10xing the Value in Your Owner-Managed Business

What is your business worth? No, really. What is your business worth? Because you might think it's worth more than it truly is. And that's coming up next on Marc Haine Live. Welcome to this episode. This is where small business owners and entrepreneurs pick up core skill sets to help them work on their business, not just in their business. I am your host, Service Expert and Master of Experiences Marc Haine. And today, my guest is mindset work coach— sorry, mindset and intelligent work coach John Mill. And we will be talking about how to set and achieve growth targets for your business. And the steps you need to take to increase your business's value by 10 times. 10 times! And we'll get to that in just a moment. If you have been following me for any length of time, you know how much I love bringing you content each and every week. I am just blessed that I have experts and subject matter experts willing to come on the show and share their passion and their expertise. This whole show has become a real passion project for me. So, I have to give you a special thanks because I'm doing this because you're watching this. Because you think this is of value and that you keep coming back week after week. So, thank you so much for being here and watching this episode. If you haven't done so yet, why don't you go ahead and subscribe to this podcast? While you're at it, Feel free to follow me on Facebook, LinkedIn, Twitter, and of course, I'm on Instagram. You invest your blood, sweat, and tears into your business. You put in hours, hours of work. You do all the hard work. And after all that time, surely your business is worth what you think it is. In An IBISWorld report, 98% of business owners don't know the true value of their company. That's 200 million small businesses all through the U.S. that don't understand what their business is worth. So that brings me to our Question of the Day. So, how important is it to you to know the true value of your business? Have you ever looked into it? Go ahead and share your experience on social media. I'd love for you to be part of this conversation. So, make sure that you hashtag it with #ExperienceLeadership. My guest today is mindset and intelligent work coach John Mill. In the last 10 years, John has developed his 5 Mindsets of Intelligent Work, which by the way is also the title of his forthcoming book due out next year. He's also the author of Hire Your Buyer, which I think is a great title. And I look forward to tapping into that a little bit. Welcome, John! It's so nice to have you on the show.

Thank you so much, Marc.

So John, before we get into the deep and the dirty, why don't you tell us a little bit about what you do for your clients?

So, what I do is I was a tax lawyer for 25 years working with owner-managed clients. And I did a lot of litigation with CRA tax people. And one of the big topics for CRA is business valuation. So, I developed quite a lot of expertise in that. And what I noticed is that with owner-managed clients, their businesses have a very low valuation. And so, I set out to try to understand that problem and to solve that problem and understand it better. So, that's what I work on. I work in 3 primary ways. One is Hire Your Buyer, which is about setting a transaction where the owner transfers their business to employees or managers, some of it or all of it. So, that's a transaction framing. And originally, that included the value creation work. But the value creation work took on a life of its own and it's now become the 5 Mindsets of Intelligent Work. And I'm writing a separate book on that. And the way I actually engage on that is to do a process that's called improvement diligence with the client's business, as opposed to the idea of due diligence, which is a way of finding problems and reducing the purchase price. And so, improvement diligence is the mirror image of that. We're looking for ways to improve the business and increase the purchase price. That's fundamentally what I work on.

Nice! I look forward to dealing or digging a little deeper into that. In dealing with your clients, are you seeing any trends that you think is worrisome as far as the marketing of people's businesses?

Well, the whole system is fundamentally flawed in terms of how small businesses are dealt with. If we're talking businesses essentially with anything less than $5 million a year of EBITDA, that's where the big M&A firms kind of stop. And then, there's a whole other level of smaller M&A firms that come down to say maybe $1 million a year of EBITDA or $750 million or something. But the problem with the large transaction is it's a very expensive thing to organize. So, you need a lot of lawyers, a lot of accountants. And it's not uncommon in deals that the expenses of the deal will run into the $3 million, the $4 million, the $5 million. And that just makes no sense in a small business. And the problem is there's a substantial bias against owner-managed businesses where they're Incredibly undervalued. And I'll just make one anecdote of that and we can— we'll deal with another question. But there's a really good book written by Harvard Business Review called A Guide to Buying a Small Business. And it's written for MBA grads. And the authors of the Harvard MBA Guide to Buying a Small Business, who are professors, are saying to their MBA graduate— Harvard Business School MBA graduates that This is the third option, buying a small business after startups or big company careers. And they're describing it as an incredibly lucrative opportunity. And of course, these are the best small businesses that there are. So, they say there's about 200,000 to 400,000 of these types of businesses available. And the structure of the deal is because they're owner-managed businesses, it makes them very difficult to sell. So, when you sell an owner-managed business and the owner leaves, it falls apart. So, it really does not have a lot of value to investors. So, the Guide to Buying Your Buyer— sorry, Guide to Buying the Small Business by Harvard solves that problem by introducing the MBA graduate as the manager. And there's a pool of investors who put up the money to buy it. Now, the investment return is 25% a year plus if there's financing. That compares to Berkshire Hathaway's 20% a year.

Wow.

So, it's a very rich private equity return. And the reason they say— they explain this in detail, so it's a real eye-opener— is because owner-managed businesses are so— the valuations are so low. The multiples are like 3 to 5 for these kind of businesses. Smaller businesses, 1 to 3, right?

Wow!

So, whereas a larger business, exactly the same business would be 6 to 12 times would be the multiple. And that's even low because the average according to McKinsey for larger businesses, right? Well, last in 2019 was the stat I had was 11.6 times multiple. That was the average, right? So, they're saying what Harvard is saying is, look, if you have an enduringly profitable, high-quality small business and you can pick it up at a 4 times multiple, That's an extremely lucrative deal. So, on the one hand, what really bothers me, Marc, is that on the one hand, we have everybody telling the small business owner like you started, which is the normal thing, is you're really overvaluing your business. Businesses are not worth anything. And on the other hand, we're having the investors saying, oh my goodness, can you believe what an incredible deal that is? So, there's a real disconnect there and that's really what I work on solving.

Yeah, nice. And so, you're saying that part of the problem that we're seeing right now is that if people own their own businesses, if they're also managing their business, that becomes the reason why the valuation is so low.

That's correct. So, 90% of all businesses are owner-managed. So, it's very normal. It's very common. So, I say there are 4 gates that a business passes through. The first one is finding a product or service that you can sell at a profit.

Mm-hmm.

The second gate is identifying employees that you can gainfully employ so that the employees now start generating profit. Right? So, the third one is the— my mind is slipping me here for a moment. So, what's the third one? So, I can't remember the third one. But the fourth one Which is really important, which only less than 2% of all businesses pass through this. So, less than 2% of all businesses are more than 100 employees. So, less than 2% of all businesses— oh yes, sorry. I remember the third one now. So, the third one is surviving what I call the startup cut. So, the startup cut is where 90% of businesses do not survive past the first 10 years of business, right? So, to be in business for more than 10 years, like to be 20 and 30 years is a significant achievement. That means the business has a very solid foundation. So, of those businesses that have survived the startup cut, less than 2% of those grow past 100 employees in size. And we know that because Stats Canada has those numbers off the tax returns, right? So, The difference. So, just in summary, find your product, hire your employees, survive the startup cut. The next gate, the 4th gate is becoming owner-independent, relieving yourself of the management. So, it's not something to be critical about. It's an amazing achievement to get to an owner-managed business that's enduringly profitable as Harvard calls it. That's one of the most difficult achievements there is. And if Harvard is describing your business as one of the most valuable investments they can find, assuming that— this is assuming you have like maybe $2 million a year of EBITDA, right? Larger. The best of the best small businesses. There is nothing to be embarrassed or ashamed about. And what I say to people is, if you own that business and Harvard is telling their MBA grads, the smartest people in the world, that this is the best opportunity you can find, Why in gosh sakes would you sell it to them for that, right? Why wouldn't you do what they're telling their students to do? Get a manager and monetize it yourself. That's the basic core message.

Yeah, that's fantastic. I'd like to dig a little bit deeper into that.

Yeah, yeah, sure.

And we'll do that right after this.

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I am speaking with Joe John Mill. And we're talking about this idea of having a manager come in to manage the business and making the owner independent. John, how hard is this as a transition for business operators? Somebody who's had their business for 20-25 years. How hard is it for them to make this transition?

Yeah, that's a really good question because the whole focus of the entire process is to make the job easier. To have the owner work less and ultimately get to the point where the owner has really nothing left that they're required to do. That they're only working on those things that they choose to do. So, in theory, it should be and it can be a very easy transition, especially if you have the right people that are eager and understand, hey, look, this is a once-in-a-lifetime opportunity that you're going to have. And I had an interesting conversation with a manager recently where I said, well, listen, I understand that signing up to pay that over time, that you're going to be responsible for paying $3 million. It sounds like a lot of money and certainly in your circumstance. But in the context of what this business can do, it really isn't. And once he stepped into that, that was fine. But really, the big barrier is the fixed mindset, right? That people don't have a growth mindset. I mean, We're taught the fixed mindset in school. We're taught that there's A students, B students, C students, and we get pegged. And then, that's with that intelligence is a number and there's nothing we can do about it. And that employees are not capable of being managers and all those fixed mindsets. And just that's— so, that's where I start. That's the first mindset I start with because it just simply isn't true. Warren Buffett says that knowledge Our knowledge builds like compound interest, right? So, the more we learn, and we have no idea. We have no idea how much we can learn. All we know is that Warren Buffett is still reading 500 pages a day past 90. And still, you know, and the studies show that, you know, if you do that, and most people will not have any cognitive decline. In fact, your cognitive ability continues to increase. You know, so we don't know what the limit is there, but we can do a lot. But that's what I find is the owners just simply have a really hard time thinking that anybody other than themselves— they have a real anxiety about anybody. It's just faster and easier to do it myself. And they just have— that's the challenge, not the actual work. It's the psychological kind of anxiety piece.

I wonder how much of that also jumps into this idea that people's worth are tied to their jobs. And bringing in a manager who is essentially going to be running the business for you kind of strips you maybe a little bit of your identity. Maybe that's where some of that fix might come from as well.

Oh, 100%. Yeah, yeah. I think that I would say that's a small corner of it. It's important. It's very valid, very true. But I just think there's more to it than that.

Yeah.

You know, it is this sense of identity, sense of self-worth, the sense of parenthood. You know, it's your baby. I mean, there's just a lot of things going on. And it's for a lot of people, they, you know, they just have a very difficult time and probably won't. So it really has to be for somebody that wants to do it and wants to engage in the process.

Yeah. And again, the whole purpose of in this, in our context today, the whole purpose of bringing in a manager is so that to investors coming in, you have a business that doesn't rely on the back of the owner.

So, in most of the cases, I have never done a case with an investor. In most of the— in all of the cases, an hire buyer is specifically designed to exclude the investors because why do we want a group of people in there owning 80% of the business demanding a 25% plus return on their investment every year, right? And being quite hostile if it's not produced. I mean, we just don't need that noise in the background. Why not share it between the owner and the manager?

Sure. Yeah. And of course, that gives the manager a real reason to be there as Well, especially if they're doing what they're paid to do, right? Is that they're there to manage?

Yeah. I mean, yeah, I mean, it's, it's, it's, you know, it's a normal job. It's not a ridiculous job. The business is proven, right? It's been in business for 20 years. It's just people don't