The Exit Engine Podcast Episode 44: The Backdoor to Business Value

Welcome to the Exit Engine Podcast, episode 44. The, the things that they have, like, I, I— we didn't have any of this stuff. We— it wasn't even— it was barely even available.

Like a good example of that, batting gloves.

I have an entire bag of batting gloves.

Batting gloves in— if I had worn a batting glove when I was in— when I was 12, I hate to think what my coach would have called me.

That there was that. And the thing is, when you got something, you got it because I got it free at the Yankee game, not because I bought, purchased batting gloves, right? If I was wearing a one right-handed, left-handed batting glove on my hand under my glove because that's what they all— that's what Bucky Dent was doing or whatever like that.

Yeah, speaking of being at the Yankee game, guess what they were giving away at the Yankee game? Yogi Berra bobbleheads.

No kidding. Oh my God, see, that's something— that's a collectible.

I know, I should have kept it, but I didn't.

So, so now, now the big thing now is all the first graders right now, or everybody right now, the big thing is— so, uh, is collectible cards is now like way back in. Right. Interesting. And there's the Pokémon thing, which is its own kind of separate situation. But these baseball, now football cards have now, are now like basically replaced the, the like baseball cards as like the thing.

No way.

So you talk about a racket. Okay. And this is a perfect segue actually to what we're gonna talk about today. Yeah. Because, because the, the, what we're gonna talk about today on the Exit Engine Podcast.

Yeah.

By the way, it's not too late to introduce this. I'm Joe Stapleton. That over there is John Kniff. Hi, John.

Hello, hello, hello.

Um, welcome to the Exit Engine Podcast, where, uh, we're going to talk to you guys about the value and salability of your business and how you can actually set your own exit trajectory and exit one day on your own terms. Um, but today what I want to talk— we want to talk about is we've developed basically kind of like a playbook, right, John?

Um, yeah.

We have the method, okay, a framework by which anyone can, uh, can basically be able to examine their business, figure out how much it's worth, uh, create a value, uh, create a target value for what you want it to be eventually, and then, and then also, and then also adjust and measure your salability over time, which is a whole other piece that we'll talk about that specifically.

Yeah.

Before we get into that, I want to talk about collectible cards for a second because This is an interesting business model and something that I think, um, that again we can all kind of learn from. So my first grader is like big time into, into, uh, trading cards, but particularly football cards.

Now let me guess, let me guess his favorite team.

Yeah, go for it.

Philadelphia Eagles.

Yes, exactly right. Of course. However, he is right now on the side of— there's 2 sides to this business. Right? And from— as a consumer, there's 2 sides. One is the getting and opening of packs of cards, okay? And this opening itself of packs of cards is a dopamine hit the size of which, right, you can't— right, you can only— online shopping probably compares to.

Well, it's funny. So girls do the haul videos and boys, I bet, do the— oh, like, there's a bunch of YouTubes about this.

That's exactly right. So he spends— he's— there's a lot of— this is one with, you know, one of the things within his YouTube allotted, like, allowed stuff to watch, um, are these basically these, these guys who are collectors or have stores or whatever, and they just— they're sitting there opening cards, opening packs of cards with— and they've got, uh, you know, if you've seen this stuff, they've got like, like a camera attached to like their head, and then they've got their cell phone camera too.

What a country. What a country we live in.

Yeah, it's insane, right? So this is a guy who's like making money on as a card thing and on YouTube, right? Because he's got the YouTube channel and so, and he's got a, you know, a million people following me. And then there are all these kids that are watching this stuff because the hardest part about the card thing is the other side. So there's this one thing is packing, what, you know, unpacking, opening.

Yeah.

And the kids love it because it's like, give me a pack of baseball cards and I might get something and I might get something. And of course, as we all know, right, the industry is set up to be a self-fulfilling marketplace. Right? And in other words, what that means is that there's only a couple of card companies that exist anymore. Okay, Panini is the company that now has bought all these different old, uh, things, including Donruss.

Wow.

You remember Donruss baseball cards, right? So they own Donruss now, whatever. So there's Panini, there is Topps, and there might be some smaller ones in there. I don't know, I haven't seen them. But you— what you want to do is check the fine print, because even things that look like they're different are actually owned by Panini. And what they do, what the card companies do— and again, this is the other side of the thing— is the value of the collection and where you're going and what you're collecting, right? And so—

Amazing.

To be a card person, whatever that is, right, you, you are looking at, at generally at— look, I guess you could just look at it for fun, and I have these cards and it's fun to trade and whatever. And that was kind of like the way it was when we were kids. Right? Like, you buy the pack of thing for 50 cents. It had a piece— stick of gum in it that was from 1950s, right? It was hard and crunchy, right? Remember that?

Terrible gum.

Terrible old gum that was stale in the pack and whatever. But the cards were relatively cheap. You bought the thing, you look through it and whatever. Oh, and what you were looking for in my day was like, oh, the favorite player and the thing, right? There wasn't like this notion of like value around the card. or keeping the edges nice and putting them in a plastic sleeve and all that stuff, which is part of this process now. All right, so again, I'm getting to a point here.

Yeah.

The idea is that in the card situation, the card trading card industry, you've got narrow competition, right? You've got basically 2 or 3 big kind of 400-pound gorillas in the market, and what they're doing is creating— and their market, they are creating a marketplace for themselves. And the way that they do that is because they create— they own the, the ability to create value. And the way that they do that is by printing, you know, special insert cards and printing low numbers of them and randomly inserting them into card packs. And so what this does is fuel the dopamine hit of the, of the kids opening the cards because they're going to get something and they can see it. And the way that they do this, John, is they they, they on the YouTube videos is they slowly move the card up because they know, because they do this so often, what the, what the standard kind of like, you know, for this particular, you know, uh, Panini, uh, whatever, you know, they get— they create these sub-brands, okay, that have special things. And there's gonna be an autograph pack and there's one autograph in a box not a pack, but in a box of 30 packs. And the box of 30 packs costs $80. So you pay $80, you get a big box of cards, an individual, you know, with like 5 or 10 cards in a pack, and you've got, you know, whatever, however many those are. And now you just sit there and you're just opening packs. And as you open packs, you know that there's a chance there's a— that there's a special yellow design card and a special insert that's got a, uh, you know, is, is called something else that's got a metallic thing to it. And then there's rated rookies and blah blah blah and all this stuff, right? And so you're moving the card just to see, oh, it's yellow! Oh, it's a yellow piece! Oh my God, I got a yellow one! And this yellow one is, you know, one of 300 that are numbered and randomly inserted into these card backs. So the The, the idea is that here is about value, okay? And so most of the kids at this stage are open the cards, open the cards, oh my God, look at this stuff right now. Now they're just starting to learn like something's more valuable than another. How come I didn't get that autograph card? Or it's unfair, I didn't get the, you know, special yellow edition of the thing or whatever, right? But all it wants and makes them do is move on to the next pack. Get me the next pack of cards, I don't care how I get it. The other side of this business is the value of those cards and the collecting aspect, right?

Right.

How do you build value over time? And so what I'm trying to teach my 7-year-old is it's one thing to have— take all this inventory in, right? I'm buying cards to have in my collection. Most of them are going to be basically garbage, okay? Are, are barely worth the paper they're printed on. But how do I identify and know what the value of this stuff is, right? How do I learn, right, by going to card shows, by talking to people, you know, at the stores who are experts in this stuff, what the high-value cards are?

And how—

and what is my goal in having this collection? And so when it comes to— it was not too, not too far, not too soon, I'm going to land this plane and to talk about the fact that when you're looking at the value of your company is no different. Okay? So what we don't— we don't know what we don't know. And a lot of times what we've— we come across are people in this job are people that have misaligned their value, right? Misunderstood what their value is. Definitely misunderstood what their sellability is, which is a whole other category we'll talk about in a second. And, and, and have no— and because they don't know that, right? How do you set an exit trajectory When you, when you're not really sure what the value is and you're not really sure where you can go.

Yeah, if you don't have your goal— excuse me— if you don't have your goals established, right, of— and a goal, a goal in this sort of example is I want to realize I want to sell my company for $35 million. Great, your company's worth $17 now. So what are you going to do between now and the time you want to sell your business to double the value of your business. Because if you don't do that, how are you going to know when you get there, right? It's like, it's like going on a road trip. I'm going to go on a road trip. Well, no one ever says I'm going to go on a road trip. They say I'm going to go to Bar Harbor, I'm going to go to the Jersey Shore, or, you know, Hersheypark. They get in their car and they look and they, they say, okay, well, I got to drive here and I got to do this and I got to get gas and I have to stop and I have to get some food. Or I have to look at a hotel if I'm driving to Nashville. It's the same way when you're doing a trajectory for your businesses. What do I need to do along the way in the next 2 or 3 years to double the value of my business or 50%? And can I do that?

And is it possible?

Because those questions are equally as important as what's the value and then is it realistic?

Exactly right. And then the question is, It might be realistic from a percentage standpoint. And again, we'll talk a little bit about these 3 big areas of the, you know, 3 big buckets that we're looking at that hold all the keys to this.

Yeah.

But the idea of being able to, in order to know what's possible, right, you have to take a next step. Okay? So basically, when we look at total exit value at ExitEngine, what we're starting with is, What is the, what is the situation your company is in right now? And it's not just about the earnings. It's not just about the profitability. It's about 12 different areas of your business, right? That basically have an impact into that, that will be boiled down into 3 basic buckets. Those 3 basic buckets that control all of this are your, are basically your, your revenue, right? How, how you can grow revenue, how fast you can grow revenue. What is your revenue concentration like across customers?

Blah, blah, blah.

What is the— right, what— where does all that money come from? How much does it cost you to get— right? And then the next piece is that cost piece, which is, okay, what are the— what is the cost? It— what does it cost me to provide this service or to make this product or to do business in general? You know, cost of goods sold is a general kind of term, right? But the reality is that that's your— it's your cost bucket. You are— where you—

where—

what can you affect in your cost bucket? that changes potentially your value, John?

Yeah, I mean, you're looking, so the revenue side is fairly clear. It's like, okay, how can I grow revenue? How can I grow revenue from existing customers and new customers? And expenses on the other side of the coin, to Joe's point, is it's either cost of goods sold or cost of services, however you deliver your product. If you're a service company or a product company, you have a cost associated with it. And how can you alter the economics of your inputs, right? Can you get your, widgets, your widget inputs for cheap, for a lower price? Can you get your services that go into your component parts, your products for a lower price? And that's the expense side. How efficient can you get? And by efficiency, I mean drive that, drive that expense side of your budget down.

Exactly right.

And there are always—

yeah, yeah.

And the third part is, is your multiple, right? Is your EBITDA multiple. So after you do the revenue and the expenses, you're talking about a multiple of EBITDA that companies are valued on and sold for. And it varies across industry. It can vary across size. So as you get larger, typically companies are willing to pay a higher multiple for more revenue, which makes sense, right? I mean, if you're making— if you're generating more revenue, you're generating more profit by definition. And companies, as you get higher, $20, $30 million in revenue, and the corresponding EBITDA is going up, you're likely to sell it between 4, 5, 6, 7 times EBITDA. And that gets typically higher as your revenue grows.

Right. And as your health grows. So the reality is too, is that the multiple changes, right? It has a direct correlation. The multiple is directly correlated to the other 2 buckets, okay? As well as some outside factors. Like, like your industry, other recent comps, things like that. And we should make a note too, Jon, about EBITDA. We use EBITDA when we talk about this stuff because it is the most widely accepted valuation method. Um, however, there are situations where it's not the best method.

Um, it's like, it's like democracy, right? It's like the least worst way to value a company, right? Of all the, of all the things, you know, and, and we joke about that, but You look up Warren Buffett, if you want to get a good laugh, look at Warren Buffett and EBITDA. He eviscerates it. And he's right, because it doesn't have your interest on the debt that you're paying. It doesn't have the amortization that you're getting, the depreciation that's in there. Again, it stands for EBITDA, earnings before interest, taxes, depreciation, and amortization. And what it's saying is, it's not saying that that's a realistic portion You know, a realistic part of the business that could be run. It's no, it's just a metric that can be shared across companies that people can compare companies of different, frankly, of different, even different sizes. And they can use this metric by putting things back into net income that are again interest, taxes, depreciation.

And it gives you a relatively good idea of the health of the business. Okay. And so that's what we— that, that's really what it does, right, is it potentially says, okay, the cash flow is decent, this person might be able to pay themselves a lot of money. We're not going to have that payment to that person when we take over the company, so it's not really fair to, to, to leave those things in as a part of the business. Those things should just go back into earnings. Um, so anyway, that's—

Yeah, and that's— that can be like seller's discretionary earnings is like another metric. Is you— so what you're doing in that case is you're putting Costs, or sorry, you're putting expenses back into the business so that it would run without John Kniff. As an example, if I'm the CEO of a business and I'm paying myself a ton of money, I have all sorts of cars, I have all sorts of people on the payroll that wouldn't be there in the future. The seller would add that stuff back and say, this is a picture of the business as it exists and as it would exist in the future. Right.

And so you've got EBITDA, you've got SDE or seller discretionary earnings, you've got cash flow. Those are— and potentially sometimes you even value the company on top-line revenue. So there are many ways to skin the cat. You know, when it comes down to your particular business, basically it's a, you know, EBITDA is simply the best way. Again, the best of the worst ways we think to be able to do this stuff. It's the most common and widely held, you know, situation there is. And again, we're, you know, we're talking about a situation here where You know, we're selling the entire company, not just the assets of a company. So we should point that out too, right, John? So, you know, keeping in mind that we're talking about the overall— we're in a situation we're going to talk through today, we're assuming that we're selling the entire company as an asset, as opposed to the individual assets in a company. That's another way to do it.

Yeah, the whole company. You know, in other words, you're buying the assets and liabilities, and depending on the size of the business, that's either Very, very common. Or smaller businesses, it's usually what we work on. I'll speak for ourselves, is we work a lot on asset sales, just asset sales, you know, or certain substantially all the assets of a company.

But really— In that case, you'd be valuing just the assets. You'd be leaving the liabilities, would not be part of the transaction. And so therefore, the seller would still remain, you know, on the hook for liabilities and that kind of thing. And hopefully you're paying those off, obviously, with the proceeds of the sale or something like that most of the time. So, but in any case, So, again, for today's example and what we'll run through with our total exit value system here is we're going to rely on EBITDA as that kind of— and the multiple of EBITDA as the way that we do the value multiplier. Okay? So we know we've got 3 big buckets, Jon, right? We've got the top-line revenue and the ability, the growth of the business from an outside perspective. And then we've got the shrinking, hopefully, or the reduction of expenses through efficiencies and other means that will basically reduce, again, reduce the costs, which would also raise the value, right?

Yep.

And then, of course, you've got the, again, you've got the multiple, the multiplier, the multiple. And that is something that, again, that comes as a combination that is A premium multiple is paid for businesses that are very, very, very strong in the other 2 categories.

Yeah. And these multiples, just to caution everybody, is a lot of times we deal with owners and they said, oh, our industry is 7 times revenue or 7 times EBITDA or 6 times EBITDA. Or they saw a newspaper article where one of the companies that they think is a competitor that sold for 5 times EBITDA.

Well, yeah, that happens.

But oftentimes, you know, in smaller companies, you're not getting— I mean, there's a reason that there's an average, right? The average is—

Right.

Average means half above and half below. So if the industry average is 4, then half the companies are gonna go above that, half the companies are gonna go below that. And we've worked with companies on both sides of that ledger. But you gotta, you know, founders tend to be optimistic about their businesses. They wouldn't be an entrepreneur if they weren't. And we have to just caution them to say, sometimes you fall on the lower side of the scale.

Right. And of course, our job and your job as the founder in this situation, in order to make a successful exit trajectory, is your job is to try to right that ship, right? Is try to actually raise your multiple by what? By being healthier, Right? By showing more sustainability, right? And frankly, in terms of when you have your stuff together, your multiple will take care of itself because you will be in competition with other people, you know, who want to, you know, the people who want to buy your business are not just looking at you, probably. They're looking at others. And if you can be the one that stands out because of your health and sustainability, right? And because you meet the— not only because you meet the criteria of the, you know, of the person who's buying the thing, but because you You have followed the rules and you've removed yourself from the business on a day-to-day basis, right? You've got a strong management team. You've got good profitability, right? You're showing that you've found, you know, you've become as efficient as you possibly can. And maybe you've left, again, some of those efficiencies on the table for the next person to be able to do, and you know what they are and you can talk about them, opportunities. So, you've done all the right things. That high, that multiple is going to go up. You're going to get a premium for it.

And yeah, and I want to correct something I just said because I realized I misspoke. Half above and half below, the middle value of that is the median.

Median, right?

Yeah, so I, I misspoke. I don't want to get notes about it, so I'm— we will if I don't correct it. So just an FYI about that. Great call.

Yeah, always better to, uh, CYA, right? That's how we do it. Um, so listen, but guys, this is, uh, you know, how are— so let's just talk about again, how do we We got 3 big buckets here, okay? Inside those buckets are ways to grow.

There's—

there are so many ways to grow revenue, it's crazy, right? So there— I mean, there's so many potential things that you can do to grow revenue that that's obviously one relatively easy place to play, okay? However, that said, sometimes companies are already doing that. Sometimes they've already got the pedal to the metal. Sometimes the revenue is as good as it can— it can be. Right? Or it can only grow at a certain rate.

Yeah, exactly. And meaning there's diminishing returns or, you know, one of the things I think of is, you know, you don't— getting revenue and generating revenue sometimes is a crutch that companies use because they think it's the only lever, right? Because, again, they have salespeople dedicated to it. So let's say that you have salespeople dedicated to revenue. And they're incentivized to get you more revenue. So people oftentimes think that that's the only way is getting more, getting more, getting more. Well, there's other sort of different ways of having more quality revenue, right? If you're going back to one customer and you're growing revenue by giving them discounts, and so you're— just think of this scenario as you have 18 customers, one of them is 34% of the revenue. You're going back to them giving discounts, and so that, that revenue percentage goes up. So there's, there's possibilities where revenue growth can actually make you look less attractive to buyers because you're being more reliant on that one customer.

Right.

And depending on how big the customer is, you could have one person be responsible for making the revenue decision and say, hey, let's, let's look for other vendors. And then you're really in trouble because a larger portion of your company's revenue is derived from that one customer. It's gone up from 34 to 47, let's say. And the quality of the revenue from a buyer's perspective has gone down. So you really need to work on not only generating revenue, but generating revenue from new customers, from new products, from new sources, so that you're not just degrading the quality of your revenue, even though you're growing it.

Absolutely right. And again, you may be at a limit to what you can do in that revenue thing and where the other place, obviously, that we find what we call latent, latent value or hidden value, right, is in, is in the, is in the costs section.

Because, yeah, because there's not oftentimes, oftentimes it's one of those things where what we found, and I'm guilty of this, I've been guilty of this in the past, is, oh, you don't task one person with doing something, you task everyone with doing it. And Joe, what happens when you have a company and you have a, you have something that No one's responsible for, yet everyone is responsible for. Does it get done usually?

No, usually, unfortunately, that's the way it doesn't get done.

Yeah, because if you, because like, if you have a salesperson Martin and you have a salesperson Serena and Martin is bringing in revenue and Serena is bringing in revenue, guess who's responsible for bringing in Martin's revenue? Martin. Guess who's responsible for bringing in Serena's revenue? Serena. If so, if you have those people, they're going to do— they're going to generate revenue. With the cost side of the business, if you don't incentivize people, your CFO, your COO, your director of operations, whoever it is in your organization, with decreasing the cost— I mean, the call we had earlier today with, with our— with, with, um, the company that we talked to, um, early at 9 was everyone was incented with lowering expenses. I wonder how that happens, right? I wonder if that does happen. And oftentimes when everyone's incentivized or everyone's— if everyone's incentivized, that's a good thing. You really need to make people responsible for consistently and constantly looking to lower the input costs of your business.

That's exactly right. And look, some businesses are obviously cost-heavy, right? There are more businesses, some businesses are more capital-intensive than others, right? If you're an online business, if you're a shop, if you're a dropshipping place, right? Obviously, your overhead is really low. Your costs are all marketing, right? Everything that kind of goes into that is relatively short. And again, it's not a great example because that's not maybe not a company you can really even sell. But at the end of the day, That's just a good example of showing that basically the only thing that, right, that they're a top-line revenue-generating thing where the costs are almost nonexistent, right? And so, you're going to have a hard— that's the kind of business that can only grow through top-line, expanding top-line revenue, and probably expanding into other product lines.

Yeah. And with the flip side is like a manufacturing business or a restaurant business, right? I worked in the restaurant business when I was younger. And I was way too young to sort of know all the inputs to this, but like what I figured out later is like, okay, like how much can you buy your liquor for? Where are you getting your shellfish and where you're getting your seafood? And constantly the owner of that restaurant was constantly looking at different vendors. And as long as the quality was the same, is how can I get, uh, you know, codfish or, you know, whatever the other— I can't think of the name of it, but there's other fish that could go into like fish and chips. It's like, if I can get that for a buck less a pound from another vendor and the quality doesn't suffer, why wouldn't I do it, right? And so for those businesses with high input costs to making their product— manufacturers, restaurants, any of those things— they need to constantly look at lowering those expenses.

And one of the ways, obviously, you know, in today's world that you're going to use, you know, one of the one of the tricks you're going to use, right, is technology, right? And so you're going to try to use whatever systems, whatever you can build to be able to find efficiencies and to make those things more efficient.

Totally.

ERP systems. The company we talked to this morning, one of the big values in the whole thing is they got a giant, well-integrated, you know, enterprise resource plan, you know, planning system. And that basically, you know, everything runs through it. All the sales, the CRM, the production, they can find out any piece of information about anything in the business with a quick query into this system. And their efficiency in the whole thing is so good that they'll have a hard time making it more efficient than it is.

Yeah.

And so for them, again, their growth in the whole thing over the next few years is probably gonna have to, again, go, not come in this case, not from finding more efficiencies, but for adding basically product that helps them expand revenue.

Yes, exactly correct. And what that will do obviously is that, you know, as we mentioned, that will affect the 3rd bucket, right? The 3rd lever that we can pull. We've talked about revenue, we've talked about expenses. You know, as you go up the chain and as you grow revenue and you grow your EBITDA, you will naturally get a larger multiple for more EBITDA. And that makes sense, right? Does a company want to buy 3 companies that have a total of $9 million in EBITDA or 1 company with $9 million in EBITDA? Again, all things being equal, they would rather buy the— you know, they'd rather go through 1 transaction to buy $9 million in EBITDA as opposed to 3. Again, all other things being equal, and there's maybe there's different products, different sets. But, but in general terms, the $9 million EBITDA company is going to get a higher premium than the collection of 3 $3 million EBITDA companies.

That's exactly right. So again, when we're, when we're working with founders, we're working with people through this, right? Then what we're trying to do here is set an exit trajectory, right? Understand where we are right now, where it is that we want to head. And then now we can look at a plan that helps us get there. And that first part of the plan is not magic. It's just math. All right.

Yeah.

We can't scale what we can't measure, and you can't exit what you haven't engineered. Okay. That's my, that's my new—

I like that a lot.

Okay. So I'll say it again. You can't scale what you can't measure, and you can't exit what you haven't engineered. Okay. In other words, you, in order to be able to get out of this company and sell it as an asset for as much money as you possibly can, You're going to need to scale it. In order to scale it, you're going to need to—you need to be able to accurately measure it. All right, and essentially what that means is that you need to be able to say, okay, here's how I value my company right now, and I—and if I—as long as I have basically like nine data points, all right—I should be able to basically measure the my value—the value of my company—not the revenue. Not how much money it makes, not the earnings, the value of the company as an asset. Okay.

Yep.

Once I can do that, now what I can do is I can project, right, how I'm— I could— I can get to a place that, as Jon pointed out, in terms of your journey, I can now know where I'm going and say, I'm, I'm here right now, you know, and I want to end up here. And so, you What's gonna show— what, what we can show you and what you can do with our calculators, you can see exactly what I need to do in order to raise these 3 buckets to be able to get me to that place that I want to get to.

Yeah. And if I— and if you're able to add, let's just say, 6% in revenue and 3% in, in expense, expense reduction efficiency, um, then you'll, then you'll able to realize a, an additional multiple, an additional 1 or 1x multiple on your, um, on your EBITDA. So again, you start with something, you have a plan, and, and that plan can, can be, oh, I'm gonna add 2 salespeople, or I'm gonna require this for, um, accounts. We're gonna go, we're gonna move up the chain in our average accounts, so we're not gonna target these smaller companies anymore, we're gonna target bigger companies. And this is all part of a plan. Oh, we're gonna change our sourcing to Getting 80% of it now from a lower-cost provider. Again, provided quality doesn't suffer. These are the types of things that you do on your journey and that we guide you through this calculator to say, this is where you are, this is where you wanna go, and this is how you're gonna get there.

And then that's, that's good for setting a plan, right? If, if I can grow my business X% year over year, if I can reduce my expenses by this much year over year, Right? If I can raise my multiple to X, right, then I will be able to achieve this number. But the— what— but that's— and that's great because that's, again, what, like we said, you can't scale what you can't measure. So the first thing you have to do is be able to accurately measure that. If you can do that, now you're in the ballgame. Okay? Because 2 things are happening simultaneously, whether you know it or not. The first is that you have figured out how to value your company and you can actually keep your finger on the value of that and you can measure that value over time. The second thing you're doing is you have just set your exit mindset because you have thought about your business as an asset and the way that it will be sold at the end, right? As opposed to just being inside your business and working it every day to grow revenue or to solve problems or put out fires or any of the other things that you're probably doing as the founder of the company right now. So the reality is that once you have the— once you just take a look at this calculator and do this calculation, you have now started to change your exit mindset. And that's the most important thing that you're going to do over the course of the work that you do here at ExitEngine or anywhere else where you are getting ready to sell your company at some point in the future. So we've got this calculator, right? You can actually give us a call. We'll take you through it if you like. But the most important thing to know is that there are ways to measure your value. So figure out where you're— the lesson is Figure out what your value is however you can. Understand what your value can be, okay, and how and what you'll need to do. What areas will you need to examine and then change, affect, grow, reduce, whatever, right, in order to be able to make— to, to, to hit those projections?

Yeah, and, and one thing, and I think we can— which I, I should have taken a step back and sort of realized These are all— these are a lot of the quantitative things that we're talking about, right? They're quantitative. These are numbers-based things, right? It's like we're talking about raising revenue, we're talking about EBITDA multiples, and we're talking about reducing expenses. There's also some qualitative things you can do in general terms to make your business more attractive, right? You— again, Joe does a really good job about talking about this and saying, do you work in your business or on your business? You know, do you have generated clean financials? You know, are you incorporated? Have you consistently grown? You know, do you— have you consistently shown a profit? Are there major blips in your financial statements that require a lot of explanation? If your financial statements require a lot of explanation, and when I say explanation, I mean like, what if you had a really bad year in 2018 and 2022 for sort of unrelated reasons, non-pandemic reasons? Well, And it's going to cause questions. You want to get in front of that and discuss it. Do you have clean tax records? Right? Have you filed your taxes for your business? Um, these are types of qualitative things that again will take time if you don't have these things. But that— this is why sometimes it takes upwards of 2, 3 years when we start working with a client to help them fix these things. Because what a buyer What a buyer wants from a company is they want consistency. They want predictability as much as possible. The future is uncertain, certainly, but if there's a track record of stable profits and growth and a stable industry, that goes a long way. And it's been audited and you're telling the truth to the government, and if those things match, like, right? Income statements and P&L statements do not exactly match what's filed with the government for a number of sort of crazy reasons. But as long as they're singing the same tune and they're showing similar numbers, like you got to group your stuff differently for tax purposes versus the P&L is typically presented. So, but you need to have those tax returns. If you don't have tax returns, very big red flag for investors.

Exactly right. So there are, and again, we have access to them. You can go and you can send us an email. You can go to myexitstrategy.com. At engine.com, you can find these 12 points kind of posted everywhere. We talk about them all the time. We talk about many of them, many of the key ones a lot, but there are, as John pointed out, there's about 12 different things that you need to do to look at this business. So again, as you're, you know, where does the value really come from, right? And again, it's these, there are 12 different places That the overall value of your company will come from. It'll— they will be idiosyncratic. The amount, how many, will be as unique as, uh, as every— as a snowflake, right? They will be uniquely yours. They will— the combination, the recipe for your growth will be different from even from the next person in your industry.

Okay.

Yeah.

And they'll sometimes, like, you know, we talked to somebody actually a long time ago. I talked to somebody who's like, He had an app on his phone and he could look at all those things, you know, in one shot. That's not necessary. But like, if you have— what you need to do is you need to be able to look, you need to be able to know those things that are critical for your business. And as Joe mentioned, sometimes, oftentimes, most times I should say, they're different across companies. But the fixes are different, but they all involve these 12 things that are Sometimes they're very important. An ERP system can be particularly important for companies that are buying a lot of materials. A CRM system can be particularly important for a company that's built on sales and marketing. So again, it's idiosyncratic, but they're all sort of involved. All the 12 points are involved in some way, shape, or form in every company we've worked with.

And so that's where— and so that's how we're deriving the value. Right? We basically are understanding the financial situation, right? We see, we've looked, you have looked under the rug and behind the couch and everywhere you can to be able to figure out what might be missing or what might be contributing to your value. And finding someone who can find ways of looking at your value that you can't see is always going to be imperative. But once you understand what the valuation is made up of and where to look, now you can start to put together a plan. And that plan is basically, now I know what to fix. Now I just need a timeline and a tactical plan for how I go about it. So this is where you get to use this total exit value score and total exit value system as the way to build your roadmap. Right? You're going to start by stabilizing, cleaning your books, clarifying your operations, right? With stabilize, optimize, and strategize. That's how we do this, right? Look at your books, clarify your operations, looking at, looking at everything. Understand, first of all, everything in the way that it works. All right? Now, this is sometimes hard to do for yourself because you will always have institutional knowledge an institutional bias. You will have— there will be certain things within your company that are hard for your company's employees to do. It's hard to examine yourself. It's why you go to therapy and you talk to somebody else and you don't give yourself therapy, right? Because it's very difficult to be honest and open and whatever when you have a— when you have someone in here whose job it is, is to uncover this stuff and knows what questions to ask you. And as long as you are truthful and give them the answers, then you're going to have a much better chance of being able to understand what's broken.

Yeah. And the example of that is when we ask companies, well, what's your change management process? Right? What's this? What is your, what is your internal process to make, to improve things? And when we do that in meetings, there's a, there's a look, there's either a pause, and we know some people, they sing from the same songbook and they use, they have a phrase, or they, or that's something that's been built and driven into them. But oftentimes we have look across the table at people and they all look at each other and like, well, like, well, Sarah usually points it out and then Jeannie says something and then we go to Mike and he gives a thumbs up or a thumbs down or something along those lines where there's not a formal process. And when you're gone and when you're selling a business, the last thing is like when we interview people and it's fine because we can fix those things. When a buyer is interviewing them for that change management process, the optimization part of what Jo just mentioned. You really want to make sure that it's buttoned up. And, oh, well, we have a weekly meeting about it, or we have a monthly meeting about it, or we meet every 2 weeks about it. And when we bring up the prioritizing, we prioritize them. That's what you should be doing, A, and that's what buyers not only want to hear but want to see and buy when they buy these companies.

That's exactly right. So again, you're— and the way that you're going about this, okay, again, this is the playbook. So the first thing is understand what your value is, right? Understand where you'd like to head, what you think is possible, and you're going to make— set that trajectory. The next thing you're going to do is put a plan into place. You're going to use— again, you're going to develop a roadmap. You're going to start by with stabilization, right? Stabilize the things that are there. What's broken? What— let me examine and let me see and understand what is broken about my business right now. What is that a buyer is going to look at and examine, and what are they going to throw Why are they gonna— what reason are they gonna give me to not buy me, right?

Yeah.

That's what I want to know right now before anything else, right? You can't set a plan, you can't measure something, right, that you can't fully like understand, right?

And as Joe mentions, like, you know, sometimes like there's certain people who can do that, right, who can understand and can really clearly delineate Well, these are the things that I'm bad at, or these are the things that we do that we have a process for. And that's why it's much easier for us to come in and companies like us to go in and help people with these challenges, because it's a difficult question. Just, you know, conducting therapy on yourself and being honest is nearly impossible. Same with surgery, right? I don't do dental surgery on myself. It's easier to outsource that to a third person and work with them. like us to ask those key questions and get the answers that are the true answers, not the ones that the owner or other— or the— or what people work for the owner tell them.

That's exactly right. And the— again, the reality is, is that for your— you to be able to honestly understand your value and honestly be able to, and transparently be able to, to prove that to a third party eventually, right, this is what it takes. Hiding it, not doing it, looking the other way, hoping it doesn't come up, that's not a strategy, right? So we stabilize, then we optimize. And the optimization again is about, that's the efficiencies. Now I know the places I can affect things, right? I've done the work to understand and basically I have elicited the full understanding of what's working and what's not, right? And again, not from what's working for what's not in terms of my sales, right? Or my being able to, but what's working, what's not in terms of my value, right?

Yeah.

So, keep in mind, the optimization now becomes, okay, well, now what I can do is I can try to, I can actually try to optimize those things that are lacking in there, right? I can, maybe I can challenge my, or I should challenge my sales staff to be able to do, you know, one more sale a week. Or, or maybe I don't have a sales staff and that's the thing I have to move to, is that I've been doing this all online and what I need now is to be able to bring in, you know, real closers, people who can, you know, you only know that because you've examined that sales process, right? And you've, you've looked at it and said, okay, this is where we're falling down and this is what's contributing overall to my lower revenue where I know I could do more than that, right? Whatever that is. Then the next thing is strategize, right? So now what we've got is to say, okay, can I scale what I'm doing? Once I've optimized everything, can I scale it? Can I make more of what I'm doing? Can I add another product line and keep the same optimization in the cost side, right?

Yeah. And scale— sorry to interrupt you— and scale, what I think of scale is when you're able to scale, like everyone talks about scaling and growing and the whole thing, but like if you're able to Scale, really the definition of it is being able to grow without adding additional costs to the business, right? So an additional— Jo's example of an additional sale from each existing salesperson is a perfect example, right? It's like, great, you're able to do that. You're able to add n number of customers to your CRM system without having a problem. You're able to do these things without adding costs to the business.

So what you need to do though, okay, is you have to understand that there are going to be costs and time involved in actually moving this needle, right?

Yeah.

So in your, your roadmap needs to include the time and those costs because how are you, what do you need to do and how are you gonna pay for it? Right? So do I need to add sales staff? Right? Is that adding something to my bottom line, that stamp, or adding to my top line? Right? Is it adding to my costs? You know, there might be situations where you have to be able to spend money in order to make money. Right? Do I need to bring in a full, you know, a new sales pod team? Do I need to bring in, you know, do I need new marketing help? Right? Do I need someone to come in and be able to do a, you know, a major, some kind of process overhaul on my manufacturing plant? Do I need someone to come in and tell me about the latest equipment that I don't have that maybe I should be investing in? Right? Things like that. So when you make your plan, you again, you are you are figuring out what is right where you are, where you want to go. You're then figuring out what is broken and what needs to be fixed. You're putting in in the ways in which you can basically try to fix those things to optimize them, and then you're basically again you're going out and you're scaling. But you've got to figure out, in order to scale the way I want to, what capital do I need? What costs am I going to incur? And what are those costs going to mean over time? And how do I get that stuff done? And so now what you've got is, again, you've got a roadmap, you've got a way to do it, and you need to go out and you find the help you need to be able to go and do it. And that's another place, by the way, that ExitEngine can help you as well, is that we've got the people. Right? Of all stripes, Exit Engine prides itself on being able to actually do a lot of these people. You've heard them on our podcast. Okay? They are our partners. These are the people that we we we are you know that we are engaged with that help us and and work on our clients all the time. And so this is the kind of stuff that you want to be able to look at and say if I need you know a sales person or someone to help me with sales strategy, we've got that for you. If you need someone with marketing, we've got that for. If you need a chief financial officer or a fractional COO, those things are also, you know, all those things are available, you know, through us as well. So just keep that in mind. But wherever you go and whatever you do, this is how you put together the plan, right?

Yeah, exactly correct.

Stabilize. You want to know what you're doing, where you're headed. You want to stabilize, optimize, strategize, and get that stuff. And again, so let's just say it this way. Let's pretend That your thing is that you have figured out that you've got an 18— you have, you, in 18 months, you want to raise your EBITDA, right? You want a higher valuation, your multiple, and you want to add, you know, $2 million or whatever to your revenue. Okay? That's the high-level plan, right? That doesn't tell you— that tells you, this is the trip I'm going on. That's all it says. Doesn't say, I'm gonna fly here and go here. It doesn't say, this is the time I'm leaving. It doesn't say this is the route I'm taking. It doesn't say any of that. It just says I want to go from whatever, from Bangor, Maine to, uh, you know, to Sarasota, Florida, and I want to do it on, uh, you know, and I want to get there within 3 days.

Don't take 95, right? Whatever you do, don't take 95. But that's the— but, but, but yeah, and Joe's point is you need to break those goals into smaller component parts, right? And put You know, the revenue increase. Put a sign, you know, we used to call them in learning and development enabling objectives. So the overall objectives is I want to learn Spanish, and the enabling objectives are I need to learn verbs and I need to learn nouns and I need to learn conversations. And you break the project and the goals, and this is basic project management, is drive them down to the smallest component possible parts and assign them to individuals and people. So that they can get them done. And this is exactly— this is a project that needs to be managed. It has a start, a middle, an end, and a goal. And once you do that, those goals get done. In my experience, projects where things are broken down and assigned to people get done. Overarching goals that never get broken down is to grow revenue. They never get done.

That's exactly right. And the reality is that the more you've been humming along the way you have been right now, the harder This is going to be for you because you have so much. In our experience, we have seen that so many people have so many, are so set in their ways. And also what might be happening to you at the same time is that you might be starting to burn out, right? So what's very common at this stage right now is that you find yourself at a crossroads, right? Many of the people that we start talking to, they're talking to us because they are at this crossroads. And the crossroads is, man, I'm pretty tired. I've got a pretty, I think I got a pretty valuable thing here, whatever. But there's some things that I have not yet done or some things that I could go here and I just need to basically figure out how to do this because, you know, again, it can seem daunting, right? We often ask people, what, how much do you have left in the tank? Right? Can you hang in there for 3, 4, 5 years and grow this thing and double the value of it? Right? Or, or are you, are you going to be to settle for something along the way? Here's the good news. Start this process. Okay? Set your goals, set your plan, figure out, prioritize the things that are the biggest or the hardest things to do first. Get those things done and then see what happens. You don't have to finish the entire thing. You don't have to get to that goal number. Right? There's no law. Right. What you need to do is along the way is the most important thing, that most important resource there is right now isn't money, and right, it is time. It was the combination of your time and your energy.

Yeah. And, and we either, we, we have people come to us a lot of times when they've gotten that, we've hit that burnout period, or even when we've talked to them, we, we put together a plan for them, they're daunted by the plan, right? Because it's a lot of stuff. It's like It's like when you have technical debt at your business, like financial debt, technical debt, and sort of efficiency debt. You know, like financial debt's very clear, you owe the bank money. Technical debt, you've neglected your product for X amount of time and you know you need to fix these 19 things. Sort of efficiency debt is something that we've talked about before with internally, is you know you need to make these changes to your business process, but you haven't done them yet. For whatever reason, you don't have the right people, don't have the right money, don't have the right time. This is the time before to get to prepare your business for sale. You want to get those efficiencies out of your business and take care of that efficiency debt so that it's— so that a buyer can't bring it up and it won't sort of drag down the valuation of your company.

Yep, that's, that's exactly correct. And again, it's— this becomes daunting, and, and lots of people, this stops people from doing things, right? But again, it's okay. Maybe you look at this, maybe if you, if you have done the valuation, right? Okay. And you, and you understand what your value and salability is right now, you may just, you, one of the choices that you have is to not do it, right? Is to not grow it, to not optimize it anymore, right? Or you have, or any, any, anything between that, you know, those 2 extremes, right? So, any effect that you have is going to be better than none. Any way that you can raise that, any way that you can just look, examine yourself, and look at the ways in which you might find what we call, again, like we said, might find hidden value, value you didn't know you had. So, the process is valuable even if you get to the point at which you're like, you know what? I really don't have this in me. You have options at that point. And optionality is actually one of the biggest things that this exit planning stuff will give you. Because you'll have an understanding along the way of where you are, where you want to head. And then as you go through things and things don't work, or, you know, the best laid plans, right? Sometimes you just can't get there. And, but the reality is that at least you'll know where you are. So I might be, you know, I might not get to Sarasota, but at least I know I'm standing here in Nags Head, North Carolina, and it's a beautiful day and everything's fine. And I think maybe I'll just stop right here.

Yeah, again, don't take 95.

Don't take 95.

And if you can avoid Harrisburg, it's even better. But sorry, that's another whole story.

Those are all true things. And again, you will find those things, you know, again, in our— in the, you know, in the analogy we're making, but also again, in real life, there is a 95 you shouldn't go down, you know, in any business that you're in, in terms of setting your exit trajectory too. So again, knowing what those things are, knowing the things you want to avoid, all that stuff So hope you guys that this gave you some kind of clarity today about the process in general. You know, it is, again, it is a process that I don't think is unique to us. The way we call things, the way we look at things might be unique, but the reality is that it is, again, that it's a matter of just with any kind of roadmap, no matter what you're doing, you've got to start, understand where you are, where it is you want to head, what is possible in terms of the routes and the different stops you can make along the way. Right? And so going through the process of being able to identify what the value of your company is, what you'd like it to be, understanding, setting a general trajectory, which we can help you do on a phone call for free to help you figure out exactly what that trajectory should be, and then becomes the heavy lifting, right? How do I actually move the needle? How do I change my bucket that is about revenue? How do I change my bucket that is about efficiency? How do I change my, my, my valuation multiple? Those are the 3 things that you're looking to do that affect the value. And of course, you're breaking those down into component parts in terms of how I can move the needle and making sure that you are setting up the right project management things to make sure that they get done in the timeframe in which you want to get them done. But along the way, all the way through, you'll have options, right? Things will pop up that you didn't even imagine. Opportunities will come because you're healthy. All the time. One of the biggest things that we think we can help people with is getting their financials just in order, because that allows you to have conversations with buyers, right? Because it's not gonna— what's not gonna hold you back is not having a financial document you need, right? Because that would be silly. But at the, at the very least, you've got, you've got your— when you have your financials in order, you can, you can tell the story of your business, and now you can have a healthy and productive conversation with a potential buyer. At the least, right, John? Parting words? Perfect. Excellent. Well, in that case, that's all you needed. Hey, um, you've been listening to the Exit Engine Podcast. My name is Joe Stapleton. This is— I am John Kniff. Thank you so much for listening today. Again, you can reach us anytime, guys. If you've got questions, we've got answers for you, okay? Anytime you like, you can, you can reach us at, uh, directly via email at Joe, J-O No E, jo@myexitengine.com, or at john, joh@myexitengine.com. You can find us at My Exit Engine. You can find us all over LinkedIn. We're doing that stuff every day. Look for one of our webinars. Look for our, uh, our— look at our YouTube channel at Exit Engine Community on YouTube. You'll find us everywhere. Get in, send us a direct message, shoot us an email, whatever you like to do, whatever at that end. By the way, if you'd like to talk to us and to talk about this value acceleration calculator, then just, why don't you just go to landing.myexitengine.com, okay? Landing.myexitengine.com, where you'll be able to find and go through the process of basically setting up a meeting with us and all that stuff, okay? Do that. I hope you guys have an awesome day. Keep getting valuable. Uh, we love you all. We're here for you if you need us, and we will talk to you very soon. John, have an awesome day.

You too. Thanks, Joe.