Small Business Big World
New episodes every Tuesday discussing the challenges, adventures and fun of being a small business owner. Each week we'll delve into various small business topics, from real-world DEI considerations to selling your business, using video to market your business, unique benefit offerings for your employees and so much more. Curated by the crew at Paper Trails.
Small Business Big World
Building a Valuable and Sellable Business
Let's talk about building a business that not only thrives but is also primed for a successful sale. We promise you'll gain invaluable insights from our conversation with Denver business coach Steven Kohnke, as we explore strategies that transform a "mom and pop" operation into a saleable, structured entity. Together, we'll discuss the necessity of having an exit strategy from the start, inspired by Steven's wisdom to "begin with the end in mind." Discover why reducing dependence on a single individual is crucial for increasing your business's value, and learn how to prepare for potential unforeseen circumstances that could force an unexpected exit.
This is Small Business Big World, our weekly podcast prepared by the team at Paper Trails. Owning and running a small business is hard. Each week, we'll dive into the challenges, headaches, trends, fun and excitement of running a small business. After all, small businesses are the heartbeat of America and our team is here to keep them beating. Hello and welcome to Small Business Big World, our weekly podcast where we talk about all things small business. Today, my guest is Stephen Conkey, the Denver business coach. Welcome, stephen, thanks, thanks, chris, good to be here. Well, today we're going to talk about building a valuable and saleable business, which is certainly a lot of people's goals when they own a small business. So that'll be fun to talk about.
Speaker 1:Before we dive into that, a little bit of housekeeping, don't forget. Forget. Please like, follow, share, rate, review, subscribe. I think I got them all. We are at small business big world everywhere. You get your podcasts on all the social platforms, of course. If you have any questions for us or any of our guests, you can always email us podcast at paper trailscom and we will get you in touch with who you need to get the answer from. All right, steven, stephen. So I'm early in my career, hopefully building my successful and saleable business right. When you work with clients, you know who might be starting to think about getting ready to get out of their business, maybe in a few years. Where does that process start and how far before you think about an exit should you be thinking about and planning?
Speaker 2:Yeah.
Speaker 2:Well that's the Stephen Covey quote right Begin with the end in mind. That's kind of how we talk with our business owners about it. It's 100% of us all business owners 100% will exit their business. It's just how do you want to do it? How do you want to exit? Do you want to do it on your terms or do you want to be forced out? Do you want to exit? Do you want to do it on your terms or do you want to be forced out?
Speaker 2:You know there's all the on the negative side of exits. There's all the things of being forced out of your company. You know some type of illness happens and you have to shut it down. So there's all of these things that go into. You know the dark side of exits that aren't as happy. That we also plan against. And if you're building your company from the moment you started with an exit in mind, really doing the things that make businesses valuable, mitigating those risks from day one and start thinking about it, then you protect yourself against a lot of that unforeseen exits that happen quite often. So we always right when you start.
Speaker 1:Yeah. So I think most small business owners sometimes get caught up in just running the business and working the business and they don't necessarily think about that end game. And I've been actually working on my estate planning the last couple of months and it's kind of forced me to think about that right For that unforeseen happening. And I would say, fortunately my business has grown to a point where it's not necessarily fully dependent on me because we've worked on building some of those processes and things like that. I'm sure you guys do the same thing with your clients, right?
Speaker 2:Oh, yeah, yeah, so it's a lot about people in process are kind of the areas that we'll look at. A business first. It's what is documented, who's doing, what are they in the right seat, what's the organizational structure look like? So a lot of the value. And to kind of oversimplify, overgeneralize the more the business relies on any one person or customer or vendor, customer or vendor, the higher the risk is at transferring that business.
Speaker 2:So if you are running a business, this happens a lot in business owners that we work with in trades and home services, like plumbers and electricians, and they've been working in their business for 30 plus years and then want to retire or go and do something else and they might have one or two people working under them. But the business will not survive without that owner's involvement, whether it's in sales or the financial component or doing the actual work. The more that business is reliant on the owner themselves, the less valuable it is. Value and risk have the inverse relationship and heavily dependency on any of those areas that I mentioned is going to significantly devalue the company.
Speaker 1:And we see that a lot with our client. We have a lot of those mom and pop, onesie, twosie type businesses and a lot of folks say, well, I can't sell my business right, because it is so dependent on me. They may not think in that terms, but they say, gosh, I don't have anything that's worth anything. But how do you work with clients to help them develop that and help them build a more valuable business so that someday when they do retire, they don't just sell the truck on the front yard and I'm not taking service calls anymore? How do you sell that client base and that business?
Speaker 2:Yeah, it takes time. You know that's one of the first things I'll talk to with any business owner that's considering working with us is you know what's your timeline? Because going from mom and pop, a couple people, to building something that is what we refer to as an asset right, it's an asset business that you can actually transfer ownership of it takes time because, when it comes down to it, it's people, and process is a big component of it, and to be able to be big enough to hire and support payroll, you have to grow the business, the revenue and all those components as well. So if we're not big enough to support payroll, we look at those issues first. What is marketing looking like? How can we improve lead flow where it's not dependent on the person, for instance, going out and doing their own networking? Getting referrals is great. Having a digital marketing presence with inbound leads is better, right, because it's not reliant on the individual themselves all the time. So we'll look at those components too and try to solve that problem first.
Speaker 1:Then we say how can we diversify workflows, roles and responsibilities? Bring on some good people, create a management team if we can. So I didn't have, and I have 15 employees to add, you know, three, and it was a little slower in that growth but it, as time went on, you know, we were able to build that and kind of create those processes and make it so that I wasn't the only one that know how to do everything Right, right, certainly. Again, like I said, I've been working on my estate planning and you know everyone's like well, what happens if you get hit by a bus, right, and now we're having those conversations today so that I'm, if something does get happened to me, you know it's hopefully it's not uh getting hit by a bus, right, I'm going some fun, but uh, how the uh, you know it's it's really making sure that you're building that process so that there, like you said, isn't one person that is reliant on that.
Speaker 1:And that's hard. I mean, I will say that's hard for me as a business owner, because there were things like our financials that I have to give up, right, in order to continue to grow and scale. But I have to be willing to let someone in on that and you know that is obviously something that's hard and I'm sure you deal with that when you look at the people aspect of that we certainly see folks are struggling with recruitment.
Speaker 1:How are you having your clients develop and grow their people? That's one of the biggest challenges we all have is our people. What are you kind of using in the toolbox for that?
Speaker 2:Yeah, that's a great question. There's a lot of things that go into the people component. Right and people. My background is in change management. I used to do a lot of change consulting with big companies and we would always say you can have the most efficient, the most effective process documented, but if you don't have the right people to execute it, it doesn't matter. The right people to execute it doesn't matter. You got to have the people in the company doing the right things to make anything work. And it does start from the recruitment process, right, and the interviewing process and making sure that you're setting the right expectations and working on trainable components of the business as well.
Speaker 2:We work with clients on that side of developing you may have heard ideal client profiles, icps. We do it on the employee side as well. What is your ideal employee? What do they look like from a cultural perspective, from all different components? Who's going to be a great fit for you in this position? Maybe not even on the technical side of actually analyzing the P&L, for instance, or if you're trying to bring on an accountant in some way or doing the sales process. Culture fit is going to be number one that we're really looking at, and more and more. When I talk to people that are in M&A those investment bankers and private equity firms they look at culture. It's one of the first things they look at is what does the culture look like? What are the people? How do they interact? It's becoming a bigger and bigger component of investing in companies, more than even financial performance.
Speaker 1:Well, even before investing, think about operating right. I mean, I've spent a lot of time the last few years trying to. I would say hiring is just like selling your product, but you're selling yourself to prospective employees. And we've spent a lot of time developing our website to our careers page of our website to say about all the great things that we do, how great our culture is. And we just did an escape room, we do a boat ride in the summer and we do our year-end party and you know I buy lunch every once in a while.
Speaker 1:You know, I mean, obviously it's not all about money, but right uh, you know we've just been nominated as one of the best places to work in maine and which that's true. You know surveys and you know of your employees and making sure your benefits are good and all that stuff, right. And I tell clients that are having a hard time finding people to go through and and take a look at themselves and say, okay, what am I offering as an employer? Right, even if you're a seasonal business or you know something like that, what are you offering? There are we have several clients that were in Maine, coastal Maine. You know we have a lot of seasonal businesses here. We have a big resort that's only open six months a year and they only hire 10 to 20 people a year on the 200-person payroll because they have such retention year after year after year.
Speaker 2:That's fantastic.
Speaker 1:What are they doing right? They have the culture and they have the process and the people, people and the team that wants to come back every April, and you know so it has taken them a long time to build that, of course, but you know, building that culture and selling yourself to respected employees is really big, and I think not only in your you know, if you're thinking about selling your business but also just in operating and running headache-free business. Headache-free, that's key, right. You should never right, you know. I definitely think that making sure that you have the right team in place is important. So that's, you know. I would say look at yourself first. Why can't you find it?
Speaker 2:Right, yeah, I mean, especially this day and age too, with hybrid work environments being so much more common and virtual work environments. You know, how do you facilitate culture? You know, we have our one client I've been working with for a long time. They go on quarterly retreats with their team, though they have people all over the country and he'll bring he lives in Southern California and he'll bring everyone into the area. They'll get a hotel or an Airbnb and go do some adventure thing. So it's. It's. How are you kind of facilitating that culture, Even if you are virtual too?
Speaker 1:Yeah, absolutely. I think that's something that we're struggling with for sure as we continue to grow is how can we develop that team from a remote, how do we build a culture with our remote employees? And actually a peer of mine in our industry kind of said the same thing. They do full, everyone's on site. You fly in from wherever you are. This know, this guy has employees in 10 or 11 states. He flies everybody in for two weeks a year. Basically they, you know, do a coworking space, so they have meeting space, they have extra space, whatever they need and really gives brings everyone on site so that you see it, feel it, touch it, you know, twice a year or a couple of times a year. And I think that that's really important, especially nowadays, where our heads are down we're at our, you know, basements or wherever we are, you know, working remotely and it's certainly important to keep that personal touch, because I think that's why we're successful.
Speaker 2:Oh yeah, we do an annual one, so we only do it one time a year. But one of our advisors on our team she has a ranch out in Ridgeway Colorado, so we'll bring everyone to her ranch and have a good long weekend with everyone, which is always fun.
Speaker 1:So we talked about the people. What about process? What kind of processes are you helping clients develop, or what are the key processes that you see universally that businesses should really be getting their act together on in order to build the strength solidifying the current business, but then getting it ready for someone to take over?
Speaker 2:Yeah, I think one of the most important and this is all debatable, right, but I think one of the most important processes relates to the people and it's your onboarding process and really understanding how you get someone up to speed. How do you facilitate the culture from day one, how you're setting the right expectations, how quickly can you get them in their role? I forget what the stats are now, but when someone leaves your business, it's really expensive to replace that person and to get someone up to speed really expensive to replace that person and to get someone up to speed. So we're always looking at how can we cut that the timeline to get someone up to speed without cutting the effectiveness of that person, that individual performing in that position. We've really turned to pictures, written and video documentation of how to do positioned processes.
Speaker 2:So, if you're a salesperson, what's your sales playbook look like? What are those steps, what are the scripts that you're going through, what is your value proposition? And they're all documented and easily found on whatever centralized location that your information is on. We, in particular, use Trainual and we also set up Trainual accounts with our clients. But it's a really great multimedia resource to be housing what we refer to as playbooks what's your positions playbook and how do you do it and then you can walk a new person through, onboard them, and then they always have that reference guide for as they go through their position Maybe they haven't done something in a while. They can always go to that platform and say how do you do this again, and then there will be a video I will show them how to do it.
Speaker 2:So being able to make your processes trainable and duplicable is is pretty key. So the onboarding one, I think is really, really important. And then I kind of generalize it to say your buyer's journey. You know how are you actually working someone from when they first find who you are, all the way through service delivery. We're mainly working with service-based businesses. So what does that whole delivery of your service look like and what is trainable on the delivery side of it and can you scale those components too? So that's on both sides. Internally and client-facing are going to be two big, big ones that we'll look at and try to figure out how to document and scale those areas of the company.
Speaker 1:Yeah, like you said, that creates a great repository for ongoing. One of the things I'm thinking about, just as a business owner myself how are your clients finding the time to develop those processes and record those things and create those presentations? That's what you're helping them with, or are they just buckling down?
Speaker 2:Yeah, that's tough, that's the hard one, right, because no one likes to document what they're doing, especially business owners. Yeah, so that is an offering that we have. So we will work with their team and really extract what they're doing, just have recorded interviews with them. We'll do screen shares and really try to capture components that they're doing. But we can't do all of it right, so we'll do as much as we can. We'll get someone up to probably 90% of the way there and then we'll create just a a a hit list and say, hey, we need a video of you narrating and pretending like you're training someone to do you know, to do payroll in your company. How do you actually do that? How do you document that? Where would you click on one of the steps? Do a two to three minute video, break it up if you need to, but we'll just create that list for them to do and that it's a continuous process, improvement in itself to document processes.
Speaker 1:So the first step is just doing it right. Yeah, I mean I can't tell you, in our industry alone, everything has changed the last five years. I mean, we're not doing hardly anything like we did four or five years ago. Uh, just because the way the industry has changed services, clients are demanding how things work, the tools that are out there uh, you know, if you asked me, five years ago we didn't even have a zoom right. We were using right, we were dry clients. They were coming to us. I don't. I see maybe one or two clients a week now, you know, because just things have happened and uh, I I think code was really good from an efficiency perspective and some of those things. I definitely think we lost, you know, some of the personality and now we're seeing all the keyboard warriors out there right screaming and hot, and none of them no, that is very true.
Speaker 2:Text me normally right like drives me crazy, sorry but there's so many more software systems that are popping up left and right of how to do something, so it's, it's. I've tried. I've found it rare that anyone sticks with a software system for more than you know, five years, um so being able. And then that comes with a whole slew of other things to be doing, of documentation, how we do certain things, so on and so forth. So I help my clients overcome that overwhelming feeling of documentation by saying it's not.
Speaker 2:You break it up into little bits and it's never going to be perfect, especially the first time you do it. You just got to start and then you can always go back and refresh and kind of do that. I always think of it as like a Rolodex. If you remember, back in the day I was just kind of going through all right, here let's review our sales process Are we still doing it this way? Let's review our payroll process Are we still doing it this way? And just kind of looking at continuously building and making those processes better. But it is a Indeed, it is.
Speaker 1:So, once you've got all your processes built and documented and you've got the best team in the world, and now you're ready to retire, ready to move on, ready to go. So where are you seeing your clients? You know, look for buyers. How are they going out there and finding buyers? You know, are they getting a broker? Are they, you know, just reaching out to peers? What's the? What are you seeing? What?
Speaker 2:are you seeing? Yeah, that's a great question because it's a mystery right For a lot of business owners of how okay, I'm ready, how do I actually do it?
Speaker 1:And I can tell you my business is worth a hundred million dollars. Right, of course it is, you know, and I'm wired to the Bahamas.
Speaker 2:Yeah.
Speaker 1:I think real challenge for business owners is figuring out where to start.
Speaker 2:And there's a whole. There's a lot of things to consider, right. There's a lot of different types of exits. You can pass it down to the next generation within your family that's an option. You can go to private equity, you can go to an owner-operator, you can transfer it to your management and there's a bunch of other different ways to exit. So that's why we always say think about it sooner than later.
Speaker 2:But I'd say a lot of our clients know a buyer ahead of time, either through their own professional networks. A common one is a strategic acquisition I shouldn't say common but what some of our clients have seen is some of their competition will look to buy them for whatever reason. I have a waste management company that is being pursued right now because it's an East Coast company and they want to break into Colorado and start making their way westward. So they're looking at one of my client's businesses to potentially acquire, just to expand their geographical location.
Speaker 2:With the more common transactions that occur, the business owner does not know who they're going to sell to. They're not really sure what the value is. So we do have really good relationships with business brokers, M&A professionals, who will do the valuation, and their role is to go find a buyer. So we'll work with our clients, get the business ready to be sold and then we'll be in the advisory component throughout the duration of the selling process, talking with the M&A banker or broker throughout that whole process as well, helping them through due diligence. So we're preparing the businesses for a financial buyer, which is someone who wants to return on their investment, them buying a company. So that's when most cases you're going to be using brokers or M&A bankers to market your business, put it on the market if you will, but in some cases it's going to be your competition or someone you already know within your network just looking to grow their own company.
Speaker 1:And how are businesses valuing their businesses? I mean, I think it's different in every industry. Burnley right, we were seeing 100X returns on tech companies and AI and all this crazy stuff.
Speaker 2:I don't know.
Speaker 1:Standards, small businesses Are you just seeing a multiple of bottom line? How are you seeing folks?
Speaker 2:How are you seeing folks? Yeah, I think, and you're right, it's hard to kind of say have a blanket statement, because each industry is different, each business performs differently, but there are resources out there. One we use is business valuation resources BVR deal stats, I think is what it was formerly called, but that's just a database of all businesses that have transacted, of all different sizes. So that really helps us narrow in and benchmark where multiples are being applied. In most cases of the businesses we're working with anywhere between $1 and $20 million in revenue.
Speaker 2:We're looking at EBITDA or we're looking at SDE seller's discretionary earnings. So that's your P&L statement with ad backs, basically, and then a multiple is assigned based on all the intangible components. So like what we talked about, the culture, the risk, dependency, all those other pieces that go into a business, with the EBITDA and or SDE as the numerical number to multiply against a multiple, depending on the industry. But there are some rules of thumb, like the private equity groups that I know and have been working with and M&A people. Once a business crosses a million in EBITDA, their general multiple will jump about two points just because of the size.
Speaker 1:Well, sure, right, right yeah.
Speaker 2:But it's all risk right, and there's always a range of multiples of what's being assigned and the higher the risk, the lower you're going to pop up on that range of multiple. If you're selling a book of business, it might be you're going to increase your multiple and increase your payout when you sell it.
Speaker 1:What are you seeing for a timeline when folks are getting ready to sell? Is it 72? It closes in 90 days, right A year or two. What are you seeing in terms of that?
Speaker 2:Yeah, I think the fastest I've seen is maybe six, six months or eight months, um, somewhere around there.
Speaker 2:Uh, the whole it all depends on size of the company too right.
Speaker 2:You can have, you know, a 50 million dollar company that can take two years for due diligence to to go through um, and you know on the on the other side too. So timeline we always say give us three years, three to five years from the day you want to go to market. Then we can really button some things up, make sure everything is looking real nice and get the maximum value you can for the business. From the point that you list to the point that you sell, assuming everything is done right on the back end, we're looking at a year and potentially another year for the actual transition of the business going through. I think the average I've seen is like nine to 10 months from the day that you list to signing on the dotted line, if you will, to actually transfer the business. And then after that point there's the actual transition period of where most owners are going to be working in their company, either as a consultant in some form or an advisor or an actual employee, for a period of time too.
Speaker 1:Are you seeing any clients of yours getting creative with their deal structure to manage taxes? Or is it straight hey, we're going to do an asset sale and I'm going to pay my capital gains and move on. How are you seeing things structured these days?
Speaker 2:Yeah, that's part of the fun part. Right like we, we will bring in, uh, financial advisors, wealth advisors, to help us with that cpa is to really understand what are some good tax strategies that we can be looking at. How can we defer some of the payments? Um, is it big enough to set up a trust and and be working things in that way? Um, you know way, if they are charitable people, we can work in charities and donations of money. You may not be walking away with more money in that sense, but you're paying less in taxes. So there's different ways that you can do it.
Speaker 2:I think, where most of our clients are coming in weighing all the pros and cons of it, they're more willing to just work with the capital gains and take what they can in that way. But once we start getting up to multiple millions of dollars of transaction value and actually going through, we're bringing in a team to help mitigate some of those tax burdens and trying to help our clients walk away. But I haven't seen any like this is the way to do it. I have one guy that does mineral rights and helps people do exchanges in that way and say, hey, we can really reduce the tax bill by funneling some of the money into mineral rights. So it's different every time. I've seen it so that's.
Speaker 1:You know the importance of finding good advisors, right? Yeah, financial advisor, good attorneys, all those things are. And you know, I think in our area we have some really great general purpose. You know, small business accountants or attorneys and things like that. But sometimes it makes sense to find someone that might be a little more specialized. You know, go to a area, find someone that does this for a living. How they do is they don't. You know, johnny needs cpa down the street's a great guy. He's helped you for 30 years. But, right, you know when, and some time comes. I mean, I've, I've heard accountants say to our clients well, that just is what it is. You made the money. You have to pay the taxes, right? Not that it's not true, right?
Speaker 2:Right.
Speaker 1:You have to pay the taxes, but are there ways to play the tax game?
Speaker 2:Right.
Speaker 1:There's hundreds of thousands of pages of tax code, and finding the way to make it most take advantage of that for your benefit should be what we should all be doing, right?
Speaker 2:Oh yeah, and yeah it's. Each situation is different, right? So it's like you said. It's making sure that you have the right team around you, that that knows what to be doing. It isn't just saying, oh, you made this much money, now you're going to pay this much in taxes. It's like, ok, how how can we work the tax codes to our advantage to help set up our kids or someone else for the long term? There's a bunch of different ways to be looking at it.
Speaker 1:Well, and of course those conversations should be starting before there's even a letter of intent signed. I mean, we'll wait until you're under contract, right? No?
Speaker 2:no, no.
Speaker 1:Well, awesome, I think we've covered a lot of ground today, stephen. So if you had one takeaway you want people to know about building their business up to get it ready to sell, what would you say? That one thing would be.
Speaker 2:Yeah, I think we will look at the ownership risk of how involved the owner is, and one of our litmus tests is how long can you be away from your business without it falling apart? And our goal is to get our clients up to three months of unplugged time away from the business and then we'll know we're at a pretty good spot. So that's a question I always tell everyone to continuously be asking themselves. It's what would fall apart if I wasn't in the business? And then, when you have your on the business time, focus on mitigating the risk in those areas. What would it take for this not to fall apart if I were gone? That's a pretty great question If you're continuously asking yourself that you're going to find your list of how to increase the value of your business.
Speaker 1:So I just walked out to Houndas, the business owner. I'm going to walk down to my management team and say okay, I'm going on vacation for three months. Yeah, Exactly.
Speaker 2:That's one of our I call it the vacation strategy. That's one of our favorite things to do with clients, Like, all right, let's take longer and longer times away and then see what breaks, and then that's going to be our action plan for the next. You know, however long.
Speaker 1:I like that. Yeah, it's great. Well so, steven, if folks want to get in touch with you, what's the best way to do that? You guys have socials, email. What's the best way to find you?
Speaker 2:Yeah, we're probably most active on LinkedIn, so Denver Business Coach is our LinkedIn page. Our website is denverbusinesscoachcom. It has a lot of great information on there, and then people can reach out to me directly as well. Steven at denverbusinesscoachcom.
Speaker 1:Well, thank you so much for joining us. I think it was a really, really good conversation and certainly don't forget to all of our listeners like, follow, share rate, review, subscribe and certainly, if you have questions for us and can't find Stephen's information, shoot us an email at podcast at paper trails dot com, and we will get you in touch. All right, chris? Well, much talk to you next week. Everybody, thanks for listening to this week's episode of a small business, big world.
Speaker 1:This podcast is a production of paper trails. We are a payroll and hr company based in kennybunk, maine, and we serve small and mid-sized businesses across new england and the country. If you found this podcast helpful, don't forget to follow us at at paper trails payroll across all social media platforms and check us out at paper trailscom for more information. As a reminder, the views, opinions and thoughts expressed by the hosts and guests alone. The material presented in this podcast is for general information purposes only and should not be considered legal or financial advice. By inviting this guest to our podcast, paper Girls does not imply endorsement of or opposition to any specific individual, organization, product or service.
