The Exit Engine Podcast Episode 9: Is Your Business Marketable?

Welcome to my ExitEngine Podcast, Episode 9. Good morning, John.

Joe, how are you today?

I'm doing good, man. Doing really good. You know, I'm excited about today because we're really— today we're gonna get into the, like, the brass tacks. Today we get into the things that you're going to be able to see in yourself change over time. I hope, right? Meaning you business owners out there who are listening to us, if you're following along, we're trying to give you very, very specific things to do to help improve the value of your business, right? We're not talking about improving necessarily improving revenue or specifically EBITDA or whatever those things are, but what we've been talking about are these kind of larger principles of things, ways to think about your business that are slightly different. And one of those things is obviously focusing on the overall value, right? Today we want to talk about the marketability.

Yep.

Okay, so the question is, how do you know by looking at yourself, how can you tell that you've got a marketable business, meaning a business that, that can go onto the market for sale and be sold in a time frame? Right? What makes— what are the attributes about your business that make it attractive to most buyers? And I will caveat that by saying that there are— every buyer's got some slightly different criteria. Strategic buyers are different from, from, you know, from financial buyers. Private equity groups are different than private investors, blah, blah, blah, right? So we're not saying that there's one size fits all, but what we are saying is We've come up with 10 solid things, uh, that you should— that you will see in yourself if you are a marketed— marketable business.

Absolutely. I think it's great.

So very first thing to start about is, again, this is the easiest one, so we're just going to start right off the top, which is your, your, your finances. Okay. The finances of the company are the number one thing that anybody is going to look at.

Yeah. And, and, and we've found, and we've talked about this on previous episodes, that You know, the pandemic was such a weird thing and a weird thing for many businesses. Some businesses thrived, some businesses failed. But what a buyer is gonna want is a track record of success, a track record of revenue growth, of profitability growth, of expense management. Now, expense declines, they'd love to see that, but what they really wanna see is the top line growing. Expenses being contained and profit growing. And profit sometimes cannot even— it's not even that important because of the way you can run your business. You can pay yourself a lot of money and minimize the profit that you realize. So it's not necessarily profit. It could be the way we calculate EBITDA and the way we come in to say, oh, this is your adjusted EBITDA because you pay yourself or you pay your employees. Or your son or your daughter or whoever. Again, totally legal, but, um, you want to have an adjusted set of, of books when you market your business for sale.

Absolutely. And just on that point, there's a really important point that I want everybody to start thinking this way, okay? And that is, when we're talking about the value of your business, okay, every dollar of revenue— okay, every dollar— sorry, every dollar of EBITDA Gets multiplied by 3, 4, 5, 6 times.

Good point.

In order to calculate the value. Okay, so the, the, what your company is worth, a multiple of your, of your EBITDA. Okay, your adjusted EBITDA. So that's in general. Okay, so remember that every dollar that you add back into the company, okay, into, into the profit, is going to be multiple, is going to come out a multiple On the other side.

And we'll have a— or not will, we will— we do have in our platform an adjust— a P&L, profit and loss statement, as well as a P&L that's been adjusted with the add-backs that Joe's talking about. So the things that, you know, the excess pay, the company car that you use, all the things that won't be part of the the, the, the business after you sell it that you want to add back to the value of the business so that it goes from a $50,000 profit to a $1 million profit that then gets multiplied by 3.5 times a multiple, which is your industry, whatever that industry happens to be, and your company's valued at $3.5 million. So all those things are critical when You're getting when you're marketing your business and what someone's going to look for in a marketable, real business.

That's right. And what we're all aiming to do here is to be able to know what these things are as you go into the sale of the company, right? So you have these financial things set, right? You understand what your revenue is. You're showing a history of revenue growth. And by the way, and you're also showing revenue growth potential in there, right? Because one of the things that you're hoping you'll see is that you're not seeing a thing where the universe, you know, of people you could go after has been shrinking and you've been great, you know, grabbing all that audience, and that's great, but there's nothing left to get. That won't— right, it doesn't matter how healthy your company is if someone can look at your financial statement and see the end of it, um, right?

That's true.

That's not what we want. We want to— we want— we want to be able to see They want to— you want to be able to project future growth, and it's going to be up to the buyer, obviously, to figure out how to do that. But you're all good. You're also going to be able to give them some ideas about what you would do to grow the company more as part of your kind of marketing pitch to your buyer.

Yeah, and one last thing to say about this is that, you know, some businesses have constraints, right? They have constraints around them to say there's 2 crews of construction that can only work on 2 different projects and companies have a backlog. Well, that's something that's very valuable. I mean, it's somewhat of a problem, but if you have a backlog of potential work, that's something that's wonderful from a buyer standpoint because that means, hey, we can hire additional crews to get this work done and we can realize all that revenue simultaneously with, you know, they're adding the cost only when they're getting revenue. So a good point.

Keep in mind, you want to know, you want to know About yourself and about your company, you want to understand what where are the inefficiencies, right? Where it's okay to have them. In fact, you want to have one or two inefficiencies that you want to point out to the buyer because those inefficiencies are going to be opportunities for the buyer to grow the company further, right? So keeping those things in mind as you go as well. But again, all of it has to do when it comes to the revenue and the financial statements. It's the num there's no question. It's the number one. issue, make sure those books are in order and that your, your, that your financials tell a story. They should tell a story of growth. They should tell a story of opportunity. They should tell a story of somebody tightening screws, right? We want to see, we want to see profitability increase. We want to see EBITDA increase. We want to see total revenue increase, and we want to see expenses start to, you know, as I, as I instituted last year, you'll see here. You know, that I reduced our expenses by creating a new, by adding a piece of technology that now helps us do this for free, right? Those are the kinds of stories you want your numbers to tell.

Yeah, and segueing into the next one is one of those inefficiencies or one of those things that can be a challenge is if you do not have a diverse customer base. So as an example of that is, we've— I've seen recently a company that had a nice chunk of revenue. I think it was $4.5 million, but $1.7 million of it came from one customer. And that can be a challenge from a buyer standpoint because what happens if they lose that piece of business, right? What happens if when they buy the company from you, That company goes with another company. So what often at times happens is you can get it— the buyer will discount that revenue and won't give you the full 3.5 multiple on that, on your EBITDA for that company. They'll take that 1.7 out and only give you on stuff that's, that's more diverse. So what you really want to work on is getting a diverse customer base. Now, you don't want to lose that customer, but you want to expand your business so that you're not so reliant and your P&L is not so reliant on 1, 2, even 3 customers. If 3 customers make up more than 50% of your revenue, that's frankly a red flag. You could be a perfectly viable business, but you wanna make sure you have as many different customers as possible to support and to make that P&L look that much stronger.

So back in the digital marketing days, you know, we used to, you know, when we had Kinesis, we would basically used to say we had a, we had a terribly unbalanced, you know, client roster. There's no question we did. We had 2 clients that made up about 80 to 85% of our revenue.

Yeah.

Now, so on paper, it was not a great look. It worked out for us because of the business we were in and and who we were being purchased by. And that those people wanted access to the 2 clients that we had. So that became a beneficial situation in our case. So we are trying to talk about generalities here, obviously. So every— it is a case-by-case situation. So not if you're an advertising agency, for example, or any kind of big customer agency where you've got a big enterprise client or 2, and then you've got a lot of smaller ones. It may not be as bad for you as it would be if you had— if the clients you had were just, you know, kind of like lower-end, you know, people who just happened to spend a lot with you, or you only had 4 or 5 clients and one of them was your big client. You have to start somewhere. So there's going to be a time probably in your history of your business-owning journey where that's going to be the case. But it's just something, again, to be aware of, right?

Yeah.

Just know that if there's anything you can do about that, you probably should as early as you can. So that it's one less thing for a buyer to kind of ding you on when they're looking to make a deal.

And that's part of our assessment too, is when we— when you take our assessment, we're asking you these— there's very specific reasons why we're asking you this, and we don't ask you questions that we don't really need the answer to. And one of the questions in our assessment is, do you sell a commodity? And if you sell a commodity or something that's commodity-like, And you are relying on 2 or 3 customers, that can be even a bigger red flag as to what Joe was saying about an advertising agency. That's not a commodity that they're selling, right? You're selling a very specific skill set and very specific domain expertise that you're buying. You're not buying, you're not selling concrete or something that can be, that can be had by many other companies and sold by many other companies.

So that's right. So again, keep that client base as diverse as you possibly can. That's your goal. Again, there's going to be different industries are going to have different thresholds for that. Different buyers are going to have different requirements. But in general, that's something that we want to obviously keep an eye on. So moving on, number 3. So this is also kind of important. And again, something that people kind of overlook, which is that how scalable are your operations, right? So in other words, are you— do you have efficiencies in place? Have you figured out ways technology or otherwise to be able to keep processes efficient, to reduce the cost of servicing a client or, or, or building a product? You know, have you— can you show a story? And you're in your financials, can you show a story of that improving over time, right? Do you have your processes written down? I think we talked a lot about this last week, right, John? John's the operations guy. John has a lot to say about it.

Yeah, and do you have your operations Sorry, your process is written down. Do you have an operations person that is the go-to for your operations at your business that's not you, right? It shouldn't be me. It shouldn't be the CEO. There's a COO in place, or there's a director of operations, and she doesn't have to have that title, but there needs to be somebody who owns those things and is constantly looking at consistently— consistent improvement, and continuous improvement is sort of a better way to put it. And that's what, that's what you need to have, have things written down and have you consistently work at, again, either revenue growth on the sales side or cost containment and cost expense reduction, because every dollar of expense that you reduce goes right to the bottom line, as everyone knows. And if you can have those scalable operations and utilizing the processes and utilizing technology, man, that can make your business so much more profitable Even if you don't gain a lot in revenue, you can gain a lot in profitability by reducing expense on the operation side.

And I think also included in that is demonstrating to the next buyer what the— maybe what the operational opportunities are, right? You could say, hey, look, if we just— we hadn't gotten around to it, but if I could have put in X, Y, and Z in place, whatever, it would have taken us 3 months to do that, whatever, I could have saved us another million dollars off the bottom. the bottom line, whatever. So those are the kinds of things that you want to be able to demonstrate and to show and even talk about when you're building your kind of marketing pitch to buyers. And again, keep in mind too that there's all kinds of operational efficiencies and all kinds of operations things, and not everything makes sense to every business. So you may have a business that's heavily reliant, and maybe you've got a completely digital you know, online business where everything is about where your tech stack is, you know, is, you know, you've got thousands and thousands of dollars a month in tech, you know, stuff that you're paying for to make, you know, processes efficient or to automate marketing or things like that, which are all great things. And all you want to be able to do is to point out those things, right, as efficiencies. So if you're on— if you're an offline business and you're like, as John pointed out, you're making, you know, you make concrete or whatever it is, Then your operational efficiencies are gonna be about process. They're gonna be potentially about how you maybe supply chain, right? Things like that that are gonna be involved in streamlining and reducing the overall cost, your overhead costs and things like that. So really, really important one because again, they wanna see, buyers wanna see how can I take this and scale it from here?

Yeah, exactly. And a lot of that will be financial leverage, right? They'll bring in money. But if there's a way that you point out to them to say, hey, again, as Joe mentioned earlier, if in the next 2 years we wanted to implement X or Y or Z or go to a new supplier or implement this software technology to help us do this more efficiently, that's gonna be something that the buyer wants to see that maybe you haven't got around to it, but that's something that they can bring to bear when they buy the company.

On that note too, as just a reminder, make sure that within your industry, okay, everybody, that you are you have table stakes when it comes to whatever systems, internal systems are kind of done in the industry. So I'm thinking of things like ERP systems, right?

Yep.

Enterprise resource platforms, you know, places that do, you know, there might be medical, if you've got a medical business, maybe there's medical records stuff, things like that. There's obviously things that will go along with compliance and stuff that you may have to have or whatever in there as well. So just keep in mind that, make sure that you really know What the— what the— what is the— what is the standard for your— for your business so that you're not surprised by a buyer comes in and goes, what do you mean you do all this by hand? Like, you know, things like that. You've got to know that you are in the— and if you're not doing it that way, have a good reason for not doing it.

Yeah, and, and also make sure that you're keeping up to date with, um, you know, various software systems that need to be updated. I, I— when I joined my company, I was 8— we were 8 versions behind And we had people contacting us saying, you have to upgrade because this is a sort of one-way door situation where you have to upgrade.

I can't pay you unless you upgrade your thing or whatever. Exactly.

That's what it was, Jo. So that's a topic for another discussion. But yes, make sure that you have the industry standard, whatever you're doing, have those systems and tools.

Exactly. So something that's near and dear to my heart is your brand and your market position. Okay. both of those, obviously, the stronger your brand and the stronger your market positioning are in general, the better off you're gonna be from a value standpoint and the more attractive you're gonna be, you know, to a buyer. So, do you have a recognizable brand in your industry, right? Is your reputation from your customers positive? Is there a track record of being able to demonstrate? Is there, you know, do you have demonstrable proof of your ability, of your success with clients that goes beyond Above and beyond, obviously, just financial stuff. Do you have a good reputation, right? Are you— are— how much of you— how much market share do you have? Do you have any idea how much market share you do have?

Right.

Those are all things that become really, really, really important. Franchises are a good example to look at. We're not all franchises here. Some of you out there may be franchise owners or looking to franchise your business at some point. There are 2 things that a franchise must have in order to be a successful franchise. One is they have to have a strong brand, and the second is they have a repeatable process.

And a system.

Whatever, a system in place that basically is something that's all in its entirety that I can just easily implement and replicate over and over again. Okay, obviously any buyer would like to be able to, to have that kind of stuff in place, especially the repeatable thing. They want to be able to grow Um, they, they— but, but starting from a place from with a brand that's recognizable, that's got a strong reputation, that is doing well in the industry, obviously is a natural launch pad for the next stage of growth. If the client, if the buyer has to spend a lot of time in, you know, improving your brand image or putting together, right, or making your— or doing a lot of advertising to let people know that you exist, that's not something that they're going to want to do, right? They want you to have had that stuff in place all the time. They They may have ways of improving that. They may be able to scale it. They may be able to take you into an international or national or international kind of scope with your marketing and advertising and growth and stuff like that. So that's— those are all opportunities. But keep in mind that you've got to make sure that you're, you know, the best companies, the most attractive companies are companies that are either really, really strong in their, uh, in terms of their market position. Or again, have an inefficient— are pretty strong and have an inefficiency that can be easily exploited to improve that market position. Does that make sense?

I couldn't say it better myself. Exactly.

So I mean, I think those are the things that are around marketing. Obviously, you may have marketing technology, you may have a process. Maybe, you know, our business, right, as an example, ExitEngine, Relies very heavily on social media. It relies on digital marketing and video content and stuff like that. That's that's how we've chosen to you know to to grow our business, and and because we're we've got a mostly online situation, it makes a lot of sense for us. If you're a company that needs heavy you know television spend because of the you know because of the breadth of your service offering or the the the the largeness. the size of your target market, whatever that is, and have the budget to be able to do that, obviously, you know, those are good things. But what we want, again, is to, within each of these buckets, okay, just one thing you got to do is go, okay, but is there opportunity here? And can I say, yes, I didn't do this, but here's an opportunity for you to do X, Y, and Z as the new buyer, right? So, again, keeping that in mind.

Yeah, well said.

Again, right up there. Again, what's your, you know, do you, are you looking, can you look at your business and go, wow, man, I have a rockstar senior management team? That's one of the things that you want to be. You got to be able to do that. Yeah. It's probably the most important thing on here.

Yeah, because, right, because you may not be going with the company, right, when you sell it, and you don't want to have it be the Joe Show or the John Show or whoever. The CEO is a component of the business, and you are, you know, might be the leader of the business, but you need to have a management team that is capable of making decisions when you're on vacation, or capable of making decisions, and real experts in those fields. Because if you're always making decisions, you're constantly making everything, making all those decisions, that's not something that a buyer wants to see. A buyer wants to see Who's gonna be there? Who can be future leaders of the company? A lot of times the buyer will, you know, be a financial buyer or strategic buyer. They're gonna wanna see that people are there and they know what they're doing, not just, you know, the Joe or the John show.

No question about it. I mean, I think we spent a lot of time on this last week. I think that the understanding that what buyers wanna be able to do is they wanna I'm not— we're not saying that you wouldn't be a part of the transition, because there's no question that you would probably, in 99% of cases, you would have to be. Okay, we're talking about a certain period of time, anywhere from 6 months to a year or more, 3 years in some cases, right, where you would— where they would ask you as part of the deal, the new ownership would say, please stay here, help us get adjusted, help us get acclimated, teach us— in some cases, teach us how you do this, whatever those things are. to be able to do that. And, and those are good, and that's, that's something that's probably going to be necessary in about 90% of the cases.

Yep.

The, the— but in addition to that, your management team and your ability to be able to demonstrate early on in the process to new buyers that you are detached from the business is going to be— do nothing but give you, uh, you know, potentially add value, really. And this is because this is— let's face it, this is what we're talking about here. It's not just gonna attract buyers, it's gonna help you actually increase the value because the buyers will see that that's something that's already in place and that they don't have to do, and they're willing to pay for that.

Yes, absolutely. You know, again, I couldn't have said it better myself. It's just important for post-acquisition that they understand that there's, yes, there's assets of the company, but sometimes The most valuable asset for a company are the people that are going to be doing the work after you're gone.

And the knowledge that those people bring in terms of being able to do things. And, you know, there's institute— so much institutional knowledge and little tricks and stuff like that. Like, you know, like for instance, like John, John doesn't know how to press record. And so that's value that I bring to our, to our group. I, I know where that button is. And so That's something that makes me more valuable in the process. Just kidding. All right, so products and services that you have that are proprietary things, man, this is good, right? Patents, trademarks, what do you got?

Patents, trademarks, and delivery too, like customer service. That is a— if you're delivering— again, I don't want to go back to commodities, but I'll just mention it briefly. If you're delivering a commodity and maybe you're You offer free service and better customer service than your competitors. That's a differentiated way to make your commoditized product and make your company stand out. If you have excellent customer service, that can be a unique offering in a lot of ways. Or if you truly do have a unique offering, we were talking to a company probably 2 weeks ago, with a very specialized construction service that, that does all the designs. Now, they, they do designs and all the design work, but, but the value add for them is, yes, architects can do this and developers can do this, but nobody really likes to do this. And that's why he started the business, because architects and developers always fight in the contracts about who would have to do this specific service. And so he thought— saw an idea, started his own business, And really adds value so that architects and developers no longer have to fight over who's doing this. He provides a service to architects, and then, and then when he brings those, those plans and those detailed drawings to developers, they're like, everyone's happy in the situation. And he's developed that niche.

That's a— and that's that niche. That's a business model change, right? I mean, in a way, right? So that the idea is that that guy's entire business model right, shifted in order to basically— because they— because he found this kind of unique position for himself, right? And so now that becomes a— not just a— not just becomes a— not just a model for service delivery, but becomes a model of the business. The business relies potentially on, on, on working this way. In addition to that, intellectual property. Okay, let's just, you know, there are, there are many ways that, you know, look, there's writing, There are your, there are your, uh, proprietary kind of processes. You know, there might be recipes involved, there might be, there might be computer code, uh, right? There might be, there might be, again, written word or video or content or whatever, that things that all of which could be in, you know, intellectual property. It could have a value to them, uh, uh, apart from the business.

Joe, did you know I have a patent?

I didn't know that. What is that? What's your patent?

So, so I had a— we created a pat— we created a product and we got a patented— we got a patent for a, uh, a system to deal with real estate offers back in 2017. And we went through a very detailed, um, uh, patent, uh, application with the patent office and got it and got a patent. And my company, my old company, holds that patent and they still have it. Um, and I think they use it in a couple of their products. So It's, you know, those types of things have lasting implicit value. As Joe mentioned, it can be recipes, it can be software, it can be a method of doing business. And, but they can be extremely valuable. And they can be, obviously, they can be utilized in different ways from a, from the perspective of a buyer. So if you are able to demonstrate that you have a proprietary product or a patented product, man, That can be gold to a buyer.

One thing that— one caveat that I will, I will throw in there, only because this has happened to me, um, I had a, a seller who was, uh, it was a software company that was basically very, very, very valued by KPMG at about $300 million. Okay, the reason they were valued that high was because they had a lot of intellectual property. However, the intellectual property they owned had nothing to do with the business.

Huh.

So what happened was, because they held this thing and because they got somebody at KPMG to basically do them a solid and say that the business— because the business owned— and I will tell you that it was so far off from what the business did that it had to do with Michael Jackson. That's all I'm gonna say. Okay, there you go. So, but the idea that it was— that this company existed and did this and got a valuation of this and then started entertaining buyers who were going— and it was my buyer client who came in and went, wait, what? What are you do— this has nothing. So I'll come in and give you half as much as your company is valued because I only want to buy the company. I don't want to buy This intellectual property, right? In fact, we made them— we made them an offer to go and actually sell their intellectual property separately for them so that they could do the deal on the, on the whole thing. So just in case you thought we didn't provide full service here. Um, so any case, but the idea is that make sure that again, that, you know, you— any, anything that you come up with and anything you can do to run it through the specific channels of patent or trademark Anything that you— where you actually hold those, you know, the certifications on those things as actual intellectual property. Anytime you can have a third party value something, that's all going to contribute and it's all going to be good. But just make sure that the business should actually own this IP and don't try to just, you know, you know, it's that you can't make a business worth 6 times your intellectual property if your intellectual property has nothing to do with the business. But in any case, so anyway, any trademark, any value that you can provide, anything that way is gonna be key to raising the value of your business.

Joe, thanks. All I have is Michael Jackson songs in my head right now.

I know, sorry about that. I may have actually said too much, so hopefully we may actually have to edit that out. But in any case, it was a thing. Recurring. So, you know, what goes along with that, and again, we'll give you another example from our business, is one of the strongest things that you can do to your business to raise the value of it instantly is recurring, regular recurring revenue.

Regular recurring revenue, it's like gold, right? When you have subscriptions, you have long-term contracts, you have repeat customer business. Subscriptions, people are making the decision when they have a subscription model, when you have a subscription model, they're making that decision on a monthly basis to say, I want to be part of the ExitEngine community, just as an example. And we, as ExitEngine, as the, um, as people who work at ExitEngine, we are constantly demonstrating our value to our customers and providing value-added things and services and events that, that keep people coming back. We're doing podcasts, we're doing events. That's why people, um, come back to us. Long-term contracts is another great one. It's even worth it to give people a discount to do a 2-year deal. So if you can get a 2-year deal from somebody and give them a 5% discount, when you look at your revenue, it's revenue that's coming in for not only 11 months or 12 months, it's now at 23 months. And when you're getting— when you're demonstrating you have 95% customer retention as a As like Jo mentioned earlier, in a franchise or something like that, and you have 95% retention, it is invaluable to a buyer to market your business in this way, to say, look, I have all of this, I have 85% of my revenue on monthly contracts or a 2-year contract. It's just, it's hugely valuable.

If a buyer can get in there the first day and say, I can project the exact amount of revenue that I will be collecting over the next first year of owning this business. Dude, that goes— that just goes so far because they can actually— that's the hardest thing about businesses and about new businesses, and particularly whether it's new, the business is new, whether you're new to it or whatever, is the projection of what will happen in the future, right? We're all— we all go through it. It's the hardest thing to do. you know, until you have a history, right? Um, so what we're doing is obviously you're showing, you know, the— our first thing was show the history of the financials, show how you grow, show how you do this. This part is showing you potentially what the future is because you have that recurring revenues already built into the forecast, right?

Yeah.

And so you're able to basically— I, as a new buyer coming in, I can say, hey, look, I got a year to get my shit together, you know, really to be able to get the rest of it up and running so that I can get, you know, to, you know, to to get this thing going and while I can still have revenue potentially coming in while I do that.

Absolutely. Yeah, I don't have anything to add to that one. I think it speaks for itself. It depends on your business model, but if you can have it, it's wonderful to show to a buyer.

Yeah. And I think your point is worth underlining again. You may not be in a position where you can have a subscription model, okay, or recurring revenue that way. But get your customers to buy into multi-year contracts. If you can do that, that's the same thing and may even be slightly better because you probably have less attrition, right?

Yeah.

So that means, right, less churn. Exactly.

You have outs only a couple of periods a year or, and again, give them discounts. There's got to be a give and take, but you should be willing to take a slight discount in order to lock that customer up, especially if you're thinking about selling your business.

So, right. So, uh, we did talk a little bit about low customer concentration versus diverse customer base. So those are kind of like the, the inverse of each other. The diverse— we talked about the diverse customer base, meaning basically having a lot of different clients getting a lot of different revenue from you, right?

Yep.

The, the customer concentration is really what we were talking about before with having like too much of one client your revenue tied up in one client so that if this client gets a cold or sneezes, you get the cold, right? Meaning that you get sick because this client decides that they can't pay you this month, right? Or something like that.

So, and a good part of this is, I don't think we talked about earlier, is the risk factor, right? I mean, we mentioned a little bit about a valuation standpoint, but the good part, the good thing to point about this is it just gets risky, right? When you have a very high customer concentration, that's a very risky business. And so it can really scare a buyer off before they even get into the business when they say, oh, 3 companies or 3 customers account for 60% of the business. Like, thanks, that's too much, too much risk. I don't want to do that.

No question. And so, but again, keeping in mind that there's 2 aspects to this. One is, do I have too much revenue from one single client, right? But the other thing is, have I been able to spread around my revenue across multiple clients, but across multiple revenue streams too, right? So keep in mind that basically it's like, okay, it's great that you have— that no single customer makes up more than 20% of your total revenue. But throughout your— if you look a level down and look at your service offerings, does— is any client basically heavy up on a single piece and not others? And the reason is, is that that's opportunity, right? I can cross-sell and upsell people who aren't taking advantage of other services. I can point that out to the buyer and say, hey, look, we haven't been great at this, but we know that an opportunity is that we've got all these people stacked up in this one service offering because this was our original thing.

Yeah.

We haven't been able to migrate or to add on or to upsell people into this next You know, this next service.

It's a good point. Yeah, it's a good point because, and it made me think of one, just one additional thing is Joe's exactly right. Like it can be on a customer basis or it could be on a product within your company basis. Like, are you a company or are you a very efficient product? Right. And those 2 things are 2 very different questions. If you're a company, you have multiple products. When you have, when you're so reliant on one product, That can also be a risk for a company to say, well, wow, if, you know, if there's only one stream of revenue for this buyer, that can be a good thing, but it also can be risky from their perspective if they're just buying a one-trick pony, so to speak.

No question. That's it. And so just keep in mind diversity, diversity, diversity across the, you know, across the board as much as you possibly can, right? Industry outlook, man, you know, we— this is kind of feels like a little bit of like a no-brainer, but I mean, obviously there are There are industries right now that are desirable from buyers, and there are industries that aren't so desirable. And a lot of them have to do with, again, industry overall, where an industry overall is heading. You know, probably getting into the newspaper game, maybe not a great investment. So if you own a newspaper company right now, you might be having a little bit of a problem. You may have to pivot a little bit in order to get, you know, in order to find a buyer.

Yeah, if you're trying to sell the 2 of us shampoo, that's probably not a good—

Not a great idea.

Use of it. No, but, but you know what, you know, Joe is a very obviously much more relevant, um, example from, from newspapers is, yeah, maybe you do take a, take a flyer on it, but man, if you're, if you're investing in newspapers in 2024, that's going to be a tough business to make money in, um, and it's going to be a tough person— tough business to, to to convince a buyer to get into. Um, so you want to have good future prospects, growth in the industry where you can demonstrate that growth, and where you're going to be different and how you can capture market share in that, uh, in that growing, uh, industry.

And, and know— and it's easy to find out, okay— whether your industry is in a high-demand industry from private equity or, or other, other sources anyway. You, you know, a quick Google search will basically tell you where that lies. Okay, so, you know, right now, uh, I think we brought this up before, but I mean, you know what's sweeping the nation? HVAC services. Like, it's like as if it's the most wonderful thing that's ever happened, because you know why? It is. Yeah, from a buyer's standpoint, that industry, and specifically that kind of business, is exactly the kind of business that most, that most buyers want to have. Right. It's, it's, it's a necessary thing that will never go away, meaning it has to be done. You know, plumbing and, and heating and cooling and that kind of stuff will always be in demand. There's none of that ever goes away. There's an emergency component to it that potentially keeps people thinking. There's potentially a subscription or recurring revenue component to it, right?

We have that for our house. We have a subscription service with our plumbing and heating company because When something goes sideways and it gets to be 97 degrees or 98 degrees, like it's, you know, unfortunately it's getting to be now, you want to have someone on call and have the ability to, uh, to call someone when the, when the heat goes out.

That's exactly right. And, and the idea is that, so I mean, this is, this happens to be, this is just a good example, right? You could, you can model yourself after that. Do I have this? Do I have this? HVAC companies right now, good ones, have all 10 of these things. I mean, that's honestly the best way that I can show you from an example standpoint is that that's why these companies are, are in demand right now because they have proven to be this kind. Now, not every single one of them, right? There's plenty of people out there right now who own HVAC businesses who should be listening to this going, oh crap, I have a real opportunity here. Yeah, you do.

You do.

You do, like significant. And if you don't know that, you know, drop us a line right now, we'll help you out. But I mean, we— I can, I could bring you 7 buyers right now. So, understand that basically that this is a huge understanding where you lie, where your business or your industry lies in favorability right now is is key and monitoring that over time because it will change, right? One of the best businesses that people can get into, and I was just I was flabbergasted when I learned this, okay, is rail freight services. Near train depots that, that, that, that just do the, the, the, the swapping of from train to truck, basically.

Okay.

Okay. That kind of like rail service stuff is like a huge repeatable process business that someone can learn in like in the course of like 6 months how to do and is one of the most incredibly profitable things in the country because of the nature of the way that we run I know, no one even knows it exists, right?

Yeah.

But I had, I had an individual buyer who came to me and said, like, the first day and said, this is the perfect business for me if you can find me this. And the problem is, is that there's only— there's not that many of them, so it's very difficult to come across. They don't come up all that often. But the reality is, it's a— it's a— the contracts are all there. They're multi-year contracts. And the rail lines come into a place, you unload the cargo from the freight freight cars or, or from the actual, uh, you know, container cars and move them onto trucks. And then the trucks roll out and all you are is like a midway transfer station. That's like, yeah. So people don't even know that business exists, right? They have no idea.

So, and there's, there's so many examples of those types of businesses and those types of jobs where, you know, you want to, you want to go down a rabbit hole. If anyone's interested, Google harbor pilots, marine harbor pilots.

So I used to work— you know, my dad was the— my dad was the head of the Pilotage Commission in New York and New Jersey, just so you know. Oh, okay.

No, I didn't even know that. So, so, so, yeah, yeah, yeah. I worked in the harbor in Boston and growing up, and I mean, those people, those guys made— back in the day, they made $200 grand easy, um, by guiding all these ships into Boston Harbor and into New York Harbor where Joe's dad worked. And, and it just It's something that, yes, you knew existed, but you had no idea how valuable and how much money can be made in those types of businesses.

So, and yeah, the business is amazing. The training that's involved, the length of time, there's an apprentice thing. Like, it's a really hard job to get, but it's a really great one to do. And again, the ability to be able to understand what your individual— where your individual business lies inside in terms of the industry Is, uh, you know, is a good— going to take a Google search, and you'll find, you know, pretty quickly about kind of where you lie, because you'll be able to see numbers of transactions. There's all kinds of ways to kind of, kind of put quant— to quantify this. Um, but the reality is a quick, you know, you, you, you'll get a feeling. By the way, the other thing that happens, it may happen to our audience quite a bit too, that we should just— this might be a good opportunity to bring up— is that you may get phone calls and emails. from private equity firms on a regular basis. You may already be experiencing this. And I don't know how anybody has obviously individually dealt with them, but I would, I would just caution you to basically be very, very, very, very careful about how much you talk with these guys, how much information you give them. Not saying that they're not— I'm not saying that they're not legitimate at all. I am saying, though, that You need to have your stuff together before you start talking to private equity companies. They will get information out of you that you don't even know that you're giving them. Okay? They will come after you. Uh, it used to be our job, which is why we know this. Okay? We would, we would constantly be going after companies cold just because they were in the industry, trying to get conversations started, trying to learn out, uh, out like intimate details about the business and the whole thing so that we could find out whether it was a, you know, a target or not, or if we could make an offer to them or whatever. So again, it's not that, that it's not good necessarily, but it is something that we should, we would, we would advise you to seek, get some help, um, in terms of getting these things, getting yourself organized before you start having conversations with potential buyers.

And, and, and, and a great place to find people who are dealing with private equity firms who have dealt with them is within ExitEngine, right? The, the ExitEngine community has, there's, there's multiple examples of people who are in our community who have sold businesses, who are there as advisors to simply be advice and sounding boards for companies like you that may be interested in selling themselves and have experience, recent experience with dealing with private equity firms, just like the experience that Joe mentioned and that I have of advising companies to say, hey, you don't want to— without a contract, without an agreement, You don't want to supply them with any additional information because it can just put you at a disadvantage later.

So yeah, absolutely. It's, it's understand that it's a very, you know, can be a very competitive situation, right? You don't want to be giving information away with, you know, without understanding where it's going, what it's doing. Obviously, at the very least, you make sure your attorney— you should already have one of these, but some kind of NDA, non-disclosure agreement already. So at least make sure that that whoever you're talking to signs one of those first so that at least you're covered legally. So that, you know, people will— people, there are people out there that will do anything to be able to make money, be able to make a deal and do things. So, just a word, just to be cautious of it. And here's the simplest thing to do, Jon. I would say this to everybody. Anybody listening to this, if you ever get— if you get a private equity company that tries to get in touch with you or whatever, drop us a note here. Let us know what happened and set— or come to our— you can set up appointments with John and I directly if you like, through our Calendly. Throw a note on our thing for 15 minutes and let us give you a quick— some quick advice about how to deal and what to do with these private equity companies so that, A, you don't mess it up, right? That's the first thing. Yeah. But B, you don't hurt yourself in the process by giving away information and stuff that you probably shouldn't, things like that.

Yeah. And it's— this is a good segue into our last, our 10th one. And this is This is near and dear to my heart because it's operational, but it's also financial. It's manuals, it's legal documents, it's contracts you have. It's, it's, you can have all these contracts. Maybe we talked about recurring revenue and how it's great to have subscription revenue. If you don't have the documentation, you don't have the receipts, as they say now, it's not worth it, right? When you have an organized set of A, financial records, B, operational manuals, and C, legal documents and contracts. When you're able to supply those to a new buyer or during due diligence, it makes A, your life a lot easier because you're not answering a million questions. B, the, the buyer knows that you have this all buttoned up, and, and, and, uh, and it facilitates due diligence, which is a critical component where Frankly, during due diligence, a lot of the buyers are looking for the to poke holes in the company. And if you have all your things buttoned up, if you have all of your operational records and your manuals and your people available to answer questions like that, they know you have your act together, and and they understand that they're not only buying the business, the the the revenue and the customer lists; they're buying a sound. operational machine that is repeatable, and, and, and it's, and it's a revenue machine, which that is invaluable because we've seen so many businesses. And I talked to Joe about this a couple weeks ago, is there's so many businesses out there that don't have their, their financials buttoned up and they have to search and hunt for their legal documents. That's what this time is for right now, is to button up all those things and get it into a Into a system that's clear and is available to you.

That's exactly right. And ExitEngine is a perfect place to be able to find even all the documents you need, checklists. We've got lists of top 10 lists. We've got so much information here, calculators. You want to calculate, try to do a quick back-of-the-napkin valuation of your company, whatever, we can help you do. There are things to be able to do that, stuff like that. Everything is here at ExitEngine. You can find it all at myexitengine.com. Obviously, we are hopeful that you will join us for one of our monthly webinars if you haven't yet, to be able to come in and see what ExitEngine is all about, learn some of the basics between, you know, our methodology and our philosophy behind exit planning. And hopefully, you'll, you know, don't forget to like and subscribe to this podcast. But we'd love to have you as a member of ExitEngine. Remember, we've got a community here. That's, you know, that is all business owners helping each other. We've got a bunch of specialists in all walks and all areas of business that can, you can, that can come and help you, that can give you advice. And we've got learning and we've got courses, we've got education, we've got everything you could possibly need to be able to figure out how to make the, how to make the best version of you and your business that you can so that you can raise the value and control your own business destiny, which is really what we're all about here. We want you to be one of the 30% of of companies that make a successful transition instead of the 70% who don't.

And of course, as Joe mentioned, we have all these things related to specifically exit planning. And we also have learnings related to general business things that are available to you in the ExitEngine community that you can take to say you need to brush up on your P&L skills. You need to brush up on how to conduct a talent review. All these things exist within our community and, um, and they're, they're there as a benefit to you.

Absolutely. So give us a follow, come to myexitengine.com, get in and come and join us. Uh, we've got cohorts start every month, so you've got a group of people that you're going to be with as well, uh, learning together, uh, helping each other out. So keep in mind, um, that's, that happens, uh, you know, basically every month. So, so join us, like us, get in here, let's get, have some fun. Um, come get supported. Uh, you'll, you'll find a wonderful community of people wanting to support each other here as well. So, um, appreciate that. John, we got anything else to button up or are we good?

I think we're good. I think we did a good job today, Joe. You deserve a pat on the back for your, for your stuff today. I, I did okay, but, uh, thank you.

No, you do great. Everything was good. We, uh, look, we are a team. This is what we do. And, uh, we're, we're here for each other and that's what you're gonna get at Exit Engine. Team stuff. All right. Have a great day. Thanks so much everybody for joining again. MyExitEngine.com. Take our assessment. Go take our assessment, right? Check it out there at MyExitEngine.com and like, subscribe. And if you've got any questions, whatever, you can put them here. You can go to MyExitEngine.com, leave them there. You can send us an email. You can book some time on our calendar if you want. All that stuff is all there. So go for it. And thanks a lot for joining us and we'll talk to you next. Next time on the Exit Engine Podcast. Thanks, John. Thanks, Joe.