Ep 66 | The 7 Deadly Assumptions That Will Kill Your Business Sale

Welcome to the Exit Engine Podcast, episode 66. Welcome to the Exit Engine Podcast, the show where founders, owners, and advisors learn how to unlock the full value of their business and exit on their own terms. I'm your host, Jo Stapleton. With me, as always, is my partner in everything exits, John Kniff. John, how are you?

Good morning, Joe.

Excellent. Uh, each week we're here to help you increase your company's value and salability with actionable insights you can apply whether your exit is 12 months away or still a dream in progress. Be sure to also check out the full ExitEngine ecosystem at myexitengine.com, where you can calculate your company's total exit value score, connect with expert advisors, and join our founders community built for strategic exits. That's myexitengine.com. John, we, uh, we have a slightly unusual guest for us today, um, because, um, we are, uh, you know, uh, Kayvon is a, um, is a mutual, uh, is a friend and a, another M&A advisor.

Yep.

Um, he owns a company called Legacy Outcomes. Um, they are again a sell-side M&A advisory firm. They've got a really good success rate, and I think that's something that's really important to point out here. They've got about— they claim, and we'll talk to Kayvon about this, but a 94% success rate. Legacy Outcomes works exclusively with business owners who want to exit without compromising their mission, culture, or legacy. And that's exactly why we're having Kayvon on here.

Exactly.

Yeah.

Because Kayvon does this also, right?

This—

we want you guys to hear that this isn't just us saying this, right?

And we've said this before, right? We've said this before. It's like, look, We think that exit planning and selling your business and planning for that exit is important. Yeah. Would we like you to talk to us?

Yes.

But also, we're not for everybody. And Kayvon and other M&A advisors out there are perfectly— are excellent choices. They can do— they do different things. They focus on different industries. So you should— if you're an entrepreneur listening to this, you should use one of us, right? Reach out to Kayvon. Reach out to us.

Do something, right? Go to exitmyexitengine.com right now. Get on the waitlist, and so that we're going to tell you all about the community that we're building right now called My Exit Engine. Go check that out as well. Here's what's cool about Kavon too, though. Okay, Kavon is not just an M&A advisor. He is a is a kind of rare gem like us who has a lot of ton of experience outside of the M&A world as a founder, right? So he's personally built and sold multiple companies himself. 8-figure outcomes. Okay, the, um, GoCheck Kids, so 100x valuation, over 6,500 pediatric care teams generating over $70 million in revenue with GenPlay Games. Kayvon has lived both the chaos and the clarity of the exit journey himself, and that's why this is such a great conversation today. Um, so without further ado, uh, let's talk right now with Kayvon Sabre. Kayvon, thanks so much for being on the Exit Engine Podcast.

Joe and John, it's an honor because like you guys, I consider Legacy to be in the very small minority of M&A firms that are really changing the trajectory for business owners.

Nice.

The market in many respects is rigged, right? 94% of business owners are unhappy who try to sell, right? You guys know the data as well as I do, but not everyone in your audience is as close to it as we are. 70% of business owners who try to sell fail. And of the remaining 30%, you have 24% of those 30 who are, who have regrets over how they sold. So that means there's 6% left, right? Who are actually happy. And those are the, of course, the clients who work with a firm like yours or ours, or the minority of firms that are doing things differently. So it's awesome to be, you know, with the minority of good guys today. That's awesome.

That's so cool. And I love how you put that because I think that's exactly how we see ourselves too, right? Which is, you know, again, and what we're doing both at Exio and at ExitEngine, right, is the servicing of 2 slightly different markets but in the same basic way, right?

Which is to—

and I think that we'll talk about this today— which is there are certain kind of standard things, right, that a buyer, okay, is judging a company on, right? And making a decision whether to buy. Now, they've got their— we know that they've already got their own criteria, right? This is our investment criteria. This is the place we play in. This is— we play in this because we've got this experience. We've got, right, we've got the— we've got a criteria we're looking for. We're looking for this kind of EBITDA. We're looking for this kind of, you know, top-line revenue. We're looking for a company that looks exactly— it looks like this, okay? And that's kind of like, you know, that's where we always started, right? Back in the— in our buyer days, that's where we started. What we're— what, what also goes into that then is a, is a, uh, obviously is the due diligence part. But the due diligence part, right, is often fraught with all kinds of other specific things that— and again, this is what this podcast is all about— that sellers are just not aware of until they are sitting at that point in the table. There are these pitfalls. So from your perspective, Kayvon, as both a founder and as an advisor, what are the common things that you are seeing right out there that people— the mistakes that founders are making or not doing that are essentially harming them when they get down to— why is this only 6%? I guess is the answer, right? Is the question.

Yeah. So let's talk about it first at the highest level and then kind of drill down to a level of granularity that's really practical. So at the highest level, I think that the seller's path to regrets starts with untested assumptions. They have a lot of ideas about how this is going to go. That have never been validated.

Right.

And then those untested assumptions meet the actual reality on the battlefield and they say, oh my gosh, I wish somebody told me, right? So why doesn't anybody tell them? Well, because after you go through a horror story and leave a ton of money on the table as a business owner, you're not gonna go onto social media or send an email to all your friends and say, I got my ass kicked. Right.

I got rooked.

Yeah. Um, you're not gonna say I was totally outmaneuvered by the buyers, but let me just say to your audience, I was totally outmaneuvered by the buyers.

I was too. I tell this story all the time. Absolutely. John as well. Yeah.

I sold my first company, um, to a public company and my second company to private equity, and I got outmaneuvered in different ways each time, right? And realized, gosh, there needs to be a different kind of representation and a different kind of education. So I'm so grateful to everything you're doing with this podcast and more, you know, from a broader standpoint, um, because business owners need to hear these realities. So that's the first category is untested assumptions. Let's get back to those in a minute if you like. Um, we have 7 deadly assumptions, like the 7 deadly sins, that are expensive and common, right?

Yep.

We go through and educate business owners on. The second category is, uh, is the brokers. They pave the way toward those regrets with not a lack of intentions typically, but a lack of competence. They might have shifted over from selling cars or selling houses and selling a $500,000 car. And I'm sorry, a $500,000 house. I don't know of a lot of $500,000 cars, but a $500,000 house and a $500,000 business, there's a lot of similarities. But if you're going to sell a $500,000 house, you have nothing in common. with the process you use to get the most value for a $10 or $30 or $50 million business. So again, it starts with untested assumptions. Then you have a road to regrets that's paved by mostly well-intentioned brokers. I'm going to come back to that mostly well-intentioned in a minute. And then the third factor is you're going to war with a $4.7 trillion private equity industry. So can To bring a pocket knife to that hypersonic warfare is just plain idiotic, right? The buyer has a team of 5 or 10 people with between them 150, 200 transactions. You don't want to go against them as your first rodeo with a broker who is trying to do everything. They're not gonna be an expert at recasting, positioning, unlocking financial, strategic, and operational sources of value, storytelling, Buyer targeting, and so on and so forth. You would never bring a running back on the field against a fully staffed defensive team with 12, with 11 people in the box, right?

And the important thing is, you know, with regard to a broker too, like sometimes those incentives are misaligned, right? It's, it's, it's you in, in real estate too, the same way. The, the broker gets paid for a transaction. And yeah, you'll get paid for a transaction too, but to your point, you don't want a transaction at any cost, whereas the broker might want a transaction at a lower cost than you because what's the difference in his or her commission if you sell for $11.2 million or $9.6 million? It means a lot to the owner, maybe not so much financially to the broker.

As a business owner, Jon, just building on your point, I have 3 big issues with brokers. And that's the This is what I was getting at when I said most of them are well-intentioned. That might be a charitable way to phrase it, right? Because most of them are conflicted, right? They're conflicted because they are trying to get paid by the buyer and the seller. Now, someone might think, oh, so their interests are divided. No, they're not divided. They are 100% loyal to the buyers because they're the repeat customers.

Right. You actually—

and they're loyal to you, right? They want They want transactions. Like, sorry, I'll speak for the broker that we've talked to and we've used sometimes. They're well-intentioned, right?

They're—

most of them, they're well-intentioned. But to your point, Kayvon, they don't have the knowledge of all the things that needs to go into a transaction. Maybe they're good at 2 of them, they're good at 3 of them, but they don't have the skill set to help you with all those things you need to get done before the transaction.

Absolutely.

They have a place, but it's not a $20 or $40 million enterprise value business. So They are in many cases conflicted. In many cases, they're playing a volume game, right? High retainers, and then if they close the transaction or they close it higher, that's really a nice-to-have for them. And then the last thing I just see over and over and over, and you said this, John, I just wanna elaborate on it.

Yeah.

Is that their fee structure is not designed to incent them to swing for the fences. And so it might be a flat fee structure where it's just a percentage of the sale, or there might be just a very small graduation or tiers to how they get paid out. Neither of those align the incentive, to your point, John, with the owner's interest.

Yeah, exactly right. That's exactly correct. And I think that that's an excellent way of putting it. Look, we were brokers, and we were intermediaries. We were the What I would consider, you know, maybe the worst kind of broker, right? Which is the the broker that is again we are and we would say this: we were interested in the transaction, right? So for us, and it was a volume game. You're absolutely correct. The idea was that again it's about I I get as many transactions as I can going understanding because one of the other statistics that we haven't mentioned yet, Kayvon, is the is the close rate. Okay, overall. Right. Your 94% close rate is outstanding, especially because when it's compared to the overall close rate, which is about 40%.

Yeah, I've seen it lower than 40% for enterprise values south of 30, and I've seen it a little higher when you go to enterprise values north of 50. But I think 40% is the average if you're talking about a business between 10 and $90 million in enterprise value.

That's squarely in the mid-market, right? And so the— but again, the idea there is the— your business brokers are— I need— in order for them to make a living, they need to have a lot of irons in the fire all the time because they are going to get— if they're working with that number, they're going to get— they're only going to close 40% of the time. Okay. In general, their close rate again might be higher than that. A lot of brokers talk about their close rate. That's an important statistic to show. But at the end of the day, right, what they're— what was really happening is that how much attention can they pay to all these different things? And, and also, most of them actually aren't being— we weren't being paid to help the sellers, right? We really weren't. We were being paid to help the buyers find sellers.

Right.

And at the end of the day, that became— that, that's when, when the— when we would come across sellers who would be like, they weren't quite ready, and we would notice that and go, gosh, you know, God, they were just— with just a little bit more, they might be able to do something, right? And then, and then of course we'd have— we'd be on to the next thing because it wasn't, wasn't our job, you know what I mean? And so I think people think that when they hire a broker, what they think is they think they're hiring someone like Kayvon. Okay, who's going to help them through this, all this stuff? And I think that they, that they're, they're often part of that regret you're talking about is the, again, attached to the broker is how the broker performed and what the broker did. Do you see it that way?

Absolutely. I think you said that really clearly, Joe. Um, what makes— what I think about as you said that is whether your audience would be better served next if we kind of go into those assumptions that are catastrophic and over and over, or if it makes sense to kind of go down practically, what is the path to regrets? What happens first, second, third, fourth, where one thing leads to another because of these cascading, you know, effects of each of the choices? Yeah, let's go.

Let's talk about those 7 assumptions that you talked— that you alluded to earlier, Kayvon. If you could just go through either from the order of magnitude or 1 through 7, whatever you think. Yeah.

Okay, cool. Yeah. So the first one is we already covered, so I'll kind of go over it really fast. It's selling my business is like selling my house, right? You can simplify a business sale, but not if you want peak value. As you know, preparation, buyer strategy, timing. I mean, those are all, those are just some of the biggest inputs that lead to the leverage and having a peak outcome as the payoff, right? You get out what you put in. It can be simple, but if you want a peak outcome, it's more of a campaign, right? And that's why elite M&A teams will choreograph every stage to avoid those costly regrets that come from the shortcuts that make sense if you're selling a commodity car or a commodity house.

Okay.

The second assumption is I'm a good business person. I can run my business and grow my business while I sell the business. And the reality is every business owner who's taken a business to 7 or 8 figures in revenue, absolutely smart enough to master M&A, no question about it. But the business growing actually is where they're going to get the higher ROI on their time. We mentioned earlier that the private equity industry is $4.7 trillion in the US. Well, why is it so profitable? In part because they can Profit on overconfident sellers, right?

They extract value, right? They extract— it's like a stock. Like, they're looking at a stock that is undervalued and they're able to extract that value from the business owner.

That's exactly—

and the way that they go about it, right, is to actually do— is use due diligence as a way, as a tool to be able to reduce their outlay, right?

Absolutely.

Reduce their costs. And that was going to potentially raise their profit on the other side.

That's so— that's the mechanism. The math is that those self-represented sellers walk away with 34% less on average than when a business owner has representation. I mean, again, the biggest sale of your life shouldn't be your first, right? And so instead of trying to take this shortcut, you probably tell business owners the same thing: focus on growth, because that's actually what's going to drive the buyer premium.

Hey, I'm Joe Stapleton from the Exit Engine Podcast. Building a business is hard enough, right? Planning your exit shouldn't feel like another lonely, confusing project you have to figure out on your own. That's why we created Exit Engine. Exit Engine isn't just a software tool, it's an entire ecosystem designed to help founders engineer a successful exit. You'll get access to self-assessments, growth roadmaps, and and a peer community where you can learn from other founders who've been in your shoes. You'll also find the guidance and expert resources you need to build a business that's actually worth buying and to do it without burning out. Imagine having the clarity to know what your business is worth, exactly where to focus to improve it, and the confidence to exit on your own terms, whether that's next year or a decade from now. You don't have to do this alone. You don't have to build a business alone. Join us and let's build your exit strategy together. Visit myexitengine.com to get started. That's myexitengine.com.

Well, yeah, what we preached is exit planning, and we talk about exit planning all the time, is just good business planning, right? It's if you continue to run your business And you continue to do things. You hire an advisor, someone like us on this podcast, is so you can focus on your widget company or whatever you do to grow that business. And then we think of your business as a product that we sell because that's what we do. We, we, we are products that we sell our businesses of our clients.

Absolutely. Okay, deadly seller assumption number 3: the price a buyer pays is mostly based on the company's historical performance.

Correct.

And of course the past matters, but they are also paying, as you both know, for what they can do with your business. They care about, they prioritize strategic fit, growth potential, and ultimately the risk profile, which you guys are so good at helping people lower over time, even before they sell. So anchoring to the past ultimately blinds the business owner to the real levers of value. And leaves the business owner to a defensive negotiation.

That's it. They're starting from a defensive place, right? Because again, the first thing that we do, right, the first thing they're asking for, right, are the financials. And, right, and I don't know what your experience with this has been, but our experience is that, you know, that most people have a problem somewhere in their financials, somewhere, something, right? But again, back to your earlier point about the teams that these people have, okay? These people do not miss these things. Right? You're not going to be able to put one over on a private equity firm. You're just not going to be able to do it, right? They may have another reason to want to buy you, and they may— it happens, right? It happens where people just go, hey, you guys are so good, or I want this so bad that I'm willing to pay a premium for it or whatever. And that's great. And that's great if you can luck into that, right? I sold my marketing company. I think I feel like I lucked into that a little bit, right? It was a timing thing. It was about what we had and It was about our, you know, about us being, us having a, you know, a capability that the buyer didn't have and was easier for them to buy, right? And they wanted to buy it at all costs. The problem in reality is that it's not always the case. In fact, it's almost not the case most of the time.

So I love the way you phrased that in terms of lucking into it. And as you know, we can systematically create the luck.

Right. That's what we're trying to—

Time intensive. And most sell-side representation, whether it's a broker, an M&A firm, or an investment bank, don't want to put in that much work. Right. So what's a good example of that? When we're selling a company, we're looking at the public company earnings calls, we're looking at their annual reports, we're looking at the private equity communications from the GPs, the general partners, to the limited partners. All to find out what are the mandates that this company we're selling fulfills such that the company is an indispensable asset in the eyes of those buyers as opposed to another company they might buy, right?

Well, yeah, it's so interesting that you said that, Kevon, because it's like if they have a mandate or they have a desire to get into a certain industry and they're going to buy an anchor company that they're going to then roll-up, right? That's where we found sometimes when we're talking to companies is if they're the initial purchase, right, for the company that's going to be the anchor for those roll-ups, that's a different set of valuation metrics than if they're going to be a roll-up company that satisfies a geographic distribution. Do you have experience with talking about or dealing with sort of going towards a private equity firm that's looking for that first one that I mentioned, that anchor?

We're selling a medical device distributor right now and we're targeting 3 different kinds of buyers. Private equity is one of them. And in all of our communication to those private equity buyers, we're saying this is a platform that you can bolt on and build on over time. And what are they looking for in a platform? They're looking for the same thing everyone else is looking for. High gross margins, high EBITDA margin, strong team.

Scalability, right?

Yeah.

Process. Repeatable process.

Yeah, nothing new under the sun, right? But we have a choice. Are we gonna describe it as an anchor and a platform, or are we gonna describe it as a bolt-on? And we don't like to leave these things to buyers' imaginations, as it sounds like you also try to avoid, by just painting a bright picture for them, right? Which of course is setting up the negotiation even before we're having the negotiation.

Yeah, that's exactly right. Yeah, no, it's a great point because again, and so much of what we do, You know, again, especially in this pre-phase, you know, early phases, right, where we are— our process, like yours I'm sure, right, is basically is what we're doing. We're examining the business very, very thoroughly, right? We look at every single thing, every rock, everything, just the way, by the way, that that private equity firm is going to do.

Absolutely.

And we're doing it now where there's no stakes, okay? There's no stakes. Learning this stuff now and getting this stuff and getting ahead of it Okay, is going to be imperative because spinning that story— okay, I say spinning may not be a great word, but you know what I mean. When you tell the story of the company that they— right, that the buyer wants to hear, you need to have that stuff supported, right? And that means that you have to have those details and the financial. Then you have to also explain the things that aren't right, right? What I call marketable inefficiencies. Right, the things that I didn't get to. But if I point those things out, I've got a plan for going into this new market. We never got there, but here's the plan. Here's what I would do, and here's what you guys can do. And pointing out the fact that you're going to make 30% ROI in the next 2 years if you guys implemented this is a pretty rich thing to be able to be buying, right? When you Yeah.

Joe, before we go into assumption number 4, I want to just camp out on the point you just made.

Sure.

Because you're really building a foundation that contrasts the difference between a quick, superficial, flimsy valuation and analysis of the company versus a forensic and even invasive analysis upfront. So let me just contrast that for your audience real quickly and again, build on what you said. A quick valuation is so tempting, right? I'm going to get a little bit of info. I'm going to take some information that I heard at a conference I was at, or I'm going to basically find a broker who's going to tell me that this is worth what I think it's worth because they want to get those fees, right? But these quick valuations, they gloss over the strategic, financial, and operational building blocks that ultimately drive the true value. And without that forensic analysis, the M&A team really lacks the knowledge to create the leverage and command the premium for the sellers. They're missing the insights to position the company for those unicorn buyers who are going to pay the most for the business. It also creates incredibly flimsy alignment between the business owner and their M&A representation because nobody actually knows what it's really worth. They haven't done the work. Now, you kind of hit on this, Jo, but I want to also elaborate on it. When you don't have that forensic-level understanding, you're actually going to ultimately have several things happen downstream, right? First of all, you're going to do simple marketing. You're going to provide information to buyers that as they do research is actually going to erode their trust. That's one of many reasons why deals fall apart.

Yeah.

You're going to see retrade. You're going to see ultimately compromised negotiations at best. You end up selling with a big discount compared to the LOI you signed up front. At worst, the deal falls apart and you're back on the market as damaged goods that has every other buyer saying, I wonder why it didn't sell. There must be something wrong.

And you're, you know, you're talking about eroding trust. It's like if you're overselling what the company is, right? Like there are situations we've dealt with a couple of these situations where someone invests in a sort of expensive set of technology that is a little bit over what they needed, right? It's more than what they needed. But to talk about what Jo was saying is like, look, this is— we know that our gross margin could have been higher if we didn't invest in this, but we're thinking about scale and we're thinking about geographic growth. And when we've talked to private equity firms about doing that, they sort of tilt their head and they're like, oh, this person understands what they're talking about, right? Like, they're not gonna— not that they don't care about gross margin, but if they— if there's a reason why you're consciously lowering your gross margin to invest in the business, and that's what they're buying. I mean, that goes a long way with not only not eroding trust, but it builds trust to say these guys are building for the long term, not that flimsy valuation of, you know, oh, a customer's whatever. There's all sorts of issues, but investing in the business and building it for the long term is something that most buyers appreciate.

Absolutely. And John, you're, you're making me think about an implication of what you just said, which is that deeper analysis and diligence upfront, what you and I call pre-diligence, actually means that you're going to have a shorter diligence period later.

Right.

And due diligence is a pain in the behind. Sorry to interrupt, but I've just gone through a process where I've sent people a whole spreadsheet with 15 tabs, and we've all seen it, right? You're smiling because it's like everyone's seen that, and you get the eye roll from people. It's like, no, no, That can happen, but, but you— but if you can get more information up front and have a discussion with people, oh, that's, that's why they're having a hard time with this, or they have an outstanding thing. So it's, it's, it's the pre-diligence that makes that actual due diligence so much better and quicker.

Something I tell business owners is you're going to answer the same questions either now or later. Do you want to do it at your own pace in a methodical way where we're having a conversation and asking, how do we make this even better? Or do you want to do it under the gun when the buyer has more leverage because they've got you under LOI and you're not talking to any other sellers? I'll take the former every day of the week.

Yeah. So true.

So true.

And not just in business sales, on everything. It's just that, right? Like, anytime you have the opportunity to know the answers before the test, right? Like, why wouldn't you take that? So if you're— and here, and let me answer my own question for a second. And let's— because I want to talk about this part of it too, which goes back to, again, the regret part and things like that, which is to say, I'm afraid. Okay? Deep down, I am afraid to know. Right? You have people who have built things and whatever, and, and, but, but every one of these people has their own stuff. Right? They're all human beings here. And at some point, what, what we see happen a lot, and that regret is tied to this, is I'm sometimes afraid of what I haven't done. Like you said before, I'm not going to share around my regret of my, my business sale with people because I'm embarrassed by it, right? What we find too is that often people are embarrassed about something that they have that they're hiding, that they are afraid is going to come out. Is there a thing, whatever, that's going to get them in trouble? And what we try to tell people is that, again, let us be the ones who see that with you. Right, and clean that ghost up, or that cobweb, or that skeleton in the closet, whatever that is. Let's do that now, right? Not when you're sitting there in due diligence. So yes, at some point it's going to come out.

Yeah, Joe, we use the same phrasing. Let them have the skeletons. Some of them we're going to be able to literally take to the dump because they're no longer a part— they're no longer material to the company's operations. But better for us to find them and take them out. Others, okay, they are relevant for the company and therefore they're relevant for the buyer. And so let's disclose them because that builds the buyer trust you were talking about, right? Transparency builds trust. And so better for us to point that out and say, this is a defect and here's what you might do about it, than just keep it in the closet buried behind a bunch of clothes. And then they find it and think, oh my gosh, I don't know if I can trust— The seller—

what else is there, right? Like, and it gives you opportunity, A, to your point, is disclose it and you're dealing with it, or like, it's something you're not— you're gonna have to deal with, buyer, or you deal with it. Like, and I don't— like, lawsuits are a good example of this. You have a slip and fall lawsuit, like, it happens to every company. I mean, not every company, but if you have physical locations, that happens a lot. Disclose it, deal with it, hopefully get it resolved before the closing so that the buyer doesn't have to take on that liability.

Yeah, absolutely. Good example. This medical device distributor we're selling right now, they had a small fine and $2,000 of inventory that the state they're operating in or shipping from found and said, hey, you weren't licensed to— actually, there's a lot of obviously regulations in medical devices. You weren't actually licensed for this one, you know, less than 1% of your inventory to have this product. It was a simple oversight. It's disclosed in all of our buyer materials. It's clear as to how that's never going to happen again. We actually said, this is not a recurring expense, right? It was just a simple mistake. It's not relevant for you. And again, it was an infinitesimal amount of dollars. But gosh, if the buyer had combed through the regulatory records and found those and then said you didn't disclose it, it would have put us on our back feet. Yeah.

Let's move along to the— I think we were at 5, right? The 5 is something—

Number 4 is All that matters is the price I sell for. And of course, a high headline price is ultimately a risky structure. It's a trap, right? What you keep, when you keep it, what strings are attached, those things define your outcome just as much, right? If not more than the headline price. So when you think about the details, escrows, earnouts, rolled equity, warranties, reps, clawbacks, employment terms, What am I missing? Working capital, tax treatment, post-liability factors. All those things ultimately will determine what the money that hits your bank account ultimately is. And I've been personally banged up by 3 of those.

Let's dig into those because I want to hear those stories, obviously without client names, but like, what have you learned about that headline number And how to extract the most value or meet the desire of the seller from that headline number to the actual money to the seller.

Yeah. I mean, there's a few things that jump out as the biggest themes, and these are lessons I've learned selling my companies. Fortunately, I've been able to protect the owners that we've served along these lines. So the first is, if there is going to be an earnout, Tie it to numbers that are far harder to manipulate. It's really easy to manipulate EBITDA. It's a lot harder to manipulate revenue.

Right.

It's much more in the buyer's interest to have the revenue growing as fast as possible, as an example. Another example, of course, is in many cases, the default purchase agreement is going to push inappropriate liability onto the seller's shoulders. And so you need a great M&A team and a great M&A attorney. I said M&A attorney, right? Not an all-purpose attorney.

Not just a business attorney, right?

You don't want a heart surgeon doing your brain surgery, right? And you don't want a heart surgeon doing your rotator cuff repair. You want a specialist, and M&A is a specialty. So yeah, we see that all the time. Of course, a lot of sellers are staying with the company for some season, right, after the sale.

Right.

And that employment agreement really matters. The sellers don't always take into account the fact that the buyer is their boss, right? And the ongoing relationship with that buyer is something to negotiate, just like the terms associated with the initial payout for the seller. So those are some of the 3 items that come out in my mind first. What else jumps out as kind of most common areas to mitigate and manage in both of your minds?

Well, I think you hit on 2 of the things that I also experienced in my first sale was, again, no one could argue with the price. The LOI was good, everything was there. We actually had a really good accountant and really good books and was always something that was important to us.

Our—

my partner who was the CEO was, you know, was very much on top of that stuff. And, and they did a really good job. And in fact, actually, the irony of all this is that the— that our financial— our CFO is still now— is actually now the CFO of the, of the company that purchased us.

Oh, wow.

She was, right? But the idea that, that what the— what you just talked about, the The biggest thing to me was the employment agreement after, in the earnout, right? Because we know we have to be there. We have to kind of do this integration and we have to, you know, and we were told, right? We were told that the reason that they, one of the reasons that they wanted to buy us was because of our culture.

Hmm.

And that's a bunch of hogwash, by the way, just so you know. So any large company that's buying another one is not, that's not, that's not something that can happen. It just doesn't happen in nature. We kind of bought into it because we liked our culture. And people used to talk about, you know, look, we are a digital marketing—

we're a family. Anytime someone says we're a family, run, run for the hills.

Run the other way. But anyway, the idea was what I was faced with was we earn out, we're there when this thing— and now I'm working for this guy where I haven't earned out yet. I'm still in that— it was a 3-year earnout. So we're doing this stuff and we're tied to maintaining. The good news, again, even the back end of the deal was decent. Okay, what the problem was, was that I was then suddenly being told to get on a plane on Sunday afternoon— Sunday night and fly to some place for the week where I would— and this was now my job to do this all over the world. And I was just like, wait, what are you talking about? I just owned a company, right? I didn't have to do that when I owned this thing. And now you're telling me that in the— even as like, you know—

Yeah.

And I knew that I'd leave eventually, right? But I had to be here to get this money and I had to, I had to do this. I, you know, it was a very, it was a very, it was the first thing that I realized was like, oh man, this is not what I thought it was going to be.

And mine was EBITDA definition, right? The, the, the, the, the story that the private equity firm was telling us was, hey, we want to grow you and we want to do this. But they were also like saying, well, you're going to have to fund that growth. Right? You're gonna have to fund that growth, which, which when we were talking about, and when I asked, okay, does fund that growth mean that comes out of our EBITDA and that will be the earnout? And they're like, yes. So, so, so we were, we were selling a piece of the company and then we were for, for less than we were— we thought it was worth. And then we were gonna have to fund our own growth. It's like, no, the whole point of this is you guys are gonna fund our growth and we were gonna run our business and we would—

And you were gonna give us money to make it better.

Yeah, see the fruits of that. And so like when the story doesn't match what the numbers are, and that happened to me, it was troubling.

John, what I'm thinking about as you're describing that definition of EBITDA is how most people approach dating, which has a lot of similarities to how sellers approach buyers. There's a lot of infatuation going on, right? We're filling in a lot of gaps with what we hope is true because that makes us feel good. And so it's so easy for a seller and their broker to say, oh yeah, okay, we have a— everybody knows what EBITDA is. No, no, no, no. There's 100 different definitions for EBITDA. And if you don't define it, the buyer will define it however results in the most money staying in their pocket and the least money staying in yours.

Yeah, well, right, exactly. And hope, as we all know, hope is not a strategy. And you hate to be the one because I was the one in this case to be the realistic person and be like, wait a second, what they're saying in our phone calls is not what's in the agreements, right? The agreements clearly state that we are going to fund our growth and that will— so our EBITDA was going to be nothing. So we're not going to have any. And remarkably, the EBITDA was going to be nothing for the first 2 years of earnout. And then the 3rd year, yeah, we might eke out a little profit that we're going to split.

Like, we're not getting anything for this. Yeah, there goes 95% of your earnout.

Yeah, right.

Yeah.

And the other thing, the other last thing is, is, is when the, when the earnout is 80% of the value, or 80% was a little much, but like if it's more north than 50, you gotta realize that money down takes the town, as my grandfather used to say. And if you don't get cash in the bank and cash up front, everything's variable in the future and the future is uncertain.

Yeah, I couldn't agree more. Let's come back to the future is uncertain in a minute because that'll lead us into our 5th deadly seller assumption. But I want to camp out on this culture point that you mentioned a second ago, Jo. You know, we have spent 10 years refining our process for getting the most proceeds or the maximum sale price and terms for our sellers. What we've seen over the last 2 years is that most of our sellers Haven't actually accepted the highest offer. They've accepted the highest offer, which oftentimes is the 2nd or 4th or 5th largest offer, where they actually believe their employees are gonna be cared for, are gonna be treated fairly. And of course, you and I have ways to assess whether how a buyer is gonna treat the employees with a pretty high likelihood, right?

Right.

And so I think it's, I get nervous whenever the buyer leads with culture. Because, you know, on a first date, everybody's gonna talk about what they want you to hear, right? What they think you wanna hear. I think it's much more important for us as representatives of sellers to come to our own conclusion of how well they're gonna treat the employees, which of course varies in importance depending on the seller, right?

Yeah.

I talk to sellers all the time who say, You know, that's the number 2 factor after how much I am gonna clear financially. We talk to other sellers who care a lot less about it, and it might be number 6 on their list of priorities.

And we've got, by the way, we've come across it with people that it's number 1 on their list, right? I mean, and by the way, and it's a perfectly viable exit strategy to sell the company to the employees. And there's like 100 different ways to do that too, right? So you're right that the idea is that this is all a spectrum. Okay, and you know, all of M&A work is a spectrum, okay? And it's a matter of where you fall, what you can do, right? What you can control, what you can't, the levers you can pull, the time you have to pull those levers, right? All those things kind of come into play here. But the most important thing is that understanding that there is a— that there is at the— There are a lot of details here that are really easy to overlook and assume They're going to fall in your favor. But if you do not expressly address them, both— and to John's point— both on the phone call and whatever, but also in the actual agreements, right?

If it's in the contract, it's in the contract. If it's not in the contract, it's not in the contract, right?

So my dad said to me several times as a kid, assumptions make an ass out of you and me.

Okay.

The 5th deadly seller assumption is that buyers pay for speculative performance. And you and I both know they don't reward speculation. They discount it. They underwrite based on what's proven, not what's promised. But they do pay up for credible markers of growth like pipeline expansion, recent contract wins, market momentum, and to your earlier point, the ingredients that enable it: strong systems, scalable processes, capable team.

Right. And I would just add into that too, what matters to that buyer too is again, generally 2 things, right? What they're actually purchasing is either capability, okay, some kind of capability they don't have. This is strategic buyers, I mean, right? Capability or market share.

Yep.

The idea is that again, you have strong ones of either of those things, okay, then you're, you're, you are raising up the spectrum, okay, of a sellable, desirable company. Okay. And again, depending on who you target, who you go after, and then of course, all the other things are important. The underpinnings are important. But I think that the thing to point out too is that the things that you want to have, the way that your employees are treated, right? Obviously, the top line number of money, the length of the earnout, the structure of the deal, Right. The, the, the, there are lots of little small details that may matter to you when you, when they, when you know what they are. Right. But again, it's knowing what they are first, not knowing what they are when you are about to sign your life away, basically.

Absolutely. Okay. Number 6 on the deadly seller assumptions list is that my M&A advisor is going to act in my best interest. And keep my sale confidential? I wanna spend more time on the second point, 'cause we already kind of covered the first, but as a quick kind of refresh, almost all brokers, M&A firms, and investment banks are compensated by buyers in ways that shift the leverage away from your interest as a business owner.

Right.

Further, their mass outreach and generic teaser blasts compromise your confidentiality, confidentiality, and therefore your negotiating power. Let's go a level deeper on that. Mass exposure is gonna shatter your confidentiality and in many cases trigger a chain reaction. We call that chain reaction unintended consequences, right? Employees quit because they're in search of more stability or just disengage. Suppliers, landlords, bankers tighten terms. And the worst thing of all is when competitors poach your talent and lure away your key customers. Telling those customers, you don't know who's going to be running that company.

Right. They might be going out of business.

Yeah. Why don't you go with a safe option? So at best, you're distracted from increasing value during your home stretch. At worst, you destroy tangible value in the home stretch and receive no offers. And so what we tell business owners regularly is you don't need to work with us, right? But find an elite M&A team who's going to act as your fiduciary, because that is how you secure your leverage and control.

Well, it's such a good point because again, if you're not paying your advisor, they're getting compensated by somebody, right? To your point, Kayvon. And again, it might sound like it's a great deal, but it's like Facebook. If you're not paying Facebook or you're not paying someone for the product, then you are the product, right? And if someone else is compensating the buyer Or you're not paying anybody for this. Well, you're probably not being represented in the optimal way for, again, probably the largest, most likely the largest single sale of anything in your life.

Absolutely.

I mean, this really is— it's the biggest sale and it's the second largest financial decision. The biggest one is whether you get divorced because that's going to cut off 50% right there. So the last deadly assumption is that really as a business owner, you should focus on the price of your M&A advisor instead of their value. M&A representation isn't interchangeable. Cheap options often cost the most. Saving $100,000 in fees while leaving $5 million on the table isn't savings, it's sabotage. And so find a team that's going to increase what you walk away with, higher price, better terms, Lower tax burden, ultimately protecting your time and preserving your legacy.

Yeah, that's a great one. That is a great one because it's, again, if it's the cheapest, it's probably, it could cost you the most in the future. And again, what you mentioned about, you know, oh, they're only this much money, yet they can't command a premium and they don't do the buyer outreach in the most effective way and positioning, right? We didn't even really talk about positioning, but The right M&A advisor can position your company to receive a premium, whereas incompetent M&A advisors just will not do that and cannot do that.

Yeah, that's a fantastic point. You get ultimately what you pay for. And we try to encourage business owners to find an M&A team that is actually gonna structure their compensation, to our earlier point, in a way that shows they're actually competent instead of just telling you they're competent. Right. The formula is actually worth far more than words or graphics on a PowerPoint.

Yeah, it's a great point.

It's a great point. Yeah, no question about it.

What have—

so, Kevon, what have you learned? Like, you know, you sound like you've learned a great deal from your own experiences in selling companies into bringing those into your advisory business. What would you say are the top 3 things you've learned Uh, from selling your business? You alluded to them before. Um, but what are those things that you're bringing to your clients that you wish you had known?

The most important things I want people to walk away from today, based on really all of our experience selling our own companies, the first one is that the market's rigged, right? And that's why so few owners sell, and those who do have regrets. The second takeaway is that there's a predictable path to those regrets. So if you want a different— if you want that outcome, then follow the predictable path. Go in with your own assumptions, use a typical broker, and ultimately you're going to expect to have the same statistics. If you want a different path, that's a conscious choice, right? And moving away from the default requires intentionality. That's the difference between the path to regrets and the seller's power path. And then the last thing I'd say that I didn't know when I was selling my first company is that there's massive conflicts of interest in this space. So make sure you understand exactly how your advisor's getting paid.

I think this is a great point and again, worth going over for sure. And again, not to make it self-serving at all. We try very hard on this podcast to not be self-serving. Obviously, we're here to We see this podcast as a public service more than anything else. And so again, the big thing to know here is that, and I love the way that you said it before, somebody is paying for you, for your advisor somewhere. Okay? If it's not you, then you got to ask yourself who it is. Okay? If you have an advisor who is saying to you, no, no, no, don't worry. I'll take care of all this, and I'm going to take 10% of the deal. Okay, then then you're gonna you're gonna have to you're gonna have to raise your hand, and you're gonna say, "Excuse me, what how do you how do you what is your business model? How do you actually make money doing this? Because it would seem to me that that's a lot of work to do, right? To get my company ready for sale seems like a lot to do on the off chance that it happens." Yeah, that's a great point, Jo.

One thing that is coming to mind as we're talking is that these business owners, of course, are incredibly busy. They're in the trenches, and therefore all of us having been there have a ton of empathy for them for not being experts in M&A, right?

Yeah.

And therefore we're spending this time providing this education, not because we think that there's a one-to-one relationship between this education and getting clients, but because we both have a passion to educate way more clients than we'll ever be able to serve with our team.

Yes.

What we do is incredibly laborious, right? There's a lot of hours, as you just said, that goes into selling a business if you're gonna do it right. And so we have a finite amount of time But having sold the business twice and realizing how rigged the market is, I've decided to make this my second career. And so my hope is that we can educate and equip 100 times as many business owners than we ever actually serve directly because we have a mandate to sell their business. That's why, of course, I do a lot of these podcast interviews. That's why I'm writing a book. That's why we are in the middle of a tour around the country.

Nice.

Educating business owners. And I'm putting together the '26 budget that we're putting more money into all those things in '26 than we did in '25. So anyway, I just wanted to point out that distinction. And ultimately that shows up in how, in the numbers, when someone actually comes to us and says, I'm thinking about selling, or I want to sell, we tell about 55%. This was— these are the numbers for 2024. 4, you're not ready to sell, right? You need to go do these 3 things or these 4 things if you want to generate a peak outcome where you don't have any regrets, right? So that's about 55%. The next 25%, we say, hey, you're actually ready to sell, or you're really close, but it would be better if you worked with XCO, or it'd be better if you go work with this firm or that firm because of something idiosyncratic about you as a company, you as an owner, and them as an organization. And therefore we'll make that introduction, right? It's about 1 in 5 times or 20% that we say, okay, you're ready and this is the right fit for us, right? Yeah. Which is to say we're much more interested in hitting it out of the park than we are getting another mandate. Well, yeah.

And, and, and look, we don't, You know, there's certain segments that we have, we have referral partners, and just like you're saying, we, the last thing we want to do, and we've, is get into a situation where we can't help get a peak sale. Look, we're not, we're not magicians. We don't know every industry in the world, but there are people out there that we've partnered with that know those types of industries and that can, that can really move the needle and can get a peak performance. And we realize that, to your point, Okay, Vaughn, we want to educate hundreds of entrepreneurs and we won't be able to help directly those entrepreneurs, but we know that there are advisors out there that can help them grow their manufacturing business as an example, just something that they can go and help them because they have that specific industry expertise.

Look, this is why— I'm sorry, to be a shameless plug because you're making me do it now, is that that's exactly why we created ExitEngine, the platform. Right? Because for that exact reason, it's, it's you're earlier on, you're not quite there yet, you're not 2 years away, okay? You're 5 or 10, okay? The idea of being able to understand early on how to build the business, how to, right, how to step back, look at the business from a 30,000-foot view, understand what you're good at, what you're not, right? See where your, where your growth trajectory is, but then set the ability to be able to say, okay, I want to target this place for, right, as my trajectory. I want this to be the end, and then I'm going to work backwards. And part of that too, we didn't even really talk about this today, but part of the regret piece that we see all the time, Kayvon, I would like actually your opinion on this, is, is the, I didn't know what I was going to do next. So people have a hard time letting go, right? Especially when you've been doing this a long time and your entire, right, a lot of people, it was for me, I mean, my entire identity was wrapped up in my business. And the the the the the other part that was hard that that I regret about it, the whole thing was that nobody told me, hey, you're gonna have a mourning period. You're gonna have to grieve this, right? And right.

I love that. Yeah, I want to I want to jump into that.

Yeah, do it.

I saw a headline last week that said that 50% of CEOs. are dead 2 years after they leave their post. Now, I didn't go in and look into the research methodology and verify how they got there, but I would say that you and I both know countless business owners who sold their company but didn't have that sense of purpose. And that's why over time, as we refined our process, we actually created a 7th stage. It's called legacy, right? And during our exit planning process, we're actually asking questions. And it's not just us. We're oftentimes involving other people that know the business owner well— their wife, their husband, their pastor, their best friends— to help them define not a 90-page plan for what happens after they sell, but directionally what kind of impact do they want to have with their family, In many cases, that has to do with family unity and cohesion with their wealth. A lot of times that has to do with multi-generations of family and what kind of purpose and value they want to pass on. A lot of times it has to do with specific charitable structures like a donor advised fund that they're going to set up before they sell and give a percentage of the business to so that that donor advised fund is well-funded at the time of the sale, which obviously reduces their proceeds and has a bunch of tax benefits. We oftentimes are partnering with the new— sorry, let me back up. I'll mention a few organizations that have been fantastic partners. So first of all, I'd say NCF, which is the National Christian Foundation. They have offices in about 30 states and have been incredibly helpful. And then Signatry have been great partners on that as well. So yeah, to your point, having a purpose, a mission post-sale before the sale is done is critical in terms of happiness. In fact, When we look at all the sales we've done over the years, one of the biggest factors for how well it's gonna go is does the business owner have something they're running to?

As opposed to away from?

Yeah.

Yeah.

As opposed to just running from.

That's a great, that's a great point.

That's, that's huge. They said that, they said it about boat ownership too, by the way, just so you know. So whenever you're, you know, whenever you make a lot of money and you run towards the boat like I did, right? That's, that's you actually running away from something.

Yeah.

Right. It's the happiest day, right? The, the second happiest day is when you buy it.

Right.

The happiest day is when you sell it.

You sell it.

Well, Kayvon, thank you so much for joining us today. We really appreciate you being so generous with your time. And I can see the headline of this podcast, the 7 Assumptions That Business Owners Make, because those were so illuminating. And we've touched on a lot of them in our podcast, but I think the concise nature with which we put it was just— it's going to be listening gold.

Really, really.

Thank you so much, John. It's been an absolute pleasure. I love the mutual passion we have for protecting business owners and their legacies and their teams. It's not every day that I get to have a conversation like this, so thank you.

Absolutely. Well, Kayvon, thank you so much for being here. Really appreciate it. Kayvon Saber, co-founder and partner at Legacy Outcomes, sell-side M&A advisory firm. 94% success rate these guys got, right? This is really, really good stuff. Again, Kavon has had a lot of experience doing this. Kavon has been you, right? We have been you. We know exactly what it feels like. We know how hard this is. Okay, this is why we are building Exit Engine, because we want you guys to to know early on what you can do, how to examine your business, what are the things that you need to look for, right? Within Exit Engine, myexitengine.com, you're going to be able to get our. Framework, our Total Exit Value System that's going to go over 12 different areas of the business that you're going to start to examine and look at. It's going to give you access to all our content, all our learning, including this interview with Kayvon. By the way, there's going to be— hopefully we haven't— Kayvon doesn't know this yet, but there's going to be more stuff we're going to be doing with Kayvon down the road, I'm sure. And also other great advisory partners. The people that you hear on this podcast are people that we work with all the time who are really needle movers. They are people that really understand the lens that exit planning is and how to move your business in the specific ways that it needs to do it in order to be able to increase your value and salability. Plus, you're also going to get access to other founders who are just like you, right? You're going to get coaching. You're going to be able to get everything that you need to start to set your exit trajectory. And when you're ready, right, you're going to meet people like Kayvon. You're going to, you're going to be able to go to Exio. You're going to be able to find that that exact right partner to be able to help you take you to the the last couple of miles. All of that, you're going to be able to find all that here at at myexitengine.com. So right now, please go to myexitengine.com. You will see right there today. You will see you will you will be able to sign up there. You will be able to actually give your email address. We will we will get in touch with you directly about how to become a member of of the Exit Engine. Kayvon, thank you so much for being here. Kayvon Saber from Legacy Outcomes, thank you so much again today. It was a really great conversation and I can't wait to see you again.

Thanks again, Joe and Don. Have a great one.