Stephan Shipe Welcome back to the Scholar Wealth Podcast. This week we're dedicating the full episode to a conversation I had with Brandon Mendez, who joined us at the Scholar Wealth Podcast studio for a conversation about business ownership. Brandon is a professor of finance at the Darla Moore School of Business at the University of South Carolina, where he teaches corporate finance and investments. A U.S. Navy veteran, Brandon built real-world experience in financial services, auditing, and consulting before earning his PhD in finance from Florida State University and moving into academia. His research sits at the intersection of corporate finance, labor markets, and capital allocation. And right now, a big part of that work is focused on how demographic shifts are reshaping private business ownership and what that means for investors. That last piece is exactly what we dig into today. With so many business owners hitting retirement age at the same time, there's a wave of acquisitions happening and private equity is moving fast. We talk about how to think about multiples and what seller discretionary earnings actually hide, why PE firms have such a structural advantage over individual buyers, how AI is starting to change the talent calculus in acquisitions, and what the red flags look like when you're sitting across from a set of financial statements for the first time. If you've ever thought about buying a business, or own one and are thinking about what comes next, this one's for you. Stephan Shipe Today we're talking with Brandon Mendez. Speaker at our conference for multiple years now — two years. Brandon Mendez Two years now. Stephan Shipe And this year's discussion we were talking about buying businesses and this generational shift in business ownership. So I wanted to continue that with the podcast this week. So Brandon, welcome to the show. Brandon Mendez Thanks, Stephan. Thanks for having me. Stephan Shipe Before we get started — some viewers may know you from the conference and everything else — give us a little bit of background on what got you into the business world as opposed to the academic world where you've been as well. Brandon Mendez I would say I've always been interested in the business world. That's where I started in my career — corporate America, controller for a nonprofit, and then going into banking and doing internal audit from there. But what got me back into business inside of academia was I had done some consulting work while I was working on my doctorate and started being a professor at University of South Carolina. And I was like, there's gotta be an easier way than doing startups, because the miss rate is 90% — 10% succeed, 90% fail. It's like there's gotta be an easier way to do this. And that's when I came across buying businesses as the easier route — maybe arguably so — of getting into business and being successful from there. So just kind of sticking around the business community, talking to a lot of people, and then just trying to find the next avenue. Stephan Shipe Because the failure rate is massive. And one of the things we see all the time is when you look at wealth generation over time or ways to generate wealth, business ownership is one of the top ones. Right? It's one of the top options alongside equity and all of these different comparisons. But what is missed in that conversation is the failure rate is massive. And I'm always a fan of anytime you have that balance of risk and reward — business ownership is definitely in that range. What is the point where you see that success rate start to shift? Is it the first year? Is it three years? Is there a revenue level at which you start to see things get shaky? Brandon Mendez As far as the startup goes? Stephan Shipe Yeah. If we're trying to mitigate the risk of that 90% failure rate by buying a business as opposed to starting one from scratch, at what point does that risk curve start to shift where you say they've gotten past point X, which means their failure rate is lower — sufficient for me to say yes? Brandon Mendez I think the curve starts to tick up for survival after year two, but it's still fairly steep when you get to year five. So obviously revenue helps if you can start generating revenue as a startup. But if you can make it past year five, you generally have a somewhat sustainable business from a traditional startup perspective. I'm not talking about Amazon reselling businesses, I'm not talking about websites or blogs or stuff like that. If you're doing a traditional startup — whether it's in the tech space, manufacturing, or something like that — and you can get past year five, you're generally in the safe area. Stephan Shipe Do you think that's because at that point it's no longer... I'm glad you brought up the Amazon reseller businesses and everything, because you have this whole thing where everyone's got their own business, but really what they have is a job. They've purchased a job — and a very low-paying job from a numbers perspective on a per-hour basis. But it's still constrained to just them. And then you move to this whole area where at year five, especially if you're in any of these areas — tech, manufacturing — there's a team being built around it. Is that the reason you have more sustainability? Because at year one you have the big risk of does the idea even work? But then from year one to year five, there are plenty of businesses we know of — especially consulting-type businesses — where somebody is solo and still has a successful one-person business that can last for a very long time. But at year five, if you're growing, you're having to deal with other problems besides just the idea. So do you think that's the factor, or what makes year five different from year one? Brandon Mendez I think it depends on the business type. In the consulting space, that's where I was. A friend of mine started a consulting business and he had one contract to sub out for KPMG — they had a team already and I joined the team. And that one contract was great, it had revenue for sure, but it had the risk of: you only have one contract, and if that contract gets canceled or ends, you don't have a business anymore. So the idea from there, from the consulting space, is you need to get more contracts, and each contract has its term — a year, five years, whatever it is. That's how you scale in that space. I think the Amazon reseller space is a little bit different. There was a boom leading up to COVID, kind of a post-COVID boom. But what you saw was a massive amount of competition start to trickle into the reseller space and a lot of businesses that got stood up where the owner basically said, "I stood up a job for myself, but I can sell this in 12 to 18 months as long as I get revenue and can say it's — air quotes — sustainable." Like, 12 to 18 months of revenue though, are they really doing that well? But they had enough to say, okay, I can put together a set of financial statements and try to sell this business on to the next person. So you saw a boom in '21 to '23 of Amazon reseller businesses coming out: "Hey, I've been around for two, maybe three years, or even 18 months." Those were people who created a job for themselves, had a decent amount of revenue, and sold it on to the next person. Whether it was actually sustainable, I don't think has worked out very well. But there are consultants in the Amazon reseller space that will look at your business and say, "Hey, this is worth buying" or "it's not worth buying." So it's all situationally dependent. Stephan Shipe Yeah. And that's one of the things — I'm thinking back on the Amazon reseller thing, it was a wave right after I got through websites and selling websites and all of that. You had like the niche site craze, the early 2000s, just putting content out on the internet. And as long as you had a unique topic to put content out on, you could go. But the EBITDAs on that, the multiples, were essentially like maybe one year of revenue, and that was it. And they were essentially buying the recurring nature of the business lasting throughout one year. And then it fades. But what doesn't necessarily change too much on some of these other businesses is really interesting — and I want to ask you about the multiples that you're seeing. We're seeing this big wave of businesses being sold that have been around for a long time, but they're running into the same multiples issues — assuming a non-fast-growing business. Think of the retiring manufacturer that's been trucking along at GDP growth rates, maybe selling for one to three times revenue. Does that seem in the range that you're seeing right now? And if so, is part of the reason you're saying that's a much safer bet — if I can pay one times revenue for something that's been around for 30 years compared to one times revenue for something that's been around for 12 months? That seems like a no-brainer. Brandon Mendez Yeah. I think the multiples — and I'm still somewhat new to this, I've been looking at it for three to four years now — but it's one to three, and it depends on what your top-line revenue is and what you're doing. A SaaS company, software as a service, is a little bit different. AI is pushing on them right now. And everybody says SaaS is dead, but I tend to disagree with that depending on the space it's in. Manufacturing, landscaping — it just depends on the business type. In those spaces, it comes down to what top-line revenue is. If you're at a million, I think it's like one to three — usually about one and a half — because who wants to sell a company at 1X their revenue or 1X their EBITDA? As you scale though, what pushes the multiple is: if you get your EBITDA from, let's say, $150,000 on a million-dollar top-line company, that's not a lot of margin of safety. And if you're going to pay yourself that as a salary, that $150,000 — Stephan Shipe That's always the worry that comes up, right? Brandon Mendez is your salary. That's your take-home. We call it seller discretionary earnings. But you're risking whatever it is you're giving up to buy this business, and maybe you're going to make $150,000. Outside of that, it's like, okay, can I keep the business, sustain it, and grow it? So maybe the person running the business right now is making 150, and you sell it to me, and I'm paying one or one and a half X on this. Okay, I hope I can make 150. I'm probably optimistic, and I'm going to work for it. So I'm going to put all this time into buying the business, risk my capital or investor capital, whatever it is. Let's say I don't make 150. Let's say I make 100 — that's a tough pill to swallow. I just lost a good chunk of what I thought I was going to take home. What if you make zero? Your margin of safety from zero is only 150, and that's all supposed to go to your pocket anyway. So as you push up out of that range and you get to a $5 million top-line company bringing in $800,000 on the bottom line — where you see the multiples push up is, one, you have more revenue, and it should be fairly safe at that point. It's not a given, but you have the competition of it being $800,000 in bottom line. I can now compete: "If I lose it down to 500, it's still good." It's probably not going to go to zero, but even if it drops to 500 I'm still doing better than the 150. Stephan Shipe And operator cost as well, right? If you need to go replace your own role, $800,000 gives you a little bit of cushion to be able to do that. Brandon Mendez Yes. If you've ever looked at business listings, have you taken a look at any? Stephan Shipe Oh yeah. Brandon Mendez If you see the ones that are like a laundromat with $150,000 in seller discretionary earnings — what you don't see is that the person who owns the laundromat is there day in and day out, or having to show up maybe 20 hours a week to collect coins or repair the machines. Okay, if you don't live in that area and you buy the business, you have to put someone in. Or if you don't want to run it yourself, you have to put a manager in place and cut your earnings to pay that person. Stephan Shipe And that's a good example — the laundromat example. If I own a laundromat and I'm going 20 hours a week collecting coins, it's really difficult for me to go hire somebody whose only job is for 20 hours a week going and collecting coins and cleaning up the laundromat. It'd be a lot easier — for roughly the same amount of payroll — to have two laundromats and have that same person now covering both. But the problem ends up being you still have to find a good person to run all the laundromats. Brandon Mendez You're hitting on exactly the point I was thinking of. Am I going to hire somebody — just put out an ad and hire somebody — to go pick up cash? Not checks made out to my business. I'm asking them to go pick up cash and report 100% of that cash back to me. There's a lot of trust in that person, and if your bottom line isn't that big anyway, how much are they going to skim off the top? Stephan Shipe Yeah, they're usually collecting a bonus every couple of days. In quarters. Brandon Mendez Like, you skim 5% — will you even notice it as the owner? It's funny, I have a buddy from high school, family down in South Florida, and one of his cousins bought a laundromat. What came along with it is he had to go clean out the coins from the machines. So he pulls up in his Tesla and uses his Tesla charging cable bag as his sack to collect all these coins. And once a week he can't take too much vacation because he has to go collect all the coins out of the machine since he didn't have anybody else to pawn it off on. Stephan Shipe That's a mess. And that's where I see this big disconnect happening. Somebody comes in and says, "Well, I'm gonna start buying businesses, 'cause I think that'd be a lot of fun." It's exciting. I bought a business — yeah, it's fun, you can grow it. You have some sort of skill set that comes in beforehand from whatever job you're at. We see this a lot with managers who have done a really good job, whether they've owned a business before or have run businesses for a larger corporation, and they say, "This is my shot. I don't need to make the money anymore, so I can go buy the laundromat." And the problems are the same types of problems, but they're much narrower. You're still dealing with processes and operations, but not for a billion-dollar business — you're doing this for a $150,000 business. You still get to play a little bit. It's like playing Monopoly with this business — you get to tweak some things, maybe you buy an ad and do all of these things. But it always comes to the exact same bottleneck: they're still going to have to be the one running it. They end up buying a job. But then the other side of that is private equity is all over the place right now. It's unreal. And I don't know if you have updated numbers on any of that, but the number of businesses being bought out by private equity — I see it all the time — is these mom-and-pop businesses that have been run forever, that maybe didn't want to sell or had thought about selling or maybe handed the business on to kids. But now private equity comes in and says, "All we do is buy laundromats. And we're gonna buy yours." How does that shift happen from both the private equity side and why it's a good time now for private equity to be in that space? Brandon Mendez I'll go back to one thing before we hit on private equity, because that's a pretty long conversation. The laundromat is a certain type of problem. If you're going to go from working in management at a manufacturing company to now buying a laundromat, you're dealing with laundromat problems. If you think about the Monopoly board, you're not dealing with Park Place. Stephan Shipe You're stuck on Connecticut Avenue. Brandon Mendez Right. If you ever talk to business owners, people that have done this or own businesses, what they'll tell you is whatever type of business you have, the clientele determines the problems you're going to have. So you could have lower-end problems that come along with a laundromat, or you could buy an audio-visual company that only does systems in homes that are $2 million and up, and you have a much different problem and different clientele base. So what you buy is situationally dependent on the problems you're going to see and the demands your clients are going to have on you. The private equity conversation — every month now, you see a new private equity shop springing up, whether it's full-blown private equity that has raised a fund or it's a family office. What they have to do: there are only so many businesses for sale, especially if you look geographically. We want to buy a business in Winston-Salem, North Carolina. What kind of businesses can we buy? Maybe I want to buy a $10 million top-line business. Okay, there aren't that many there. So I push down to eight, down to seven, down to five. What you're starting to see is what PE is doing is a kind of portfolio arbitrage. If I can buy a $3 million business at a 3X multiple — as you scale the businesses, you get into higher multiples. So if I can get it up to 9X, I make a better multiple off the sale. Maybe I'm at 4X now. If I can get it to $10 million plus, maybe I can sell it for 6X. What you get from the private equity side is the realization that you have portfolio arbitrage: I can roll up, say, 10 businesses doing $5 million each top line, and now I have a portfolio that does $50 million. And where I rolled those businesses up at, let's say, a 3X, I can sell my portfolio now for an 8 to 10X. So you've seen a lot of roll-ups in that space, and then you see those middle-market private equity firms selling onto big private equity from there, because now they're big enough to sell for the big multiple and get their big payout. Stephan Shipe And I think that's an area that a lot of people misunderstand about why — because there's a little bit of angst about selling to a private equity firm. You talk to an owner and they want to sell to somebody local. The dream is you find some young entrepreneur that wants to be in the exact same business, walk in your shoes, and you're going to sell to them. You're going to be able to mentor them, they're going to magically have all the cash to buy your business, you're going to retire and sail off into the sunset, and they're going to run this business forever. And the reality is that person doesn't have the portfolio arbitrage benefit that these private equity firms have. They're not going to roll up five to ten businesses together. They're going to buy this one, so they're stuck with your $150,000 of earnings, and the multiple they're going to pay is probably close to that one to three. Private equity comes in and says, "We can buy this business tomorrow, show up with cash, buy it," and immediately roll it into this portfolio. Now it's safer because instead of one location, they have 50 locations. They can handle the cash flow needs. They're well-funded. There's even more stability going back to our concept of: they have operators in place, they have a cash management system, they have a process already built, and they can come in and offer you the top of the range — they can offer you 3X in cash without the headache. But you don't get the feel-good feeling of selling to the local kid in town who's looking to buy the business. Brandon Mendez The next me. Stephan Shipe Exactly. And those are hard to disentangle. We're starting to see more and more of these funds popping up, getting smaller, targeting smaller and smaller businesses — because the $10 to $20 million businesses already have private equity shops after them. So what do you tell the business owner who's trying to figure out: do I sell it one time to the kid down the street who's grown up sweeping the floors and now wants to own it, or do I sell tomorrow to a private equity shop that could buy it for three? Brandon Mendez I mean, that's a hard question, and I think it's dependent on the owner and what their feelings are. I think you'd be hard-pressed to talk to a client and say, "Hey, you should sell your business for 2X instead of 4X because of the feel-good factor," right? Because at the end of the day, the retirement funds are the retirement funds you get from the cash out. I can tell you in South Carolina what I tend to see is that most of the private equity shops are in New York, Chicago, Boston — up north. And the push is, "Hey, I set up this business in 1980 in South Carolina and I've run it for the last 40 years. It's been my baby. I've missed birthdays for it, I've missed little league games. My kids don't want to run it. I want to sell it off, but I don't want it to go to somebody sitting in New York." Basically, I don't want the value extracted from Columbia, South Carolina all the way up to New York City. Which is a big issue to think about. You could say the same thing with casinos — North Carolina has casinos now. But it comes down to the waiting game and what they're willing to take. So, private equity in New York is offering 4X, I don't want to sell to them today, but I need to find a buyer. I can go get a business broker to try and help me list the business and sell it. Maybe that's a one to two-year process if I can find somebody, but I'm probably going to give up a little bit more — probably not going to get the 4X, maybe I get 2X. It's whether or not they want to play the waiting game of getting out today as opposed to two years from now, along with the discount in valuation they're probably going to take. Situationally dependent on the person who owns the business. Do I want to hand my baby over to that private equity firm, or do I want to wait, take less money, and hand it over to that feel-good situation — I found another me and I'm giving them the opportunity to run what I created? Stephan Shipe And one of the comments that always comes back on that conversation — we're looking at the seller side, right, but the buyer has these exact same conversations. If you're trying to buy businesses, this is what's going through the seller's mind as you're trying to make a pitch that sounds better than the New York PE firm that's about to offer the business you want to buy twice as much as you're able to offer. And the one area that comes up regularly — and I think would be kind of the pitch to the independent buyer — if you're trying to make a good case for why the founder should sell to you as opposed to PE, it always comes back to the employees and the customers. What they don't want is: I own a business, I'm about to sell it, and my worst nightmare is that I sell it and everyone in town hates me because I just sold to somebody who got rid of all my employees and treats my customers horribly. All those relationships I built out over 40, 50 years since the 1980s — now one day they're gone. And I think that gets discounted when independent buyers are looking for businesses — how important that factor is in all of this. Because if the business has been successful, the odds of that business being needed for the classic retirement goal aren't there. The value has already been extracted in cash flow. If it truly is around retirement time, that cash flow need is not what's driving things. So while it seems like a big cut to take, and it is from a nominal value perspective, there's a lot of value in not having the risk of that business disappearing or just being sold for parts in that type of scenario. And that's one area where I'm a little concerned now, getting even broader with all the AI conversation. Because you're starting to see private equity firms — and I say private equity, it could be any kind of bigger buyer who has scale — looking at it and saying, "I could take that business and replace a lot of the processes and people with AI." Brandon Mendez Right. Stephan Shipe And that's going to be my path to increasing margin, and then I'm going to go sell it at not only a higher multiple, but a higher multiple on a higher margin. So that's a massive pitch right there. If I could take the laundromat and somehow automate it with AI or some of the processes, and go from earning $150,000 to $300,000 — not only am I earning twice as much, but my multiple is already going to be twice as much once I roll it up. There's a big pot of gold at the end of that rainbow. It's not a surprise that we're seeing so many of these funds being opened up, especially as more and more people retire. How do you see the AI revolution affecting both the talent side and more specifically the operator side — if I'm coming in and having to hire an operator to run this, what are you looking for now? Where does the talent picture shift? Brandon Mendez I'd say specifically on just buying the business — if I am me and I want to come buy your business, that's the start of the conversation. How are you beating out PE to get there? It's the standard everyday test that we all do, maybe without knowing it: would I get a beer with this person? That's the basic test. It goes to whether you want to be friends with them, whether you would want to work with them day in and day out. You kind of have the same test when it comes to buying the business. Would I get a beer with this person? That's the basic litmus test. If you can be likable to the point that you and the seller could sit down over a beer and just discuss business, you're off to a great start. From there, actually buying the business and the talent picture and what AI is bringing to bear today is much different. It depends on the business itself. A laundromat and putting AI into one laundromat — that's a hard example. Stephan Shipe We should have started with a better example at the beginning. Brandon Mendez Yeah. So let's take a more labor-intensive business — where you have front-office labor doing things like compliance and administrative work, and then there's back-office labor doing the accounting side. I think of AI like I talk about it in the classroom in terms of talent distribution. I think about labor and talent in the normal distribution curve — the bell curve where the mean is right down the center, you have the right tail which is the positive outliers, and the left tail which is the negative outliers. I think AI cuts that talent distribution in half. If you're in the left tail of talent, you can probably easily be replaced by AI. And what I'm talking about is doing the basic work — "Hey, I need to download bank statements, make sure they're put into our system, and then they go over to QuickBooks." I can generate an AI agent today that would do that for me, read my bank statement as it goes into QuickBooks, and maybe I can also generate an agent that replaces QuickBooks for me, because that's possible today. So now I've reduced the workflow for that person who was manually getting statements. Maybe they're active for one, maybe two weeks out of the month because they're really in the accounting phase. And then I can also start to replace the person dealing with reconciliation and matching out where my funds have gone. I hate to be doom and gloom, but I think AI is coming for those basic, basic jobs. What you have over the top though is: if that's first-order thinking — doing those basic redundant tasks — AI can take over that first-order thinking. Now your team needs to be able to do second and third-order thinking on top of what AI can do. I think you do have room for talent to still be there and work on the problems that AI can't solve yet, or get a more critical or creative answer than what AI would give you. Because we've all used AI at this point — the answers it gives you are pretty textbook, pretty basic. You have to know how to prompt it to get what you're really looking for. I think if that person already has that critical thinking inherently, they have the creativity about them, and they have some experience in the space — they don't need to prompt AI. They know what's coming next. So you can leave the token usage at home and just work with the employee at that point. Stephan Shipe Yeah. One of the things you brought up — and I think this kind of relates to the concept of especially with the QuickBooks and the labor cost — if someone's buying a business, they're looking at these types of scenarios, trying to run their own pro forma statements, trying to figure out: if I were to buy this, what would the new income statement look like, what would the new P&L look like with my expertise or with my changes for AI and all of this. Where are the bodies buried when it comes to financial statements? Because you mentioned seller discretionary expenses, and this is one that is brutal when you're looking at buying smaller businesses — and I use small lightly. Even up to the $10 to $20 million business, depending on what the margin looks like, seller discretionary expenses can be quite a number that gets thrown around. When you're looking at business listings, where do you immediately look for the red flags? The one we just said — salary for the owner — it always comes up. "Oh, well, my business makes $150,000." Well, how much did you pay yourself last year? Brandon Mendez Yeah. Stephan Shipe Right. Like, you personally made $150,000 but the business made zero last year. All right. What are the other things? What are the red flags that, even if somebody has started looking at listings and gets into an NDA and starts looking through some financials, you say, "Look here, this is where you're going to see some issues"? Brandon Mendez Again, situationally dependent by the business. Stephan Shipe Pick one. Let's go manufacturing — something more traditional with a mix of labor, technology, everything else. Brandon Mendez Okay. So if I didn't know what I know, I would go out and prompt AI and say, "Found this business in manufacturing." First question: what is the typical profit margin on furniture manufacturing? My guess is it's like 5 to 10% — it's not that high. Now that I have that piece of knowledge, I'm going to look at the business listing and say, "Okay, maybe they're doing top-line $10 million and they say they're doing $4 million in bottom line." That's a red flag immediately. Where are they coming from on the $4 million when I think it's supposed to be around 5 to 10%? That's $500,000 to a million. So you do have to sign the NDA to get the financials. You get the basic stuff that I gave you right now, but when you get the financials, they usually give you the income statement and then they'll give you the math to back into from EBITDA what seller discretionary earnings are — any add-backs the owner put back into the business to say, "Okay, it says we're at $500,000, but I added back another $500,000, so we're really at a million in seller discretionary earnings." That is the big trigger. If you see a massive amount of add-backs, that's a big one. I'll give you a funny scenario. When I worked in banking, we had an accountant move into internal audit with us, and he happened to do taxes on the side. One of the tax situations he came across — that we laughed about for a good while — was a business owner in a construction business who added back $35,000 for a boat motor. "Hey, I need this to come out. This is a business expense." It's like, "This is a $35,000 boat motor." And the response is, "Well, I take clients out on the boat, so it's definitely a business expense." So you get that kind of stuff, and if you don't know, you don't know it should've been taken out of the business. Maybe it is a legitimate expense and the boat motor needs to be replaced every five years and they don't tell you it needs to be replaced every five years. Another thing in the manufacturing space would be maintenance on the machines. Machines need maintenance consistently, just like your car or truck. A lot of what you'll see in those spaces, or at least what I've seen doing this with students in class and pulling out financial statements, is deferred maintenance. Usually they'll defer maintenance but not tell you there's deferred maintenance on the machine. "Hey, the machines need a $250,000 rebuild every year. That's an expense we have. Maybe I didn't do it this last year, so it didn't go into my trailing 12 months of financials. You buy my business, you're going to have $500,000 of expenses now for machine maintenance. And oh yeah, maybe one of the machines breaks a month after you bought the business." I've actually had business owners in my classroom talk about the business they bought where that was exactly the situation — bought a business and all the trucks went down a month later. It was a landscaping business. And every business owner I've talked to or had in my classroom will say: you will never know 100% of what that seller knows about their own business. You're walking in kind of blind. You do your due diligence, but if they're truly hiding something from you, you won't find out until after the fact, or maybe you don't find all the skeletons in the closet. Stephan Shipe Yeah. And that's always the hard part for me when I'm looking at businesses or talking to business owners — sometimes it's treated as malicious, like "they didn't tell me that." And a lot of times it's not the case. It's just they've owned the business for so long that it's just normal. They just assumed it was known, or they didn't think to mention it as something that needed to be disclosed. Brandon Mendez Right. Stephan Shipe So it's almost like buying a house. No matter what's disclosed, there's always going to be something that wasn't disclosed or wasn't there or breaks after you buy it. That's just part of it. The business aspect just means those can be a lot more expensive to fix really fast. Brandon Mendez Absolutely. One of the items that actually pops up in buying businesses is you've got to figure out who the important labor assets are. This one comes up quite a bit when we talk to business owners. "Okay, I'm going to go buy this business. Part of my diligence process is who is the important talent to keep in the organization?" And you try to keep them around either with incentives to stick around or maybe a contract to lock them up. Stephan Shipe And it can't be the owner. Brandon Mendez And it can't be the owner. Stephan Shipe Right. I mean, that's a huge problem. The founder-led or owner-led business — that's a huge risk for a buy. Brandon Mendez Absolutely. I mean, there was one owner who came and talked to my class. The original founder of the business had passed away. It was a manufacturing company, and the wife had been running it for about seven years from an hour away — only came in once a week. What the buyer found out in the diligence process is two of the employees were the sales team, and they had basically taken over. "If we didn't take over, none of us would have jobs anymore." So they were running it as a sales team. Okay, I need those two people to stick around just to keep the baseline of what I'm buying, and I can grow it from there — redo processes and so on. But his key identification was: I know the widow is not running the business. Who is actually running this business? And that's part of the diligence process. Stephan Shipe How do you keep those people? Are you going in with equity? Bonus structures? What would be the go-to if you were in that situation — and obviously it depends on the business type and all those factors, because that is a major issue. The people on the team also start to get nervous. If the owner who's always run everything is no longer there and a new owner comes in, that's a great time to be looking for another job. You see the retirement factor come up all the time — "Now that Johnny's gone, he always ran the business, treated me well. I think it's time, I'm just gonna retire." Brandon Mendez Exactly. I tend to be in the incentive and disincentive camp. I like the incentive structure. Percent of equity if you can do it — if it's an LLC, you're going to complicate your membership side of it. But profit sharing is super simple, and it should align them to your best interests. I would say profit sharing with those employees, and probably with the talent pool as a base, as a way to get them aligned to your side and then take the growth to another trajectory. So basically they feel like they own the business and want to do well. There's an excellent podcast — I'm going to butcher this one — it's Let's Buy a Business by Ryan Condie, I think. There's one episode I always put in my recommended reads on Blackboard for all of my classes. It's about an hour and a half long, about a guy who bought the business that he worked for at 52 years old, and the way he got all the employees on his side was he gave them all part of the profits. He said it basically got to the point where as the CEO, he didn't have to run the company anymore — the employees did. I think he said he found, while walking around in the manufacturing shop, a $50,000 check sitting on top of a toolbox. It was a business check. And he asked, "Hey, what is this?" And the guy said, "Sir, don't worry about that. This is a deal we shouldn't have done. We're already taking care of it ourselves." Basically: "This didn't go into our bonus pool and it never should've been done as an employee base. We've got it handled." Stephan Shipe So I think of when I think of owning businesses and buying into businesses and keeping the talent on my side — to work together, get in the boat and row in the same direction as me — incentivizing them like that where they feel like they own the boat. Stephan Shipe Yeah, especially coming in fresh, right? There's no goodwill that you've built up over time to know that they're going to be taken care of. Brandon Mendez Exactly. I mean, there's a Louisiana case — it's very recent, in the last six months. Do you know this one? Stephan Shipe Yes. Yeah. Brandon Mendez It's like a Louisiana food company. So the basic facts are it's like a Louisiana manufacturing or food company. Been family-owned for 50-plus years. And the current generation decided to finally sell the business, and part of the deal they had a $10 to $20 million payout to all the employees — where the employees got cut checks of like $150,000 to $350,000. Life-altering money for them in Louisiana. And that's part of "hey, how do we keep people on our side or reward them for doing the things that let's get to this point." Stephan Shipe So what's funny about that — when I saw that story, my worry was there's another case that was always taught in business school, and this one I know none of the details to other than there was a similar case where somebody bought the business, the owner had paid out all the employees, and then they all quit. They all retired. And that was the case I thought of when I saw the Louisiana scenario. The risk is you write this big of a check to all of the employees — how worried was the buyer coming in saying, "Wait a minute. You want to do the opposite of what we just talked about from an incentive structure. You're just going to go give all of our employees a bunch of money and hope that money isn't enough for them to say, 'Well, now I'm gonna go do something else.'" Right. It makes perfect sense from the seller's perspective, but that's a good example of that difference — what the goals are from an incentive perspective. Because the buyer's trying to incentivize everyone to stay. The seller's trying to make sure everyone gets a ton of value for working there all those years. Brandon Mendez No, I had the same exact thought. But it's an opportunity, right? If you're the buyer — okay, if these people are going to retire, maybe this clears the way for me to take over and do some efficiencies with AI and otherwise. Stephan Shipe Ooh, that'd be smooth if that was the plan. Because that's where you get the buyouts. We're seeing this now with a lot of the tech companies. If you want to leave, great. We'll let you leave. We'll pay you three months. Please leave. Brandon Mendez Absolutely. So you have that, or if you know you're going to have a brain drain — "Hey, I'll give you a little bit extra in your retirement fund. Just stick around for me for six months to a year." You contribute on top of that, and then you can go. So you're going to get the reduction in labor force maybe that you're looking for as the new buyer, but you get the opportunity to extract the knowledge from them before they take off. Just depends on where that employee falls on the talent curve for you. Stephan Shipe Super interesting. I think this is — I mean, I could talk incentive structures all day long trying to figure out how that all works. But I think anyone looking to buy a business, hopefully this gives a little bit more insight into all these different dynamics that go beyond what's the multiple and how do I use it, and ways to leverage AI in that process. Brandon Mendez Absolutely. Any of the business owners I've talked to will say, "I'll let the buyer pick the price." Stephan Shipe I can pick the deal structure. Brandon Mendez Right? So everybody wants to fixate on price when buying a business, but deal structure matters quite a bit. And getting creative — if I could say anything, everything I've learned from the people I've talked to and had in my class is: deal structure matters. Get creative. Get creative, get creative, get creative. And get creative in finding a business to buy. If you're seeing it on the internet, everybody else is seeing it. Maybe you're the guy that's pedaling around Columbia, South Carolina on a bike with a shirt that says, "I want to buy your business, and here's my phone number." I've heard that on a podcast — somebody did that. It came out of Harvard or from the My First Million podcast. Her name is Sarah Mora. That's what she did to buy a business. Stephan Shipe It's getting harder. Competition's getting out there to buy. Brandon Mendez But there's opportunity. Stephan Shipe Yep. Brandon Mendez There's always opportunity. Stephan Shipe Perfect. Well, thank you so much, Brandon. Thanks for coming on. Brandon Mendez Yeah, thanks for having me. It's been great. Stephan Shipe That's our show. Thanks for listening, and we'll see you next week.