Successfully Exit Your Business With the 8 Business Value Drivers

Only 20% to 0% of businesses actually end up selling at the end of the day. So for all of us hundred businesses that are formed, we build teams, we build a product, we build a service, we start creating something extraordinary. Only 20% of us successfully exit the business for a value. Upon that exit, do you have a business and making a million dollars a year? How many people do you think want to make a million dollars a year? You, you're on the 0.1 of 1% factor of earnings potential. When you're looking at your financial performance in your business, if it's making a million dollars a year, people will likely invest in that greater than if it's $50,000 a year. Is it a cash cow, lots of cash going back to the owner, or is there a large capital investment? So if we're in a business or an industry where there's a large capital investment required on a frequent basis, the likelihood of us selling drops. It doesn't mean it's not going to happen. It just means we're going to have to work harder to demonstrate the cash that goes back to the owner. How many times are you getting a reoccurring customer in maybe likely, maybe it's 10%, 20%. We actually want to make sure that you're tracking that. But even more importantly is a reoccurring business model where you just continuously get revenue generated from your clients on an ongoing basis. Good day, everybody. Welcome to the Wealthy Entrepreneur Podcast. My name is Bob Govreau. I will be your host for the day and I'm really excited about this topic today. What we're going to be talking about is the eight factors that impact business value. And I've got a bunch I want to talk about on this because this is really, really a passion for me. Ultimately, for those of you who've been around for a while, you know that I am helping business owners just like you to maximize their wealth, become a wealthy entrepreneur, and really live a financial life of independence and financial freedom. And one of the ways that we get there is through our businesses and maximizing the financial performance of our business. So shockingly, I want to share with you guys, and this is something that I think everybody needs to know. Every business owner who is part of building something, building something incredible, creating an enterprise, building a team. Not everybody has a successful exit from their business. Now, if you're looking at building a business and you're relying upon this for successful retirement, this is a really interesting statistic. So only 20% to 0% of businesses actually end up selling at the end of the day. So for all of us, 100 businesses that are formed, we build teams, we build a product, we build a service, we start creating something extraordinary. Only 20% of us successfully exit the business for a value upon that exit. That is a shocking statistic for me because initially when I started my business, I thought, oh great, no matter what, I'm going to build this business, we're going to have an exit, no problem. It's going to be my retirement plan. For all of us that are listening out here, if there's thousands of us listening right now, only 20% of us are actually going to exit from our business successfully. Would you like to know how to exit your business successfully? Would you like to know how to be one of the 20%? Because I think that is going to be the value of listening today. So there's really, there's eight factors that are involved in maximizing the opportunity for you to exit successfully. Successfully. The very first factor is financial performance. So what does financial performance mean? Well, it means that if I'm a business and I'm getting ready to sell, I have to have a profitable business. And this is how people essentially put a value on a business. As a framework, as a benchmark, as essentially a starting point is to think of a business's earnings. Normally we call it earnings before interest, tax and appreciation and depreciation, ebitda. So we look at this sort of flatline benchmark as a five times earnings multiple. Right? Five times EBITDA. So, for example, if a business is, you know, $3 million in revenue, irrelevant, they have 400 employees, somewhat irrelevant, but they make $100,000 a year, that business is likely worth somewhere around 500,000. Now, there's other factors that impact that. We're going to talk about the other seven factors, but financial performance is number one and likely the greatest number that dictates the valuation of what your business is worth. Just because your company makes money though, doesn't mean that somebody is going to buy it. Again, of the hundreds of businesses that exit only, or, sorry, hundreds of the businesses that are created and only 20% are actually sold every year, you know, it's a pretty low factor. So again, five times earnings financial performance, obviously if that business is making $200,000, the starting baseline factor for that valuation is going to be higher. If it's $200,000, five times earnings, likely, it is worth a million dollars. Again, the starting point, to create a framework for the value, I can tell you from experience, the more your company makes, the more likely it is that the business is going to sell. If you have a business that's making a million dollars a year, how many people do you think want to make a million dollars a year? You're on the 0.1 of 1% factor of when you're looking at your financial performance in your business, if it's making $1 million a year, people will likely invest in that greater than if it's $50,000 a year. So for all of you business owners out there who are maximizing your expenses and driving down your profitability just to make sure you're not paying tax, keep in mind that if you're looking to exit sometime in the near future, you're going to want to be looking at your earnings, at least normalizing them, but making sure that your profitability is as high as possible. So, number one, financial performance, your company has to be making money. Number two, and this is maybe my favorite topic, although financial performance is pretty important to me, the second factor is owner dependence. What does that mean? Well, that means if you are the owner of a business and every customer comes to you, you do every job, every vendor deals with you, you're in, you're responsible essentially for delivering every output inside your business. The likelihood of you transitioning to another person is very low. It means that ultimately doesn't have that much value because you're the one who's delivering everything. And if you're not there, then really the business doesn't have any value. So that is going to be a challenge. So are there ways that we can eliminate owner dependence? Absolutely. We can look at employee engagement. We could look at employees starting to take over relationships with suppliers, with customers, with delivering, with making sales. Right. If we're doing all of these things in our business, then it's again, completely dependent upon us. We're likely not going to sell our business. That is going to be a major, major factor for anyone who wants to look at exiting successfully is to get themselves out of the way and build a business that operates without them. Again, if we look at the first two factors, owner dependence and financial performance. If you can get out of the way and your company can generate a million dollars in profit every year, this is a business that people are willing to invest in. And I guarantee you, if you look at those two factors alone, assuming no other risks, if you have a business that you're not involved and it's making $1 million a year, I guarantee you the factor that people will pay is more than 5 times earnings, likely higher 6, 7, 8 times earnings, maybe even 10. Because people are willing to reinvest in a business that has no risk related to the owner and over a 10 year period it will repay itself. And in that 11th year they're making $1 million a year. That's assuming it doesn't grow. So those two factors are super important. Factor number three, potential for growth. So if you're in an industry where growth is a major opportunity, so you think of tech industry right now, applications, software as a service, SaaS type businesses, huge growth potential, right? I anything associated with technology right now is growing fast and the opportunity to continue to evolve that is massive growing market share. But if you look at accountants, for example, you look at the market for accountants, the accountant, growth in that industry is not very high. Now there's more and more people who are considering the opportunity of going out and starting a business. That maybe is a future opportunity for the accounting world. But the growth in the accounting industry is maybe 1 or 2%. It's not negative. So I wouldn't necessarily take value away in this industry because. But it's not going to be an exciting growth opportunity. And why is growth exciting and why is that impacting the value of a business? Well, if you're in a growth related industry, likely somebody is going to pay more for the valuation and likely be interested in your business because there's more opportunity in the future. If a business is making a million dollars a year right now and there's growth opportunity, the likelihood of them increasing that to $2 million a year is very, very high. So that is why we like growth opportunity inside acquiring a business. So that one is super important as well. Number four, I like this one too. Is, is it a cash cow? Right. We know what a cash cow is. It just keeps printing money, printing money. Money is coming back to us as owners. Or is it a cash pig? Right. Is this business just consuming all of the money? All of the earnings that are being made need to be reinvested. And what does this mean? Well, this means, you know, is it a super lean business where the margins are high and there's no capital requirements, so all of the cash and all the profit is just going right back into the owner's pocket. If that is the type of business, I guarantee you the risk profile is going to be lower, the cash flow is going to be better and a potential investor is going to be way more excited about that. On the opposite side, if it's again a company that's making a million dollars a year and 800,000 has to go back into capital. New vehicles, new equipment, new machinery, new tools, new everything. And those reinvestments continuously need to happen. Ultimately, the cash flow that ends up back to the owner is not very high. So we want to look at that and say, is it a cash cow, lots of cash going back to the owner, or is there a large capital investment? So if we're in a business or an industry where there's a large capital investment required on a frequent basis, the likelihood of us selling drops. It doesn't mean it's not going to happen. It just means we're going to have to work harder to demonstrate the cash that goes back to the owner. Because if the cash isn't going back to the owner, the likelihood of reinvesting by that shareholder is not going to be as high. So they're not as interested in that type of business because there's more risk. Right. Maybe the capital infrastructure is going to be 1.2 million in one year. So that, yeah, I made $1 million, but 1.2 million of cash went back out. Not a great situation. Right. So if it's a cash cow, super big positive, if it's a cash pig requiring all of the resources that the business is earning, it's going to be a little less likely to sell. And it's going to essentially, if it is saleable, it's going to bring in a lower multiple on that earnings potential. Number five is a relationship dependence. So we talked about owner dependence. We now want to talk about relationship dependence. And what that means. It essentially means that if you've got a dependence on any other stakeholder, that the risk profile of the business is higher for it to be successful, which means that the probability of you selling is going to drop once again, and the price that you're going to get for your business is going to drop. This is something that we can work on. Now, who would be the stakeholders that would essentially be dependent that the company would be dependent on? Think of a car dealership, for example. If I own a Ford dealership, then, which I do not. But if I were to own a Ford dealership, I'm selling Ford vehicles, I'm completely dependent on Ford Canada or Ford US in order to provide me the inventory that I sell. If something happens to Ford Canada or Ford US and I no longer get access to my inventory, then what do I have as far as a brand? My business is going to be diminished. So, not that this is really the case, but when we're evaluating franchisees, we want to look at the franchise and say, is it strong, is it a strong brand or is the brand struggling? And is it less likely to have a long term viability down the road? The other sort of dependence that we can have is on our employees. So I talked about vendors being the car dealership, the Ford dealership employees can be a major dependence as well. And let me explain. So if you are in a business and you have one salesperson and that one salesperson, if you were to lose them, you would essentially lose the revenue generation and revenue growth in your business. That is a major risk factor. If you have one employee who has the skill set that manufactures that one piece that you sell and it's a really high profit item. If you're to lose that individual and that skill set, then you have a challenge in being a saleable business. People will identify those sorts of risk factors. When we're looking at assessing a value of a business and if those relationships exist, the valuation of the business is going to drop. Now, in a dealership, sort of example, with the vehicle market for sure, especially if it's an electric based advanced leader in the industry, those dealerships, those vehicles don't seem to be going anywhere. However, it might change when we start seeing autonomous vehicles and maybe move towards people not buying vehicles anymore. We may be looking at a dealership and saying, is the success of a Ford or a GM or an Audi, is it viable in the future? Because maybe the market is changing. So we want to make sure that any dependence on any sort of relationship with a stakeholder is eliminated. If it's not eliminated, it's a risk factor. It could prevent you from selling your business in the future. So how do we eliminate this? Well, one, we create systems. We document systems, roles, definitions, we cross train employees. We definitely don't have one salesperson. We want to have more than one salesperson. We switch people up from one role to another. We want to make sure that if one person who we're dependent on were to leave that we could quickly replace them and ultimately create an extra value in the business. So we want to make sure that there's no stakeholder dependence one way, shape or form that will impact the value of our business. Number six is a reoccurring revenue model or basically looking at your revenue model. So I'm going to take a step back here. We're going to talk about the different types of revenue that you can get in. If you think of a retail shop, for example, and maybe it's in downtown New York, how many times are you Getting a reoccurring customer in, maybe, likely, maybe it's 10%, 20%. We actually want to make sure that you're tracking that. But even more importantly is a reoccurring business model where you just continuously get revenue generated from your clients and on an ongoing basis. What's a good example of this? Well, if you think of a subscription model, let's say Apple, right, We buy an application on Apple for 1999amonth. It continues to be charged every single month until we turn it off. That essentially is guaranteeing that income is going to be coming until the person says, I don't want it anymore. Instead, you've got the other angle where you have to go out and resell to everybody every month. You have to send them a flyer. You have to get them back in your store. You have to continue to generate enough incentive for people to buy from you. That's a bit more challenging of a model. Continuous money coming in that the customer essentially has to shut off or really hard work to bring customers back in and give them something that they want to buy. So the value of a model, that's a reoccurring revenue model where you have consistent repetitive income and revenue earnings, that model will drive a higher valuation and will increase the probability of you actually selling your business. So again, 20% of businesses sell, it would not be 20% of reoccurring revenue model businesses that sell. It would more so likely be 80% of reoccurring revenue. Businesses that sell, but they want to have a financial performance, and they don't want it to have to be dependent on the owner. When we start looking at those other factors, we bring up the valuation, we bring up the probability of eventually selling our business. Number seven. And this one's very important. This is customer satisfaction. So I'm wondering how many of you do a net promoter score or a survey with your customers. And if you don't do this, it's something you should definitely look into, because this survey allows us to ask our clients how we're doing as a business, get their feedback, and identify one of three things. One, who are our active promoters? These are the people who are nine or 10 out of 10 are giving us that sort of rating on how likely would it be that you would refer someone to work with us? If it's a 9 or a 10 out of 10, those are the people who are active promoters. Those are the ones who whisper on the sides and say, you know what? Bob and his team are the best. You should work with them. We Want to identify those people, because guess who our best referral partners are? Those people who are shouting from the rooftops. You need to work with Bob and his team. Those are the people we need to identify. Okay, so that's employee or sorry, net promoter score for customers. That is a number one priority because there's a lot of revenue sitting there that we can tap into. The next category is the seven and eights, and those are the passive users. Those are the ones that say, well, Bob and his team, they're okay, they're fine. You know, we'll continue working with them, but we're not really excited to share our experience. It's just. Okay, right? And those are the people. Again, let's look at this as an opportunity. Those are the people that, with a little nudge, a little improved service, a little personal attention, maybe those people turn into promoters really quickly. So we don't want them to be passives. We want to actually engage them to be those promoters and offer them something that gets them into that position because they're so very close. And then we've got the third category. So that is our zero to six. And in that category, these are our detractors. These are the people that we actually don't want talking about the experience working with our company. Because those people are saying that it hasn't been a very good experience and that something has gone wrong that's not allowed them to have a good experience. But let's look at this as an opportunity as well. These are the people who are giving us our very critical, real feedback of the challenges that we have in our business that we can fix and make better. And I can tell you from personal experience, one, we're not perfect. Nobody's perfect. If you identify those challenges that people are vocalizing, they're saying it hasn't been a great experience because of this. If you reach out to them and you say, we're so sorry that that's the case, we want to fix that for you. How can we offer you more value? Those people have one of two outcomes, but typically it's if you can try and solve that, if it's salvageable, they will be your promoters. And we've had it before where we've essentially had a client situation where maybe things didn't turn around as fast as possible. We reached out, we apologized. You know, we shared the circumstances, and then we looked at it and said, we're going to make this better next year. We make it better next year. All of a sudden they go from being you know a detractor to being a promoter very quickly because we said what we were going to and we've built some new trust with the customer. So customer satisfaction is huge. If you are looking at acquiring a company or someone is looking at you, you want to look at their customer net promoter score. If their net promoter scores are high, that means the reliability of those customers to continue to buy from you, continue to support your business is really high. If the bulk of the customers are in a passive sort of situation that puts a really big risk profile on your business. I don't want to buy a business where there's a ton of passives and we could have a bunch of churn on our customers. Why would I buy that business? Why wouldn't I just go out and acquire those customers in a different way? Maybe through marketing. So the higher the net promoter score, the more people that we have that are actively sharing their experience and it's a positive experience, the more referrals, the more revenue growth opportunity we have, the higher probability it is that we're going to be able to sell our business. And the last one, probably my, my least favorite of the eight, but number eight is market control. So what does this mean? This means, this is our strategy and positioning in the market. So market control means that we are unique in our space and nobody can copy us. We are differentiating what we offer or how we deliver it in such a way that nobody can recreate that we're very unique. We're not cost focused, we're value focused, we're differentiation in our service or product focus and we have a cool unique opportunity to control our space. Or at least we've differentiated ourselves in such a way that we're not competing on price. The other side obviously is on the high volume markets which is like the Walmarts of the world. I can't compete with Walmart if Walmart wants to sell something for a super low price. If I'm offering the exact same product or service, I will never be able to build to beat Walmart. But what I could do is on their low price product or service, I can actually create something that's much better than what they have, charge more for it and continue to build a market for people who want a higher product and higher value opportunity or space with that as a consumer, right? So again, if we look at it as a pair of jeans, I'm not going to be able to compete with a Walmart to create a $1999 pair of jeans, but I can sell $100 designer jeans that are way stronger, way better material, look better. That's the market I want to go after. If you have a differentiation and you control your market space or you've created yourself as a unique enough individual and business in that space, you're going to have more control over the valuation of your business. People don't want to compete with Walmart. They can do the exact same thing on their own. They want to buy something that's unique. So I want to do a bit of a recap here on those eight factors. But if you. I just want to. Before I do that, I just want to say if you focus on these eight factors in your business, not only will you create a more successful business and a more profitable business right now, but you will maximize the increase of your valuation in your business and you will maximize the potential for you to sell your business. I can tell you if you get your financial performance high enough and you create a company that operates without you, while mitigating all of the other risk and creating yourself in a unique space, you will sell your business and it will be a good exit plan. These are eight factors you can continue to work on in your business, in your life, starting today, because eventually we're going to want to exit. And by focusing on these eight factors, you will build a stronger business. So just as a bit of a recap, number one, financial performance. If you're not making money, there's nothing to buy. I don't want to buy something that's not making money. Number two, owner dependence. I do not want to buy a business that that is buying a job. I do not want to have to come in and take over doing all of the work. I also don't want to take on the risk that if the existing owner leaves that all of the customers leave with them. Do not want to see that happen. Number three, growth opportunity. If we're in a declining market, like a typewriter market, I'm not buying a typewriter business these days. I'm going to focus on something that's leading technology. You want to be in a growth space that is going to maximize the ability for you to sell. You want to look at whether it's a cash cow or a cash pig. That's number four. If your business is generating positive cash flow and maximizing returns to the owner, that is going to increase the probability of you selling and your valuation. Number five, relationship dependence. If you have stakeholders, employees, vendors, anyone that the company is dependent upon, we want to eliminate that risk because that risk could jeopardize you eventually exiting from your business. And there's ways to do it. Looking at systemizing, creating roles, responsibilities, job descriptions so that if someone were to exit, you could quickly replace them. It creates a much stronger business for you and it increases the probability of you eventually selling. Number six, reoccurring revenue model. If you can create a business where you have customers that continue to buy, that increases your opportunity to sell. If you can create it even better on a subscription type model where businesses are essentially paying you regularly and they have to make a conscious choice to terminate the services or product that you offer that is going to be a stronger business with a higher likelihood of selling and a higher valuation. Number eight or number seven, customer satisfaction. This is where we get our Net promoter score. Identify where a business is is at right now with satisfaction from its customers. Who are the promoters? Who are the detractors? Who are the passives? Get your net promoter score done. This is something that we do annually and work on fixing it and making it better. If you have a business where you have a majority of people who are active promoters of your business, you are going to sell your business for a great value. It gives the potential buyer the confidence of continuity in your business. And number eight, be unique. This is market control. Differentiate yourself. Don't be a standardized product because if you are, nobody wants to buy something that another competitor could essentially drop price 5% and wipe you out. They want to know that you've got a unique space in the market. You've differentiated yourself so that you are going to be able to be a long term growing market and business so that you have a future of success. That's what they want. So focus on those eight factors. You will increase the probability of selling and you will maximize the valuation of your business. Here's what I want to offer you guys right now. We've actually subscribed to and we are a value builder company which allows us to help coach on these eight factors. What we what we actually have for you is a free assessment. It's a value builder assessment. It looks at these eight factors and gives you a rating of where you're at right now. It also shares with you an informal valuation of how much your business is going to be worth. So if you want that free sort of assessment, you can download it. I'm going to include the link below this podcast recording. Download that link, put your information in, we'll send you the report. It will likely help you have a really good start of identifying where you're at so you can build out your plan to improving it in the future. If you have enjoyed this podcast, everybody again, my name's Bob Goveraud. Please make sure that you like this podcast. Leave a comment Share this episode out and subscribe to our podcast. Ultimately, I'm here to help empower entrepreneurs just like you to become a wealthy entrepreneur and change the world one day at a time. And hopefully we can do it together. So thanks for joining in today everybody. Look forward to catching you next time.