stuff. So if people are interested in getting connected with you, following along and reaching out with some questions, how else can they do that?
Erin Fenstermaker 1:00:20
So you can go to my website. It's my it's my full name, Erin fenstermaker.com, you can also you, if you Google me, I'm with my with my very unique name. I am. I'm pretty easy to find. And you can just reach out on my website. I have a contact form there, and that's really the best way
Collin 1:00:42
cool, yeah, well, I'll have that in the show notes so people get connected and follow along. Erin, this has just been such a wonderful conversation. I'm so thankful for your time today. Thank you for coming on
Collin 1:00:50
the show. Yeah, likewise, thanks for having me. My biggest takeaway from my conversation with Erin was when she said that Exit Planning is simply good business strategy, the things it takes to exit a business Well, turns out, actually set us up to be successful and run a strong business today, business fundamentals will always be the right move. It doesn't mean complicated or way out there in left field kind of planning or strategies, fundamentals, basics. When we focus on those, when we lean into those, it helps us today and in the future. One step at a time is all it takes. And as a reminder, this episode is eligible for one continuing education unit from psi or naps, go to the link in the show notes, take that quiz and get your certificate and turn that in. Today, we want to thank today's sponsors, tying to pet and the peaceful petmusic, calm music for pets, YouTube channel, for making this show possible. And we really want to thank you so much for listening. We hope you have a wonderful rest of your week, and we'll be back again soon. You.
