[02:34] So what is going on in the world these days. And one of those things that you and I are going to talk about today is exiting a business, selling your company. You’ve put years into building it, you’re maybe headed towards retirement or whatever thing you want to do after your business, you want to make sure that you get the best exit possible, which normally all on its own is challenging enough. But we’ve just come through this year of worldwide pandemic, and that’s had significant economic consequences for all sorts of business owners.
So how do you think that’s impacting trends that owners are going to see in terms of selling their business this year, next year or two years from now or whatever?
- I can tell you actually, we’ve just done some research. I just looked at the data recently. We analyzed people who completed the valuable questionnaire, which is sort of like our questionnaire prior to COVID being announced and then eight months during the COVID period. And we pulled out about the end of November and looked at the data and the pandemic has made some material differences, two that come to mind. Number one, business owners have moved up their sell-by date by 20%. In other words, they’re looking to sell 20% sooner.
Number two, they’re looking to sell to a third party. There was a time when business owners used to pass their business down to their kids. That was the sort of the way businesses were passed down from generation to the next. That no longer is the case. And the pandemic has made it even less likely. And we can riff on why that might be my guess is, this has been such a difficult period for a lot of business owners that they don’t want to pass the albatross on to their kids. And so that proportion, people who say they don’t want to exit by selling to a third party is up over 56%. So, it’s a big change.
[04:22] Yes, no question. All right. So, when it comes to selling, I’ve sold one. I guess you’ve maybe been witness to many. Let’s talk about the mistakes that people commonly make and then we’ll talk about maybe how to avoid them and then we’ll talk about how to gain leverage during the negotiation process.
So, first of all, let’s talk about mistakes. Lots of mistakes to be made when it comes to selling a company, what are one of the biggest ones?
- Oh, man. I mean, that was really the whole idea behind the book. I interviewed you on the show but some years ago now. I’ve done like 300 interviews. And that was the idea behind the book, is to distill the best practices and some of the mistakes frankly, and try to provide a little bit of a playbook. One of the most common ones is getting lured into a proprietary deal.
So, M&A guys refer to it as a prop deal or proprietary deal where effectively, you begin negotiating, oftentimes in a sort of benign friendly way with one buyer. It happens over lunch or dinner or an email or Zoom or whatever, where a buyer will compliment you on the business you build. Say, “You’re a fantastic company, this is amazing. Let’s learn more. Let’s partner.” And then the conversation around partnership expands to something more deep and ultimately gets to negotiation to an exit. And that sounds great and it sounds like a very fluid way to sell a company. The problem is, the buyer knows they’ve got a hook in and they know you’re not negotiating with anybody else.
And when that happens, two things tend to come out of that. Number one is the value they offer you is lower because they know they’re not competing. But perhaps even worse, they tend to protract diligence, the period after you sign a letter of intent before you do a purchase share agreement. And at the end of that diligence, they know they’ve got you on the line. You bought the beach house or the ski house in your mind. And then they do what’s called re-trading, which is where effectively they will lower the price—and oftentimes it’s for no other reason other than they know they’ve got you.
And those are just a couple of the kind of sleazy things that acquirers do to try to get your business for less than it’s worth. But it all comes down to kind of avoiding this being a victim of a prop deal. That’s one of the big mistakes people make.
[06:47] So the takeaway there is make sure that if you’re going to sell your business, you’ve listed it with a business broker or put it on an exchange someplace, in some way, shape or form to ensure that you have multiple buyers who are coming to look at the business.
- Yes, we’ve just done a bunch of research into a business owners—interesting stat. 76% of owners, one year after selling, say they regret the decision to sell. And when we unpack that as to why they regret the decision to sell, one of the four big reasons is they think they got taken advantage of. They’re not sure if they left money on the table.
And it’s one of the most common things, during the deal, you get this number and it’s like 6, 7, 8 figures. You’re like, “Oh my gosh, this is like the most incredible thing in the world, people are going to pay me money for this dream I’ve had.” And you get romanced into this entire sale process. At the end of it, you sign a deal, you put the money in the bank, and then a year later, you kind of rocking the rocking chair and you think, “What have I done?” Like, “Did I leave money on the table?”
And the only way you, I think, can eliminate that regret is to create some sort of market for your company. It doesn’t have to be hundreds of buyers, or even dozens, but like two or three legitimate buyers making an offer will give you a sense that what you’re getting offered is fair market value. But if again, if you get stuck in a prop deal, you may never know if you left money on the table. And so again, I think one of the most important things to do is, to your point, get some sort of competitive marketplace going for your company.
[08:26] And even before that though, long before you ever get to that phase, there’s a bunch of really important decisions that you need to be making. So, let’s set expectations. For the average small business. Let’s say somebody’s got a company that’s doing between one and $10 million in revenue. So, they’re probably still very much the key man or key woman in that organization. They’re feeling a desire to sell it for whatever reason. Maybe they’re getting close to like an actual retirement age, maybe there’s health issues, but maybe there’s just I’m feeling burned out. What should they be doing?
Because to go and just call a broker today and say, “List my business for sale,” like that’s literally the worst thing probably—well, maybe other than prop deal. But that’s one of the worst things I think that you could be doing. Set expectations in terms of—before you actually want to sell it, when do you need to start planning and preparing for the sale? And then what is that planning and preparation process look like so that during due diligence, you don’t get overly distracted and end up having seen numbers nosedive when you’re in the negotiation phase and then you get fleeced, so that you can still run your business effectively and ideally even be growing it during the due diligence phase?
- Yes, I would use the analogy—to answer your question—of the idea of selling a home. Like when you go and sell your home, everybody’s heard of staging, right? Where you buy the nice flowers or bake the cookies or whatever, make the house look good. That’s all the kind of packaging stuff you can do when you are ready to sell your company. Prior to that, though, I would argue that you might want to consider renovating. So, you might want to consider investing in the new kitchen, that’s going to have a big premium on the value you get for your home.
Similarly, there are some things that you can do that are more akin to renovation. So, a lot of this stuff you talk about, Trent, is the idea of building process, making your company run without you, building a business that’s transferable. All that’s what I would refer to as renovation. Those are big strategic projects that can take years. I think they’re really valuable. I wrote a book about the whole topic, years ago. So, I feel really passionate about that process. But it does take time to get in. So the kind of big renovation project you want to do is making sure your business can thrive without you personally doing all the work. And again, processes and documenting your processes are a big part of that renovation project.
Once the renovations are done, and you’ve really got a business that’s thriving without you personally pulling all the shots or calling all the shots, then I think it’s time to flop or preen the business or make it look as pretty as possible. And some of the things you can do there are what they call pre diligence. You’ve probably heard of due diligence, where they vet the business and evaluate all things you said. Pre diligence is one of the most important things you can do because it’s basically answering all the questions someone’s going to ask in due diligence prior to taking the business to market.
And I remember, in a book, I write about this. Have you ever heard of Barefoot Wine? If you’d ever go to like a Trader Joe or anything?
[11:46] No. But I’m not a wine drinker. I don’t even like wine.
- Well, there you go. P Barefoot one was one of the kind of big, relatively inexpensive wines, they were red wine to begin with and they were available at Trader Joe and a lot of retailers in the United States. The guys behind that, Houlihan—the husband-and-wife team, they decided they were going to sell the company. And they knew that the biggest wine strategic acquirer in the wine business is E & J Gallo. You probably have seen those guys, big, huge, wine company in the United States.
So, they knew they had one shot at getting it right. And instead of sort of approaching them in a haphazard way, they did a full pre diligence project. So they got all their binders together right? All their questions that they think they were going to be asked in advance. And when I asked the Houlihans about this. I said, “Why did you do that?” They said, “Two reasons. One, we want due diligence to go smoothly. Two,” and I think this is the more interesting reason, “is because it signals to the acquirer that you’re going to market and they’re going to have to compete to buy your business.” So, it’s a very subtle, non-threatening way to say, “We mean business. We’re going to sell this company. You’ve got the first shot at it but if you don’t get it, someone else will.”
And again, it’s one of those really subtle ways you can communicate to a buyer that they need to pay attention. And so, long story short, Gallo bought the company for a truckload of money, and they now live in a beautiful retreat, and so forth. So, in any event, it’s one of the things you can do to kind of get the thing ready to go to market.
[13:27] So with respect to—I don’t want to gloss over the process of creating all your documented business processes. Obviously, if I was being interviewed, I’d have a whole lot to say about that particular topic. And I’m happy to chime in. But I’m interested in your opinion on if someone’s thinking, okay, well, I got to do that but how? What does it look like? What are the best practices? Am I putting a binder on the shelf? Like literally what is that mean?
- Right. So again, documenting your process, I think I would separate that from creating your binders. When I talk about creating your binders, I’m really referring to the pre diligence checklist that you would go through. So, for example, an acquirer is going to want—if you have a leased premises, they’re going to want to see your lease, if you’ve got employees, they’re going to want to see your employee agreements. If you’ve got contracts with suppliers, they’re going to want to see those contracts. So, preparing all of those things in a documented fashion is really preparing for diligence or pre diligence.
Documenting your processes is also important for pre diligence, but it’s more of an operational project, right? It’s more so that you can get employees doing the work for you, as opposed to doing the work themselves. And I am in no position to preach to the choir on the ladder because I know you are a guru in that space. So, feel free, like what are the best practices for documenting your processes?
[14:57] Well, so, I guess the short answer is, you need to make sure that you have a highly detailed checklist for everyone, or as many of your repeatable processes as possible. And in particular, the processes that cause growth. Because what the buyers want? They want to see a business grow and they might have their vision for what they’re going to do to it after they buy it. But nonetheless, you’ve got to show them—to get maximum value for your business, you gotta show them that this thing grows, month after month after month on the back of all of our processes. And that way, it’s not all because “I’m some wizard magician, who’s the key man, and I’m the only one that can make it grow.”
So those checklists, there’s all sorts of ways to do that. Obviously, I’m the Flowster and that’s a whole thing what the software is for. You can come in, and you can create them in the software. But I don’t want to make this a Flowster commercial. So, let’s say that Flowster didn’t exist, what the heck would you do? I’d say, at a minimum, you might want to find or open up Google Docs and start—like, here’s what I do. I take my screen, and I got a 27-inch monitor. And so, I divided in two—I got a browser on one, I got a browser on each half.
And so, on the left half, because most applications you’re using to run your business these days are web applications, I’m doing whatever the thing is that I need to create the process for. And so maybe it’s, I’m prospecting, or I’m running an ad campaign, or I’m doing a social post, or I’m creating a blog post, or whatever, or a podcast episode. And then on the right-hand side of the screen, a screen in another browser. As I’m doing the thing on the left, I’m taking screenshots, and I’m documenting the thing that I’m doing on the right-hand side of the screen, so that at the end of doing the thing, I also have a document, which I could then give to you. And you for the most part could probably do the thing without having to ask me questions. Now if you have to ask me a lot of questions, that means my documenting wasn’t very good. It wasn’t detailed enough. So that’s your litmus test.
And when you get to the point where—and this is what we do in our business all the time, we’ll hire a new remote worker from the Philippines or from Mexico, or wherever. And we’ll give them one of our standard operating procedures. And we know if we get zero questions, and we get the intended result that our documentation was completely on point. Just imagine that you could take a new human who’s never done this job before, give them your document, and they execute the task flawlessly.
Now, just imagine if you had all of the growth processes in your organization documented to that degree. Now, is that a one-day job? No, much more than one day job. But if you did, and then you’re insulating yourself from that risk of well, you’ve got Suzy and marketing, who’s a freaking wizard. And what happens if you lost Susie? Well, then all the knowledge just walked out the door with Susie. You don’t want that to happen.
So whether you’re using Google Docs, or you’re using an application specific, like Flowster, some way, shape or form, you want this to be in an electronic form, where there’s words and pictures, so and that has some level of functionality that you’re also able to—because you want to use these processes, you don’t want to just create them and put them up there on the shelf because then they become out of date and go stale. So that you can assign that process to an individual or individuals with a due date. So that you always know that whatever that process is, as the manager, when you delegate it to a subordinate, that it’s going to get done according to the process, by the right person, by the right due date.
And you’ll notice I didn’t say video, and I’ll just speak very, very quickly to this and then we can move on. Some folks think, well, why don’t I just create, I’ll just turn the video capture software on and I’ll create my screen. And the reason I don’t think video is very good is a couple things. Number one, if your video is six or eight minutes long, how do I memorize everything you just told me in the video? Pretty hard to do, which means that I have to hit play and do a bit and hit pause and then do some more, and then hit play and watch some more, and then hit pause and do some more, which is not very efficient at all from an execution perspective. This is why pilots don’t have a preflight video, they have a pre-flight checklist because they can just look through the thing, put a tick box, do the thing, put a tick box.
But then there’s even a bigger issue. You get to the point where let’s say you’ve now got a hundred videos. Well, they were all current when you created them. But guess what happens? They get out of date with every passing day. And so editing or reshooting video is really time consuming. And so now you’ve got this library of a hundred different videos, which is giving a great user experience to begin with. But then you gotta keep these suckers up to date—that’s a nightmare.
Whereas if you have a document and you have an image or a screenshot and one portion of your process, how much work is it to just take a new screenshot. If the software app changed and now the screenshots don’t match anymore, so you take a new screenshot, delete the old one, put the new one in. That’s a lot less work than editing, and compiling, and reuploading a video to YouTube or wherever you’re hosting your videos. So that’s my super quick on how to actually do the documentation for your systems.
- Makes a ton of sense. And if I may, Trent, I mean, like I relate that back to sort of the idea of selling your company or preparing to sell a company. Imagine yourself. You’re about to buy something relatively complicated.
So imagine you’re thinking about buying a new car. And instead of buying a Ford or a BMW, you’re thinking about buying a Tesla. Well, a Tesla is really a computerized car, right, and that could be quite confusing for you, it could be like, intimidating. Exciting on one hand, right, because it’s a brand-new car, very sexy, whatever. But also like, “Oh, am I going to be able to figure out a different way, it’s a bit different than…?”
Now imagine you’re an acquirer, instead of buying a $100,000 car, you’re buying a million, 5 million, $10 million business. The fear that buyers have, that they are going to screw it up is enormous, right? In some cases, it can be life changing for them in a bad way if they screwed up. So, the more you can allay that fear, by having standard operating procedures, saying that you can mix and match people and swap people out and so forth, you’re basically taking away one of the enormous barriers that business buyers have.
And for a lot of companies, we’ve been talking about —if Google is going to buy whatever, Apple, and this is a stupid example. But if you’re going to see some massive acquired company, acquire another company, well, they’ve got tremendous resources, they’ve got legions of people. In the case of a small business, a couple million dollars in value. The most likely acquirer for business like that is an individual investor. Somebody who’s leaving a job, wants a business in your market or in your category, and needs to know how to run it. And that person needs SOPs, they need the manual, right? They need the checklists because they don’t have a legion of corporate people to run it for them.
[22:25] You.. actually, I was gotta speak to exactly that, who your buyer is will greatly impact the extra value created or valued detracted by having or not having standard operating procedures. And you just, you kind of hit the nail on the head there, so.
- You know what? It’s funny. Yes, so like private equity. So, the three types of buyers—individual investor, private equity groups, and negotiation investors. Individual investors, somebody who has a job. Buys companies somewhere between a million and 5 million, which is the kind of classic sweet spot there. Private equity groups are the next tranche up. They’re the classic buyer of businesses that have a value of somewhere between five and $50 million. Interestingly, private equity groups, they’re going to lock you in. When they try to buy your business, they’re likely to only buy 70% of it and they’re going to try to keep you because they don’t have management team in place.
And so, in a funny way, having SOP documented is actually a little less important if a private equity group is buying it because they’re going to take you in golden handcuffs with them, right? So, they’re like, “Hey, Trent, you know how to run this company already.” So, like, “You’re coming right? And as long as you’re coming out, like, I’ll let you continue to run it.”
Whereas, an individual investor, again, the company that subs 5 million, that person is petrified of screwing up what they bought. And I just think it’s so important that they’ve got stuff documented.
[23:51] Yes, absolutely. All right. Let’s talk, let’s close out then, John, I’m talking about the negotiation phase. So, now, you’re towards the tail end of due diligence, you’re in full on negotiation. And as you mentioned earlier, there are buyers out there who will use this as an opportunity to reduce the price and take advantage of what I call, the invested time principle. In other words, the longer you’ve been at it, the more likely it is you want it to come to a successful fruition. You emotionally bought the beach house and the Porsche or whatever. But what are some ways to gain leverage during the negotiation phase?
- Yes, so again, prior to signing a letter of intent—so letter of intent is an engagement ring. It’s not marriage. Both parties and a letter of intent can usually back out, but it’s a fairly strong indication that somebody wants to buy your business. So, before you sign an LOI, I think you want to make sure that the acquirer knows that there are other competing offers. Because the LOI will typically include a no shop clause, meaning that you cannot negotiate with anybody else while they do their due diligence. So as soon as you sign a no shop clause, which is in almost every LOI, you lose leverage in the negotiation.
So up until the point you sign that you want to make sure that number one, they know there are other players that are interested. That’ll hold them accountable and keep them honest. Number two, you want to make sure you negotiate any material things that are important to you before signing on LOI. And the acquirer is going to want to do exactly the opposite. They’ll be like, “Hey, Trent, we’ll work on that in due diligence. Oh, you want to talk about your earnout? Yes, yes, we’ll kind of nail those details in due diligence. Oh, you want to talk about your salary, your employee, your bonus, your car, your blah, blah? Oh, yes, we’ll deal with that in due diligence.” The reason they’re doing that is for the reason that you said earlier—they’re trying to get you into the process, and they’re going to have more negotiating leverage once they sign the LOI.
So anything that’s really important to you, four weeks’ vacation and a car allowance, as an example. If that’s like really critical for you, get it signed at the LOI stage because once you sign that LOI, you’re losing all kinds of leverage.
[26:10] That makes a lot of sense. All right. So, before we wrap up, is there anything that we haven’t talked about that you think we should have?
- I think we’ve covered quite a bit. And yes, no, I think we’ve covered a lot.
[26:26] Okay. And folks, there are some other guests that I’ve had on the show where we’ve talked about selling businesses before. And I’ll be sure to include links to those interviews in the show notes for this particular episode.
So, John, thank you so much for making time. For anyone who would like to get in touch with you, is Twitter a good way to do that? Or what’s your preferred method?
- You know what? I would say go to builttosell.com. And if you opt in—like there’s a million places you can opt in and provide your email address, if you do that, we’ll push out once a week a new episode of Built to Sell Radio. It’s the same show you were on years ago, where we interview a different entrepreneur about their exit each week. And it’s just a good chance to hear firsthand from other entrepreneurs who have sold. It’s free. We do it every week, so it’s builttosell.com.
[27:14] All right, thanks so much for being on the show. Take care.
[27:19] All right. That’s it for today’s episode. If you enjoyed this episode, I would be super grateful if you would take a moment on your favorite podcast listening app to like, rate, and review this episode. If you’d like to get to the show notes, you can get to them at brightideas.co/355. Thanks very much for tuning in. Take care. Bye Bye.