The Entrepreneur's Guide to Building a Sellable Business | Mac Lackey, CEO of Exit DNA (Podcast 449)

One of the challenges a lot of entrepreneurs have is there is a primary reason that they need or want to sell. And we use kind of this five factor model and say, in a perfect world, you should be considering all five of these factors. And if you're considering these and you're making the changes that we generally would suggest you're building a better business to your exact point, then you have what I think is the most powerful point of leverage, and that is optionality.

Matt, good to see you again. Thanks for doing this.

Yeah, great to see you as always.

Yeah, I'm looking forward to this. I wanted to just do a quick interview with you and find out a little bit more about you and Exit DNA and, and talk about why we actually wanted you to be a partner with the CEO alliance and why we were hoping to be able to send you some good referrals of clients for your business. So why don't you tell us a little bit about what your business Exit DNA is and focuses on and then I want to do a couple deep dives with you around it.

Yeah, absolutely. Well, as you and I have discussed a little bit in the past, my, my background is quite different than what I would consider traditional M and A advisors or investment bankers. You know, I'm. I'm an entrepreneur. I'm a six exit founder. And so in a lot of ways, I have been in the trenches now for literally 30 years. I started my first company back in 1995 in Web One. Right after Netscape launched the commercial web browser. I had an Internet company. And so I've really been in the trenches. And with six exits, I learned so much, good and bad. I made a million mistakes. I got a few things right. I've been incredibly fortunate in my life. But what I realized is that my experience was not only unique, having been an entrepreneur that's been on the exit journey, but maybe most importantly, I never sold a company based on a financial multiple financial metric. I never sold a company on an EBITDA multiple or revenue multiple. And I didn't realize until I was kind of out of building my companies how unique that was. Everyone I was talking to, every entrepreneur said, do you think my company's worth five times EBITDA or seven times ebitda? I was like, who cares? Like, let's talk about your strategic value. Let's find buyers that are willing to pay you a massive premium because you solve a real problem for them. And I didn't understand how unique that perspective was. And so a lot of what I do within Exit DNA is I help entrepreneurs create the option to exit in future. But a lot of it truly comes down to looking at their business differently, creating an irresistible exit story and finding those unique, often strategic buyers who really have to have what they're building. And that's something pretty different.

It's interesting. I talked to somebody years ago about the Rembrandts and the attic idea. I think you and I might have chatted about it when we were together in Croatia that, let's say you and I were out buying a home and you were going to pay $4 million for the home and I offered 6 million and the other three people offering on the home all offered 4 million. You're like, Cameron's crazy. Why would he offer 6 million? Well, I noticed there were two Rembrandt paintings up in the attic and I'm willing to buy because they're worth $5 million each. I'll happily pay 6 million for the home and all its assets. Is that kind of what you're talking about with looking for the strategic value is there's more to the business than just the P and L on the balance sheet.

It's spot on. That's such a good story. And you and I did talk about that in Croatia. And I think a lot of entrepreneurs intuitively know that there's something special and unique in their business that's so much greater than whatever profits they're producing or revenue they're generating. But they've been told so often that, that their business's value is just a financial multiple that they really sort of tamp that down and don't even think about it. So number one, they need to elevate that. And then number two, the other part of that is you have to find buyers that are somewhere in the world that identify that Rembrandt and realize how incredibly valuable that is. And I, I could bore you with examples and I won't today, but I, you know, some of my own companies, I hadn't even generated profits yet and we sold them for eight figures because we had something, whether it was technology or intellectual property or an exclusive distribution agreement that was so valuable to the buyer they could care less about my financials. And that's what you're really for.

Yeah, that's kind of the big strategic value I think about, you know, Tiffany's jewelry, you know, it's just pretty average, high priced jewelry, but because it comes in a blue box with a white ribbon, there's this value. And I've always talked about selling the sizzle, not the steak. Right. You're going to sell the. So is that kind of how you help these companies? But you also do have to get into some of the basic nuts and bolts of the basic P and L and the basic value, too, don't you?

We do, yeah. What I would often say to an entrepreneur is I don't want to be dismissive of anyone's financials and core business. Those things do matter. They are important. You want to run a good business, you want to be growing, you want to have profits, you hope you have higher margins than your competitors. All those things are true. They're just foundational. And so, yes, that's part of the story, it's part of the foundation. But you can imagine, and I know you personally are really good at this, when you're talking to prospective buyers, you don't want to talk about history. And that's where everyone says, what Was your last 12 months? EBITDA. What you want to talk about is almost with your hand, be dismissive and say, yes, we had a great last 12 months. Let me show you where we're going and why you're going to benefit so much from what we've created. It's all about the future and what's possible. And so that mind shift, I hear that all the time from our members. 30 days after they join Exit DNA, they'll call me and say, I'm thinking totally different about the business I'm building and how I articulate it. And that, to me is transformational. That doesn't mean the financials don't matter. You're just stacking a lot of things on top of those.

Yeah. It's interesting, I was laughing because I remembered when we were building, 1, 800, got junk back when I was the COO and we would get interviewed by the media and the media would ask us a question and we would always talk about three years later. We would talk about, like, what our revenue is going to be in three years and what we were building in three years and we were expanding to in three years. We knew they would never ask us. They'd never say, where are you going to be in three years? So we just told them anyway. And the more that we talked about the future, the more they got excited. And I guess you're doing that with potential buyers. You're getting the buyers excited about what they're going to be able to build your company into versus the boring history of where you are and where you got to. Is that right?

That's. That's exactly. I mean, I used to draw this real simple chart on a whiteboard and, and use that example, where are you going to be in three years? And what really has to happen is prospective buyers have to see where you're going. And the part two of that is why you're likely to get there. Because they never want you to get there because that's when you're most expensive.

Right.

They want to get you on the way on that journey. When they start getting confident that this company is going to make it, we need to buy them now. Yeah, that's when you maximize value and you really even capture some of that future value because they have to pay you for some of that, otherwise they're not paying you enough money because you're going to get there anyway. So that psychologically really creates a nice dynamic.

Now something else that, you know, I think we get told or we hear is that there is an earnout. You know, there's always going to be an earnout and if somebody's buying you, there's always going to be an earn out. That's not entirely true, is it? There's often you can negotiate that. Is everything negotiable?

I think everything is negotiable. And the way I advise entrepreneurs within exit DNA, I think again, just a great simple strategy is the most important number is guaranteed cash. Now that doesn't have to be cash at close, it could be paid out over five years. As a matter of fact, the company I sold back in 2018, I got the last check back in October just a few months ago and it was. But it's contractually guaranteed. And so that number, I always tell an entrepreneur, that's the number we need to nail. But the minute you nail that, then all of a sudden you can be dismissive and say, okay, that's great, I'm glad I'm getting $6 million in cash. That's guaranteed. But what I really care about is all of this potential, all of this future. I need to capture some of that. Now whether that's in the form of earnout, rolled equity performance guarantees or any other triggers, you can sort of psychologically in your mind say I just checked off the only number that really matters, which is guaranteed cash. That's what we're negotiating hard for. Everything else is a bonus. The earn out can be dismissed, you can negotiate it away. I have a current member that's under LOI right now that didn't want an earn out, didn't want any performance. And so we shifted about 98% of the deal to Cash at close with a small kicker so it can be negotiated. To your point, everything's negotiable.

You know, it's interesting. I was speaking with a CEO about 10 years ago and he was able, he sold this company for 107 million. He got 100 million in cash and a note for seven. And he was able to walk away day one and did not have to stay and work inside the company anymore. And I was like, well, how did you do that and how is that even possible? And he said, I built a company that didn't need me. I built a company and a team of people that didn't need me. Is that pretty normal or how would you advise a CEO that if you don't want to have to go work for this new owner, which by the way, most entrepreneurs would never want to work for the new owner. That's why we're an entrepreneur. We're not employable in the first place. What do they have to, what are the two or three things they have to do so that they can negotiate that out of the deal?

I think it's one of the, I would call it core tenets of exit DNA is I like to work with entrepreneurs literally two to three years before they truly want to exit. One of the mistakes entrepreneurs make across the board is they wake up one day and they need or want to exit. Something happens, right? Financial health burnout and they say, I want to be out of this business in six months. Well, you know, exit value is a lot like, you know, compounding interest in the stock market. It's the eighth wonder of the world. Little things compound into value over time. And one of those core things is nobody wants to buy a business that the founder is in the critical path. If you are in every meeting and you're the main salesperson or you're the creative person, that is negative as it relates to exit value and it's incredibly negative in terms of your personal freedom. Those things are highly correlated. So I like to work with people that are methodically, we're helping them create systems and processes and teams and understanding that not only is it impacting your personal freedom, you'll never get paid enough money if you are in the critical path. And they're going to demand that you sign a long term non compete and you have an earn out and you are staying with the buyer. So the more you do to reduce your role, even if you have all the controls, you can own all the shares, you can have all the vote, but you need to be able to present to A prospective buyer that I am not in the day to day. As a matter of fact, my very last company I sold because I learned it the hard way many times over. I literally, I was the largest shareholder, I was the chairman, I had all controlled the board. But even in the office I had a desk. And no one knew if I was in the office or if I was even in the country because everything had to run exactly the same whether I was in the office, in the country or completely disengaged. And that is an incredibly sellable business because you can present without any misrepresentation that I am not critical to this business. Maybe I founded it, maybe I advise them, maybe I care about it, but it runs without me. And that's the most powerful place to be.

Yeah, it makes sense, right? If you actually build the better business, then of course you're going to sell for the better price. And the better business is the one that doesn't require you at all. Something you mentioned, I just kind of finally realized originally when I heard about your model with exit DNA, which was very different from the traditional kind of M and a firm or investment bank firm was. Your model is almost like part mastermind community, I think, part course and part we will get you sold. Originally I'm like, I just want you to sell my company. I don't want to be in this mastermind.

I don't want to be with a.

Bunch of other people selling their company. But now I'm like, wait a second, now I get it. Is the reason that your model includes this, and I'll get you to explain it, is because they're working with you two or three years before they're going to get to that exit. And by being in this mastermind, sharing ideas with others, being a part of a program, they're building a better business which net net at the end of the day gets them the bigger exit. Is that the whole model?

Yes, 100%. I think it's such a, again, it's such a common mistake. And a lot of the referrals, I mean, almost my entire business is referrals. A lot of the referrals are people that have had a failed process. They decided to sell their company, they wanted to go to market, they were excited about what was going to happen. They spent a lot of time and a lot of money with investment bankers or M and A advisors only to realize the deal fell apart. And so they come to me very frustrated, very upset. And we kind of start from that, that point, which is forget going to market we can go to market at any point. The real key is, are you set up for success in a transaction? And if you're set up for success in a transaction, the good news is you have complete optionality. You don't have to sell, you have a good business. You could recapitalize and take chips off the table. You could sell 100%, you could sell minority. All of those things are based on you having your business set up the right way and you having the right mindset of what this transaction looks like. And I almost never meet with entrepreneurs sadly that have clarity around that. They're very successful entrepreneurs, they have a great business, but that's because they're engineers or they're creative. They're not exit experts. And I wouldn't have held myself out as one except I've done it six times and I've learned the hard way I know how to prepare a business. So our model brings people in. It is a mastermind. It's almost a year long program, not that it takes a year. I always tell people if you can put a few hours a month into exit DNA, you're going to get 10 to 100x ROI. It's not an expensive program. It is a mindset change and then very tactical things that you can start doing immediately with limited amounts of time that will compound into a lot of value. Investment bankers, when we ultimately plug them in, whether it's someone I recommend or one they already have, they don't have to use our team even they call me and thank me to the ends of the earth because people come in prepared, their deal rooms are ready, they understand what the process is going to look like, they know how to negotiate, they understand the structures that is so valuable before you go to market. So you don't have to learn the lessons in process which are very painful and often life changing. Most entrepreneurs leave life changing money on the table by not doing the simple things they could do in advance.

You know, it's interesting, the other part of this is that in that whole 12 months to 24 months leading up to the deal time period, they're also building a better company that's throwing off more cash flow. Like they're making, they're making a return even if they haven't sold their company yet. So I was coaching a company years ago called Blue Grace Logistics and I coached them from 40 people up to 600 employees. And Bobby went out and raised $255 million from Warburg Pincus. It's a deal that's been written up in the Wall Street Journal, New York Times have all covered it. You can look up Blue Grace Logistics and Warburg Pincus and the dollars are all there. And the CEO, the night of signing the deal, turned to Bob. Bobby's told me, he's like, I can never be fired. I have full control of the board. I can never be fired. I could turn this place into a pizza parlor. I could move away and not check emails and phone calls for 12 months. They can still not fire me. I'm like, how is that even possible? He said, I was so willing to walk away from the deal that I only did the deal that I wanted. And I built a company that I knew they wanted. And I continued to build a company that I knew they wanted, that I had the confidence to not cave and not give in. The night of the deal, the CEO of Warbird Pincus pulled Bobby away and he said, were you really willing to walk away? And Bobby said, yeah. And he goes, this is the most one sided deal we've ever signed against our own company in our history, but we had to have you. And Bobby goes, yes, I know. Is that something that you coach people on as well as being willing to walk away? Like how do you know another client of mine who I think you know, Ben Kirschner, who built Tenuity, it used to be called Elite SEM.

Oh yeah.

Ben walked away from the deal literally at 11:30 at night, the night before signing because something was going sideways. Do you work with them on that, like knowing when to walk?

Yeah. We have one of the, what I would call core sessions within Exadena is called if and when you sell. And again, one of the challenges a lot of entrepreneurs have is there is a primary reason that they need or want to sell. What could be a personal issue, could be a market issue, whatever supply chain, all kinds of things can happen. And we use kind of this five factor model. And say in a perfect world, you know, you should be considering all five of these factors that are your personal situation, macroeconomics, industry dynamics, human dynamics, all of these things need to be considered. And if you're considering these and you're making the changes that we generally would suggest you're building a better business to your exact point, then you have what I think is the most powerful point of leverage and that is optionality. You don't have to sell, you can wait another six months, you can wait another year, you can use a down cycle in the economy to buy a competitor versus sell at the lows. And you need to be clear and confident on what that looks like so that you can decide, you know what, this just isn't the right deal. And it also works the other way. I was literally on the phone with one of our members this morning who has a probably $50 million exit, almost all cash in the not too distant future, and it could be bigger. And the conversation was, I would actually recommend we pull the timeline forward because the risk reward skew does. Doesn't work to your favor the further you go out in time. What if the supply chain changes? What if there's a global pandemic? What if we go to war with Russia? Whatever issue you pick, you can put probably 40 to 50 million in cash in your pocket today, maybe 60 million a year and a half from now. The risk reward skew is wrong. Let's pull the timeline forward and get the deal done. So, yeah, it's really understanding how these factors play into your timing and what the number needs to be. And most entrepreneurs, again, without fail, overestimate how much money they need to put in their pocket to live the rest of their lives incredibly well. They think it's 50 million when I could probably convince them it's like 14 million.

You know, the other mistake I've seen a bunch of entrepreneurs make, and this story goes back to 1998. An entrepreneur friend of mine got an offer for 118 million for his company, and he said, no, I'm going to push for 125. Six months later, he was bankrupt. Some laws got changed in Canada. He was out of business. And John has never made more than $1 million a year since. The big lesson that I got from John was the best time to take an offer is when you get it and to write a number down and put it in your wallet. And when you get an offer, pull out the number. And if it's more than what you wanted, take it. What happens is we keep trying to grow, right? We keep pushing, we keep pushing, we keep pushing. How do you advise entrepreneurs against that?

Yeah, I think it is. One of the characteristics that makes entrepreneurs successful is that willingness to take risk and optimism. You always think next quarter is going to be better than this quarter, next year is going to be better than this year. And what you don't know are the things that you don't control. Like COVID 19. You know, I had a. I had a member who went against my advice to pull a deal forward and decided to wait two more quarters. And their company went from probably, I don't know, 70, 80 million in sort of enterprise Value to almost out of business during COVID because it was a very in person related business. And I have a lot of those examples even in my own life. You know, people, buyers. I had a buyer of one of my companies get diagnosed with a brain tumor a week before the deal was supposed to close. Like, of course the deal is going to fall apart. Like, yeah, you know. And so I really, really believe entrepreneurs need to get clear, which we can help them do. On what is that number to live the life you want or to get in the mind space you want and get paid the value that you've created. I'm never telling people to sell for less than what it's worth. I'm all about maxing value but not using give it one more quarter, one more year for arbitrary things. Right. If you have $118 million offer close immediately. Immediately. Your life in generations behind you will thank you. The dollars are not worth it.

I had another client of mine years ago say that he got an offer 18 months after starting his company, got an offer for something like 14 or 15 million bucks. He only had $600,000 in debt. And he said between he and his partner, they'd never have enough post tax to fly private for the rest of their lives. And I'm like, Michael, take the offer. You're 34 years old, you'll do it again. He was out of business two months, two years later, out of business. I'm like, you can't keep chasing that, that carrot. What's the. If you were to describe the absolute perfect person, the person who's listening right now, that would know for sure that they should contact you and maybe work with exit DNA. Who are they? Just give us like the one or two sentence that describes them. So they go, yeah, that's me. Or this is not me for sure.

Yeah, I would say the, the entrepreneur that wants the option to exit in the next, let's call it three to five years, they don't know for sure they want to exit, but they think that somewhere in that timeline they're going to have a business that's valuable enough that they're going to want to sell it, that they are probably going to have the enterprise value that it's worth selling, that maybe they want to do something different with their life, start another company, start a foundation, move to Bali, travel the world like you do, whatever it is. If they're just thinking I might want the option, then I almost guarantee you exit DNA has off the charts roi because again, all we're really helping people do is get clear on how do you create the option. You're not agreeing to sell your company or we don't take any percentages. Within the core of Exit DNA, it's really educational in an environment where that same entrepreneur that might be three or four years from Exit, they're in a mastermind hearing members of mine that a year and a half ago were where they are that are now negotiating an loi and they get to hear the questions, they get to see how it works and it is life changing for these individuals.

Awesome. Michael Ake, the founder of Exit DNA. Thanks very much for the ideas and sharing. Really appreciate it.

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