It’s never too early to plan your exit strategy
What’s the business worth? Who will buy it and at what price? Should I even sell the business? Is there another option?
It is never too early to plan your exit strategy. It can take 3 years or more to prepare your business for you to leave and receive maximum economic value.
In this episode I talk with my friends and business experts, Thomas Mele and Kirsten Barranti about some practical operational and legal steps you can take now to prepare your business for an exit that will maximize its value to a potential buyer.
Jason Clause: Welcome to the Jason Clause Show. I'm Jason Clause, your host, and today we're talking about, as always, good ideas for busy managers. Welcome, welcome, welcome everybody. This is the Jason Clause Show. It's a podcast dedicated to helping busy managers find good ideas to lead their teams. My experience is the best managers out there, they're idea collectors. They're always on the look out for great ways to build culture, to build their teams, to help their teams be more efficient, to help their teams be safer, and that's what this show is about. It's about finding those ideas and sharing those ideas. We have an awesome episode for you today. I've got a couple of friends joining me, Thomas Mele and Kirsten Barranti. We're going to be talking about how you build the business in a way that allows you as the owner or you as one of the management team leaders, how do you build it in a way that allows you to maximize the payoff when it's time to exit. We'll get into it right after this.
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Alright everybody. Welcome back from the break. Like I said, we've got a great episode for us today. I've got a couple of guests, and this is the first time we're going to be trying to do two guests on the show. I'm excited about that. The topic we're going to be talking about, it's a presentation that I saw a couple of weeks ago called Built To Exit: Maximizing Your Business Afterlife, and this is one of these episodes that will fall into the bucket of begin with the end in mind, only this is a much longer arc than anything that we've talked about before. It's about building the business in a way that allows you to get to where you want to be at the end of things. My guests are experts at helping companies do this. Ladies first, I'd like to introduce Kirsten Barranti with the Barranti Law Group.
Kirsten B.: Thank you.
Jason Clause: Welcome, thanks for joining the show, so glad you're here. My second guest is Thomas Mele with the Mele Group. Thomas is a management consultant focused on helping companies improve their operations to maximize the efficiency and the profitability of the company. Thomas, thank you for joining, really glad you're here.
Thomas M.: Thanks, Jason, glad to be here.
Jason Clause: Like I was saying, thank you for having me come to the presentation. That was awesome and I'm eager to share it with everybody. Before we get into it maybe just do a little self-introduction as well. Ladies first. Kirsten, maybe where you're from, how did you get started.
Kirsten B.: I am from the Bay area here in Livermore. My office now is in Dublin. I've been an attorney since 2001, so just a few years. A second career looking at, had worked out in business prior to working with small businesses on labor issues, business issues, and so firsthand recognize those issues that you may have built a business and you think you have children who will take it over, and now what do we do with that business. And I think that's kind of where, from a legal perspective, people have an expectation that they're going to get all this money, but there's only so much I can do and that's where I think Thomas comes in.
Jason Clause: That's awesome. What I just heard was breeding by itself is not an exit strategy.
Thomas M.: That's true.
Kirsten B.: That would be a fair statement.
Jason Clause: That's not going to be in the presentation, everybody. That's free advice from me.
Thomas M.: That could be a whole other show, actually.
Jason Clause: Yeah, I guess. Well, Thomas, same sort of hand off to you. Where are you from and how did you become Thomas?
Thomas M.: I was actually born and Ann Arbor, Michigan, but lived all over the country. My dad was in sales so we lived everywhere. I think I went to, last count, was 13 different homes before I got out of high school. But my PhD is electrical engineering, I graduated back in 1988. The focus there was on semiconductor technology and I spent 25 great years. I really enjoyed every year of it, very challenging, in the semiconductor industry. The first half was with a company called Motorola, working with semiconductors, production and technology side and then the second half was with a company called Applied Materials where I worked on the equipment, manufacturing and tooling side. Lots of different roles, everything from an engineer to a plant manager for Motorola to being a Chief Marketing Officer for one of the large billion dollar groups at Applied Materials. Had a great career, loved it, enjoyed it. And then in 2014 decided to open my consulting firm, the goal there was very simple, it was to take all the techniques and tools and learnings that I'd gotten over the years working across many functions inside large corporations to figure out how do I scale this down from these tools to business owners to help them really maximize the performance of their company? How do we get the maximum income out of it for them, so they're really reaching their income goals but ultimately how to build an operation so some day they can see their operations thrive without them and maximize their value, however they choose to exit. So that's what I do.
Jason Clause: Right on, well welcome guys. Alright, let's just jump into this. Other than breeding, what are some examples of some exits that you've seen out there? What are the options that folks have?
Thomas M.: Yeah, so, what happen is people, as you mentioned earlier, they spend their whole lives building a business, really for many of them, it's their most valuable asset at that point in time. And there are, in the simplest form, fundamentally four different ways it's going to turn out in the end. First is, they're going to shut it down and walk away and obviously nobody wants that one. You wind up liquidating the assets themselves in some form or fashion. A lot of cases, business owners ... the second one, is they're going to work until they die. Literally they will work in the business until they pass away and then again somebody's going to liquidate that asset, but it won't be them, it'll be somebody else. The third one is to keep ownership of the company but set it up so they can have it run without them and that is actually an interesting concept that a lot of people don't consider but ... And that could be a transfer of ownership to the employees, it could be transfer of ownership to ... Actually, they wouldn't transfer the ownership, they would keep the ownership but they would have it run without them and they would basically see a residual income. The transfer comes in the fourth one, which is they could sell the business or transfer the ownership to somebody else and that's where most people see their business ending up, they want that payout at the end.
Jason Clause: Right, and then the goal here being which mix works for you, hopefully not one of the top two.
Thomas M.: Right, no one wants that. No one starts with that as their goal.
Jason Clause: Right and so the real challenge then is how do you ... And no one goes into business really thinking about this, I don't think. At least none of the people that I talk to, early on in ... It's about just does this idea work? Will it hunt? But as you get into it, you need to really be thinking about how do you maximize this after you're done or when you feel like you're done, right?
Thomas M.: Yeah and I think that's the point that Kirsten and I, why we put this whole talk together was because it takes time to do those things and when it comes to the whole theme, which is how do you maximize your business afterlife, you have to accomplish really two things. One is to maximize your business values, so how do you maximize what it's worth when you're done, particularly if you're trying to sell it. And the second is how do you minimize your long term involvement, which if you have to do an earn out of some sort you have to re-attach the business, the business can't run without you. Whoever is taking ownership of that business is going to require you to stay. I think when a business owner decides they're done, they want to be done, they don't want to have to work another three or five years to make sure that they can get their full payment. So that's what we mean by maximizing the afterlife, maximize the value and how do you get out of it when you're done.
Jason Clause: Yeah, that's really good. One of the things that I loved about the presentation that you guys gave was the questionnaire that you handed out. And getting us to all think about questions that I wouldn't think to ask or that as an owner or as a business leader, I wouldn't really think about. Like question number one, I just assume that you build a business and there's some value attached to it but it turns out there's a known percentage of businesses listed for sale that end up selling and I was astonished by that number. I won't steal it from you. I'll let you share it.
Kirsten B.: Well 10% is quite low and I think it shocks everybody in the audience.
Jason Clause: It shocked me, that's for sure.
Kirsten B.: And you have that number ... From my experience you have business owners who think that their business is worth so much and the best example I can give you is I had a scenario where I represented a large business and a smaller business had approached them and the guy was 65 or so and said "We both do the same thing and I think I want seven million dollars". And my client as we went through due diligence and looked at it, and we're going to talk about this, there were no processes, there was a significant amount of liability, when we ran the numbers, it was probably maybe a million dollar business and my clients comment to me was "Well it was a good exercise but I think I'll just wait until it folds and I'll just scoop up that business". And so there's a certain amount of ... (Cuts out)
Thomas M.: I think people are pretty shocked at what it is worth and typically it is, I'm not an expert in this, I don't do this for a living as far as business evaluations but the easiest, simplest formula I use with my clients is basically taking a 3X multiple on their net income before taxes. And whatever their company's generating right now, true, true income that's coming out of their company. And I think people are pretty shocked when they hear that because everybody thinks their business is probably worth ten times more than it actually is. And that's a wake up call for them. And when they get that number in their head, they start to understand, okay, I might need to re-think my overall strategy and my plan or I need to build the value of the company in some way and that's where we can come in and help.
Jason Clause: Right. You've identified some key impact areas that levers or buckets that you can direct energy and attention towards. Can you talk a little bit about those?
Thomas M.: So when Kirsten and I looked and helped guide companies, there's typically three areas that really require a lot of focus. The first is basically building a capable leadership team and building a strong organization. These two things are very, very important and highly valued by the person that will be operating the business long term. The second is to develop a market strategy or have a market strategy that protects your market position and shows a clear believable path to profitable growth. No one wants to buy a dying business, they want to buy a thriving business that has potential to grow. And then the third is to get the operational infrastructure to accompany in such a way that it can scale with growth. It's clearly systematizing documented and very transparent how things work so someone that comes in, if they are going to buy the company, they can see oh, this is how things are done here, it's documented, people know it. And these are the three areas that when Kirsten and I talk to people through our workshops, we share the details and that's what our story's all about. What are the legal and the operational aspects of these three areas that are critical to really maximize the value of the company and the afterlife of the owner.
Jason Clause: Right. We're going to spend a little time digging in to some of these right?
Thomas M.: Yeah.
Jason Clause: For example, just beginning with leadership, right? Leadership from the owner or the business leaders perspective is different from leadership from the teams perspective, right? And from their perspective, not all of them necessarily have the greatest faith in their leaders, right? And this was another one of those questions that I was a little bit surprised by. What percentage of companies don't feel their leaders are able to lead the organization into the future?
Thomas M.: Yeah, it's a very high number. It's 71% and this includes companies of all sizes, this is nation-wide, this isn't a small private business survey. So yeah, it's a staggering number and it shows you how important it is to develop your leadership team and your organizations. And so from an operational standpoint, there is at the highest level, the three areas that are really critical for an owner to be thinking about whether they plan to have the business run without them, which was option three or ultimately sell the company, they have to build their leadership team. They have to have a core group of leaders that have the maturity and the depth of knowledge to really be able to lead and continuously improve the company within their specific area of operations. And this is a real challenge for the leader or the owner. They have to either find these people or they have to train them up from within. And both of those things take time and a lot of energy. In fact, this is the area the owner should really be focusing most of their energy on. They have to follow that up, they have to be prepared to compensate these people, get good people, need to be paid, particularly in the competitive market we're in, in the Bay area here. And the tough one that most people struggle with, at least a lot of my clients do, is actually delegating authority and decision making power to all. That's ultimately the goal is you want people making decisions and directing operations without you having to get involved in every aspect. So building the leadership teams, one and the operations. The second one is really designing the organization. A lot of people, a lot of companies will have employee manuals with very generic roles and responsibilities perhaps, if they get that far. We really encourage people to take it to the next level. They need to really define exactly what every position is, what are they accountable for producing, how is that going to be measured and ultimately how does it contribute to the success of the company so it's very clear. And then the third area that's critical is establishing rhythm of execution. This is where there's a rhythm to how things get done in a business. The leadership team, the organization that's known to operate with a certain rhythm and that means there's a couple critical weekly or monthly or daily meetings that are held and this is used to reinforce goals and really reinforce the operational elements of what needs to be done on a daily basis. There's lots of other elements but at the top level, these are really the three and there's a tremendous amount of detail behind each one of these but those are the three that are critical to making sure this operations going to thrive.
Jason Clause: Yeah, definitely the last one, pack under that. Great overview. And Kirsten you have a perspective on this from the other side of the transaction, yeah?
Kirsten B.: That's true. When I come in at any stage but many time it's late in the game and we're looking at either I'm representing the buyer or I'm representing the seller, we're looking at, what is your legal status? Meaning are you a corporation, are you an LLC, have you been compliant if you have been a corporation? And that's a whole other hour talk but we're looking at who are the owners? Even if it's not a formally put together corporation or LLC, are we going to have an issue because we have five owners and we're not going to get five people to agree to the sale or the price. And in that same vein that impacts both the buyer and the seller, is what's your tax status? Everyday now, we hear something about some tax changes potentially coming through the federal level. How will that impact that sale? And so we're going to look at the purchase or the sale of your business and what will that do? And in that same light, we may change the structure of how that sale will go through so I'm looking at should we do a stock sale? Which means if it is a corporation, we're buying the whole thing, we're buying the assets and the liability. And we'll talk a little bit more about it but what are the liabilities? I do a significant amount of labor and employment, have you bought yourself a lawsuit by doing that versus all we're doing is buying the assets, the chairs, the books, the customer list, whatever it may be.
Jason Clause: Mm-hmm (affirmative)
Kirsten B.: On that, I touched a little bit about legal compliance but that legal compliance is related to annuity but it can also be about, have there been any sort of investigations? And it can be as simple as for example a restaurant. There's environmental issues, have you been putting stuff down the drain and now you've got an environmental or a CEQA issue. Is there anything pending? The processes Thomas had touched on but that's important because from my standpoint, when I look at it from a legal, if you're marketing or you're buying and you've held out that you have processes in place at the end of the day, will we have a fraud situation if those processes really aren't there? And lastly we're looking at do you have some sort of lease that's going to ... Again, like at the restaurant, are you buying this wonderful restaurant but the lease is only nine months and so you get in there and now you've got to move to somewhat [inaudible 00:21:53] as we well know. It's location, location, location.
Jason Clause: Right. I guess you can't have a conversation about real estate without using that.
Kirsten B.: Yes, that's exactly right.
Jason Clause: That's awesome. Alright, so one of the things that you mentioned when you're evaluating buying, a lot of times particularly with this in service firms, I've noticed this in my business. We're buying their customers, mostly. We're buying some of their employees too but it's mostly their customers and we're going to lay what we do over the top of that. And one of the questions that we want to know is how good is the business that we're evaluating at acquiring new customers, right? And so the percentage of companies with less than 50 employees that have a documented marketing plan, that number I thought was low too.
Kirsten B.: Well, you know, you have 56% of companies that say "I have something there". They will all say "Yes, I market and yes, I have sales" but as Thomas is going to talk about, having documentation and from my perspective is key because you're buying that. You're buying the service and the marketing. And Thomas is much better at this. I'm going to go ahead and let you go into that, Thomas.
Thomas M.: Yes, it's remarkable when you ask business owners, do you have a strategy, do you have a vision, do you have a marketing plan? Oh yeah, yeah, we have it. I say "Well is it written down? Can we read it? Has it been shared with your employees?". The answer most often is no and that's a big problem. The second area that we ...
Jason Clause: Thomas, let me ... Has anyone ever gotten out a napkin and shown it to you that way?
Thomas M.: No, I've never seen a napkin. But I have had a lot of business owners get very angry with me, which is when we do assessments to do this and Kirsten does this as well with her due diligence checklist. Everybody thinks they have everything but when you actually say "Show me the file or the document or the evidence that this exists", it doesn't take very long for them to get frustrated.
Jason Clause: Mm-hmm (affirmative) It's in their head, right? Which is one of the key problems, yeah? If it's in your head, it's not really process.
Thomas M.: Correct.
Jason Clause: Sorry, I know. I'm sorry I interrupted there please.
Thomas M.: We'll talk more about that because that's a third category but on the marketing side of things, the number one factor that people have to understand here is they have to get the owner, the owner has to be out of the sales process. In many cases, the owner really is the rain maker, they have the relationships, they understand the channel, they've been working in the business ten, fifteen, twenty years, they know everybody and everybody knows them. And the business isn't going to thrive without them if they're gone. So this is really, really a critical element so they have to begin to understand and put in place, either they have to decide this is going to be a sales team, they need someone that's going to do the sales person or they're going to have some sort of customer acquisition process that's going to be automated through online or other tools or other arrangements with other companies however it works out. And it's interesting, you know everybody thinks everybody's moving to the web and everything's going through some sort of online digital marketing but even with these trends, 13% of all jobs in the United States are still sales jobs. So outside sales and you know this, this is what you do for a living ...
Jason Clause: Yeah.
Thomas M.: Is still a huge part of the way industry works in this country and it's going to remain that way for a long time.
Jason Clause: Absolutely. You and I never would have met otherwise.
Thomas M.: That's true.
Jason Clause: There's a person to person aspect of this that I don't know if it's ever going to go away.
Thomas M.: Yeah, yeah, I would agree. And for certain industries, that's the only way it's going to happen frankly for a long, long time.
Jason Clause: Yeah.
Thomas M.: The second element on the marketing side is one of positioning the portfolio of products or services you have for growth. Some revenues better than others and we want them to focus on the revenue that generates the maximum gross margin, gross profit for them. But also the one that has potential for growth. People don't realize that any resources that you spend on products or services that really don't fall into that category are really a distraction for the company. It may be generating some top-line sales but you really need to have the owner go through their portfolio products and services and get focused on the one or two things that really for growth and are profitable and get rid of everything else because everything else is just a distraction. It's a real hard thing for people to do because they say "Hey, every revenue dollar is sacred" but it's really not true when you look at the totality of the company. And the third is the one that is actually an interesting one which is getting the current team to really figure out and create a vision they can really leverage the core competencies of the company of where they could expand the market if they really put some energy into it. And so for a business to be really attractive to a buyer, it has to have some sort of growth potential. And this is what I tell my clients, this is really the Disneyland Tomorrowland story, this is where they really just want to cast division of what they fit see being able to do with the assets and the core competencies of the company and where it can go in the future. And they don't have to do it. They don't have to accomplish it, they just have to paint a credible picture of how they can take these assets and core company and launch it into a ... Take the business to the next level of growth.
Jason Clause: Yeah. And do you find that people will ... That's the exciting piece, right? Of the acquisition we gain, right? If you have this really great story to tell, people will actually come on board because of that story, I would imagine.
Thomas M.: Yeah, absolutely. And it's great for ... What people don't realize is that is a great recruiting tool too because when you can tell that Disneyland Tomorrowland story where the company's going to go, you'll attract great people. Those great people need to be part of your leadership team. No leader that is capable and is someone that you would want to have on your team long term is going to join a company that doesn't have a future. They want to believe there's a future because they're going to jump in with both feet and help you contribute to that long term future of the company. Very important.
Jason Clause: Kirsten, from your side of the table, that dynamic I imagine is for you to bring a certain level of skepticism from the evaluation process, right?
Kirsten B.: And that is probably a great characterization because I'm looking at it from marketing sales. I put them both into that same bucket. But I'm looking at okay you've promoted that you have this marketing strategy if you're buying the business or as the seller, so what have you done? And so some of the areas that during due diligence we specifically look at are what are your contracts and do you have any sort of restrictions? Many times, we'll see if it's a franchise, they may have a zip code restriction and they can't market into a certain area, they only have 94551 or whatever they've purchased. On the other hand, they may have a good situation where someone's selling widgets and the vendor has said "I can't sell to you because I'm selling to someone else". So it's important to look at it although everybody thinks of marketing is getting out there and branding and there can be some back agreements that could restrict that ability to market. The next area that we look at is okay you are out there marketing, what's the message that's out there? Is it an accurate reflection of what you're doing? Specifically, is it compliant with the law? There's a number of laws certainly that you could end up in an unfair competition situation or is it confusing? Is it false? And that again would potentially maybe be a claim or a case of fraud. So we're looking to make sure that that side of marketing is what you're telling us in compliant with the law.
Jason Clause: That piece of it, I would imagine, that changes a lot. Right? I've noticed that, as the different ways to advertise change, it's changed the way that it's regulated and the legal implications of it.
Kirsten B.: Absolutely but what hasn't changed is you can't lie, I guess is the easiest way to put it in a non-legal. Whether it's in electronic form, social media, print, verbal, it's got to be truthful. And so the law's still going ... You don't get a pass, if you're doing it on Twitter.
Jason Clause: Right.
Kirsten B.: Probably the last area that I look at is who's the competition and do you have some pricing issues? Are you again ... Is there competition from a standpoint of will your competition squeeze you out or are you going to end up trying to potentially have to buy them out because of where you're at. And does the price support it? If you have a price that isn't in line with your competition, why is that?
Jason Clause: That's it, we're out of time. We've already gone way past the amount of time we like to have for these episodes. This is a great interview and I really want to thank Thomas and Kirsten for making the time to talk with me. We're going to do this as a two-parter. There's enough of this interview left for an additional episode. I'm going to get that up very shortly so you can expect to see that soon. In the meantime, I'd encourage you to check out all the show notes, I've got links for Thomas, I've got links for Kirsten and any pertinent information's going to be in there, so check that out. Until next time, I hope my good friend Jesus blesses you with peace in your heart, wisdom in your spirit and a whole lot of laughter, belly laughter, we all need more of that. Talk to you real soon.