The 8 Exit Planning Truths Most Business Owners Learn Too Late

Speaker A: Welcome to the podcast that's dedicated to helping business owners prepare for an exit, manage the valuation of the business and get an exit on their terms. This is the Exit Insights podcast, presented by Exit Factor. I'm Daryl Bates, Brownsword, and I'm joined by my partner, business partner in crime. I probably shouldn't say that it's going to get the wrong idea, but Kevin, good to catch up with you again.

Speaker B: And you, Darryl. I've missed you.

Speaker A: Yeah, well, it's been a good couple of weeks now since we've had a bit of a rant, uh, and thoughts all things about working with business owners. So in our, in our, our little, short, little hiatus, we've, we've, we've gone through and we've analyzed, uh, a lot. We've, we've done over 190 episodes now. And after a couple of weeks off, I actually missed it. I missed producing episodes. And I know that I've had a couple of people contact, uh, me and regular listeners and sort of said, where are you guys? Yeah, we love catching up. We love, we love hearing what you guys have got to say, you know, you grumpy old buggers like the Muppet Show. But, you know, the insights are always really helpful and valuable for us. So are you coming back? Well, of course we're coming back. We enjoy this. And whenever we talk and we catch up, it's really good for our learning and our reflections. I don't know about you, but it forces me to stop and think and go, uh, what are the things I've been learning about in the last week? So, um, yeah, I think it's valuable for that. So, Kevin, we've pulled together after reviewing all of our, our episodes, we've gone, let's have a look and let's come up with what are the top tips, if you like, that keep coming up again and again and again. From the advisors that we've interviewed and people who help business owners get that exit that they're looking for, and from the business owners themselves who have had a successful exit or had an exit not always successful, these are the top tips that keep coming up again and again and again. So I just thought it'd be really valuable to, after a little break, kickstart, uh, our getting going again by going through and refreshing ourselves on these top tips and, uh, and digesting them and, and, and having a bit of a conversation about them. So why don't you. Have you got the list there in front of you?

Speaker B: Yeah, we'll take it in turns on

Speaker A: them, shall we go on while I, while I have a drink. You kick off with the first one then.

Speaker B: So I think the number one issue that we've identified and we've talked a lot about in the last couple of weeks, events we've been to with M and A advisors and business brokers and so on, is the top tip is start earlier. The number of stories we've heard recently where the business has personal reasons or professional reasons they want out straight away, that's far too late. And you know, most, most business owners begin preparing far too late, full stop. We usually say to people that it's good to probably have two clean year ends when you know, the books are being tidied up and so on, and it gives a great narrative to a potential buyer. But if you suddenly decide you want to sell tomorrow, that's when the start problem comes. When 80% of businesses don't sell, people haven't tidied the business up. They've been running it as they're uh, as their lifestyle business perhaps, um, there's been expenses through the business that have been distorted, numbers and a whole bunch of other things. And the thing is, if you start earlier, it doesn't mean you suddenly have to leave your business in a year's time or 18 months time. A lot of gen zers today are starting their business and before they get revenue, they're saying how they're thinking of exiting. And that's what we're saying is start behaving now. Take some advice about the things you have to do to make your business exit ready. And do you know what, you'll tidy up your business. It'll probably be more fun to run and it's generally much more profitable if you start early. And our recent experience across our business is that uh, 56% increase in value is achieved by people working on planning their exit in advance.

Speaker A: It's interesting. And when people say to me, why should I really be starting two years earlier? Well, you've just rattled off uh, a couple of great ideas. Well, hey, look, you don't have to sell it, but your business is going to be more fun to run because you know you're going to have more time, more money and less stress in the meantime. So it's going to be more fun, it's going to be ready in case someone comes and just approaches you, even though you're not got, uh, your business on the market. But if your business is seen in the marketplace as a desirable and attractive business, you might get someone come and knock on your door. And go, hey, look, I'm interested in buying your business. If you have got your business exit ready, even though you don't planning to exit, if someone comes with that great offer that's too good to be true, well then you're going to get through the due diligence and you're going to get a deal on your terms or attractive terms at least that'll, that'll make it worthwhile and they'll want to continue with the conversations with you. So, so there's good things like that. The other key or the other big one that I think is really important is if you're building the intangible assets, these are the things that, that don't show up on your balance sheet straight away. You need to demonstrate over two or three years that a, here's the strategy I've built to build the intangible asset and here's how that, that has benefited my business. And, and the uh, the impact of that strategy is now flowing through to my P and L. So if you can demonstrate how this intangible asset benefits your P and L, then that'll really add value to your value valuation. So that's why you want to get at least two or three years planning on horizon and two or three years ideally bare minimum of nice clean accounts that you don't have to argue over, you don't have to justify, uh, they're nice and clean. It'll just make things a whole lot easier. Right. So the next one on our hit list is the one that I'm sure you've all heard of, it's owner dependence. How do I eliminate owner dependence? And this is one that you and I have worked on and put a lot of thought and effort into and to the point that we've created a white paper we've written and documented. How do you eliminate owner dependence? There's a lot of people out there writing about how to boost business valuation, how do you increase profits, how do you do better marketing, how do you structure your business and what have you. But no one's actually created a formula that I've seen before on what's a step by step process to, to eliminate owner dependence in my business. Because if I already knew everything I had to do to eliminate dependence on me, I would have done it. So eliminate owner dependence. How do we create the business where the owner, uh, is operating in the chair type role rather than anything else. They're not in any operational role or any other operational role in the business. That's the essence of eliminating owner Dependence, isn't it?

Speaker B: Yeah, yeah, for me in conversation when I talk about this with people. But let me address this point now to the business owners that uh, are listening. It's if I were to buy your business on a Friday, I want to know that on Monday I can take over your business and I can achieve the same revenues, the same profits and a reasonably healthy chance of being able to grow both of those things as well. If I don't sense I can do that because you've left the business, why would I buy it? Why would I buy it for the price you're suggesting? That's the kind of conversation I've been having.

Speaker A: Yeah, that's nice and concise. You know, I want to buy a business, I don't want to buy a job. Why do I want to pay for a job when I can get one and get paid for it anyway and probably get paid more in too many cases? So brilliant. Okay, so we've started earlier, we've been eliminating owner dependents. Now we're going to what, build predictable revenue. Let's dig into that one, shall we?

Speaker B: Yeah, so this leads on quite nicely from owner dependents where quite often with an owner dependent business, they own all the key relationships with the big customers and so on. Uh, if I am looking at buying a business, I want predictable revenue. So the first thing we need to detach the owner from day to day revenue generation. But also a whole bunch of other things need to happen. I want to see a business that's got recurring revenues. I want to see a business that has contracts with the clients. That mean, uh, there's a very strong chance over the next 12 months that most of the businesses by and large pre written that's the idyllic world to be in. And actually let's not forget that actually if I'm going to have customers that are going to be with me for a year, probably I want the suppliers there as well. So essentially I want the things that relate to the costs and the things that relate to the income coming in. Eventually it's the profit, not just predictable revenue that I'm looking for and that needs to be written down, it needs to be contracted. We need to know how it's going on and as far as possible create a business model where subscription or recurring revenues or automatic renewals, whatever, come into play to keep things running smoothly so we can get on with doing other things.

Speaker A: And a pet gripe of mine, since you touched on the word is, there are other ways to have predictable and secure revenue streams apart from just forcing all of your customers into some sort of subscription model. Subscription models are great, but they're not always the best fit for your product or your proposition. And you already mentioned contracts. But yeah, it's a soapbox thing for me, so I thought I couldn't resist mentioning it. Okay, so we've got revenue. So the next thing is we need to move on from revenue. And we want to talk about, uh, leadership. And leadership is part of the culture and part of the structure and the operating structure and make sure that everyone knows what they're doing and they're inspired to do it. And you've got leadership is a mix of control and reporting systems in place as well that demonstrate that the business is working to a plan and achieving that plan. Uh, and you've got operating structures and everyone knows what's expected of them, in essence.

Speaker B: Yep. Um, that's on the leadership piece. We're moving on from that one.

Speaker A: Yeah. Well, I guess the only other piece to add while we're talking about leadership is ideally, you want some sort of layered succession strategies so that you can say, hey, look, here's my key roles in my leadership team, and here's the logical successes that we think are going to replace those people. In the short term, they may not be the ultimate successes, but if you've got some sort of backup plan or a plan B initially, that's always helpful.

Speaker B: I should be a radio dj because I could segue anything here. So actually, what you just talked about leads on to number five in our top tips list, which is around systemizing everything. And one of the great ways of getting that succession plan started is to do is to systemize things. Let me pull this together so it makes some sense. The first thing is that systems allow you to run a replicable business on a daily, A, uh, weekly, a monthly basis, so that when someone comes and buys something from you, they're buying from the company, not the individual. Everyone's delivering the same quality to customers. The human side of it can then sit on top of it. It allows us more time to be human having systemized business. A lot of people we talk to say, yeah, but if I have to write all this down, it's going to take me days to do it. I'm too busy. This is a business owner doing it all themselves. Um, here's a great way. Here's my sort of top recommendation here is if you want to document the processes so that they can be replicable, and it helps you train new people. It also helps people train the person that's going to get promoted into that role. So get the current candidate to write down what they do and document it. And as a business leader or business owner, you then just have to review it and check it's okay, and then make sure that the incumbent updates it every now and again. It refreshes their mind on actually what they're supposed to do and it makes them become more accountable in owning that role as well. But it allows us to move on as we scale the business. So systemizing everything for many entrepreneurs sounds so deadly dull and boring. What it actually does is it frees up your talent in the organization once you've got this rolling so they can excel at the things on top of that. So systemize everything so the business can grow and people can grow beautiful.

Speaker A: And when we're talking about systems, we're talking about process. Systemize your process, meaning it's done the same way every time. Now you might want to get some information systems in place to help automation and that's an extra layer. But when we say systemize everything, we're talking about your workflows so that your business is consistent, repeatable, reliable and boring. And buyers like boring businesses because there's no surprises. They know exactly what they're getting and that's what's valuable. Okay, so after we've systemized, what do we want to move on to? We want to start building those intangible assets. So one of the big intangible assets is your favorite topic, which is brand new and branding. And uh, one of my favorite assets is intangible assets is building IP and a methodology and becoming known for your methodology and your proposition rather than being known for the key individuals in your business. Because part of creating that leadership depth is ensuring that your business is dependent on those systems that we talked about earlier and not dependent on the key people and John's or Bob's or Sally's history with the business and their corporate memory and their personal expertise. We want your business to be known for your IP and your methodology rather than the people delivering that methodology. And ah, there's well, two of our my favorite assets or intangible assets. Um, have you got any that you really want to bring to the front while we're having the conversation? Kevin?

Speaker B: So I think one of the overarching reasons why this is important is it's about differentiating your business. Let's imagine you're an architect. Let's imagine you're a, uh, car body shop or whatever. How do you, how do you gonna be appear to be different. It strikes me that in so many industries, if you look at websites, you look at the faces on businesses and things like that, you kind of look at them and think, well, this is just like everyone else I've seen. And people need to distinguish themselves so that they stand out. And it doesn't mean doing wild, wacky, dangerous things. They're doing things that are just that little bit different, put forward as being more reliable. There's some intellectual property that's being used and reputational, relationship type things are being brought to the fore. Most people we talk to go, yeah, yeah, yeah, I'm just too busy. These are things that slip down the list. If you don't have strong brand and you're same as everyone else, if you don't have clarity around intellectual property and associated things, et cetera, you end up becoming fourth division players. That's the reality of the matter. These things are so important that actually all of these items sit on well developed balance sheets. All of these things have got their intangible, but they have a value. And on, uh, many businesses, they actually appear as an amount of money part of the real valuation. So it's good to help you trade well, but it's good to help you grow value in the business as well,

Speaker A: especially things like brand. If you acquire a business with the brand and you pay for it, then it sits on your balance sheet.

Speaker B: Right.

Speaker A: So, uh, we're talking about, you know, getting those things working, getting them in your business so that, uh, your, your intangible assets are known and understood and um, we've just mentioned a couple of them. But, uh, if you get clear and around understanding what your intangible assets are. Uh-huh. Then when it comes to due diligence, you'll be including those conversations and you'll be talking about your culture and how your staff stay and they're loyal and they add value and uh, they're performing higher than benchmarks. You'll be talking about your contracts and your information systems. You'll be very clear on your intangible assets. So they'll be part of the pitch and the proposition that goes out to market so that you're on the front foot communicating all these things rather than on the back foot, uh, or the buyers potentially identifying an asset that you, that you haven't seen. Brilliant. So we've got our intangible assets, we've built them, we've created value, We've had them around for a couple of years now and they're flowing through and you can see how they're influencing your P and L. A classic one is if you niche down and get your positioning right and become a specialist rather than a generalist, your pricing tends to be able to go up, you tend to be able to charge more, and there's a classic example of how it flows through to your P and L. So we've got these things in place now. Now if you're doing some exit planning and you're on the front foot, you can understand what your exit options are. Now you want to be on the front foot and you want to exit on your terms. That means you get to dictate whether it's uh, an mbo, you sell it to a trade buyer or a PE or uh, any of the other options. It could be an EOT Here in the uk, if you're on the front foot, you'll think about the options. Passing it on to a family member, you'll think about your options and you'll figure out what's best works best for you and your vision and what you're trying to achieve for your business and your life and your ambition and goals. People who uh, don't do any planning tend to be price takers or they're the ones that end up dissolving their business because they haven't been able to make it attractive and they're four out of five. Now while we're talking about the four out of five is probably worth putting it out there. Every time we have this conversation with a, uh, business owner, an entrepreneur, they always seem to think, no, no, no, we'll be all right, we're going to be one of the 20% that get a successful exit. What is it, Kevin, about every entrepreneur that automatically assumes that they're going to be one of the 20%? Is it that never ending optimism? What do you think it is?

Speaker B: It's partly that, but it's partly the fact that most business owners are running quite good businesses. And yes, they make a profit and have been around for 10, 20, 30 plus years or whatever. And because they know how to run their business, they there, there tends to be this assumption that it will sell really easily. And um, if you talk to one or two of the wild west brokers that exist in selling businesses probably best, not to mention names, um, they'll tell you how easy it will be to sell it and they'll happily take uh, a down payment on the transaction. And you're often running with not being able to sell your business even though you were convinced you could. Now I think one of the Real points here though is I'll also tell

Speaker A: you, you'll get the valuation you want as well.

Speaker B: Oh, yes, they'll do that. I think the thing here is that respected business people have started with a craft, skill, a, uh, profession or whatever. They're really, really good at doing their job and they've become owner dependent because they keep control of everything. And there are some things they'll give away to other people to look after. In our personal lives, we don't tend to do dentistry on ourselves and things that, because we don't know how to do it and it would be too difficult. But in business we seem to think we can do it all and the mundane things we might, might pass away. But most people, if they are lucky enough to sell a business, they only ever do it once in their, uh, in their whole life. Some people go on to sell two or three businesses, but they are the absolute minority. And I mean, businesses are quite happy, I say quite happy generally, I think very happy to be using an accountant, um, for getting their compliance on their tax returns and so forth, because it's an area they don't do. They're not specialists at it. Well, most people aren't specialists at exiting businesses. You and I, for an example, I mean, we've been doing nothing but business exit planning with, with SMEs in the UK since 2019 and we've had experience of business exits, um, both acquiring and selling before that. So, you know, we've done it many times and we've seen so many things that happen. So the combination you want is the client, the business trying to sell, knows their business and industry really well and get advice from someone that really understands how to make a business exitable, how to make, maximize the value and make it attractive to a buyer. Those two things together mean you get maximum valuation and a real chance to sell it. And you get choices on how you exit as well, because you start to take control.

Speaker A: That's it. So, and see, the language is all about looking forward and knowing where you want to go so that you could, you're on the front foot and you, you, you have an opportunity to exit on your terms. And that's what every business owner wants at the end of the day, isn't it? So that leads us to. Sorry, you going to jump in?

Speaker B: I was just about to do what you were doing. Really segue again into the next one. It's. Let's imagine everyone's taken those top tips and they've been rocking through them. And it gets to a point in the transaction where, sorry, the journey to exiting, where there's a transaction and a large chunk of cash is winging its way into an individual's personal current account and they're exiting the business, well, where are they going to go? What's our ambition out of it? So I think the start point needs to be the end point. So right at the very beginning it should be, where are you trying to get to personally? Why do you want to exit your business? What are you going to do when you exit your business? And we're very keen to make sure people end up achieving their dreams rather than not achieving anything after they've sold their business. That's really, really important. And the journey is about aligning that business value with your personal goals. Add values to this. I'll, uh, tell you what. If people start to spot a business owner that's got strong personal ambition and has got great business values and those business values are aligned with the personal goals, that tends to generate a lot of respect for the business owner and the business leader and tends to get a business more noticed so that it becomes something that people start knocking on the door, saying, excuse me, is your business for sale? And making offers. I mean, let's just remember, though, the first person to knock on your door is unlikely to offer the best price. But because you've been doing all these things, making your business attractive and then aligning those business values with your personal goals, it is quite likely to happen. And when it does happen, be ready for it, is what we're saying.

Speaker A: Yeah, brilliant. So being clear. And one thing that entrepreneurs don't have problems with is having a vision, being ambitious. And if you have a goal, if part of your goal is to go, hey, I want to sell my business for X amount of pounds, it's often a goal or a target, or working with your wealth manager to go, hey, look, here's the lifestyle I want to live, here's one I want to do. Post my business. How much do I need for that? There's another way of setting an exit goal or an exit valuation, but it's both of those things are on the front foot. You've put some thought into it. It's an actual plan rather than just a hope or a, uh, aspiration. You've done the work in it and that's what's required to get that exit on your terms, is making sure that your business exit planning is aligned and congruent with your personal goals. Otherwise you'll have exited your business and you'll be going, what now what am I going to do? I'm feeling lost. And we need to work through those feelings and energy as well.

Speaker B: Hey, do you know what a tally stick is, Daryl?

Speaker A: No, tell me, because I'm sure I'm not the only one.

Speaker B: A tally stick is something you keep tally of things, keep counter things on and yesteryear to agreement of payments used to cut notches in the tally stick and there'd be two of them and you could marry them up and the tally marks coincided and that's how you knew that that was the agreed numbers and so forth. But I was just thinking as a way of kind of summing up where we've been here is we need tally sticks and these eight things we've been talking about, we should start keeping score of how many times they're coming up as key points in conversation. And in the last couple of weeks, every one of these has come up several times in conversations I've been having. And so they evidently deserve to be those top 10 tips for making sure you exit your business on your terms.

Speaker A: Yeah, and this list of, um, I guess repeatable topics hasn't just been the things that you and I have been talking about. These are the things that we've collated from all of the guests over the years, the many years of the podcast which we started six years ago. So, um, uh, they're pretty much, well, they're fact of. If you want to get that exit on your terms, if you want to maximize the valuation of your business, you've got to address these things. There's a few more, but these are the main things.

Speaker B: Absolutely brilliant. That was jolly fine. I wonder how many people are wanting to shout at us and say, what about? What about? Or I disagree. Well, do you know what, you're welcome to just go to exitinsights.co.uk and you can find us there, or you can find us on, um, LinkedIn. And always happy to discuss further, uh, on any of these topics if people want to.

Speaker A: Yeah, and look, if anyone wants a one pager or a short document that compiles all these, just, uh, drop a note on that page and we'll send something through to you. Excellent, Kevin, once again, thanks for sharing your exit insights with me.

Speaker B: Yep, thanks, Daryl. Do it again soon.

Speaker A: Cheers.