39. Creating An Exit Strategy With Russ Sky & Andy

Every single owner of a building company needs to think about their exit strategy and work to a plan, because otherwise, the least appealing option, it chooses you.

I'm sure this is a question that every builder is going to want to ask.

If I get to the point where I'm redundant in this business, why would I want to sell it? Builders don't think about selling their businesses early enough, or at all. That's the biggest mistake.

You really got to demonstrate that it's a profitable model because who's going to pay tens of thousands of dollars otherwise? The irony is that the less work they actually do in the business, the more valuable the business is.

This is Professional Builder Secrets, the number one podcast to help you grow your building company safely and securely, brought to you by the association of Professional Build Builders. Join us every week as we talk to industry experts and your fellow professional builders on everything you need to know to generate more leads, more sales and higher margins, while improving the building experience for your clients. Hello and welcome to the Professional Builder Secrets podcast, a podcast by the association of Professional Builders for building company owners, general managers, VPs and emerging leaders. Here we discuss all things running a professional building company from sales processes, financials, operations and marketing. I'm joined today by co founders sky and Russ Stevens, as well as head coach Andy Scarter for the association of Professional Builders. Sky, great to have you here again.

Thank you, Bosco. Lovely to be here.

Russ, always a pleasure to have you join us as well.

Thanks, Bosco, good to see you again.

And Andy, thanks for taking the time to chat with us today.

Always a pleasure, Bosco.

Always. Well, let's get into it. Why do builders need an exit strategy moving forward?

Well, I think the main reason in this industry, the simple answer, is because it's not easy to shut down a building company. It's very easy to get started in this industry, but it's very hard to exit. And that's due to the long sales cycle and the even longer delivery cycle. So it can take a year or more to exit a building company, and that means you've really got to plan it in advance. And even if you just want to get out, if you've just had enough and you're not even thinking of selling, you can't just liquidate or stop trading because you've got all these contractual liabilities and they don't just go away. So it's very tough for builders, and a lot of time they feel very trapped and chained to what they're doing, and by the time they normally decide that they've had enough. I think at that point they're still completely burnt out and yet they've got face another 12 to 18 months just to shut the company down. And that's why you need a plan in place and you need to be thinking right now, what is your plan? Is it to sell, is it to liquidate, I. E. Close down the company? Is it handed down, put in the gm? They've got to look at it that way. And every investor that goes into an equity deal, they go into that deal with a time frame to exit. And business owners have got to think the same way, especially builders. They've got to have a time frame and you've got to be working towards that goal.

It's interesting you mentioned liquidation, Russ. Who would consider that?

Well, I guess if your company is not particularly profitable, you're not getting close to that 10% net profit benchmark, then it's going to be very difficult to put a GM into the company and kind of pull back and even to franchise the business. So those options are off the table. It also means if you don't have family that are going to come in like a succession planning, that's going to be off the table as well. And of course, if it isn't profitable, it makes it very difficult to even sell the business. So I think if you find yourself in that position with a company that's not particularly profitable or not profitable at all, they're the companies that get shut down, put into liquidation.

And I think, Russ, just to tie back to something you said earlier, we kind of tend to hear the word liquidation only from the negative perspective. But what it realistically means is shutting down the business legally. It doesn't necessarily have to be negative. You could choose, as we know a couple of builders have done, to get out of the industry and exactly what you said, although it's going to take you the year to work out your contractual obligations, et cetera, et cetera, literally putting the business to bed properly is known as liquidating the company. So it can be done positively or neutrally as well from a legal perspective, but absolutely, we tend to hear that word liquidation and we always give it that negative connotation.

Yeah, that's a really good point. Yeah, we just associate it with something bad, don't we? It's just tying up the loose ends.

When and who should consider an exit strategy and plan out there.

Well, every single building company owner should be thinking about it. It's that age old thing of you only start a business to sell it, so you're not going into business thinking this is it for the rest of your life. You need to exit somehow away because we're all going to die at some point. So you quite literally are not going to be here forever. So every single owner of a building company needs to think about their exit strategy and work to a plan because otherwise the least appealing option, it chooses you. And that's that voluntary liquidation that Andy and Russ were just talking about. And it doesn't have to be negative, but I mean, after all those years of work, in so many cases, decades of work on this asset to just what, shut it down, walk away, you're not going to get anything out of it. It just seems like a waste to us. And this is why we want to talk about exit strategies for builders. Get rewarded for all the work, time and energy you're putting into the building company.

So, you know, Russ talked a little bit about the fact that some of these exit strategies could take over a year to implement. What does a successful exit plan look like from a structured perspective?

It's not quite how long is a piece of string. But I think the foundational answer here has to be it'll be different for every single builder and every single building business. But there are some fundamentals that are going to be exactly the same. And the way we look at this is it is another business process. It's a significant one and it's one that can have far reaching consequences, but it needs to be put together in sequence, taking into account all of the parameters that will affect it. And then once you've decided what the end goal is, you then want to work out a strategy to get you from where you are today to whatever that that outcome is. So I think the elements there that are important is it's not going to happen by accident. It's got to be planned, it's got to be carefully planned. And when you talk about successful, just to kind of link back to what sky said earlier at the apb, we obviously are all about builders building value. And if you're going to spend a decade building something of value, then a successful exit is you maximizing that value at the point that you sell that asset. So that's what we'd like to see, a plan that, that builds the business sequentially. Make sure, as Russ has already alluded to, that it's systemized and it's profitable and all those good things. And then at that point, at the right point in time, and that's the other reason to plan it is if it's forced on you. I loved what Scar said earlier about the least favorite option chooses you if you don't do anything. The beauty of planning, it means that you get to control the time frame. You get to decide when it's going to happen and if it's ready to go. Even if circumstances change, the only thing you're doing is adjusting the timeline. So that's the other reason why we want it to be properly planned so that you can then execute that plan.

Now, for our listeners out there, I'm sure they're curious, what are the different types of an exit strategy? We talked a little bit about liquidation, we've talked a little bit about selling as well. But what are some of the different types of an exit strategy that we should consider looking at? An exit play?

Well, I think we've got four main types, really. The liquidation, the closing down of a company. We've got the selling of the company, we've got succession and then we've got investment. Yeah, if we just look at liquidation, the company has no value and no family members want to carry it on. And that unfortunately, and quite sadly as well, is the most common in our industry. But the reality is these companies don't have any value. And the younger generation, they see how hard it is to run a building company. So really, I mean, who can blame, who can blame these guys for not wanting to carry on the family business? Which is a shame because like we're saying here, there's a lot of work that goes into these businesses, a lot of compound work over the years, and it's sad that there's no value there at the end of this time. I mean, selling, really, that should be an expectation for everyone going into business, for everyone in business. The expectation should be that this is a valuable asset that can be sold. But yeah, there is. You gotta ask yourself, what exactly am I selling? Because really it comes down to two things. It's systems and cash flow. And if you're not systemizing and generating a healthy net profit, then the reality is you have not created a business and certainly not one with value. You've literally created a job. And yeah, be honest, who wants your job? You know, it's hard, you work in long hours and then there's succession. And this is tricky because I think you've got to be realistic about the value of your business and ensure there is a proper transition. Now, most building companies are not systemized and they're not profitable, so really they're worth nothing. And if you are going down the succession route, you need to Be honest about that. You're not handing down something of great value to the next generation. In fact, fact, they're the ones doing you a favor and taking the building company off your hands, because otherwise it will take you 18 months to shut it down. So, yeah, you've got to be realistic about that. You're not doing anyone any favors. But if you did go down the succession route, you've got to invest time coaching the next generation into ownership rather than literally dumping it on them when you decide the time is right and you want to get out. And that takes planning two or three years, really coaching and investing the time to make sure that they can take the business to the next level. And then within investment, I guess the kind of investment category, there's a couple of different options. You know, a lot of people like the idea of franchising their building company. We hear this quite a lot. Builders coming to us because they want to systemize, because then they want to franchise. Yeah, it's quite a popular idea, not easy to execute. And you do need a lot of systems. You got to have everything documented and you really got to demonstrate that it's a profitable model, because who's going to pay tens of thousands of dollars otherwise? And when you gauge how profitable your model is, you've really got to look at your role in that business, how much to replace yourself. Because if you're going to go the route of putting the GM in there, the GM isn't going to work as hard. And as long as you are. So realistically, you might need two people coming in to replace the workload that you do. Is the company still profitable after that? Because if your margins aren't around 10% after you've put those two people in and your business is fully systemized, then you've probably got a bit of a problem on your hands. And I think you're going to find it very hard to take a step back and just let it run itself.

To add to that bit on franchising, though, because I think this is a step that's often missed when you're considering an exit strategy going down the route of setting up a franchise, you're not actually you're exiting that one business, but you're creating a whole other for yourself because you're suddenly the franchiso and you are on hand to help all of your franchisees. And I think a lot when that's the realization, it's suddenly like, ah, but you know, I wanted to be out totally. And then you like reconsider those Options. So I don't think it's talked enough about. Like, if we go down the route of franchise, we need to go all in on that new, completely new, different business. Because you're no longer building homes. You're essentially supporting people building homes and building their businesses.

Yeah, it's a really good point. And they say there are three attributes you need in order to be a successful franchisor. You need to be able to sell franchises, sell franchises and sell franchises. That's all that matters, really.

Speaking of considerations, Guy, you know, what are some of these key considerations when creating an exit strategy and planning?

Well, it's everything because it's just completely unique to everyone's own unique situation. I mean, how old are your kids? How old are you? What's your whole family? Are you married? Are you single? How many more years of work have you got left? What are your personal goals? What do you want to do in the community? An exit strategy is actually really personal to the founders and who's working in the company. So everything is a consideration. Every single thing about your life and your business needs to be factored into that decision so that you can come up with the exit that suits you best. Because honestly, selling isn't going to suit anybody or just anybody. And, you know, succession isn't going to suit everybody. It's completely unique. So there really isn't a one size fits all. And that's why there are options. And rather than just thinking, no, I definitely want to sell, or that's, you know, it's definitely succession, at least explore all of them, because we have to have the knowledge of what if and what could it be so that we know we're making the right choice and then can go all in on that one direction.

What are some of the mistakes that builders make when trying to sell a business or look for an exit strategy?

Difficult question to answer because unfortunately, as Russ has alluded to, it doesn't happen a lot in our industry. And that's primarily because of the fact that most builders become business owners by mistake. They never intended to do that. They wanted to build stuff and they really went into it in a lot of cases. With the mindset that Russ mentioned earlier as well, of I want to get myself a secure job and do things my way. And the problem with that is if you are not working towards selling a business, and let's take it wider to exiting a business on any basis, you don't plan to get there. So it's a little bit like, I'm going on vacation and I get in my car and I just drive and I get to the first corner and I turn left and I get to the second one, I turn right. It's aimless. I have no idea where I'm going to end up. Whereas if I decide I'm going to the Gold coast on holiday, I can plug that into my GPS and I know exactly how to get there. Now, that's the problem, is that a builder who isn't in the mindset of I want to sell my business, I could sell my business, is not even going to start thinking about it. And really, it's part of why I love the fact that we are doing this podcast. Because what I'm really hoping for is we won't necessarily give people the final answer on this is how to do it necessarily. But if we at least get them thinking so that the things that they do from now onwards, the people they hire, the software systems they install, the profitability, the margins that they start to create within their business, if those change tomorrow because they start thinking I need to start building value, then this podcast will have. Will have knocked this out of the park as far as I'm concerned. So really, the mistake that. But to try and summarize all of that, builders don't think about selling their businesses early enough or at all. That's the biggest mistake.

They wait until they want to sell and then they realize they have to systemize, don't they? And that's come about because, yeah, we've worked really closely with a guy called Kevin Lovewell who's been on the podcast and runs a business brokerage. And that's the main feedback from him. And it's not just builders. I think it's a lot of small businesses. They come to a business, business broker because they, yeah, they've had enough. They want to put their business on the market and your business is not in a position to be sold and they spend the next year or so.

Then systemizing again with the end in mind, literally.

And I think the other problem with a lot of builders, unfortunately, is they are the business. Like, literally, they are the center of that universe. And the problem is if you are the business and you go to somebody and say, buy my business, and they realize you're going to leave, they don't really want to buy a business where it just left with a check in its hand. So, you know, that's the other value in systemizing is you get to the place where it doesn't all hinge on you.

And this is more common than you think. Because think of the amount of building companies that have come through to apb, and they're thinking they're in a much better position. You know, they're not on the tools, they're not on site all day, but they are doing all of the sales and really driving the building company forward. And if you think the business doesn't depend on you, well, it really does, because you can't step away from that building company for longer than maybe a day, maybe a couple of weeks, maybe a month at maximum. But if you can't step away for six months and have it run smoothly, then it does depend on you. And that's still an issue.

Yeah. And I mean, I had a. I had a case recently, in the last. Literally the last week, with a client who planned a wonderful holiday. A really sort of, you know, not quite bucket list, but. But up there, and hated the 10 days that he was away because he was bombarded incessantly with emails and telephone calls from the office. And there you go. That's. That's the kind of way that this problem manifests.

I think the irony is, isn't it, that people think about selling their businesses because they're getting burnt out and because they're working so many hours and, yeah, there's so much demand on them in the business, and as a result, they then go through that process of selling. And I think the irony is that the less work they actually do in the business, the more valuable the business is.

Exactly. That concept is wonderful to look at, because what it starts to say is, if I get to the point where I'm redundant in this business, why would I want to sell it?

Exactly. Exactly.

I loved. Everyone needs to listen to the episode with Kevin Lovewell, because I love what he said in that episode. He said, the first question to ask is, would you buy your building company? Because if you wouldn't, why are you thinking it can sell? You know, we need to sort that out. So I thought that was. Yeah, great. Great episode.

So let's talk about leadership. And I guess I'm sort of on the fence to say, should leadership be proactive, reactive? How do you communicate with the people that you work with when going through an exit plan? Is it something that you hold close to your chest? What does that look like?

Yeah, I mean, good points, Oscar, because I think good leadership is, first of all, looking ahead and anticipating the challenges. Whatever exit you plan, you've really got to think ahead and anticipate the roadblocks that are going to come up. And part of that once you've anticipated the challenges, is then creating the plan. But step three is communicating the plan. It's so, so important. And obviously that communication is going to vary, dependent on the strategy. But good leaders, that's got to be communicating the plan well. And it's very similar, I think, to growing or even operating a company. It's exactly the same, isn't it? You know, you're anticipating the challenges, you're creating the plan and you're communicating the plan. I think there's probably a couple of additional ones. If you are selling the business or planning on selling the business, then negotiating skills would probably come under good leadership. And for that I think we'd all recommend never split the difference. You can pick up a lot of good tips in that. I wish I'd read that before I sold my last company. And then if you're going down the GM route, I think a good skill set for a leader to have his delegation, because you're going to have to be able to step back and let others step into your shoes and take over. And if you're going down the succession route, I think being humble would be a good quality for a leader because there's every chance that the next generation is going to take that business to the next level. So be humble and embrace that. And liquidation, it comes back to what you said, Bosco. Communication, because that can be quite fraught. You can be walking a bit of a tightrope, especially with a building company. It's a balancing act, closing down the resources strategically as the company gets towards its final days.

I think that was a really good point. Sorry, Andy, you go.

No, I was just going to say one of the things in terms of communication is making sure that the incoming buyer has continuity in the leadership of the company, for example. So, again, this is why we talk about planning it, making sure that you've got a long enough Runway that your key leaders, you identify who in the company is going to keep that continuity going and you involve them in the process. A wonderful thing to do in terms of that is to build in a deferred compensation bonus that is payable only after the company has been sold based on its results in the first year, that kind of thing. But to do that, you've got, to be honest, you've got to actually get to the place where you know what you're doing and then you share that openly and honestly with your team members.

I did something very similar, actually, when I sold my company in the uk, we had a key account and the whole Deal was like very dependent on this kind of key account ongoing. I had a key employee that was looking after that account and I did exactly that. I set this deal up for three years where he earned based on the success.

Yeah, yeah.

So let's get into what goes into the sales process for a business that's looking for an exit play. What are some of those critical elements to take to the market?

Yeah. So in order to create like a saleable asset. Yeah. Well, I think just piggybacking on what both Russ and Andy were saying just then is often when you do make the sale, it's not goodbye, see you later. There's often going be a deal in place that you will stick around for maybe a certain amount of weeks or months to ensure a smooth transition for the new owners. But that's after the sale. So how do we even get it saleable? This is quite literally begin with the end in mind. I'm going to pair together every. Every little statement I've just made throughout the whole episode because it's literally, would you buy your building company? Think of why people try and think, you know what, I can't do this by myself. I'm going to go buy a franchise. What are they trying to buy? Well, a lot of the time they're trying to get systems. They're trying to get maybe some brand recognition and a bit of a name and maybe a little bit of a network. All the other franchisees, really, that's probably what they're getting. I don't think I'm missing anything, but feel free to jump in if you think I am. So if that's why people are buying franchises, why would they buy a solo building company? Well, let's try and build that into our building company. We need to make sure it's saleable and scalable. And you can only do that by having proper systems in place and massive assets as well. Like I'm talking about marketing assets. So think of all of your content. So this is your whole building company's ip. It's not just a systems manual. It's so much more than that. What's your sales process? All of your scripts, the entire marketing to back it up? What are all your content videos? What are your socials like? Are they posting automatically? Who's in control of that? Is that someone's KPI? Does that run without you? And then you can take it to all of your other assets. So look at exactly how your website is and how it functions. Make sure you have all of those logins and your Servers are under your name, so you have total control. Then look at all of your photography assets and all of your video assets for all of the homes that you have built. Look at your design range, all of your lead magnets. I could go on and on and on, but it's about making a really valuable looking building company. And it takes work naturally, because otherwise why would someone buy it it to look good. All of your online reviews, your whole reputation, everything counts. So it's not light work and it really shouldn't be. Because if you're going to sell it a, you should have proven that you've been making decent money from the profit from the building company for several years so that it's proven. And so that's why you can then sell it for a multiple of that net profit. And they're buying literally something that is good to go. They can keep moving forward with it.

How does one acquire the magic number for sale? I'm sure this is a question that every build is going to want to ask, but you know, when it comes to actually planning this, is there a way of finding the magic number?

Well, I think to jump onto the magic part of that question, the real magic number is what do you need out of the sale? This is why we talk about developing your exit strategy and your plan, because those two things are different. The strategy is you deciding what form it's going to take. The plan is the individual steps that get you to that eventual outcome. So it's going to vary on things like are you walking away from any kind of income generating activity at all when you sell this business? Or exactly as sky said earlier, if what you're saying is you selling your building business but you're going to to open a franchising business, then that puts you into a completely different situation. So it goes back to the uniqueness that sky mentioned earlier as well. Your number is your number. It's going to be driven. It goes back to the foundational element. Your business should not be your life. Your business should serve your life. It should be a tool, a resource that allows you to accomplish those things that are important to you as a human being, no matter what those are. So it's really taking the time to do a bit of self reflection and introverted sort of thinking on why am I here, what am I contributing to the spinning green ball and what do I want my legacy generally to the humankind to be? And when you get to that, it's then at the point that you've worked out what that is, it's then calculating the price tag that is associated with that outcome. And not that we're going to pretend to be financial planners on this podcast, but that's where you'd need to sit down with a professional like that and say, okay, this is what I want to do. Can you help me work out how much money I need to be able to do that? And that is then going to inform how much money you need to sell the business for in order to achieve that financial outcome.

Take me through a potential buyer's perspective. What are they looking for when they're looking to make that purchase decision? What are some of those critical elements that a buyer looks at?

Well, they're going to be looking at a few different ways to value a business. And businesses get valued in different ways in different industries. And of course, based on the size as well, for a small business, they're pretty much looking at how much income it brings in for the owner. But a larger business, you'd be looking at a price earnings ratio. And when you look at a price earnings ratio, that could be be ebit, which is earnings before interest and tax, or it could be ebitda, which is earnings before interest and tax, depreciation and amortization. Now, I'm not sure how that is even relevant to value in a company, but I'm not an accountant, as so many accountants like to remind me. So yeah, I've got no idea what part that plays. But there's also, there's net asset value as well, which could be more appropriate. For builders, it's the net equity or the stock value of the building company that can be a more appropriate one. Some industries even do valuations on revenue, which that could be appropriate. If you're selling to someone that's looking to wash their money, for instance, it could be very attractive. But of course, the like sky alluded to as well, there's the intangible figure as well, that brand value brings the reputation in the marketplace, the systems, et cetera. So part art, part science, I would say, in the whole valuation. But I mean, to answer your question about what the buyer would be looking, well, they're going to look for anything that produces the lower number.

I think they're trying to buy, like you say, the value. And even if you look at, and I know this is a different industry, but if you look at some of the other sales that are happening of businesses that are getting sold and you think, well, were they too profitable to begin with? Some of them weren't. So you have to think, what was that other company trying to get. There's clearly some value there. And often, if you really dig deep, it was because of the audience that they had. We're all trying to buy that attention and that customer base, that client base. And if you are building your building company to be so valuable and well known in the area and you're building your database like this is another valuable asset you can have, people are taking into account. Account, yeah, the net profit and your total earnings for the last 12 months. But then they're looking at every other thing you have, your audience or your other assets. And that's where your multiple can come from and can get much higher.

And I think the other thing that's critical that we mustn't gloss over here is niche or niche, depending on where you are in the world. Listening to this podcast, there are a number of businesses that get sold because the buyer wants to get the seller out of the way. You dominated a portion of the market that they want and they know that to take you on, let's call it in, the open market is going to take them longer and cost them more than what you will take as a price to go away. And that kind of almost hostile acquisition kind of scenario where you've become a thorn in their flesh and they want to get rid of you, that pumps that value up significantly.

And the opposite is also true. So think about when you are in a great position as a building company, you can swallow up much smaller building companies to buy their assets. If you want to buy their team members and you want to buy their corner of whatever market, the opposite can also be true. It's a great scaling strategy just to.

Put a couple of numbers out there for builders, because I'm sure there might be builders listening to this and just wondering, well, how much could my building company be worth? If it's a small business where you are a very integral and important part of it, you're probably looking at between one and two times the owner's income. You might struggle to get above one and a half in all honesty, and it might be closer between one and one and a half. However, if you've got a systemized company, you've even got a GM in there, you're probably still only looking at a price earnings multiple of around about 3 or 4. Building companies don't really attract high multiples like you might might see for other industries. So I think it's probably important to be just a little bit realistic about your expectations there.

To clarify with realistic expectations, I'm surprised we haven't raised this in this episode so far. We tend to raise it on every other episode. The clean accounts are a must as soon as you go into a sales process. And I know we're focusing very heavily on the sale of a building company and it's just one of the exits, but no buyer is going to come in unless those accounts are perfectly clean. And we talk about this figure so often because it's just too important. That means doing your work in progress, accounting adjustment, your profit and loss, your balance sheet needs to be clean. And obviously you've got to be hitting the industry benchmarks. Gross profit margin, net profit margin, fixed expenses as a percentage of revenue.

We haven't mentioned the swear words around an exit strategy either, yet those 2D words, due diligence in every sale of a business before somebody's going to actually hand over a check if you're in the US or do a transfer anywhere else in the rest of the world.

You can put makeup on a pig and it's still a pig kind of.

There you go. I mean, the topical one. I know it's going to date this episode, but I think it's worth it. As a really good example, Mr. Musk was going to buy Twitter a couple of weeks ago and then what did he do? He turned around and he said, well, hang on a minute, maybe I'm not buying Twitter because I'm not sure that the assumptions on which we can, which you guys use to get to the price are even achievable.

The question of the evaluation.

Exactly. So, you know, this is the point, and sky mentioned it earlier. She stopped way sooner than she could have in terms of the things that add value. So if you take what sky said about you must first build the value, then add to that what Russ said about the multiplier. The bigger you can get the value to be, the bigger effect that multiplier is going to have when it's actually applied to your business business. So the key focus initially is build that value.

It's interesting you also talked about market expansion as well as the reason for exit plays, because we actually had a guest in previous seasons that talked about a trend where some of the big building companies were buying out some of the smaller building companies to expand territories as well. So it's a very timely conversation because this is actually going on in the market right now. I'm going to take this conversation, which has been really stimulating, to a different, different direction, and we're going to open the can of worms here. How does intellectual property complement an Exit strategy and what are some of the significant impacts does it have towards the sale?

Well, with franchising I think we have covered this, which is quite good, so we don't take up too much more time. But you are starting a whole other business. So when you franchise, the thing is if you compare it to selling, it's just that the new owners that get the benefit of what you have said up. Whereas if you start franchising and you know what franchise law, it can get, you know, a bit messy. It's very specific the way you need to set it up. Maybe it's not technically a franchise you do, maybe it's licensing. Consider both for what we're saying here. So franchising, licensing, whichever one you choose, if you go down that route, you can actually benefit and bless so many more people because they get to use all of your systems. And this is how you can go national or statewide or, you know what I mean, just grow that little bit quicker and it's all under your same brand. So if you want to see this go a little step further, that's a wonderful opportunity. And obviously you get rewarded for your effort. When you sell a franchise or a license, you're obviously getting the purchase immediately for that territory or area and then you're getting those franchise fees. So it's ongoing reward for the support. And this is why the full time job and new business kicks in of being a franchisor. But obviously in order to do that, you've got to make sure you've got really, really robust systems that actually work. So you want to make sure you can set it up somewhere else first and prove that it can work and that anyone can buy it and run it.

And then you've got to work out your exit strategy to get out of the franchise company.

Exactly.

We're here again, it's a circle, basically.

Absolutely.

How does legacy and succession planning come to life in this exit strategy? We talked loosely about it, but let's talk about what the steps would look like.

Well, let me be pedantic here. You know, I'm the words create worlds boy. So I'll start there. There is a difference between legacy and succession. And when we talk about legacy, we're talking about handing down to a family member. Usually a child doesn't have to be could be a nephew or a, you know, a brother, sister. Whereas succession is really the transfer of power or the transfer of authority. And you could have one without the other. You could quite easily have succession happening in a business that wasn't being passed down, down to a family member. So I think it's important just to differentiate that. But really where this question is going is how do we get it to the next generation? I think there's two fundamental questions you've got to ask yourself. First of all, is your family functional? Because the quickest way to really break a family apart is to add the weight of a business to something that's already shaky. So that's number one. And number two, probably most importantly, are they competent? In other words, they don't have to be today, but the fundamental question would have to be are they interested in getting involved in the business and taking it over at some stage? And that takes me back to what we said earlier, that this needs to be a process that's properly planned so that there's enough time to set everything up. And what would that mean? Well, that might mean that one of your children is going away to get a very specific academic qualification to bring into the business. It might mean that somebody else is coming into the business to do an apprenticeship so that by the time they are ready to take over the business, they've literally walked through the entire business from site. They've built homes, they've sold homes, they've run the numbers, etc. Etc. It's, it's an ongoing thing that what you really want to do is make sure that by the time that transfer happens, it is a blessing, not a burden. You know, Russ said earlier, in some cases your family's doing you a favor by taking the mess off your hands. As a professional builder, you don't want to do that to anybody, no matter what kind of sale it is. But in particular, you don't want to do that to people that you care about. It's important that maybe even more important in the legacy hand systems are in place, people are competent, the business is a going concern. That is healthy. Healthy. That's what you want to hand over to your family.

100%. You know, I can remember so vividly it was an event we did in person in Australia and clients flew in from different cities and states to come to this event. It was a two day workshop. And I remember so vividly it was, I suppose you could call it a family business because there was the parents who had started it, but they, their son was in the room because he was going to take over the building company. It was such an expectation. I vividly remember that the son was so entitled to have this building company and the parents and it's more specifically the dad of the family. I Remember, he said something that fully stuck with me afterward. He said, it's such a shame because I have had to deal with this building company for years while it's been essentially like in the ground, terrible, not making any profits. Profit. And he is going to get all the benefits of the work I am putting in. He's going to get all the profit. And he resented that so much. He was so bitter about that because he wasn't making profit for so long. He wants to retire and he's going to do all this work just for that. And I felt for him. But it was a shame that it was so bitter and it just stuck with me for so long.

There's the functional question being answered.

I think. I think, you know what, in hindsight, because this was quite a few years ago now, but I think actually his dad set up the company, so he got passed on the building company that had no systems. It was a generation before and, you know, he'd been working and now he's going to systemize it, make it better and it'll get to the point where he's. Yeah.

And you know, Bosco, you and I've had a couple of discussions about different types of liquids, refreshments. When we talk about legacy, the best examples of family businesses that have stood the test of time, strangely enough, are European alcohol manufacturers. If you look at the French winemakers and the Italian winemakers, and you look at those businesses that literally have been handed down for centuries, if you go back and you analyze why that is, it's because they literally have done the same thing thing the same way generation after generation after generation. It's that consistency thing. We don't see that a lot in the building industry. Most building businesses don't make it past the second generation. Occasionally they'll get to the third. But even in the example Sky's giving you now, there's some bitterness in the middle. The guy that got the bad business, made it good is really feeling bitter about handing on this beautiful thing to their kid.

He got the burden and he's going to pass on a blessing. He just feels a bit left out.

Yeah, I resonate with the French champagne legacy planning because you look at French champagne, we stood the test of time. Which begs me to ask the next question, which is what comes after exit planning? And do you have builders that struggle with the scenario where they've exited and they don't know what to do with themselves?

Well, I think the next step after exit planning is procrastination, without doubt. Really. It has to be execution. And I think selling is. Is probably the one thing that business owners. Yeah, not necessarily just builders, but business owners in general. It's probably the one thing that they have the most trouble with because it's out of their hands. You need a buyer and you think it's going to be quite a quick process when you decide to sell and then you realize that it's not worth what you probably thought it was going to be worth. And in my experience, when I've looked at valuations put on companies by owners and, and then the negotiations get underway, I've kind of seen about a third, I think is a pretty good guide really, of what it's really worth against the expectation. But the reality is, like we said earlier, when you go to the broker, they're going to ask you for a ton of information which is only going to expose all the gaps because you can't lay your hands on that information and that's obviously going to lead to delays. So I think, I think that's kind of where the struggle comes in. And at this point, after going down that route for like a few months, this can be the point where the plan changes for a lot of builders and it moves from an exit strategy of selling into an exit strategy of liquidation. But in all honesty, any route that you choose, it's a long journey and that puts pressure on a builder for sure. Sure.

Yeah. And I mean, if I can just add to what Russell said, you don't want to be doing that. While you are trying to keep the business running day to day, the actual preparation that goes into the sale, the setting the business up, all of those negotiations, the business must be running on autopilot with the team making it happen while you as the owner are focusing on selling it.

And that's the irony, isn't it? When we worked on our system of exit strategy strategies, step number one, no matter what exit you choose is you technically need to choose the option, move to investor status, you need to be out of your building company altogether so you can very calmly think about the actual next step. What is your exit otherwise? Yeah, you're trying to work in the building company, you're trying to grow it, you're trying to stay profitable, you have your role in the company and then you're trying to think of what next to do. No, get completely uninvolved. And often, often what you'll find is when you get to that step, you think that's okay. I'd probably like to live off of the net profit for the next Few years and that's pushed way further down the track.

Yeah, so it's a really good point because going through that process of selling the company, it's a bit like being audited tenfold. If everyone in the company is already working at maximum capacity, you're not going to have to bank bandwidth to cope with that kind of audit. So you really want to maybe even bring someone on in anticipation. If you are selling, it's probably not going to be public knowledge, so you can even use the guise of an audit. The accountant's asking for this. But, yeah, really do make sure you've got that capacity because otherwise it will suck you under and it will take.

You longer than you expect. Absolutely double the time you think it's going to take you.

It sounds like you're also going to go through a roller coaster of all kinds of emotions as well. Excitement, fear, anticipation, exhaustion. What are some of those common outcomes for builders who've sold their business? What do you do next?

Well, yeah, like as soon as you do exit your building company in any which way, it's going to have that what now Feeling. Unless you actually have a plan just ready. Anyone who has sold any company, if they did not have a plan because their company was their whole life and then they sold it, and even if they were really happy with what they sold it for, if there's no plan, there's just this emptiness and you feel a sense of loss, like you just have to mourn who you once were. And this is why it's really important that our identity isn't caught up in our company. It's just part of what you do, not who you are. So we have to go into any exit strategy, separating our identity from the company's identity, because again, it's what we do, not who we are. So you can sell it and it's not a part of you leaving. So you don't have this midlife crisis after making such a huge achievement. So, yeah, unless you have a plan, you really can fall into that what now midlife crisis kind of point in your life. And it's kind of like you can work all your life just to reach that retirement age. And if you don't have a plan, what are you going to do? Just sit on a chair there for the next 10 years, really, just waiting to pass because you have no other purpose in your life. So when you plan your exit strategy, you need to plan life after the exit so you have something to look forward to so that you don't end up in a Bad situation. And this, again, is unique to everybody. Is it your family? Is it your community? Do you even want to create a new business? You know, you can exit a building company very young. Who says you have to work in it for a few decades first? You know, you can exit really early and start all over again if you've got that energy. So, welder oyster, what are some of.

The key learnings from the coaches at apb working with the builders in this particular process and thought process? And do you have builders that are speaking to your coaches on the front line around an exit strategy? What are some of those perspectives?

Well, I think we need to go with full disclosure here. There aren't a lot. And the reason for that is quite simply some of the things that we've mentioned earlier that most building businesses, this is not an option that they really consider very seriously. And because of that, they're not really set up to be sold for any kind of real number. And therefore it doesn't happen very often. And that is primarily what we would like to change. And you know, we've spoken about why the APB exists. We want to improve this industry for the clients and builders. And part of that means if they are going to invest themselves, they're going to put their blood, sweat and tears into a business. Let's make sure that we build value and we get something back for them at whatever point it makes sense. So what really are the key learnings? Well, to be totally honest, they're not that different to what they would be on an ongoing basis. Except now we've answered the why question. We're not just systemizing for the sake of systemizing. We're not employing people for the sake of employing people. We're not trying to create profit just for the sake of having money. We're now starting to look at why do I want that money? What am I going to do with that money? How long am I going to be part of this? And as sky has quite, and this is, it's critically important, what am I going to do when I'm no longer part of this? Those are the kind of the elements that go into it. We've touched a little bit on how long it takes. Truthfully, we would be very surprised if somebody made the decision today that they are going to sell that it could be done maximizing value in less than three to four years as an absolute minimum.

Speak to you guys about this for a very long time. But my final question for the day is, is there a checklist or resource where some of the builders who are considering an exit strategy can access from the association of Professional Builders.

Yeah, essentially what we've done at APB is we've put together an entire action plan discussing all of these exit strategy options options and giving much more of a deeper overview of all of them or five different options. And included in that action plan it is for members, it's part of our membership. But included in that is actually a detailed list or checklist of how to make your building company valuable and all those assets you can get in place. So yeah, that's available for all of our members. I suppose if you're not a member of apb, what we can do is pop a link, maybe in the show notes to a full demonstration so you can at least see behind the scenes and see how they look and what else is included with what we do as part of membership.

Yeah, I mean that's the subtle answer. Bosco, join the apb. You know me, I'm plugging away. Always join the apb. That's what you need to do.

Well, and as I think Skype alluded to saying, begin with the end in mind.

There you go.

I think there's definitely left us with a lot of food for thought. Thank you once again everyone for joining us today. This was a lovely chat, a very detailed chat about future planning and look forward to sharing more conversations with you in the near future.

Thanks so much.

Awesome episode. Thanks.

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