FYE-GI with Negotiations | How to Exit Rich

 

The biggest mistake that business owners make is that they don’t plan their exit from their business. People don’t think about the planning and preparation that goes into negotiating the sale of their business. Michelle Seiler Tucker—a mergers and acquisitions master intermediary, a senior business analyst, and the best-selling author of three books—outlines exactly what you need to do to get top dollar for your business in her book, “Exit Rich.” Michelle covers much of that process in this episode of Negotiations Ninja. Don’t miss it!

Outline of This Episode

  • [1:55] Who is Michelle Seiler Tucker?
  • [3:57] The flip-flop of statistics
  • [5:46] Formulating an exit plan
  • [7:43] Michelle’s GPS Exit Model
  • [12:14] The 6 pillars of proprietary
  • [20:31] The 6 P Method to exit rich
  • [28:34] How to get Michelle’s book + membership

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How To Exit Rich With Michelle Seiler Tucker

My amazing and incredible guest is Michelle Seiler Tucker. She is the leading guru when it comes to selling your business. She’s written a fantastic new book, which I recommend, called Exit Rich. Many people push off planning the sale of their business until the last moment. They don’t think about what it takes to negotiate a good deal of the planning and the preparation that goes into it. Michelle’s written about that. She outlines exactly what you need to do to get top dollar for your business. We talk all about that in this fantastic interview. Enjoy this great conversation.

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Michelle, how are you?

I’m great. How are you?

I’m great. Thank you much for being on the show.

Thank you much for having me. It’s my pleasure.

I’m excited because not often do we get to talk about how to manage an exit and make sure that you manage it profitably. It’s generally speaking, the last thing that people think about, but probably one of the most important things that people need to be thinking about. Before we get into our topic, I’d love it if you could share with the readers a bit about who you are and what you do.

I am an entrepreneur. I own many different companies and several different verticals. I’ve always been an entrepreneur. I did get caught up in working for Corporate America for Xerox for one year, but then I went right back into entrepreneurship. I left Xerox and went into franchise sales, consulting, and development, then I transition into selling companies versus started selling small companies like your restaurants, coffee shops, and things of that nature. Very quickly, I transitioned into selling large businesses for $10 million and up manufacturing, distribution, staffing, and B2B service businesses. I also transitioned into fixing businesses because I realized that what Steve Forbes says is true that 8 out of 10 businesses will not sell.

I’m like, “If I don’t fix, tweak, or grow them so they’re sellable, I’m going to starve to death.” That’s when I started specializing in buying, selling, fixing, and growing. I’ve bought companies and flipped them. I’ve partnered with business owners investing my money, time, expertise, and resources to put them on a bill-to-sell plan because the biggest mistake that business owners make is they don’t plan their exit. That’s me. I’m a Mergers And Acquisitions Master Intermediary, Senior Business Analyst, and bestselling author of three different books. I’m very excited to be launching Exit Rich.

The biggest mistake that business owners make is they don't plan their exit. Click To Tweet

That’s primarily what I want to talk about. Something that you mentioned there piqued my interest and we’ll start there. Many people don’t think about the exit. When they start a business, or even once the business is even mature, only much later do they start thinking like, “I should start thinking about how I’m going to sell this thing,” then they get to the end and they realize, “There’s not much to sell. I’ve got something here that I haven’t nurtured and grown and put processes and procedures in place. It’s not a plug-and-play for anyone who wants to pick it up. For readers, educate them on why this is important to start thinking about right from the beginning.

When I wrote my first book, Sell Your Business For More Than It’s Worth in 2013, and I did the research and found out that 85% to 95% of all startups would fail. We all know that. That’s common knowledge that if you go into business, those first 1 to 5 years are the riskiest. 95% of startups go out of business. However, when I wrote Exit Rich in 2019 and 2020 to the exact same research, I already suspected very quickly that the business landscape flip-flopped.

Now it’s only 30% of startups will go out of business or will businesses will fail. Think of it. It used to be that if you could make it the past five years, you’re golden, but now out of 27.6 million companies, 70% of those businesses that have been in business ten years or longer will go out of business. That is like shocking.

FYE-GI with Negotiations | How to Exit Rich

How to Exit Rich: Out of 27.6 million companies, whose businesses have been in business for 10 years or longer, 70% of those will go out of business.

 

We’ve said that of the businesses that are going to make it for 10 years or longer, 70% of those businesses are going to go out of business. That’s wild.

It’s hard to even imagine. There are 30.2 million businesses in the United States employing over half the US workforce. If we lose small business, then what happens? We lose jobs. When you lose jobs, then you lose spending power. It’s very scary.

When we think of the broader implications on the economy, on people’s jobs, on all that stuff, having an exit plan makes a ton of sense, but business owners aren’t necessarily thinking about the economy and all that stuff. What should they be thinking about when they’re starting their business and they’re starting to formulate a potential exit plan? Why is that important? If they go out of business and there’s nothing to sell, that’s their nest egg. This asset that they’ve built is now worthless.

That’s why I wanted to give a little bit of background and history because those businesses that are going out of business, the 70%, they’re reinforced to selling for pennies on a dollar, closing their business, or even worse, falling to bankruptcy. That’s horrific. You hear about the big box companies all the time, like Toys “R” Us, GNC, Kmart, etc., but you’re not hearing about the private companies. Here’s the bottom line. Business owners have to plan their exit.

Whether you’re starting a business or buying a business, you have to think about building a business that is valuable and that buyers are willing to pay top dollar for. Sellers don’t think about selling their business until they have to due to an internal or an external catastrophic event. They called me up when there was a debt, partner dispute, or health issues. A little sweet old lady called me and said, “Can you please sell my husband’s business? He dropped out of a heart attack.” “I’d love to help you.” She goes, “He left me with all this debt and I don’t know what to do.”

I started asking her questions, “How many employees does he have?” “Zero. He has subcontractors.” “Does he have any policies, procedures, or systems in place?” We went down the line of questioning. He did not have a business. He had a job. There was nothing to sell. Now she’s upside down in debt. Business owners have to think about their business as their asset, not their baby. They need to build it to sell, and not for them but for their heirs because catastrophic events do occur.

What are some of the common characteristics that you’ve noted in your research and in your work that business owners need to start thinking about making sure they’ve ticked off to make sure they have a sellable product?

Number 1) I tell business owners, “Follow the ST GPS Exit Model, which is outlined in my book, Exit Rich.” What business owners have is no plan. They drive around in circles, driving up and down financial hills, going nowhere. This is a plan. I want all business owners to pick a number. When you drive somewhere, what do you do? You pull out your phone. You plug in either Google Maps, Waze, or something, and you plug in your destination. We need a destination, an end game, and the desired sales price.

Plug in your destination and say, “I want to sell my business for $20 million.” Great, we got a number. I don’t care if you need it or not right now, I just want you to have a number. Now, what does the GPS model need to know? It needs to know where you’re starting from. What is your current evaluation? Us humans go to the doctor and get physical checkups once a year. We drive our car into the shop to get a checkup on our car, but business owners never get an evaluation checkup. Most business owners have never had their business evaluated.

I’m working with a company that’s been in business for many years and never had the business evaluated. That is financial suicide. Business owners should have a financial evaluation checkup every year on their business because there are events that increase value and events that decrease value like COVID. You need to know where you’re starting from. If you say, “I want to sell for $20 million. I’m starting at $5 million.” Now we’re starting a plan. We need to reverse-engineer it.

Now we need to know, “If I want to sell for $20 million. I’m worth $5 million now. How much do I want to sell for? What timeframe?” Let’s say you want to sell in ten years. Now, who are your buyers going to be? Not buyer, but buyers because I can promise you sellers come to me all the time and say, “I have a buyer.” I will bet money on it that that buyer will not close. You always have to have backup buyers so there are five types of buyers. You need to know what type of buyers are going to buy your business. If you’re trying to sell a $20 million company, it’s not going to be a first-time buyer because they won’t be able to afford a $20 million company.

It’s not going to be a turnaround specialist because they buy distressed assets. They don’t buy $20 million companies. It’s either going to be a private equity group, a strategic/competitor, or a serial entrepreneur who chases cashflow. Those are going to be your three types of buyers. Now you’ve narrowed that down a little bit. You need to ask yourself, “What are our financial criteria to spend $20 million on a company?”

It depends on the industry but it depends upon the numbers too. Where do the gross revenues have to be? Where do the EBITDA, Earnings Before Interest, Taxes, Depreciation, and Amortization, have to be? To sell for $20 million, you’re going to have at least $4 million to $5 million in EBITDA unless you are a SaaS company and you have some proprietary, then that might be a little bit different.

You can come on to bigger multiples.

We’re working with a SaaS company that we’re looking at a 23 multiple. On average, multiples in the US are usually anywhere from 1.5 to 3.5 or 4. However, the higher the EBITDA, the higher the multiple. Once you start getting over that $1 million, $2 million, or $3 million in EBITDA, then your multiples go over five. Under that, they’re probably under around 3 or 4. That’s the GPS Exit Model. Also, not only what are a buyer’s financial criteria to spend $20 million on your company, but what characteristics are they looking to buy? What synergies are they looking to pay for? Buyers will pay more for synergies than they will for EBITDA.

Explain that a little bit. What do you mean by that?

Facebook paid $19 billion for WhatsApp. WhatsApp was hemorrhaging. They weren’t making any money whatsoever, but WhatsApp had a synergy. They had 1 billion users. Facebook looked at that billion users and said, “We can monetize that. We can ROI that.” They went ahead and paid $19 billion for the company hemorrhaging money because they had a synergy. When we talk a little bit about the 6 Ps and we get into the biggest P, which is Proprietary, I’ll talk to you about all the value drivers because that’s where you sell synergies, and that’s how you get to demand a much higher price.

When we talk about that last P, let’s dive into that a bit. Could you explain that to the readers?

Do you want me to start with the first P or with that one?

Start with that one because I feel like this is the crux of the matter. This is where you start generating a lot more money when you have that proprietary piece.

If you don’t have many other pieces, you might not get that much money. We’ll talk about all of them. Let me talk about proprietary. Proprietary is the highest multiple driver. Proprietary can take you from a 5 multiple to 10X quickly. It’s all about being in proprietary. There are six pillars to Proprietary. Number 1) Branding. You don’t have to ask yourself how well-branded are you. The more branded your company is, the more I can sell your business for as long as the brand is relevant in the mind of the consumers. Does anybody want to pay anything for the Blockbuster brand?

The more branded your company is, the more you can sell your business for, as long as the brand is relevant in the mind of the consumers. Click To Tweet

It’s a valid point. Zero people.

Nobody wants to pay for the Blockbuster brand. The biggest brand in the world is Apple. Apple is worth $189 billion just for the brand. That’s not including EBITDA, equipment, assets, real estate, inventory, and accounts receivables. This is what I’m talking about. Proprietary is the highest value driver you can possibly get. The second thing is trademarks. Trademarks are very important. Most business owners make big mistakes with trademarks. They go out and start a company.

If somebody wants to start a business in California, they go and get a state trademark, but they never check the federal database to make sure that the company name is available. They get their state trademark, go into business, and years can go by, and all of a sudden, they’ll receive an assistant desist letter in the mail that says, “You have to stop using this company name.”

They’ll hire an attorney. They’ll spend hundreds of thousands of dollars and they’ll lose. They then have to stop using that company name and start branding all over again. Always trademark. I don’t know how important that is in Canada, but in the USA, it’s everything. You need a trademark on your company name, podcast, and slogans. I trademark the ST 6P’s and Exit Rich. Also, patents. Patents are extremely valuable. Do you have a watch Shark Tank? What questions does every single Shark always ask?

“Do you have any Proprietary Information or IP?”

“Do you have a patent on that? Do you have a patent penny? Do you have a utility patent? Do you have a patent?” Patents are extremely valuable. We once sold a company that wasn’t making much money for $18 million because they had 18 patents. Patents are very valuable. The other thing that’s valuable in IP that buyers will pay more money for is contracts. Let’s say a franchisor has 5,000 franchisees. That’s extremely valuable.

These are manufacturing contracts, exclusive manufacturing contracts distributor, exclusive distributor contracts, and fender contracts. Client contracts are the most valuable of all because buyers will pay more money for them. We had an oil manufacturing business that we had appraised in the $9.8 million range. We have 550 buyers and narrowed it down to 12 Letters of Intent or LOI. We found a strategic that had a similar product in service.

Our owner had customer concentration. 65% of their business was tied up in BP. The strategic wanted the BP contract because they’ve been trying to get into BP for decades and could never get their products or services in there. They were willing to pay more money than everybody else. They offered $15 million for a company whose price is $9.8 million. $15 million are 70% of the business. It’s 65% higher than appraised price because they wanted that contract.

For them, that was a massive strategic move.

When we evaluate businesses, we’re looking for these types of synergies. Here’s the caveat to contracts. In the US, 99.9% of all sales are asset sales, not stock sales. If the contract doesn’t have the transferability clause, and I will tell you none of them do, then the deal is going to fall dead in its tracks. We have to go back out to those clients and get that transferability clause. BP did not have a transferability clause. We had to work with BP until we got it.

That’s extremely valuable that buyers will pay more for the database that we already talked about. If you have a database for clients that can be retargeted and repurposed, there are companies out there that will pay you a lot of money for your database. The other thing I call is IP real estate. It’s not your building or your land. Let’s say you have a skincare line and it’s endorsed by Oprah Winfrey. Do you think a strategic that maybe has a diet company or has some other synergistic products would pay more money because now they’re in front of Oprah?

Celebrity endorsement counts.

Celebrity endorsements are huge value drivers. So is being number one on any of the platforms. Let’s say you manufacture furniture and you’re number one on Wayfair or AllModern. Let’s say you manufacture vacuum cleaners, you have a unique patent and you have a corner of the market on Amazon. Let’s say you manufacture these masks that we all have to wear and you’re number one on Etsy. IP real estate drives value. At that point, the EBITDA is still important, but it is not the focus anymore. The focus is the synergy that the buyer wants to buy. Not only that, when we market companies, we know what our companies have and we know what buyers are looking for.

We help our buyers figure out how they can take advantage of the economy and scale and how they can cut costs right away from buying that company doubling or quadrupling the EBITDA. Let’s say you have a manufacturing company. They have distribution centers, but the company that’s buying them has distribution throughout the entire United States. They don’t need their distribution center. You cut that expense. You doubled your EBITDA.

FYE-GI with Negotiations | How to Exit Rich

How to Exit Rich: When we market companies, we know what our companies have and we know what buyers are looking for. We help our buyers figure out how they can take advantage of the economy of scale, and how they can cut costs right away from buying that company.

 

I love that you are precise with the things that can increase the multiple of the business or make a business more valuable, potentially perceived value to the person who wants to buy it, where you’re creating these synergies. That’s the 6P. Arguably, one of the things that are going to make a difference for you. If you don’t have a lot of the other things, the other 5Ps, sometimes that 6P doesn’t necessarily work out. What are the other 5Ps that people need to think about? We don’t need to get into a big lot of detail about it. What are the other 5Ps so that people can start thinking about, “If I need to develop this proprietary stuff on the sixth one, what are the other things I need to think about?”

The number 1) P is People. You don’t build a business, you build people and they build a business. You cannot sell a business if the business is 100% dependent upon you. If you’re a dentist and you have a dental practice, you’re the only dentist and you’ve been in business for 30 years, your business is not sellable because once I pull you out of the business, there is no business. We have a fabrication company. The two owners have been in business for 35 years. There are two partners who’re in their 70s and 4 employees. It’s very difficult to sell.

They’re like, “We can fabricate anything. We can make anything we want to make.” I’m like, “You can because it’s in your head, but four employees cannot.” They’ve never taken an IP out of their head to put on paper. Entrepreneurs need to focus on their strengths, hire out their weaknesses, make sure they have the right people in the right spot, and ask them the who questions. “Who opens the door? Who handles manufacturing? Who handles logistics? Who handles accounting? Who handles legal? Who handles environmental? Who handles transportation?”

The clue mark is that you should never be next to the who. You want to build a business that runs without you. If you’re going to try to sell a business for $20 million, you better have a level of management in place, a COO, a CFO, and for some of those people that are an integral part of the company, buyers want to make sure they have an employment contract and non-competes. You’d be surprised how many owners don’t have their key individuals have non-competes. It’s very important.

Number 2) Product. Ask yourself. Product is huge because if you have the wrong product or the wrong industry like Blockbuster, you could be dead. There’s a lot of industry suffering because of COVID. There are a lot of industries thriving right now because of COVID. You got to ask yourself, “Is your product on the way up or out? Are you an Amazon or Blockbuster?” If you’re a Blockbuster, don’t quit. Align yourself with an expert that can see things more clearly than maybe you can because you’re in the middle of it. When you’re in the middle of the fog, it’s foggy.

I always tell my clients, “Ask three transformational questions. Amazon did this. Amazon asked themselves in the ‘90s, ‘What business are we in?’ They said, ‘We’re booksellers. What do we do well, better than anybody? We do fulfillment well. What business should we be in? We should be in a fulfillment business.” Those three questions transformed Amazon from a small bookseller to the multibillion-dollar role conglomerate that they are nowadays. If your product is filling, you need to pivot and innovate.

The Process is the third P. We all know processes are important. Most business owners never think about processes until something bad happens in their company. If something bad happens, “We need a process for that.” You need to think about processes from the beginning of starting to buying a company. Did you ever watch the movie The Founder, The McDonald’s story?

I haven’t watched it yet. That’s the Ray Kroc story.

It’s based on the McDonald brothers and Ray Kroc. McDonald’s brothers started McDonald’s, not Ray Kroc. Ray Kroc is the one who blew it up. Back in the ‘40s, McDonald’s brothers said, “We want to open up a fast food restaurant,” because back then you had the drive-ups and the food was always cold. It took so long and the order was always wrong. McDonald’s says, “Here’s our mission, vision, and customer experience. We’re going to design a process to achieve and obtain a customer experience. Our customer experience is going to be this. They’re going to get great-tasting food fast and they’re going to get it in two minutes or less.”

They took all the employees out to an empty tennis court, took chalk, mapped it all out, and did this all day until they figured out, “Who’s going to take the order? Who’s going to toast the buns? Who’s going to cook the burgers? Give it to the client in two minutes or less.” Those processes right there, even though they’ve been tweaked through the years, are why you can eat at McDonald’s anywhere in the world and get the same experience. Here’s the bottom line. Processes have to be designed with the customer experience in mind. How many times have you dealt with a company and you’re like, “I’m infuriated because our processes are terrible?”

It’s like PayPal. You got to go through all these prompts, you can’t get anybody on the phone, or you were hacked on Facebook and you can’t get anybody to take care of it. Processes must be designed with the customer experience in mind, not designed to alienate us. There must be efficient and productive, and most importantly, they must be well-documented. You must have an SOP checklist. Processes are huge. You’re not going to sell a $20 million business unless you have your processes documented.

To reiterate what you said, processes must be designed with the customer experience in mind. Many people try and make it easier for themselves and not think about the customer first.

It’s all about them and their agenda, then they wonder why they have no more customers. That’s one of the reasons why 70% of businesses are going out of business. They forgot about the customer. How many times have you tried to call something and got to go through 25 prompts before you can even get somebody on the phone?

There was a huge retail chain that ordered a standup jewelry box for a client of mine. They shipped it here instead of to my client’s house. My assistant said, “Take it back to UPS. Ship it to the right address.” They don’t do that. UPS ships it back to the warehouse for the retailer. We’re on the phone with the retailer saying, “We didn’t want that jewelry box. This is the last one in stock.” I go, “Go to the warehouse and get it.” They go, “We don’t do that. It goes to the warehouse and then it goes to substandard stores like TJ Maxx, Marshalls, and stores like that.” What a terrible, horrible process. Make sure you design your processes with the customer experience in mind.

Number4) is Proprietary that we covered. Number 5) is Patreons. This is your client base. You can’t have a business without clients. You got to have customers. In the USA, most businesses follow the 80/20 rule where 80% of your business comes from 20% of your clients. If you lose a client, you can be out of business. You want to have customer diversification.

You’ve always got to be working to make sure that you keep balancing out that 80/20. If 80% of your business is with one customer, for example, and you lose that deal, that’s catastrophic. That’s game over.

For the manufacturing business that I sold that had 65% in BP, I was fortunate enough to find the right buyer that didn’t care because they want to BP, but most buyers were walking away when they heard that. I had an advertising company that had five clients. They were worth about $10 million. Their clients were casinos. During an evaluation and sales process, they lost 2 of the 5, then they only had 3. You got to be extremely careful. It is a balancing act.

The last P, the most important to all entrepreneurs is Profit. We’re all in this to make money. Everybody thinks that when there’s a lack of profits, the profit is the problem. Profit is never ever the problem. Profit is the symptom of not running on one of the other 5Ps. I have clients that come in, “I have a profit problem.” I’m like, “No, you have a people or process problem because you are not inspecting your accounting and somebody’s embezzling from you.” That happens over and over. I had one seller that was embezzled 3 different times with 3 different people.

Profits are never ever the problem. Profit is the symptom of not running on one of the other five P's. Click To Tweet

I thought you would’ve learned the first time.

Profit is never ever the problem. It’s always the symptom. If you are not profitable, go look at the 5Ps and see where you’re lacking.

This has been informative. There are going to be people that read this and go, “How do I get ahold of Michelle? How do I get ahold of this book? Where do I go next?” Where do they go to?

To let you know a little bit more about Exit Rich, my co-author is Sharon Lechter, who wrote Rich Dad Poor Dad with Robert Kiyosaki, New York Times five times bestselling author. She’s also written several books for the Napoleon Hill Foundation. She is a CPA and a financial literacy expert to several different presidents. She writes the mentor’s corner after every chapter. Exit Rich was endorsed by Steve Forbes and the foreword is written by Kevin Harrington, who is the original Shark on Shark Tank.

FYE-GI with Negotiations | How to Exit Rich

Exit Rich: The 6 P Method to Sell Your Business for Huge Profit

They can get Exit Rich at ExitRichBook.com or Amazon, but it’s less expensive at ExitRichBook.com. For $24.79, you’ll receive the email digital download right away. You don’t have to wait for the book to be delivered, then we’ll ship the hard cover to your doorstep. We’ll give you a lifetime membership in the Exit Rich Book Club. If you like what you’re reading here, there’s more of me talking about all this, plus there are documents.

Every business has to have documents to run or sell a business. We have employee handbooks, non-competes, organizational charts, sample LOI or Letter of Intent, sample purchase agreements, due diligence checklists, and closing docs. These documents alone will cost you about $25,000 worth of an attorney. You’re getting all that for $24.79, plus you also get 30 days of free membership into my club, Club CEOs where we do transformational questions and hot seats Q&As to help you survive and thrive on the other side of this pandemic so you can exit rich.

Thank you much for being on and for sharing your wisdom.

I have one other number that I can give you all so all of your listeners can text me. They can text Michelle at (888) 526-5750. When you text that number and text MICHELLE, all of my social media and my websites will pop up. It was a pleasure being here. Thanks for having me on.

 

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