Why Are Clear KPIs Essential for Exit Success with Gary Hallett

Welcome to the B2B Growth Blueprint podcast, where we talk with entrepreneurs, founders, and leaders at B2B services, tech, and SaaS companies to learn the systems and processes they've used to create success for their business. We'll also learn from marketing and sales experts to provide insights to help you grow your business. I'm your host, Mark Osborne, and the podcast is brought to you by Modern Revenue Strategies and their 10X ROI B2B Growth Guarantee. Schedule a free diagnostic call to learn the fastest path to double your B2B revenues in just 90 days. Hello and welcome to another episode of the B2B Growth Blueprint Podcast. I'm your host, Mark Osborne. Today, I'm very excited to welcome my guest, Gary Hallett. Gary is the co-founder of Gateway Business Advisors, which is an M&A advisory firm and Strategic Business Valuations, a business valuation exit planning firm. He helps business owners understand, protect, and optimize the value of their companies in preparation for an eventual exit. And we'll talk about what eventual means. not necessarily in the next 5 minutes. His passion is guiding business owners on their journey towards creating a business that's valuable, enjoyable, and optimized for an exit with no regret. So, Gary, welcome to the show.

Thanks, Mark. It's a pleasure to be here.

Yeah, absolutely. So, why don't you tell our audience a little bit of your background of how you sort of got to where you are today and what sort of led you here? Sure.

That's quite a journey. We started into the business brokerage business 15 years ago. I had had a career in the non-carbonated beverage industry, which I started in Eastern Canada and over the course of a career ended up in Florida.

Okay.

And when the company I was with sold, I left with the owners. And as I was about to turn 50 and looking what's next, I discovered business brokerage. I'd owned a business in my 20s and 30s while I was also in the beverage industry. And I bought it without any idea on valuation and I sold it without any idea on valuation. A real estate agent helped me on both of those. I learned a lot of lessons when I owned that business, but the idea that you could value a small business along an established set of guidelines that both people in our industry use as well as lenders and buyers. I thought that was fascinating. Over the years, we, we sold a lot of businesses, and we've also met a lot of business owners and engaged with many of them to sell their companies, only to realize they hadn't prepared the business for sale. They hadn't prepared themselves Emotionally, and maybe they didn't know what was next. Sometimes there was a wealth gap, and it was only when we were working negotiating on the sale of the business that we realized there was a gap between what they needed and what the business was worth. We started the valuation company in 2018 or '19, and then 3 years ago, we started working on exit planning. My wife runs that business. She's a certified valuation analyst. And she also— both of us now are certified exit planners with the Exit Planning Institute. We love the content and the direction of that organization and really how it helps business owners prepare for an eventual exit. What we saw in our experience in business brokerage was there was a small percentage of business owners that had prepared their businesses, and many of them were left disappointed. There were many businesses we didn't sell. And the average in the industry is somewhere around less than 25%, maybe between 20% and 25% of businesses that actually sell. Today we sell over 80% of the businesses that we engage, and that's because we're working with business owners that are prepared well. And, and we've also narrowed our focus in that industry, referring a lot of business out to other brokers, etc. So, today, we are— my wife especially is very focused on helping business owners understand value and more importantly, understanding what drives value, what detracts from value, what you can do to improve value. And really, it's not easy, but it's not as difficult as a lot of people believe to improve the value of your business doubling and sometimes Tripling that. Yeah.

So like you, I'm also part of the Exit Planning Institute Certified Exit Planning Advisor program and for all the same reasons, because so many businesses that I've seen just sort of aren't really prepared for what's likely to be one of the largest, you know, sort of transactions or transitions in their life. For most entrepreneurs, 70% or more of their wealth is tied up into their business. And so, if they haven't sort of taken the time to really think through— and you and I were chatting earlier and you said something that I thought was really sort of telling, which was that you were talking with a business owner and he said, well, I'm not ready to sell. And you and I were sort of commiserating on, we know you aren't ready to sell and you need to get ready to sell before you're ready to sell.

Correct.

For lack of a better play on words there, because oftentimes it takes companies, you know, more than a year, if not up to 5 years to sort of really maximize the value that they can get out of the enterprise that they've built. It's not like you just put a sign in the yard.

Right.

Like when you're selling a home. So why do you think that, you know, many business owners sort of miss the mark? So what happens when folks Just put the sign out in the yard. They're like, now I'm ready to sell. I'll put a sign out and sell. What's one of the things that you see happen? What's one of the sort of pitfalls there?

After having done this for a while and talked to hundreds of owners, I think the biggest issue is that all of us, I'm a business owner, you're a business owner. We start businesses because we have a passion for something, a skill set for something. And we look at business life cycles. So, you know, once you've got traction and you've made it and people are accepting your idea and you're generating— oftentimes business owners are generating more cash flow than they've ever had in their life, better than their last income.

Mm-hmm.

And all of their decision-making and thought process is around a business as an income generator. They very rarely think of it as an asset. And if they— and so, we try to educate folks on, for an hour this week, for a season, put on a different hat, wear the hat as asset manager. You're managing that asset that, as you mentioned earlier, could be worth 70%, 80% of someone's total net worth. They have wealth advisors to help them on the wealth side. They probably have a real estate person. They know from Zillow at any given time what their house is worth. We all think we know what the rest of our assets are worth. And they pencil in a number that comes from a variety of different places on what they think their business is worth. But it's not verified. It's not validated. And that's where there's a big gap and disappointment, I would say, once someone comes to that meeting.

Yeah.

that point where they say, oh, no, my business is not worth what I thought it was going to be worth. So, we try to get in front of that. And by offering, I mean, this is not a plug, but affordable valuations because we don't think that valuation should cost a fortune.

Right.

But there may be work that you need to do along the way and you need to invest in your business, whether it's with a coach or an exit planner or someone that can help you. close the gap, your own wealth gap, or improve the value of your business. And if you think about that in terms of wealth advisory fees, it's a fraction of the money you're investing on your business compared to your portfolio. And your business, I would argue, in most cases has the greatest ability to improve your overall wealth.

That's right. Well, there's so much there to unpack, but on that last point, On that last point, like most entrepreneurs and business owners, they sort of see the option of, well, I could invest in the stock market. Well, I'll get some return, but I'm really investing in someone else and their ability to run their business. Or I could take that same money and put it into my business where I have more control. And I think I'm generally smarter than most other people. And so that's why the sort of the value that's tied up in the business is so often such a big slice of an entrepreneur's overall worth. And you talked earlier about something that I think is really important, which is the idea of thinking about business as, you know, let's drive revenue and cash flow versus let's think of it as an asset.

Right.

And that ties back to that thing that you shared before, which is that, you know, something like 70%, 80% of businesses don't sell. Because they're not sellable assets, right? And so, talk to us a little bit about what makes a business a sellable asset versus just a source of cash flow that you've seen.

That's a great question. We use in our firm, we use something called the Value Builder System. And so, parallel to the financial assessment of a business to get the cash flow valuation. And depending on what the cash flow is in a business, let's say we go to the midpoint on multiples. Now, we know that there might be 2x lower for companies that don't have the qualitative factors, and there might be 3 to 4x higher for companies that do. And it's those qualitative factors that we dig into where we look at What's their history of growth and decline coupled with their margins and their financial record keeping? Do they have good financial record keeping? Are they really assessing all direct costs to their cost of goods so that they understand their margin, which is really important for every industry? We look at the growth potential of a business. Oftentimes, business owners don't fully articulate that. They might have an idea for growth, Or someone suggested one. But we look at it from a, what could you do within your existing customer base? What could you do within your market? And then what are new markets you might want to tackle? Another really important one is how involved is the owner in the business? Incredibly important to kind of unwind the owner's responsibilities when there is a transition. So having that second in command, having good In fact, at all levels in the organization, not just the owners, but you want to have backup people for all of the functions. And the more the owner can step out of the business and work on it instead of in it, the more valuable that's going to be. There might be a 12-month period, 18, or even 24, where that transition costs you a little bit more money. But in the long term, you're going to see a much higher return on those investments once you've made the transition. Another big one is subscription revenue. And there's a book, I'll plug it, it's called The Automatic Customer. But in there, they identify 9 business models, 9 subscription models I should say, that fit virtually any business. It's just a matter of understanding your business, your customers, and building subscription revenue because that's the type of sustainable revenue that your best buyers will pay a premium price for.

Yeah.

On the lower end of the scale, working capital can be a substantial adjustment to purchase price. And people don't realize little things like tightening your accounts receivable collection cycle, reducing your days of inventory, maybe stretching out your payables a little bit. These things can have a dramatic impact on the amount of working capital in an eventual sale of the business. There's a variety of other things that we look at as well, like how do they differentiate themselves. Differentiation is one of the truest ways to generate a premium positioning versus your competition, which you can translate into pricing and margins if you do it well. We use Net Promoter Score to assess customer satisfaction. Not only does it give us a gauge, but the questionnaire gives us really valuable insight into what customers think. What are they thinking about what you're currently doing? And if you're scoring well on NPS, there's a good chance you're going to get good highlights of what they like about your business, and they're going to give you some good ideas about what else they would like to see. So those qualitative factors really drive the quantitative side of things.

So, as you're talking, the thing that's sort of really becoming apparent is this idea that, well, I'm not ready to sell. No, that's right. We got to get you ready to sell.

Right.

A lot of the things that you talked about aren't necessarily things that you wouldn't do as part of running your business today, but it's a difference of focus. And you talked a little bit and So, we work with companies in, you know, sort of building revenue systems. And so often when companies are, you know, thinking about just sort of growing, they're just thinking about, I need new logos, new clients.

That's right.

That's the only piece of revenue they ever think about. But when you start to get ready to sell, you can actually drive just as much revenue, oftentimes more, and certainly a lot more EBITDA from focusing on, well, how do I get more from my existing customers? How do I get them to spend on a continuity basis with me Instead of every once in a while, or even if it's once a year, how do I turn that once a year into every month? And just sort of that change of mindset makes a big difference in, you know, fundamentally, a lot of the same things that you're doing, maybe even the same amount of work, same amount of effort, just focused in some different ways, can, as you say, make the difference of a couple different turns. So, that takes a million-dollar business selling at, you know, 10x, just for round numbers, from going from a $10 million exit to a $20 or $30 million exit just from changing some focus and spending, you know, a couple years on that focus as you're running your business.

That's right. Math is an interesting concept. And what I've learned in this industry is that there are a large percentage of business owners who would rather not deal with the financial side of their business. They have a bookkeeper, they have a CPA that does the taxes. They don't get too involved in the weeds, but the weeds is where value lives.

Yeah.

And so, I talked to a contractor in the pool maintenance space 6 months ago, and they're about $5 million in revenue. And they want to sell in 3 to 5 years.

Yeah.

And they made a comment that immediately I realized they felt that they had to grow to $10 million to double the value of their business. And I said to them, if you were to double the revenue of your business, and let's say you did that not in a— if you did that in a structured manner, you know, you don't want to overshoot and crush your capacity, right? Uh, but let's say it's, you know, 15% to 25% growth over 4 years. You should get a 3 to 4 times improvement in your value. And if really what you want to do is double the value of your business, I can show you how to do that with a 25% to 30% increase over 2 years.

That's right.

15% annual growth is not going to kill you on a marketing standpoint, business development, It's not going to— you probably have capacity in terms of your efficiencies. If you can keep as many of those operating expenses in line, even at the same margin, you will see a substantial improvement in EBITDA and an exponential improvement in valuation. Now, sometimes there's opportunity on the margin side, and it really drives some phenomenal results. But that's where you've got to kind of assess where you're at. And for the people that say, I'm not— I don't need a valuation, I'm not ready to sell, you've got the great line on that one. No, we know you're not ready to sell. But my point is, you know, it's a small investment to know where you are, not just on that bottom line number. I've seen a lot of valuation reports where you got to go through pages and pages and pages to find the number. And that's all someone wants. We think the number is just a marker. It's really what's influencing that number and what are your options based on your timeline of what you've told us as far as your own personal readiness to exit, your personal motivations. Is there something pulling you out of the business or is there something pushing you out?

Yeah.

And just trying to help people visualize what life looks afterwards. And, you know, have they reached their goals? I met a guy a couple of days ago who said his wealth advisor told him, you're ready. Yeah, you're ready. You can retire now.

And I know you use, I believe you said the Value Builder framework as part of your evaluation. And that's part of why I like that framework specifically is it doesn't just give you a sort of evaluation number of your business is worth X. But it says it sort of deconstructs it and decomposes. Well, these are the 7 drivers of business value. And because you're here on this one and here on this one and here, then that's what delivers this valuation. But that sort of creates an obvious and immediate roadmap for, oh, well, here are things that I can do that isn't doubling the size of my business. So, you think about that, you know, pool service person you were talking about. He's got to go from, you know, 3 teams of 5 people out in the field doing services to, I got 6 teams. How am I going to manage all those people? How am I going to bring in double the amount of leads? How am I going to— but instead, he can double his business through impacting some of those other drivers that impact that enterprise value. Not only do they impact that enterprise value, but they also have impacts on your EBITDA and on those revenues that sort of grows the whole enterprise value at the same time.

Right. It can be overwhelming when someone thinks about doubling their business, right? But we break it down into manageable parts. I, you know, I don't run into a lot of business owners that have a business plan for next year.

Yeah.

Or business plan for their business. They don't have a financial forecast. They're not running, you know, from a budget. It's just these aren't things that accountants and CPAs are doing in your business. CFOs are helping. CFOs are incredibly helpful, fractional CFOs especially. So that's one of the first things, you know, that we try to work with people on is like, what does the future look like? I can't tell you the number of business owners When I was just selling businesses, I would ask them, so, you know, what do you think your business is gonna do next year? What's your growth rate? 10%, 15%. And I look like a history of 3% or 4% or 2% or 0%. What are you doing different? My hope is higher now than it was.

Well, now I need it to be bigger because I have to sell it.

Right. Yeah. But what they don't realize is, you know, when you start looking at the KPIs that drive revenue, And the strategies to impact those KPIs and even the transparent nature of how you're measuring those things with your employee base. They're the ones interacting with customers every day. They're the ones that are answering the phone or doing business development or what have you. And that's the first place that you've got to set targets.

That's right. That's right. So, you talked about one of those kind of pitfalls of not really having a plan or operating from a plan. What are some of the other sort of common mistakes you see companies making when they say, well, now I'm ready, and they come to you and you say, well, you're not because you haven't done this yet or you haven't done this yet? What are some of those big gaps that people should start thinking about today before they think they're ready to sell so that they can be ready to sell when they feel that way?

I think, you know, there's complexity in a lot of these things. I think one of the overlooked items that's really important is the condition of your own financials.

Yeah.

And one of the reasons people trust their financials is that they have a bookkeeper that's getting the work done and they have a CPA that's working on the compliance. decide whether they're reconciling monthly or quarterly submissions or annual tax returns. So they're confident in that, but that's a false level of confidence. I can't tell you the number of financial statements I've seen that are submitted to CPAs for taxes, and, you know, they're not properly recording cost of goods. They don't know what their margins are, revenues in different buckets, but, you know, there's no scrutiny as to whether they're tracking that. Oftentimes, most often I would say business owners aren't tracking profitability at the customer level. And so getting a handle on your financial statements, I should say, understanding your balance sheet. Should you be in an accrual system for your industry? Almost all business owners we work with are on a cash basis. And that's for a variety of reasons that CPAs are recommending that. But it could be that you would— there's more value in your business if you were running your business on accrual-based accounting. I can tell you that the strategic and private equity buyers love to see accrual-based accounting because that's, you know, that company that they're buying, they're going to have to transition it to their own accrual-based system. Most often. Now, there's a lot of industries where it's not applicable, but for several there are. I think the biggest one though is the owner, probably, you know, the owner's involvement in the business.

Yeah.

And we just asked the question, you know, what would happen to your business if you were out for 90 days?

Yeah. Well, and you make such a, it's such a point there that's so often overlooked, which is, you know, running your business as if it's ready to be sold. It's actually just a great way to run your business. And if you think about a business being entirely dependent on the owner, well, you can't take vacation, you can't be out of the office. That's no way to live your life. Like, you got into entrepreneurship because you wanted freedom, not because you wanted to be tied down. And so—

That's right. You know what they say at Exit Planning Institute? Exit planning is good business planning.

That's right.

And it is. I teach a number of entrepreneur business owner classes here through a couple of local organizations. And, you know, we use— I'm a big fan of the Business Model Canvas.

Yeah.

A one-page document that, you know, really kind of lays out the key fundamentals for your business. But that should be revisited on a regular basis, you know, and then Just making sure you've got good planning pieces in place. The other piece that we didn't mention was risk in a business. And that's where I see a lot of discounts when you go to market. But also, they can be things that kill a business. The lack of a buy-sell agreement. It's stunning to me how many partners don't have a buy-sell agreement.

Yeah.

We're doing valuation work right now for someone whose partner suddenly died. And now, it gets messy. People want to do the right thing, but there's tension.

That's right.

Between emotions and the practical nature of things. So, insurance, legal, these are some of the risk factors that I believe are spoken about more often. And a big one that I see is lack of marketing. People don't know where their business is coming from. They don't know why customers are leaving and why they're getting new customers. They're not tracking these things. They may be spending a lot of money on marketing, but they're not holding the marketing company accountable for results. How many leads are we getting from the paperclip, from the social media posts, from the billboards, the radio, whatever your channels are? Those must be measured. And I did work with a guy several years ago in the meal subscription business. He was just maniacal about tracking everything. He had 8 different measurements for where new customers came from because the meal subscription business lives on new customers.

That's right.

90% of them came from Instagram. So, he poured You know, as that started to materialize and change, he poured a lot of money into that and he was getting really good new customer acquisition through that. So, that's one piece, marketing. The other piece is HR. And I work with a tremendous number of boomers, later, early stage, is it Generation X? So, people in their 50s, 60s. And they remember when it was much different to hire in the hiring space, easier to hire people. If someone wasn't doing the work they did, you could find a person to replace them, probably fairly well-skilled. It's a different landscape today. Younger business owners don't mind that because that's what they've grown up in. Older business owners shy away from it and they stop hiring. And I think that there's so many fractional services out there in HR now. Having someone that helps you with recruiting, job descriptions, retaining, retainage programs to keep people on board is really critical. That's what buyers are buying. That's right.

And it's so interesting to hear you talk about marketing too, because obviously we spend a lot of time with marketing. And what we see is that there's really a very different approach to marketing is if you're going to run this business forever in perpetuity, you do some things that might not pay off for 10 years.

Right.

Or might not really pay off for 10 years that have a lot of upfront investment versus if you're actually preparing to sell in the next 3 to 5, it changes your approach and your focus. And there's a different sort of playbook for that. And, you know, I like to joke that most marketers can't spell EBITDA. Much less think about enterprise value, which is just, you know, it's a different mindset, different approach to how to do it.

It is. And you mentioned a while ago, you first, you know, the first thing is to what could I, what additional thing, services, what have you, could we sell to our existing customer base?

That's right.

If you're thinking about selling in 1 to 5 years, that's the first place to go.

That's right. Well, and then—

Second place is your market share. These are, these are very efficient ways to grow the business.

And not only that, one of the main things is protecting the value you've already created because for so many buyers, they're, you know, they can look at a market plan, all of those things, but if they don't see a process that they feel like they could step into and run, that scares them off the business. But if you can document what your process looks like Then that really de-risks the sale for the buyer. And they're like, okay, I can see how this might actually generate these kind of returns year after year. You've got a process I can follow instead of sprinkle some fairy dust and then sales happen and hope for the best.

Right.

The strategy, right?

So, one of the things that we see in companies that haven't been growing and they're probably losing some share, we're in Northeast Florida.

Yeah.

We've had tremendous population growth in the last 6 or 7 years. And we all know the impact of inflation. And I say, if you're not growing 10 points, you're falling behind in your market in most industries, right? But that's not a bad rule of thumb. We see concentration start to creep in when growth slows because now there's an overreliance on the customers that have been around for a while. And again, when we value a business or when a buyer looks at a business and they see that one customer's 20-25% of the business, another customer's 15-20%, all of a sudden your top 3 customers are close to 50% of your business. That's a problem.

That's right. That's right. Very scary for a potential buyer to see that.

Right.

Well, Gary, you're obviously an expert in a lot of things that are super interesting to both of us. We could spend all day talking. I got to be mindful of your time, but before I let you go, tell us a little bit about, you know, sort of who you work with specifically at Gateway. Like, what kind of customers do you help? What do you help them with? Who should reach out?

Don, Gateway Business Advisors, M&A firm. We sell companies that typically are $750,000 and up in EBITDA to about $5 million of EBITDA. We work in Contractor industries such as HVAC. We do plumbing and electrical. We do work in the IT and managed services space. We're building out a decent capacity in engineering. On our valuation side, we work with business owners, typically founders, and we help them kind of discover the whole value proposition, what it looks like to manage a business as an asset, not necessarily a job. Or an income generator. I heard it said a while ago, when you're working with a business owner that's, you know, they've got a business worth $1 million and it could be worth $2 million, but it's only worth $6 million. That is a substantial impact to their retirement.

Yeah.

Most likely. Somebody's got a business worth $30 or $40 or $50 million and they're looking at the difference, let's say $30 million, and they're looking at the difference between $25 and $35. The impact on their life is a lot different.

That's right.

That's a $10 million swing versus someone who has, you know, I've worked with a number of business owners back in the day when we were doing straight-up Main Street business brokerage. They needed the money out of that business to retire.

That's right. So, well, and so for businesses that are in that space, what's the best way for them to get in touch with you?

Uh, so they can reach me at gary@gatewaybusinessadvisors.com. They can reach me on LinkedIn, and I'm available. I love talking to business owners about their business, and we've got a great network of fellow brokers, M&A advisors, and investment bankers across North America that we work with. And on our valuation side of business, we work with people all over the US. But love talking to folks and kind of pointing in the direction of how to help.

Well, you've got a lot of expertise, so I know our audience will gain a lot from a conversation with you, and I'm sure gained a lot from listening to you today. So, Gary, thank you so much for taking the time to join us.

Thanks, Mark. I appreciate it. All right.

Talk to you soon.

All right, man. Bye-bye.

Thank you for joining this episode of the B2B Growth Blueprint podcast. We hope you've gained insights to grow your business. If you enjoyed this discussion, please rate, comment, like on your favorite platform, and share to others who will find it useful. Do you know a CEO, founder, or leader If you know a leader at an early-stage B2B services, tech, or SaaS company who would like to be a guest and share their story, send us a note. Let's schedule a conversation.