The Exit Engine Podcast Episode 12: Your Paths to Exiting

Welcome to the Exit Engine Podcast, episode 12. Good morning, John.

Joe, good morning to you.

How are you doing?

I'm doing great.

Excellent. Um, we, uh, we wanted to talk today about the, uh, different ways that people can exit.

Yeah. And this, I came across some very interesting research and the paper is a little dense and the research is a little dense, but basically it comes down to this question. Do entrepreneurs change from initial, from an initially intended financial harvest exit strategy to a stewardship exit strategy? And if so, for what reasons? And I think I need to define a little bit what those terms mean.

Okay.

So financial harvest, uh, is do entrepreneurs initially intend to just sell the company for as much as it's possibly worth when they start the company? And then do they change from that and from that initial strategy to more of a stewardship and keeping the business in the family, as an example, and pass it along to a daughter or a son or a nephew or a cousin. And it's an interesting paper, and it's interesting research because it goes into why those things change and why the entrepreneur changes their initial, I want tons of— I think I want tons of money for this business. Versus, oh, let's keep this business in the family because it's doing really well.

That's a fascinating question because most people, this is one of the reasons why exit planning early is important because things do change over time. Like a lot of things change and understanding where you are today is not necessarily where you're gonna be tomorrow, right? I love this research. I think this is something that is really interesting. I'd love to see more of it. Hopefully there's more of it, but it reminds me of the 5 Ds.

Yes, indeed.

And the 6th D that we feel that there is. So let's talk a little bit about the 5 Ds and what those things are in terms of the exit strategy things, and then we'll tie it back to this research, which I think is really interesting. So That paper talks about these really 2 different kinds of exits that are planned exits, good exits, that either one of them are good, they all are beneficial and whatever. And really, that's the 20% of the world.

Right, exactly. The 20% of the world is, or said differently, the 20% of entrepreneurs who successfully sell their business, A, Either sell it to a strategic buyer or private equity firm, whoever it is, and reap a financial harvest, right? They, they, they sell the company, they exit the business after some period of time, and they realize, um, an amount of money from that investor.

Right. And hopefully if they've done that well, that it's covered the value gap, that they're able to do the thing they wanna do next, whatever that is. And remember, we're not always talking about retirement here. Okay. So, just because we're talking about exit planning doesn't necessarily mean that we're talking about exit in a way that means that you're at the end of your life. I mean, that's not it, right? What we want to be able to do as entrepreneurs is have the, you know, know where all the exits are.

Yes.

It's like you go to a party. The first thing you do is learn where are the exits, where are the fire exits? Right, I mean, that's what I want to know is like, right, I had a— at my, at my, at one of the weddings I had, um, there was, uh, I, I, we, we, we made a joke that the first thing that we were doing was that the first thing was there's 2 rules. One, learn the fire exits, and 2, have a good time. Like, that was, that was as simple as the, the party required, right? But, but I think that the matter is, is that when we talk about exiting Knowing what all the exit options are is the first step, right? So we talked about a harvest. People are like, what's a harvesting— what's a harvest strategy versus a stewardship strategy? And we'll talk about that in a minute. But let's talk about the majority of people, okay? Because this is what's sobering. 80% of people will exit in one of these 5 ways.

Yep.

Death themselves. Divorce.

Yep.

Disability.

Yep.

Um, uh, disagreement.

Yep.

And, uh, and distress. Otherwise, in other words, the company is in distress, there's something wrong financially with the company or whatever. Okay, so those 5 D's— death, divorce, disability, disagreement, and distress— those are the most common ways that people leave their business. 80% of you out there, unfortunately, if these statistics were to hold true, would leave the business in one of those 5 ways, which is— and none of them are favorable.

None of them are favorable. And it doesn't necessarily— I mean, the obvious one, let's start with death, right? The obvious one is your death or the death of your spouse, your partner, whatever you have that causes a You know, an incredible, um, you know, the cause of the business's decline. Um, obviously your death—

Or an upheaval, even not necessarily in decline, but what is it? It forces something to happen within the business, right? Which is not planned.

Right, right, exactly. So, so your death obviously would cause, would cause that. You're instrumental to the business. You're running the whole show. And if your death happens before you've had a chance to, to properly plan your exit, Well, that's going to be a catastrophic problem for the business.

Exactly. Catastrophic. That's the point, is that— and if you're not prepared for it without a succession plan or without, right, without knowing who takes over, oftentimes what we come across is that even in families, people are fighting over who gets to be in charge because no one has laid out specifically what's supposed to happen because nobody saw this coming, right? So the death thing is a very common way for people to exit their businesses, unfortunately. And if they're not planned, if they don't have it said to say a contingency in place, to say is simply this: what happens to the business if, God forbid, something was to happen to me?

Right.

Asking yourself that simple question and having an answer to it Is like 90% of the battle, John.

Yeah, exactly. Because, you know, unfortunately, I'm not immortal, Joe. I don't think you're immortal. So everybody— and this is a question, that simple question that Joe just mentioned is someone that everyone that owns a business needs to ask and needs to answer. They need to have that answer. But we realize that many people don't. It's— but it can be as simple as writing it down, talking to a learning— an attorney, and getting it, um, written into a will, into the, you know, into all those things so that it's very clear that Simone takes over after my death, or whoever it happens to be that you're— that is in your family. Um, or not in your family, it could just— it could be, um, somebody else, right?

Yes, it could be any other person or whatever. Your partner, partner, it could be— you could have a minority partner, things like that. So yeah, I mean, and some of those things seem like they're like, well, that'll just be what happens. Like, it'll just be a natural thing. If something happens to me, then my, you know, then so-and-so is going to take over. And that may be understood, but what you may not be prepared for is whatever legal challenges or things like that arise after you're gone if it isn't ironclad.

And the equivalent, the analogy is dying without a will. And, you know, I'm not going to get into state law and all sorts of— but trust me, when you have assets and you die without a will, It becomes a mess for your heirs. So if you want to cause a mess for your heirs, don't have a will. And if you want to cause a mess for your business, don't have a plan for your passing, which unfortunately, as far as I know, everyone's going to pass that's on this webinar. I don't want to be the bearer of bad news, but it's going to happen.

It is. It is going to happen. And understanding exactly what is to happen, you know, if that should happen to you while you're going through, you know, while you're owning a business, is a really, really important thing to do. But the other thing, the other of these things, some of these other ones aren't exactly— the death one is really simple because I think everybody can understand that and everybody knows it's inevitable.

Yes.

But when you talk about— let's talk about divorce because this is a thing that happens more often than people really realize, and this can really impact the business, right?

It can really impact the business because to your point, no one goes into a marriage thinking they're going to get divorced.

Right.

However, the pure statistics, and I don't know if it's 50%, but I think it's north of 40%. It's somewhere between 40% and 50%. I should have done some research and had that.

I've heard over 50%. Yeah. Somewhere between 40% and 60%.

And so that changes, that vacillates. But if you don't have a contingency or you don't have a plan for dealing with a divorce, that's a real big problem because your assets are, when you, you know, if you're in, depending on where you live, some states are 50/50. And if you have, if your spouse gets 50% of the business upon a divorce by state law, well, those assets are part, sorry, the businesses are part of those assets.

Right.

Which can be chaotic. I mean, we, I dealt with somebody We were trying to sell a company, I think it was in October, and they were selling the company. They were already divorced and they had an agreement, which thankfully they were amicably divorced, which is great that it happened. But they had an agreement that they wanted to sell the business within the next, or they had to sell the business within the next year per the divorce settlement. That set a clock and it was really difficult to navigate that. They were getting a little bit, you know, a little antsy, a little, a little anxious when to sell the business. And, uh, they had a plan. It wasn't an ideal plan though, unfortunately for them.

Right. And that's the thing. And so what you're left with in a situation like that without a plan is whatever happens. And if you're not prepared and if you're not in a situation where you know how to handle this, it is so easy, John, to be able to just to think, you know, no one wants to think about divorce. I get it. You know what I mean? You don't want to do that. Nobody's in a thing where they want to, they want to wish it on themselves or whatever it is. And so they don't want to think about things or it's magical thinking or whatever, right? But the react— but, but what's, what's missing from that is by not addressing it just in a statement, it doesn't take a lot. You just have to be able to say and write into, you know, a, you know, into, you know, to write down and have a plan for what happens if this should happen. And understanding that in your state, if you were to be divorced, if there was either you would buy out your spouse, or if you would split, have to sell the company and split the proceeds or whatever, or you need to go get financing and stuff, whatever, to be able to get your husband out of the business or whatever it is. Those are the things that you need to think through in order to know this is what I would do. And by the way, that discussion Probably should also occur with your spouse. Okay, guys, I mean, I know it's difficult, and I know that maybe one of you has been the, you know, person who's really obviously in this business, and maybe the other one has very little to do with any of it in the whole thing. And, you know, that's a very common situation, right? Um, and that the other spouse would never even want anything to do with the business because they wouldn't know what to do or how to do it or anything like that. And that's fine, except for the fact that now the state gets involved. And now the state says, I don't care if you want the business or not, you are getting 50% of it. And in fact, in order to realize that, you need to sell the company in order to— for that money to be able to take the place of the asset through the divorce decree. Now, now it's a whole other animal, right? Yeah.

And, and just to build on what, what Joe's saying is Part of one of the ben— or part of the benefits of, of ExitEngine is we have all of these people that are legal representation, right? What we're, what we're delving in is to legal things. And the best person and the best people to deal with these legal issues are attorneys.

Right.

And estate attorneys, divorce attorneys, all people that are in the ExitEngine community that can offer advice on these specific pieces of how do I write a divorce clause into my business? How do I write these types of things so that if this does happen, I am covered for this? And the attorneys in our community can offer those suggestions and those options to you.

Absolutely. And again, and it varies so much by state and all that stuff as well. And there's obviously, just like every business and every person, every divorce is different. The the two people involved, you know, obviously that's a that's a that's something that's that that you can't again you can what you can do is prepare for the for that eventuality or that occurrence, and you can have a plan for how to attack it. That's all we're saying here. Yep. Right? The rest of it is just going to be is going to be specific to your situation. What you say, how you say it, the arrangement, the specific arrangement you make is going to be up to you. But understanding that if you take one thing away from this podcast today is understand that these are the things that you need to hedge against, right? Part of a strong exit plan is preparing for the worst, expecting the best and preparing for the worst, right? And to be able to—

Yeah. And there's all sorts, like to Joe's point, there's all sorts of things. There's the, there's the, as someone wrote a while ago, there's the known unknowns, right? There's the things you don't know about, right? That are the things that are that hopefully don't happen. Divorce hopefully doesn't happen. Death will happen, but hopefully not for a long time. There are other things you can't plan for. So, when you know the things you can plan for, plan for them because they're inevitably, as everyone knows, the pandemic, all sorts of other things have happened in the past that were completely black swan events that you had no idea that came out of nowhere. There's enough of those that we can't plan for. When you know you can plan for something, Plan for it, right?

That's exactly right. So let's, so that's, we got death and we got divorce, right? Those are 2 big ones.

Yes.

Disability. So instead you don't die, but you're horribly, you know, injured in an accident and can no longer be the owner of, you know, the leader of this company, right? That's something that it's unfortunately a very real possibility just statistically for people.

And there's all sorts of, you know, there's disability insurance and all those types of things. And those will keep you, like, keep you in your house and keep you, you know, so you don't have to lose your car and those types of things. Those types of insurance aren't going to save your business, right?

Right.

So, they will keep you afloat. They won't make your business thrive. And it certainly won't increase the value of your business. So, Having a plan for if you are, again, unfortunately, if you are disabled, that is something that should be written in and written into your operating agreements and discussed with a lawyer of what happens if I have a stroke, what happens if this happens and I'm incapacitated to the extent that I can no longer run the business.

Right. And that's just one of the pieces of your exit strategy is called a succession plan. All right? And that, and essentially what we, what we're doing is, is just writing out a paragraph or whatever on how, on who, who takes over, what, how, how that works in terms of the actual like methodology that, that, that has to, if there are legal things, if there are rewriting of the operating agreement, there are things or whatever that have to happen in order to fulfill this plan, then all those things need to be written down and thought about. Simone, to your earlier example, is going to be the person who succeeds me because she's been my second in command forever. And she's been, you know, and she's been right there by my side and she knows the business and this is a no-brainer and everybody's aware of this and it's really easy to do that. Great. But don't take it for granted. Write it down. Write it down. Write an agreement. Write it into the— write it into, uh, you know, write it— write an agreement, a new contract. Um, that basically that, that says this is what's going to happen. Make sure everybody knows it. Okay?

Yeah.

There's nothing wrong with saying one day I hope to prevent— I'm in order to prevent you guys, the employees, the company, whatever, from going under, which by the way, we should say, let me interject real quick and say, um, the numbers of, uh, on how businesses fare after their owner, especially particularly after death, All right.

Not good.

Not good, guys. Not good. I mean, it's, it's, we're, we're like down to like, like we're like 10% survival rate. Okay? It's very low. So, and within a couple of years, it's just what happens is it just tanks and it might take 2 years for the business to tank, but the business will tank. And the odds are that the business will tank. And, and it's, you know, and, and a lot of it happens because there isn't a plan around it. Okay? So understand that the way you prevent tanking is to— for everybody to know what happens if I become incapacitated, if I die, if I have to leave, if whatever happens. Okay? If I go to jail. I mean, you know, I mean, those are— that's a— that's a thing that's not on here, but I mean, that's something— that's distress, right? I mean, that's the kind of thing that, that could happen. So making sure that you are thinking about these eventualities or these potential issue, you know, things, these 5 Ds. And preparing yourself for what happens if— what if this, what if this, what if this? And then you're going to leave your room for the 60, which we'll talk about in a minute. So we've got death, we've got divorce, we've got disability. Now here's one that people just never think is going to happen: disagreement.

And, and disagreement, trust me, when I When I say that disagreement happens among people that you would think would never happen, it happens. I had a situation early in my career where, um, I was called names. People were called, were name-calling, and the disagreement led to a, um, a rift that is still going to this day. Uh, 20, no, 18 years later. And it happens. It's real. And it's the situation—

Devastating.

You wouldn't believe what people disagree over. And you wouldn't believe how much money can make the difference between someone agreeing and disagreeing. And I saw it in my own career. I saw it in decision-making when we were offered a couple of options for someone purchasing our company. And once one person felt so strongly one way, one person felt so strongly the other way that the rift was just irreparable. It never— we never got to an agreement because of that initial disagreement.

And that was while you were selling the company. Like, so understand, guys, that this is the thing. Like, you— that this disagreement can happen earlier in a thing if you've got a partnership. It can happen. Yeah. And look, we should be saying that this is kind of what we're talking about when we say disagreement. What we mean is that there's probably potentially more than one equity partner. There are people that are helping make decisions here that obviously have the weight to be able to make decisions, right? So we're not talking about you disagree with your underling about how the company, the future of the company should be. That's a whole different problem. What we're really talking about here is multiple partners and their inability to be able to agree on a direction, on whether or not they should be selling the company now, on how much the company is worth. We see people disagree about who should be taking over. We see people disagree about, you know, I don't want you to leave. I mean, like, you know, one person could want to leave, the other one doesn't.

Product A versus product B, service A versus service B, geographic expansion, not geographic expansion.

I mean, every single aspect of the business could be a potential disagreement.

Yeah, exactly. And the reason that you're an owner of the company is you want to have If you have partners, right, you want to make money and you want to be prosperous. And oftentimes the personalities that come together to form a country, a company, an entrepreneurial venture can clash. And that's, you know, that's something that just you need to take care of and you need to assume that when you go into business with somebody, you're going to get out of business with that same person at the beginning and understand that. Ideally, you could be one of the 20% that successfully sells their business without a disagreement, or you can know numbers and realize that you're probably gonna be in the 80% where you don't successfully sell your company.

Absolutely. And yeah, I think, look, I think the saddest thing, honestly, one of the saddest things that can happen to a business is even worse, I frankly, I think than death, okay? Is in terms of an exit is Being forced to be into a position where partners disagree to the point at which it obviously affects, it negatively impacts the business. And the solution to that is obviously, you know, riddled with legal stuff and attorneys and court and, you know, potentially, you know, really things that really, really impact not only the exit, but the day-to-day operations, current operations of the business. Because when 2 partners are fighting and stuff like that in a business, then it's a very, very uncomfortable place for everybody else. to be. And the business suffers greatly. So I don't, I don't have any numbers on that particularly, but we should probably find some. But I think that the—

Yeah, yeah. One other thing I want to add is, and there are, there's a phrase that I'll use in this sentence, in this situation, and it's disagree and commit. And I think it comes from Jeff Bezos. And I love the phrase because this is one of the ones here where, yes, you should, you should take care of things. But you should also have perspective As an example, if Joe feels— we had an example of this. We had an example of this in our business where we disagreed and our other people were weighing in. And I completely disagreed with Joe's thought. I thought he was wrong. I thought I was right. But I remembered back to what I read about Jeff Bezos, and it was called disagree and commit. Joe Felt strongly about it. I didn't feel as strongly as Joe about it. I trust his judgment. So I disagreed. I said, I completely disagree, but that's— this isn't important. We need to commit to moving forward and making other decisions for the company. And you will get to that point where you want to disagree and you want to dig your heels in and you want to be right. Trust me, I know. Everyone with a family member understands this. You want to be right, or with any other situation. That's just, I'm dealing with that in my personal life, but disagreeing and committing to sell the company, move forward. That is, that is, that is power. And that shows how much you care about the end goal as opposed to whatever you're deciding at that moment that you're disagreeing about. Just wanna add that in.

No, I think it's a great point. And I, and I think again, how you manage, look, partnership, we could do an entire frigging, you know, an entire podcast just on partnerships. I mean, and the fact is, in the ins and outs and the psychology behind it and the ways in which people can be better partners and things like that. And look, we've got some courses in ExitEngine that touch on this subject as well, the psychological aspects of owning a business and how you get along with other people and being a good leader and all that stuff. But I think that one of the things that, to your point, is exactly right. And I do remember that situation. And I think that By the way, it wasn't the end of the world. In other words, we disagree all the time. And in fact, part of our thing is to do that. I mean, it's what we want from each other. And even if we disagree initially, often though, we're able to get the other one to come around. And that's the— but look, there may be a day, God forbid, where there is an impasse for whatever reason. And let me tell you where the impasses lie, okay? Almost always about money. So, you know, I, I think that the thing is, is that it's a— it's, it's money is a necessary evil, obviously, in this situation. And, and obviously everything that we're doing around this revolves pretty heavily around the financial aspect of stuff. Um, uh, you know, even having a financial harvest, as we will talk about in a minute, and the whole thing is, is rife with kinds of issues that way that might pop up. In terms of disagreements over money, where we go, what we do. And, but I think the point is that John's advice is spot on, which is that if you are in a part— before you get in a partnership, understand what being in a partnership is. And it's different. It's slightly different probably than even your marriage. Okay. And that kind of partnership.

Yeah.

And other partnerships you've had before because of the nature of what you're doing in terms of creating revenue. Okay, creating money. You may have different— as you go along the business, you may have different ideas about what's needed here. Okay, and those are going to be kind of relatively innocent disagreements. Those are the kinds of things that John and I mostly kind of get into, was like, you know, I think we should do this, John says no, what about this, you know, and then we have a discussion about it and one of us ends up prevailing because we convinced the other one that that's the thing to do. Um, and that's great and that makes it work. And if— but I also respect John enough to know that if John really disagrees with me on something, there's a good reason for it. Okay? And that I need to listen to John when he says, I disagree. Right? Because John is a really smart guy and John has a lot of experience. Okay? And, and, and I need to, to trust in that as well. That's part of getting into a partnership.

Right? Yeah. And just, and just to Just to, you know, square the circle, Joe was right, just to be clear. Like, I was wrong, he was right. But that— not that that's relevant, but I just want to, you know, point that out.

Thank you, I appreciate that. Look, it happens every once in a while. Um, but, but honestly, I mean, that— but, but if you hadn't— if you hadn't had that, okay, and if you hadn't said, look, I'm willing to take the risk of Joe being wrong and me being wrong and me being right anyway, You know, and you don't want— you didn't want to be right in that situation. You like— I even remember saying, like, I wish— I hope I'm wrong.

Yes.

And, and you— and, and in that situation, it, you know, whatever you were, but the point is that it's irrelevant. The notion is that the trust— okay, so look, don't, don't get into bed with anybody, okay, that you don't trust. It's that simple. And look, and, and you can be— and you can be betrayed. There's no question about it. We're not trying to say that this is not— that this is something that is, you know, is going to be easy when you own a business over a long period of time, people change. People's lives change. What happens to them in their personal lives change, and that can have an impact on how they act in the business, right? There are so many things that can go on here because we are all human beings. And so the key thing is to understand is that, is that when you are in a partnership is just, again, agree to disagree, but write down some rules, right? Write down some ground rules. How are we going to operate here? What's my role going to be versus yours? What's your bailiwick versus mine? In other words, what is your lane? Do you do— I do this and you do that and we don't cross over, or maybe we do cross over in these instances and we say that this is how we do it. But so like I said, we can do it and probably should do an entire thing just on partnership. But understand that that ultimately the disagreement that can happen between partners can be catastrophic.

Yep.

Right? And so planning for that and to mitigate that however you can is going to be critical for your business and, you know, for anyone's business, no matter when it is that you end up selling it. These disagreements don't just happen during— these disagreements don't just happen during the everyday operating of the business. In John's case, and John will testify to the fact that his situation happened during the sale, that they disagreed on which direction to go from a sales standpoint. They got an offer, they were— one wanted to take it, one didn't. One wanted to move on, one didn't. And the reality is that that became a real sticking point.

Yeah, and not all right. And thank you for bringing that back up, Joe. That decision or lack of decision and rift, and that caused problems in the business, right? Like they were talking less. The partners who were arguing were talking less frequently. They were collaborating not as well. They were— everything sort of rippled through all those other issues or other issues came up as a result of them Arguing. It's like you don't really want to talk to somebody and you don't really want to collaborate with somebody that you fundamentally disagree with. It just doesn't happen. Um, so, so, so the business suffered because of it. It prolonged the search process and prolonged the decision-making process, and the business suffered as a result of it. So, and nobody wants that. Um, but the transactions suffer.

I mean, that's the point, right? The trans— the eventual transaction suffered as a result of the rift. Right.

And we got less money. So yes, exactly.

So if you need any more reason than that, right? But the idea is, again, take, take your partnership seriously. Work on your partnerships. You know, it's easy for it to sit here and say, but the reality is, is that it takes some, it takes some, it takes some love. It takes some stuff. It takes some, like, you know, get to know you. It takes some time away. Look, some people get along really well and splendidly, but I'll give you a great example of something that you can look to To, to get to, to look to towards advice for partnerships. Rock bands.

Okay, go.

Okay, so, uh, I don't know exactly what the numbers are, but some kind of really, really high number of, of people who get together to form bands end up not being able to work it out personality-wise. They have different— they have direction differences, you know. They may start out good together or whatever, but when you take a look at the rock bands in the Look at your favorite rock band, okay? And I guarantee you that, that chances are that, that over time you have seen members come in and out, okay? Oh yes, right? It's the joke, right, of like, like heavy, whatever rock bands is like the drummers are like constantly replaced and stuff like that, right? Like, like there's— it's like a known thing and it's very hard to end up being the Rolling Stones, okay?

Or the Grateful Dead, like, right? Uh, shout out to Wilco on this because Because Wilco has continually been excellent in all their different members. But that's another, that's another aside. So yeah.

But you're right. But there's bands that have been different members, and the idea is that, you know, there are— and look, and there's different reasons for that. People leave all the time for personal reasons or whatever. It's not necessarily there's a rift in the band, but often there's creative differences, right? Often there are personality things, and sometimes people are doing it just because they, they are— they can deal with it for a certain amount of time until they just can't take it anymore. Right? And so the reality is that, again, this is human nature stuff, man. You know, and so much of the M&A world forgets about the human beings involved and is only focused on the financial and the transaction part. But the reality is that owning a business and having a partnership takes care and growth and, you know, and probably some arguments and some disagreements. Right. But the disagreement doesn't have to be catastrophic if you don't let it.

Right. Yeah. Agreed.

So again, we can probably too, plus we can do an entire hour of partnerships distress. And I think that, that this is the 5th D. And again, it's probably one of the most common next to death is that the company is just not performing well.

Yes. Right. The company is, for whatever— it could be the result of a disagreement, right? These things sort of, you know, distress is the result of all these, right? When you have a death, there can be distress. When you have divorce, that can be— or distress just can come up independently.

Lose a big client, right?

Lose a big client, have a pandemic, you know, a huge competitor comes into the market, you're all of a sudden starting to compete with With Amazon, like we talked about, or we mentioned the company earlier, great company. But the last company that you want really to compete with, I think, is Amazon. They're just enormous. They can outspend you, or the government, or not-for-profit. But like that, when distress comes in and it's in the form of anything, it's, oh my gosh, as a result of one of the 4 we've already talked about, or independent, man, it is hard to navigate yourself out of this. What are you gonna do? How can you plan for the distress in your business? You can't really, but you need to understand that it may happen if you get a new competitor or something drastic happens in your industry or business.

Right. And so it may be that again, in a preventative situation, when you say about, all right, how do I hedge against distress? Okay. Obviously operating the company as efficiently and effectively with all the operational components in line, All the legal stuff in line, if all your financials in order and all that stuff, right? So the first thing is the health of the business overall before a catastrophic incident happens, making sure that all those things are in place. And again, you can find people at ExitEngine to help you with all these things, whatever the issue is. But remember when we talked about the 10 things that you really need to make sure that you concentrate on, In terms of making it, you know, in terms of making a healthy business, those are the things that you have to do first, right? So you want to make sure those things are in place no matter what. What happens, though, when I have something that's completely out of my control, i.e., a competitor comes in, something happens in the, you know, in the industry, regulation, something I can't afford to do or whatever? What do I do then? And the idea is, A, understand that that's a possibility. Today, It's a possibility. You may say no, no, no, and whatever. It's a possibility. So the first thing is have a— what we just said before— plan for what you have to plan for. Okay? Plan for this as an— as a potential eventuality. What would I do if this— I suddenly found the business in distress? Maybe I'm underwater. Maybe I've lost a big client. Maybe I've lost 2 clients. Maybe a bunch of employees left. Maybe I got a competitor who comes in here, or maybe it's one of the results, as John said, is one of these other 4 Ds, right? Either way, what do I do? And the solution in most cases is, is often to sell the company.

Yep.

Right. And so, but selling the company when it's under distress is a way different process than selling the company when everything's going great.

Oh, I mean, and guess, are you going to get more money or less money when the company's under distress, Joe? Right.

Uh, less.

Because trust me, even in comments that even conversations, you could, they, people can tell right away when people don't like each other. But even in comments, I, we had a situation in the same situation where people were making comments on the agreements that were that disagreed with each other. So the, the lawyers for the other, the other, uh, for the buyer found out that, and miraculously, their next offer was lower when they— when we went back. So, right, every— everyone can figure out when you're on a conversation. If Joe and I like each other, I think you can tell that from this, from this podcast and this video. You can hear it in our voices, I should say. Um, when someone doesn't like each other and people don't like each other, People quickly find that out in conversations and on phone calls.

No, no question about it. And I think that's the thing. So, you know, at the table, essentially, when the lawyers for the buyer go, hmm, I think these guys might not be getting along, you know, or I think maybe the company's in distress in another way. And remember, that can be, that can cause distress. Okay? So the company, you don't have to, the financial distress is just one Yes. Okay. So, you know, it's easy to say that, you know, we're not, we're not saying that the only kind of distress here is that you're financially not doing well and, oh my God, I got to sell the business really fast, otherwise it's not going to come back or whatever. No, it could be the fact that, again, you got a partnership issue. It could be that, you know, any of these other 4 things have happened or whatever. The reality is, is that the distress, the distress is anything that's going to potentially affect You're, you're, you being able to put your absolute best foot forward when it comes, when it comes time to actually try to sell the business, right? Or try to exit yourself. So the distress thing can happen along the way. Much of the stress that we encounter as business owners, we are able to overcome, right? So distress by itself isn't the exit. It isn't the end. Okay. And we are, one of our jobs We're working with a client now, you know, John, who was about to go under, and we've been able to come in and make some pretty significant changes just because, you know, there are blind spots as an owner. Sometimes you're sitting there and you can't see everything, and you have your own way. And like I said, and a lot— many of you guys out there, we know you're not MBAs, you haven't gone to business school. You fell backwards into a business because you had— you were a subject matter expert in something and, and realized the thing. Maybe you went to work for somebody else and suddenly you became the owner of the business one day. I mean, and so you may know your business, okay, but that doesn't mean you know business, right?

Correct.

And that's okay. I want to say no shame, okay, because I, I don't know what the number is, but I'm— I will venture that 70% of people who own businesses Would not have considered themselves business people in the you know with capital letters, you know before that. Okay, so you get good at it like anything else. You're going through it. You're learning. You're going right. But the reality is is that you know the the much much of the time you're going to encounter distress and you're going to overcome it. But you what you need to be able to do is to understand that what are my options going to be? If I should become financially distressed, if I should lose a big client, what am I going to do? The answer may be I might go borrow money.

Yes.

So again, we're not saying that distress causes an exit. Okay? What we're saying is that distress is a large cause of people giving up. It's a large cause of people going, throwing in the towel and saying, I can't do this anymore. It's the kind of thing, it really does separate people. We are working with, again, this client right now who is just such a positive person, and she has held on for so long and done such a good job trying to keep it together for as long as she could that it enables us to be able to actually come in and help her. If she hadn't done some of the stuff to keep it together as long as she did, she would not be— she would not have a prayer.

It wouldn't be a viable company, right? And yeah.

And so The stress obviously is something that is, again, can rub off on any of these things, but just keep in mind that distress doesn't mean it's the end.

Agreed.

You need to understand the degree of distress and what you can do about it. So those are the 5 Ds, and those are generally kind of considered bad exits, like exits I don't really want to have, but I need to plan for them just in case so that I can make sure that whatever we want to have happen happens.

And after going through the 5 Ds, we know it's depressing. A lot of 6D, it's a little depressing to go through these Ds. But the last D, the next one that we're going to talk about is destiny.

Right.

And I mean, we've gone through the death, we've gone through divorce, we've gone through disability, disagreement, distress. Destiny is what you plan for. is what you will get if you plan for these contingencies. So I'll let Joe go into the Destiny discussion. Yeah.

I mean, so yeah, Destiny is what, with the exit engine, this is what we've come up with as the 6th D to combat these 5 other Ds. Okay. And that right now, about 20% of people who exit their business in any way, okay, are gonna fall into one of those 5 Ds. All right. 20% of people will exit successfully in terms of, again, in terms of the way that the industry would look at it successfully, meaning you successfully sold the company, you transitioned it to another person, you are out and you are living your, you know, whatever life you're doing in your next chapter and everything's fine. Now, you can be like me and you can look back on that experience and go, I still wish it was different. I still wish some of the things that maybe I didn't think of, I knew that I would have planned for, things like that. So we can all individually look back and rate our own experience. But at the end of the day, what we're talking about, just for the intents and purposes of this conversation, is to say that destiny is when you successfully exit, you make the transition, the company changes hands, and you are in the next phase. Okay, fair enough?

Yep.

So that's destiny. We, we can break— there are a couple of different situations that we would— we can categorize into in terms of types of exits under the destiny heading, okay, which is again the good way. I am getting what I want. I am exiting on my own, mostly on my own terms. I am getting the value of the company that I believe is fair. And I probably have some kind of after agreement for some period of time to stay on as a consultant or to otherwise transition things. And maybe I'm handing it to my son or daughter or some other relative, and I'm staying on as the chairman of the board, okay, or something like that, right? So there's all these permutations, but we can break them really down into like 2 major categories, okay? The first is that we've brought these terms up before, but now we're going to give you the definition. Um, there is the, uh, a, a financial, what we call a harvest exit, okay?

Yeah, and the financial harvest is, is simply this. It's I have a company on one day, I sell it on the next day, and in exchange for the company, they give me cash or equity or something, you know, consideration for that company. You sell it to a buyer and maybe there's a vesting schedule like Joe mentioned, an earnout period, but you are relinquishing control of the company and you're staying there for some defined period of time, but then you're gone. You're on a beach in Cabo, you're hiking in the mountains, you're doing something You're doing something else. You're starting your new business with your financial harvest and your windfall. That's one exit option that happens very frequently.

Exactly right. Now, and that tends to be what people think of. And let's go back to this study that you cited at the beginning of the conversation. Many people start out thinking that they want a harvest strategy?

Yes.

Okay. Because the reason they get into the business or whatever is they see a financial thing. They see that they feel that they can grow the business, that they can put their expertise behind this, and that they can grow this thing into a situation, an asset that will be worth a lot of money. And in the meantime, while they're building that, they are also building their own income and personal wealth and the whole thing as they go. And so, the idea is that it's not just a— yes, I've made— my father owned a consulting business for years and actually 2 different ones. And the second one that he owned and the whole thing, he sold to his partner. And the deal that they made, the exit strategy he did, he retired and he sold the company. But what he did was he actually had the company pay him monthly for the rest of his life And then also the rest of my mother's life.

Okay.

That was the agreement until one clause in the contract that everybody kind of thought, well, it's fine, whatever. If we can't afford, if we lose a major client or whatever and we can't afford to pay you anymore, we get to stop. Yeah.

Not great.

Not great. Okay. And when that happens to you and then suddenly you're in the middle of your retirement and you have this income and you have this and you're used to this stuff and someone suddenly goes, oh, sorry, we lost this client. And so no, we're executing this clause where we never have to pay you anymore. So obviously you gotta be careful about agreements like that and making sure that it sounds like great, it sounds awesome because honestly, and it worked really great for a long time. Okay. But it's not, when it doesn't work, it can be really bad. So, but the point is here is to say that, look, you start out thinking I'm gonna sell this company for a lot of money one day, and that's great. Okay, what happens to people according to the study too is that during this time of owning the business, their mindset changes. And what happens is they've made a lot of money in the business, owning the business. They've been able to put money away. They've got it there, whatever. The asset's still a huge asset, but it may not be to them the end-all be-all. Okay, they may not need to sell the business in order to, right, in order to have a nice life and to move forward and everything else. They've invested well. They've done They've used the money that they've made being paid by the business to invest that thing in other places. And so that the business, they don't need to sell the business to fulfill their dreams of what's next.

Yes.

So what they are interested in, however, is ensuring that the business lasts even though they are leaving. And that's what we call a stewardship exit. Okay. What they want is they want to be the person who is still attached somehow is still the person known to be the founder or whatever it is. And they're, you know, the picture of their bust is on the wall or whatever it is. And they've got the, our founder, and this is the guy, and everybody prays to this guy every morning or whatever he wants them to do. You know, the idea of being, it's more about me and my legacy as the owner and the founder of this business is more important to me than the financial rewards that I get with it. Not that it's no financial rewards, but that it's the intent. The intent is, I want— I need a windfall of cash and, and money to do the next thing, to, to, to, to, to finance the next part of my life, whatever, versus I want everybody to know and remember that I started this business. My names are on the trucks.

Yeah.

My name's on the trucks. My thing is there, and I'm probably going to end up going, oh wait, I didn't even realize. I didn't know when I started this. I didn't have a son when I started the business. Now I do. And now maybe the best thing to do is to keep it in the family if he'll do it or whatever, or things like that. And that could be stewardship stuff.

Yeah. And the stewardship is interesting that in that research paper, many of the founders pivot towards that stewardship option. And they think, again, causation does not equal correlation. But what they think one of the reasons why is these founders start out with, oh, I want to reap a financial reward. I want to reap a huge financial reward and sell the company. Whereas when they get along and they're growing the business, they are making a lot of money, right? Money becomes less of a motivator as they have more money, which is sort of not surprising. But when they don't have any money and they're a startup founder, They want to reap a— they think they want to reap a huge reward at the end. But when they get along in the business, 4, 5, 6 years in, and they realize that they can sort of have their cake and eat it too, they have enough money. Money's not motivating them anymore. And they, they have a daughter, they have a son, they have a nephew, they have somebody, they have a partner that they want to leave the business to, and they want to keep their names on the trucks, and they want to maintain Their legacy, right? It's really about legacy when you think about stewardship is the way I think about it is money's less important. The financial harvest is less important. They want to have a skin in the game even if they're not here, which is interesting and points to the fact that these entrepreneurs start these businesses oftentimes from scratch. They want to, even after they're gone, they want to maintain a legacy.

That's exactly right. And look, the point is that it's your destiny. Okay? So you get to choose what your destiny is. That's what Exit Engine and exit planning in general is all about. It's about planning for the event, for mitigating the risks. Okay? Right? Hedging.

Yep.

A little bit. And it's also about, but it's also about formulating the, what's the best path? And by the way, the best path changes over time. So what we're trying to point out to you guys today is that Your mentality coming into a business and starting the business will be will be guaranteed will be different by the time you leave that business. Okay, and understanding that just human nature, time goes by, things change, priorities shift. You know, things become more important, less important, whatever. You know, in terms of my life and things like that, and and that your exit plan needs to keep up with those. Shifts, right? So you can have an exit plan at the beginning and you're, and you're, you know, built right into your business plan. Great. Which everybody should, by the way. Okay. And then what you're going to do is you're going to, every year, you're going to look at that exit. You're going to look at every single thing that could hurt— death, divorce, disability, uh, you know, uh, distress, right?

Um, disagreement.

Disagreement. Sorry. Thank you.

Gosh.

And then, uh, and then, and then destiny. All of those things, right? And every year you're gonna reexamine this stuff and go, is this still true, right? Yep. Is this how I feel? Is this the actual conditions that I'm existing in right now? Have they changed, right? And that's why this is an ongoing process that will last the entire time until the moment you sign a contract selling the company.

Yeah. And, and, and, and right, just like as Joe mentioned, everything else in the exit process is reviewed. Your exit plan is reviewed. And as you mentioned, things change. You, you could go from the financial harvest thought at the beginning— I want to make tons of money and I want a huge financial windfall— to, wait a second, let's keep this in the bit. Like, this is a— this, this can provide for my grandchildren, my great-grandchildren, all those things. It can be, it can be an enormous windfall for the whole family forever, not just for you in, you know, 2024.

Right, exactly. And continuing that stuff forward. And like I said, I brought up that example of my dad and his company just to show that there are plenty of permutations of things out there and different ways to be able to handle your exit, no matter what strategy that you're going through. And sometimes, look, I think one of the clients that we're working with now that we talked about who was under distress when we met her and the whole thing is, is really has a hybrid strategy. So she, what she wants is she wants some stewardship. Like that's, that's actually kind of first and foremost in her mind, but she knows that she needs the, you know, the money to, to, to, to go on to live and everything else. And so, yeah, you know, the reality is, is that again, to her, it's all about her and, and the legacy she's leaving behind and her contribution to her particular industry and, and the people that she's helped, because that's what she's really all about. Right. But the, but she needs some money to be able to live and to make sure that she can do the thing that she wants to do, move So, again, it's, it's not one or the other. It's never— it doesn't have to be either or. But what we are talking about in general is controlling your own destiny.

Yeah.

And that 6th D encompasses all the other ones because you are taking the steps to mitigate or to, to, or to plan for those negative outcomes— death, divorce, Disability, disagreement, and distress. I got it.

Good all. Good all.

Good all. And that's why I did it just to practice anyway. So I does that make sense? So where we are here is that basically is that again you're looking for a harvest strategy. That's you know you're looking for a stewardship strategy. That's great. No matter what they are or the combination of the two, no matter what, just understand that this stuff can change over time, and that's why. I need this attention on it, at least on an annual basis.

Yep. Agreed. And again, that's part of ExitEngine. That's part of the exit plan that we, that we, that you frankly will build when you join ExitEngine and with our help, and you'll revisit it, you will review it, you will update it based on the current business that you're operating, not something that was developed 3 years ago and was right before the pandemic and was correct before the pandemic. It's right for right now. It's reviewed annually. And as you know, things change. Customers change, clients change, employees change. So it's only natural for your exit plan to change and your destiny to change.

So beautifully said. I can't even— gosh, John, that was really good. I'm gonna— I'm gonna— we're gonna leave it right there. So So, let's control your own destiny, okay? Guys, thanks for listening to this podcast. I hope you enjoy it, you get something out of it. Please let us know what you feel. I'd love to have your feedback. So, if you can come back and comment on this episode or any others or whatever, or have any— or if you have any questions, you can feel free obviously to make those comments. And we do actually try to make an effort to answer people's questions directly. So, and we're gonna actually gonna put together a podcast coming up. A whole entire episode is going to be dedicated just to listener questions, okay? Because we get a lot of them and there's some things that we really want to share. But please do subscribe, like, comment, share with a business owner that you love, okay? And tell them about Exit Engine and all this stuff. And we hope you come and join and subscribe. You can go to myexitengine.com. And remember, it's myexitengine.com. And You can look at our subscriptions and things that we can provide for you. We hope you will take our assessment, which is always the first step in understanding where you are in the process on your exit journey and what are the immediate things that you can do to immediately kind of enhance the value of your business and to start your kind of exit plan. Jon, thanks so much, man, as always.

Thanks, Rod.

It was awesome. It was a great discussion, and, uh, we will talk to you later. Thanks, Joe.

Appreciate it.

Have a good one.