064: Steve Little - There’s More Than One Way to Increase the Value of Your Business

Are you thinking about how to grow your business with near and offshore staffing, but you're also wanting to make sure that it's reliable, cost effective and really well done? I think docsa talent is the way to go. Here's why. They don't just fill your jobs. They bring integrity, top talent, and a people first approach that's hard to find. I've known the people at Doxa talent for over 20 years now and I say that you can count on them. I have. Talk to Docs of Talent and you won't be disappointed. Go to docsatant.com Bill G. Again, that's doxatant.com Bill G. One more time. Doxatalent.com Bill G. Check it out today.

All right. What drives the value of your business? I'll bet you're not really sure and I'll bet that it could surprise you. What do you need to do to really drive it up and what options do you have? There's more ways than one to drive the value of your business, and many entrepreneurs are missing the real gold and a real understanding of what makes a powerful exit strategy. What's going to drive the value of the business? That's what today's show is all about. Hello and welcome again to the Scaling Up Business podcast. I'm your host and growth coach, Bill Gallagher. With me on the show today is Steve Little. Steve is a highly successful entrepreneur across all kinds of industries and he's the CEO and managing partner of Zero Limits Ventures. He's going to talk to us today about what really drives the value of your business, what are the options and so on, and what are most people missing that would have you drive up and make your business more valuable, whether you intend to sell the business or not, whether you want to keep it as a family business forever. Driving value is really important for a lot of reasons. So I'm so happy to have on the show today. Steve Little, welcome to the show.

Well, thank you, Bill. It's great to be here. Appreciate the time.

Thanks so much. Steve and I have met socially through friends and entrepreneurs and so on over the last year and I've enjoyed our conversations a great deal and I think you will love his stories of business and so on and how he ties it in. I'm so glad to have you. Before we get into really the heart of this message of how to drive up the value of the business, let's talk about how you get into it because I think your stories as a young boy and as an entrepreneur are totally on Point for this.

Yeah. Well, it's actually sort of serendipitous, right? I mean, I started with my first business when I was 13. It was in lawn care. I mean, I give it credit for being a company, but, you know, I started like every 13 year old, you know, I want to make some money, dad, I'll go cut the grass, I'll pay a few bucks, right, like that.

I think a lot of us had paper routes and cut grass and things like that, right?

That's right. That's right. But I didn't stop there. What happened with me is I picked up a couple of neighbors yards, and then I very quickly realized that I really hated being behind the lawnmower. So I hired some other kids to push the lawnmower. So, you know, I would arbitrage a little bit of the fee. And then, you know, long story short, I ended up with about 30 yards every week. A whole bunch of people working for me, some children, some. Some other workers that were looking for that kind of work. And, you know, it was a bizarre sort of experience because, you know, I didn't really know anything about business. I just kept growing, right? And on the weekends I would have to take my bicycle or walk from house to house and, you know, reset the next week's work plan. So I'd come in on a Saturday. I said, okay, you know, here's the bill for this week and hey, we'll be back next week like that. And what would happen is in August, in that part of the world, the grass doesn't grow very quickly. So I started hearing people say, hey, you know, I think we're good for a week. Come back in two weeks, you know, and it didn't occur to me right away, but after about five times that day, I thought, you know, this is going to cost me some money. This is not a good deal. So I started looking at ways that I could change that. And so I looked just sort of tactically at the issue and ended up creating semiannual and annual contracts for me to take care of everything. So I'd cut your grass, I'd pick up the twigs after a storm, I'd trim your hedges, I put down your mulch, I'd shovel your walk in the winter, whatever it is you wanted me to do. I was going to take care of the outside of the house for a flat monthly fee. And almost everybody I had at the time went for that deal. And that continued to grow over time. And one day my dad came home, said to the family, hey, I've been transferred. We're moving. And I was like, well, dad, man, what am I going to do with my business? Of course, you know, he thought I was out cutting a couple of yards. Right. He didn't realize I had 35 people working for me and equipment stored in a warehouse down the road. He didn't have any idea what was going on.

And really, a subscription model at this point, Right. You've got subscribers, members. Not exactly.

Exactly. And that really turns out to be the crux of the story is that, you know, ultimately I had him drive me around into town. This is right around the time I'm going to age myself a little bit here. Right around the time lawn care and you know, the other one, the lawn doctor or whatever, were first. First getting started. And there were two pretty aggressive competitors there. And I went. One was in Berwyn and one was in Devon. I went into each town and my dad dropped me off and I had a contract book. I had a big. Remember in grade school, Bill, you had those loosely binders with the blue canvas covers. Yeah, it's like, you know, and kids always wrote on the COVID Right. So I'd written on that cover in blackmagic markers, Steve's big book of business. You know, it was the big thick binder, right?

Yeah.

Anything just stacked, stuffed full of these annual contracts. And I went in and I put those contracts down on the desk of the proprietor of the lawn doctor. He flipped through it, you know, and he looked at me, he goes, you have. You have active contracts with all of these people for the care of their yard, all aspects of their yard. We had, of course, a long talk about it. He said, yeah, absolutely. I'm interested in buying this book. No doubt about it, you know, because of course, he's seeing probably millions of dollars worth of service revenue available to him. He's going to spray chemicals and he's going to seed, he's going to aerate. He's going to do all these things that I didn't do, Right?

Yeah, he's going to.

And so the first Guy offered me $187,000 for the book.

How old are you?

I was 15 at the time, so I'd been running it for two years.

And how much equipment and people and all that did you have?

I had about 35 guys working on me. Everybody had either a cutter or a blower or a tremor. Nobody's standing around without a piece of equipment in their hand, right?

Yeah.

So I thought that was amazing. I mean, I tried not to look too surprised. As a 15 year old. And I went running out to the car and got in and my dad told, I told him the story and he's like, wow, that's awesome, son. I mean, that's more money than I've made in, you know, several years. He was an engineer. Yeah, yeah. And he said, so, wow, you know, it said on I got your check, that's head on home. I said, no, no, no. I told him I'd come back. Let's go over to Devon and go to the other guy over there. And you know, we went into the other lawn care company and gave him the same pitch and the guy offered me a bit more. So it was close to 200, took 200, actually a little over $200,000 that I ended up selling that book of business to them. And I think that is where the lesson is. I didn't really know it at the time. It's not fair for me to say that I had this realization when I was 15 years old, but years later, as I look back on it, I realized that, wow, that was a critically important lesson about value drivers. When I think about that business now, I realize that all the equipment and all the people and all the, you know, the sales effort and all the stuff that typically went into the day to day operations of that business were not the things that created the value. What created the value was that book of contracts. Yeah, right. And the way I boosted the value of the business at the end was I just went out and sold a bunch of new projects, filled that book up with contracts that me, with my capacity would never be able to fulfill. But I knew that this guy could. So, you know, we just sort of sweetened the deal at the end with some extra contracts. And that was an important lesson because as I looked forward into my life in business, I went from, you know, through school and college, I did a bunch of different businesses there and so on. Eventually I ended up in Silicon Valley working for top tier venture firms. And my job was to boost valuation. So I started discovering that, hey, there's all kinds of value components inside the walls of these businesses. There's valuation that's tied up in constraints, the words things that exist in your business that are keeping it from being as valuable as it could be. And there's things outside the business opportunities in the market that you're not fully leveraging in terms of the value of your business, you know. And when I first work with clients, now I ask them two questions, prospective clients, that is the first question I ask is what's your exit strategy. Now, you can imagine the range of answers I get, but they all sound something like either we don't have one, which I say, well, bravo, at least you're willing to admit it, or we're growing, someone's going to buy us. To which I say, that's fascinating and good, but not a strategy. The next question I ask is, do you know what drives the value of your business? And this is where the opportunity for Zero Limits ventures really sort of formed. Because the answer that I get to that question sounds like a question. What the people say is something like, what do you mean by that? Revenue, earnings, gross margin, what do you mean? Right. And my response to that is that, well, those are certainly important factors in calculating a valuation. That's a true statement. Right. However, they're typically not the things that actually create the value of a business. And most are confused by that. So by illustration, I give them some stories. I mean, you know, everybody's familiar with the Zappos story that, you know, Amazon bought Zappos for a billion dollars. And if you look at it, sort of think through it, did Zappos have any products that Amazon couldn't sell? Probably not, right? I mean, did they have any customers and Amazon either didn't already have or couldn't get? Probably not. I mean, if you buy something online, you've probably bought something from Amazon, right?

Yeah.

So the question was always, well, why did they pay a billion dollars for a company that didn't have anything they couldn't sell and didn't have any customers they couldn't get? And of course, as it turns out, Amazon was in the midst of this organizational shift to launch Amazon prime and the distributed warehouses in the same day delivery and all the things that we've grown and loved about Amazon now. And they needed a cultural shift and they needed an infusion of a radically different culture and they needed the infusion of the Zappos culture. So they bought Zappos primarily to get the cultural orientation integrated into their business. And what's interesting about that whole story is that when you talk to Tony Hsieh, he'll tell you that he built the Zappos culture for that specific reason. So that somebody buy the company for its culture then, you know. Another example that I like to use is Starbucks. You know, when you think about Starbucks or to the same degree, McDonald's, you know, the real value of those businesses is in the real estate. Now Starbucks doesn't typically own the real estate the way McDonald's does. But my question to people is Starbucks. And it's in a crappy location. Right. And most people say no, come to think of. I don't. So the print, the primary location for the Starbucks is the key value driver for them. Right. So those elements are not in the financial model. They're in the business model. They're in the market opportunity. And so what we really want to help people understand is that, look, you may not want to sell your business today, and that's okay. But you really can't know what your business is worth unless you understand who would buy it, why they would buy it, and what they'd be willing to pay for. Right. Because in a very real way, at the end of the day, your business is worth what the highest payer will pay for it. Okay. And as you know, you know, there's a broad range of things. I mean, somebody, some buyers might want to buy your company for its customers. Right. What they're saying to you is, I have product, I want to buy a market. Well, that's great. Let's say that buyer is going to pay eight times earnings for your business. This is where the earnings calculation does indeed come in. Right. But there's another buyer. Maybe they want to buy for your brand or your intellectual property or buy it for your people, whatever. There's a lot of other reasons to buy a company.

Your systems, your technology, your holdings, your. Your business partners.

Exactly.

Your real estate, your manufacturing.

Right. Any number of other things. But what they're saying is that, hey, I'm glad you have customers. Customers are good. But this other thing over here is what we're really interested in buying. And let's just say, hypothetically that it's worth 10 times earnings to them. See, their calculations are going to be based on how buying you is going to affect the value of their business. They're not looking at a chart saying, oh, this chart says right here, this business is worth this. Right. That's not how it works. They're figuring out that if we bring this business in, we get these customers or we get this intellectual property or we get this, these systems, this is how our business is going to benefit. That's going to be the basis of their calculation of what they're willing to pay for you. That's going to be the thing that identifies where the highest value drivers are. So what I say to people is, look, an exit strategy is not about the exit, it's about the strategy. It reveals a strategy to you that helps you understand where the next dollar of investment should be spent. If I Have a business that somebody will pay 8 times earnings on for customers and 10 times earning on for intellectual property. Where should I invest my next dollar? Well, as an investor, I hope you would invest it in intellectual property because you're going to get a greater rate of return out of that investment than you were going for more customers. That doesn't mean you don't go for customers. It just means that you have to understand where your investments are building value and where they are not building value. Does that make sense?

Absolutely. I think what you're pointing to is the range of different things that a buyer might value that are different than simply your revenues and earnings. Right. Typical thought is okay, well, I think most people start off thinking some multiple profit or ebitda, that's going to be what people are going to do. And God, I would really love it if I could find a buyer who would give me a multiple of sales because then I could not focus on my operational expenses and things like that. I could just keep growing the top line. I think a lot of people wish for that. But what you're pointing to is that actually there's like 20 other things that you could focus on that potential buyers might be interested in if you'd entertain the conversation of what is the exit strategy. Who are the different? Not only the actual players, but the categories of buyers that might be interested for different reasons.

Yeah. Well, here's the thing, Bill. If it was revenue and earnings that drove value, then explain Snapchat to me. They have no revenue, they have no earnings. They've got, what, maybe over $100 million in investor money by now, and they're worth 25 or 30 billion. Right. So what? So it's not revenue earnings. Right, Right. I realize not every company is a Snapchat, I get that. But still, the basic point is the same. I had a trucking company work with us some years ago. Good, solid company, I like to say. You know, it's the kind of company that, you know, had a Christmas party every year and people got vacations. Right. I mean, it was a good, solid business. Right. Been going for 12 years. The problem was the trucking industry at the time carried a 0.85 multiple. Now, what that means is that they could never even get a year's worth of revenue for their company. Not a really good rate of return when you've been working at it for 12 years. Right. So the brothers who started it called us, we did our magic, and we came up with a strategy. We found some really interesting gems that were unique to this company, inside the company. One of them was that they had a large. Is like 80% of their payload, 85% of their payload was energy and energy related equipment. Pumps and fans and turbines and motors and tanks and all kinds of stuff. Right?

Yeah.

And they had developed internally or had, had developed for them, I should say, some software which gave them a real, tangible, measurable logistical advantage in their regional market.

Yeah.

Well, our analysts started doing some research and we found some really interesting things. One of the things we found is that energy logistics companies are willing to pay seven times earnings for your assets. So we moved, we transformed them from a trucking company into an energy logistics company. All we did was rebrand them. They did the same thing they did every day. The next day they just had different color trucks. It had a different logo, it had a different website. Right. That was it. Everything else, this was exactly the same. We didn't get all seven point, but we got 5.7 of them. So we went from 0.9 to 5.7 in less than a year.

That's a big star. For how much?

67 million. Yeah.

That's great.

Yeah, I mean those kinds of stories. So that's a great illustration. It's finding that point of value, realizing that the value of this business is in the energy space. Right. We have to move it to the energy space or it's not going to be valuable.

Right, right.

So knowing those things is critically important. And you know, I see so many business owners that are out there slogging away, building revenue, building revenue, building earnings, building earnings, you know, gross margin, gross margin. And hey, those are important things. Like I said, I'm not saying that revenue and earnings aren't good things to focus on, but they may not be the things that are going to actually determine the value of your business in the end. Right. And I like to say, look, whether you sell your company, take it public, or keel over debt at your desk, there's going to be an exit. And don't you want your business to be worth as much as it could possibly be worth at that point in time?

You do, you do.

In a very real sense. Just like you said earlier, the exit strategy is not really about the exit, it's really about the strategy. So when I have people say to me, well, I love to have you come in and work with us, but we're not ready to sell, my point to them is, well, now is the best of all possible times to bring me in so that you can understand what drives the value of your business. So that when you are ready to sell, you will have built all this great value instead of running on the treadmill. Revenue and earnings, revenue, earnings. I hope we're building value. I hope we're worth more than we were yesterday.

Well, this is not a tomorrow kind of an activity. You're not going to get a transaction done tomorrow. And your best time to do is to think about it and to plot it out for a couple years and go to work on it, right?

Absolutely. I mean, I think that people should get on this trajectory now. What ends up happening for us is we usually find such aggressive value boosters that we're actually able to package the company for early acquisition and get the buyer to buy on future opportunity. And, you know, that's an exciting possibility for many, many business owners. If, if you're now evaluating the value of the business based on its future performance instead of its past historic performance, you've got a very different set of equation. Right. And you know, that's really what we do for our clients is we help them build that model, build the plan, so that when we're able to take it to market whenever is appropriate for them, we're marketing the business from the perspective of its future opportunity.

Now you're talking there about momentum and buzz, right?

Yeah, well, everything. Right. It's whatever the value drivers are. Right.

But it's the expectation of the future value in this case.

Yes, yes, yes. So here's an example. We had a transaction last year. The company was street valued. Right. So the calculated valuation was 3.5 million. Not a bad little business, little Amazon seller. Right. We ended up selling the business to a $19 billion private equity fund for 7.7 million. Right. Which was a premium on its actual. Right. Plus there was a bit of extra based on performance. Right. Some things like. But the interesting part was because we had done the packaging the way we had, because we built the new product roadmap, because we built a new monetization financial model, because we implemented certain elements of that model already when the buyer closed on it, they had a business that was going to be worth 23 million, but the end of the year, so they were happy to spend seven and a half, almost $8 million for a business that was street valued at three and a half because they were really getting a business that was worth 20.

Right.

Well.

And you set certain things in motion that create future value. And even when we think back to you as a 15 year old selling the business, you essentially increase the value during your earnout period.

I did, I did and what was really going on there, of course, was that if you look, what's underneath those contracts is those recurring revenue. And as we all know right now, recurring revenue is sort of the holy grail. You can set up some sort of subscription volume where people are paying their money every month no matter what. You've got a much more valuable business than if you don't.

Well, I had a friend who, I was on their advisory board for some years and they had a business well over $100 million. And it was a nice business, solid, multi generational, been around for a long time. But the value of the business really started to go up when they started adding maintenance contracts and update agreements and things like that to a traditional old school, industrial kind of nuts and bolts kind of company. They start training support, maintenance, compliance.

Yep, all those elements and that increases. Here's a, here's a very simple rule of thumb for selling a business, right? High risk, low price. Low risk, high price. Anything you can do that reduces the risk for the buyer is going to increase what the buyer is willing to pay for the business. Recurring revenue, subscriptions, that kind of thing. That diminishes risk because that's happening anyway. You don't have to keep the clients don't keep making that decision every month. Right. That's an automatic. Right. So those are the kinds of things that can really affect it. We had a client, right now we're pretty close to finishing up on a project. Originally came to me, had an offer on the table for 1.1 million. That's pretty small in our world. Right. But right now, today we're negotiating an offer at 12 million for that business. Right. And it's all based on the revisions we made to the business model which reduce risk and improve this performance. The metric that we're describing, one of the key elements of value add that we pushed into the system was finance. They sell a big product, their average transaction is $2,500. Right. So what ended up happening is we created a financing plan where now a buyer arrives at the website. They're immediately given a $7,500 credit or $10,000 credit they can use to shop. Right. So what do you think happens to the average transaction price? It tripled, right. 2500. Went to 7500 predictably. So now we have to go, we go into our conversion models. Our it's an E Commerce business. So we go into the E Commerce conversion models and what we find is that, well, we're now on a vertical ramp because our transaction volume is the same, but we've tripled the price. Astronomical effect on the value of the business. Right.

All these kinds of. I think that the other thing to remember since we're talking to business owners and CEOs here, is these things are often also in the interest of your customers and clients. Time and again, I see a business offer and they're like, oh, offer recurring. Well, that's nice for me, but maybe my customer just wants to pay for it as they go. Actually, I think lots and lots of people like the predictability and the consistency of the budget, whether it's your homeowners at the age of 13 to 15 or our clients today. Look, you engage us, we're going to help you double your company. Company's revenues, profits, triple the cash. And it's predictable, it's reliable. You're going to pay us a monthly fee. Oh, okay. And it's going to look like this. It's going to take the next two years. Oh, okay. Right. So there's a predictability, a budgetability. It's not like, well, it could be this much this month, and then I might have to do a lot of stuff next month. It's going to go way up. That kind of thing is predictable. Now, that brings sanity and peace of mind in both our worlds, right?

It does, it does. And that's what I find with my clients as well. I mean, the work we do provides an enormous amount of value, and of course, we get compensated on that basis. But there's also this component that says we're going to amortize that over a period of time. So you're not hemorrhaging all this cash. You're getting value out of the work we're doing, and then the big windfall for everybody comes in the end.

Right, right.

And that is a big help to them because they, you know, frankly, if you called someone like Goldman, you could. Right.

If you're big, you know.

Yeah. You know they're gonna start at 250. Yeah. Just to come talk to you. Yeah. Right. Well, most business owners I know couldn't fight that off. Right. Yeah. So.

Or wouldn't go to even, you know.

Or wouldn't. Right.

Yeah.

Right. So you end up with, you know, not the kind of representation you need. You know, the other thing is, I'd say that, you know, I don't. I'm certainly don't mean to blow my own horn here, but I don't know a lot of other bankers or brokers, M and A groups that do what we do. I mean, really dive as deep as we dive into the company and find all these different strategies because, you know, they don't have to. People are coming to them saying, hey, I want to sell my business. It's a transaction to them. So they look at the numbers, they crank the numbers, they pick the. Pick the model out of the, out of the, you know, the big matrix chart. And they say, okay, you know, 12.2 million, that's what you're worth. We'll sell it for that. Right. You know, we don't see it that way at all. You know, we will take that as a baseline and say, okay, anything above that is gravy. Right. And we usually do. Our average is 2 to 500% over. Over a predicted value. So we're usually doubling, if not quadrupling the value of the business.

But I've heard in some cases where you go much higher because you found something really interesting and a really interesting buyer.

Yeah, we have done really interesting.

Certainly things like recurring revenue are obvious and interesting, but there's lots of other things that we've pointed out. Real estate team, IP technology systems, customer lists, distribution, production capacity, a whole variety of things like that can make you interesting to another business. And there's a strategy to develop. So companies like Steve's company will do a lot of work with you to help you plan that kind of thing. Let me point to you where to get more about him. Actually, he's zerolimitsventures.com but if you go to zerolimitsventures. Com access, you'll get a white paper there on his valuation growth playbook so that you can begin to understand some of the thinking and so on. You can register and get an hour of time talking with Steve. Time available. Right. And there's a video of a seminar he gave on this so you can go a little deeper and longer in this thing. How long is that video?

It's about 45 minutes.

Okay, great. So some more points for you to consider and think about in the planning and speculation because it'll take some time for you to think this through. But this is such an exciting and fun thing to think about, like really maximizing the value. Now, whether you intend to sell the business or not or pass it on to your kids, the. The opportunity to increase value gives you lots of options, financing options. And even if you intend to sell it on your kids and then for whatever reason they decide not to do that, it gives them options for the future. Thinking about and maximizing the value of the business, thinking about the potential buyers has huge payoffs here. Those are the resources for you. ZeroLimitsVentures.com access. You'll get some of the stuff and of course the website itself. Then also to this point, just the basics of scaling up. How do you get started scaling up your business? How do you begin to apply the second version of the Rockefeller habits from Scaling Up? That's what we provide@scalingupbusiness.com, podcasts like this every week. Blog posts. We've got a growth kit there that you can download that tells you how to start running your planning and strategy sessions with your team. Gives you a bunch of worksheets and an overview of the scaling up book so that you get at least the basic ideas of it and get started really fast on getting your team. You can get started this weekend and you can finish the year strong. So these are some of the resources that we've got for you. I'm so glad to have you on the on the show this week, Steve. Thanks for joining us on the show.

Hey, thanks you man. I really appreciate it. Look forward to hearing from anybody that decides to contact me. I'll be happy to help in any way I can.

All right, and thanks to our listeners for joining us once again. We'll be back next week with another great show with great business growth ideas and if you want to get noticed of these every week, go to our website scalingupbusiness.com, subscribe there and see if we've got a workshop coming up. Get a basic, you know, register, bring your team and start to learn the basics in one of our one day public workshops. We do them a couple every quarter and so you can find those also with a link on our website. Thanks so much. Thanks again everyone. Talk to you next time.

Are you ready to turn your goals into daily wins? You should check out our scoreboard software. Powered by Align, it's the official software for scaling up. With Scoreboard, you'll get an AI driven coach for priorities and KPIs and it'll help keep your team focused on what matters most. With Align, you can track your goals in real time and you'll even see results on the go. With their mobile app you can rest easy knowing that Align has world class onboarding and support to set your team up for success. This is really more than just software. It's what I actually use to manage growth in our scaling up client teams. Unlock clarity and results with Scoreboard by Aligned. To try it now, go to aligntoday. Com Bill G One more time. Aligntoday Com Bill G. That's aligntoday. Com Billg Check it out and try it now.