Unlocking the Secrets to a Profitable Business Exit
In this episode, we delve into the essential elements that determine the sellability of your business.
Join host Lani Dickinson, as she uncovers the critical factors that buyers evaluate when considering a purchase. From ensuring your business generates sufficient cash flow to establishing a self-sustaining team, we explore actionable strategies that can enhance your exit value.
Discover why a predictable sales system, documented processes, and a strong brand story are vital for attracting buyers and achieving a successful exit. Don't miss this opportunity to learn how to position your business for maximum potential!
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Transcript
>> Lani Dickinson: The business has to be making enough money to be
Speaker:worth buying. That might seem like a
Speaker:no brainer as I say it, but part of the reason
Speaker:many businesses don't sell is there's not enough
Speaker:money to pay the new
Speaker:owner much more than a salary. But also
Speaker:they have to make debt payments. So there's gotta be enough
Speaker:cash flow and profit coming out of the business to make the
Speaker:debt payments and give the new buyer
Speaker:the cash flow lifestyle that they are looking for and
Speaker:also grow the business.
Speaker:Hey Exit Focus Founder, welcome to the Stealth Freedom to
Speaker:Exit podcast where we dive into the real questions,
Speaker:the real answers, the strategies, the
Speaker:mindset, the roadmap. Basically the changes
Speaker:that self led founders need to make now
Speaker:before they find out it's too late and they have an asset that
Speaker:is not sellable. Which is true for four
Speaker:out of five businesses that get listed. They are not
Speaker:sellable. Only one in five actually sells.
Speaker:So in this podcast we talk
Speaker:about how do we get you
Speaker:operational independence, a real exit
Speaker:strategy that will work and will make you happy
Speaker:and how do you get radical life changing results.
Speaker:I'm Lani Dickinson, your Freedom Sherpa on this
Speaker:journey and we are all about helping you
Speaker:get what I say are two versions of Exit.
Speaker:One time and location freedom, the other an
Speaker:actual sale at the end for the maximum multiple that
Speaker:is possible for your business. Here's the cool thing, the
Speaker:actions are the same no matter which version of exit you want.
Speaker:So with that let's dive into the whole list of things that are gonna
Speaker:drive your exit value for you and also get you time and location
Speaker:freedom.
Speaker:The first thing is that we have to realize is
Speaker:buyers today are not looking for a job. Many of the
Speaker:boomers who are ready to sell their businesses, they grew up in a
Speaker:different time where hard work was sort
Speaker:of a badge of honor and it built the world as we know
Speaker:it today. But buyers today are not looking for a
Speaker:job they have to work in. They are looking for
Speaker:cash flows and return on investment.
Speaker:And frankly there are several people out there
Speaker:training buyers on how to buy your
Speaker:business with no money out of pocket.
Speaker:And because most businesses aren't built in a
Speaker:way that make them sellable or sustainable,
Speaker:they are also teaching them how to keep you in the business for
Speaker:another two to five years, running the business but now
Speaker:as an employee and they're making the payments off of
Speaker:your existing cash flow. So it's really important
Speaker:to dial in and hear what are the drivers
Speaker:of that exit value and what are the changes you need to make
Speaker:now, so that you're not caught in that
Speaker:situation, first, the business has to be
Speaker:making enough money to be worth buying.
Speaker:That might seem like a, no brainer, as I say
Speaker:it, but part of the reason many businesses don't sell
Speaker:is there's not enough money to
Speaker:pay the new owner much more than a
Speaker:salary. And I already said they don't want to work in the
Speaker:business. But also they have to make debt payments. So
Speaker:there's gotta be enough cash flow and profit coming
Speaker:out of the business to make the debt payments and
Speaker:give the new buyer the cash flow lifestyle that they
Speaker:are looking for and also grow the business. In a
Speaker:person to person transaction, that would be about a
Speaker:minimum of a million dollars in EBITDA
Speaker:or seller discretionary earnings. And in an
Speaker:institutional transaction where
Speaker:another company or private equity is buying the business,
Speaker:that's going to be at around $10 million. So as you're
Speaker:thinking about, is my business sellable? Depending
Speaker:upon who you're looking to buy your business, we got to
Speaker:hit either a million dollars or $10 million. The
Speaker:very next thing, which is kind of in a tie for
Speaker:earnings is is the business self
Speaker:run without the owner? That means is there a
Speaker:team that is developed enough to run the
Speaker:business and stay after
Speaker:the selling transaction? This is
Speaker:key. I've already talked about all the reasons why the next thing
Speaker:is not just making at least a million dollars or
Speaker:$10 million, but profitable with very
Speaker:high margins. And in future episodes I will
Speaker:talk about why that matters in depth. But
Speaker:basically people are looking for return on their
Speaker:investment. And when you think about it, we can invest our money
Speaker:in the stock market and get about 7% return.
Speaker:And most small businesses are making about a 5%
Speaker:return. So why would would somebody buy your business if they could
Speaker:make more in the stock market? So we will deep dive that in
Speaker:a future episode. The next thing that is critically
Speaker:important is a predictable, repeatable
Speaker:sales system. Meaning we turn on the
Speaker:lever and saless come in and we can show that
Speaker:that's very predictable and repeatable. And the thing
Speaker:that makes that even a higher quality item is if
Speaker:we have documented how we have optimized
Speaker:each phase of that. And the next thing that
Speaker:takes it up a notch is do we have monthly recurring
Speaker:revenue? That's very high quality. We'll dive into that
Speaker:in a future episode as well. But monthly recurring
Speaker:revenue will get a minimum of $2 for
Speaker:every dollar you have in monthly recurring revenue. So this
Speaker:is a hot topic in the small business
Speaker:entrepreneurial space, but it has definite
Speaker:impact to Your ultimate exit multiple.
Speaker:The thing that most small business owners and
Speaker:entrepreneurs hate is sops. They hate
Speaker:writing them. But we have to have system
Speaker:and process that show how this business is run,
Speaker:front end and backend. We have to have our key
Speaker:systems documented and again optimized.
Speaker:And we also have to have what we call OKR
Speaker:or KPI objective key results and
Speaker:key performance indicators. Otherwise, how do we know if we're
Speaker:getting better or we're getting worse? We want toa be able to track data
Speaker:on these systems, these key systems, and
Speaker:what takes that up a notch in the exit multiple is if
Speaker:key leaders in your organization have their
Speaker:compensation tied to the outcome of those
Speaker:okrs and those KPI's. So we'll deep dive that in
Speaker:another episode. Another thing that shows a very
Speaker:strong business that's worth buying and worth paying a
Speaker:fare multiple for is a communication
Speaker:cadence and the discipline to have a
Speaker:monthly review where we deep dive all of the numbers.
Speaker:So numbers are important and we say what are we going
Speaker:to deep dive and make better? And then
Speaker:having a quarterly project where every quarter we
Speaker:take one little segment and we fully optimize
Speaker:that and we start closest to cash. So if we
Speaker:can document that we have that discipline,
Speaker:that's gonna drive our exit value even higher. The next
Speaker:thing that a buyer is going to be looking for is your
Speaker:history of focused and intentional year over
Speaker:year growth coupled with the growth
Speaker:plan for after the sale and how their
Speaker:investment can actually make that growth go
Speaker:faster or be larger. So a real
Speaker:emphasis on growth. Remember, they're buying cash
Speaker:flow and they're buying return on their money. So really
Speaker:they're not looking to buy plateaued businesses.
Speaker:The next thing that they're gonna look at in the valuation
Speaker:is concentrations. That's concentrations of
Speaker:customers. So do you have one, two or three
Speaker:main customers or do you have 10 customer types or 20
Speaker:or more? And then the same with your suppliers? Covid
Speaker:taught us we don't really wantna be dependent on one or two
Speaker:suppliers. We've probably already learned that lesson. But
Speaker:it also impacts your exit multiple. But it's not enough just
Speaker:to have a diversified customer base. We also wanna have really
Speaker:happy customers. And so how are they judging
Speaker:really happy customers? Well, they're looking for, do
Speaker:you have a formalized way that you get and
Speaker:implement feedback? And the most popular way
Speaker:is through a net promoter scoring system. We will talk
Speaker:about that in later episodes. But do you have happy
Speaker:repeat buyers that make referrals and
Speaker:grow your business by word of mouth? And then how do you
Speaker:systematically take their feedback and improve the
Speaker:business. Another thing that is important to note is they
Speaker:really generally don't want the real estate. Real estate does not
Speaker:appreciate in the same way as growth, in
Speaker:the business, number one. And number two, they're not looking
Speaker:for the opportunity to just randomly buy machines. So your
Speaker:capital needs to be up to date. If not,
Speaker:that's gonna be a discount on the exit
Speaker:multiple. Now all of this comes down to
Speaker:the numbers. How well are you managing to the
Speaker:financials? There's a statistic out there from the Small Business
Speaker:association that says something like
Speaker:only 35% of business owners get
Speaker:their financials in less than 5% even look at
Speaker:them. Now those might be off by a few
Speaker:percentage based on my memory, but at the end of the day,
Speaker:what that says is most of us aren't doing anything with our
Speaker:financials. And so it's important. You got to get
Speaker:a bookkeeper. At the minimum, depending upon where you are in business,
Speaker:you may need a cpa. And if you want toa sell your business in the
Speaker:next three to five years, you absolutely want to
Speaker:transition to having a cpa. And we
Speaker:want audited financials and at the of the sale, you
Speaker:might evennna provide a seller quality of
Speaker:earnings report. And we wanna be very transparent
Speaker:about all of those costs that we're sticking
Speaker:in the business that our CPA has told us.
Speaker:Yes, we can tax deduct those things, but they aren't
Speaker:completely necessary for the ongoing running of the business. So
Speaker:those are called seller discretionary earnings. We really
Speaker:wanna get them out. And if that's not possible
Speaker:just because the reason we do that is to minimize our tax
Speaker:burden. Right? We wanna be very transparent about that so that it
Speaker:doesn't create another discount in our
Speaker:selling transaction discussions. The other thing is we
Speaker:want to be eliminating as many costs as we can without
Speaker:slowing down growth and then being able to show
Speaker:that we pay for experts rather than
Speaker:generalists. This is a whole topic in another
Speaker:podcast. the other thing that they'renna look at is what is our
Speaker:competitive advantage? Do you have ip? Do you have
Speaker:trademarks? Do you have license? Do you have a
Speaker:process that nobody else has? Is there some kind of unique
Speaker:access that you have? What's your brand story? What's your
Speaker:big why? What were the struggles? This all reveals the company's
Speaker:DNA. Is this dog gonna hunt? Is this horse gonna win
Speaker:the race? This is what the brand story reveals to the
Speaker:buyer. Our past generally
Speaker:informs the future. So it's important if you were in
Speaker:business in 2020 and
Speaker:2008 to be able to show what was
Speaker:the trough of those years and then how long did it take you
Speaker:to come out of that trough? So the peak to trough story, your
Speaker:brand story is incredibly important. There's an
Speaker:online marketer, his name is Billy Jean, and he
Speaker:put what's called an order bump on a checkout. And
Speaker:that's really not important, but it was something people had to pay money
Speaker:for. So it was $9.95 order
Speaker:bump. And he stated on the bump
Speaker:in the video at the checkout, all the places,
Speaker:this is literally for nothing.
Speaker:Ninelars 95 cent gets you nothing. He restated it many
Speaker:times. His brand is so powerful, by the end of
Speaker:30 days, he had made $5,000 on
Speaker:that. People just believe, you know, o this is Billie Jean. He's
Speaker:gonna put out a quality product. And so they bought this
Speaker:thing. So what is your brand story and the strength
Speaker:of your brand? So this is kind of the main
Speaker:list of things that we will talk about in depth
Speaker:in future episodes. We will interview people who've gone through
Speaker:the process. We'll interview experts on each of these topics
Speaker:and at the end of the day, help set you up
Speaker:in a way that you are positioned for
Speaker:either version of exit, whether that's time and location freedom, or
Speaker:to sell your business for as much as you possibly
Speaker:can. When you'ready to completely exit and
Speaker:exit for more.
