The Exit Engine Podcast Episode 13: The 3 Most Important Financial Reports You Need To Know

Welcome to the Exit Engine Podcast, episode 13. Uh, John, this is— I've been dreading this.

Come on. Why, Joe?

Because it's the financial stuff, man. Oh, I, I don't know what it is. I just, I always get like a weird, uh, you know, uh, whenever we look at our own stuff, but whatever it is, I mean, I just have a weird, uh, like block, uh, against these fi— this financial stuff. And when I, I, it, it gives, gives me agita, I guess is the best way to put it. Right. I, I, but I think that's true for a lot of business owners.

Yes. But it, but it's the language of business, right? You need to understand it because This is the primary way that people are going to learn about your company, at least first, right? You're gonna have a discussion with them and you're gonna explain your business. And if you explain your business and it doesn't jive with what they see in the financial statements, they're gonna wonder like, what is this guy telling me about? He says his business is great, but he doesn't make any profit. Like, okay, he needs to explain this stuff. So—

Yeah, absolutely. So, I mean, you're right. I mean, the reality is that there are a bunch of— the financials obviously are a very important part of your exit strategy and your You know, in any kind of exit planning that you do, obviously, in order to grow the value of your business, you have to understand where that business is right now. You have to understand, look at those things to see the things that you could potentially, the levers you could potentially pull to be able to increase the value of that business. And obviously also the propensity to sell, right? Which is what, which is what we're really focused on on this podcast. And by the way, we say welcome to the Exit Engine Podcast. I'm Joe Stapleton. This is Jon Kniff.

Hi.

We are here with you every Friday to talk about exit planning and the importance of and how to grow the value of your business. You know, most of it very quickly. Today, we're gonna be talking about the financial end of things. There are 3, John, right? 3 major financial reports. So there are so many ways to skin a cat and so many deep dive things that you can do.

Mm-hmm.

But as the business owner, we really want you to only just really just focus on 3 things, right?

Correct. Yeah, there's the balance sheet, there's the income statement/P&L statement, and there's the cash flow statement. And they're each important for their own, in their own specific reasons, right? Everyone's very familiar with the P&L. That's your revenue, your expenses, and your profit. The balance sheet—

That P&L is showing that information over a certain period of time.

Sorry, over, yeah, over a period of time, over a quarter, a month, you know, whenever you're looking at your P&L, you're running it for a month, a quarter, a year. And, and it's what happened with revenue over that course of the year, the corresponding expense to generate that revenue, and then the profit or loss based on if your revenue is more than your expenses. So yes, that, that's the P&L in a nutshell. Right.

And, and then the balance— then the balance sheet is the second one.

And that balance sheet is the second one. That is assets equal liability plus equity. And the easiest way to think about this is if you own your home Your house is the asset, the liability is the mortgage, and the equity is the down payment. So your house equals your mortgage plus your down payment. Very simple. It details cash, which is an asset, other current assets like property, plant, and equipment, accounts receivable, things that are owed to you, um, and, um, and liabilities, right? Liabilities are if you Let's say you have debt. Let's say you have accounts payable. Those are all things that you owe to other people. And then the equity is what the— is the ownership in the business. So, um, and that's the balance sheet. Uh, that is at a period— or sorry, that is at a point in time. Excuse me. So that is as of December 31st, 2023, as an example. Um, it's, it's what your— it's what your balance says of cash, of accounts receivable, at that specific time. Um, and then there's the cash flow statement, which is over a period of time as well. And that's where's your cash gone. It's, it's basically a reconciliation between your net income, which is on your income statement, and all the uses of cash throughout that time period. So over the course of, let's say, a year, if you bought equipment, you use cash for that. The equipment goes up, the cash goes down. If you have sold debt, the debt, uh, you know, you get cash into the business. Um, and so you, you have a liability of debt, uh, in the liability portion of your balance sheet. So they, they're all related to each other, but they— but individually, they point to the health of a business, um, in slightly different but yet important ways.

Like you said, it's the language of the business, right? So in other words, it's basically when we're talking about revenue and profitability, right? Those are the 2 things that everybody kind of really knows about. But we're also going to be talking today about things like other calculations that are important to make, to be able to make, like EBITDA, right? Which is—

Correct.

Which actually is an acronym, and it stands for earnings before interest, taxes, amortization, or depreciation and amortization. So again, it's EBITDA, uh, which is earnings before interest, taxes, depreciation, and amortization, right?

Right.

Yeah.

And everyone knows that, that those things are expenses, right? Taxes are just— we all have to pay taxes, right? Depreciation and amortization are a non-cash expense, but yet they're, they're important to business. The reason that we're, that we're adjusting for these things is because everyone has to you know, pay taxes. It's like, okay, you can't control them, right? The reason that we calculate EBITDA for purposes of evaluation is not that it doesn't matter, but it's one of those things that everyone has to deal with. So we're gonna, we're gonna add those things back to net income to get EBITDA. And then we're also gonna add things back to your business and, and sort of we're getting into the meat of what we're gonna talk about today is your income statement, balance sheet, and cash flow statement are how you run the business, right? That's how you look at the business. you might pay yourself in the example we're going to look at, uh, now is $340,000, right? Let's say you pay yourself $340,000. It doesn't matter what you pay yourself. It's your business. You can pay yourself anything. But for purposes of evaluation for your business, we're going to add what you pay yourself back into the earnings of the company. Because what the, what the buyer is buying is a company. Let's say, let's use Joe as an example. Joe's the CEO of a company. They're buying the company without Joe, right? They want to look at the company from the perspective of, I'm going to buy this company. Joe's going to go away and start his next venture, go on a beach somewhere, do whatever he wants to do. The most important part about that is he's not going to be in the company. We're not going to be paying him. So we add back all those things into, um, the company's, uh, EBITDA and get something called adjusted earnings. And there's all sorts of names for it, but adjusted earnings is essentially the name is, is you add back, let's say that Joe has a company car. Let's say that the company contributes to his retirement. All those things are added back to get a calculation and get a figure that is more reflective of the company after Joe or without Joe.

And this stuff is, this is really, really important. And here, here's why it's, here's to me why it's the most important thing that you, that, that every business owner understands how to do. In order to value, there are different ways to value a company. Okay? There are, and it is a little bit kind of cagey. Okay. And kludgy. Okay. In some cases, right? There is no standard. It is not like there's an industry that's regulated in any way. There is no way to say that this is the way to do it. Different industries have different ways of being able to value the companies within them. Okay. Some will use EBITDA, some will use straight cash flow, Some will use asset, you know, and then asset method, whether you're just calculating the, you know, the things that the company owns that are, you know, that are worth money versus the things that they— versus their expenses. So the reality is that there's more than one way to skin a cat. But in general, most valuations are going to occur as a calculation of your adjusted EBITDA. multiplied by some number, um, and that is based, based on a— that's called a multiple, and that is mostly, again, an industry trend. Okay.

Yep.

Not always. It can be different. It can be adjusted. It can be, it can be, uh, manipulated.

Yeah, exactly. And it can be, it can be a premium, right? Like, when the— my first— the first company I worked for out of college Was, was, I think they had $50 million in revenue and they were bought by a very large company for $200 million, right? So that's a 4-time multiple. And that was like a premium because of the way that the company operated. They billed in advance and they did all sorts of things. So they collected their cash before they delivered their services. And they were, they were bought at a 4 multiple, which is a premium. Because of the way that they were compared to their competitors, they had a market-leading position. They were No. 2 in the industry. So they were able to argue and convince a buyer that they were worth 4 times revenue when the industry standard was like just about 3 at that point, back in, you know, back in, well, I'm not gonna give the exact date, but back, way back when, when we were doing this. So.

Right. So the reality is that that is something that can be, again, it's It is not an exact science. It is based on essentially mostly on industry and like, kind of like the housing market, right? It would be the kind of thing that was based on, this is essentially how things are in this, the businesses of this type have been selling for in the recent past, right?

Yep.

So that's generally how the multiple is done. However, to John's point, your multiple can be manipulated and it actually can grow As a factor of how likely or how desirable your business is. So the multiple can go up when some of these other things about your business are actually complete. And the things that we preach at ExitEngine are actually done and checked off your list. What you're doing in that case is you are actually, when you are doing the things that make your business stronger and better and more desirable, Not only you're making growing the value of it, but one of the ways you're growing the value of it is to grow the multiple, um, that, that will be multiplied by that, by your adjusted EBITDA to come up with the value of your company. Right.

And, and, and a simple, just, just, just to make, make that, bring that point to, um, fruition is let's say you have $1 million in adjusted earnings and you have the industry standard is 3 times multiple. Your company's gonna, you know, you should look at a $3 million valuation for your company and get, and potentially get that. You could argue for a higher. The buyer may argue for a lower based on, again, their— maybe they've bought a company like this in the past for 2.5 times seller's adjusted earnings. So that's a subjective discussion that you have in a discussion with these people to try to convince them that because you did all these things that you'll learn throughout Exit Engine, that you have your processes documented, you have your management team, you have all the things that we talk about that are important to these buyers, you'll be able to argue for a higher multiple of your earnings.

No question about it. And again, that's the last— we use this, everybody knows about the valuation. It's the one thing that everybody really knows about selling a company is they have to put a price tag on it. The unfortunate part in our experience, and I think just about everybody who works in the M&A space in general who works with owners, Is that they're not very good at judging their own valuations, right? Everybody thinks, in general, thinks that the company that they've built over the last 20 or 30 years and they've made so much money on and all that stuff is worth way more than it actually is. Many of the people that we come across are surprised to learn that their valuation isn't as high as they think it is. But they're equally surprised to learn that they can actually make it pretty close to that, if not actually exceed that, with just a few things, like a few adjustments to their company by examining some of the things that are kind of underneath. So I think today what we want to take a look at is, look, we're going to talk about valuation more. We're going to talk about EBITDA in depth and things like that. We're going to talk about what are those things that you can actually add back into your EBITDA. Because there are some things out there that people think that they're hiding from, like, people like the IRS and stuff like that, that actually are things that they can actually use to add back and increase the value. One thing I think I want to say real quick about EBITDA, though, is just remember this. We are always looking for things to add back. And the reason that— one of the reasons that we're always going to be doing that is because every time you increase the EBITDA, Remember, you're increasing it not just by one, but you're increasing it by the multiple. So for instance, if you pay yourself $200,000 a year, uh, you know, and that's what we call seller's discretionary income, you are essentially taking that money out of the company. But, uh, as John said before though, we're gonna adjust the EBITDA. We're gonna take that money, we're gonna put it back. That $200,000 you're putting back in the company actually represents Times a multiple. Okay. And that's the actual total amount of money that actually is in your pocket. So you take your $200,000, you put it back into the, back into your EBITDA, add it back in, add the multiple of, let's say, 3. Okay. Which is a general kind of multiple. You would see that that's actually 3 times $200,000. So that's $600,000 in actual money in your pocket, not just $200,000.

Exactly correct. And, and what we have, you'll see we have an adjusted P&L example on the screen here. And as we talked about, you know, you see the sales, you see the cost of sales, fairly standard until you get down to the net income. And you'll notice that the net income, about $2.7 million, we're adding back those things that Jo mentioned to get to EBITDA, right? So we're taking the net income, we're starting there. And we're adding back depreciation, amortization, and interest to get to EBITDA. And then the next thing is we're adding that owner's salary. And I think I mentioned this earlier in the podcast is let's just say, for example, that you're paying yourself $340,000. That's fine, totally legal. But you get to an adjusted earnings of about $3.3 million. And here is where you get into the discretionary earnings and the add-backs. And again, These are the things that Joe mentioned that will increase your multiple by definition when you're adding cash back into the adjusted earnings. Things like the car that your company rents to you. Again, you drive around, you do a lot of business meetings, you, you need a car. Donations that the company may have made, rent that is paid maybe to you as the owner of the business, right? Maybe you own the building. That's just an example in here. Meals and entertainment. You know, you entertain a lot. Those things are gonna go away once you're not at the company anymore. So they can— the new buyers can decide what to do for meals and entertainment. The retirement funds your company contributes to your retirement. Again, think about this as like a 401 match. That's essentially what this could be. Travel. Maybe your customers are down in Florida, down over in California, wherever you have to go. Um, and, and the total add-backs to here, as you see, is just under $110,000. Again, that adds back to your adjusted earnings to get to just under 3.5. So we started with, with 2.9 in EBITDA. We added $500,000 worth of EBITDA, almost. That math is right. So you're almost— if it's $500,000 and you're at a 3 multiple, that's $1.5 million in valuation you're adding back to your company. So You don't want to— you want to be able to defend these earned add-backs, but you don't want to forget anything, right? You don't want to have someone come back with a buyer, come back with a valuation that— or a discretionary seller's discretionary earnings that's higher than what you have, because then you've left money on the table. Um, but this is a good example of, of a seller's discretionary earnings calculation. Now, they may be different in your case. There may not be rent in your case. You may have a lease payment and you may be, uh, staying in that same building. Again, these will vary, um, but this is a good example of the types of things that you add back, um, with the goal of— and it's gonna be different in your case— removing the compensation that the company pays to you. And all of that compensation, you really have to think about all—

In any way, in any way that you can convert from a cash standpoint into any kind of compensation that you're being given. Now, it also may be there might be other people that you're compensating through this discretionary, uh, discretionary, uh, fund, for lack of a better word, right?

And they might be leaving as well, right? And if you have a— if you have a couple business partners and they're leaving as part of this, you want to have that in this discretionary earnings too. And again, there's notes, there's explanations, there will be discussions about your calculation of seller discretionary earnings. No one's going to accept without scrutiny, um, you walking them through, oh, this is why I add this back. My auto payment is $26,000. My lease is $26,000 a year, whatever it happens to be. There's repairs, there's all sorts of things. Um, if there's, if there's all of a sudden travel one year where there's not travel this year, what happened? You know, that type of thing. So, um, yeah, it's just something to, uh, keep yourself aware of. Um, so.

And I think that, I, I think that it's an excellent point. And to note that that's why we always recommend a third-party, independent third-party, uh, certification Yes. Because that means that basically that you're getting somebody who's a disinterested third party to basically objectively look at this information and give it their stamp of approval. And that's going to go a long way, you know, when you go to a buyer and you're trying to make an argument for why, you know, why you did this, why you added this back in, et cetera, et cetera. So that's always going to be a huge step. Here's the— here's the— this sounds really easy, right? Oh, this is great. I'm gonna take all this money and put it back in everything else, and I'm gonna have this valuation, and this is what I'm gonna then sell my company for, guaranteed. Wish it was like that, right? Unfortunately, not so much. So now we're in a situation where, again, by looking at these 3 key documents, and again, understanding that it is, you know, finances is hard, you know, it is It is not something that's, that everybody's built for. There are plenty of business owners out there that we know personally that wouldn't know a balance sheet if it bit 'em on the butt, right? I mean, the reality is, is that you've got, we've got, I've got people for that and whatever, and you're relying on the reports and things like that that potentially other people are giving you. When you're managing the company on a day-to-day basis and you're looking at the revenue that you're trying to bring in and you know, you're trying to increase profitability where you can, you're working on new products and you're— or new services. You've got the, you know, the invariable HR issues going on on a daily basis. You've got running a company is a lot of stuff going on all at once. And it can be, you know, it's a time suck and something is going to give. And we are not all not good at everything, right? And so the one of the things that we always preach to people is first is that be honest with yourself about where you are with this stuff and what you're— not only what your interest level is, but also, you know, kind of what your aptitude is. Because, um, if you are, for instance, um, you know, one of the things that we preach big time, that buyers are going to come in to look at your company and the first thing they're going to want to see is, can this company run without the owner?

Exactly right.

Exactly.

And what has, what has the owner done to make it run Without the owner, right?

Exactly.

The specific things. And when we're not talking about, you know, oh, I hired a CFO or, oh, I hired a salesperson, we're like, no, no, no, that's required. But sorry, that's something that you need to do. But you need to do more than that. You need to remove yourself. Again, you can hire a salesperson, but if you're still 40% of the sales, well, that's a problem. Or if you're the COO and you don't have anyone in operations and you're doing all those things, Well, that's a challenge for the buyer. They have to replace that, and they're gonna put that into their P&L to say, well, we have to hire a COO, so it's gonna cost us X, Y, and Z. And you don't want people to— companies and buyers to put costs back into the business to say, hey, we have to replace Joe.

Right.

And it's the flip side of removing yourself. Once you remove yourself and you have the management team in place doing things and you're the owner, sort of floating above the company, then you have the argument to say, oh no, no, no, no, Buyer A, the company runs by itself. I've removed myself, removed myself, and the company runs and flows smoothly without me.

Right. And that's, that's the desire from the buyer's standpoint. What we have to deal with is, uh, I'm the owner and I don't want to do that, or I'm not used to doing that, or I built this company on my back and my own, my own blood and sweat and tears and the whole thing. All that's true. I am— this company can't survive without me. I'm the guy that brings in the business. I'm the guy that, you know, as John always puts it, the chief cook and bottle washer. And that's something that's a point of pride, right?

What's our favorite quote about those business owners who've built up incredible businesses that we work with every day?

Do you work in your business or on your business?

And what got you here, the great Marshall Goldsmith, what got you here will not get you there. So what got you to the point of you building an incredible business of whatever revenue you have, whatever, whatever industry you're in, in order to sell your business, you need to have different muscles. You need to do different things. You need to exercise different strengths and frankly exercise different weaknesses to get the, to get To prepare your company, excuse me, to be sold. Because again, what got you here won't get you there.

And so, and, and what we're saying today, and it relates to the financials directly, is the first step is, is A, figuring out how you are personally dealing with the financial aspect of things. Okay? Be honest with yourself. What are you doing? What's your, what is your limit? What are, are your limitations with this stuff? Look, some people went to business school and they have accounting degrees and they're They're really good with numbers, and they— and, and part of their success, uh, you know, in their company has come from their ability to be able to do, you know, good things with, you know, with numbers and be able to actually, you know, examine things and, and make decisions based on, you know, the, the numbers. That's great. Um, a lot of people who are business owners don't— aren't good at that, um, and they're relying on other people to, you know, to give them that information. So What's the advice for people like that, right? Is that now you're in a situation where you're starting to think, we'll set this up like this. You're starting to think about, okay, at some point I'm gonna have to exit this company, right? That's what we want people to be doing. We want you to be thinking about this, that, that at some point this is gonna happen. The 5 Ds aside, right? Which we talked about in a recent podcast. What we're, what we're concentrating right now is just on, on the destiny one, if you remember that, right? So that's the good one. We want to be able to say, okay, I'm now thinking about retirement, for instance, and I'm going to hand the reins over, you know, all that stuff. What should be my involvement? How should I be looking at this financial stuff? And, you know, if I'm not one of those people who loves the numbers and gets off on spreadsheets. Yeah.

You're finding yourself a good accountant. I mean, you know, hands up, I'm pretty good with numbers. I am not a tax expert. So, so you can deal with the numbers at your company, but when you're getting down to selling your company, you need expertise. You need— just like you need legal advice, you might need financial advice, you might need tax advice. Those financial and tax advice, depending on— again, as Joe mentioned, depending on your comfort with numbers, your comfort with the financial rules of your jurisdiction and the tax rules of your jurisdiction. I would recommend everyone to get a good accountant because you might be very good at running your business and you've grown it. We haven't— we had an example at, you know, I had an example, I should say, of a company that had $30 million in revenue and they were looking for, uh, like basically, uh, 80— sorry, $60 million, $60 to $65 million But they had all their cost accounting that was completely screwed up from when they ran their numbers for the potential buyers. And buyers walked away after looking at it because they asked like 2 questions and said, what is going on with your product that's bringing in $14 million a year in revenue? The costs just don't seem realistic. And of course, not only are they not realistic, they were incorrect on the financial statements that they sent to the buyers. You do not want to be in the position of sending financial statements that either A, are wrong and you know they were wrong and they don't adequately, um, reflect the business situation. If you don't have all your costs in there for a product, it messes up profitability. It can make a company or a business segment look much more profitable than it is. No buyer wants to have to do that and send their financial statements to a forensic accountant. It's much better to resolve any issues you have internally and then get your financial statements pristine so you can defend them and you can talk adequately about them and correctly about them to any buyer that wants to buy your business.

And again, and it's at a level, okay? So what we're saying is that if you're the owner and you are comfortable with the numbers and you like that stuff and whatever, then obviously you're gonna have an easier time looking at this stuff. And just making sure that this stuff is actually, you know, is, is legit. It's got to be accurate. Um, everybody's got an accountant somewhere, right? What you may need in your individual situation is more of a, a, a chief financial officer, depending on how, you know, how, how, how big you are, how much revenue you've got.

Correct.

Um, but at some, some point, you're going to need somebody to look at these books before you are starting to sell. I cannot stress this enough. Okay?

Yes.

People are the, the first thing that people are gonna wanna look at, as, and, and you all know this already. Okay? This is not, I shouldn't be saying this to anybody. Anybody out there listening to this should already know this. The financial documentation that you have that supports, that tells the story of your business is the, is, is, is the first thing and, and probably what people consider to be the most important part of selling the company. All right? Because it's the value. It is telling me what the cost, what the val— what the business does. How much money it generates, how, what the expenses are like, how, how it, how it is managed in terms of how it's been managed, right? It gives me all the other things. The, it shows me all that information.

Yeah.

As the owner, so I'm sorry, as the owner, you want to make sure that you understand all that stuff, right? You need to have at least a top-level understanding of what that stuff is. Know what your revenue is, know what your profit, what your profit margin is, know what your EBITDA is. on any, at any given time, right? That's what those are. That's the basic, the baseline. You can have other people do the work of running the reports and pulling the information and putting that together and getting them certified and verified and all that stuff. And we recommend you do that before you have a buyer sitting at the table.

Exactly. And, and, and as Joe mentioned, and, and just to emphasize the point, they're looking at, yes, they're going to look at the current year information, but they're also going to look at the past year information, right? We happen to be looking at earlier about 4 years of financial statements, and people are going to want to look at that, especially in the context of the pandemic, right?

Right.

So we noticed in doing work is these financial statements have changed drastically. And things like, obviously, the income statements has changed. Sometimes revenue drops. Sometimes, you know, everyone talks about inflation and supply chain problems. The cost of sales went up in a lot of businesses, the cost of fuel. We were looking at a transportation company that didn't hedge their fuel back in 2021. We're like, what were they thinking or what were they not thinking? But things like PPP loans, which were legit, right? The government gave all these PPP loans and they often— most of them, I think all of them, I should say, were paid back, right? Were forgiven rather. But you had that on your balance sheet. When I looked at companies in the pandemic, And they didn't have a PPP loan. I was kind of like, well, why don't you have— why didn't you have a PPP loan in here? Like, wait. And, oh, we took that out and we never had in there. That's, that's can be like a red flag if you're taking things out of your financial statements. But the changes over time is what buyers are looking at, is how have— how has A, revenue changed? B, how have costs changed? And C, how have you managed those things, right? Have you taken costs down when Inevitably, during 2020, revenue fell for the vast amount of companies because there was that period. Remember that period back then when no one went out and no one did anything? So, yes, certain businesses like Amazon went crazy, but restaurants, as an example, my gosh, if you're a restaurant in 2020, that, that from, from March up in the Northeast until June—

Catastrophic. Yeah.

Yeah. So, so those types of changes, A, again, What happened? And then B, what— how did you adjust? How did you take the cost down? How did you, um, keep the business going? Was it all PPP loans? Those types of questions will come up, and that's why people want to see a history. And they even may want to see what hap— what was happening in 2019. Is— we asked for things that were hap— like, hey, how was your business in 2019? Because that wasn't affected by the pandemic, and it's, it's the last year where it was pre-pandemic. And if you're, if you're saying, oh, we completely covered— recovered from the pandemic, and yet your revenue is not back where it was in 2019, that will be a, a red flag or a question that a buyer will ask you. Well, so—

And we should point out, it's a good time to point out that questions around this stuff, okay, aren't necessarily bad, right? Everybody that you, that you sit down with who's interested in buying your company, even, even, even just a little bit, is gonna, is gonna be asking, you know, probing questions, right? What the, the thing that we want to teach and we want to preach to you guys is that the, the, the, the solution to all this— you're never going to be able to have every single answer, probably, right? You're never going to be able to see it exactly the same way that a buyer sees it. And the reality is there's different types of buyers and different types of situations that come from different places and have different goals in mind. So not every buyer that comes along is right. You know, you know, for you anyway, right? But one of the things that we want to do is, again, we, we want to kind of hedge our bets on stuff here, and the idea is to be as prepared as possible, as buttoned up as possible. So looking at making sure that you know what these numbers are, making sure that these— that, that, that you have not just 3 years but 4 years. Be proactive. Go back before the pandemic, especially when it's a good story to tell. Because these numbers, what you're doing is essentially you are telling the story of the business and, and the way that you managed through the pandemic, the way that you maybe came back after the pandemic or whatever is a good thing to highlight, right? If you've, if you've, if you've gone through the— if you were doing gangbusters in 2019, the pandemic came and you haven't been able to kind of get it back, right? That's not necessarily— doesn't necessarily mean you can't sell it. It's a— but you've got to tell a different story.

Yeah, exactly. And an example, you have to think again, as Joe mentioned, you're thinking from the perspective of the buyer, right? So you realize that if you're selling to a big private equity firm or a larger company that may be able to, let's just say, retire your debt and recapitalize the company, may take out your existing debt and fund the company at a lower interest rate, well, that's going to affect their valuation of your company. So they could be thinking cheaper, you know, this really high-interest debt. They're asking all these questions about this high-interest debt. Maybe they think I wasn't savvy enough to negotiate with my bank or my lender. Well, that's not the case at all. It's just they realize they could have a— they have more access to capital. Maybe they do. They have better relationships or larger relationships with banks. Therefore, they can get the money at a better rate, which makes your company Much more attractive to them than it even is to you because they can operate it at a lower operational cost because their interest payments go down. So things like that you need to, you need to keep into, uh, in mind. And again, think from the perspective of the buyer when you're, when you're preparing your, your financial statements and your company for sale. Think from the perspective of imagine if you were buying the company from you. What would you want to hear and what would you want to see that you've done to the company?

And I think that this is a great time to point out that basically is that, you know, with that last statement, okay, we have lost about half our audience. And the reason is, is because it just sounded really overwhelming. Okay.

True.

And totally under— not, and not, not John's fault. This is the way it is. And I think this is a great time to point out that this is exactly why you need help. All right? It's not about, and, and not just help from your accountant and not just help from your lawyer. And not just help that way. You need help from people like us, and it doesn't have to be us. There are so many people out here that do this, okay?

Sure.

But what you need is you need somebody who has— who can advise you into— into— for all these things and look at your individual situation. There is no one-size-fits-all, right? There is no business— even businesses in the same industry, right, are run completely differently. They're run by different people. They, they will look on paper They will look vastly different from each other. The reality is, is that, you know, what the way that you, by nature of a business in, in and of itself, is that you are trying to do something differently than the next guy who's doing basically offering the same thing, right? And so that alone makes your business different, especially when you're looking at the financials. What we need to make sure happens though is that when it starts to get convoluted, it starts to get complicated. It starts to be like, I have to think about all this stuff. The answer is you have to think about it at least, because otherwise you might be leaving money on the table. And at the end of the day, that's what this really is all about for most people, right? There are other exit strategies. There are other ways to go. There's lots of stuff, and we're going to get into all those on a podcast someday. But right now, the assumption is that you want to sell the company and you want to sell it for a financial windfall. Right. That's the, that's the goal.

That's right. That's our assumption. Exactly.

So the idea is that if you're, if that's the case and you start to feel like this starts to be complicated to you, that's, that is a sign for you to be able to go get some help. All right. And I don't mean mental help. You might need that too, but that's not what I'm talking about. I mean, right now you need some, you need some advice. You need a partner that you can do, who can, who knows the questions to ask. And I think that's an important thing to point out about what Exit Engine does. And when you join Exit Engine, uh, as a member, you will go through— what you will get is, you know, our, our, our courses that are designed to help you learn the questions to ask.

The questions.

They won't give you— we won't give you the answers. Let's just be very clear about that because your business is unique and right. But what we, what we can do is give you the questions to ask. And I think that was just a great example of like, That was not a question that most people are going to even think about asking, right?

Yeah. And just to build on that is the other thing about ExitEngine that you'll go through when you're going through the courses, you are in the course and in discussion groups with other people doing the same thing, right? They are in the same exact boat. Yeah, they might have a different timeframe, they might have a different business, they might want to sell in a year. But they are adjusting their company because they've been a part of it. They've been, they've been probably the, the as big as an engine of growth that you've been to your company. And they're going through the same thing. They are trying to, to prepare their company for sale and doing maybe different things, but a different pace, at a different pace. But they're doing the similar things to prepare their company for sale. So you learn not only from, from the instructors, the expert, the experts we bring in, But from each other and what they're doing with their companies.

Absolutely right. And so that's what makes it a great environment to do this in. And again, you don't have to share— just so you guys know, you don't have to share any personal information. We're not asking you to give, you know, people— tell people exactly what your EBITDA is or any of that stuff. That's not required. It is an exercise that you have to do with your company, with the people that you trust inside your company, or maybe with some outside help as well. to be able to put all your ducks in a row and create a plan that gets you from where you are right now to where you want to be and shows you the way, you know, out that. And then the Total Exit Value System is a framework that we created that does exactly that. It helps you ask the right questions, right?

Exactly.

So, when we talk, let's go back to the financial statements. So, when we're talking now about things like, let's talk about the, let's talk about, you know, cash flow is a critical factor here, right? Because at the end of the day, letting your revenue is important because your revenue is the top-line generator, right, of the money coming in. That's your top line. Your bottom line is important because it's now it's about how much does it cost me to actually get to make this money, right? And how much money do I actually get to keep in, you know, in the margin there? But then also The ability to be able to understand where that cash goes and on a regular basis. That's something that's gonna be really important for a buyer to look at.

Yeah. And this gets into other aspects of the business, right? Maybe your company's very good at generating sales. You have a wonderful set of salespeople, or maybe you have one salesperson and she is a rock star. Right? She, she is just on top of it. She makes sales. However, if you are unable to convert those sales into cash quickly, and you have a large set of accounts receivable on your books, and that's growing over time, and you'll, you'll find that in the balance sheet. Again, if you're on your balance sheet, if you have accounts receivable increasing, well, why aren't you collecting that? Are you, are you able to turn your sales into cash In a, in an orderly, timely way. Timely way. Thank you, Joe. And what's, what's happening with your, with your payables? What's happening with your liabilities? Um, you know, are you compensating and do you have a lot of stock awards on your, on your, uh, your compensation to employees? That's sometimes, that's not the case with smaller companies, but, but, but those types of things are, that, that points to the operations of the business. If you're not able to, in the, in the earlier example of take your sale, and if you have very liberal financial terms or very lenient financial terms, and like net, you know, 60 days payable, well, that leads to large accounts receivable and you're not collecting your cash quickly. That is a red flag, can be a red flag to, to, um, to buyers because they're looking at your balance sheet, looking at your cash flow statement. Where's your cash flows going? Maybe you have You've purchased equipment, you're a machine company, and you've bought equipment consistently over the last couple of years. Well, have you disposed of the equipment? Have you replaced the equipment? Those are questions. If you're, if you're getting large cash purchases of equipment, are you disposing of the ones that you— the equipment you have? Or is your business fueled by debt? Again, that will show on your balance sheet and your cash flow statement. It won't necessarily appear on your income statement, but Hey, if you have vast amounts of debt that are fueling your business, well, that's not a good thing because you owe that money eventually. And the operations of the business, the restaurant, the machine shop, whatever you're doing, is not generating appropriate cash and you have to borrow. Well, that's something that's going to be abundantly clear when you look at your cash flow statement and your balance sheet.

So no question about it. I think, look, debt as a whole, we're going to spend an entire episode or 2 probably on debt. debt management because it's obviously, it's a huge factor. It's not always negative, you know, and obviously debt is necessary sometimes. And obviously our recommendation is always that you try to, if you're gonna borrow money, you borrow money against things that you are fairly sure are going to happen, as opposed to borrowing it for things like marketing or things like that, that basically are not guarantees to actually have the revenue come back.

Right.

Right.

But yeah, and you might have a very capital-intensive business, right? You might have a manufacturing business or something where you need a lot of machines and a lot of repair.

Retail. Retail is actually really cash-heavy, right? Because you have to constantly have— you get inventory, buy inventory ahead of time and stuff like that.

Exactly. And inventory is a great example, Joe, right? Inventory can be oftentimes in retail is the largest asset that you have on your balance sheet at any one time. Again, are you moving the inventories that aren't selling out? Right. There's all sorts of ways to look at inventory to say things that aren't selling, obsolete inventory needs to be removed from your balance sheet.

And again, are you buying too much inventory? So one of the issues, just to tie it back to the pandemic, was that what people were left with was a lot of unsold inventory. Right. So that inventory isn't worth nothing. Right. What's crazy about that is that that inventory alone is actually money sitting there, right? So in some cases, that's gonna be money that might, might work in your favor in terms of having this inventory here is, is something that might be valuable, especially if you're looking at that thing from an asset perspective. The problem is, of course, obviously, is that if you're not turning— what you're supposed to do is to take that money that's sitting there and turn that money into more money. Right? And so when you're not doing that, then you're not actively— then the business isn't really working. And so therefore, that's obviously a red flag for a buyer coming in. So what they want to see is they want to see that your receivables, which is the money that you're being paid for whatever your service or product that you're providing, comes in in a timely way. Some businesses do this naturally. If I have an e-commerce business and I'm paying— I'm selling a You know, whatever, t-shirts. Um, I— it's a very simple process. You, you come, you buy the t-shirt, you put your credit card in, it's swiped, I take your— the money out of your credit card immediately, and I send you the shirt. In fact, I probably have the money well before the time you have the shirt. However, that's aggressive. So that's— that is, again, on one hand, it's a very, very good business to be in because, hey, I'm going to get paid quickly and swiftly, and there's not going to be a lot of outstanding— there's not going to be any outstanding receivables ever. Right? Because it's not how the process works. However, if I'm in a service business and I am working for a giant corporation that, uh, that is— has its own, by the way, its own ways of operating things and purposely— and look, these, these corporations do this, they purposely don't pay vendors and the whole thing because they got thousands and thousands of vendors. You know, they will make their own rules about how they pay things, and they will try to put that in contracts and stuff like that. But I can tell you an example from, you know, My own experience is working with Comcast is that Comcast was you know Comcast paid you know they they they they claimed to pay net thirty and they didn't pay net until net ninety minimum minimum never yep right and so the reality is is that you're in a situation where you have to manage that and that's one of the trickiest things about one of the trickiest things about business because it is something that is hard to control right it's not within your dynamic to be able to change it without threatening or without getting to, you know, getting to your— and again, the person who's writing a check, if you, if you're a service company that does, that does business for large corporations, you're not talking to the person who's cutting the check. You're not cutting, you're not even talking to the person who's approving that check to be cut.

That's true.

You're talking to some line manager somewhere who's, who's had been given budget and is allowed to spend this money because that's what they're allowed to do. But they have no control over actually paying you. It's one of the most difficult things. You know, agencies deal with this all the time. You know, IT companies, anybody who's in a service business who's basically doing it. Now, that's an easy example. What can you do in that case to try to change things or to try to reflect, you know, stuff? There's changes that you can actually make to your receivables and the way and the overall operation of your business to reflect to a buyer That this is just the way it is. It's not bad. It's not detrimental. We always get paid, right? But again, it's going to be a different, uh, you know, there's gonna be certain buyers that are into that and certain buyers that not. You would think, right, John, that basically that if I'm a buyer buying an, an advertising agency, then I'm used to this. I'm used to seeing this, um, you know, on, on, uh, you know, on the, on balance sheets. And I'm not gonna be I'm not gonna be too concerned about it, right? But in some businesses, it could stand out like a sore thumb.

Right. And that's why certain— that's why many private equity firms specialize in certain industries. And the ones that buy agencies and service-oriented business are by definition comfortable with that because they bought companies in the past.

They're part of the landscape.

Yeah, it's part of the landscape. If you're— that's why it's important to get the right buyers in front of you, because if you don't, if you have a buyer that is not comfortable with a service business. They're used to buying product businesses who get paid, usually get paid upfront. And then all of a sudden they're getting a company with these huge receivables that, oh my gosh, these receivables are enormous compared to the revenue. And that's also what buyers are looking at is the percentages, right? Your percentage of your accounts receivable, that's your cash, that type of thing. And if that goes up over time or it's artificially large, or large compared to a product business, that can cause some buyer to say, you know, it's great, just not for me. It's like on Shark Tank, right? There's certain businesses that are like, you hear the pitch, it's like, great, this is a wonder— sounds like a wonderful business. And then all of a sudden, 2 of the sharks are like, I'm not comfortable with it, I'm out. This is the reason they're not comfortable with it, is they don't like those types of businesses. It had nothing to do with the pitch. It had nothing to do even with the product. It's, I don't buy these types of businesses because of X, Y, and Z.

Because I personally don't like that particular thing, or that's not where we like to play, right? Or we can't. Or more likely what it really is, is that I don't know what I can do or how I can turn a profit on this business, right? Because I don't like having to deal with outstanding receivables or things like that, Right.

I don't know the levers to pull in this particular business exactly.

Right.

But, and what we're looking at, what we're looking at here on the screen is an example of a business that, that all of a sudden decreased their accounts receivable in 2023. Well, why did the accounts receivable go down $1 million? They, they could have, they could have collected a $1 million receivable. Maybe it was a large customer. Their inventories went up. So the business ebbs and flows, right? There's Accounts receivable goes down. That's a good thing. Inventory is going up. Maybe that's a good thing too because they were preparing for a big sale in the spring. Maybe their business is seasonal and this always happens. Their contracted assets went up as well. Their property, plant, and equipment went down. So this is part of the business's story. When you're the owner and you have these things that are in the inherent in your financial statements. They will cause questions. And as long as you have the answers to those questions that make sense to you, it will make sense to them. Or maybe it's not the right buyer that you're talking to, but, but you have to have a story for your business that corresponds and is logical when looking at your financial statements.

And, and again, and there's going to be things that you can control and things that you can't control and things that you wish you could have controlled or you could have controlled better, uh, you know, 2 years ago. that are now, you know, that then there's nothing that you can do about them right now. So the story is the story. All we're trying to do is put the most positive spin on the story, obviously, as we possibly can. And, and then more importantly, I would say too, is that leaving yourself time to make adjustments to show a better story. So a lot of, a lot of what happens is that people come to us and at a time when they're like, I want to sell my business right now. And most of the time what we're gonna say is no. And the reason that we're gonna say this, again, not 100%, most of the time, is because you're not— there's no way that you are— very few people have prepared themselves for this moment. Okay? Very few people know, like I said, no, even know the right questions to ask about their business, let alone, you know, what the answers are. So, you know, what we wanna make sure the first thing that happens is that you're leaving yourself time. All right. It's 9 months, man. It's, it's right. We, we time and time again, it's like we try to do it in 6. Um, we, you know, whatever we've seen it, we've seen it done in, you know, 7, 8. You know, the reality is, is that it takes about 9 months to really do a good job. Exam— first examining what your business is right now. Again, and not from your perspective, not from the perspective of your employees or even from your customers. None of that matters. It's the— it's what it looks like from a— from the eyes of a potential buyer. Okay? And so being able to basically go through the exercise of asking yourself all the questions and asking your, you know, takes time. There might be things that you discover that says, look, our process always starts at the end, right? Where— what is it that you're trying to achieve? Because the most important thing is to say, look, I want to end up here. And in order to end up here, I need this much money, right?

Yep.

And so is my, is my business worth that much money? Is, is, is, is that it? And, and is that the amount of money that's gonna go in my pocket, right? Because there's other costs and things like that going through the sale. There's other things that happen as a result. There could be partners involved, stuff like that, right? There could be equity you've promised other people. There could be, um, you know, startups often will use you know, kind of what we call manufactured, or, you know, manufactured equity, or synthetic equity sometimes it's called, that basically is not really equity, but it's like a promise that when we sell the company, you're going to get a percentage of the profit of the sale. That's a popular thing for people to hand out. Of course, you know, it was 10 years ago, and now you've forgotten that you did that. So anyway, things like that. So we're starting at the end. We're saying, how much money, what do I want to do, and how much money do I need to do that? Then we're gonna go back to the beginning. We're gonna look at the business and say, what is happening in the business right now? Let's look, look at the last 4 years, the last 5 years, right? You may only need to present 3, but go back 5. You wanna look at it. If the pandemic's in the way, go back 6, right? Look at how you made, made it through the pandemic. Look at this profit and loss situation by looking at this over a time period and seeing what, where the ebbs and flows of things are in your business. Maybe you have a good— many of you will have a good sense of this just because you're going through it all the time. As John mentioned before, you had a seasonal business or something like that, it's easy for you to see the ebbs and flows, right?

And if you're— and if your business pivoted, like, right, so many businesses pivoted during, during the pandemic. You know, you had— you're selling X, Y, and Z, all of a sudden you, you know, you're— again, you're a restaurant, and all of a sudden the— maybe you make more money on your takeout now. And you have that, you've cultivated that business, and that didn't exist before the pandemic. Well, if that's a part of your financial statements, that's something to— that's a story point where you're gonna mention, oh, you'll notice that expenses decreased and margins increased in 2023 because of da da da da da. That's something the buyer's like, oh, like takeouts 30% of your business or 40% of your business? Okay, that's something that they want to know, um, and, and they will value that because that's something that they don't have to uncover or It's something they maybe, maybe, maybe never would've asked about, but because you volunteered the information and had the quick, the answer to those questions, or, or said, oh, you, you shed light on something they didn't know. Again, buyers appreciate that.

So, and of course, as you go through these financial documents, this is a great way for you to start, start asking questions. Why did this happen? What made, what, what made this the, you know, the, the way it went? What mistake or what thing could we have done differently that would have changed this XYZ, right? And as you start to ask yourself those questions and you start to dive deeper into the, the kind of the, you know, the financial realm, the story, the story of the company, you're going to be able to start uncovering some things. And the things you're going to uncover aren't always going to be like good. I want— I want you to— we need to say that out loud, okay? Like, And I don't mean none of them are going to be— not none of them. They're not likely to be catastrophic. Okay? It's not likely that you would be in a situation where you're suddenly like, oh gosh, I didn't know that I was losing $1 million a year on something that I didn't realize. That's rare. Okay? Not impossible, but rare.

Yeah.

But the point is that to examine the things, what you're going to start to see is, oh, here's an area I can improve on. And what you may discover is if I can improve on this area in a, in a time period, I might be able to, again, be able to raise the value of the company at the multiple, right? And be able to actually, if I can do this in the next 6 months, right? That's something that could maybe make me a lot more money, right?

Yeah. And if you're here and you're listening to this podcast, then I think it's reasonable to assume that you realize, A, that your business— that you want to sell your business at some point in the future, and B, you want to try and improve it. And, and that's, that's the point, is you're looking at your business in order to sell it. There's no exercise here. There's no— this isn't a simulation. This isn't some type of academic exercise. Um, sure, we use academic techniques to learn, to teach you things and to help you learn things, but this is a practical company and a practical platform to help you not learn, just learn things, but learn and do things. You're going to learn and do things back at your company based on what you learned here about financial statements, about operations, about all these things to improve your business with the goal of, of that financial harvest that Jo mentioned is what you figure out what you need. You need $2 million. From a closing, great. This is what you can do to reach that goal of the $2 million total exit value.

Good.

This is how you do it.

That's right. And it might be that, exactly. And again, it's determined by that is where are you actually now? So if you're making $500,000 in total revenue right now and you want your, and you want your value, the value of your company to be $2 million, Okay. Well, you've got some work to do, right?

Correct.

Okay.

So, good point.

You're gonna look at your, you know, at your EBITDA, uh, and you're gonna look at your EBITDA out of $500,000 might be $150,000. All right. And you want the value, you know, and so even at, let's say, 4 times that, right? 4 times $150,000 is still not $1 million. So, you're in a situation where it's just about $1 million. In any case, you're not, you're definitely not a 2, right? The, the bottom line is that, but, but that doesn't mean there aren't things that you can do To, to right now. And it might take a year, it might take 2 years, right? So the most important thing is understanding, uh, you know, where you, what you want and what you expect to get, right? And it's a back and forth between what your evaluation is now versus the things that I can do to increase that valuation. But let's talk right now, John, about some of the little things that people can do that kind of immediately increase their value, right?

Yeah.

There's a couple of things, a couple of tricks that we've learned over time that when we look at just about any business, these are things that we can kind of relatively quickly uncover and determine that if we see these things and know they exist, potentially we can actually immediately fix them, and that which would actually immediately raise the value of the company. And the first thing we talked about already, the first thing is understanding your EBITDA, your adjusted EBITDA.

Yep.

Right.

Yeah. Getting, getting to your EBITDA, however you want to say it, is, is, is critical, right? You are adjusting your financial statements to reflect the business as it will be in the future, not as it has been run so far. So you are— or the way it's been running with the owner, because again, the owner is going to be different. The owner is not going to be you. It's, it's going to be— you want to reflect adjusted P&L and adjusted financial statements to reflect the business without you. So it's not going to have your salary, all those things we went over earlier. Those are realistic and actual things you can do without actually lifting a finger other than just looking at a spreadsheet, thinking about it for a little while, and saying, oh yeah, this will go away when, you know, maybe they don't, they don't need the storefront anymore. You're merging with a larger store, they can get rid of the rent. You can get rid of all the items that you were using to support the business via travel and meals and entertainment. Those are easy things to sort of take out of the business that immediately increase the value of what you are selling.

If you are, by the way, that's just, that's the easy thing. The second thing is we want to start looking at our— one of the easiest things to do is to start looking at your, at what we call the 80/20 rule. Right? So the Pareto principle, right, everybody knows is that basically is that, you know, 80% in most cases, and it actually ends up being scarily accurate, um, actually, and just in life, which is that 80% of anything, right, is, is, is, you know, happens as a result of 20% of the effort that's put into it, right? So basically, or sorry, the other way around. So in other words, you're putting 80% of your effort is, is getting 20% of the business. You know, that's the, that's, that's kind of the golden rule in kind of in everything, right? When you are, when you start to break down that rule across individual accounts or individual customers or individual products, some big realizations potentially happen.

Yeah, I mean, because if you think of it and you think of like 4 boxes, right, the old 4-box thing you probably learned in either business school or The Gartner Quadrant. Ooh, I didn't— I, maybe I did know that name, but I didn't recall it off the top of my head. The Gartner Quadrant. So you have 4 quadrants, right? And if you, if you think of you, if you put your customers in those 4 boxes, right? You have, you have customers and products, excuse me. So you have your profitable customers buying profitable products. That's one box. You have profitable customers buying unprofitable products. Then you have unprofitable customers buying the profitable products and the unprofitable customers buying unprofitable products.

Thank you.

And that 4th quadrant is, you know, they talk about low-hanging fruit. If you have a customer, a customer that you're not making money on, that's buying a product that you're not making money on, you want to eliminate those, those customers, frankly, and those products as soon as possible. Now, it's not as easy as it sounds because you may have very— you may have profitable customers buying unprofitable products. You don't want to upset them, but there's low-hanging fruit there to say, man, I— you could be losing money, and you very likely are losing money in this case because every company that, that we've seen that we've done this for has those— that 4th quadrant box of people that you want to eliminate that are just costing you money It's, it's a— not only is it sunk cost, but it's a cost you're— you're— it's a sunk cost, but you're doing it every quarter. Every time you make a sale to that customer of that unprofitable product, you're losing money.

Losing money.

And you're— and also it's opportunity cost, right? Everyone learned about opportunity costs at some point in their life. It's like, look, you could be selling to— you could be making, uh, another sale to a profitable customer, or you could be expanding your share of wallet, as they say, from that profitable customer. Maybe they're buying— they're only buying a third. You have 30% of their spend in your category with that customer. You could expand that to 40 or 50 or 60, and you're making money on those profitable customers. You're not making money on unprofitable customers. Now, how do you measure those customers? You're spending too much time with them. They're customizing your product or service. They are just a time suck for your employees. They're difficult. You know, nobody wants to work with difficult people. But when you have a business and you're selling things and you have multiple people selling things, it's in— over time, you just gather customers of all stripes. And sometimes you say yes because it's the end of the quarter or you cut a deal or you have a very persuasive salesperson and she convinces you to sell this product. To this customer. We all have those situations. What we do is— In the aggregate, though. Yeah, yeah. But it always— I mean, let's put it this way. Maybe I'm the only one guilty of this, but we were certainly guilty of having a service business, which isn't a bad thing, having a service and customizing the service for customers, for certain customers based on what they think that they wanted. Don't do that. But if you find yourself in a situation, if you've done that, This is the opportunity. ExitEngine is the opportunity to fix that because we can point out to you that these are your customers that are causing this challenge.

Exactly right. We actually have a methodology that will actually give you the ability to actually see, uncover those things. But again, asking the question is the first thing. So you don't need— we've got calculator tools, you know, at ExitEngine, you're going to find all this stuff. There's all these resources. We've got calculators up the wazoo. We've got different ways of calculating different stuff. We've got EBITDA calculators and we've got projected value calculators and we've got total exit value system, the total exit value measurement system anyway. But the idea here is that without these tools, okay, all you really need to do is to be learning what questions to ask, right? Just by virtue of the fact that you go to your financial person, whoever that is, Or you're doing it yourself in QuickBooks or whatever it is, that you start to ask the question, am I profitable in every— with every client I have? Is every transaction I make a profit for me, or are there some that aren't? That alone, okay, could potentially give you a 20 or 30% lift on the value of your company once you figure out what that is and how to fix it. Okay.

So, And you don't owe any— like, if you have unprofitable customers, you don't owe anything to those people. You're not making money from those people. It's costing you money to do business with these customers. So, and if they think that they want— there's other companies out there that can offer a very customized service. It shouldn't be your company, especially when you're trying to sell it. And, you know, because buyers will do this analysis. We've seen buyers use a similar tool to do this analysis on On the, on the people that were— that are buying, our, our clients. It's like, look, they're going to come back with this now. So you have to assume that these buyers are A, sophisticated, and B, have done this before. It's not their first rodeo, and they're going to look at your business objectively, and they're going to look at— you have $20 million in sales.

Deeply.

Deeply. How much of that $20 million in sales comes from, uh, one customer, 2 customers, 3 customers? Is it highly concentrated? And The profitability of that revenue. That's the key thing they're looking at.

And it's the— and again, the profitability, not just by client, customer, not just by— but by transaction.

And by product. Yeah.

By product. So you gotta be— the idea is though, but even the transaction, because you've got a service delivery thing depending on how you actually deliver the service. Okay.

Good point.

That potentially is something that might be in the way as well, right? That might be affecting the speed at which you deliver. You know, any of those things. So the idea is that again, it's, it's, we're not trying to make this more complicated than it has to be for sure. But, but most people underestimate how complicated it should be. All right. For them to be able to look at this stuff and all the levers potentially that they can pull that can immediately give them, uh, you know, very, very quickly increase their value. Okay. But again, guys, you need time to do this. Right? And so we, what we wanna make sure is that we are, we are, that is, is that we are giving you the questions, that you are taking this back to your team, that you're looking at this, that you might be putting someone else in charge of looking at this stuff, but that you know what to look for. And that at the end of the day is why working with somebody professionally to, to do this stuff is, you know, is, is so valuable, right? So that's a, that, that's why it's so important for, for you to be able to just be asking the questions. You may not have all the answers, okay? And not everybody has the time either. So, the reality is, you might say, look, I gotta get out of this thing, you know, for whatever reason, the thing I wanna do next or whatever. And so, I'm not, you know, I don't have the time to do, to go through 16, you know, value-building projects.

Yeah.

But look at the little ones, because what I hate to see and what we both hate to see is people leaving money on the table because You know, because the financials are overwhelming or because they didn't have the right help or because they didn't look at some of the simple things that could matter in terms of their valuation.

Yeah. And as Joe mentioned, the answers, the questions you're going to ask will lead you to the projects that you need to do. And again, some of the projects you shouldn't do, right? Some of the projects are things that you won't be able to do, right? Things like Retire all your debt because you can get better terms. Maybe you can't get better terms. So those are things, and Joe's great about mentioning these, are those, those, uh, what's, what's the term you use for them? The, the inefficiencies that you're selling to the market.

Marketable inefficiencies. Thank you.

And that's a way, a far better phrase than I could come up with in my brain, is you want to have those marketable inefficiencies and point those things out to the buyer, right? The buyer is going to want to know That you thought about, hey, if I if if if I had unlimited resources, I would have done X Y and Z and A B and C. Well, maybe you just did A B and C because you wanted to sell at a certain time period, and you're you're letting the buyer know of if I were gonna stay on and do this, and I had a different sort of capacity to do this, I would have done X Y and Z. And here these three things that to do it's gonna take me longer time. I've started the process. They appreciate— buyers appreciate that as well.

That's exactly right. And so all of that stuff is, is all included in the, in, in what we call the Total Exit Value System. It is looking at 10 areas of your business that basically are going to— and, and asking the questions around these 10 areas that are basically gonna, gonna, gonna elicit, um, potential issues. They're gonna elicit things that you can fix very quickly, low-hanging fruit. They're gonna elicit longer-term projects that you could do that are gonna grow the value of the company. But that's what— that's the value of this. Okay? So, so that again, recapping, we are talking about the 3 big documents, financial documents. If you only look at 3 things, P&L, balance sheet, cash flow, those 3 things are the most important things for the CEO or the owner of the company to be familiar with and to know. You're gonna ask— start asking yourself some questions around those documents. What do you see that looks Interesting. Um, when you look at things over time, uh, what are the questions that you immediately have? Put yourself in the eyes, uh, in the, in the shoes of the buyer.

Right.

Was, is a buyer gonna make sense of this? Is a buyer gonna understand that this is a good thing, even when it looks like a good thing, right? Is the buyer gonna, if the, is the buyer gonna see it that way? And is there anything that I can do to affect that change or to make sure that that happens? Right? Is there— what are the things that I can do that are going to immediately increase my value right now? What are the things that I need to do that might take a longer time frame to do? Do I have the wherewithal, the capacity, the desire, whatever, to actually do those things? And if not, can I then turn those things and spin them into a positive for the new buyer coming in? Right? So, and that's it, you know, in a nutshell. Yep, exactly right. So again, You have been listening to the Exit Engine Podcast. I'm Joe Stapleton. That's John Kniff. Uh, we want to say thanks again for listening today. Hopefully you got some, uh, some tips and stuff out of this. Uh, remember that you can follow us on LinkedIn, you can follow us, uh, on, on YouTube, you can follow us on Instagram, you can follow us just about everywhere. Um, the, uh, our website is myexitengine.com. You can come there, you can learn about some, about how we do this. You can You can join and take a course. You can get some coaching. And of course, if you need some help actually doing this, we can actually help you actually do it as well. So thanks again, right, John?

Yeah, thanks again. Last thing I just want to mention is our assessment is a 3-minute assessment on myexitengine.com. Again, it will be— it's quick, it's easy, it will generate a score for you that you'll get back about your company based on your answers. We encourage everyone that's listening to take that assessment and then find out how your company is.

You're gonna get a very— just, that's a great point. The assessment is really important because the assessment is gonna be— is gonna— is literally gonna take you 3 minutes and it's gonna give you a 4-page report, okay, on what the things that you can do right now to increase the value of your business, okay? It's just based on answering some questions. You're not giving us financials, you're not telling us anything real about your business. It's simply a matter, it's simply an exercise that will show you the things that most often are the things that, you know, to look at. So, come take that assessment. It's called the Total Exit Value Assessment. You can find it at myexitengine.com. Again, this is the Exit Engine Podcast. Thanks so much for listening. Please like, please comment. We will respond to your questions. You can ask us anything at any time on any of these various platforms. LinkedIn's probably the best, but anywhere. that you see us, ask a question. We want it. We want— we love these questions and we want to answer this stuff all the time. So really appreciate you hanging in there with us today. We will talk to you very soon. John, thanks a lot, man. We really appreciate you as usual.

Thank you, Joe. I appreciate it.

All right. Have a great day, man.