What’s catastrophic to your business is when you built it unsellable. To guide you into the path of building a sellable business, Michelle Seiler Tucker brought her compass to help you Find Your Exit in your business. In this episode, Michelle provides insights on how business owners can use the GPS Exit Model to exit rich from their business. She also enumerates the steps for building the GPS Exit Model. Now is the time to take action to build a sellable business. Join Michelle in this valuable episode and grab her compass to lead you to find your exit today.
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The GPS Exit Model: How To Use It So You Can Exit Rich
Unfortunately, our guest for this episode cannot make it due to an emergency but don’t worry. I’m very excited to have that guest on and he’ll be on next time. I decided I’m going to come on solo and we’re going to talk about the GPS Exit Model. Did you all know that 85% to 95% of businesses up for sale will never sell? This is according to Steve Forbes. I want you to take a minute and think about that.
This should be catastrophic news for almost all of you. There are 30.2 million businesses in the United States. At any given time, 40% will be up for sale. It is a competitive landscape. The reason why 85% to 95% of businesses will never sell is a multitude of reasons. There are a tremendous number of reasons but the number one reason is because business owners don’t build a sellable business. They don’t think about even selling their business until a catastrophic event has occurred, whether that’s internal or external.
Internal catastrophic events, what are those? Let’s think about that. We have some. We had COVID, the pandemic, which we’re still in. Everybody says, “We’re out of COVID.” No, we’re not. That caused a tremendous number of businesses to go under, especially restaurants, hospitality, and a bunch of other different industries. Whether they went under or not, they certainly did not do very well during COVID.
Some industries exploded, like healthcare, manufacturers of healthcare products, paper towels, tissues, and toilet paper. What are other catastrophic events? Hurricanes, tornados, fires, and recession which we’re all talking about. A recession is coming. Internal could be health issues, partner disputes, divorce, or businesses about to go into foreclosure or bankruptcy. All types of external and internal issues can cause us business owners to go out of business.
Business owners probably don’t set up their business for success. They’re not building their business to sell. Many business owners think, “This is my legacy. I’ll pass my legacy down from generation to generation,” as they took it over from the previous generation. I’m here to tell you that our kids, in many cases or most cases, don’t want our business anymore. Less than 15% of business transfers are handled through legacy transfers.
Your children don’t want your business. Your children want to go out and create their masterpiece. They saw how hard you worked in your business. They saw the sacrifices you made, how you missed their games, their soccer games, gymnastics, plays, and recitals. They see that you don’t go on vacation very often so children don’t want our business. Most business owners think, “I’ll hold on to the company. I don’t want to sell it.”
A huge marketer was telling me, “This is my legacy business. I’m not going to sell.” You should never say never. I had a client in Dallas. The wife called me. Her husband died of a heart attack at the age of 45. She said, “Michelle, I need to sell this business. I have no idea what our receivables are. I don’t know what the debt is, what the business is worth, or anything about any of our bills. My husband took care of 1,000% of everything. What do I do?”
I started asking her some questions like, “Does your husband have employees,” knowing he has all 1099s. “Does your husband have processes in place?” “No. Everything is in his head.” “Does he have products?” “He gets paid one way when they do renovations or construction.” The bottom line is he had nothing to sell. He left her with the amount of debt. All of you owners who say you never want to sell your business need to change your mindset. You need to change your thinking because there might be a point where you don’t have a choice but to sell your business because of health issues external and internal things that we talked about.
You need to always build your business with the end of mind so you don’t end up leaving your family in financial ruin and with nothing. No business owner wants that. We go into business so we can have a better quality of life, have financial freedom, and provide for our loved ones. We need to build our business to be a sustainable, scalable, and sellable business. There’s also what I call burnout. Business owners get burnout. They get tired of doing the same thing.Build your business with the end of mind so you don't leave your family in financial ruin. Click To Tweet
They want to go off and create their next masterpiece. This is called the seven-year itch. You need to always do what Stephen Covey says, “Start with the end in mind.” I call this in my book, which is a Wall Street Journal, a USA Today bestseller, the Seiler Tucker GPS Exit Model. I created this because 85% and 95% of businesses will never sell. The first thing you need to do is think about your GPS and wherever you’re located.
The GPS Exit Model
The first thing we do is pull out our GPS and start with our destination where we would want to end up. It’s the same thing in business. You need to start with your destination. What do you want to sell your business for? What’s your end game? Start with the end of mind. This is not just for existing businesses. Starters should be thinking about this too when you build your business. What do you want to sell your business for? A lot of my clients get hung up on this number like, “I don’t know.” Pick a number. It all starts with a number. You can increase or decrease along the way.
Let’s say you want to sell your business for $20 million. Now you have a destination and a target. We’re going to build out that roadmap. What is the GPS Exit Model you need to know? Where are you starting from? In other words, what’s your current location and evaluation? What is your business for? Do you know that most business owners have never done a business evaluation to find out what their business is for?
This is insanity. If you own a business, in most cases, it’s your most prized possession. You should always know what your most prized possession is worth. If you’re in the stock market, your financial advisor tells you where you are. They send you monthly reports. If you’re doing it yourself, you always know where you are. Think about this. We take our car into the shop to get an annual checkup to make sure our car is in alignment. We go to the medical doctor to get a physical annual checkup.
Why? To make sure our body is in alignment. We’re running and healthy. We’re going to continue. Our clock is going to continue ticking but the most valued possession of your business, we never check in. We never get a checkup and know what that business is worth. A lot of times, business owners will come to me and say, “Michelle, I want to sell for $20 million.” “Great. Let’s do a valuation checkup.”
They think their business is worth $20 million because that’s what they need to retire on, pay off debt, and compensate their key employees. It’s not the $20 million price tag that’s the actual value of their business. It’s what they feel they need to enter the next phase of their life. It’s always my job to tell a business owner because all business owners think the same thing parents think, “My baby is pretty. My kid is good-looking. I got the best-looking kid or baby.”
They think that with their business too and I’m here to tell you, “No, you don’t. Sorry.” It’s my job to tell your baby is not as pretty as you think it is. We need to come to terms with what that valuation is. Every year, you should have what I call a valuation checkup. You need to know what your business is worth every year. If your destination is $20 million and you get a valuation, let’s say you’re worth $10 million, we have a lot of work to do.
The next thing you need to know after destination and current location and valuation is the timeframe. Let’s say you want to sell your business for $20 million. It’s worth $10 million and you want to do that in 5 years. Now, we have what we call a roadmap. We know where we want to end up, where we’re starting from, and the time frame in which we want to accomplish this $20 million sale. What’s next? You need to know who are your target buyers.
A lot of business owners go, “I have no idea who my target buyers are.” We need to think about that. That’s five types of buyers. We can get into that next time but I’ll run through them real quick. You have the first-time buyer, strategic/competitive buyer, equity buyer, and turnaround specialist. We have five types of buyers. What buyers are right for you? We’re working with a company to sell their company for $1 billion. $1 billion is their destination in 5 years. Their target buyer is Google, Facebook, and Microsoft.
Identify who your target buyers are and what’s your criteria. What are they looking for? When you’re trying to sell a $20 million, $30 million, $40 million, or $50 million company, it’s not just about the EBITDA or Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s also about the synergies. What synergies have you created? Buyers will pay top dollar. They’ll outbid everybody else. We can create a bidding war for synergies.
A Bidding War For Synergies
If you have a huge team, a great team, an excellent management team, and extremely talented, buyers will pay top dollar for that. If you’ve got products and you’re operating and getting paid on 4 to 7 profit centers, which you shouldn’t be, buyers will pay for that. Buyers will pay for contracts, proprietary assets, contracts, and transferable contracts. They’ll pay for location, celebrity endorsements, patents, and trademarks. They’ll pay for all this stuff.
What you need to do is figure out what your target buyers are. Who are they? What are your buying criteria? What synergies will drive them to pay the highest multiple for your company? It’s not easy to do this. A lot of times, you need an expert and a mentor. That’s what we help you do. You need to figure out, “I want to sell for $20 million. I’m off $10 million. I want to do this in five years. I figured out my target buyers. I know their criteria. Now what?” You need to reverse engineer your plan and say, “If I want to sell for $20 million, where does my gross revenue need to land? Where do my cost, operating expenses, and EBITDA?”
Most businesses are paid a multiple of EBITDA. Very few SaaS companies specifically are paid a multiple of revenue. Everything else is a multiple of EBITDA. We’re going to reverse engineer that and figure out exactly where your numbers need to land, what are the average multiples, where you should be spending your money as it relates to marketing and employee costs, and where you should be spending your money legally. Fine-tune your financial model so that you have the specific numbers in the profit margin for your particular industry to be able to obtain that $20 million sales price.
You need to ask yourself, “What is my why?” Have you ever thought about that? Why are you in business in the first place? Why do you do what you do? If business was easy, everyone would be doing it. It’s not. You have to have a very profound why and something bigger than yourself. Serve a higher purpose than yourself because if it was easy to sell a $20 million company, all of us would be doing it.
It’s not easy. Your why has to be powerful enough to keep you in the game, financially motivated, and hungry. Your why is the most powerful component of the GPS Exit Model. Think about this because business owners start their businesses. They get busy hiring people, developing their products, and working in all the different departments. Most business owners never build out what I call the six Ps, which is the solid foundation of your business.
Build A Sustainable Business
Most never do that. They go into business and start putting out fires. I call entrepreneurs firefighters because we’re always looking for that next fire we have to put out. We’re working in our business instead of on our business. That’s why it’s so important to build a sustainable business that can work without you because if you are the business, your business is not going to sell. The number one reason the businesses don’t sell is because they’re too dependent upon the owner.
You need to build a sustainable business and create those processes that manage and run your company. People is the first P in the six Ps. It does not run your company. The process is true. You need to build a sustainable business to run without you. Otherwise, you have a glorified job that you’re going to work at every day versus a business that works for you. We all go into business so we can have financial freedom and a better quality of life.
We want to build a business that we can scale. It can get big. Some business owners say, ” I don’t want to get big.” That’s fine. You don’t have to sell for $20 million. What’s your number? Is it $5 million or $1 million? Whatever your number is, build your GPS Exit Model. I’m going to repeat the steps. 1) Start with your destination. What do you want to sell your business for? 2) The current location. In other words, your valuation. What is your business worth? Get an annual valuation checkup.
3) What is your time frame? 4) Who are those target buyers? 5) Know your buyer’s criteria. What synergies are they willing to pay top dollar for? You need to know your numbers. Reimburse your GPS Exit Model and say, “I want to sell this $20 million company. Where do my numbers need to land?” Most importantly, know your why.
We have some questions here. “Could you share some common challenges business owners face when trying to exit the business and how the GPS Exit Model addresses those challenges?” We talked about that in all the steps but let’s reiterate that because you share some common challenges. There are lots of common challenges when business owners want to exit the business.
1) Most business owners are the business. The business cannot run without them. If that’s the case in your business, the business is not selling. The only way the business will be sellable is if a buyer comes in and buys a percentage of your company. You retain equity and agree to stay for so long. You can possibly sell your company or you sign a very long-term employment agreement so you’re stuck to the company without equity, then perhaps you could sell the business.
Most buyers are very wary about the business being dependent upon the owner because if something happens to that owner, in the case of my construction worker in Dallas, there is no business. It’s important to build this. What are some other challenges? 1) A lot of business owners don’t have other numbers. They don’t know their financials. They have unrealistic expectations. They always think their baby is prettier than their valuation.
Many business owners will come to me and say, “All my businesses are worth $10 million,” and their EBITDA is $250,000. It’s unrealistic expectations. They’re not prepared to sell their business because if you go back and think about what we talked about on the GPS Exit Model, they might not have the right people in place and the right seats. They might have one revenue center one way they get paid.
Buyers want to buy teams. Buyers are not looking to buy a job. They’re looking to buy a company that will work for them. They want to buy multiple revenue centers. They want to mitigate their risk so they look for businesses that are less risky than other companies. They want to make sure the process is enough and their company is a well-oiled machine. A lot of business owners have issues with proprietary assets.
Their trademarks are fully trademarked. Their contracts are not transferable. That’s just to mention a few. There are so many more. A lot of businesses have what we call customer concentration where 50%, 60%, or 70% of their revenues is trying to put 1 client. When you get into that scenario, the business is almost impossible to sell because you lose 70% of clients and you’re out of business.
A lot of businesses are not profitable. Many owners don’t know their KPIs and numbers. How can the GPS Exit Model help you navigate through this? It’s going to keep you crystal clear. You know you want to sell for $20 million. You have $10 million. You know your timeframe and why. You have to figure out what those buyers are. You’re going to have to build those synergies and your business on the six Ps, one P at a time.
People who have read Exit Rich have come back to me and said, “Michelle, I changed my entire business model. I changed every single department, the people in the seats, and the leadership department because we understand the six Ps. We never knew what the six Ps were before.” The GPS Exit Model keeps you focused and going in the right direction.
It takes the blinders off and the guessing game out of it. It gets you to focus on building those synergies and that sustainable, scalable business so it will be sellable one day. Here’s the deal, too. If you decide you never want to sell your business, that’s okay. Why don’t you like the plan like you are? You’re going to have a much more profitable business that you can scale and it will run without you. Everyone should want that.
“What are some key strategies outlined in your GPS Exit Model that entrepreneurs can implement to increase the value of their business prior to selling or existing?” Hayden, I appreciate that question. Most of the answers to your question are about how will it help you. It’s going to help you to know what are your revenues, COGS, and operating expenses. What is your profit margin? Where does EBITDA need to land to sell a $20 million business? It’s going to have you fine-tune into those financials.
Know your numbers. Most business owners are working blindly. They have blinders on. They have no idea what their operating costs are. A lot of business owners go out of business because they take their eyes off the numbers or put them in someone else’s hands. They trust but never verify. You are always going to inspect what you expect. It can help you keep focused, centered, and on course. It will help you look for those target buyers as you’re going through your company, identify what those synergies are, scale and track those numbers, and build out those six Ps.
We have a question from Stefan. “In Exit Rich, you emphasize the importance of building a sustainable and scalable business. How does this tie into the GPS Exit Model? Why is it crucial for a successful exit?” You can’t build a business to sell for millions if it’s not sustainable and scalable. I’ll go back to nobody wants to buy a job. They want to buy a company. If the business is not sustainable and cannot run without the owner, it’s very unlikely that you will ever sell 100% of that company.
You will have to scale with a long-term employment contract or need to retain equity and continue to work. That’s why it’s so important. That’s how it ties into the GPS Exit Model because when you start going through the model, you say, “I want to sell for $20 million. I want $10 million. I want to do this in three years. My buyers are this and this. I’ve identified my buyers.” If I’m identifying Google, I buy a medical practice and there’s a large medical company, a private equity group, that finds that medical practice.
What is that private equity group looking for? What are their synergies? We’ll help you know what synergies to build once you identify those buyers. It will also help you to reverse engineer that plan and know your numbers. “The GPS Exit Model emphasizes the importance of proper due diligence before selling a business. Can you elaborate on the due diligence process and its role in achieving a successful exit?”
This is a great question because everybody forgets about due diligence until a buyer makes an offer on the business. I was like, “Due diligence, I have to prove out all this stuff I said. I have to prove out my financials.” If I said that I have non-recurring expenses of $250,000 and personal expenses of $500,000, I have to prove that. I have to have my credit card receipts, invoices, and checks. It proves everything you said about your business. How long have you been in business? Who is your team? It’s proving out.
Do you have some revenue centers and some wages you pay? It’s proven out. Do you have all those processes built yet? Do you have any environmental issues, lawsuits, or legal problems? Have you been sued? What’s your workers’ comp score? How many issues have you had with employees? What is your reputation online? It helps you prove all of that out so when you do get to the due diligence table, you’re not guessing or trying to hide things.
I always tell my clients, “Think of me as your lawyer, even the good, the bad, and the ugly.” You want to be transparent because it will come out in due diligence. You should do due diligence as you’re building this business to make sure you have clear transparency. If you’ve buried any bodies, you know where those bodies are. You handle that situation. You talk about it because it’s been resolved. Due diligence is part of the process of building a sustainable, scalable, and sellable business. Without transparency and you are not able to prove everything that you’re saying to a buyer, you’ll never be able to close the deal.Give me the good, bad, and ugly; you want to be transparent because it will come out. Click To Tweet
“Exit Rich highlights the six Ps, People, Product, Processes, Proprietary, Patrons, and Profit. How does the GPS Exit Model guide entrepreneurs in optimizing these elements for a successful exit?” Emily, you’ve been paying attention. That’s a great question because we’ve been talking about the six Ps. You cannot have a successful exit. Can you sell your business without the six Ps? Yes, people have been doing it for decades. Can you sell a $20 million business without the six Ps? Can you maximize value? Can you sell the business with the desired sales price for your destination without the six Ps? No.
Here’s what buyers do. We want to increase the zeros for our clients. They want to come in and decrease the zeros. The more six Ps that you don’t have in order, the more you’re going to start discounting. Let me give you a quick example. I have a lot of small entrepreneurs. These Gen Zs are crushing and killing it but guess what they’re doing? They’re building a great business model and solving a problem. That’s what business is.
Entrepreneurship is solving a problem but they’re not going to have the infrastructure. They’re going and getting labor that has contract labor to be from all over the world. They don’t have any key management or key people in place. They’re all virtual. Can that business be sold? Yes, but it’s not ideal for a lot of business buyers. They’re operating all virtually. There is no infrastructure. There are very little to no processes. Most of them get paid one way. They have no proprietary assets. They don’t have any human systems in place. They might be extremely profitable. When a buyer comes in, they’re going to start discounting.
We had an app company that we’re working on. The app company was husband and wife working out of their house. They had 1 to 2 independent contractors. The husband and wife did everything. The buyers come in and say, “We’re buying a business and going to build this business.” Most buyers don’t want to buy your business and keep it where it is. The buyer’s business wants to grow it in most cases. They said, “We’re going to discount because you don’t have an infrastructure. We’re taking off $100,000 or $150,000 to build a team. You don’t have an office.”
One of the buyers was a big Hyatt, a big wig at LinkedIn. “We need an office space. We’re discounting for that. You don’t have this software. You don’t have QuickBooks. You don’t have this and that. We’re discounting for that.” Before you know it, EBITDA went from $1.2 million down to $700,000 to $500,000. You want to build that infrastructure on those six Ps so you can maximize your multiple, which maximizes the value that you can sell for. If you don’t have that infrastructure, you’ll never be able to sell for the highest price possible.
“What part of the GPS Exit do you feel is most ignored and neglected by business owners that you have looked at?” I can truly say all of it. Out of many years of selling companies and doing mergers and acquisitions, one time, I met a company that’s planned half of their GPS Exit where they go, “This is my desired sell price. This is what I’m worth. This is the one I want to sell,” but they forgot all the rest. Nobody has built this out fully.
Many business owners don’t understand it and don’t know about it. They need to get their hands on Exit Rich and haven’t thought about it. Business owners get buried in what I call the sandbox. You’re so busy putting out fires and handling the day-to-day. You’re working in your business, not on your business. It’s imperative to work on it, not in it. All of it. I tell my business owners, “Let’s start slow, one step at a time.”
How do you eat an elephant? One bite at a time. Start with the destination and then hire an M&A expert like Seiler Tucker to do your evaluation. Figure out what your time premise is. Work with somebody like Seiler Tucker to map out that roadmap for you. Identify those Tucker buyers who are going to help you build out those synergies when you’re building those six Ps and identify where your numbers need to be. None of it, which is very sad.
When business owners start to plan their GPS Exit Model from the beginning and not the end, you’ll see that 85% to 95% drop exponentially to where maybe only 20%, 30%, or 40% of businesses are not selling. When business owners start paying attention to working on their company to build a sustainable, scalable, and sellable company based on the GPS Exit Model and the six Ps foundation, you’ll see a lot more businesses changing hands, which we need in America.
Small business is the backbone of our economy. There are 3.2 million businesses in the United States and 98% of those are small business owners. If small business owners close, what happens? You lose spending power because the owner or owners of that business are going to stop going to restaurants and spending money. It’s a triple-down effect. Those businesses start to lose money.Start with your destination and then work from there. Click To Tweet
I would like to say thank you so much for your patience. We’ll have that great guest next time. Thank you for reading another episode. This was tricking through a fire hose. I encourage you to start with your destination and then work from there. Business owners never go into business and say, “I’m going to go into business because I’m trying to fail.” No, they failed the plan.
Start with your destination. I would love to hear your feedback and comments. Thank you so much. If you found this episode to be valuable, please share it with your network, influencers, or anyone you know who’s an entrepreneur or wants to become an entrepreneur. Please, subscribe to the show. We will see you next time for another episode.