How To Prepare Your Business For A HUGELY Successful Exit

Welcome to Capability Amplifier, the show for business owners and entrepreneurs who want high performance upgrades for their brains, bodies and bank accounts.

Hi, this is Dan Sullivan and this is the next episode of Capability Amplifier with a marvelous conversational partner, thinker Mike Koenigs. And we're going to talk about something really. It's a near death experience for a lot of people in the entrepreneurial world, and that is the whole prospect of selling your company. Something that was your baby and you nurtured it and you grew it and you went through the growth pains, but you're now at a point where you're actually thinking about selling the company. And I should say this, my experience is that 9 out of 10 experiences of this in the entrepreneurial world are very negative experiences because they're not approached correctly.

You are speaking the truth, my brother. You are speaking the truth. So the framing I'd like to give is, you know, what most entrepreneurs seek and desire is what would it feel like to receive that check or that wire transfer for 1 or 5 or 10 million or $100 million and have what we all are working for or think we are working for, which is freedom. And, and I love how you think of the four freedoms, which is time, money, relationships and purpose. But also so many of us, me included. My first business cost me a marriage, certainly cost me my sanity for a while, near bankruptcy. And then I believe that my third business actually was a major contributor to getting and having cancer. The stress it put on my body. And, you know, we do this thinking we're going to get to a certain point and we trade this time and we stockpile and we compress all this energy for the big check. And I've learned a lot about that mindset, which I don't necessarily agree with anymore. But the thought of, wow, what would it feel like to have your FU number, you know, where you actually have financial freedom and what that represents. And so often that's a driver instead of having what I would regard as the purer thought process, which is having pure gratitude for being able to provide great service and great value to an audience who loves you as their hero. And being rewarded on another level is really what this game is about. So our conversation today is about, like, what do you need to do to get yourself prepared? Prepare the business, make it attractive to a buyer, and also deal with, as you said, 90% or more people. It ends up being a failure. And I've got my commentary. You have the good fortune of working with tens of thousands of entrepreneurs and business owners, many of which have had multiple exits. So where shall we begin today, Dan?

I'm actually going to take you back to the last time you were in your 10 times workshop in Chicago, Mike, because you told me something that day which I think is really dramatically significant, that you were at your 10 times workshop on the day that completion of the sale of your business was being done by someone else. So talk a little bit about how this sale of this last business contrasted with the ones that almost killed you.

All right, well, this last one, which was you everywhere now. And it was. It was literally as we were standing there, I remember turning to you and saying, dan, I just got word the transaction's completed. The wire transfer happened, which really marks that. And this was a very different exit, which was. I actually chose and reached a point where I woke up one day and knew I was done. It was like a segment of my life was over and I'd completed everything I ever needed to complete, and I wanted a clean exit. So actually made the decision to wind down all the things that didn't serve my body. My family, my marriage, my son, and my purpose, really, Because I knew if I wasn't 100% behind this in every way, it just didn't feel right anymore. And fortunately, I also found someone who was interested in the business to take it over. So I'll contrast that to the backstory. Here is. The first company was a interactive marketing agency which sold to a publicly traded company called the Interpublic Group. The second was actually two businesses, and it's kind of like three businesses in one. It was traffic guys or instant customer, and then an information marketing business which sold to another publicly traded company. The third was a product, really a product business, but a product in itself. And then the fourth was kind of an event information product training business with coaching and advising. So what was different about them is the agency was a pure act of passion. And the real truth is we built the business. And my business partner and I really wanted to make movies. So we wanted to make movies. So we were writing scripts and learning filmmaking skills while we started this agency and we were producing, like, video games for the ad agency and all that. We never even thought of the idea of selling the business until the dot com thing came around in about 97. And we were approached by a guy who brokered businesses and made them public. He was working with all the big guys, and back then you could just make anything, go public and earn tons of money. It was junk, you know, it was crazy. But we learned really fast how we had not built a business that was ready for sale. We didn't have a process for hiring. We weren't scalable. Eventually what happened was a bunch of agencies realized that interactive marketing was so important for them to attract and retain customers. And they went into an acquisition phase. And we ended up getting in a situation where there were multiple agencies looking at us. And we created a little bit of a bidding war strategically. The truth is, the way that happened is someone I knew started leaking, hey, these guys are being approached by this guy and you should take a look at them. And it created a buzz and pretty soon a little frenzy. So that was interesting. And also our timing was impeccable and we had very attractive clients. We had General Mills, 20th Century Fox, Sony. We were doing stuff for. And we worked for a bunch of agencies. So they had experience with us. So I'd like to look at that and say it was a lucky timing break. And some of it was. And the truth was the value was in perception. It wasn't really in the business itself because, shoot, if a whole bunch of complicated clock pieces fell apart, there was no business. But we were a tip of a spear for agencies that what they needed right then. And we had a great story and that's really what they bought. Yeah, I'll let you stop here and ask me any questions about that before I kind of move on to the other ones. And we can look at like, what were the big learnings.

One of the things I've discovered from my own past experience, Mike, that past luck, properly analyzed, can become future skill.

It's so true.

I mean, even if it happened by luck, that's cool. But you know, there's a lot of things that have allowed the human race to survive. That was luck in the first instance. But then it became skill. One thing I want to just get in here just as a couple things that I've learned. Now here's the thing about me. I have one company. I've never thought about selling it and I never will think about selling it because it's the vehicle for creating an enormous amount of other things as I go along, like books and, you know, concepts and tools. And we have a build in multiplier model that allows us to look forward easily that we can go 10 times. I love the activity. There would be nothing else that I would be selling this company for to get into. But I will say this. The key to really selling your company is to look at everything through the buyer's eyes. Okay? And there's one thing that the buyer is looking for, and that is first of all a self managing company that if I buy this company and the owner is no longer there, it goes on managing itself because the owner's gone. If any part of the ongoing success of your company depends uniquely on you, they want to buy it at the lowest discount that they possibly can. They want discounted. So the big thing is you got to have really, really clean books. And the other thing is that people who buy companies do it all the time, but people who sell companies generally do it once or twice or three times. So the people buying companies really know their game better than you do. When you're selling a company, the other things they're looking for is predictable monthly cash flow. And if you don't have a business that provides predictable monthly cash flow and it has big leaps and it has valleys, they're not interested. It's not saying they're not going to buy it, but they're not going to give you what you think the company's worth. So they want predictability of cash flow and they don't want you around. So here's a sale that I had about a year and a half ago and it was the biggest in my history of entrepreneurs who were in strategic coaching. It was for $1 billion. One billion. It was a big one. Technology company had a particular process that was world class and it shortened another whole industrial process in the industrial world by about 60%. This one process and somebody big really wanted it. So I asked the person, I said, why are you doing this? And he says, well, I've created this other company I want to get to and right now that other new company is a lot more exciting to me than the company I have. I said, that's a really good motivation. You have something to jump to that's more exciting than what you're leaving by. I said, if you're saying I just want the money but I don't know what I'm going to do afterwards, that's a really bad motivation. So you're freeing yourself up to do something that's more exciting. So what I said is put down absolutely everything you want on your response to their buying offer. And he wanted three things. He wanted the check in one check. So it wasn't a billion dollars over 20 different pieces over five years. It was one transaction for a billion dollars. The other thing is he was gone the day after, so they weren't going to have him on board for next two or three years. And the other thing is he wasn't going to sign a Non compete. So the company says, well, this is totally unacceptable. He says, that's not the way we buy and sell things. And he says, well, and first of all, he had a lot of guts for this. He says, well, you see, we've reached absolute clarity. He says, I'm not going to sell my company to you because unless I get it in one check and I'm gone the next day and there's no non compete, I'm not interested in selling. And remember, you approached me, I didn't approach you. So I'm actually the buyer here and what you're offering to me, I'm not buying. Then there was 10 days of absolute silence. And he says, what have I done? I'm just totally crazy. And on the 11th day, business day, the phone said, anything you want, anything you want, let's just make arrangements to do it. The thing is, approach it as if you're the buyer from your side and they have to be an acceptable person to take over your company. Because a lot of companies just take over other companies and then they treat them like chopped meat or if they're steak, they make them into chopped meat and then they sell it off four or five years down the road. They don't have any of the emotional attachment to your business that you do. And remember that you're leaving your company, but your employees aren't. And how do you want to be remembered by your employers on how they got taken care of after you sell your company? So there's a lot of considerations here, but the biggest one for me have a bigger future that you're actually jumping to. And then the other thing is have a totally clean company that grows without you being there after you leave. So I would say those are some considerations about it.

Yeah, those really resonate. It's a good transition to the second business, which again was fascinating timing, which was when I did Traffic Guys are an instant customer. Both software companies. And I'll comment on two of the little things for you. One of them was this whole notion of having really clean books. A good friend of mine who had multiple exits told me once, he said, you should be doing book audits every quarter. And the reason for that is time kills deals and you never want to be strapped by funky books. So I've always kept impeccable books, always paid my taxes on time, have no black marks. And you know, it's easy to do research on the owner and the business to see what kind of nastiness is out there. Plus, having a Better Business Bureau listing is valuable Too. It's ratings and reviews. And with regards to the predictable monthly cash flow, that's precisely what made Trafficizer instant customer attractive, is it was a software service business that we had paying customers and at one point, you know, many thousands of them paying 100 to a few hundred bucks a month. And that's super attractive because a smart company walks in and they're like, not only do we have the predictable cash flow, so it's easy to provide some multiples, but if they've got a service offering that they can sell to the good customers, it's a no brainer for them. It's literally a math problem. And what every business I've ever run into is that, you know, they all can always look on the outside and go, holy cow, you're leaving so much money on the table. So that opportunity in the situation with that business, we also had some incremental revenue, which is we did product launches that were information related at least twice a year plus we had events and we had trained our audience. So this is a very key thing that I would look for if I were buying a business now is have you trained your audience, your non buyers and your buyers alike to buy from you a certain way? In the specific example I'll give you, there was not long ago in the world of influencers, there are these people who've got millions of followers on their Instagram and their Facebook feeds and big business went in and they're like, oh, we're gonna monetize these influencer followings and everything. And everyone got all smart about what they're gonna do. And as soon as the businesses got involved and started taking over these influencer channels and buying them or doing whatever, the first thing that happened is all the followers rebel and go, yeah, you're a sellout whore, I'm not gonna buy anything from you. And they haven't trained anyone to buy anything. There's massive rebellion. So they could influence someone to behave a certain way and buy. But I think, you know, in the case of the Kardashian, the one that has the makeup line, you know, it's 23 year old billionaire. What she did that was smart is she rolled out her own products and taught people to buy.

Kylie Jenner.

That's right.

Yeah. First self made 20 year old billionaire, I mean she was actually kind of thrown out of the family when she was 15 years old and cut off and everything. And she's become a self made billionaire. And it's just perfect example of the concept that we have in Coach of who, not how, totally.

And that is certainly in my opinion, an anomaly.

I think she's got 20 employees, actually 20 employees, you know, and she's doing a billion. You add 20 into a billion, that's a lot of income per job.

Pure craziness. I give the Kardashians a lot of hell because as a rule, first of all, I don't get it. The second thing is, I don't get it. I look at it, I go, adds no value to the human race, but you just can't poo poo the success.

I mean, she's providing really good products.

Totally. Yep. So yeah, absolutely, I got, I've disallowed myself to vote on that one. So. But anyway, that was what made that deal work. And also again, crazy impeccable timing. Both of those businesses were built when SEO and search engine marketing and video marketing didn't even exist. I've started playing around, had some success, could demonstrate success, worked with some influencers, launched the business and it just took off like hotcakes. It was during the early times when generating sales was very cheap. And as things got more sophisticated now and you know, everyone's basically dependent on Facebook or Instagram ads, who's doing online marketing. There is no inventory, there are more advertisers and they're just a bunch of lemmings running to their deaths. The costs are insane. And it's gotten so complicated to market and advertise successfully. I don't like it and I'm an online guy, right. But getting back to one of the things that I did that really was smart. This wasn't my invention, but when I did my deal, I didn't get all my cash up front, I got enough up front. This was where I could walk away, say that was worth it, no matter what happens after this. Because the attorney said this might be the last check you ever see and there was enough money on the back end that it was my FU number. Okay. Subsequently, things started falling apart. But the way my deal was structured, and this is what I'd advise anyone who ever sells a business, is just make sure that if there's any non compete at all that it's terminated immediately upon any part of the deal or payments being even missed by a day. It's sort of like everything is off the table and a good lawyer will be able to negotiate that. It's sort of like, hey, we all have the best of intentions, we're gonna do the right thing here, blah blah, blah. And anytime someone is financed with outside, you can't control anything. As soon as you've handed over the keys, that deal's done. But I think that's the other one. And I also thoroughly agree on having your next thing figured out. But in my particular case as a serial entrepreneur, the other mistake I made is I started another company less than a month later. That was a mental mistake because I burned a lot of cash, made a lot of mistakes, and I didn't realize how much accumulated entrepreneurial trauma I had been carrying around. All kinds of cumulative fears. And you're gonna just make the same damn mistakes if you don't have time to meditate. Meditate and reset.

You know, it's really interesting because I've followed you since I first met you and except for, I would say the cancer setback that you had, that basically all the trauma that you experience is not necessarily seen on the outside by other people. And the big thing about being an entrepreneur and going through this experience again and again and again and again is that there's a real wisdom that sets in where you size up things 100 times more quickly than you did in the first one. And you would never have developed the ability to size things up quickly if you hadn't gone through the trauma.

You're absolutely right. Now I understand why so many wise entrepreneurs, and this isn't an always, but why your 50s are oftentimes reserved for your big money. Your 50s and 60s, yeah, you just need to be conditioned and get some of. It's just like stupid testosterone pushed out of your body that caused you to make stupid mistakes. And again, this isn't an always, but I know when I meet 20 and 30 something and even mid 40 something entrepreneurs, I'm like, holy cow. I really can see the lack of maturity of character that allows you to weather the storm beyond good timing, a great idea, or just like, you know, the lucky sperm club getting you through. You know, it's like after you've gone through three or four cycles, you don't take this personally, you don't have the personal association. So I do want to go down one little rabbit hole with you, which again goes back to you opened up and talked about the world class company that had the billion dollar exit. But to your recollection, out of the 30, 40,000 or so businesses that have gone through Coach, what percentage of them have you observed go through a sale and then the owner starts something again and is successful the second time? Do you have any concept, even anecdotal, of what that might be?

First of all, you know, in my Experience. It's seldom that the second business is better than the first business that they sold. And the reason is the first business was passion created. And they created a company because they were very compelled to create something new in the world. And then when they do it the second time, they're convinced of something is a really, really good investment and everything else. But they don't bring the passion across. It's almost like they got a big check to leave their passion behind. But the only thing that would actually start a new company is the original passion they had with the first one. One of the problems when you get a big check is you don't have the same danger and fear factor.

Totally no pain, too, to drive the pain. There's no pain.

Yeah. In your first business, you couldn't pay for stupidity. In the second, you've got enough money to pay for stupidity, you know? So you do stupid things because there's no penalty for stupidity in the second time through.

That is true. So here's something I can speak to as I'm going through what I call an observant cycle. So I've taken quite a bit of time off to think. And I noticed my tendency is, oh, I'm going to do this. Nope, nope. Because now I know what the mindfield is like. I'm like, I'll lose a limb over here. I'll lose a toe over here. A finger. Or my tolerance for BS is at an all time low to be like, ah, that's going to suck. No way am I going to go through that. But the other thing was when I.

You were the BS master of the universe on your way up.

Yeah, right, Right. Yeah. And I put up with, right. It's in and out. But here's what was interesting. When I started my last one, you everywhere. Now, even though I started it right away, I didn't know exactly what I was going to do. So I started experimenting. I built out a big studio, I started playing around, I started an online TV show, and I'm like, huh, I wonder if I can create, like a podcast that has a live audience. It does audio and video with live guests and has a Saturday Night Live component. And I hire comedic writers and I sell stuff like an infomercial and I'm gonna get it on TV too. So it turned out it was like one of these. I didn't think of it as an ego project at the time, but it was. I must have burned 400,000 bucks, hired the wrong people, just did all kinds of stupid crap. And I didn't have a business model. It was like an experiment. Now, the funny thing was I ended up creating products as a result of that and learned a lot really fast. And, you know, eventually my wife was like, what the hell happened to all that money? And I was like, I wasn't paying attention to it. And I thought, like, the next thing was just around the corner. So that is the problem I observe is stupid, follow stupid, Especially when it comes to money. You can't believe you're gonna do it all over again. So I agree with that. So getting back to. I would like to end this episode with what have you observed to be the exit mindset, the best exit mindset from your past coaching members. What have you noticed that the ones who walk away unscathed and say, I did it right. What's the value emotion that you observe consistently?

Yeah, the biggest thing is that they make it very, very formal. So in other words, it's something that happens over 30 days and at the end of 30 days, but that from a learning standpoint, they go back and do a good review of. This is everything that I've gained from this experience. And I do this on a weekly basis. And most people in coach have this as a habit. Mike, in terms of the moving future exercise that we do in all the workshops. So every strategic coach client has a moving future. This were my winning achievements for the last 90 days. These are things that have a lot of movement right now that all I have to do is give a little bit more attention to, a little energy. And I've heard about some great new things that I'd like to start and look at during the next 90 days. And during the next 90 days, these are five measurable jumps in performance that will constitute 100% win over the next 90 days. But here you're doing it, and I would formalize the time. I tell everybody, you know, at least take some time off. Don't leave one office on one day and go to the office the next day. You know, it's kind of like marriage. I tell people, you know, don't date after you go through a divorce because it's unfair to the other person. Because you're not looking at them as an actual individual. You're looking at them as compensation for what you just lost. And I said, the other thing is free time and work actually heal you. And there is a wisdom that you have that you won't know for two years. So give yourself a chance to actually grow as a person where you're not right back into the grind Again, you know, there's different situations. But the other thing is you have to be back in the saddle within one year or you're going to doubt the confidence that actually created your previous success. You're going to discount all the skill and all the knowledge and wisdom that actually created your success and you're going to start putting it in the luck column. You were just lucky. So you're losing in one year all the confidence. So I make a requirement that everybody who sells their company has to have a fully active company within one year or I won't let them in the program because they drive everybody in the program nuts.

That's really good. I know that at one point I can't quote it precisely, but it'll be generally right. Which is Harvard Business Review. And something else, I think we've talked about this on a previous episode that they did an analysis of people who started another business and if they didn't start within a certain period of time and it wasn't long, the chances of them being successful a second time was like. Is single digits.

Yep. So.

And I've observed that and you know, a fair number of clients that I've.

Worked with, they become annoying because they, they're like retired ball players who are talking about something that happened 15 years ago. Remember that game with, you know, that you remember, you know, the ninth inning.

Napoleon Dynamite has the best. If you've ever seen that movie, it's this guy's uncle who's still talking about his touchdown pass. He missed. And he's like a 35 year old guy who lives in his van. It's the best example of that ever. He's reliving this horrible moment and trying to.

Nothing more boring than an old retired entrepreneur.

You know, it's good. Yeah. The stories are 30 years old. My takeaway that I think is most important is detachment, which is the moment you've handed over the keys. If you're attached in any way to the baby, you just allowed someone to adopt knowing that you may never see them again and they could just turn them into sausage. You're in trouble. You cannot be attached to the brand or anything. And I knew a guy who started a company back in the cable industry and he literally went insane because his board kicked him out of his own company. It was on the basis of sexual harassment. And this is back in the 90s.

It had to be serious in those days.

Well, the truth is I'm not sure if it really was, but they used it. He's not the kind of guy who would have done that? I knew him well enough and I knew his character and I also knew his wife. The board saw a lot of money and he was an impediment. He's the kind of guy who didn't have a filter and he just said stupid stuff all the time. And it's kind of like what Scully tried to do with Jobs, because Jobs was an impediment and a pain in the ass. However, Scully basically drove Apple to its death because he thought he could walk in. And so it was a different example.

He thought it was just another kind of Pepsi.

And the truth is that's exactly what happened to this company. Basically, the board drove it into the ground because this guy, even though he was a nut job, he had solid relationships, even though he said stupid crap, you know?

Well, and the other thing is, and that's, I think, more and more the case that the investment is not actually in the product. The investment is in the entrepreneur. Most of all, our smartest investments are in people, always.

That's the true value product.

It's not service, it's not device, it's in a person. You know, this is so crucial, Mike, because we're going through a period where there's a lot of selling of businesses going on right now. Smaller business, a lot of 50, 60 year olds, you know, I mean, the boomers are leaving the field, you know, and they accumulate a lot of wealth and there's a lot of movement of companies right now. And I have them in my workshop program and I said, if you're going on to something bigger, I got all the time in the world. If you're going on to retirement, I have absolutely nothing to say to you.

Once again, I completely. It's a fascinating time. We've talked about that in a previous episode and I will go back to a resource that I mentioned in a previous one too, which is powerful by Patty McCord. It really is about driving a business based upon values and employees. And look, this is not a new topic, but it's like, how can you get them to that point of having the predictable cash flow also? But it comes from just having the right people make good decisions.

Yeah. Netflix completely restructured how people get their entertainment, so they've got a great story to tell.

They totally do. Well, let's wrap this episode up. Once again, thank you for being here. Make sure you head on over to capabilityamplifier.com people like you can share and learn about the gifts that Dan and I are providing. Thank you for the listen and Dan, as usual, another fun, fun episode.

Great pleasure. Thanks.

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