Successful Post-Exit Entrepreneur Ivan Zakharenkov Reveals How To Think Like A Buyer And Increase Your Enterprise Value (#70)

[00:00:05] Jeffrey Feldberg: Welcome to the Sell My Business Podcast. I'm your host Jeffrey Feldberg.

[00:00:10] Jeffrey Feldberg: Are you thinking about an exit or liquidity event?

[00:00:13] Jeffrey Feldberg: This podcast is designed to help you increase the value of your business, and at the same time, give you the certainty to capture the maximum value in your liquidity event.

[00:00:25] Jeffrey Feldberg: At the heart of the Deep Wealth Experience is the nine-step roadmap of preparation. Learn and master the same strategies that had me say no to a seven-figure offer, and a short time later, say yes to a nine-figure offer. In the words of a business owner who went through the system, "the Deep Wealth Experience was hands down, the best program I've ever participated in."

[00:00:50] Jeffrey Feldberg: To learn more about the 90-day Deep Wealth Experience, please visit www.deepwealth.com/success.

[00:01:00] Jeffrey Feldberg: Welcome to episode 70 of The Sell My Business Podcast.

[00:01:05] Jeffrey Feldberg: Dr. Ivan Zakharenkov is a veterinarian, an entrepreneur, and a passionate advocate for the wellbeing of veterinary professionals. Twelve years as an ER vet inspired Ivan to create Smart Flow. A first in the industry workflow optimization system later acquired by Fortune 500 company IDEXX.

[00:01:27] Jeffrey Feldberg: In 2019, Ivan founded Veterinary Integration Solutions an executive consulting firm where he helped veterinary groups systematize acquisition, integration, and improvement of practices with special attention to burnout prevention.

[00:01:45] Jeffrey Feldberg: Along the way Ivan obtained an MBA degree in international health care management with a thesis in "implementation of lean thinking to improve the employee experience." Pursuing his goal to make a sizable impact on the veterinary profession, Dr. Zak took the lead in Galaxy Vets, a new veterinary healthcare system co-owned by its employees with burnout prevention as a strategic priority.

[00:02:12] Jeffrey Feldberg: Ivan, welcome to the Sell My Business Podcast.

[00:02:14] Jeffrey Feldberg: It's an absolute pleasure to have you with us and for our listeners, hang onto your hats. You're in for a real treat today because Ivan is going to help us decode the world of a buyer. He has extensive experience in this, we're going to hear the ins and outs of what your future buyer is hoping that you're going to do and is looking for and how to really maximize your liquidity event and make sure that it's the absolute best for you.

[00:02:40] Jeffrey Feldberg: But one thing at a time, Ivan. I would love to hear the story behind the story. How did you get to where you are today?

[00:02:47] Ivan Zakharenkov: Hi Jeffrey. Thanks for having me. It's quite a glorious introduction. I'll try to justify it maybe. So, my background I'm originally from Ukraine. Came to Canada about 20 years ago. I have a background as a veterinarian which I got my veterinary degree from Atlantic Veterinary College in PEI, Canada.

[00:03:05] Ivan Zakharenkov: The first sort of serious step into running a business was right after vet school. I had an unusual experience. Instead of going to work as a veterinarian straight after school, I went to Russia to learn how to do surgery.

[00:03:19] Ivan Zakharenkov: And while I was doing that for three weeks as an international experience, I realized that they don't have a diagnostic lab for pets in Moscow. So, I came back, I had a job lined up in British Columbia, wanted to learn more about diagnostic imaging, advanced my veterinary career. And then just mentioned to someone that there's no diagnostic lab in Moscow.

[00:03:40] Ivan Zakharenkov: And someone said, do you want to build one?. And so I said, why not? And I went to Russia and built the first veterinary lab in Russian Federation. That was an interesting experience. And then they came back to Canada and continued with my veterinary career.

[00:03:54] Ivan Zakharenkov: And I worked as an emergency vet for about 12 years and was exposed to many hospitals.

[00:04:00] Ivan Zakharenkov: I worked as a relief veterinarian in emergency. And I noticed certain inefficiencies in the workflow. They were really annoying to me. So, I came up with an idea to optimize workflow. And partnered up with a high school classmate of mine with whom we decided to build a software application, and we ended up building a software product that was optimizing workflow in the veterinary clinics and starting from the garage or if you will, the little bachelor apartment in Toronto, it grew to be a software that we distributed to 600 hospitals globally. Australia and New Zealand, Africa, Europe, US, Canada. And in 2018, we ended up selling this to a Fortune 500 company called IDEXX. They're in Portland, Maine.

[00:04:49] Ivan Zakharenkov: This is the biggest diagnostic company I think in the world, in the veterinary domain. And I ended up becoming a general manager of their software division. I stayed in the veterinary domain, but I shifted to completely to do software. And along the way, I realized some deficiencies in my business background.

[00:05:09] Ivan Zakharenkov: We don't get much of that while in vet school. And I ended up doing an MBA with a focus on business methodologies in the healthcare industry. So, it was my specialty was in healthcare management. A year later I came out of that company. Couldn't do the corporate and decided to build a new initiative, which focuses on helping consolidators or roll-ups as they call them to acquire veterinary hospitals while preserving the experience of the seller. So, basically focusing on the veterinarians but building the large enterprise that merges anywhere from 20 to 50 to a couple of hundred hospitals. And that's what I'm pretty much busy day to day these days.

[00:05:53] Jeffrey Feldberg: Wow, Ivan that's an amazing story. I can't help myself. I mean after all this is the Sell My Business Podcast. Let me just quickly ask you for your exit for your liquidity event firstly, congratulations on that. Good for you. When you look back to that, Ivan, if you could go back to the younger Ivan, who's going through that liquidity event on the positive side, what worked really well for you?

[00:06:18] Jeffrey Feldberg: What would be a few things that you would even do more of in terms of strategies or approaches or tactics on your liquidity event?

[00:06:26] Ivan Zakharenkov: I learned at some point about I don't know if you've heard of the Montessori Kids’ education. This is a very early school when kids are learning by doing, and I compare my MBA degree with that Doubling up on hours and working, I think 26 hours a day plus studying was probably the best choice because everything I learned in the MBA course, I applied immediately to the business.

[00:06:54] Ivan Zakharenkov: We didn't have a product that resonated with the market just because it was, I don't know, maybe it was luck. Maybe we just had domain expertise, but the business aspect of it was difficult. When it came down to selling the company, we had dinner with the CEO of the acquirer of the buyer.

[00:07:10] Ivan Zakharenkov: And I know the figure that they had in mind for acquisition and after the conversation and everything that we had from the business structure I know that number went up by 40%, approximately just from one conversation because what I was able to apply from business school directly to my business.

[00:07:28] Ivan Zakharenkov: So, I think that the best part that I can think of is jumping in and learning something while you're doing the business, even though it feels like crazy. I think that's probably the best advice I could give to anybody. And I'm doing that again. I'm doing another leadership course at Stanford right now, as I'm building this new software company.

[00:07:48] Jeffrey Feldberg: Congratulations. That is terrific. I just love how you were able to increase 40% from the start of the conversation to the end of the conversation with your future buyer. And so Ivan, let me look back and ask this question in regards to your liquidity event. Nothing's ever perfect things always happen.

[00:08:07] Jeffrey Feldberg: Were there a few things that you would do differently knowing what you know today that you would pass along and share to our community, of a heads up of what to look out for in liquidity event?

[00:08:17] Ivan Zakharenkov: I think that it's important to understand the actual synergies that the company's looking for post-acquisition, because if those are not aligned with your vision, for the founders, of course, it's a great event.

[00:08:30] Ivan Zakharenkov: It's becoming wealthy, it's executing on some sort of, projects, dreams, and things like that. But then if you're planning to stay in the business and continue working with the business within the structure of the new organization, you need to really understand that the synergies that they're expecting post-acquisition and the incentives are aligned with the plan because McKenzie claims that up to 75% of acquisitions fail. They were looking probably at the numbers right after the acquisition. But it's probably not that percentage, but there's a lot of synergies that are not executed. So, aligning this energy's pre-acquisition and incorporating it into the integration plan, I think is very important.

[00:09:07] Jeffrey Feldberg: And what's interesting. And for our listeners, I hope you're paying close attention because Ivan what you've done, not just in this one instance, but as you're sharing your story, this is what we would call step two in the Deep Wealth Experience, the nine-step roadmap. X-Factors to insanely increase your enterprise value.

[00:09:27] Jeffrey Feldberg: You were doing it selfishly for yourself, which later turned out to be the best thing. You found, as you said, inefficiencies, you found problems. In other words, you found a problem. It drove you nuts and you said, hey, I'm going to be the one to solve it. It's going to help me. It'll make my life better.

[00:09:42] Jeffrey Feldberg: But that problem that you solved each time turned out to be a huge win for your business for the marketplace for your future buyer. So, your ability to find a problem and solve it, what we at Deep Wealth call it's a blue ocean. You created a blue ocean for yourself. You're unique in doing that, worked really well for you.

[00:10:02] Jeffrey Feldberg: And then you got on the radar and were able to do some wonderful things in terms of monetizing that solution and that blue ocean. So, congratulations. What's interesting Ivan is where do you sit right now today with your experience both on the software side and the private equity side of all these different roll-ups.

[00:10:22] Jeffrey Feldberg: What are some of the things when you're analyzing a business that a business owner if they did this, it would work to their advantage.

[00:10:29] Jeffrey Feldberg: It would just make their value increase. It would make the deal easier. What would be a few things that come to mind for that?

[00:10:35] Ivan Zakharenkov: I think it's exactly the same thing as on the seller side, what are the thesis of the buyer? What are they trying to execute on? The buyer usually acquires businesses to increase the shareholder value. So, when this acquisition happens, it's not to make the seller wealthy.

[00:10:53] Ivan Zakharenkov: It's not their goal. So, they're looking for some sort of, again, synergies post-acquisition to execute on them. Owner of the business, if you're selling it, I think understanding what is going to be the performance that they're looking for, whether it's locked into the seller or into the business, especially if there are holdbacks and things like that in the deal. That you have hit certain KPIs and certain numbers, you really need to understand how do you reach those and how do you get to those achievements that are outlined in the deal itself?

[00:11:21] Jeffrey Feldberg: You said a couple of things, and one is finding the synergy for the buyer in terms of what you're doing. And then you also said to know what the thesis of the buyer is. So, if I'm a business owner and I'm now going down the path of a liquidity event at Deep Wealth, we always recommend this may drive you nuts as a buyer, Ivan, but we always recommend an auction where you can have multiple buyers at the table.

[00:11:47] Jeffrey Feldberg: Maybe it doesn't work out for one particular buyer. You have another group of buyers that you can go to. It also helps with the enterprise value, but what can I do as a business owner Ivan to find out your thesis to make sure that the meeting is a terrific use of your time and give you a comfort level and help me create a narrative that resonates with you.

[00:12:07] Ivan Zakharenkov: Well, hopefully, the buyer outlines prior to the meeting or at least if you can find them from what the company does. We probably are covering here in multiple verticals and with the audience, but, in our specific vertical, when they acquire or the roll-up of the veterinary practices, post-acquisition we want to make your life easy and we want to take care of the back office. So, we want to do marketing for your inventory management, and we want to help you with talent acquisition. And then we're creating a joint venture by keeping you with some interest. that's the partnership model that they have.

[00:12:42] Ivan Zakharenkov: So, understanding the most common partnership models that you walk into and as a seller understanding, do you want a full liquidity event? Do you want a partial liquidity event? Do you want to retire? Do you want to work for another 10 years? So, sometimes the acquirer doesn't have to buy a hundred percent of the business.

[00:12:59] Ivan Zakharenkov: Let's say they're buying 60 or 70 or 80 percent. And then you want to prepare for these scenarios and know what those partnership models are. And then understanding what is the times for their money and how long they're going to spend on buying these businesses.

[00:13:15] Ivan Zakharenkov: In a roll-up world it's a short sort of three to five window for private equity unless you're selling to a large family. Fund and knowing that you need to be prepared that if your plan is to work for the next 10 years and the private equity that's funding this business in five years wants to sell. Then regardless of what they're telling you right now, that's going to change in five years or three years. So, you need to understand that there's going to be that change. You need to be able to maintain what you signed up for in order to create your wealth and in order to execute on your retirement planning. Because usually if you're selling a part of the business you need to understand what's going to happen with the equity that you roll into the business, or how is it going to multiply?

[00:13:58] Ivan Zakharenkov: So, there are all these details about how are you planning to increase the value of your assets if you're selling fully or partially.

[00:14:06] Jeffrey Feldberg: And so, it's interesting. Then when you're looking at, in this case, a veterinary clinic, as an example. How does a business that's independent or a business that depends on the founder, what does that look like for you? And how does that change a potential deal?

[00:14:21] Ivan Zakharenkov: So, as an acquirer it's very important because again, depending on how you're buying the business. If you're looking at the business where there was one provider, let's say it's a bit generic link and there's one veterinarian or there's two, but one is really driving that revenue and what we call them sort of unicorns.

[00:14:38] Ivan Zakharenkov: Then if that's the person who is getting liquidity event, you need to assume that person is going to be probably less motivated after the liquidity event. So, you need to account for that or you need to lock the incentives in the way that they, the seller is still interested in high-performance and production post-acquisition.

[00:14:58] Ivan Zakharenkov: So, you need to make sure that your KPIs that you put on the practice as well as onto the entire network help them to execute on what you've put in that agreement. And I think that a lot of veterinarians don't understand that. Talking about what KPIs the buyer is measuring their organization on is important.

[00:15:18] Ivan Zakharenkov: And some organizations, especially in the veterinarian domain, that's why our business exists right now. We help them to build those KPIs because a lot of them measure just the finance. And even if it's just the finance, what do they measure? How do they measure success? Because if your strength is in, not what they think is the strength of their organization, maybe that's not a match.

[00:15:38] Ivan Zakharenkov: So, you need to understand that if your strengths matches what they value then there's a match.

[00:15:44] Jeffrey Feldberg: And Ivan for our listeners who are hearing the word KPI and maybe they don't know that means a key performance indicator, what would be an example of a few key performance indicators that you're looking for in a veterinary clinic and for our listeners, you're not running a veterinary clinic listen anyways because you can take from here and you can apply it to your business.

[00:16:04] Jeffrey Feldberg: And if you are running a veterinary clinic bonus, here's a great insight into what you should be doing. What would be some of the main KPIs, Ivan, that you look for and why that's important to you as a potential acquirer?

[00:16:18] Ivan Zakharenkov: I think some of these would be universal across multiple business verticals. What's interesting is when you're measuring the productivity of the clinic or business it is potentially different from what you're measuring as the contributor within the clinic.

[00:16:36] Ivan Zakharenkov: And I'm going to parse that a little bit. If I'm a clinic, what is important to me is EBITDA. My earnings before taxes, depreciation, and amortization. That is how the business is valued usually for sale, at least in the veterinarian vertical. And the multiple is based on.

[00:16:52] Ivan Zakharenkov: And in order to arrive to that number you need all of your revenues and you need all your expenses, and then you understand what your profit is. And then you arrive to the EBITDA and that's the multiple that you will have. But if you have people in the organization like associates, that are not owners, they're driving the sales part of things, they're driving the revenue.

[00:17:13] Ivan Zakharenkov: And the most common KPIs in the veterinary domain that people measure is average check transaction. So, how much money you bring per check on average. And what I see a lot, and this is what we deal with all the time is that veterinarians don't understand the conversation. When you talk to them, your average check transaction is low because when you deal with healthcare if I have a coughing patient coming in, or I have a patient that's coming in, hit by a car, it's a vastly different health scenario. And I can lift the average between the two is basically what you're presented with. You do your best to treat the patient. And I think that's the main disconnect in our domain is because veterinarians perceive their success based on the health outcomes.

[00:17:58] Ivan Zakharenkov: And then business looks at it as the numbers produced. So, what is important is that KPIs are presented to the people that generate revenue in the way that they understand. So, common KPIs, average check transaction. if you're looking at the business, your cogs, so the cost of goods sold should be a certain percentage.

[00:18:18] Ivan Zakharenkov: In the veterinary domain, it's around 20%. And if it's too high, you need to shrink your inventory. So, there's a lot of instruments that you can apply, but basically, you need to widen the gap between there, the top line and the expenses. And then that's your EBITDA that you will get the multiple on. But then again, if you get to the level of the producer, you need to only think about what services they provide and maybe set goals for them to push on the services that bring most of the profits.

[00:18:46] Jeffrey Feldberg: What's really interesting when you start looking at key performance indicators and whether you're running and you own a veterinarian clinic or you're in a manufacturing business, or you have a high-tech company. I would say most business owners aren't measuring enough and they just don't have KPIs.

[00:19:04] Jeffrey Feldberg: So, it's the old adage of what gets measured is what gets done. And for all you business owners out there, when you put metrics in place now you have a measuring stick. How do we do today? How did we do this week, this quarter, this month? How do we do now versus this time last year? And you start to see patterns and trends and Ivan to your point if the average total amounts charged per sale is going down well, why?

[00:19:30] Jeffrey Feldberg: What's happening? Or if it's going to up what are we doing that's going up, but how do we do more of that? How do we do less of that? And so, I think it's just a terrific way of really optimizing your business. Particularly if you're going to have a liquidity event, that's terrific. But at the same time, you want to have a thriving business either way.

[00:19:49] Jeffrey Feldberg: As I like to say, what's wrong with having a thriving and profitable business that you can keep forever, or you can sell it tomorrow. Both choices are terrific. Put yourself in a situation where you can do both. And so, Ivan, what I also heard you say, and maybe we can do a little bit of a deep dive on this.

[00:20:06] Jeffrey Feldberg: When private equity is looking to go in and let's say, do an outright purchase on a veterinarian clinic. If it's a one-person shop, as opposed to a veterinary clinic that has multiple vets that are there is not dependent on the founder of the founder, took a year of vacation. It wouldn't make a difference.

[00:20:25] Jeffrey Feldberg: I would imagine that your valuation is going to be very different between the two scenarios. Can you talk to us about the thinking that goes behind that and what the thought process and the strategy is at that point?

[00:20:37] Ivan Zakharenkov: It's certainly mitigating risk. I think when private equity invests capital into such a thing as roll-up, they already ran their risk profile. And then within that portfolio, they know that there will be certain practices acquired, but then the executive team that runs consolidation, they need to really understand that risk profile of the private equity that they are funded by. The risk of losing a unicorn producer that is the only producer that's just, that's just tanking the business. The risk of having someone take time and vacation, I think is not that big, just like you outline. I think it's a matter of really understanding what type of risk you're willing to take.

[00:21:20] Ivan Zakharenkov: The valuation in our vertical is hard to say to a veterinarian that is, high producer, the practice is profitable and then say, but you're going to get less multiple because you're just one guy. Today the market is so frothy in the veterinary domain that I think it's basically just a comfort level of the organization how much risk they want to take on. But they wouldn't change the valuation much. In other verticals. I can see how that could play a role in the multiples.

[00:21:45] Jeffrey Feldberg: And if the valuation isn't changing, you had referenced earlier, is this where you might have the dreaded earn-out or perhaps a higher escrow or other kinds of mechanisms to account for that risk factor?

[00:21:58] Ivan Zakharenkov: Exactly. So, you would incorporate into a deal, which is, one way you can look at it and say the dreaded earnout. The other way to look at it. The glass half full person then yay. There's a mechanism for how I can sell the practice where I'm one practitioner. I just have an earn-out.

[00:22:14] Ivan Zakharenkov: So, you know, that's maybe another way to look at it and to say yes, there are mechanisms don't accept, lower valuation curve, be creative with how do you structure the deal. So, you can still capitalize on the full value of your business.

[00:22:27] Jeffrey Feldberg: I think we could have a whole separate podcast on an earnout but the big takeaway here, and this is not just for veterinary clinics and I love your term that unicorn producer.

[00:22:37] Jeffrey Feldberg: Hey, business. owners out there. If you are the unicorn in your business, you have a problem. You have a big problem. Go and build out a management team, let your management team be your unicorn in the business. It frees you up. It gives you more options. And I would say it can even give you a higher valuation when your business runs without you. And talk to us about that Ivan. So, when you're walking into a veterinarian clinic and there was just a strong management team.

[00:23:05] Jeffrey Feldberg: They've been in the seat for a number of years. They have a proven track record. Does that change your thinking at all in terms of doing the deal, not doing the deal or even not make a difference at all?

[00:23:16] Ivan Zakharenkov: The veterinary businesses, unfortunately, are rarely, at least the smaller practices are rarely well-structured on the management side of things. If you're talking one, two operators, veterinarians, then you know, they would have the customer support people. They will have a customer success front desk.

[00:23:34] Ivan Zakharenkov: They would have some technicians or nurses and they would maybe have a practice manager. If you're talking about bigger practices multi-specialty hospitals, they usually have an infrastructure and it's more comfortable acquiring those because other than sourcing specialists it's a business where there are people while they are leaving, they could be replaced. It's not again, hanging on one person. So, in the veterinary domain, unfortunately, these smaller businesses usually don't have that management structure, but if you have one it's more comforting, but again, the challenge in the veterinary domain right now is that we have too many pets and not enough vets.

[00:24:09] Ivan Zakharenkov: And that's what we're facing every day. Which to me, I have recently changed sort of the way I talk about acquisitions in the veterinary domain. And this is our head of sales at Veterinary Integration Solutions. . He said, look, I'm looking at the acquisition of veterinary businesses not anymore as you're buying an asset or a business, it's an acqui-hire because we don't have enough professionals to drive revenue. So, you're buying the practice with people in it. So, the focus should be on preserving those people’s experiences. And then focusing on that is more important than actually the business itself.

[00:24:42] Jeffrey Feldberg: I'd love to circle back and talk about the market conditions. Before we do that, though, Ivan, I would love to get your input on this, and here's the question for you. When you're going through the due diligence for a business or when the private equity is doing the due diligence on the business.

[00:24:59] Jeffrey Feldberg: I would imagine that on the downside, on the negative side, there are just certain things that are happening that just aren't good for the deal. It either takes longer to happen, or you have to put more provisions in place to protect the acquisition or the infusion of capital. What are some of the common mistakes that you're seeing out there that you can share with our community of things not to do?

[00:25:20] Ivan Zakharenkov: So, what we see a lot is that veterinarians don't want to upgrade their systems. They don't want to buy new equipment. They're saying I'm selling the business anyway. I don't want to invest into it. When the private equity evaluates the veterinary hospital for sale, they need to account for all the capital expenses that they'll have to infuse post-acquisition to the business to develop it.

[00:25:40] Ivan Zakharenkov: Not being all caught up on all the vacation pay, the pension funds and everything else, that sort of those soft things that people didn't demand for a long time. And then they accumulated a bunch of vacations. All of that will go into the negative side of the valuation of the deal.

[00:25:56] Ivan Zakharenkov: So, those things should be maintained and I think it's a good practice to hire either a coach or financial people and what you do Jeffrey to help you to shape the business towards that event to watch for these sorts of pitfalls. You are building your business for 10, 20 years, and this is your asset for retirement.

[00:26:16] Ivan Zakharenkov: And then all of a sudden, we've seen it many times when veterinarians think, oh, I'm going to get, this and that amount. And then when you do the finances for the last three years, you understand that your business is not worth as much as you thought. If you did certain things right for the last three to five years before you sell.

[00:26:31] Jeffrey Feldberg: You can pay me now, or you can pay me later, but you're going to pay. And business owners, in general, don't hold back on keeping your infrastructure up to date and making sure that you're current, because either one of two things is going to happen for your liquidity event.

[00:26:47] Jeffrey Feldberg: If you've put the money in, you've invested it, you'll spend less money doing it your way. You'll negotiate a better deal than a private equity group. We just got to get it done. Let's just go. So, you're actually saving yourself, time, money, and effort down the road.

[00:27:01] Jeffrey Feldberg: You removed a skeleton as we like to say at Deep Wealth, one of those skeletons in the closet. You've found that you removed it. And Ivan I think that's terrific advice of keep current with the business. Don't hold back. Don't scrimp. It's better for you is better for your future acquirer.

[00:27:15] Jeffrey Feldberg: It's just a good news story for everyone all around. Are there any catastrophic mistakes that you see businesses make that have you say, we knew there might be a few hiccups along the way, but wow. This is just so off the range here. We're just not even going to do it

[00:27:31] Ivan Zakharenkov: I've seen worse. I've seen the deal happen and that was returned.

[00:27:34] Ivan Zakharenkov: One of the biggest challenges I've seen as, too many skeletons in the closet. Having gone through due diligence myself, as much as it's an unpleasant process I wish I had done upfront and more things that I didn't have to tie the loose ends during the process. Because every time you dig up something that you forgot about, for a year or two or something else, then you have to fix it in a very short period of time because you signed some sort of a letter of intent that you have to, close up the deal. And then when things are discovered during the due diligence that you have to fix very quickly the buyer has an opportunity to renegotiate the deal.

[00:28:12] Ivan Zakharenkov: Every time you find something that may decrease the value of your business or risk the investment that they're doing, then they probably will leverage that to lower the valuation. So, fixing everything upfront. And then also culture. And that's what I've seen a couple of times in the veterinary domain there were acquired and then it turns out that the things are not just not okay in there, but there are some relationships going on.

[00:28:36] Ivan Zakharenkov: There was a husband and wife and then-wife was cheating on her husband was someone in the hospital. Like the culture that they bought into was just it just fell apart. As soon as they bought it and people were, just not happy working there. So, it's one of the hardest things to do and most often ignored thing is the cultural diligence.

[00:28:56] Ivan Zakharenkov: But I think that they're doing the due diligence on the culture of the acquired business is very important. And if you don't get it right, and you buy a business where it is just everybody unhappy, to begin with and they're burned out, which is very common in our domain then you're in trouble. Because you'll have to replace, hire new people immediately out of the gate. You just bought, group of people that don't want to work together.

[00:29:16] Jeffrey Feldberg: Words to the wise. And what you're saying, Ivan really resonates with us in the Deep Wealth community. Good preparation does two things. Number one, it helps you find and remove the skeletons in the closet.

[00:29:31] Jeffrey Feldberg: And then number two, every business is world-class in at least one area. Usually, it's more. And we call those areas that you're world-class in those are the hidden Rembrandts in the attic where you can identify what you're world-class in. So, you find your Rembrandt and now you put it out for public display.

[00:29:48] Jeffrey Feldberg: From your perspective as a future acquirer if you're walking into a business. They've already performed an internal due diligence audit on themselves. They remove the skeletons. They are letting you know what those Rembrandts are.

[00:30:00] Jeffrey Feldberg: When you see that kind of preparation, they have their own data room everything's already been done. It gives you a level of confidence, not only to do the deal, but perhaps to revisit the enterprise value in a good way of, okay I know we're thinking about this, but look at all these new things that we learned, perhaps the business is worth more. I would love your take on that.

[00:30:20] Ivan Zakharenkov: Going back to my experience with our company acquisition, I think that's what happened. We were able to display things that we prepared in the last couple of years and restructured our management. We had layers of management, we had KPIs going up and down the organization, and a balanced scorecard.

[00:30:35] Ivan Zakharenkov: We had a very well-structured org chart and I think that's what helped us to increase the value of the company. You know, in the veterinary business, it's doing things in advance like an appraisal of your real estate, because usually the businesses are sold with, or without the property and things like a general preparation. I certainly experienced through our exits that those things can change your valuation overnight, which is literally what happened with us.

[00:31:01] Jeffrey Feldberg: Which is terrific. And then when you have that, I'll call it a culture of preparation. And this ties back to your comments earlier Ivan on culture. I like to say that money can buy lots of things, but it cannot buy culture. Your competition can use its capital to copy your technology, to copy your marketing, copy everything, but they can't copy your culture.

[00:31:22] Jeffrey Feldberg: And when you're having a liquidity event, a rich culture really stands out. Makes you different. Would you feel that a healthy culture with KPIs that are part of it and measuring those metrics and looking for those blue oceans and growing, how does that affect you as a buyer?

[00:31:40] Ivan Zakharenkov: It's interesting. I changed my view on the culture a little bit recently. I took an M&A course at Harvard. They were talking about, a lot of times people think about the culture is just core values, mission, vision and things like, which are extremely important.

[00:31:55] Ivan Zakharenkov: And you need to understand if they align because one of the six triggers of burnout is misalignment on core values. But the way they define it, however, the culture is also, how do you get things done? What are the processes? And I thought that those were not the culture piece, but how do you get things done here?

[00:32:12] Ivan Zakharenkov: And does it align with the way we do things? What is normal? What is abnormal? What would surprise you if someone did it this certain way? And then you would say that doesn't fit our culture, how we handle things here. So, I think that that's the important angle. Not just the mission, vision, and core values.

[00:32:27] Ivan Zakharenkov: I think it's the, how are the processes handled? Is there continuous improvement culture? Do people try to improve every process that they make or they are just handling everything? It was status quo. Cause this is how we've done it for the last 20 years? Those are hard things to pick up during due diligence.

[00:32:43] Ivan Zakharenkov: And that's why you really want to spend time, not only with the seller, do they communicate it with their management team? Because of what happens a lot in the veterinary domain, a lot of veterinary owners will come in and say, hello team.

[00:32:54] Ivan Zakharenkov: I just sold my business with all of you in it on the day. So, there's no preparation. All the shock happens after they already announced the deal and it already happens. So, all of those things are very important to pick up in advance and understand how they run things.

[00:33:08] Jeffrey Feldberg: Ivan, let me ask you because you bring up the one area. I know most business owners and I struggled with this with my exit. When and how do you tell the staff, hey, we're going to be having a liquidity event or we've had a liquidity event. How do you deal with that? What's your advice?

[00:33:24] Ivan Zakharenkov: It's a very interesting aspect. We've been asking many consolidators in our domain, how they do this? And I think that the most successful ones learned that they have to actually demand the seller to make an announcement a couple of months prior to the liquidity event. And I thought that was extremely smart.

[00:33:42] Ivan Zakharenkov: Because usually the shock that happens to the team, it happens once they find out and then people are nervous, they think they're going to lose their job. They think that the corporate will come in and slash a bunch of positions and those positions that are, they're going to start doing three times more work.

[00:33:59] Ivan Zakharenkov: So, there's tremendous stress. You can use this stress to guide the change because if this is an organization where there was no change in the past, and if you want to do change management properly if you make an announcement early enough, drive the positive effects of the acquisition and the added culture from a new business that owns this business. And while people are in that turbulence, push the change alongside because they already are in turbulence. So, you can actually manipulate that state off of instability, if you will to implement change correctly.

[00:34:32] Jeffrey Feldberg: I know the one pushback that's often there as well liquidity events are very fickle and maybe it doesn't happen.

[00:34:40] Jeffrey Feldberg: And now you've created unnecessary concern amongst the employees or with your clients. So, where is the right balance between no information and too much information?

[00:34:52] Ivan Zakharenkov: I'm sure it's very different for every business, but when someone who is thinking to sell the business signs the letter of intent, I think the person or the group of owners are pretty certain that this will happen. It might not happen with this particular buyer, but they made a decision. You don't sign the LOI if you are not on the journey to sell your business.

[00:35:14] Ivan Zakharenkov: If we were to put some sort of a template on the situation. I think if you're at the point where you're just shopping, that's fine. But if you're at the point where you're putting a letter of intent in place, maybe at that point informing the team and getting the temperature, understanding people that are most vulnerable. You know, your team that is relying on this job, maybe the most for other than just pay reasons.

[00:35:38] Ivan Zakharenkov: We just acquired actually a smaller company. And in order to implement the change, I personally went and talked to every person in there. It was a small company, a small software company. So, I was able to talk to, 10 people on their team, but I met with everybody and understood their needs, so they feel welcomed in our company.

[00:35:55] Ivan Zakharenkov: So, I think that introducing people and doing all of that stuff, at least on the culture level prior to the actual acquisition will really help to smooth the transitional period. And will keep the respect of your team to you, especially if you're staying in the business. That's very important.

[00:36:12] Jeffrey Feldberg: Some terrific advice and wonderful insights on that. Ivan, let me ask you something in the current pandemic that we're going through and lights at the end of the time. I would imagine that the pandemic in the veterinary industry, has it been a pandemic, that's been an accelerator for this frothy market to have these roll-ups because everyone's been getting pets from the pandemic and it's put a surge on the veterinary clinics?

[00:36:36] Jeffrey Feldberg: Is that one of the unexpected market conditions that came around as a result of the pandemic? Or has it been something else that's been driving the growth?

[00:36:44] Ivan Zakharenkov: There are a couple of events and a couple of conditions that COVID brought that help the industry to accelerate. We have a joke going in the industry that veterinary medicine is immune to the COVID virus. Because it was only March of 2020 and April that the general revenues dropped and then starting May, June it restored and then went, 70% year over year, prior to the previous one.

[00:37:10] Ivan Zakharenkov: A couple of reasons for that. One is, as you said, people are adopting more pets because they're now at home and they want to spend time with their companion. The secondary reason is those that do have pets or a new pet at home. Now they're not going to work and they're observing more clinical signs.

[00:37:27] Ivan Zakharenkov: So, their dog was limping, coughing, vomiting, whatever it is. While they're not at home, they don't see the clinical side to concern them, to bring the pet to the hospital. So, that increased demand. And then in addition to that more business owners that were considering selling later now within the next wave, especially in Europe, I know that in England with the latest lockdown, a bunch of veterinarians threw the towel and said, look, I don't want to do this anymore because we were the central business.

[00:37:55] Ivan Zakharenkov: So, we stayed operating, but the workflows had to be extracted to servicing the customers in the parking lot, which they call curbside service and, and other things that are just driving people to burnout. So, that's an additional activity that added to M&A so yeah, those are the factors

[00:38:12] Jeffrey Feldberg: And again, what's interesting about this Ivan is no one could have predicted the pandemic. But it goes back to if you're prepared as a business. So, if you're a veterinary clinic, as one example, you followed our nine-step roadmap or you just prepared, you prepared your business year in, year out an opportunity now arises.

[00:38:34] Jeffrey Feldberg: You're ahead of a curve. It's a different curve that we're talking about here, but you're now ahead of the curve and you can take advantage of that now while everyone is still trying to catch up. And for the community out there, to me, the big takeaway is when you're prepared, you cannot time the market, but you can time when you do go to market.

[00:38:54] Jeffrey Feldberg: So, if it's a frothy market right now, and it's very strong and you're ready well you're the benefactor of that. If it takes you a year to get ready or two years to get ready. Maybe the market is there. Maybe it's increased, but maybe it hasn't. You have that uncertainty that's now come in there. So, to me, that preparation is at the heart of everything of really running, keeping, owning a successful business.

[00:39:17] Jeffrey Feldberg: Prepare and be smart. So, Ivan, as we begin to wrap up the interview, there's one question that's my favorite question. And I love to ask every guest on the, Sell My Business Podcast. And the question is this. I'd like you to think about the movie Back to the Future. And in the movie, you had the magical car, the DeLorean car that would go to any point in time.

[00:39:39] Jeffrey Feldberg: And so Ivan, I want you to imagine tomorrow morning, you wake up, you look out your window and the DeLorean and car it's right outside your door. The door is open. It's welcoming you in. You hop in the car and you can go to at any point in time. Maybe it's Ivan as the young child or a teenager, adult, whatever point in time it would be.

[00:40:01] Jeffrey Feldberg: What would you be telling yourself in terms of lessons learned or life wisdom, or do this, or don't do that.

[00:40:07] Ivan Zakharenkov: I wish I may be listened to more of your episodes to see it here. The examples and I might be a disappointing one here. But more recently through everything that happened. I really liked this speech that Steve Jobs gave at Stanford about connecting the dots. And as I'm looking back and connecting my dots, I actually must say that I can't remove an episode of my life, that I would like to change anything where I'm at today.

[00:40:34] Ivan Zakharenkov: So, I think that everything that's happening is happening for a reason. There were a lot of bumps, but every bump, when I'm looking back really connected the dots to take me where I'm at today, and I'm just comfortable with it.

[00:40:46] Jeffrey Feldberg: I love that Ivan and for our community what a wonderful insight. And winning is always nice. And it's great, but it's the challenging times. That's what forms, who you become, who you are, what you're going to be. And Ivan, I just love how you said I am where I am today.

[00:41:00] Jeffrey Feldberg: And I'm grateful for that from all the things that happened. I wouldn't change anything. And I think that answer is terrific. Ivan it's been a pleasure to hear your insights. Congratulations on your exit. Congratulations on what you're doing today in a few different areas. And I really appreciate your strategies and the insights that you've shared with our community on how to have a better business.

[00:41:22] Jeffrey Feldberg: And as we wrap up the interview, if someone would like to get in touch with you and I'll put this in the show notes, so you don't have to worry about writing it down for our listeners, what's the best way that somebody can find you online?

[00:41:33] Ivan Zakharenkov: If you want to find out more about the roll-ups and the consolidation strategy and how to build a consolidation, we're at VetIntegrations.com. You also can find a lot of information about burnout and how we combat burnout using business methodologies. And if you can spell my last name that you can find me on LinkedIn, I'm Ivan Zakharenkov.

[00:41:54] Jeffrey Feldberg: Terrific. And that's quite the challenge for us to say, but again, thank goodness for show notes on that. I will have links for everything to make it super easy for everyone. And Ivan, as we wrap this up again, thank you so much, and please stay healthy.

[00:42:09] Ivan Zakharenkov: Thank you. It's been a pleasure.

[00:42:10] Jeffrey Feldberg: This podcast is brought to you by the Deep Wealth Experience. Your liquidity event is the largest and most important financial transaction of your life. Most business owners leave anywhere from 50% to over 100% of their deal value in the buyer's pocket and don't even know it. I should know. I said "no" to a seven-figure offer and "yes" to mastering the art and science of a liquidity event.

[00:42:37] Jeffrey Feldberg: Two years later, I said "yes" to a different buyer with a nine-figure offer.

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[00:45:52] Jeffrey Feldberg: Are you leaving millions on the table?

[00:45:54] Jeffrey Feldberg: Please visit www.deepwealth.com/success to learn more.

[00:46:00] Jeffrey Feldberg: If you're not on my email list, you'll want to be. Sign up at www.deepwealth.com/podcast. And if you enjoyed this episode of the Sell My Business podcast, please leave a review on Apple Podcasts. Reviews help me reach new listeners, grow the show and continue to create content that you'll enjoy.

[00:46:23] Jeffrey Feldberg: As we close out this episode, a heartfelt thank you for your time. And as always, please stay healthy and safe.