*This is part two of an interview that I started in the previous episode.* You can find part 1 by clicking here: Listen to Part 1
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 going to be 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 Bay Area busy managers find good ideas for leading their team, for working with their organization. My experience is the best managers out there, are idea collectors. They're always on the lookout for great ways to inspire others and to help their people get from where they are to where they want to be. That's what this show is really dedicated to. It's about finding those ideas and sharing those ideas with a growing community of local managers.
We're going to continue an interview that I started earlier. We just ran out of time. It's not going to be the cleanest in the world, because I've never done an interview like this before, so we'll incorporate what we've learned, and the good ideas that we've gathered, and I'll make sure to roll that into future shows. Please excuse the abruptness of our intro and getting into it. I'll give us a little more detail about what we're going to be talking about right after this.
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All right, all right, so for those of you that listened to part one of my interview with Thomas and Kirsten, our topic is about how can you structure a business earlier on or headed into a liquidation event, or for someone who's trying to position a company to be sold, what are some of the things to concentrate on to maximize that business's value to a potential buyer? Thomas and Kirsten have a wealth of information. I'd encourage you to go back and listen to the previous episode, if you haven't, because you'll be a little bit lost. Like I said, we're just going to jump into it almost immediately, and we'll get into it right here, right now.
Pricing, as a part of the competition bullet, and pricing it right, and specifically how your pricing impacts every other aspect of the business, particularly cash flow ... That was the next question that you guys had, that you threw out to everybody. What percentage of businesses that fail, fail because they run out of money or fail because they have cash flow problems? That number was sobering.
Thomas Mele: Yeah, that was 82%, yeah 82%, and it's ... Some people say, "Oh, I thought it would be 100%." There's other reasons companies fail, but yeah, specifically for cashflow problems, it's 82%. A lot of it comes down to really having a very clear picture of financially how is your business operating? It's sometimes pretty interesting that there isn't a very, very clear, transparent picture of that. Marcus Lemonis of The Profit is famous for saying, "If you don't know your numbers, you don't know your business." That is absolutely a true statement.
Business owners, they don't have to be financial experts. There's people they can hire and bring in to do that, to put their books together, and a lot of them do, but they have to have them in order, and they have to know which of those numbers are critical for their particular business. Kirsten and I both know this, is that when someone comes in to evaluate your business, they're going to be looking at your finances at a level that you've never even dreamed possible, have never even seen before. It's really crucial that you understand them and you know which ones are critically important for the financial health of your business.
Jason Clause: Mm-hmm (affirmative).
Thomas Mele: The second area on the operations side, and this, as far as operational infrastructure, is something both of us have talked about several times, which is systematize and document everything. Every aspect of the company needs to be documented, particularly on the product, service, and customer maintenance side. I really encourage people to document. Literally, write down, take pictures, draw diagrams of how things are done. The owner doesn't have to do it. I mean, some of these companies we work with are quite large. This isn't the owner running around writing everything down. This is getting the team to do it and basically have the leaders of your team and the individuals in their groups to just write down, how do we do things around here?
This adds tremendous value to a company. If a person can come in, and they see everything documented ... They can go on the computer. They can look at notebooks, whatever the case may be, and it gives them confidence that if one of your critical players is suddenly abducted by aliens, the business is still going to run, because a person can go and figure out, oh, yeah, how do we do X? They can go, and they can read it, and they can figure it out.
Jason Clause: Mm-hmm (affirmative).
Thomas Mele: This leads to the third one, which is really important, which is critical, and it's part of a company thriving, is getting the team involved in continuously improving the operation. Once it's documented and you write it down, you can take a critical look at it and say, "Well, why do we do it this way? Is there a better way to do it? Is there more efficiency that can be gained? Can we save time?"
If you can get your leaders and your people to create a culture of continuous improvement, and that's evident when someone visits your company, in the way people talk, it really creates a very positive culture of moving the business forward, of progressing the business forward. It gets people to constantly be looking for, how can we do things better around here? When you empower people to do that, it becomes a game for them to figure out, how do we cut time? How do we cut costs? Then it gets them involved in their own development and how they can improve themselves. It really creates a culture of why people like to be part of this company and want to stay, very important.
Jason Clause: Right, part of the vision plays into that, too, like in the previous slide.
Thomas Mele: Absolutely.
Jason Clause: The thing that I'm struck by on this slide more than anything else is just how difficult these bullet points are.
Thomas Mele: Yeah, and people don't like to do any of these things, actually.
Jason Clause: It's not something that can happen overnight. This is-
Thomas Mele: No.
Jason Clause: I mean, you can't even have the bottom bullet point without the first two, but just getting the first two, that's like, roll your sleeves up and plan on just being in it for a while, because it takes [crosstalk 00:07:49].
Thomas Mele: Yeah, it really is. I have a client I'm working with now that's been trying to get their business organized — I won't go into the details — but in a very, very specific way. They've been trying to do it for years, and they just haven't been able to do it. I literally, the last time I was in their office, was walking around their office talking to the various people on their team to finally get the numbers that they have not been able to get. It's literally rolling up your sleeves and saying, "Okay, from now on we're doing it this way."
Jason Clause: Yeah.
Thomas Mele: You've got to break through the hesitancy or the lack of desire or just the fear. In many cases, it's fear. Sometimes they don't even want to know how things are actually being done. It's kind of funny.
Jason Clause: Yeah, and then, Kirsten, you again, as you're reviewing these things from the other side of the conversation, knowing how hard those swim lanes are to create, those process swim lanes are to create in the first place-
Kirsten Barranti: Right.
Jason Clause: Again, looking at that, you having it ... That doesn't necessarily mean that you're going to get the price that you want, right? There's some other things that you need to really be looking at, right?
Kirsten Barranti: That's key. You make these assumptions and either, again, from the buyer or seller point of view. Typically, I'm looking at it as we're buying an asset, and that can be in a variety of forms. It can be what's called tangible or intangible, meaning you've got a car. What have you done to protect it? What have you done to protect your customer list? Do you have any sort of confidentiality agreement in place.
On the intangible side, we sit in the Silicon Valley, and IP or intellectual property is everywhere. Have you done anything to protect it? People will say, "Well, I've trademarked it," or, "I have a patent," but if you're not out there searching, to make sure someone's not using it, that's not protection, because you do have a legal obligation to say to the other party, "Stop using it," or, "Cease and desist."
Jason Clause: Mm-hmm (affirmative).
Kirsten Barranti: Those are the types of things I'm looking at. I'm also looking at do you have insurance to cover that protection? Because certainly if someone steals something, whatever it may be ... We always think of protecting money, but can you afford to protect it? A lot of people will tell me no.
The other thing that I look at is contractual obligations, meaning when you buy that business or you sell that business, do you have either a negative or positive contractual obligation? For example, are you in a longterm contract that would maybe produce ongoing revenue or a contractual relationship where you're buying a product at a profit margin of 5% or 1% or you're losing money. If you're buying or selling that business, that could be a deal breaker, because you may be obligated to take that contract over.
Probably one of the biggest issues, and Thomas spends a lot of time, and we've talked about leadership, but how is this business going to continue after you sell it or when you buy it? Do you have the right people? How are you going to retain those people? Do we need to enter into some sort of transaction, for example, like a retention agreement to stay on board, so that the business will continue after you're gone. On that same note is, like I said earlier, if you have some human resource issues, are you buying a lawsuit because you aren't paying people correctly or you have some sort of discrimination or, the big hot topic today is harassment, that now you've bought that liability.
Jason Clause: Yeah, boy, that's ... Yeah, it just gave me an uneasy feeling in my belly.
Kirsten Barranti: Well-
Jason Clause: Okay, yeah.
Kirsten Barranti: I know one of the slides that ... One of the things we talked about is lawsuits.
Jason Clause: Mm-hmm (affirmative), yeah, the question here that you put up ... It's one of those uneasy ones, because what percentage of employee lawsuits are won by the employees? Again, I missed this answer completely. I was surprised by how high it was.
Kirsten Barranti: We used [Bright Hub, inaudible 00:13:21] as a source of 67%. That is a national number. I would tell you that, county by county, state by state, will differ, but, in general, you also have to recognize only about 4% of cases go to trial. Again, we have cases in arbitration, but what I would tell you ... You don't want to end up as a box over here in my office, because it just, as an employer, it creates a morale issue, because everybody in the business knows about it, but it also is very costly, from a financial perspective.
Jason Clause: Mm-hmm (affirmative), yeah, man, yeah, particularly now, right? It seems like every time I turn on the news, I see something that impacts that, this area, right? Your team ... We've already talked about this. They show up in almost every one of the points that you guys have made. They are the lifeblood and what you're depending on to be able to have an end at the end of the business's life, but they're also, I guess, unfortunately for you, as the owner ... They have their own minds and their own feelings and their own things and their own misunderstandings and their own communication, and that's also a huge piece of it that needs to be [working, crosstalk 00:14:57].
Kirsten Barranti: Absolutely.
Jason Clause: If you don't, it doesn't necessarily mean that something bad's going to happen. It may just mean that you don't get as close to your goals as you want, or it could be awful, and it could be something that's just incredibly destructive.
Thomas Mele: Yeah, Jason, Pat Lencioni is famous for several books on organizational dysfunctions and so on, and I really agree. I can't quote the exact quote. I don't have it off the top of my head, but essentially he's a firm believer in the person that can put together the most effective and productive team will win in any market. I think that that is the most important competitive advantage, and there's so many elements to it, but it takes time and a lot of energy to make it work.
Jason Clause: Yeah, again, that's a whole other, that's a whole other episode.
Thomas Mele: That's a whole other talk, yeah.
Jason Clause: A good one. We've covered a lot. Any ... Could one of you sort of wrap up for us and maybe just leave us with some final thoughts here?
Thomas Mele: Yeah, and I think the intent, when Kirsten and I try to present these ideas, is just to sensitize people that these things aren't ... They're not impossible to do. They're all things that can be done. They're all things that an owner can get help to work on. The key is that you need to start and recognize that it takes time to put all this stuff together. The concept of beginning with the end in mind, figuring out which of those four exit strategies you want to press the button on ... Is it going to be you shut the business down, or you work in it until you die, or you figure out a way to use some of these concepts and build an organization and a team and a business that can run without you, so you can go to the beach but still get an income from it? The fourth is to ultimately sell or transfer the ownership to someone else.
Once you make that decision, then these concepts that we've covered today can all begin to start to ... You can start to evaluate, which of these areas am I weakest in now that I should start working on? Just start working on one. Get the help. There's lots of people that can help in all these areas. Get some help.
Jason Clause: Yeah, well, I'm talking to two of them right now, right?
Thomas Mele: That's right, that's right.
Jason Clause: Yeah.
Kirsten Barranti: Yeah.
Thomas Mele: Just to summarize ... To work on building a capable leadership team and organizational strengths, to develop the marketing strategy that's going to basically protect where you are today, but then give the vision for where the company can go. Then, do the ... Roll up the sleeves and really put the energy into getting the operational infrastructure scalable, systematized, documented, transparent, ready to go. Once these things are in place, it's going to take ... You're going to have to have evidence that you actually have these things in place. That's simply operating the business over time. I think the minimum that I tend to encourage my clients to have in their brain is at least two years, where you've got these things, and you can tweak them a little bit, but you have the evidence that, yeah, we do have these things in place, and they are working.
Jason Clause: Mm-hmm (affirmative).
Thomas Mele: The funny thing is, Jason, is that what happens is when owners do this work, when they originally set their objectives of wanting to exit by a certain period of time, when they get it to this point, they actually find that it's actually more fun to run their business, so they actually aren't too concerned about it, because it's fun now. The business is operating itself. There's a vision. There's an excitement. There's an energy that's positive. There's an operational rhythm, and the business turns out to be a lot more fun to operate and, with the vision, it'll grow and be more profitable. Then they can maybe even choose whether they hang on longer and stay at the ownership, hold this asset for a longer period of time, or if they really want to sell, they're going to get maximum value for it and be able to walk away. It'll be great.
Jason Clause: Yeah, that's great, great way to end. Kirsten, if I'm ... If there's somebody listening to this show, and they're in the process right now of evaluating a potential client, or excuse me, a potential acquisition, how do they get in contact with you to help?
Kirsten Barranti: They can either go to my website, which is KEB Law Group. They can give me a call, which is (925) 474-0040, and we'll talk about a lot of the things that we talked about here and process and try to get a sense of where they are in the due diligence process.
Jason Clause: Mm-hmm (affirmative), excellent. I'll make sure to include all that information in the show notes for today. Thomas, if on that, I'm that same person, and I'm thinking, "Okay, I love this idea of letting the business run without me," how do they get in contact with you?
Thomas Mele: Same three ways. Website for me is melegroup.net. They can go and they can contact me there. They can call me, (925) 413-4712, or they can email me, firstname.lastname@example.org, and, like Kirsten, we're more than happy to sit down and do a complimentary consultation to step through these things and do a rough evaluation and see where they are relative to where they want to be.
Jason Clause: Yeah, I was going to mention that, too, that you guys are open to doing this as a team and doing a complimentary sit-down and just say, "Hey, let's just talk about your goals," and see where that conversation goes, yeah?
Thomas Mele: Absolutely.
Kirsten Barranti: Absolutely.
Jason Clause: That sounds like something that would be incredibly valuable.
All right, that's all we have for today. I'd like to thank Thomas and Kirsten for joining me. Great topic ... I really enjoyed the conversation. Like I said, I'm going to include all their contact details in the show notes. If you want to reach out to them, please do. They're very smart people and can help you with this specific problem and other ones.
Next up, we're going to be doing another interview with another friend of mine, Doug Kennedy from CFOs2Go. We're going to be talking about some of the telltale signs that it may be time to upgrade your business system. I think we've got a great episode in store for you with that. Until then, I hope my good Friend, Jesus, blesses you with peace in your heart, wisdom in your spirit, and a lot of laughter in your belly. Take care, now.