Main Street Business

#573 How to Exit Your Business The RIGHT Way w/ Chris Van Dusen

• Mark J Kohler and Mat Sorensen

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In this episode of the Main Street Business Podcast, Mark J. Kohler welcomes Chris Van Dusen to unpack the biggest mistakes business owners make when trying to sell—and how to avoid them. From cleaning up your books to understanding your true enterprise value, this is your roadmap to a smarter exit.

Here are some of the highlights:

  • Mark and Chris explain the concept of enterprise value, differentiating it from lifestyle businesses.
  • Chris emphasizes the importance of understanding the market and strategic fit for a business looking to sell.
  • Mark and Chris discuss the significance of replacing oneself in a business to increase its value.
  • Chris introduces the term EBITDA and its role in determining business profitability.
  • Mark shares his experience with clients who decide to stay in their business after preparing it for sale.
  • How multiple businesses can be combined to create a larger, more efficient entity.
  • Discussion on the role of investment bankers in helping businesses prepare for sale.
  • Chris advises being prepared for the emotional transition and having a plan for the next chapter.
Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are best-selling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever.

Speaker 2:

Here is Mark and Matt, welcome to another episode of the Main Street Business Podcast. Today I have the honor of introducing to you and interviewing Chris Van Dusen, a capital growth expert. He likes to help business owners with a big idea raise the capital they need to launch that special idea and create an incredible business, and he's also helping those that have a current business that think it's scalable or want to exit at some point. He's sold several businesses himself for millions of dollars and has so much inside information and techniques on working with business owners through the private equity process. So I'm excited today to break down that process, some of the definitions of terms and get some tips from him that might help some of you that are on your path to an exit as well.

Speaker 2:

Well, chris, thanks for joining us. It is an honor to have you here and I know a lot of business owners are going to be really find this conversation very interesting. Awesome, mark, thanks for having me Really excited to be here. Well, you've got a really neat pedigree of experience and something that a lot of business owners wish they had in hindsight, because you kind of just don't know what you don't know. Maybe let's start there with, like an average business owner says, hey, I want to sell my business, or could I, should I? You know how hard is it going to be. I know you consult with a lot of clients on the front end, raising capital, but also on the exit. What are some of your initial thoughts? I mean, let's just unpack it for a minute.

Speaker 3:

Yeah. So it's funny. It's almost like the question is how long is a piece of string right? You don't know. And that's what's interesting is you'll sit down and go okay, I've got my business to a point, whether or not it needs some efficiencies right, which most do right, especially if it's a family business or something you're doing and you're trying to figure out. Is there enterprise value here? Is there something interesting? And what's really kind of tough is depending on the business, depends on the multiple you're going to get, and so what you find is people love their baby Many times.

Speaker 3:

They've been working on these companies for a very, very long time and they might have different expectations of the value versus what the market will actually bear. So my first thing is start looking and are there other companies in your market being sold right, depending on how much EBITDA you have? Should it be part of a roll-up strategy, meaning find someone who is taking five or six or seven businesses like yours and putting them into a roll-up, or is it something that there's a strategic, you fit a certain niche in the marketplace and there's a call it a bigger company that would love to have that as a service offering and figuring out how to work at it. But just saying I'm here, I have a great company, someone's going to buy it. Traditionally isn't the best place to start right.

Speaker 3:

It's figuring out like why would someone want this thing that I've created? And sure, cashflow is one thing, but usually it needs to fit into something bigger Right and so so it's this into something bigger right and so it's this balance of. I know the industry. I'm in well enough to understand who the big players are. Maybe you are the big player, so maybe it's the other side. You should be acquiring more right into your business, but traditionally it's finding out in your market who's the biggest player. What are you doing? They're not doing. And figuring out how to strategically place yourself or with a private equity firm, who's doing other businesses like that, where you're going to get the best multiple but also the best home for your company, because sometimes the best multiple on exit isn't the best home right and you can get Now.

Speaker 2:

Hold it Now, before you keep going here. I got to interject. You've thrown out about 19 things here, so we got to unpack this a little. Sure, you're throwing out terms the average small business owner and I'm a small business owner. I mean, I've only learned these because I consult with so many other business owners going through this process. Okay, let's start with one of the first terms you used they don't know a business owner if they have an enterprise value. What do you mean by enterprise value?

Speaker 3:

So I look at things for is this company large enough where it can scale? Or is this truly a great mom and pop business that puts cash flow in the pockets of the owners, right? And so when we look at it and again I'm glad you mentioned it from the front side right, providing capital for venture deals, it from the front side right, providing capital for venture deals we look at things that we call lifestyle businesses versus ones that have true kind of this enterprise growth or value. Now, a lifestyle business, they're great businesses and not everyone's going to like this, but my wife and I have owned a marketing firm forever. It's a service-based business, right, typically, you're trading time for dollars. Right, you're going in and you're doing some work. Maybe it's creative, maybe it's email marketing, maybe it's something, and it's something we've had for 12 years. That value is very different than if I were manufacturing a product at scale and had a manufacturing facility hard assets, things like that and what I mean by that is it's an actual physical location that makes goods right.

Speaker 2:

The way I like to describe it too is on the can scale, or if it's an enterprise value, it can run without you, correct Like you're it's going to. You've been able to replace yourself, or could, very easily, and they could take it to another level. That means you might have something special, If not, a buyer is really just buying a job, exactly.

Speaker 3:

Exactly. And so service-based businesses like the one I mentioned, marketing firms, not the best example, because once they get to a certain size, they do have that right. There's no key man risk anymore. There's no CEO, that's the leader, right, You're really buying this machine that's been built, but with a small agency or small service-based business to your point.

Speaker 3:

you have this CEO or usually small group that really are that secret sauce, and if you remove them you remove a lot of the value, and so they're not going to give you what we call multiple right.

Speaker 2:

I have revenue. Okay, no, that was my next question. Can you tell everybody what a multiple is?

Speaker 3:

Sure. So it's based on typically two different factors. It'd be revenue or EBITDA, right, and EBITDA would be an easy way to look at it as your profit dollars and they're going to say we value your business at some multiple or your profit times. Some number Could be three, could be five, could be 10, right. Obviously, if we have a 10X profit business, that's a great business and someone really wants that. When you go down into the service-based businesses, traditionally they're gonna have a smaller multiple. Maybe you get 2X or 3X. So you have a business doing two $3 million a year. That's doing two $300,000 in EBITDA or profit dollars. Maybe you're getting six $800,000 for that business. That business owner might go, but wait, I love owning this business because I get all of the benefits of owning the business outside of just my profit dollars, and so they'll have to make a decision is that worth it? But maybe at 10X, 12x, it gets very worth it for them, and so that's where you need to understand the valuation you're going to get for that business in your own unique market.

Speaker 2:

Okay, so valuation is based on that net profit times, this multiple, this number that's going to range from three to 12, let's say based on the industry you're in and how strong you have as much enterprise value as possible. Let's define EBITDA. You know people throw it around. People say different ways too EBITDA, DA, DA, I never know EBITDA.

Speaker 3:

Yeah, earnings before interest, depreciation taxes and amortization Okay.

Speaker 2:

Earnings before interest taxes. Depreciation and amortization Okay, earnings before interest taxes, depreciation and amortization. Which is a fancy account Like what do you?

Speaker 3:

make it. Yeah, it's a fancy way of doing accounting right, cause you're able to depreciate some things. Yeah, but really it is. What is the business making?

Speaker 2:

a profit at the end of the day, gotcha, and don't get me started. Okay, now you said another cool word here, so all right, everybody and this is this is really helpful. I wanted this, this show today, to be give some next steps for someone that sees an opportunity, but also kind of as a reality check to others that might have pie in the sky, because if you're only going to get three or four times your profit, you might say, well, I'll just stay in the freaking business for the next three years and make that same amount, and I think I could tweak a little bit what I've seen. That's interesting. Have you ever seen this where I have a client that's like, yeah, yeah, I want to sell my business? And la, la la.

Speaker 2:

And I'll say, okay, we got to prepare, it's going to be at least a year out, maybe 18 months to two years. I need you to get efficient, I need you to replace yourself. Go hire that person, train them. I want all the fat cut. I don't want you to run in anything through your books. We can add that into the tax return later, but other than that, I want it tight, I want it clean, and they're like, okay, okay, and then they come back here later. They're like oh my gosh, I wish I would have done that 10 years ago. I'm like showing up at the office half as much and I'm making 20% more. I don't want to sell, I'm loving my business now, right, have you ever seen that?

Speaker 3:

kind of experience, 100%. Well, because if you think about it as a small business owner and we both been small business owners and we've also been business owners that were able to sell you're running it very differently than you would if it was a huge company. Right, you said you might be putting things through it. Right, maybe it's your car lease, maybe it's something else. Right, you're just kind of running it because it's your business. When you clean it up, it becomes a lot more efficient. On paper, the business does, maybe not what you're taking home. So that's the first little tweak, right?

Speaker 3:

Number two you don't realize as you're building because a lot of times, as founders, we're doing the things we need to do to solve the problems that are at hand today without a 12, 18 month outlook. So we're going no, I'm going to hire this person because I need to fill this gap. I haven't then looked at it and said, yeah, but in the Venn diagram of labor I have a 50% overlap and really I just needed to put some systems in place for the one person, not the two, and so you do, naturally, become more efficient. I've seen, however, the one thing that no one does to get ready, aside actually doing all the efficiency work, is having what we call a data room. Now, a data room is like your 100% Bible for the company. It's every contract, it's every agreement, it is your financials, not necessarily having to be crazy audited, but just everything you have to get ready.

Speaker 3:

And so you have a buyer who says man, I really like your business. May I check your assumptions and validate what your business is doing? And they go sure, here's a QuickBooks printout. And they're going no, no, no, no, no, no, thank you, I would like everything about your company. And you're finding a contract with a coffee stain on it in some file folder somewhere from two years ago and it just isn't efficient. What ends up happening is it's a 12 to 18 months just to build the everything that is your company, to get ready to sell it. I look at it. It's like the home buying process right, you have all the stuff that goes into that process and it feels arduous, but that's what it takes to sell a company. You can't just say yeah, no, no, trust me, it does well, you should like it. Here's the $2 million that we did last year. It's no, I want to see your contracts. I want to see how defensible they are. I want to see everything. And that's the thing most people don't have ready to go.

Speaker 2:

Yeah, I'd like that selling of the house concept because it's now doing all those little things that are a little broken. It's looking for all the home warranties, all the manuals for all the appliances, what are all the utility bills, so I can show what utilities really are. And is the swimming pool working how it's supposed to, how much is the lawn, people or whatever, and so all those little pieces that you have to gather to sell your home. It's a good three to four or five months for an average home seller, I would think, and for a business owner, I like what you're saying at least a year to two to really, because it's going to affect your sales price dramatically.

Speaker 3:

Yeah, in the real estate world, we'll call it concessions need to be made from the seller. In the business world, we call it being traded down, meaning they offered you, on a term sheet, a certain amount of money for your company, and then, once they get into the data room past the term sheet, they go uh-uh, this wasn't what you said it really was, or no, that doesn't work as efficiently as you said, and the price goes down and it's really hard to get it back up right, and so it's very similar. You're selling an asset, a living, breathing asset, that has value, and so you need to be able to prove that it has the value you've agreed upon.

Speaker 2:

Many of my followers that listen to my show here know in my book Financial Freedom, I have a whole section on preparing to sell your business to family, a whole other animal. But I wanted to stick with this private equity concept if I could for a minute. You've had so much experience in that area. It's a very interesting world. So let's assume for a minute okay, I clean up my business. I've got, I'm okay, I've got it could scale a little. I've replaced myself, my books are clean, I'm working my butt off.

Speaker 2:

I'm ready to just take a break, do something new, focus on my real estate and I think in my area I could get a six or seven multiple and maybe I've, I've. I've eked out a million dollars in profit this year and I did it last year close to it. So I think I and my books are ordered. I got my data room, you know, and so, okay, everybody you've done all those things. Generally you're pretty close. And so, seven times a million, I could sell this thing for maybe six to 7 million. That's exciting. It's a big payout for so many Americans in middle income America. So I try to shop it and I know private equity is going to look for bigger deals maybe, but you mentioned the word roll up. What does that mean? And I think in my experience, that's where maybe a five to $15 million sale might be a part of a private equity roll-up. What does that look?

Speaker 3:

like. So what we call it in private equity is you'll have an independent sponsor. Fancy for people like us who say, hey, you know what If we took six businesses that all have about this profile and we put them together and we use shared services, right? So the accounting is one accounting team, right, or the finance teams, one legals one. We have the sales team that handles all of this, not eight, you know, six different sales teams and we make the totality of the business more efficient. Our overall EBITDA profit goes up dramatically.

Speaker 3:

And now to your point. As you started off, we have a $30, $40 million business that we can then go sell for a higher multiple. What ends up happening is, as we move up from $2 to $3 million in EBITDA to $5 to $10, to $15, to $20, to $25 to $30, the value goes up tremendously. So does your exit multiple, or what you're going to get from a value perspective. So we could sit and take five companies, put them together, and then now we have rolled them up into one company, right In a holding company, with five individual businesses that become one. And now the value, as I clean that up and use shared services, becomes greater than they were independently. And so that right there is what we call right An industry or a vertical roll-up.

Speaker 3:

What typically happens and this is what most people forget is at first, whoever the sponsor firm is, the independent sponsor will want the principles traditionally to stay on. So they will not buy 100% of the company, which means you as a founder will traditionally get some portion of the new hold company. And don't forget, private equity makes their money by at some point operating and selling these businesses at a higher valuation. So we have what we call the second bite of the apple. So not only have I sold that $7 million, but really I only got five. Okay, 2 million stays in, but that 2 million might be worth 15 in three to five years. So the totality of my sale became much better and bigger, and that's where it becomes very interesting in the private equity world.

Speaker 2:

Okay. So let's play with some examples. What's interesting? We've all probably seen it and if you're out in the HVAC, it's kind of this unique little area where HVAC, solar heating, air and conditioning is what we're referring to, and people doing garage doors, kind of these unique little service businesses that can get really efficient with teams. I've had a couple of clients get a purchase and a roll-up. So let's say, in a mid-sized city in the US there's six to ten of these little HVAC businesses and they're all making maybe a million dollars. And these they've been career workers, mom and pops, and they're making their million, they're eking it out, they're getting close.

Speaker 2:

And PE, private equity comes around and finds these seven or eight businesses that all had a million in profit and say, okay, we're going to buy you out for 7 million, but I'm only going to give you five. I'll buy you out for a hundred percent, but 20% of yours goes into the big pool. And so I'm just repeating what you said with an example. So seven of these HVAC businesses sell out for a million each. Now we got a 7 million in EBITDA on year two. But the holding company, the parent company, says all right, guys, we got a few things to teach you, and we're going to kind of combine a lot of the services that you guys could be more efficient at and just with what we're going to do to help you. Even within a year to two's time, we can turn your seven into 10 million Easy. Then, once everybody's efficient, let's take it to 15. And so within. But you got to stay on and work.

Speaker 1:

They're like, I want it out.

Speaker 2:

Yeah, yeah, yeah, we know you want it out. We'll give you 5 million now but if you hang on that remaining two, you're going to get to sell on the big game. When we take that 15 million and get a nine multiple on a bigger EBITDA and you get a piece of that and they're like you mean I'll get more at the second exit than the first. Is that true? Like you could really see kind of more in that second exit than the first. Happens, Absolutely Happens all the time.

Speaker 3:

I have a good friend I was actually just on a trip with, who is about to get his second payment, which is considerably larger than the first one. He's ecstatic Now. He stayed on three extra years Absolutely, but it was. It was a three years of a new professional team alongside of him not having to do it by himself, looking at growth that they didn't expect to happen and getting a really nice second bite of the apple Absolutely.

Speaker 2:

Wow, okay. So let's say wow guys. Mark, chris, this is amazing. How do I find these private equity groups? And do we need to explain the word investment banker? Probably should. Yes, where do you go next? You're like, okay, I'm going to get lean and mean, I'm going to get efficient. You'd want to start a relationship with someone who would you recommend Is an investment banker, explain what that is, and would that be the person you'd start talking with?

Speaker 3:

Yeah, I mean traditionally, you're going to have service providers in any business, right. You're going to have an accountant, you're going to have an relationships, right, so you're not calling every strategic or every private equity firm. They're going to help you get in front of the ones that actually do these things in your space. Now, most individuals, most business owners go well, doesn't that mean that everyone's going to have their handout, getting fees for helping me sell my business? And the unfortunate answer is, yeah, but guess what? They're going to get you a higher price, right, then you would have on your own. They're going to be helping you drive and negotiate the deal. You want that and they're well paid for helping you do that.

Speaker 2:

I like it. What you're talking about is you mean I shouldn't just go for sale by owner on Zillow? If I get a good agent that shows me how to price my home better and how to stage it, I might make more money even after I pay my agent. Get what you pay for Duh, right? No, that's cool. So that's a great point everybody needs to understand here and I like the way you framed it.

Speaker 2:

Okay, mark, I'm a two to three-year-old trajectory on this. I got a lot to do to clean up my business. I see some potential, some inefficiencies, data room, all that. Love it. I start to get on that path. Don't wait two to three years to then start calling someone Call a broker lack of a better word broker, investment banker, a business broker they're out there, that's a phrase. And a business broker they're out there, that's a phrase and say, hey, I really want to prepare to sell my business. You're not going to call private equity firms that are doing roll-ups. You're going to call a broker that says, help me look good, and then they're going to take you to 10 private equities, maybe Correct, and prepare you for that process. Would that be a fair summary of kind of like where to go.

Speaker 3:

Absolutely, absolutely. Yeah, and I've know, I've been, I've been in this world for a while. You have as well. Relationships are the best way to do it right? You're not just going to cold call some investment bank. Traditionally, you're going to meet them through someone, and again I go back to look at the other providers you have in your network. So attorneys and CPAs have all worked with them and you're going to know ones that are. They're going to know ones that are in your space and what if I may, what?

Speaker 2:

what's the biggest risk? Or like, what are some? I mean, everything we're talking about sounds incredible. I really like sign me up, you know, maybe, or whatever, but what are some? Some bad stories per se or things to look out for that could nip you in the butt and you don't even know it.

Speaker 3:

So a couple One is sometimes and it's natural we chase the highest dollars offered not the best place for my company that I've had to succeed. So if you're getting a full buyout, they want to buy and give you that $7 million as we talked about, and it's the highest price and you don't necessarily care what happens to your company afterwards. That's a decision. If you're going to have five and two is going to go into this new company, you better make sure your new dance partner is the one that's really going to be able to take it to get that second bite of the apple, that second piece, and grow it meaningfully. Sometimes the highest offer isn't the best offer. It's the one that's really going to take the attention or give the attention in growing this meaningfully, and so that's, that's a big one.

Speaker 3:

Number two there's a sale, meaning I've sold my business. There is a sale where it's a mix of cash and stock, but don't forget, when I sell my business, I'm responsible for both the cash and stock, and so understanding forget when I sell my business, I'm responsible for both the cash and stock, and so understanding the splits of what my tax liability is. Then there is a merger, so it's two companies coming together, and if you merge, that's great no tax but now you've got to make sure your dance partner is actually the one we want to use. And so all of those are considerations. As you're sitting there trying to understand, once I give up control because we've merged or I've sold, I don't have the same say I had before. So are the individuals who are gonna be running my venture now, even though I have cash in my pocket?

Speaker 3:

My bank account looks great. My personal balance sheet looks amazing. Is it the right place for my company? Is the right place for my company? Is the right place for my employees? May have been with me for 20 plus years? And those are all considerations.

Speaker 2:

Yeah, it's funny you say that I was at a Christmas party just a couple of months ago. Wow, this year is already flying by and this woman I was with had sold her business and she was a part owner in it and it had been a private equity deal really for all intents and purposes, but there was a total buyout. They had bought it out to do some bigger plan and I was like so excited to hear about it and I was like, oh man, I'd love to sell my business, this business or this project. And she's like, oh man, I'd love to sell my business, this business or this project. And she's like prepare yourself. She's like it's not as she goes. It's a really weird feeling. You know this has been your baby, you're, you've got employees in there, you've loved and cared for and you might benefit them financially a little bit with some of what you receive. But you're going to have to walk away and feel like you've sent your kid off to college in the right hands. And it was really kind of an eye-opener for me.

Speaker 3:

On the emotional piece, you know it's a great way of putting it, sending your kid off to college. So I was fortunate and sold a business in 2021. And, to make a long story short, I didn't continue on after the sale, so we sold the business. I was the chief revenue officer Nothing negative, just more. They wanted me to move and I said I'm not interested in moving.

Speaker 3:

So stayed on consulting a little longer, but after that was done, I had spent the better part of 2017 to 2021, August, hundred hours a week growing this company into the second largest uh CBD firm in the country or the CBD company in the country, and like that it was gone, Meaning I'm sitting at my desk. There's no email coming in.

Speaker 3:

There's no phone calls going. Teams Isn't doing that annoying ring coming in every day, right, there's no dinging and binging. And I can remember making the joke to my wife like I just responded to an at&t upgrade email going no, thank you. At&t, right, sounds good, but I'm not interested. Yeah, what else? What else you're doing? Yeah, what's going on, but you're sitting there going like I, it's everything I've done and it's over and you're right, my balance sheet looks better personally, but like I don't have that purpose that I got up every day to do. Now, hopefully you're in a place where you can go find new purpose and new ventures, and that is also something I don't coach or mentor necessarily, but I do talk to people and say are you prepared for what the next hill to climb is going to be be? Because if not, that's tough right. Like you're now over with that entire chapter and you're about to open a new one and if you haven't given that any consideration, I think it's a tough transition.

Speaker 2:

Wow, that's a great point. Well, on that, maybe this is a good transitionary point when you talk about some of the support you're providing people through this process. How can people get ahold of you? What are you doing right now? Where can we send people that would like to work with you? What's your story've grown and sold one in 19 and two in 21.

Speaker 3:

I help early stage companies with capital and resources. We have a full management consulting firm that we kind of, during these formidable times, help companies grow, provide them not only capital but resources. Easy way to get a hold of me is either my email, which is cvanduzen at SlycoCapitalcom, or LinkedIn's the same thing. Chris M Van Dusen Would love to chat. I love hearing the entrepreneurial journey and story. It's not for the faint of heart, but I think that's maybe why I love it. It takes a lot of grit and determination to truly do the entrepreneurial journey.

Speaker 2:

Oh, yeah, it does. It's so exciting, so it can be so lonely and hard and every, every emotion as an entrepreneur, which is the, the blessing and the curse. You know it's. I love it, yeah, but well, chris, thank you so much for joining us. We'll put all that contact information down in the description. And any final word of advice for someone that's thinking of a possible exit, any final words of wisdom, someone that's thinking of a possible exit.

Speaker 3:

Any final words of wisdom Buckle up. It will be a tough challenge. If you make it through, it will be an amazing journey because not that many people have the opportunity to start something. Have. It be a wonderful experience for you the good, bad, the sideways and the ugly and then be able to have someone else see so much value in it. They want to spend an incredible amount of money and try to take it to the next level. But the buckle up part is I had a mentor of mine say once in the sale process if you are not using expletives with each other, do either of you really want to be there, which means you are both trying to get this for the best for each of you, pricing value, all of the things, and you will be what feels like mortal enemies right up to the point where it's signed and then you give each other a huge hug and say now the fun begins. But it is a challenge, but it's well worth it.

Speaker 2:

Great advice. Well, chris, thanks again for joining us. We appreciate those incredible tips and pieces of advice, and good luck to you this upcoming year 2025. Exciting, very exciting. Thanks again, we'll see you around. Hope to have you back. Thanks, mark, appreciate it. Thank you you.

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