"The better businesses will sell. The weaker ones won't, regardless of the market."
On Episode 35 of 1st Floor Conversations, we were joined by Pat Ennis & Corby Megorden, two of the Partners behind, Ennis Legacy Partners. A Bethesda-based firm that helps business owners plan and execute the process of selling their businesses.
At the time we connected for Episode 35, the market was at an all-time high; pre-COVID. It was safe to say, business consolidation was more prevalent. At the time, with people looking to sell and merge, it seemed like an excellent opportunity to bring two experts to the table to provide some insight. That said, their extensive experiences lends itself valuable during times of prosperity and times of hardship.
We dive into the lengthy process of preparing the sale, common challenges, and misconceptions, and be sure to read to the end for the number one pitfall that can plummet the valuation of a business. So, if you're in a position as an executive to exit, if you're in a company that's growing and trying to find the right time to sell, or if you have any desire to own a business, it's never too soon to begin exit planning.
Beginning with The End:
While most people are focused on the big-ticket price, Corby and Pat emphasized how important it is to start with the end in mind; the health and well-being of the business owner. This prompts questions like;
What is the ultimate goal?
How much money does the owner need for retirement?
Does he/she want to sell to a third party, to family, to a valued-employee?
Is he in a highly competitive, technical niche looking for a quick sale?
With so many potential avenues available, it's critical to dig into the business owner's goals for life after the sale.
Pat and Corby warn us to be wary of any exit planner jumping into sale tactics before gathering an understanding of what a win looks like beyond the dollar value of the sale. This is vital to a successful outcome because, more often than not, businesses have an inflated expectation of their valuation.
The truth of the matter is, even in an economic downturn, there are always investors looking to purchase viable businesses. Corby goes on to share that the market is not monolithic, meaning there is still going to be money available, "the better businesses will sell. The weaker ones won't, regardless of the market." There is a plethora of qualified buyers; it is much harder to find sellable businesses.
Several value drivers make a business sellable and ultimately, attractive to a buyer. Interestingly enough, Pat and Corby shared that buyers are all looking for the same things—first, a company with a robust financial performance, profitability, and revenue. Most specifically, recurring revenue.
Next is a demonstrated growth plan. A buyer is purchasing the future value of the business. The ability to show a history of profitability and revenue targets demonstrates a genuine understanding of the business and instills credibility in future forecasts.
Subsequently, the team and business culture can be a tremendous value add.
Does the leadership team and frankly, the entire staff, embody the drive and vision of the owner?
Do they maintain the character of entrepreneurship? And, are there clear systems and processes in place?
This is the last piece of the puzzle that can make a business functionally turnkey under new ownership.
The next part of the process is the evaluation of potential roadblocks that would significantly decrease the business value. Exit planners take an X-Ray of the bones of the business and determine just how strong, healthy, and ultimately valuable they are. Remember, prescription before diagnosis is malpractice. Upon diagnosis, a 90-day and 365-day plan are drafted to begin to mend any fractures or underlying "health" problems.
The most significant adverse value driver of small businesses is owner dependency, or when too much of the company is run by and funneled through the direct efforts of the owner. Owners have to be able to step away from operations. A business should be a machine to drive profits. If you have to crank it manually, it's a poorly designed mechanism.
"If the business owner is the management team, the business isn't that scalable. If the business owner has a management team that can run it. Very sellable… The value of the business is created by the key employees, not the owner. The owner can be detrimental to the value of the business." Pat Ennis
The next common danger in small to medium-sized businesses is the presence of a few key employees who embody the inner workings of the company. Without documented and standardized systems and processes, the loss of a critical employee in an ownership transition could be detrimental to the health of the business.
The last potential downfall discussed was revenue concentration. If 30% of business revenue is tied up with a single client, the entire business is at risk.
Functionally, there's a switch flip, where the business owner needs to start thinking of their business as an invested asset as opposed to a job or a company that they run. This transition may take years. As a business owner, are you willing to navigate that roadmap to obtain the best possible return on investment?
The value is in the key employees.
The value is what you can package and ultimately give to somebody.
If you are gifting your business, can you provide them something that will stand through that transfer of hands?
And finally, I am a believer in the power of networking. "The omnicompetent individual doesn't exist," we must find and connect with uniquely competent people. Both Pat and Corby have, in their words, "pared off what others do better to focus in on what we do best."
Developing a powerful professional network has allowed them to niche down on exit planning. They develop the plan and quarterback the process. However, when there is a job that needs to be done, they don't hesitate to introduce their clients to members of their network who spend their entire life doing that specific thing. As Pat and Corby shared, focus on developing a network of people that have great character, competence, and chemistry, and skies the limit.
Remember, this is 1st Floor Conversations, where the view at the top is only as good as the foundation which preserves it. And when you're selling a business, that is exactly what you need to maximize valuation and make sure you get to the promised land in one piece.
Ennis Legacy Partners is offering 10%, a $600 discount, off their three-month ExitReadiness Baseplan. Just let them know you were listening to 1st Floor Conversations. Additionally, for anyone looking for more exit strategy education, head to www.exitreadiness.com. Use the code ACADEMY-15 for an additional 15% off the ExitReadiness course.