5 Smart Strategies to Exit Your Business with Maximum Value Franchise Fridays with Jeff Dudan #200

Hey everybody, Jeff Duden here. Welcome back to Franchise Fridays on the Unemployable podcast. When people start a business, it's really about one thing and one thing only, which is creating value that you can exchange for money at some point down the road. Now, there are some advanced strategies that experienced or more sophisticated business owners have that have to do with tax advantages or taking advantage of carry forward losses, or getting into businesses that have accelerated depreciation opportunities. But let's just keep it simple for the purpose of this episode. That somebody is a first time or otherwise uncomplicated business owner. They're looking to start a business that they can do one of three things with. Number one, run and operate in perpetuity, meaning operate this business for decades or even pass it on to future generations. Number two, run the business and transact the business and say six to 10 years. Or number three, you know, build the business as part of a platform, as part of a family office, as part of a group of assets that's going to be either a legacy asset or maybe traded as a group in the future, creating cash flow, whatever it is. In any of these scenarios, the most important thing that you can do as a business builder is to begin with the end in mind. And there is the old adage that says every day you should be running your business as if it were sale ready. Meaning if you were forced to sell the business, which sometimes happens due to an unexpected death, an illness, or even a huge opportunity, in terms of an inbound offer that you didn't even see coming from a strategic buyer that just feels right from a timing and value perspective, you should always be ready to sell it. So if you're looking at getting to get unemployed and start a business, here are some things that you should think about from the very beginning. Number one, build a business that is not reliant upon you. Look, this isn't going to happen day one and it might not ever happen for several years. Because every business starts in a scrum with an owner or a founder doing all of the things that matter, that are critical to make the business healthy and profitable. But you should have a plan by every measure, by every KPI and at the ascending revenue levels that continually stick, systematize that business and allow it to be transferred to other people. To operate all of the key functions of the business, you've got to organize them in a way that somebody else can do them while still maintaining the profitability profile of that business. Now, I would say oftentimes, but I'm going to Suggest that every time you're going to take off one of the critical hats and put it on somebody else, it is almost always going to need to be accompanied by an increase in top line revenue. So as you add people to your business and they start doing these critical things, the revenue is going to have to go up to accommodate for that. So I do believe that if you're not growing, you're dying and that anything left to itself will always go from bad to worse. So if you're either constantly focusing on ways to grow your top line to make room for these people that are the caliber and have the capabilities that can perform with excellence the roles that you have previously performed. There are many flavors of strategy tools that include this people piece, including the entrepreneurial operating system by Gino Wickman, which you can find in the book Traction, or Scaling up, which is a variation by Vern Harnish and John Ratliff, or any other methodology that essentially will provide you as a business builder. Templates for you to close the gap between some future organizational chart state who's in the business, what are they doing and where you are today, who are the people that you need? What are the numbers that tell you exactly they are performing the appropriate activities with excellence and what are those activities? The business will always be more valuable if it doesn't rely on you. And it is run by systems, processes and people. And the biggest benefit of all is that you can walk away after some transaction and not have to go with the business because you've already proven that other people can operate it. Number two, which is something that is often overlooked, you can't sell something you don't own. 83% of transactional value now is tied up in some type of IP intellectual property. And the great thing about building a business inside a franchise system is that there's not only established operating systems and procedures, but there is also a clear methodology and generally a group of buyers that have been pre screened, they are ready, willing and able to buy your business. The franchise system will have made sure that all of this intellectual property is transferable to the new agreement and fully usable by the new owner, and that all of the data is properly organized and will also be available for the continuance of that business. And, and of course there's this great team of people that are going to support the new owner so that the old owner can ride off into the sunset or whatever flavor of horse, motorcycle, boat or golf cart that they so desire. Now, if it's an independent business, we're talking about building, you better make sure that you've at least made an attempt to get your intellectual property protected, meaning obvious things like a trademark. But the less obvious things like employment agreements that include confidentialities, non compete agreements, so that when you sell the business to somebody else, that your team, including your salespeople, just don't walk out the door with all the customers and all of the contracts and all of the systems and processes that you've taken years to build and no steps to protect. The third are several things that I'm going to bucket into downside risk protection, which is a whole host of things that include making sure you're properly insured so that you've got no gaps in insurance, making sure that any claims have been settled, and nuisance claims, employee claims, unemployment claims, or any other contingent liabilities that may have been incurred. Because if those are still open, then people will look at that and say, hey, you know what, if this comes back on the business, that's going to be my responsibility. So you tighten those things up and clean those things and then think about your customer concentration. One of the things that healthy businesses have is a diverse set of customers. So you know, if you've got two or three customers and you're kind of lazy and you do all your work for just a small group of buyers, a buyer for your business is to look at and say, well, if I lose one of those customers, the business is going to be way down. So that's a risk to me and I'm not willing to take it. Whereas you look at your customer profile and the diversity of your customers, you need to understand that you have eliminated that risk by providing services for multiple customers at multiple levels. And also to go through and if there's any unprofitable customer set, remove that as well. And last, probably most important thing is demonstrated track record of cash flow. You can say whatever you want about a pretty business or a great team, or fulfilling products or service, but at the end of the day, it's cash flow that's going to determine the value of your business in any sales situation by any formula. So making sure that you are evaluating your expenses and costs on a regular basis. And if you know that you're heading towards a sale, you need to land projects that don't contribute to revenue that might have a long return on the investment horizon. Or you need to challenge your business to run as lean as possible and only bring the things back into the building and you absolutely need them. If you have eliminated some things and of course drive your Revenue as hard as possible while holding your cost the same to prove the optimum cash flow that can be generated from the business. And then when you're calculating this cash flow, this is something business owners don't often get, is that you need to make sure that you add back any personal expenses or developmental expensive or things that the future owner like projects might not have to do or might not have to incur in the future because you will get credit for those. And I guess if one wrap up point is to say never sell your business yourself. The beautiful thing about being inside of a franchise system is that there are comps from previous sales, there are examples of businesses that might be performing better in the disclosure document and there's a vetting process for a new owner and there should be guidance from the franchise on how the business is priced and how to get the best absolute deal for you. So if you're outside of a franchise system, you need to think about hiring at minimum a business broker or if the business is bigger, maybe an investment banker if they would take it. Because finance is a language that is as foreign as any other language that you would have to learn. And if you don't know how to speak it, you will absolutely leave money on the table for the benefit of the buyer. So if you're thinking about getting into business, start, begin with the end in mind and make sure that every decision you make is building towards the most profitable exit that you can possibly obtain. Okay folks, that's it for today. I hope that was helpful and you know, number one, recap. Build a business that can run without you. Number two, make sure you have a clear title to all of the assets and you own everything possible. And number three, clean up any risks, eliminate the risks. Tie off any loose ends that might be hanging open in the business to make sure that the buyer doesn't perceive though as a liability and try to reduce the price. And then number four, cash flow, cash flow, cash flow. Cash is just like oxygen. You never know how bad you need it until you don't have any. And your proven cash flow plus any add backs is how your business is going to be valued at the end of the day. And of course the big number five, don't do it yourself if you don't understand it. If it's not a car, it's not a boat, it's not a house even, it's a lot more complicated than that. And if you don't speak the language of finance or you have a language barrier that's going to cost you money. So thanks again for joining us today. And of course, if you want to learn more about the great businesses that we have at Homefront Branch, just go to homefrontbranch.com, click the link below. We've got five incredible businesses for you to take a look at. And don't forget, click the link to get a free copy of my book, the Business Athletes Regimen for a Great Life Through Better Decisions. Because if you're listening to this podcast, I can only suspect you're probably at an inflection point in your life and you need to make the very best decision that you possibly can. And because every decision you make is compound interest on your life, either positive or negative. I'm Jeff Duden. You've been listening to Franchise Fridays on the unemployable podcast. Let's get you unemployed in the best way possible. Thanks for listening.