The Exit Engine Podcast Episode 24: The Total Exit Value (TEV) System

Welcome to the ExitEngine Podcast, episode 24. Good morning, John.

Good morning, Joe.

It's another great day. How are you doing today?

I am doing wonderfully, and it's still the morning, which is good.

It's still just barely still the morning, which is awesome. So I got that one right today. So we are embarking on a new year. It's, uh, when you're listening to this podcast right now, it's, uh, 2025. We have made it. Um, we are, uh, if you, if you can hear my voice right now, everything is, uh, everybody, everything is still working and operating as expected.

Happy 2025.

Same to you. Absolutely. It's going to be a great year. I hope all our listeners are, uh, are ready for a new year. And if you spend some time listening to this podcast this year, we could pretty much guarantee that you're going to learn a lot and you're going to prepare yourself for a successful exit down the road. But because this is the beginning of the year, and I know that we talk about this stuff a lot, but I thought, we thought maybe it would be worthwhile today to dive into really the Total Exit Value System, our way of looking at the world. Um, and to give you, you know, as a late Christmas gift, whatever, to give you the process. Like, here it is. Like, we're just gonna lay it out for you and give you all the areas that you need to look at, the questions, some of the questions that you need to ask yourself, and, and to figure out some very, very specific kind of actionable things that you can do right now that's gonna help you get your business in line and ready to sell in 2025. Does that sound good?

Yeah. Yeah, and we've talked about a lot of these things throughout the podcast we've done through 2024. However, as Joe mentioned, what we're going to do today is walk through the 10 steps that we have of our system, of our Total Exit Value System, and give you, as Joe mentioned, some practical examples, some example projects, and some things that you can do to make sure that, as an example in financial health, that you're doing the things you should be doing. And in the spirit of 2025, the, the New Year's resolutions, take— you should— I think you should take a few of these and, and start them. Start these projects and finish them, I should say. Not just start them, but complete these projects. So, you know, without further ado, we should get started.

Yeah, let's just jump in. I think that, again, this is a great way, guys, to know is that we're going to give you some things here that you can start to actually apply, like, right away, the second you hear this. Okay, so this isn't— these aren't things that are going to necessarily— some of these things will be a little bit more involved. Some of these things will be a little bit easier to do. All of them are doable. And again, if you've listened to the podcast in the past, then you're, as John said, you're going to hear something. You've heard of these, some of these areas before. We talk about a lot of them all the time. They're incredible. But I also think that the thing to keep in mind here is that your— what we're going to give you are What I like about our system and the reason that we do it this way is because what most people don't know is what they don't know, right? In other words, what most people— most people don't do this maybe once in their lives. Okay? On the other side of the coin is the buyers. The buyers are out there doing this. Most buyers are doing this several times a year. Okay?

Yeah.

So, understand that basically there is a— that you are walking into a situation where there is a decided, you know, a very, a decided advantage to one party just based on knowledge. All right. And so one of the greatest gifts that we can give you, I think, is to give you the gift of knowledge. Right. And so as we go through these things today, what we're going to do is try to give you the questions to ask yourself. Here's how you find out what you don't know is by asking the right questions. It's not about having the answers today. It's about getting the questions to ask yourself. Because that will send you down the path of adding value and creating salability.

Fair enough? Yep.

Excellent. All right, cool. So, as we know, the Total Exit Value System from ExitEngine is a 10-step, a 10-area, 10 areas of your business that we're going to ask you to examine rather closely. Okay? The first one, let's talk about, John, financial health. This is one of John's areas of expertise. So, John, Tell us about financial health.

Yeah, this encompasses things like cash flow and profitability and debt management and understanding your 3 financial statements. And specifically, the 3 main financial statements are the balance sheet, income statement, and the cash flow statement. And they all interact in ways that are important to understand. But one of the things that I recommend doing, and I do this in my personal life too, is from with my credit card as an example. So I look at my credit card statements during this period where it's a little slower. Usually I take some time off and I print out my credit card statements old school style and go through them and look at all the expenses. And you can do the same for your business, right? You can look at all the expenses that your business incurred in 2024 and just make sure that that makes sense, right? Make sure from a ratio standpoint and from a dollar value out standpoint that you're What you're paying these suppliers and vendors and all these people, does that make sense? Is it— do you think it's too high? Do you think it— are you missing expenses? Do you have a full picture of this? You wanna make sure that you have all of your expenses categorized correctly so you can work with your accountant so that you're paying your taxes correctly and you're calculating your income, your revenue. Um, your expenses and your profit correctly.

And one of the big issues that we see people have, right, are the fundamental accounting issues. Fundamental ones like, like not entering, like, like not making all your journal entries.

Not making all your journal entries or, or, or double counting things, right? In, in double entry accounting, right, you need to put things on 2 sides. You know, if you, if you have an asset, you have liability. Um, you know, everyone knows the assets equals liabilities plus equity equation. But what, what, what Joe's mentioning is, and we found this out recently with a couple of clients, is, you know, owners of companies are, are not accountants. And accountants, sometimes they own their own companies, but a lot of times they don't know all of the machinations, and they do one side of the input, they don't do the other side, or they put in something that's incorrect. Now, Everyone makes mistakes, but when you compound these mistakes and you keep doing them over time, it— you can untangle them and detangle them, I guess, is the right way to put it. But that takes time. And if it's better to do— there's 2 things to do things right: correctly and again. And I don't like to do things again. Um, so this is a good example of, you know, this time of year is a good time to go through these things and make sure that 2024 is wrapped up, so it makes it easy for your accountant. And ask your accountant questions at this point. Am I doing this correctly? How you can pay him less or pay her less in 2025 than you're paying in 2024 by doing things better in 2025 than you did in 2024.

And you're using software, right? I hope that there isn't anybody out there who's keeping like a ledger book or anything like that, right? You're using QuickBooks, you're using Xero, you're using some kind of accounting software, probably. It's making it easier to do. Lots of these things, especially now, have AI analysis tools built in and things like that that will basically just run through things and kind of try to find common mistakes and stuff like that and let you know that they're there, or at least give you an idea of something to look into that looks irregular. And so there's really no excuse for not having clean books. And not, and not being able to have yourself set up the right way. If, if you don't, if you really can't do it, then you do need to hire somebody, and you do need to get somebody to be able to do this stuff on a regular basis. And there's bookkeeping, uh, you know, outsourced bookkeeping, uh, you know, bookkeepers you can get. They don't have to be CPAs. They don't have to be, you know, they don't have to be any kind of highfalutin anything. They just have to be able to be people who can take this stuff and enter it into QuickBooks. And just by keeping up with that, right, that alone, okay. And again, I'm not— we can look back at our, at the, at the data, but essentially when we see clients at ExitEngine, when we see clients basically in this, in this position, what we're seeing is that they are adding for somewhere between 5 and 15 points to their total exit value score just by getting their books in like, like clean.

Yeah, and, and, and one example that, like, there's all sorts of accountants and bookkeepers that you can use outsourcing. There's also fractional CFOs, and like many companies are not ready for a full-time CEO— sorry, CFO, excuse me. So you have a fractional CFO. There's also— we have a good one that we've worked with, that I've worked with in the past, that I can recommend. Drop a line to info@myexitengine.com for that. Um, but they can come in and they, they can do 4 hours a month, they can do 2 hours a month, they can do 8 hours a month, and they come in and they're part of your team, but they're not there all the time. It's, it's setup work at the beginning, but then you are using them on a regular basis to look at your, look at your books, give you advice, run some numbers, run some analytics, and they're not a full-time employee. They are— it's, it's a godsend. They are wonderful When you use them in the correct way. And many companies, again, are not ready for a full-time CFO but are in need of a fractional CFO.

Look, we are big fans of fractionals, okay? I mean, and the reason is because we understand the importance of having this stuff buttoned up, okay? So if you're not— it's an expense. If you see it as an expense and you are at the same time considering selling your business or trying to sell your business, then it is not an expense, it's an investment. Okay, because what you're gonna do— and guys, I think this is a good— this is a great time, actually, it's occurring to me to make a statement about this in general.

Okay.

If you are considering selling your business, there are— there are, in order for you to be able to maximize its value and salability, there are things that you are going— and things that you're going to have to do and expenses you are going to have to take on above and beyond what you currently have. However, done well, those expenses that you're putting towards this mission of selling the business will come back to you multiplied by 3, 4, 5, or 6 times. Okay? So understand that the money that you spend on a fractional CFO, as an example, right now, is an investment you'll be making in how much money you will be able to get in a financial harvest at the end of selling your company. And that every dollar that you retain or every dollar of value you put back in the company is going to come out to you in your pocket at the end in a 3, 4, 5, 6-time multiple of what that actually is. So, there's no excuse. There's no reason to say, oh, I can't afford this, or Whatever. There are so many ways to do these things, guys, to get your books right. There's just no reason to not do it. And it means it's and especially in the financial health situation, and John will attest to this, is that it is the most important piece. Yes.

No, absolutely.

Understanding what your revenue is, how good it is, what your profitability, especially by guys, especially when you have a good story to tell, right? Because the worst thing you could do would be like. Actually have a good story and a good financial story to tell and not be able to tell the story well.

Yeah, it's called burying the lead, right? You don't want to bury the lead with your company.

That's exactly right. And so just know that whenever we're talking about things and you're looking at a thing and you're, you're a person who goes, ugh, I gotta spend money to do that, know that, that this is the kind of place you want to spend this money because this— every dollar you spend is going to come back to you 6 times. It's, it's, it's fantastic, right? So, all right, so I've said my piece. Um, financial health, incredibly important. Those are the things you can do right now is, again, just by checking your books. We call it the eye test, right? What John's talking about is print this stuff out, take a look, get familiar with your books if you're not familiar with them right now. Start looking at things, look at the trends, see how you feel. What does it look like to your eyes? Does it look like it's right? Does it look like— is there, is there common sense telling you that maybe this isn't, isn't correct? Or is there a situation in which you can uncover and go, oh my God, I forgot to add all this revenue in, or something like that? Which sounds crazy, but it happens.

Well, we, we had a situation where we double-counted expenses in 3 different situations. And it's like, okay, when you double-count your expenses, what you're doing essentially is you're adding additional expense to the business So you make your company and your product look less profitable than it is. Once we took out some expenses and we recategorized them, we said, wait a second, like, this is okay. Like, this is much better. It's more realistic. And then we, again, we did the eye test. We talked to our client and said, does this make sense? Like, yeah, that could be right. And names. So silly things like names of vendors and when a vendor changes their name. That happens more than you care to know. And like, again, I've had situations in the past where an invoice kept getting paid by a vendor who was no longer delivering services because you know what they did? They kept sending the bill and you didn't realize it. And people kept paying it. And people kept paying it. That didn't happen at one of our clients, but it happened back at another one of my jobs. So I guess the point is the financial health means more than just your financial statements, right? That's sort of table stakes. But what you really need to do is you need to look into your actual vendors, your clients. Have they paid you? Are they paying? Those types of things, those types of questions are asking. Hopefully they are paying you, but are they paying you in a timely fashion? So, yeah, financial health. I think we can go along to number 2.

Absolutely. But again, just understand that when you're in a situation, you know, you're looking to do this, the money that you're gonna spend to do this is coming back to you.

Yeah.

And in places like where you work potentially with companies like ours, you're gonna get it all back. Whatever you spend working with us, you're gonna get it back. And then you're gonna, on top of that, you're gonna get, you know, whatever you're gonna get from a value of the company standpoint. So, you know, it's a, this is a time, the one time probably, right, in your business life where you can pretty much, pretty much count on That if you do these things and you spend this money in these ways, that it will come back to you, right?

Yep.

Um, all right, number 2, operational efficiency. Big one. We talk about this all the time, right? What are we trying to do? We're trying to streamline operations. We're trying to understand where we spend money. How do we spend more time than we need? How do we spend more money than we need to in certain terms of delivering our product service to our market? Um, in terms of The things we have to do inside. Obviously, manufacturing processes are are very easy things to start to look at. If you are a manufacturer, you're probably and probably should be pretty well tied in first, well versed into how you can actually streamline these efficiencies or the this processes. But standard operating procedures in general, we just did a post about this the other day, right? Your standard operating procedures. Do you have any? Are they written down? Right? And if they're not—

Are they followed?

Are they followed? And if they're not, maybe what you need to do is to take another pass at writing them down.

Why?

Because if you just start writing them down, you will start to think about them and you will start to think about things. Oh, I forgot this. Oh, I forgot this piece. Oh, I can make it better. Oh, well, here's an efficiency I can find.

And yeah, and the thing that I've found in doing these standard operating procedures, because I have some experience in doing these and implementing these across large groups of people in large geographic, frankly, physically areas in different geographic areas, is you drive the decisions down to the people implementing the procedures, because then you get really good feedback, right? So as an example, we wrote our operational procedures. We drove them down and implemented them at the branch manager level, and then we had them implement at the team and real estate agent level. The best feedback that we got from people was directly from real estate agents saying, this isn't realistic, or this isn't how it's done, or you need to rewrite number 3, or A becomes before B. And that was the biggest one, is A comes before B. And this happens a lot in corporate world is Someone does a lot of work and they pass it along to someone else for their 2 cents, and then they pass it along to someone else for their 2 cents. And by the time— it's like the game of telephone. By the time the 4th person gets it, it's like a complete— it's like Moby Dick turns into, you know, I'm blanking, but some other novel. It's like, wait a second.

Right. This isn't what we were trying to achieve, right?

Right. So in other words, there's a lot of effort that's wasted, right?

There's a lot—

talk about inefficiency. And this is like scrap metal, right? Scrap metal in the manufacturing business is a lot of times it's waste, right? It can't be used again. But there's also waste in the corporate world when you have someone really work on a project or a script or a playbook, and then it gets completely gutted. A, that's inefficient. And B, the person who did the initial work is like completely demotivated because they put in this ton of effort and what they see come out at the other end of the machine after people have done it after they've given their 2 cents and their feedback is totally different than what they did, and they get demotivated. So the operational efficiency can be a lot of things. It can be machines, it can be physical waste, but it also can be, you know, we used to call it gold plating. And it's like effort that was done early in the process that was completely wasted. And what it does is it happens, it comes out in the end completely differently. And it's, again, wasted effort and it's demotivating.

No question about it. And, and again, an easy fix right now would be to basically take a week over, you know, or a few days over this, you know, holiday break or whatever. Okay? Or, you know, the break we obviously— when you've heard this, you just had the break, but take a week or whatever in the next couple of months. Okay? And, and simply just map out workflows. And again, I'm not asking you as the owner to do this, but I'm saying is get your team. To say, hey, look, once a year we ought to look at our processes.

Okay?

And it doesn't matter if we're selling 5 months and 9 months or a year or 10 years from now or whatever. Okay? This is for anybody. Take a look once a year at what our processes are, what has changed in the last year, because a lot of what happens is that you will find is that you will have documented a process and you documented this process 3 years ago. Right? And since then, 17 things have changed. And the people on the ground who are doing the work know this because they have had to make these changes and do this stuff. And maybe they've changed them on the fly. And now the process that you're using or whatever has changed, but the documentation isn't backing it up.

Right.

What's on the business now you've got— now you've got documentation. It's not actually supporting the right process.

Right. What's actually happening on the ground is not what's documented in the process. And everyone knows that. Maybe really except for you, right? The people who are doing the work know that, you know, they do A before B and then C before D, but really it's not documented that way. So you wanna update your documentation because the buyer will ask you questions about it and you wanna have those right answers and you wanna be accurate. You don't wanna hand them inaccurate information about how the actual business flows.

Exactly right. So that's, and again, operational efficiency can span all kinds of things, right? You also look at your tech stack. What are the things that you're doing on a regular basis? You know, that can be implemented that you can use AI to help you do, right? That could speed a process, that can make it faster, that can make it improve the quality, right? Whatever those things are. So there's lots of ways to look at operational efficiency. It's not just about, you know, people process, but it is about potentially about where there— it is about time savings, effort savings, and ultimately cost savings. And so being able to adjust those things, and again, Look at them on a regular basis.

This is—

this should not be a set-it-or-forget-it thing. It's very easy to let it slide by the wayside because you're so busy doing other stuff and whatever. We all have that issue. But this is just your reminder. This is the beginning of the year, and it's a really good time for you to sit down and make a project for the next couple of months of reviewing your processes, seeing what can change, what has changed, and making sure that documentation is there. If you do it now, It's going to be much easier to do it now when you're not ready to sell, okay, than if you're trying to do it in arrears when you are under the gun of trying to sell the company.

Yep.

All right, uh, number 3 is our market positioning. So within the Total Exit Value System, we talk about market positioning and how important that is, right? Um, your market positioning obviously is, is where you fall in the marketplace. What is your reputation? Where do you rank against your competitors? What is it that your target market thinks about you? How are you generally viewed? And where is your position financially, potentially within that marketplace? So obviously, why is this important, John? Because your market positioning potentially gives you an advantage in terms of, you know, from a— especially, definitely from a strategic buyer. But maybe potentially even from a financial buyer who's, who wants to get into the market using, using and, and, and getting to, to the, to the, not always necessarily, by the way, either the top firm in the market either. Right? So being the number one, being the 400-pound gorilla in your industry and the whole thing is usually a good thing, but not always. Right? Because again, because of something called marketing marketable inefficiencies, we're gonna have to take a pretty good examination by industry about whether or not you are in a position where being the 400-pound gorilla is a good thing or a bad thing in terms of the buyers who wanna buy you.

Yeah.

Right.

Look, look, look at, look at, uh, the, the company, and I'm not gonna name the company, but, you know, we try harder, right? Mm-hmm. They're not number one in their, in their market, right? And, and, and their, their, their positioning and their brand describes it in such a Distinct. And I mean, talk about embracing it. We try harder. It's like, okay, I want to go with them. Like, I look to them every time I rent a car because I, you know, I believe it.

Right.

Um, and, and, and you can, can carve out a niche, um, or not a niche is not the right word, but you can carve out a way that you, you position yourself in the market with exceptional customer support or great transitioning skills. We had a— back again, I mentioned real estate again. We had a vendor that their big thing was customer support. They, because transitioning from this particular software to another software was a huge pain. And they realized that if they could support people in that transition and make it so easy for them to transition, that they'd be like, that they wouldn't use that as a, as a reason not to use their software because their, their help and their support was incredible. And I, I lauded them for that. You, you guys say it. And you deliver. So if you do something and you position yourself in such a way, you really need to deliver. You need to try harder and you need to support those customers if you're saying you're gonna support them.

No question. And I think, look, again, you may be different founders, probably have different views on marketing. They have different marketing abilities. They, you know, some people are sales-driven, some people are marketing-driven. They're not exactly the same thing. You know, the reality is, is that there's all kinds of different again, permutations of the way that we look at our markets as founders. Okay. And again, if you have a marketing bent, if you're on that side or you've got a strong marketing department, you may have a very good idea of where you lie in the marketplace. What is your market share? What are your competitors up to? What's your unique selling point? What's your point of differentiation? Right. You'll have those strong things. Whether or not you're using those things correctly in your advertising or in your marketing materials that help drive drive leads or drive business, that's another question, right? And so, right, within the marketing thing alone, there are so many different things to worry about. Technology becomes a big piece of this as well, right? There's obviously, there are efficiencies in this, but the reality is, is that what most buyers are looking to buy, okay, is a company that knows who it is. So we're not saying that you have to be the number one company in your area, in your industry to sell your business.

No.

What you have to be is a company who knows who it is. And just like John's example of, you know, we try harder, they know who they are, right? They know what they exist and their messaging resonates, right? And so again, it may not be about the fact that you have the most revenue. There's lots of reasons for that. Marketing is just one. Okay. But what, what a company wants to know, a buyer wants to know is you are, we have a place, we play our role well, right? We, we are in the marketplace and there is room for growth.

Yep.

That's it. And so if you know those things to be true about where you are right now, then, then hats off to you. You're, you're, you're better off than most. But what you could do right now is how about going out and talking to your customers, right? Could you get some feedback from your customers? Could you do a survey? Could you do a focus group? Did you do a thing? You know, what, what, what are, are you doing those things on a regular basis? Is there a process for getting customer feedback and support and that kind of thing from a sale, from the, in the, within the sales organization, right? So these are the kinds of things, again, very simple thing to do is to say, if you are not sure who you are in the marketplace, You, you, whether you know it or not, you have a reputation, you have a brand. You can either control that brand and decide what it is, or you can allow the market to, to decide what it is. But either way, it will be decided, right?

Yeah. And so I, I think of it as being defined, right? You either define yourself or the market defines you. And I, I think everyone on this podcast understands which is better in that scenario. You want to define Your company and deliver against that product. That's exactly right.

And again, as we're— it's not just about making the sales today. What we're here to talk about is the importance of this in the long term in terms of being able to sell the company. The product you're selling is the company, and the company's— one of the company's attributes should be we have a particular market position that we are proud of and that we exploit. And by the way, There is room for growth within this market. That's the message that needs to get across to the buyer, and it needs to be true. And by the way, it needs to be true, right? So, you're not gonna pull the wool over anybody's eyes, you know, in terms of market position, okay? It's gonna be, you know, obvious. Risk and compliance, man. God, the risk. The way that people are not buttoned up with contracts, the legal aspect of this thing, man, help them out, Jon.

Well, just the things that, you know, there's the, you know, there's a book a while ago about the known unknowns and the unknown unknowns, right?

Mm-hmm.

There are things that you know that you're not taking into account, right? That you're just, you know, an earthquake could happen, something like that, right? And is it worth mitigating against that risk? Maybe, maybe not, maybe depending on where you are. But there's other risks to your business that that maybe are known within certain segments of your company but aren't known to the people at the top, namely you, the owner of the company. And it's always good to, you know, ask people on a yearly basis, frankly, at least on a yearly basis, what they think the biggest risks are to your company. Because yes, you probably know a lot of them, but I bet you don't know all of them. And, but, but if you tap into the collective wisdom of your team. Just like if you're doing a SWOT analysis, you want to get a broad group of people together and ask them, what are the risks? What are the opportunities and what are the risks for the business? Like, where could you go for revenue and what are the risks inherent in the business? And what this will help you do is this will help you deal with things that you either may have been trying to avoid. Maybe you can deal with them via insurance. But it's dealing with the things that you should be dealing with. Compliance, legal, tax, environmental, all those risks that come up that seem to come up one-off. Well, they shouldn't really be coming on. Not many should be coming up one-off. Maybe the pandemic when that happened. But now the pandemic, if another pandemic happens and you don't have a plan for it, that's on you. It's not on anybody else.

Right. One of the biggest places for risk too that gets overlooked is the employee. Queen Carvania stood haloed by the morning sun. An army hung on her every word.

My champions, I have sold my chariot on Carvana. 'Twas a lovely SUV, an inexplicably queenly offer. They're even coming to the castle to collect it tonight. We feast. An offer you can feast on. Sell your car today on Carvana. Pickup fees may apply. Right.

So, yes, your HR situation, whatever, potentially, you know, potentially is, is for most businesses, probably your high, maybe one of your highest points of risk, right? Because whether it's competitive information, whether it's people leaving the company to go, whether it's being able to retain talent and, and, you know, you have an attrition situation going on where people come and leave. Right. Those are the kinds of things.

Yeah. If you're a business, a consulting business, your most valuable assets walk out the door every day. Fortunately, most of them come back the next day. But you deliver your services through those employees.

Right.

Now, even many manufacturing businesses are, you know, the specialists that run the machines, the ones that do the specialty things, the ones that do the discrete work that gets the product done. Those are— those are— there can be a lot of risk if there's— if there's the jerks, if there's jerks in there, if there's people that are harassers. That's a big deal.

If you have to deal— if you have to deal with labor, right, or labor unions, right, or if you have to deal, right, right, or, or, you know, with the Teamsters because you— because of you delivering things or whatever, you know, all that stuff. So look across the supply chain too, right? Because the reality is, is that there are going to be things that you're going to be on the hook for, whatever. And by the way, and you get into contracts, right? Your compliance when it comes to contracts that you've signed and the agreements that you've made, whether it's with suppliers or with clients, you know, with customers or whatever, those are part of that as well, right?

Yeah.

So understanding, you know, where are you in terms of your compliance? Are you actually providing the service that you say you're going to provide, and are you doing it well? Are you right, or are you at risk for someone potentially suing you for a breach? Right.

And yeah, and if, and if you're big, right, if, if you're big, if you're a big company or a bigger company and you have a couple of attorneys and a couple of people doing this thing, you want to make sure that everyone knows what everyone else is doing, right? We had a situation back in my old company, it was a big company, but all of the information technology contracts would flow to one attorney. And the reason that was, that was a huge bottleneck, kind of inefficient.

It got—

annoyed us. But you know what it did? It prevented us from signing contracts for overlapping services when it was a big organization. Now, sometimes that doesn't happen, but you want to make sure that legal is informing the other legal people and the other operational and financial people, hey, we're signing this contract. And there's that information flow so that everyone understands what's happening that can affect the business. So that's risk and compliance. And yeah.

Yeah. By the way, another place where AI can be incredibly helpful right now. Okay?

Yes.

So there are, there are legal AI, you know, software out there that will do this compliance, that will manage this stuff, that will read documents, that will keep things in line, that will alert you when there's something that's out of line. Like, it's, it's incredible what we can do in those situations. So, again, any— by the way, this is also true with your marketing. It's true also with your you know, with your operational efficiencies and things like that. You know, AI right now, guys, if you're not, you know, and you have to be, you know, live under a rock right now to not know, but, you know, this is where the— this is the future, right? The future of business right now lies squarely within or is being held in the balance by artificial intelligence, right? The ability for us to be efficiently be able to look what's— I mean, look, if I have to tell somebody this, like I said, it's obvious, right? this is the way that the world is headed, and being able to, to take advantage of this when you can, where it makes sense. And it doesn't make sense all the time, but where it does is going to be something that's going to be expected of you. Again, it's going to end up being table stakes because the buyers who know these businesses almost as well as you do in most cases are going to say, why aren't you doing this With AI, right? And then your response is going to be, excellent point. What an opportunity for growth for you that is.

And this, this is a good segue because the next one we're talking about is scalability and growth, right? So scalability and growth. If you aren't, to Jo's point just now, if you aren't looking at artificial intelligence to scale and grow your company and automate repetitive tasks, Man, you should be doing it. I mean, I was using automation back in 2014 with a wonderful, great company to automate report building. And it sounds crazy that we were doing this back then, but we, we had automated tasks that would come from certain data, would come from certain databases. It would be put together manually by somebody, and they'd take the first 2 hours of their day to do this. We automated the thing and did it in 6 minutes. And so instead of being ready at 11:15, the report was ready at 9:15 before the market opened, which was really important to the CEO. It was all because of a random phone call that I— or not a random email that I responded to back in, I think it was 2013 or 2014. Now that company is huge and everyone knows it, but there's, there's, there's— trust me, there are repetitive tasks that are going on in your business that someone's doing that can be automated, that can use artificial intelligence for. And once you do those things, you free up people to scale and do other things.

That's it. And again, it might be that there's a change in that person that you need, right? So if I no longer need someone to write all this marketing content or whatever, as an example, right, the question is that marketing person is not gonna suddenly be turned around and be something else internally, but you're going to be able to say, okay, I'm going to— I no longer need this person, I need a different kind of person, but I can replace this person with this person and have them do another job. And so, and from a, you know, from an expense standpoint, it remains relatively the same, or maybe it's cheaper or something like that, right? The idea is that you're finding efficiencies not just in the process but in the people that manage the process and all that stuff, right?

Yeah.

Again, we're not saying that— to be clear, We're not saying that only businesses that are, you know, that have these things are going to sell. We're not saying that at all. Okay? What we are saying though is that your attention and your understanding in these areas, okay? And your ability to be able to for yourself spot the problems, right? Spot the squeaky wheels or whatever to give them the grease that they need in order to make it as smooth as possible, you know, as you as you go forward. The The scalability and growth thing, okay, is an area in which there's a couple of things happening. The first is to say, how can I right now scale and grow my business now before I am ready to exit? Okay, and so the first thing that you can do right now is start to think about— in that process is start to think about what it is you want out of the sale. All right, you're gonna— we're gonna talk about optimizing the value in a moment. But in general, the ability to say, do I need— can I scale this more before I sell it? Right? I grow it more before I sell it. All right? That question might be yes, it might be no, whatever. The other side of the coin, other question that you ask at the same time is, do I need to scale and grow this? Or is this an opportunity that I want to present to the new, to the potential buyer to say, hey, Here's an area of the business that I didn't get to grow yet, but it would be a natural place for you to start when you take over. That, that, that means more to a buyer, okay, than anything else. You being able to say, hey, I didn't get to this, but I know this to be a case. And if you've got some documentation around it or an strategy or whatever that just hasn't been executed, even better, right?

Yeah.

These are some of the things you wanna come to the table with around scalability and growth.

Yeah, again, and Joe always talks about marketing— marketable inefficiencies. This is exactly a great one, is, hey, I have a plan, it's on the shelf, or it's on my roadmap. I haven't gotten to it. I don't have the resources to get to it. It would— we think it would cost XYZ dollars. We're planning to do some of it in 2024 and 2025 and 2026. But that can be something that a buyer can look at and say, man, I have this product. All I need to do is hire some additional people and blow this out to the rest of the world. Man, that, that's gold to them.

Exactly right. So again, and what can you do right now? Let's look at— again, make it a sit-down and just with yourself and make a decision about what it is. Where are you trying to head? What is your goal for 2025 or beyond? Okay, are you, are you considering selling the business? Okay, if you are, then you're going to want to start paying attention to this stuff. You're going to want to ask yourself about those growth questions. Okay. If not, then maybe all you need to do is to ask yourself about, am I growing the right way? Is the trajectory I'm on okay? Can I— what are the ways in which I can scale this business more, right? What are the ways in which I can grow this thing more? It's a question you should be asking yourself every year, right?

Yeah.

And hopefully it's at the end of the year, of the previous year, but so that you can execute things in the next calendar year. But again, if you're in first quarter right now, And we're at the very beginning of first quarter. This is a perfect time for you to be sitting down and carving out some time for yourself to be able to look at this stuff. Your customer and supplier relationships, John, like, I mean, there's, there's, right, this is an ongoing, this is a, anything that's called a relationship requires some ongoing management.

Yeah. And one of the things in my experience that I've forgotten, and I, not forgotten, in early in my career, I didn't realize the importance of suppliers, right? Customers are obviously important. They're paying you. They've bought your product or service. But suppliers, man, what I've neglected suppliers in the past, I regretted it. And I have fostered relationships after the fact with those suppliers because they are the ones that are supplying, whether it be raw material or people. If you have a talent agency that you're working with, like there's all sorts of suppliers out there that are Critical to your success. And just do not forget how important it is, as Jo said, to have a relationship with these people, to check in with them, to make sure you visit them, to make sure you talk to them, schedule things. This is a perfect time to do it. It's January. You know, you— it might be a little cold where you are. Where we are, it's certainly cold. It might be time to get on a Zoom and just have a conversation, pick up the phone and call them. They know they supply you with stuff. They want to hear from you. And your customers, certainly you need to understand, are you still delivering value to your customers? That's obvious. But don't forget about suppliers, to reach out to them as well.

Yeah, exactly. And to put it in context of, again, why is this important, right? Because again, if you were considering selling a business, right, you want to make sure that you're in a situation in which everything can remain at least as good as it is right now for the next, you know, 2 years while you earn out. Okay. So, yes, one of the big reasons to check in on this is to, A, make sure that you're not going to suddenly be like, uh, as I'm in the middle of selling the business, I get an increase in, uh, in pricing from one of my suppliers that throws, uh, the numbers off. Okay, because if that happens in the middle of due diligence, the buyer's gonna see that, the buyer's gonna, you know, whatever, the buyer's gonna balk.

It sucks when that happens because that happened to me. And it's, it's just a, it's a conversation that, that everyone should understand and everyone does understand. But when you have to, when there's other things going on in due diligence that people are finding, and everyone always does find things in due diligence, that's just the way it goes. It's just another thing you have to add to, well, this is the— and they're going— what are they going to do if prices increase? They're going to decrease the value that they're going to give to you because it's more cost to them and less profit for them in very general terms.

So that's exactly right. And the same thing on the customer side, right? What you don't want is suddenly, because you're either— because you're selling the company, whether it's related to that or if it's just a timing thing, a coincidence, what you don't want is to be like losing a giant client in the middle of due diligence.

Yeah. And, and then, and you don't wanna be hearing about it for the first time when you get an email after the fact saying, yeah, you know, PB&J Industries just fired us.

What? Right. Yeah, exactly. And by the way, they were, and they were 70% of our revenue. Like, that's the kind of thing, right? You, now hopefully you've got a better idea of what's going on. Now you could also be too close to these people yourself. Okay, so understand that as the owner, again, the founder, if you— this is the kind of news that you're getting in whatever, you've got a more significant problem, right? That means that something's been going on and brewing probably for a while that you're unaware of. But the point is, make yourself aware of these things, okay? And even if it's just to get into a situation where you know what's happening and you can prepare yourself, the business, you can stop selling the business. Right? If you know this and you can say, whoop, pull it up, stop, pull everything on hold, stop the presses, I gotta go fix this thing and make this whatever to get this back. And I'm not gonna go through the exercise of trying to move through with the sale of my company when this is happening because it will not happen.

Correct.

And so being able to make sure that you are aware of these things, and then again, and that's why John's saying take this time of year And just do it. Do a check-in, do a road show, go see how everybody's doing. What can I do more of? It's going to be a great thing for your business no matter what, right? It's not just about telling them you're going to sell this year or checking that stuff, and maybe you don't want to say that at all, or what— it's not about that. It's about just, just make a healthy business, okay? And you will have— you will be able to sell it.

Yep.

Make a healthy business. Right. Stop. You're planning your business to taxes or whatever you're doing, right? That's not the way you want to operate the business when you're getting ready to sell it. Things like that.

All right.

So moving on, the succession planning becomes— again, here's another one, right, John? I mean, it's—

Yeah, it's so important. And it's not just for— when people think about succession planning, they think about like the show Succession, right? We did a podcast on this earlier. And while that's— again, that keeps eyeballs and that keeps people subscribed to Showtime or HBO, whatever channel it was on. I think it was HBO. But anyway, um, there is succession planning that needs to be done throughout the organization because as people leave the top and people leave the middle and people leave throughout, you want to have people groomed for those roles, those key roles, right? So if you have a director of operations and director of finance, it's very important that if they leave, would be critical. Like, that's the way you should think about succession planning. If You should think of it from the perspective of if this person leaves, how damaging would that be to the business? If it is very damaging, you should have a succession plan for that person, whether it's the director of finance, the manager of customer service, or the VP of legal, right? Full stop. And you can develop these things, develop these people within your organization. It's much easier to hire and promote and better for the company to promote from within.

Right?

You promote from within. It shows a path for people, whether they're in the finance group, the operations group, or they switch around. They see people moving up, they're much more likely to stay. And you want to have that first option for people to stay when they see that. And succession planning is critical to any business. And that's one of the reasons why.

Yeah, no question about it. And look, we think about succession, about our own succession as the founders. And that's obviously an important thing too. But what John's pointing out here is that, again, the succession is really about all the management team, everybody in place, and especially people of importance, in order to making sure that you understand how you're going to basically change, you know, replace those roles, you know, as people go. More than that, having that leadership team in place at all, right? So ask yourself at the beginning of the year this year, do you have the people in place that you need to be able to remove yourself from the business, right?

Right. Are you doing finances? Are you doing 60% of the sales? Are you doing something that you shouldn't be doing? And by something you shouldn't be doing, you as the owner, if you're looking to sell your business, you need to be working on the business, not in it. And I say that all the time, but it's so important because when a, when a buyer is interviewing people and looking, and looking at the org chart and saying, oh, well, Where do the sales come from? Be like, oh, that's me. And you're the owner? That's a problem because you're going to be on the beach in Cabo or wherever you're going to be.

So let's be clear that you can't hire a management team the day before you put the, you know, the company on the market.

No.

Okay, you need to show that these people can do this, that there is a succession within the ranks, all right, that we know who will go where and what will go, because They will— the buyer will ask. They will go through every single employee. When I sold my company, when we sold Kinesis, we sat and went through bios of every single employee that we had with the buyer. Every single one. I mean, copywriters. We were— it's a digital marketing agency, right? Writers and who— what, right? Do you need Do we need these people? Because they are looking at every possible way they can of, A, making a deal, but B, when they do own the business, they want to know how are we going to integrate and what are we going to do, right? Is there— how much redundancy is there going to be? Now, we were— it was a strategic deal, right? We weren't being bought by a financial buyer, being bought by another agency, a larger consulting company, right? And so what they were looking was how redundant are we going to be if we, if we bring all these people into our organization? They were thinking about how are they gonna integrate and what the, what the deal, what the company, what their company's gonna look like after the deal's done. So the ability to be able to look at every single person and go, do we need that person? Will we need that person moving forward? I mean, that's the level at which they're operating.

Yep.

All right. So this is the, the next one is again is about due diligence. And, and we, you guys hear us talk about due diligence all the time, but understand what— let's talk really about what due diligence really is and how you prepare for it.

Yeah, I mean, what due diligence really is, is, um, an organization of your finance, legal, and operational documentation, right? It's, it's everything that someone that you're doing And the documentation behind that. So it's your customer lists, it's your financial statements, it's your general ledger, it's your insurance policies, it's your, you know, lawsuits that you have outstanding. It's operational documentation. It's the standard operating procedures, SOPs, that we have after We talked about earlier. It's all those things that someone wants to look at to say, okay, this company has everything documented. They, um, they have a process for looking at their financial statements. They have a process for analyzing their business. They have a legal review of their contracts. As an example, one of the things that happened to us when we were— when, um, when I was going through is, what is the process? I asked this question. What is the process to sign an agreement at your company? And 3 people looked at each other and they're like, well, my thing is I do it this way, and B is I do it that way. And like, what? You do it all different ways? Like, well, I use— you know, this was, this is legit— I use our real estate attorney because I went to high school with him. Okay. Like, I use our general counsel, um, because I have a good relationship with him. And the other one uses general counsel. It's like, well, when that happens, And, and those things, those 2 things are bad. That's bad when you have 2 different people reviewing the same type of contracts and then not knowing about the other one's contracts.

Right.

It's amazing how many, like, leases were, were signed as an example and using completely different templates. And that doesn't sound like a big deal, but when you use a template for a lease and you're signing a lot of them, there's various things in there that you want codified in one section. The rent payments, the increases, all those things. So due diligence is getting all those things ready so it can be in a package. You think of it like a virtual book of information that you're handing over to the buyer to say, this is how I run my business, this is the results of my business, and these are the standard operating procedures with which I use to run my business.

Exactly. What we do is we take everything, and I think most, you know, most people in this situation, their advisors or brokers do this, is that they're actually, you know, they're taking all this stuff. Documentation, and they're putting it in a thing they call a, you know, a deal room or a data room.

Yeah, deal room. Exactly.

There's all kinds of different things. There's software out there where you can capture this stuff. And now there's the AI stuff that'll help you even analyze, you know, these documents as they go in and write a synopsis of what the things are and, you know, make search really easy and all that other stuff. So there's really no excuse now for not having a shared, some kind of file server system the cloud, whatever, where you're keeping all these documents and all that stuff, and it's all organized. Okay, now it's a project to get that stuff organized. And look, we all— if you, if you're anything like— if your file server is anything like my computer, okay, you have a system, okay? And your system is probably not, you know, recognizable by any other human being. Um, it's definitely not going to be recognizable by a buyer, okay? So, but one of the greatest due diligence stories that I have, okay, is about, is about a client that we had, that I— we had that basically ran a fire— what they call basically a due diligence fire drill, right? And the, the mission was by start, start by asking everybody to collect certain documents quickly. Okay. It was basically ask the finance— the CFO for this, ask the market— the, the head marketing person for this, ask the head salesperson for this, whatever whole thing, and how quickly can they deliver the correct document when I ask for it. All right, and the reason that he was doing this, right, was, was a suggestion we made because it was about whether or not he could get people to do the things he needed to do, uh, and, and, and to demonstrate to his company that they were not as buttoned up as they were claiming they were.

So Yep.

underlings were like, no, no, this is easy, we have all the stuff, it's easy to get, whatever. And the CEO's going, okay, you're telling me this, But let me prove to see if it's true. And so this is something that you guys, you could actually do in your business right this week.

It's like a fire drill, right? It's like when you're in— if you've ever lived— I lived in Chicago, I lived in New York. And when you have a fire drill in your office and the fire marshal comes in and he gathers the 8th floor and he said, why did it take everyone so long to get to the spot where we're supposed to go? Because luck, fortunately, we didn't have a fire and we didn't pay attention when they sent around the fire stuff, the things that changed. So the operate— the due diligence, mock due diligence, is like a fire drill for your company, right? You're, you're making sure that when, when before a fire happens and before an opportunity to present due diligence happens, you have all your ducks in a row and you have— you can— you, it will take minimal amount of, um, work to pull all those due diligence documents together because you've asked people for these things in advance and they should have them organized.

That's exactly right. And so the lesson that you're teaching, right, everybody, is, guys, we need to get these things organized. And so we now, we need to have a place where all this stuff is. And by the way, I as the owner want access to every single thing we have the second I want it. So the reality is what you do is there's a project here potentially of organizing all this information into your own kind of file service thing. There's, there's the ability to add AI on top of it for search to be able to make it accessible and the whole thing or whatever. But when you have this, again, as you— when you have this as a standard operating procedure for your company, it's going to make preparation for sale that much easier, right?

Yeah.

And it's going to make your company run better and be more efficient and have all that stuff buttoned up anyway. So you're going to be more profitable, you're going to be more sustainable, you're going to have a healthier company even if you're not trying to sell right now. So the, the, the, right, this is the, this is the key thing that I think that we're getting out there today, which is that it may have been inadvertent, but I think that what we're coming across is that understand that all these areas that we're asking you to look at are just areas of your business that should be clean and healthy anyway. Right. And, and so, and that even if you're not selling the company right now, that's going to make you a healthier, better, more profitable situation. So there's no way that this stuff can hurt you, right? No matter if you're selling right now or you want to sell 10 years from now, having all this stuff and getting into the habit of doing everything this way will make the actual eventual process of actually selling that much easier and simpler for you to do.

Yep. Um, the value— yeah, yeah, value optimization. And, and this is about maximizing your business's valuation, right? So, so you What are the things you can do, um, Joe, to maximize your company's— your, your, your business's value?

Yeah, so the first thing I'm gonna do is I'm gonna say, let's look at existing books and make sure that I am— I have everything kind of buttoned up and that I'm doing all my accounting right. I don't have major errors. I'm not double entering things or whatever. And that I've got, you know, that I fundamentally have my accounting straight. That's the first thing I would say.

Yeah. And another thing you look at is, once you get those, the sort of, again, the building blocks, the sort of table stakes, you can look at things like customer retention, right? If there's ways that you can extend that customer— not extend that, but increase that customer retention. You know, I would look at— Yeah, go ahead.

The next thing, the other thing I would look at off the top of my head is like, all right, let's look at the customer concentration.

Customer concentration. Are there ways to offer discounts to people to do subscriptions and extend contracts? We were, back in my day when we were doing consulting, it'd be like, hey, offer a 2-year deal, offer a month free, you know, those types of things. And we charging by the month, it's like you do a 13-month contract for 12 months or 25 for 24. And those were popular because, hey, you get, oh, you got something free. And you're giving them a deal for additional revenue for a longer period of time. So you keep that customer for a longer period of time.

What if I could do analysis on those customers and stuff to figure out, am I actually profitable in delivering these services to everybody?

Yeah, the customer profitability is a big thing because that will come up is when you have a company that's that's barely profitable or just profitable or even highly profitable. It's like, how many of your customers are profitable? And people look at you like, wait, what? We don't measure that. Like, well, that's something you should look at. How many resources it takes to deliver the services that the company buys.

Right. Yeah. And so the value optimization comes in 2 flavors, right? One is the inherent or latent value that is existing and kind of lying underneath the surface of everything, right? In terms of the things that are relatively low-hanging fruit things. Like the books, like making sure that you've optimized everything appropriately or whatever. That's one way. But then the other thing is to add new stuff, right? To build new things out. Like you said, like the subscription model. Like, is there a way in which we can, you know, are we undercharging? Right?

That's a big one. That's one that people always are hesitant to do. I was hesitant to do that. And it can be you're limiting yourself, right? If you're not If you don't think that your company is delivering value to your customers, that's a problem.

And most of—

a lot of the founders, I shouldn't say most, many of the founders that we work with and the owners we work with are vastly undercharging for their product. They're delivering an incredible value and they just, they don't believe that they could get away with or that their customers will understand if they raise prices. Trust me, In very most— in many cases, they will understand that.

So just don't— Just ask yourself if you stopped buying eggs because the price of eggs went up 75%.

There you go.

I mean, honestly, that's the thing. So we're all afraid of it, but you're right, it comes down to basically like a limiting belief, right? That, oh, I can't get away with this, whatever. Now look, there's always going to be a limit, and you're going to find— but finding where that limit is is actually the job.

I was guilty of this this week, Joe.

You undervalued what we do.

There you go.

Um, it happens to all of us. Um, and the last one, look, the, the strategy and the timeline for exit becomes just as important a part of the entire thing as anything else.

Yeah, I mean, all the things we've talked about today and all the example projects are, you know, come from our customers come from our experience. These are all examples of things that you should be doing if you have a desire to sell your business. Again, drop us a line if you do have that at info@myextension.com. Sorry for the plug, but, but, but all these things that we're talking about will make your business resilient, to a degree bulletproof, and definitely more saleable because it will It will demonstrate to the buyer and show to the buyer that you care, that you understand that your business isn't perfect. Trust me, they know that your business isn't perfect. But if you acknowledge that to them and you've told them that, yeah, you're working on, on, on your customers and your compliance and all these projects you've worked on in the last 12 months, that's going to demonstrate to them that this person really cares, um, that they, that they know that they can improve things. They know that they can diversify their customer base or do whatever it happens to be, have due diligence ready quickly.

So much of it is about trust, right? And what happens in these situations is that, again, think of it from the buyer's perspective just for a second. Okay? If you were going out and purchasing a company that was where the revenue of the company was $10 million, okay, that you would want to make sure that what you were buying was something that was going to hold up That was going to be something that you could run, that was going to be something that would continue to do what it has been doing for however many years it's been doing it, right? And that there were ways to be able to relatively quickly grow it, right? So that I, you know, for value purposes, right? If in the case of that situation, the ability to be able to, um, to, to, uh, understand that Sorry, having a plan in place that says, I'm going to do this, this, this, and this in order to raise the value from this to this, right? So that I can then sell the company at this point in time, right?

Yeah.

That's an exit strategy. That's the idea. And what you're doing is telling yourself, I need to get from here to here, and here are the 4 or 5 things I need to do in order to do it. That you can start that. You can do a vision board right now that says, what is it gonna look like after I sell? You know, what, what's a, what's an attractive company look like to a buyer? Can I take my company and can I manipulate it and show that this is what it's going to be in order, in terms of getting the sale done, not just in terms of running the company from a day-to-day and growing its, growing its revenue and things like that, but growing the value in the eyes of buyers.

Yeah, and, and again, January is a perfect time to do this, right? You've come back from— hopefully you come back rested and ready from vacation. You have an opportunity. Hopefully you can carve out some time, or you shouldn't— not hopefully— carve out some time, do this, look at these 10 steps, and realize that this system is, is a tried and true proven system to help, to help you prepare your business for sale, whether it's in 6 months or 2 years.

That's exactly right. So hope you guys got some information out of this. Again, if you've got any questions about anything, if you want to ask, you can ask us anything. Drop a line at info— to info@myexitengine.com. You can find us on LinkedIn. I'm Joe Stapleton. That's Jon Kniff. This is the Exit Engine Podcast. You find us wherever podcasts, uh, you know, are found. Um, and come, come, uh, come say hi on LinkedIn. Just drop a note. Come find my thing. Just send it, send a message. I answer just about anybody. Say hi, ask a question, whatever you like. If you're thinking about this over the holidays, don't hesitate. We are very, very open to doing this. So just ask us anything you like. We're happy to give you an answer. And if you'd like to talk about something in the new year, obviously you can do that as well, about a project or anything else you want to— you may want to talk about. We're happy to do it. All right. Hey, John, I know that we— this is coming out after Christmas, but we are recording this before Christmas. So I want to say— Very happy holidays. Merry Christmas to you and yours. And looking forward to a healthy and prosperous 2025 with you and all of Exeo.

Joe, happy holidays to you. And May, I'm very happy that your son will have an extended Christmas, an extended holiday season.

Hanukkah is a part of this whole thing.

He gets all sorts of present days.

So that's good. He's a lucky kid. That's for sure. All right, man. Um, have a great one. Thanks so much, and we will talk to you soon.

Thank you.