To err is human, but to profit is divine. That is why it is absolutely essential for business owners to look back on their mistakes and use those lessons to succeed getting what they want from their business. In this episode, Michelle Seiler Tucker discusses some of the most common mistakes that keep business owners from getting the most favorable business valuation for their exit. Organized around the Seiler Tucker 6Ps, these common pitfalls are what hold business owners back from making a profitable sell when the time to exit comes. And that exit will come to your business too! There is no going around that fact. You might as well start planning it now!
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The Seiler Tucker 6ps: The Mistakes Business Owners Make
In this episode, we’re going to discuss the top mistakes that business owners make in their business. Entrepreneurs make mistakes all the time. Let’s learn about those mistakes and how we can avoid the pitfalls. One of the number one mistakes that business owners make is they never plan their exit. They never think about selling until they have to do due to a catastrophic event occurring whether that’s internal or external. Sellers will call me all the time because of health issues, partner disputes or divorce. Now, we have Coronavirus, fires, hurricanes and all types of different catastrophic events. This is the worst time to sell your business because your business is typically turning downward when a catastrophic event occurs. The best time to sell your business is when your business is doing well and turning upwards.
However, I understand if you are facing a catastrophic event right now, then you may need to sell your business and it’s better to sell it even if it’s turning downward to avoid selling for pennies on a dollar, closing your doors or even worse, having a fall bankruptcy. In a perfect world, we would like to sell when your business is doing well and turning upward. That is the biggest mistake that business owners make is they don’t plan their exit. They don’t think about selling until they have to. It’s important to plan your exit from day one of starting your business or buying a business. In EXIT Rich, we talk about the Seiler Tucker GPS EXIT Model. Plus, we have an episode that we filmed on our Exit Rich podcast. The second biggest mistake that I see owners doing is that they get stuck in business.
Many business owners have created a glorified job in which to go to work every day, rather a business that works for them. They haven’t created the business with all the systems, and we’re going to talk more about that in a few minutes, but it’s important to create a business that works for you and get yourself all out of the business. You need to work on the business, not in the business because here’s the bottom line. If you’re involved in the business and the day-to-day, it’s going to be very difficult for us to sell your business because when we take you out of the business, there is no business. The number three is owners don’t run the business, all six cylinders on what I call all Seiler Tucker 6 Ps. Let’s talk about those Ps.
Nobody Buys A Job
Number one is people. Business owners have created a job that works for rather than a business that works for them. It’s very important to create a business with a team. You don’t build a business, you build people and that people build the business. It’s imperative to have employees. Hire people that are smarter than you and hire those core competencies that you don’t possess. Let’s face it, entrepreneurs are visionaries. A lot of entrepreneurs, you would all call integrators. Those operation managers that can go out and integrate. You need to make sure that you have tenured people, have a management team in place and you need to know the difference in your business between hiring W-2s and hired 1099s.
Most businesses should have W-2s. However, one of the biggest mistakes that I see are businesses like manufacturing, distribution, industrial staffing businesses, they have hired 1099s instead of W-2s. I know it’s hard to believe, but I have a manufacturing plant that has over 1099s, not W-2. Heaven forbid, if there’s a catastrophic event that occurs, that owner can lose everything because these 1099s are not covered by workers’ comp. In addition, the buyer is going to come in and calculate how much it’s going to cost to convert 100 1099s over 200 W-2s that’s going to decrease the EBITDA, Earnings Before Interest, Taxes, Depreciation and Amortization, which will decrease your purchase price. It’s very important to know when and these owners know. They know that they should be hiring W-2s and not 1099s, but they’re trying to save a penny.
When you’re trying to save a penny, it could cost you a fortune. We also have a distribution company that we’re working with right now that has 50 1099s working in their warehouse packaging and shipping. If they have a catastrophic event that they too can be out of business because they might not have the financial wherewithal to be able to fight, handle the lawsuit. It will come no way from having 1099s employed versus W-2s. It’s going to reduce the sales price. Most companies need to have W-2s. When can you have 1099s? If you are in construction and you have subcontractors if you’re a flooring company and you have been dollars, if you’re a real estate brokerage and you have real estate agents, but there are all these types of rules and regulations to define the difference and define what 1099 is and you need to follow those rules and regulations. That’s very important.
To recap, create a business that has people, because here’s the bottom line. If you’re a physician, and this happens to me all the time where doctors, chiropractors and dentists will call me and say, “Michelle, I want to sell my business.” “How many associates do you have?” “I don’t have any.” Here’s the problem, you cannot sell a medical practice if there’s only one doctor because by the time I take that position out of the practice, there is no practice anymore. That does not mean I can’t ever sell it because everything’s possible. However, you’re going to have to stay in the business for 1 to 2 to 3 years to ensure a smooth transition and the approaches price will be based upon you staying on for those 1 to 3 years because buyers will want to mitigate their risk.
It’s the same thing with dentists. I have a dentist that wants to sell and he has no associates and it’s the same issue. He needs to stay on for 1 to 3 years otherwise, we can’t sell their business. When you’re a solo practitioner and you don’t have other licensed professionals in your organization, it’s very difficult to sell your business. It’s not impossible because nothing is impossible but it’s difficult. Make sure that you have people and if you’re in a licensed profession, you have to make sure that you the associates. If you’re a pharmacy, you need to have another pharmacist if you’re the only pharmacist trying to sell. If you’re a medical practice, you have to have other physicians. We’re selling a chiropractic clinic. They’re in good shape because they have three other chiropractors in their office. Make sure that you have people because buyers want to buy a business, not a job.
Dying Or Thriving?
The second P is product and here’s where I see a lot of business owners make mistakes because many business owners are in an industry that’s dying, not thriving. You have to look at your industry and ask yourself, “Is my industry thriving or dying?” That answer’s probably different now than it was before COVID because many industries that are thriving before COVID are now dying and the opposite, many industries that were dying are now thriving. Manufacturing is thriving. You have to look at your industry and find out is it thriving or is it dying? If you’re in an industry that’s dying, then you need to innovate and you need the market. First of all, before you innovate a market, you got to ask yourself, what business are you in right now and what business should you be in?
The biggest mistake that business owners make is that they don’t plan their exit.
You need to ask your clients, “What do you need from me? What do you want? How can I make it easier for you to do business?” I will guarantee that the company that makes it easiest for the consumer to do business with them is the company that’s winning. Amazon is winning because they make it very easy for you to do business with them. You can be anywhere and order whatever you want. In most cases, if you’re on Prime, you can get that sent to you within two days. Ask yourself, what business are you in and what business should you be in?
Let me give you a quick example. You’ve probably heard me say this before, but Steve Jobs came back to Apple and he asked, “What business are we in?” They said, “We’re in the computer business.” He said, “No. What business are we in?” They also, “We’re in the computer business.” He said, “No. We are in the communication business. No matter where you are, you have one of these in your pocket. You have an iPhone. We have an iPad. We have an iPod. We have the iCloud.” That one question alone about what business are we in, what business should we be in catapulted Apple to the next level to where the brand is. They’re like a $200 billion brand because of that one question.
You have to pivot. The name of the game is pivoting because of business you were in before COVID might not be the business you should be in right now. Not only before COVID but remember this key fact, it used to be that 85% to 95% of all businesses will go out of business in the first 1 to 5 years. That’s not the case anymore. Now, it’s only 30% of those businesses will go out of business. Here’s the most important fact to know that out of 27.6 million businesses, businesses that have been in business for ten years or longer, those businesses will go out of business. If you haven’t been in business for ten years or longer, you’re at big risk for going out of business right now. It’s because of your product and asking your customers, “What do you want? What do you need? How can I make it easier for you to do business with me? What business am I in? What position should I be in and pivoting?”
That right there is why businesses go out of business is because business owners become complacent like Blockbuster. Blockbuster was so complacent. Netflix came. The writing was on the wall. Blockbuster could have innovated but they did nothing. Look what happened? Blockbuster is now out business. I can tell you story after story to illustrate this point. It’s very important. What business are you in? What position should you be in? What are your customer’s needs? What do they want? How can you make it easier to do business with them and AIM, Always Innovate a Market.
The McDonald’s Formula
Here’s the third P and where I see many business owners make mistakes and that’s in process. Many business owners focus on marketing. We focus on making sure we get clients. We focus on making sure we have money to pay bills and invoicing. One of the things that most business owners tend to overlook in the process. “I want to design the process.” Many business owners do not design the process with customer experience in mind. This is a competitive space. You have competitors. Whoever makes it easiest for the consumer to do business with them is the company that’s going to win. Whoever makes experience the most enjoyable, the most pleasant and easy? Whoever delivers a wow experience to the client seamless is a company that’s going to win.
I encourage all of you to look at your process and go back and see, has it been designed with the customer experience in mind? Is it’s designed to create wow experiences? Is it’s designed to stand out in a customer’s mind? If it’s not, you need to work on that. Most importantly, why I see business owners fail, is they stopped documenting it. They don’t document their processes. Yes, they might have an operation manual here or there, but they don’t have employee handbooks. They don’t have an operations/training manual with SOPs for every department. It’s imperative to have all your processes documented and SOP, flow charts, operation manuals and employee handbooks. They have to make sure that their employees are trained on such so that if you have to replace someone in the department, they can read the SOPs and they know what to do.
Look at McDonald’s. McDonald’s is probably one of the best well-known brands in the world. What are they known for? They’re not known for the best food. They’re not known for the best experience. They’re known to have the best systems, the best processes, because no matter where you go to McDonald’s rather than Paris or China or America, they all have the same experience. My experience in China is pretty much my experience here in America. Yes, it might look and feel a little bit different, but the experience is the same because the McDonald’s brothers before Ray Kroc got involved went out on an empty tennis court and laid out their processes. They spent hours on a tennis court figuring out who’s going to take the order? Who’s going to heat the buns? Who’s going to cook the patties? Who’s going to put the mustard and pickle on the bun? Who’s going to hand the bag to the client?
They figured this process out with the customer experience in mind and they built a multibillion-dollar corporation with their processes. This is where I see most business owners make the biggest mistakes is not having processes in place. This is what will cause you to lose profits probably more than any of the other Ps. Go back and define your processes because again, this was one of the biggest mistakes and probably one of the most undervalued because most M&A advisors don’t know how to put a value on processes, but I do.
What’s In A Name?
Let’s talk about the fourth P, which is proprietary. I see lots of business owners making mistakes here. Proprietary is huge and probably one of the biggest value drivers there is. We’ll talk about why it’s such a big value driver. I’m not going to get into all the pillars of proprietary because I’ll talk about that in another episode. One of the number one less takes that I see companies make is they get a state. When they registered their company name, they don’t get a federal trademark because they never think big. They get a trademark in their city and state in their state, but they don’t get a federal trademark.
Work on the business, not in the business.
This has cost business owners tremendously. I have seen business owners lose a tremendous amount of money because they have been forced in court to defend their company name because they never did the research to make sure that their name is available from a federal standpoint, not a local standpoint. I encourage all of you right now to make sure that your name, A, is available and B, get a federal trademark. It’s worth it. It doesn’t cost that much and it can save you a tremendous amount of money trying to defend your company name.
Can you imagine if you had to change your company name after being in business 5, 10, 15, 20 years? This is huge and one of the biggest mistakes I see. One of the other big mistakes is that companies use slogans and don’t trademark it. They don’t trademark the logo. If you are starting a business and you’re trying to figure out what to name your company, come up with something that’s nondescript because it’s easier to get a federal trademark for something that’s nondescript. Cookie Bouquet who had several franchises all throughout the United States had to change their name because of trademark infringement because Cookie Bouquet was too normal. It’s always good to get a name that’s nondescript and then explain what you do in your slogan. Like Nike, Just Do It.
Trademark your logos as well. Trademark your slogans. Also, patents. If you’ve got a proprietary idea, get a patent on that idea. I see a lot of business owners do not protect their IP or intellectual property by getting trademarks. They don’t get patents. This is huge. The other big mistake I see is that business owners don’t have contracts or if they do have contracts, they’re not transferable. It’s extremely important for you to contracts. I have a manufacturing business I’m working with. They have one manufacturing plant they work with, they have no contract with them. They’re in Canada. If this manufacturing company falls through, there is no contract and there is no backup plan. That’s very scary. Most buyers will not buy that business because there’s no protection and there’s a huge risk.
Make sure you have a contract. If you’re a manufacturer and have contracts if you’re in distribution, have contracts, try to make sure that those contracts are transferable. 99.9% of business owners never have the transferability clause in their contracts. Here’s the biggest thing, client contracts. Client contracts add huge value, but again 99.9% of business owners never ever have that transferability clause in there in your client agreements. We sold a medical transportation company that had 150 contracts. 99.9% of all sales were assets, that were not stock sells. Therefore, the contracts will not transfer over. I had told the seller, “Go back out to all your hospitals, doctors, nursing homes and get those contracts transferable. Add that transferability clause in each one of your agreements.” “Okay, Michelle, I’m doing it.?” Did he do it? Of course not. I bought him a buyer. It was an asset sell.
He went through due diligence. He didn’t do anything I told them to do even though he told me he did. The contracts were not transferrable. Nine times out of ten, this deal would have fallen apart. The deal would have died because buyers do not like stock sells and like asset selves. Luckily for me, I had a great relationship with the buyer and I was able to get him to do a stock sell. Otherwise, this deal was dead. If you’re not listening to anything I say, but you should be listening to everything I say, make sure you add a transferability clause to your agreements. Agreements add huge value. Rather it’s a manufacturing, distribution or vendor agreement. If you have some exclusivity with a distributor, it adds huge value. Let me tell you what adds the most value and most value is client contracts and the more client agreements you have the more money I can get you for your business, but you have to have that transferability clause.
Let’s talk about the fifth P, patrons. Patron is your client base. A lot of business owners make the mistake of having customer concentration. They don’t mean to. It’s the go-to rule, 80% of your business comes from 20% of your clients. Here’s the bottom line, you have to have customer diversification. If you don’t, it doesn’t mean I can’t sell your business. It means I have to find the right buyer. We once sold a manufacturing business that specialized in the oil industry and 65% of their business was tied up with BP contract. The contract was not transferable. We had about 550 buyers for this particular business and we had probably about twelve different LOIs. LOI is a letter of intent. We have one specific buyer that was a strategic buyer.
This buyer had a similar product and similar services. They have been trying to get into BP for years and can never get in. They were willing to outbid everybody else because they want to BP. They ended up paying 65% more than what the business appraised for because they wanted that relationship. However, most buyers see that as a risk and they will walk away from that type of business. Most buyers want customer diversification, not customer concentration. You want to make sure that you have a diverse customer base and your customers are aging out.
Numbers Are Everything
If you’ve been in business for 40 or 50 years, how old are your customers? You want to have diverse, not diverse as far as percentage-wise, concentration-wise, but female now what’s the age. Go after the younger generation as well because some companies age out and you don’t have a client base. Let’s talk about the last P where I see many business owners make sometimes huge mistakes and this is profits. We’re all in business to make money and to make a profit. I’ve been in this industry for many years, but it still surprises me how I always thought, “This industry must make a lot of money,” and they don’t make any money at all.
Here’s the deal. You have to know your numbers. You have to know your operating cost. What’s your gross revenue? What your cost of goods? Know if your numbers are turning up or your numbers turning down and what is your profit margin for your industry? You should know your industry average profit margin and you should know if your company is making money. Many business owners have been so used to running personal expenses through the business, but they forget what they’re making in the business. You need to know what you’re running through the business. What you’re non-recurring.
Profit is never the problem. It is always a symptom of not running on one of the Seiler Tucker 6Ps.
Non-recurring means like you hired a software developer, cost you $300,000 to do that and you spend it over two years, $150,000 a year, that’s not reoccurring. You don’t do that every year or you own the building and you had to replace the roof, it cost you 75,000. You don’t do that every year. If you’re living out of your business or when you post expenses for the business, you need to know your numbers. You’d be surprised how many companies don’t know their numbers. Everyone we talk to, whether it’s a small company or a large company, they are like, “Our EBITDA is $10 million,” and the EBITDA is $5 million a year. You have to know your numbers.
The other thing that the other big mistake I see business owners make when it comes to profits is they don’t have checks and balances. Meaning that embezzlement is huge and I came and begin to tell you how many clients I have seen suffer embezzlement because they didn’t have checks and balances. They weren’t inspecting what they expect. They were trusting, but not verifying. Always verify, always have checks and balances when it comes to money. Always know where your money is going. The other thing always says about profits is if you have a lack of profit if you’re not making money, profits are never, ever the problem. It’s always a symptom of not running on one of the 6 P’s. You will have a lack of profits if you don’t have the right people in the right seats.
We’re going to have a whole episode on people, but if you don’t have the right people in your company or if you’re doing everything yourself, you won’t have a problem with profits. If your product is on the way out, instead of on the way up, and you don’t have as many consumers purchasing your products, you’re going to have a decrease in profits. If your processes are not efficient and productive and there’s waste, you’re going to have a lack of profits. You’re going to lose money. If you haven’t protected your IP and if you have to go to court to fight for your company, name for trademark infringement, then you will have a problem with profits. If you have customer concentration, you lose a client. I once had an advertising company I talked about before they have five clients specialized in doing marketing for casinos.
There aren’t any evaluations and the sales process under their five clients, they lost five casinos. They lost two. They were at risk of going out of business. They were losing huge profits because they had huge overhead. They had to have the best talent in marketing in order to service those casinos so they couldn’t get rid of people. They still had huge overhead but didn’t have the money coming in because they lost two clients, a lack of profits. Profits are never, ever the problem, always the symptom. It could be a symptom of lack of processes, lack of checks and balances that somebody is stealing from you. I once was doing due diligence on a business that we were selling and found out that the company’s internal CPA was taking money. These are some of the mistakes that business owners make. There are many more.
One of the big things that I see business owners make is that they don’t protect the corporate structure. Unfortunately, when a business fails or has to sell for pennies on the dollar and file bankruptcy, they don’t just lose their business assets. They lose their personal assets too and that’s because they pierced the corporate veil. They commingled their business assets and their family assets by signing personal guarantees, by taking out a mortgage on our house to support the business. You want to make sure that your corporate structure is protected. I always say you don’t know what you don’t know. Hire experts. Have a good CPA and attorney. I will tell you that I’ve seen business owners buy real estate and put it in a personal name. Corporate real estate that the business operates and puts the real estate in a personal name.
That’s not a good idea. If there’s a lawsuit that happens, they can you personally. You want to make sure that you have the right corporate structure in which to protect your personal assets. As I said, there are a lot more most takes I could talk about, but I think this is enough for now. The key is to plan your exit plan and plan it early. Don’t sell it because you have to due to a catastrophic event. Sell because you want to and you’ve planned your exit, the Seiler Tucker way. Also, remember to build your business on all 6Ps so that the business works for you rather than you walking for it. This has been another episode. Thank you for joining me.