SELL-EBRATE! Successfully Exit Your Business

What’s the smartest move someone can make early?

Gary Morris

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0:00 | 10:18
SPEAKER_00

So, what are some of the smartest things you can do early on? So, I would consider there's probably two things. And first, I would say let's talk about what early on in the s selling process is. I would say if you're convinced you're gonna sell, early on would be five years away. Anything under three years means it's uh it's a flash sale. We can't really go back and fix anything because you're gonna need to, you know, divulge the last at least in typical three years, the last, you know, 36 months of income. So if you are five years away from selling your business, again, you can sell it if you've decided you want to sell it and you know it's now you don't have three years, you don't have five years, life circumstances happen, those are still sellable businesses. But if you've got five years left before you want to sell your business, there are a couple key important things. So number one is put more cash on the books. Number two is marketing getting away from you as the main focus. So let's talk about number one, cash on the books. Uh, I, you know, it just happened two days ago. I was having lunch at a restaurant and sitting at the bar, guy next to me uh owns a successful construction slab company, and he's laying foundations and massive, beautiful homes. I mean, we were going through some of the blueprints and they were gorgeous. And he he already knew the answer. He said, What can I do before I sell it? And he said, I could you should probably take some of the cash off and put it on the books, and that's the right answer. So you have to look at this as a cost analysis perspective and what it actually cost you as in comparison to what you're saving. So let's say you're making uh you know a hundred thousand dollars a year for easy math, and you keep twenty thousand dollars off the books. Well, you're gonna save, you know, you're gonna pay 30%-ish, let's say, in taxes. So you're gonna save like what six thousand dollars in taxes to do that. The problem is when you go to sell it, you're selling that profit that would have been on the books with a multiple. So you you kept$20,000 and you didn't spend the six thousand dollars in taxes. So there you go, you have$20,000. But that on the books would have been worth$2.5 to 3x minimal. So you're looking at$60,000 of enterprise value is now completely removed from the books, and there's no way to put it back on. So, in an effort to keep$20,000 and not pay$6,000 in taxes, it didn't what it actually cost you was an additional, you know,$40,000. And so the first thing you can begin to do when you're serious about selling your business is to begin to treat it as the business that it is and put everything in the books that belongs in the books. Now, there are going to be things that are covered by the business that's profit. That's okay. We do when we're doing valuations, we look for adbacks. Things that are um not necessary charges that cover some of the owner's compensation, but aren't necessarily going to be a recurring expense for the incoming buyer. So those are adbacks, every business has them. Those do get included in profit. But if you're keeping cash and you say, Oh, well, I made another$30,000 and you know, or$300,000 or whatever it is, and we kept it off the books, that is actually going to cost you in the end an enormous amount, much more than you would have paid in taxes. So that's number one. Start to put everything in the book, start to legitimize, legitimize the financial component of the business. Treat it as if it's its own entity, separate from you, and then it does disbursements to you as the owner, and this thing is being prepped for the next buyer. The other one might sound surprising. So a lot of people that are in this are service-based business people, which are a lot of the people that I deal with. Uh, they're typically, you know, generating well over a million dollars in sales per year. And they have been the center of the business for years. So they're getting referrals, they don't even have to pay for them. They're, you know, they've paid through them by doing great service. Now people just call them because they're known, they have great relationships with other people in the service-based business that don't do what they do. Uh, the problem there is it's a high-risk acquisition. If there's no marketing going on, and you are the only relationship that's generating sales, and that's seen through the books, and there's no way to track that back to any inbound marketing methodologies. I would say begin to take a portion of your revenue and put it toward marketing. And for mainly for the purpose, yes, it's gonna cost you more than what you're currently getting through referral processes, but you're beginning to decentralize the function of growth in the business as it pertains to relationships that you've created, and so you really begin to diminish the risk that a bank and a buyer have to assume by the relationships that you built disappearing if they acquire that business. But if they see, okay, well, he's running PPC ads and generating, you know, X amount of leads per month and closing X amount per month, they'll see that there's there is at least a reduction of relationship-based businesses. So even though it's it's a great spot to be, and I this is why this one's really hard. Although I'm a marketing consultant, so I'm always going to go back to you need to figure out, you know, how marketing your business, because for buyers, if they see that you've got a uh system in place that generates leads, it's also part of the acquisition. And it could just be a relationship. So they could own, in this, in the example I gave you today, a concrete business, they may already own a concrete business. They already may be heavy leveraged in relationships, but they see that you are now generating 40% of your income in PPC leads or social media leads or paid ads or direct mail or whatever it might be, they now see that whatever that relationship is that's creating that income can now be part of the acquisition. Even if it's a separate company doing it that they don't know about, they can now take that relationship and apply it to their existing business. So it's part of the acquisition, that relationship, or however those are being acquired. And so I would also say you need to be careful with what you divulge in the process. A lot of this stuff, the IP specifically and the relationship-oriented aspects of marketing, need to be kept somewhat secret until the sale is complete. There are some things that you could tell them, okay, well, I'm generating X amount on social media, um, running ads, but you don't tell them how, you don't tell them who those relationships are because that could they they'll get all the info they want and then take off. But you need to be taking a portion of your profit right now and having predictable, trackable records in place that can assist the buyer in knowing that there's stability in this acquisition outside of the relationships that you built. So though those are the two, I would say, probably most important things when you're thinking about, you know, you're not you you've got some a window of time in front of you. And so you want to think what's most important right now. I want you to take cash that are off the books, start putting them on the books. If you've got time, like maybe you're like, I'm probably 10 years away. Not as important, although, you know, I would still say it's you know you still are opening yourself up. If there's any sudden reason that you need to sell, that's that's it's gonna cost you. And then marketing, you need to be expanding your marketing capacity to where when somebody buys it, they're not just needing to leverage your relationships. Furthermore, if they see that 40% of your business in is in this channel of marketing and they're doing some other channel of marketing, and they know that in the prelims, well, then that's a recipe for success for them because now that's a new channel they can add, and then they can just turn up the volume. So they see like you've got a two for one ratio, every dollar you put in this marketing channel, you get two dollars out. Well, what if we put in a half a million dollars in that marketing channel? They can see often they're looking for under-leveraged marketing spend based on positive return on investments. So, those are the two things I got. I hope that helps. As you're starting to get serious, you need to you need to be handling these things completely different. Look in the eyes of the buyer and say, how can I stabilize this and make this look like a stable good investment to a buyer? Everything's clean, everything's on the books. It's not just about me as the owner. And so, oh, I'll add another thing, just because this came up in the conversation I had over this weekend. You you need to legitimize it with things like a website, you know. Um, in this case, he didn't even have he didn't even have a website. Again, not uncommon in the trades business where it's very heavily relationship oriented. But when it comes to a buyer, they're gonna want to see that this company is not just about you. So these are layers of protection that you're affording the luxury of the buyer to now obtain. So that's all I have. I hope that helps, and we'll chat again soon.