The Exit Engine Podcast Episode 16: The Biggest Mistake You Can Make

Welcome to the Exit Engine Podcast, episode 16. Good morning, Johan.

Good morning, Joe. How are you today?

Doing great, buddy. How are you?

I'm excellent. I'm excellent.

Excellent. Very good. Um, you know, I don't like to usually, I don't like to like talk about people's mistakes. You know what I mean? We like to look at things a little bit more positively than that. And, you know, we don't like, we're not, we're not about judging here at Exit Engine, right?

True.

However, you know, there's a, there's one common mistake that we keep seeing happen over and over and over again. And I think it's a, it's a, it's something that's probably keeping a lot of people down and keeping people back from actually realizing their exit potential, if you will. And I think that that issue is how people recognize and evaluate their companies.

Yeah. And there's a lot of reasons for this, right? There's people just inflate what they've created, right? They have an idea of what they think their business is worth and they want that and they cling to that. They can cling to that number. Despite, you know, evidence to the contrary that it's actually an inaccurate number.

That's exactly right. I think we see this happen in almost every single instance, right? There is always kind of some kind of— there's always a preexisting belief, right? There is some kind of thing that I have in my mind about what my company is worth as an owner. And then there is ultimately also some kind of disappointment that happens immediately when they find out that that valuation isn't accurate. And so what What we wanted to talk about today was, you know, this is a common thing. People do this all the time. So, A, you know, don't feel bad, right? It's the kind of thing that people do. They overestimate, especially when your business is successful and you've been making, you know, good money and people are telling you all the time, you know, you can see your success, right? You can feel your success. And so there's always a kind of a potential to kind of overestimate what that what that value is. Right. But there, so when we talk about valuation, we can talk about it kind of in terms of your emotional valuation and your kind of objective valuation. Right?

Correct. Yeah.

So we, we see a lot of people who, who, when we first start talking with them, that they have this kind of emotional valuation, right?

Yeah. And it's, you know, there's many reasons why, you know, there's, There's a reason that they've— that a competitor recently got purchased, or they saw something in a local journal, or frankly, they saw something in the Wall Street Journal where they, they perceive themselves to be a competitor similar to a company, and it got bought out at a crazy valuation. Or more likely, one of their friends got an offer, you know, at the country club or the golf club, and they're talking over a round, and I said, oh yeah, I got 4 times, you know, EBITDA or 4 times whatever the metric is for my company, or 6 times, let's call it. And they're like, wait a second, you know, and there's, maybe it's a different business, but there's all sorts of reasons that trigger these thresholds and these like valuations that they have in their mind for many different reasons.

No question. And I think that there's a trap here, right? That basically is that you kind of set for yourself accidentally. And a lot of this has to do with not only just the, you're right, there's plenty of cases where people are seeing what they think is a similar company and the way that they were evaluated. And of course, the ones that make the news are the ones that are the outliers, right? The ones that went to 10x or 15x or some kind of crazy multiple are happening because they are incredibly unique circumstances, right? And so that's the first thing. There's no such thing as a 15x multiple on a general company, especially if that hasn't happened in your industry before, right? It would be very rare. I'm not saying it's impossible, but it'll be very rare for you to be able to get some kind of multiple like that.

Correct.

The other issue is that I have, and this is legitimate, by the way, a legitimate issue, right? Which is that I have put a lot of blood, sweat, tears, and my own money, and, you know, and I, I've sacrificed time with my family, and, you know, and I've built this business over a long period of time, and I feel like someone owes me for that. And the fact is, is that I'm gonna try to see if I can get, uh, you know, someone to come in here and understand that, and they— you should pay me, you know, 5x on a, on a, on a valuation that's that, or give me a higher valuation because I've been, you know, I've been working really, really hard and I've been sacrificing and things like that. And the reality is that's not really how it works, right?

Yeah. And the reality is that, you know, the person that is buying your business or the entity that is buying your business, you know, I gotta let you in on a little secret. They don't care, right? They don't care how much blood, sweat, and tears. They don't care how many parties you missed or how many Saturday nights you went in. to fix the server. I've done that. Um, and, and do all these things. They care about what's a rational, um, price to pay for the business because what they're doing is they don't want to overpay for the business. They want to pay a fair value in their opinion, and they look at it objectively. You're, you know, a lot of times sellers aren't looking at their business objectively because it's tough. The emotional attachment to the business is real.

Right.

I mean, when I helped, you know, a business to be sold a long time ago, you know, going on 11 years ago now, sorry, 10 years ago, and they thought the business was worth X, the buyer thought it was Y, and even in the components of the X, the parts of the business, the business wasn't really worth that much. The real estate was what the seller or the buyer wanted. So it wasn't even that the, you know, the buyer got lucky. Sorry, the seller got lucky because they had bought a piece of property that appreciated incredibly. The business was kind of an add-along to that, and this particular company just wanted to buy the 2-lot, uh, real estate and, and frankly do away with the business. Well, they didn't— they weren't going to get what they wanted. Um, the seller wasn't going to get what they wanted. But, but you have to realize that the buyer looks at the business sort of objectively when by definition you're looking at it with an emotional attachment to it oftentimes.

That's it. And look, that is an immediate kind of a pretty significant kind of a head-to-head problem, right? I mean, because again, you are coming from it from an emotional standpoint. The buyer is decidedly coming from it from a not emotional standpoint. And again, understanding that you're— so that you're right there, your objectives are already different. Okay?

Correct.

And I think one of the things that we see and the reason we see deals fall apart is for this exact reason. Which is that I come to the table, I believe as the owner that my— or the potential seller, that my business is worth X. The buyer comes in and says, we've done our due diligence. We look at this and we've said, no, we believe the value is this. And of course, even if you— the way to solve that issue is to have an objective third party provide the valuation. The problem with that is that that problem still exists between the owner And whoever is doing the valuation, right?

Yes.

So, you're in— we're in a situation where, okay, the buyer's saying, yeah, but, you know, we— I would value it at this X, Y, and Z. Okay, we might— we can discount that a little bit for being, you know, again, overly objective and looking for a deal. And so, that valuation might be a little bit low. When we're talking about, you know, your emotional attachment and your emotional valuation that the owner is putting on it, Now we're in a situation where we could be really, really over— like overinflated, so overvalued, right? So right now we're sitting in a situation where you're already at odds. The third-party evaluation comes in and can solve this problem, but as we have seen before, Jon, the reality is, is that even getting the owner to buy into a third-party evaluation becomes a problem, right?

Because the third-party evaluation by definition is not going to account for the emotional attachment that the seller has to his or her business. And I'm thinking of one example that, you know, of her business where she had an excellent business, but it just wasn't worth the multiple that she thought it was worth. And all the reasons that she gave to the buyer, you know, the buyer discounted. The buyer said, well, you know, there's other competitors out there. And the problem was the buyer had logical and reasonable responses that the seller just didn't want to hear.

That's it. And so many times this is where things fall apart, right? So basically at the table. Okay, let's just, let's back up a second and talk about a little bit about the process here because I think it matters, right?

Sure.

So in general, what's happened is that a seller has said, okay, uh, here I am, I've had this business for 30 years, uh, I've made a pretty good living, I'm ready to retire. And so now what I want to do is I want to try to sell, and I don't have any heirs or anybody else that I want to give the business to or whatever, or turn it over to. I don't, you not gonna sell it to the management team, whatever. So I'm gonna look for an outside buyer. Okay? And then again, we, we've talked about this many times before. That can be a strategic buyer, like a competitor or someone like that, um, or someone who's in the industry and wants to roll you up. Or, or it can be potentially, uh, you know, a, a, a private equity firm or some kind of financial buyer looking to buy this as a portfo— as a platform company or an add-on to something else or whatever. Okay? But in general, we're looking at Let's just, let's for the sake of argument say that you've got a, this is a $10 million business to make the numbers in terms of revenue.

Yep.

Maybe it's got $2 million, $3 million worth in EBITDA, which would be a 20% or 30% EBITDA situation, which is relatively good. And then you've got a, again, a valuation that is based on the owner's valuation.

Okay.

So the owner thinks that he's going to get— again, where you get to play with is because EBITDA is EBITDA. Okay? The reason that we use EBITDA is because it is an objective measure, right? For the most part. There are still some— can be some subjective things, and I've seen deals fall apart because one party wanted to add back to EBITDA something. The other party didn't think that was legitimate, blah, blah, blah. So you can still Sure. Even at that level, there can still be some discrepancy. But in general, the reason that we use EBITDA or cash flow at least is because these are potentially provable objective things. Okay. The multiple is where the issue comes in. Okay. Because the multiple seems to most people to be a very, very subjective situation. Right. And it can be. It's not untrue. The reality is that, you know, why is it 3x, 4x, 4x, 5x? Why is it so? Why are some people getting 10x? What, you know, why does this happen? And the reality is the multiple is simply the way in which we can show the premium value on top of the objective value. Does that make sense? Yeah.

So yeah, and, and to further dive into that, in your example, right, let's just say for argument's sake that the EBITDA is $3 million and there's a— the, the, that the buyer thinks it's worth— it's a 4x multiple, and the seller thinks it's a 5x multiple. So you're talking about a difference between $12 million and $15 million, right, on that $3 million of EBITDA. And the buyer could be discounting the multiple, right? The industry average could be 5, and they're discounting the multiple because 2 of your largest customers are 90% of your revenue. Well, that's risk. And so the buyer will say, you know, and sometimes they won't say this specifically, they'll just assign a lower multiple to— the good buyers will say, well, I know the industry average is 5, but Joe, I'm giving you a multiple of 4 because we view that revenue as risky, right? When you have a concentrated revenue stream and 2 Big customers are— it's great to have big customers, but when they're 90% of your revenue, what happens when something happens? A new operations chief, a new whatever chief at that, at that company who's buying, you know, who's 90% or 45% of your customer, 55% of your customer. When that revenue goes away, the buyer's stuck with the company after they buy it, and you're gone, you know, surfing on the beach or whatever you're doing. And they're holding the bag, so to speak. They have to replace that huge chunk of revenue because your big customer decided to go somewhere else. So that's an example of why a buyer would assign a lower value and sometimes not necessarily be transparent upfront about it. They'll just do this and they'll give you an offer and then you have to negotiate with them.

No question. And I think that there are— so this is one good example of a way in which a buyer is gonna say, They're going to look at these objective measurements. They're going to look at things like, obviously, they're going to look at the EBITDA. They're going to look at the profitability. They're going to look at the overall revenue. There's no question. They're going to look at the cash flow. They're going to look at the overall financial performance, right? But most of all, what they want to look for is the predictability of that financial performance.

You're exactly right. Because what they're paying for, right, when you get down to it, when they're doing a valuation, they're predicting future cash flows, right? You know, people talk about a discounted cash flow analysis, DCF analysis, and what they're doing is they're projecting those cash flows that they'll get so that they can justify the upfront payment and the total payment. So they're basically doing a, okay, well, I have to pay X amount, you know, 50% down for this. I can borrow X amount. We were talking to someone a couple weeks ago who was very transparent about their model. And this is what they can pay, this is what they can get from a lender, and this, this is the specific structure of their business. And, and that's, you know, the buyer has a template. The buyer is a template that they feel comfortable doing, and they do these things. And a lot of— if, you know, you have to assume that they know their business well, just like every other business. You have a process for making widgets or making candy, they have a process for buying companies. And if you don't oftentimes fit into their criteria, um, they will not purchase you.

Um, and, and that, that's gonna directly potentially affect your multiple. And it also, also brings up a reason why you have to make sure that from, from a planning standpoint, that you are actually not just throwing it out there on the market and seeing who sticks. This isn't a, like a Facebook Marketplace ad, right? I mean, one of the things that I think people are mistaking is like, oh, I'm gonna throw my— throw a for sale sign on my business and someone's gonna come walk along off the street and and, you know, and buy it, right? Which is just not how it works. The reality is that you have to be out there in front of hundreds, if not thousands, of different buyers, right? Because all— because of what you just mentioned, which is that all these buyers have their own formulas, they have their own models, they are looking for specific— they have their own criteria, they are looking for these individual things in a specific way that matches their risk profile and what they're comfortable with. And so the job of the seller, if you want to sell it, and of course, look, no one's making you sell it, right? If you want to sell the business, what we're saying is this is the way that you have to look at it, right? You have to look at it through the eyes of the buyer, and the eyes of the buyer are different based on the buyer and based on the kind of thing that you want to have. So the only real way to hedge yourself against this stuff and to make sure that you can get that you can get the thing sold is to make sure that your company is actually buttoned up, that your financial performance is demonstrable, right? Is that a word? Yeah, demonstrable, right? You can demonstrate the financial performance over time, making it a, you know, showing that there's predictability in terms of what's going to happen in the future for a new buyer, right?

Yeah.

You may not be able to predict exactly what's going to happen. You may— and nobody's saying that you're telling the future, But these are the tools we have, right? And so, we're trying to use the tools we have to show a buyer that this is a worthwhile thing. So, that's the financial performance, obviously, is a big thing of that and the predictable thing. But there's other stuff, right? I mean, we talk about these other things all the time. Your operational efficiency and the systems that you have in place are another piece, maybe not quite in the same weight as your financial performance, but they are related. And it's obviously something that, again, could be a big deal to a buyer.

Yeah, especially if the buyer, you know, is going to come in and they want the business to operate and they don't want to make large changes. And it's, no, I want to either keep the business running as smoothly as it has been running, and they expect that it's buttoned up and there's processes and there's people there to do these things, which is, again, We harp on this all the time, but it's, you know, some of the most— you'll get a premium for your business if the business runs without you, right? If you're floating above the business and directing it and allocating capital and doing those things, well, that's something that a buyer can do very easily. If you have a very specific skill set and you're doing that skill set, you're the one that's, you know, cutting the die material, or you're the manufacturing expert as well as the CFO, That's not gonna be very appealing for someone who doesn't have any experience in those specific things or your industry. So it's just another example. Yeah.

Yeah, I was gonna say, and look, to be clear, that may also not be the right buyer for you. So understand that you get to have an opinion, right, about who you sell this company to. So we're not saying by any means that There's one buyer for every company, right? That's, that's just not—

To your point, and shouldn't— there shouldn't be, right? You don't, you know, think about it. You don't want to have just one buyer because that's one offer that, that she can make, as an example. That's— that could be a lowball offer, could not be the right offer for you. They might not want to continue the business. They might want to relocate the business and move it to wherever, Kuala Lumpur. Um, you want to keep your business in wherever, in your local area. You may want to keep the name. There might be specific things you want to keep about the business that this buyer is not going to do. So you want to get as many, as much interest as possible from as many different entities as possible. Yes, within your industry, but also if you can appeal to people that are in companies that are in an adjacent industry. I think of real estate and mortgage as an example. You know, you might, if you have a mortgage business and you want to sell it, sure, go after mortgage, find mortgage buyers, but also a real estate person has to deal with mortgages all the time. That's just, just an example of a sort of an adjacent market, adjacent buyer that you could look to if you're trying to sell your business.

But the point is well taken, which is that, you know, you need to basically make sure that you appeal to as many potential types of buyers as possible if you really want to get this done, right? Because they will have— again, they all have their own individual plans, their own individual metrics, their own templates and terms of what they're looking for. And so, and then the other thing you're gonna do is that once, you know, when you understand what it is they are actually looking for and what their criteria is, then you're gonna— what you're gonna do is you're gonna basically kind of spin your story to match more closely to what they're looking for, right? Understanding that, but after you have already done the things that you know you have to do, right? And what we say have to do, we mean you want to at least examine the areas, And when we talk about our Total Exit Value System, that's what that is, right? Essentially a framework for you to be able to do a deep dive investigation into certain areas to ensure and/or to prove to a buyer that you are a good buy, right? And so the financial performance and predictability is a huge thing. Operational efficiency and the systems you have in place show, demonstrate that you are an efficient business that's making money and is profitable, and you're not overspending on certain areas. You've got technology in place that is helping you from an efficiency standpoint. You've got, again, processes, not just processes that are written down, that are repeatable, that other people can do if they had to, you know, if they had to repl— if you have to replace somebody, you know, you don't want your, the entire, you know, recipe for your manufacturing process to be inside the head of one guy, right? That's like not a good thing.

So not even exaggerating, that exact thing. thing. What you just said happened to one of my very early clients, right? They had a wonderful business. They had incredible recipes. And all of it was in the head of an unstable—

Unstable genius.

Yeah, you're not a stable genius. No, we're not going to get into that. But, but, but, but basically, He— every— oddly enough, it was around this time of year, every October around Halloween, he would get— he'd get ill, he wouldn't come in. Oh, getting ready for the Christmas rush. And he was a crazy person, and he held the owners every, every year he got a raise hostage. Yeah, exactly. Because none of the— none of the recipes written down, they're all not—

Not a good buy. And as a buyer, right, this is the— like, it's bad enough that if you as the owner had all that knowledge, but I mean, to have somebody else on there who was basically holding the entire company hostage. That's not a good buy, right? Yeah. So, you know, those things, the customer-supplier relationships, we talk about that all the time, right? How's your— what's your customer? What is your customer picture, right? Concentrate.

Yeah. If you think of that from COVID sorry to interrupt you, but like, so when COVID happened, right, if you were getting all of your milk, honey, whatever, chocolate From a supplier that was overseas and you had to, you know, as you can maybe see, I used to deal with this. It was a huge pain if you get 80% of your, of your stuff. And we had, we had, we had a, back in the day, we had a vendor who just said, we're no longer making your product. Forget the supply chain. We're no longer making your product because you were the only company that customer that bought that from us.

Right.

We're not going to sell it anymore. We're not going to sell it to anybody. I'm not going to sell it to you. Okay, like, I think they gave us a month lead time to do this. Okay, that's a real problem. You wanna diversify again. You wanna have diverse supplier relationships. You wanna have diverse customer relationships.

You never—

you don't wanna depend on any customer or supplier for too much.

That was great, great, great advice. And the reality is that even if you have that good relationship and that thing is there and it's been taking you on forever, if a, if a potential buyer looks at that and sees this one supplier relationship, or that 90% of your revenue is tied to one particular customer, that's the kind of thing that's gonna turn them off no matter how good you think the relationship is. You could say, hey, look, that guy, that supplier, that one guy who's supplying us our honey or whatever it is, the thing, and it's the one supplier I have, is my brother-in-law. Great. Well, hope you, you know, hope nothing happens, the, the new rift in the family or whatever, right? I mean, the idea is that It doesn't matter who it is, that, that objective buyer, again, objectively is going to look at this and go, this is not a good idea. We're not saying, by the way, guys, not saying that there aren't these one-off cases where people can and will ignore these things purposely or let them slide because there are other things they like. Okay, so remember that what we're doing when we, when we use RT values TEV system or anything, any other kind of paradigm for examining this stuff and preparing your business for sale. The most important thing is that you are examining all these things and then being able to, once you understanding what these things are and why and what is the actual state of your business kind of under the covers, okay? Is that knowing is like 90% of the battle. Right? Making changes to things can only happen when you know those things exist. When you know those problems are there, now you can jump in and you can make a plan for fixing things that you can fix. And look, some of the things aren't things you can fix. Some of the things are, are things that you aren't willing to fix, right? All those things are your choice. They're your prerogative. But the idea that, but not knowing what those things could be is, is, is shooting yourself in the foot. Yeah, no, anyway, look, the, the bottom line is it's either way. Look, you are— what, what we're trying to, to teach here is that there is no— and I think that you can— this comes across, right? There is no one answer for any of this, for how to sell your business. Okay? It's not a one thing. It's like 10 things at the outside, right? 10 things that you have to at least investigate to be able to understand. And so what we're trying to teach here is not that you have to change things or that what you're doing is wrong. Okay? It's not that, but it is a matter of that the buyer will look at your business completely differently than you do, and every other buyer will look differently than that buyer. So what you have to be able to do is to understand what are the issues, right? The solutions will come. The understanding what to look for is really the, you know, the first part. And so what— this is why we keep talking about the financial performance and the predictability of that. The operational efficiency, the systems that you have in place, the customer-supplier relationships. We're a broken record on this stuff. How close you are and how tied you are as the owner to the actual operations and the day-to-day operations of the business. Your risk management profile. What are your legal situations going on out there? How do you address compliance, the liability, other legal things that are out there? And then, of course, your scalability and your growth opportunities. You know, one of the things that, again, gets really kind of swept under the rug is the ability to say to any buyer, yeah, you're right, I didn't do this thing, whether that's, you know, insert, you know, whatever thing it is. I didn't— I haven't spent, uh, over— overspent or spent a lot of money on, uh, whatever, on maintaining equipment. Um, I have, you know, maybe I've got some You know, I understand there's a market here that I haven't gone after. That's not necessarily a bad thing. All you want to be able to do is to highlight that to the buyer because that's a potential growth area for the new buyer to come in, right? Yeah.

And so, yeah, because maybe the constraint that Joe's mentioning, maybe what you didn't do was all related to the fact that, you know, you didn't have money to do it, right? You have a successful restaurant in, you know, in 4 locations. And you would love to expand to other counties and to other areas in your local, in your local area, but you just didn't want to do it. But if you had a repeatable process and all you needed was money, you just didn't want to leverage that, you didn't want to take on too much risk, that's exactly the type of thing that a buyer would want to hear to say, oh, if you have a plan to do that and build that out, oh, I, you know, Morristown, New Jersey, wherever, Summit, New Jersey, any of those Places around me would be a perfect example. Here's my, here's my restaurant in a box, right? Go ahead and take it and blow it out and add number of locations. That can be really appealing to a buyer.

That's it. And so again, what, what we're trying to teach here is not that, not to scare you, okay? Or to say that this is impossible, or look how hard it is to sell your business, okay? It's not that. It's not hard. It's not hard. It's time-consuming, okay? It might be There might be some things that you have to do that you don't want to do, okay? There might be some hard looks at yourself and at your business that you don't want to make because, you know, it's hard to do that stuff as human beings. We never like looking at ourselves. The problem is, is that if you don't look at yourself and at your business well in advance of getting in the room with someone who's— who is attempting to buy you, 95% of the time you will be disappointed. And I'm telling you, and I mean disappointment will come in different flavors. The disappointment will come because A, you won't sell the business. B, you won't sell it for the amount of money you want to sell it for. C, you will get all the way through the process and then be unhappy with the way that the business integrates with the buyer. Those are the 3 big things, right? And the reality is that it is about understanding these areas and looking at your business and being able to uncover these things is what's going to increase your value. No matter who the buyer is, right? So when you, when you look at your financial performance and you look at your operational efficiency and your customer and supplier relationships and your risk management and your scalability, your growth, and a broken record that Joe and John are constantly talking about, it's because those are the things that directly relate to how, how much your business is worth.

Yeah. And we had, we had a situation, and not to go into total story time here, but we had a situation where You know, guy had an incredible business. He— it was a $30 million business and he wanted $50 million for it, which, you know what, in the realm of possibility, I mean, it really wasn't that much of a stretch, right? It was— I think the EBITDA was about $12 million.

Crazier things have happened.

Yeah, profitable business, and he couldn't get his financial statements together. So it's number 1 on, you know, it's 1 or 2 on our list of You could have the most repeatable business. You could have everything. You could have— you're removed from the business. Your risk and legal compliance are all set. Your customer relationships are tip-top. If you can't produce a set of financial statements, and I think we've talked about this in the pod before, that's like the biggest red flag in the world. Or if you produce— even worse, one, you can't produce a set of financial statements. That's a— that's one problem. 2, if you produce a set of financial statements that are wrong, And that that do not represent the actual costs associated with the products in your business, man. That will turn. That turned. I think it was three buyers completely off. One they won't.

Yeah.

Yeah. One bought a competitor, right? One wanted to get into. I can't mention the name of the industry because it's too small. But one wanted to get into this industry, and he just he said, "You know what? I'm gonna I'm gonna get in in a different." competitor because this company can't produce financial statements that accurately reflect the business. So these are things that not only Joe and I talk about them all the time, but they come up in deals. They come up when people get an LOI and people get— go into due diligence and they ask, they ask us the questions and say, why does this company can't produce a cash flow statement? Well, you know, WorldCom used to be able to— was not to be able to produce a cash flow statement, or Enron. Go back and look at Enron. Google Enron and cash flow statement. There's a couple of crazy articles about the Wall Street Journal, a specific analyst saying, why can't they produce a cash flow statement? That is red, a huge red flag.

Especially for a company that size. Yeah. I mean, with all the people they had there because of what was going, right. They couldn't produce one. We found out why. But yeah, the, the, the, but you're right. The bottom line is that's a red flag for, for, for anybody to be able to not be able to do that stuff. But And again, the buyers that you are attracting is as much a part of the process, right? And as much a part of your saleability as anything else. Like, so for instance, I mean, think about this. If you put your house on the market and you are getting all these people are coming in with lowball offers and you're not getting anybody to come who sees the vision that the house could be and stuff like that, right? It's because it's— you're— when you're attracting a certain market, that's, that's your market. Like, your market will tell you who your market is.

Makes sense.

So, the reality is, is that what you have to be able to do in order to get a wider market or a better market or a higher, you know, class, if you will, a potential buyer Then it's incumbent on you to make sure that you were setting yourself up and making your business attractive to those people, right? And so there are some steps that you need to take to basically kind of separate or transition from this emotional valuation standpoint, or, you know, to this market-based valuation standpoint, which is what you want to get to. Okay? However long it takes you to do whatever it does, maybe it'll happen instantly. Maybe the Maybe the, you know, the third-party evaluation or your CPA coming in and do, you know, or getting an evaluation from us or anybody else will come in and basically will instantly change your mind. But we have found by and large that it's not that simple. Most people have a hard time transitioning, and the reason is, is because they can't— there's 2 reasons in my opinion. First is that they have a hard time separating themselves and what they have put into the business in terms of like a We are very caught up in this world, especially in a, in a, you know, in this kind of capitalist, uh, you know, mentality that we are all in, that my— there should be some kind of payment that I'm given for the amount of work I put into something, and that there's some kind of direct correlation in that, right? We all know that that's not actually true, right?

Yeah.

There are people— if you want to talk about people who are hardworking and Sweat every day or out in the sun and baking and the whole thing, then roofers and, and, uh, power line repair guys and stuff like that would be the highest paid people in the world, right?

They're not.

The highest paid people in the world are the people who basically sit around and run giant, giant, uh, you know, corporations that, you know, make whatever, you know, Fritos, right?

Yeah, exactly.

The, the, the point is, is that so that we know that's not true, right? So you gotta start from a place where you say, okay, first of all, let's accept reality. The good news about accepting reality, especially if you are working with someone who knows what they're doing like us, or, you know, I'm sure hundreds of other people out there who are in the professional space, are, is going to be for you to be able to self-assess and to stand back for a second and go, okay, let me listen to what these guys have to say.

Because, yeah, and the point in that— sorry to interrupt, Joe— the point of that is you can either look at an offer that you don't like, um, in one of two ways. You can get angry and say that they, they don't know what they're talking about, they don't understand my business, they don't, they don't value my business. And that may all be true. Or you can look at the at the offer as feedback. And you look at it as feedback for ways to improve. And while they might be wrong, in your opinion, about a couple of the areas, this is a, this is a way to transition from your emotional standpoint of rejecting it out of hand over on this side and taking it and saying, yeah, I think they're wrong about 2 of those things, but 3 of the things have a valid point. And that's the value of, again, You're coming at it from your emotional standpoint. They're coming at it purely from a financial standpoint. Most times they're saying, look, these are the cash flows, these are the— this is the business, this is the prospects, this is the future that I see. Prove me wrong. And they often walk you through the offer. If you take it as feedback, that's a way to go back and improve it and take those 3 bullet points and say, they're right about these 3 things. I, what I can do, what can I do in my business to change their opinion and thus change my business?

That's it. And so, but it starts with assessing yourself, right? Or having a third party come in and help assess you. OK, so those external options and going outside of your business and even outside of your industry in some cases is going to be a really vital thing for you to do, right? The ability then to recognize once you are Once you are informed of what might be missing or what might be lacking or whatever it is, is to find, you know, basically is to create a roadmap, a plan for improvement. So just because my business is valued at this right now doesn't mean it can't be valued at, you know, at a higher valuation at some point in the future after a couple of levers are pulled or, you know, a couple of projects internally are completed, right? And so we don't have to sit there and argue about the fact that my business isn't worth this because maybe my business can be worth this. Right? And so, part of what we do at ExitEngine, and again, this is a little shameless self-promotion, but I think this is what makes us, you know, really kind of unique in the space, is that what we wanna do is we wanna show you what your valuation is in real life. Okay? And maybe that's the bad news, right? But the good news is what we can do is we can show you exactly what it can be worth. Right?

Yeah.

And so, the idea of being able to get that, get that from your advisor, Go out and ask your business broker or your, your, your M&A advisor or your investment banker or your CPA or whoever you have helping you do this stuff. Okay? Ask them for that. Tell me what it can be worth, right? Because once I know what I can see, what it can be worth, then, then all I have in the way potentially is effort and time, right?

Yeah.

And so, and if I can conquer one of those or both of those things in terms of Excuse me. Maybe I let some time, you know, maybe I need more time before I'm ready to actually put my business on the market. Maybe there's some effort things that I can do between now and then to be able to actually raise the value of the business significantly.

Yeah. And, and, and one example we talked about earlier was, oh, revenue concentration, right? You have, let's say you have 2 customers that are 80% of your revenue. Well, one thing you can do is you can Incentivize, just as an example, incentivize your salespeople, pay them more money because people respond to incentives, pay them more money for new customers. Conversely, you know, reduce the commission on, on existing customer sales or eliminate it altogether. But if you incentivize people to do things, if you incentivize your salespeople with more money to get more revenue, guess what's gonna happen? They're going to go out there and they're going to hit the bricks. They're going to hit the phones and they're going to respond to those incentives. So just like you respond to the incentives of a higher valuation, the people on your team will respond to incentives. You want to create an operational plan? You need to have things more buttoned up? Great incentive. Incentivize your employees to create that.

And by the way, you know, we're talking about things that might be longer-term stuff, but we know, right, because we do this every day, that there are things that you can do that will immediately, you know, that you can change right away that could, could immediately impact the value of the business that wouldn't even take like long-term project stuff, right? Or incentivizing employees or even generating additional revenue. There are so many latent value, hidden value, you know, within most organizations that all you need is someone to be able to take a deep dive into your books and into your financial situation. And many people could find, you know, things that could instantly You know, increase your value on the open market. Okay? So it doesn't have to be, they're not always a long drawn-out process, but it is about learning the things to, learning the places to look and the questions to ask, right? The answers are almost irrelevant. The answers will come. And then, and when the answers, you'll be able to make decisions about moving forward. But you can't do any of that until you start to examine kind of what's underneath, right? And of course, the last way that you're going to look at this, you know, in terms of getting from emotional to market-based valuation is you got— you know, we say this every single podcast, I feel like, and I, of course, you know, we are all over social media with this, but you've got to detach and delegate. Because one of the biggest factors keeping people from selling their businesses at all, but also for a high valuation, is the fact that they, they as the owner are too attached to the business. You gotta reduce your personal involvement in day-to-day operations, right? It's more buyer-ready, it's more buyer-friendly. And if the other things are in line, that's gonna be holding you back for sure.

Yeah, exactly. And we've, we've harped on this. We've, we've said this, this is probably the number one thing is, and again, we say it, it's much easier to say on a podcast than it is to actually do in your business. But it, but it's, But it's a requirement, right? It's one of those things that will immediately go in. And where you've done this and where you've empowered other people and given delegated authority, you are the owner of the company. So you could do this stuff. There's no emotional thing or risk to it. It's, hey, you want to create that strength and that capability on your team outside of you to do the finances, to do the manufacturing, to do all the sales.

Right.

That's a, that's a strength when you do that. Buyer's gonna look at us and, oh yeah, he's gonna be off on the beach somewhere. Sally and, and, and, uh, and Marion are gonna be my finance person and my operations person.

That's it. That's exactly it. And, and to be able to have that stuff in place and to be able to, again, demonstrate that that's the situation, um, you know, is, is also part of it. So remember, delegating is actually doing it. It's not saying you're gonna do it. It's actually showing that you can demonstrate that it's been done. Okay, so one thing that we want to find out, because this came up, um, you know, with a client the other day, was that it was like, not— you can't, you can't, you can't fake it. Okay, so you, you know, be saying that, well, one of the things I'm gonna do is be less, less attached to the business when I sell it. And they're like, the answer is like, yeah, no, no kidding. The problem is, is that again— If you have been the one, what is the thing that you have been doing that now has to be replaced by somebody else? And the question is, can I find that person? Does that person already exist in the company? Leaving that to the buyer is not the right way to do it, right? You need to show them that you've already done it.

Yeah, because look, who wants to buy? You know, Joe's analogy, when we were talking about buying a house or selling your house, like the market's gonna tell you what the house is worth, right? It doesn't really matter the list price. It matters the offers you're going to get. And, and no one wants to buy a problem. No one wants to buy a house without landscaping because then they have to do it. No one wants to buy a house that needs a paint job because then they have to do it. They want a— yeah, they want a house, they want a business that works, and they want a house that looks nice, and they, they want to be able to buy that and move in and start running the business just to Further the analogy. Again, you want to keep those things that the buyer has to do after they pay you money for it to a minimum.

That's exactly right. And again, going back to what we were talking about earlier in terms of diversifying your buyer pool, is that the idea of getting these things done and examining this stuff is so that you can, and/or your advisor can, or whatever, be able to have, basically be able to meet the objections of the buyer with, right, and be able to overcome those objections, right? And so, if we know, if you've done the due diligence of yourself, forget about the due diligence the buyer's gonna do, you need to do that yourself first, right? Because you want to be prepared for that. So that when the buyer does it, that you're all buttoned up. Jon talked earlier about the financial statements and have being able to have access to those things and have them be accurate and have them be accessible and all that stuff. That's a huge piece That, that, that, that goes unnoticed. But all of these things could be things that are preventing you from being your— presenting your best self or your best business, right? And so understand also that as the business, as the buyers change and the buyers are different, you need to be able to— having examined all these things and being able to have answers for this stuff is just as important Uh, as anything else, because you need to be able, you know, because a buyer is going to present you with this particular challenge, looking for a way of being able to lower your value, and you want to be able to take that and turn it around. And not only say, not only, not only can I counter that with why we shouldn't be lowering our value, in fact, it actually makes our value— it actually increases our value, and here's why, right?

Yep.

And so that may, that may not be the buyer that We're not saying that buyer is going to buy that and change their mind, but what it is going to do is going to help you be able to determine who the right buyer is for you. Okay? Because the right buyer, as they always say in the real estate business, right? We've all been in the real estate business, which is why it comes up for us so much. But the idea is that there is a buyer out there. Okay? Somebody will buy this house at some price point. Okay? There's not enough houses. So just, it's just so you know, like, you know, where's like, where's like 300 million, some, not 300 million, 300,000 fewer houses than is actually needed in this country? So something huge.

It's a huge number. Yeah. Yeah.

Don't quote me on that number. It might be wrong, but the, but there is some huge number, right? So the, the bottom line is that there are more houses, there are, there are, there are more buyers for houses than there are houses. Okay. And that's what, why you see the housing market be what it is. Okay, the same thing is, is essentially true with businesses. The problem is, is that the businesses aren't to a place where the, where the, where the buyers are willing to spend the capital because they don't think the businesses are good. Yeah, guys, we've got 9,000 private equity firms, okay, with $3 trillion worth of investment capital sitting around waiting for you.

And, and if you have a business that is turnkey and is buttoned up and has been cared for and maintained and like crafted to sell and done these things we've talked about, trust us.

Yeah.

Your business will sell. Like, we're— again, I'm a terrible salesperson, but, but Joe knows the numbers as well as anybody. 80% of businesses never sell. Only 20% of businesses experience a successful sale, meaning that those businesses obviously are, you know, are often, I should say, bought for a premium because they are buttoned up. The other 80%, the buyers look at and they just turn away.

Yeah, you're, you, you, the competition that you have in terms of, uh, of this stuff is not that great. Like, the reality is, is that so many businesses are in a state where they are, they are unsellable. that even the competition you have in terms of other businesses that might be being looked at in your category are relatively low, you know. So the more that you can do, this much more makes you this much more attractive, okay? And the reality is, is that this stuff is not difficult to do. Like I said, it's not, it's not, it's simple, but it's not easy, I guess, right? Is a better way to say it, right?

Yeah.

So the idea is that looking at these individual areas of your business, Right? Looking specifically at things like your financial performance, your operational efficiency and systems, your customer-supplier relationships, your risk management, your scalability and growth opportunities, and how close you are to the business. Those 6 out of— there's 10 things total, but those 6 things are the most important ones. And being able to examine that stuff by asking yourself some really hard— some that could be some hard questions, man, you know what I mean? Nobody's saying that what you did out there as a business owner was easy. Nobody's taking it for granted. Believe us, man, we have all been— but we have always— John and I, collectively, have been responsible for $100 million worth of revenue over the course of our careers. Okay? And the reality is that we know exactly— and some of that stuff has come— failures have been thrown in there too, right? We understand what it is to be you. We really do. What we're trying to, what we're trying to point out to you is that don't let being you get in the way of being able to sell your business.

Yes.

Well said. So the idea is that understand who the buyers are, understand what the buyers want, be able to ask the hard questions about your business, about when have I done everything I can do, right? Am I too close to it? Am I able to get these financial statements and are they accurate? And can I do this? And can I, could I throw a cash flow statement at someone who asked for it, right? Am I buttoned up from a risk standpoint, right? And the risk, by the way, isn't just about legal risk and stuff like that, right? It's about— risk is about how much maybe there's debt. There's risk is also about compliance. Risk is about, you know, are you OSHA compliant? You know, things like that, right? So your customer-supplier relationships aren't just about your customer concentration in terms of how much revenue comes from one customer. It's also about Do you have more than one supplier for product that you need to buy? Yeah.

And the last thing I would add is take feedback on all those things, right? We talked about feedback a little. I don't think we talk about it enough in the sense of you can look at your business and say everything's been fine. It's been fine. It's worked the last 25 years for me. However, the new buyer comes in and looks at it from a different perspective, and she gives her perspective, and maybe she has a lower risk tolerance than you, and she wants things that are— she wants things a little bit more buttoned up, a little bit more less, less risk on supplier side. Take that feedback and incorporate it as much as you can into, into the business. Because if it's appealing to— you never know what the risk tolerance is for, for your future buyers. They could be far lower than yours. And let's put it this way, they're probably not going to be a lot higher. Maybe they are, maybe you get lucky. But in most cases, you're gonna sell to a buyer who is putting a ton of money on the line and wants a return on her investment. And when— if she is saying that she doesn't want to take on this risk, you got to listen to her. You might not agree with her, but you should listen to her.

And know that that's not the only buyer in town as well, right? And so, again, the idea is that that buyer might not be right for you, but again, the next one might be. And so the reality is, again, it's as much about understanding the buyers and their needs as Anything else. So actionable takeaways. Okay, so we talked about, you know, again, the idea that the importance here is moving from this emotional evaluation methodology, right, to into more of a practical kind of like market-based objective valuation situation. Okay, so detach your emotions. Okay, as much as you possibly can, allow yourself to be— nobody's, you know, remember It feels like you're being judged, okay? And it feels as if a buyer, you know, is essentially judging your business. And I guess they are, okay? To be fair, yes, you're right, they are judging your business. They are judging it in terms of whether it's right for them, okay? But they're not judging it based on whether you're a good person or whether you did a good job or any of that stuff, okay? It's— I wish it was actually more like that because If it was, we'd actually more have might have more segue getting emotional evaluation happening, right? The reality is is that you've got the business guys or these buyers are object completely objective. They've got a set of criteria. They're not gonna deviate from it no matter what you say or do or whatever. So all you can the most that you can do is to be prepared for every buyer and be able to understand your business and what. the market is for your business so well that you're able to, to, to at least discern whether this person is a good buyer for you or not. So detaching your emotions from the valuation, the most important thing, your, your personal investment in this does not equal market value. I'm sorry, but it just doesn't. Number 2, focus on what buyers want. Improve those areas, right, that objectively drive the value and the salability of your business. Keep in mind something that we didn't address that we should right now, John.

Yeah.

Valuation and saleability, are they the same thing?

No.

No. Right. Not even close. So understand that every business has a, could have a value put on it, even if that value is negative. All right. But not every business, in fact, most businesses aren't sellable. So the reality is, is that what you're looking for is the right combination, the valuation, the highest valuation you can get. At the highest propensity to sell that you can get. Yeah. Right. So then, so you've got the, the emotion, detaching emotional value, focus on what buyers want, get professional, guys. Yeah.

Get professional. This one's so important. This one's so important because again, what we've talked about so far is in this, in this episode is you are gonna have an emotional attachment to your business. It, it's inevitable. The buyer is not. The way you way you can counteract that is to get advisors who are detached. Not that we don't care about your business, because we certainly do, but we don't have an emotional attachment to your business. And, and, and yes, I would like everyone to sign up with ExitEngine and, and Exeo Advisors, sure. But the reality is, find an advisor out there that can help you look at your business in an unbiased way. They're going to give you Their unbiased opinion, and they're going to help you improve your business, get it ready for sale from the perspective of, hey, I only want to help you sell your business.

Yeah. So I would— I think excellent advice. And I think that I would add one more thing to that, which is, here's an easy way to do this, okay? When you get someone who's going to do a valuation for you, okay, ask them 2 things. One is, can you give me an accurate valuation of my company, a market value of my company today? Okay, that's the first thing. The second thing is, then can you tell me ways in which I can improve the value of my company?

Yes.

Okay, because that's going to be a decided difference. Most people out there will be able to give you a value. Most people will not be able to tell you in any kind of real substantive way outside of these generalities about how you can improve your business. And so specifically, when you're asking someone for evaluation, right?

Great point.

A real valuation isn't back-of-the-napkin calculation that's based on EBITDA that you tell a person. Okay, if I'm a business broker, and this happens a lot, and I come to you and we're talking about me selling, helping you sell your company, and we talk about valuation, and the business broker says to you, hey, how much, what's your EBITDA? And you say, hmm, no, I'm not really sure, but Probably, I don't know, like $2 million. And it goes, okay, great. So in your industry, it's a 4x multiple. So your business is worth $12 million. Sign here. Okay. No, not enough. Not enough. You want the— that you wanna make sure that to get an actual valuation, that you've got a written valuation that says, this is what we did. This is the methodology we used. We went through it and this is why we discover this is, and by the way, this is who we are because there's credibility at stake. This is what we value the company at, right?

And this is why, right? Because it's not just— it's what it's not going to be, as Joe just mentioned, it's not going to be multiplying a number in cell D4 by 4 or by whatever number. It's going to be— certainly that's going to be part of it, but it's going to be subjective analysis as well as quantitative and qualitative analysis of your business, of your— of everything we talked about, your customer relationships, Your financial statements, your operational processes, your management team, the saleability of your business, the independence of your business. Those are all going to be factors in the valuation. And the second question that Joe just mentioned is a key one. How can I improve the value of my business? Not that it's just worth $12 million now. What could it be worth if I do X, Y, and Z?

That's it. Because— and I would even— I would really put a slightly finer point on that and say, ask them What is my valuation of the company? What's the best valuation you can gimme for the company right now? And then ask them, what are the ways in which I can both, A, immediately in the end, in the medium term, grow the value of my business? Okay? And that the answer you get from those questions should determine whether or not you work with those people or not.

Okay?

Because it's one thing to have a valuation from a third party, you know, to say, this is the value, this is the value, right? But the, what they won't be able to get to do for you is to give you the saleability of it. And they won't be able to potentially won't be able to tell you how to make the, what changes to make outside of the general kind of generalities. Okay. If they can go with them, do it. That's great.

Great.

Okay.

Yep.

Last pe— last point, right? Keep, do this on a regular basis. Okay. In other words, Constantly check the— maybe you're not at a point where you're ready to retire. Maybe you think you're 2 or 3 years away. Okay? You should be on a biannual, twice a year, value the company, especially if you're on a track that you're where you've already done it once and you're trying to make improvements to it. Okay? And the financial value of that isn't necessarily always the best way to do that. And that's why our Total Exit Value System actually is a non-financial way of actually measuring the sellability of your company.

Yep.

Right? Because what you wanna see over time as you're making changes is you wanna see the sellability improve, right? As well as the value, right? Because again, I could put any number I want on something. That doesn't mean someone's gonna pay it, right? What we're, what you really wanna get to is if I make these changes, is it going to increase the value and raise the sellability of my company? That's the, those are the most important things.

Yep. Couldn't agree more.

And do that on a regular basis because again, as you're going through this process, you wanna measure this. You wanna see it change. You wanna see it go up. All right. Now look guys, uh, we are Exit Engine. Okay. And at, at Exit Engine, you can learn how to do all of this for yourself. Okay. We have coaches, we have the, we have, uh, self-paced courses. We have live cohort training. We, we, we have a, a way of teaching you this that is right for you. All right. So if you come to myexitengine.com, first thing we're gonna ask you to do is take a self-assessment, right? Because as you can tell, we believe very strongly in examining our own businesses and for ourselves. If you come to myexitengine.com/cat, C-A-T, /assessment, that's where you will find a tool, a first tool that you can use right now to figure out where do you lie on the total exit value score system. Okay. That will give you a starting place, a benchmark, right? Once you do that, we'll give you a full report. We'll show you the things in which you can actually, the ways in which you can immediately change, uh, change and increase the value of your business. Yep.

Okay.

And then we will potentially be able to work with you together, or you can use our Total Exit Value System on you to learn how to do that and on your own, be able to figure out your own valuation. Correctly, more correctly, and be able to figure out the sellability of your company and figure out the things you need to do that can increase the value so that you are ready to sell when the time comes, whenever that is, right? Oh, and by the way, we haven't mentioned this on this podcast, but the other thing that exit planning or— and doing these kinds of things will do is help you stave off some of the negative exit, adverse exit situations. Okay, nobody here can stop you from necessarily from dying, right? But what we can do is help you figure out what to do with the business under these adverse conditions.

Okay.

So, keep in mind, we love the idea of selling the business for a lot of cash or putting it into a trust for your heirs or whatever you wanna do. Those things are great, and we want everybody to be able to do that. But you also have to guard against some of the things that can happen to you that aren't necessarily something that you can control. So again, those are the things that all those things, and by the way, having those plans in place, right, for what happens to the business if I die, who, uh, who takes control of the business in these situations, extra, et cetera, et cetera, are all things that contribute to the sellability of it. Because having those plans in place, right, are things that can either be rolled over or changed or amended or whatever by the new owners. Those things are just as important to have in place and show the health and sustainability of your business, just like you're, you know, showing how much, you know, uh, you know, profit you have, right? So, um, guys, this has been the Exit Engine Podcast. Uh, John, thank you so much for your time today. It was, uh, as awesome as usual.

Thank you, Joe.

And, uh, we will— guys, come to myexitengine.com, take the assessment. Um, you can— you there, you can, you can watch video and you can learn, uh, right there on the, on the, on the initial site. You can take a look at this stuff, but we want you to join us. We want you to learn how to do this yourself. You can always, again, on the comments here, tell us what your situations are. Tell us what kind of terrible, crazy evaluations you got. Tell us what had— tell us your stories. We want to hear these stories. We want to share them with other people. Thank you so much for listening to us. Again, you can find us at myexitengine.com. You can find us on— you can find us on just about every, every social media site there is, but primarily LinkedIn is probably the best place to find us right now. Um, have a great day. Thank you again for joining us, and we'll see you next time on the ExitEngine Podcast. Thanks, John.

Thanks, Joe.