Michelle Seiler Tucker is the Founder and CEO of Seiler Tucker Incorporated. As a 20-year expert in the Mergers & Acquisitions industry, she is regarded as the leading authority on buying, selling, fixing, and growing businesses. She and her firm have sold over a thousand businesses in almost every vertical and have a remarkable track record of success.
Michelle is also the Co-Author of the best-selling book Exit Rich; The 6 P Method To Sell Your Business For Huge Profit released in June 2021. She holds the M&AMI (Mergers & Acquisitions Master Intermediary) title, as well as Certified Mergers and Acquisitions Professional (CM&AP) and Certified Senior Business Analyst (CSBA). Michelle also owns many other businesses in several different industries.
Listen to the podcast here
Why Your Business Isn’t Worth Anything – With Michelle Seiler-Tucker
In this episode, we’ve got an expert in building your company’s valuation and, hopefully, maybe someday, even selling your company, Michelle Seiler Tucker, the Founder and CEO of Seiler Tucker Incorporated. Her team has sold over 1,000 businesses in almost every vertical. She has a remarkable track record of success. She’s also the co-author of Exit Rich with Sharon Lechter, who’s also been on the show in Episode 182. In this episode, we’re going to talk about one of my favorite subjects, building valuation and exiting. It’s something I’ve experienced myself, which made me a side hustle millionaire. Michelle, welcome to the show.
Thanks for having me on, Tony.
How did you get involved in this type of industry? What is it that drove you to become a business expert and understand how to build, scale and sell businesses?
I didn’t wake up one day and say, “I’m going to sell businesses.” I knew as a little girl that I was not going to work for somebody because my biggest pet peeve is, “Don’t tell me what to do.” I don’t like to be told what to do. I always knew I was going to be a writer, be in sales, be an entrepreneur, and I’m a people person. I’ve owned different businesses and different verticals at a very young age. I did go to work for Corporate America. I did go to work for Xerox because they recruited me. I was there for about one year.
I was pretty high up in the company. I was promoted to Regional Vice President of over 100 salespeople in Louisiana, Texas, and Mississippi. I ended up leaving Xerox and going into starting my franchise development consulting and sales business. I had some partners with different franchisors. I had some equity with some different companies. Many buyers kept coming to me and asking, “Do you have existing businesses?” A lot of buyers don’t want to buy franchises. I kept saying, “No.” I’m like, “Why am I saying no? I believe in the Law of Attraction. I should be saying yes.” That’s what led me to start my M&A business.
That is key. A lot of times, people start with the question, “What business should I start?” I always say that, “If people keep asking you for advice on something and they keep doing it over and over, that’s probably a good indicator.” Either portraying yourself as an expert or someone with knowledge of that thing, maybe that’s something that you should start building a business in. You did that with an entire business because people kept asking you.
It didn’t take me years upon years of people asking me. I did it quickly. I transitioned into mergers and acquisitions. I still kept my franchise sales development consulting business and transitioned out of that. I still do some consulting and development. Franchisors come to me all the time and want me to take them on and do area development for them. That’s my story.
That’s a good intro on why you get started in that. Give us a look at what your childhood or something like that was like. Were there some influences you had around the business? Was it purely, “I didn’t want to be told what to do?”
I didn’t grow up in a family of entrepreneurs. My dad did have a couple of businesses while I was growing up. He would take me to work with him sometimes. He was somewhat of an entrepreneur, but that was about it in my family. It stemmed from not wanting to be told what to do and wanting to do my own thing, make my own rules and create my own masterpiece.
Do you find that with all the entrepreneurs you’ve known, that’s a similar characteristic that we tend to share?
Yes, and that’s what I love so much about what I do. That’s why I think I’ll do it forever because I always say, “Would you still do what you do if the money wasn’t there?” I would say yes because I love the entrepreneur’s story. I love finding out how an entrepreneur with an eighth-grade education started a multimillion-dollar business out of their pickup truck and now selling their business for $70 million and have $17 million in EBITDA. How does that happen? I love those kinds of stories.Would you still do what you do if the money wasn't there? Click To Tweet
This entrepreneur whose business we’re selling didn’t grow up in a family of entrepreneurs. He had a few, but nothing big. This person also said, “I want to create my own masterpiece.” They didn’t grow up with much, so they want to create a better lifestyle for their children. I love that stuff. I’m like a kid in a candy store. I can’t wait to hear the next entrepreneur’s story.
It’s always fascinating, and I’ll use myself as an example. I sold my company for over $2 million. It was a side business I created, and that was in 2007. I had zero idea of what the valuation of that business was at that point. I learned about it as we were going through that whole yearlong due diligence, going through the records and understanding where they calculate things. Honestly, I probably left about $1 million on the table because I didn’t know that kind of stuff.
It should have never taken one year to go through due diligence, not on a $2 million business.
There weren’t a whole lot of examples in 2007 or 2008 for buying digital assets. They didn’t have a lot of understanding of how to value things and all that. We had recurring revenue. There were a lot of things we could cover in this episode to increase value. I had all those boxes checked. It was very unnerving, and you never feel like it’s real money until it’s in your bank account. Even on the day of the wire that was supposed to come in, you feel like, “Are they going to pull the rug out? Are they going to change their mind?” There are these weird type mental things that you go through.
It takes forever for the wire to come through sometimes. Were you representing it? Did you have an advisor?
We had a lawyer that was more on the M&A lawyer side, so that was more of the contract side. I didn’t use a broker or anything like that. I didn’t know anything like that stuff.
That’s pretty common. I’m an international speaker and spoke at events before the pandemic with over 800 people. I always ask, “Who’s familiar with an M&A advisor?” Very few people are. You’re normal. What type of buyer were they? Were they strategic?
They were buying very similar business models. I had the number one General Motors website on the internet, and then they wanted to buy the number one Mercedes, Cadillac and all these brands.
You had the domains.
I owned an online community with about 300,000 members. They wanted to build a big portfolio to roll out their marketing across multiple brands. If they owned all the top-level sites, they could do package deals and things like that to entice the advertisers.
Do you feel like you left $1 million on the table?
Knowing what I know now, absolutely.
That’s common. Steve Forbes endorsed my book Exit Rich. He said, “Exit Rich is a gold mine for entrepreneurs because they leave way too much money on the table when they go to sell their business.” For all business owners, you should have been represented. You should have had an advisor because attorneys don’t know about valuations, negotiations and all that. They are just contract attorneys. If you had me, I would’ve got you that million more.
I have no doubt because I know some people sold it for more, and I know a lot of people sold it for less. The thing is that people are reading this and going, “I’m a business owner. I bet my company’s worth millions.” You and I both know that’s the unfortunate opposite of the truth. Most people think their business is worth something until they get an evaluation. They realize it’s worth zero or less than zero in most cases, and they’re like, “I’m making a good living. I have a good life. How come my business is worth so little?” I don’t want to get people’s hopes up if you’re reading to thinking that your company’s going to be worth millions by surprise. I was fortunate to go through that. Michelle, let’s talk about the more realistic side. Why do most people think their business is worth something, but it’s not?
Before I answer that question, let me give you a little statistics here. Steve Forbes says, “80% of businesses in the market will never sell.” That’s a pretty startling statistic for business owners. That means you have less than a 20% chance of selling. That’s scary. There are many reasons why businesses don’t sell, but the reason why business owners have such an unrealistic perspective of what their business is worth is because they don’t base their business on the value of their business. They base it on the, “I’ve been in this business for twenty years. I put in all this hard work and sweat equity, invested in money and made all these sacrifices.” They base it upon their sweat equity, but most importantly, they base the value on what they need to enter the next phase of their life.
They’ll come to me and do an evaluation. I always ask them before I do an evaluation because I want to take their temperature, “What’s your desire sales price?” They always give unrealistic numbers. They’ll say, “$10 million,” and their cashflow is $100,000. I’m like, “How’d you come up with that?” They’re like, “That’s what I need to retire on. That’s what I need to pay for five girls’ colleges and pay for five girls’ weddings. That’s what I need to buy the next business with.” They base it upon what they need, not upon what the business is valued because they have no idea how to valuate businesses. This is a huge misconception. Sometimes I hear their CPA saying, “You can get 3 to 5 times gross revenues.”
I’ve had many owners tell me that over the last decades. The last guy that told me that is here in New Orleans. It’s a medical company. I said, “Bring your CPA in next for our next meeting.” He brought him in, and I said, “Why did you tell him that he can get 3 to 5 times gross revenues when he’s going to get 3 or 2.5 times EBITDA?” He goes, “That’s how we valuate businesses.” I said, “Who valuates businesses like that? What methodology are you using? Show me the comp. Show me the data that supports that. There is no data that supports that.” He goes, “You should speak in front of the CPA Association and teach us how to do valuations.”
I’m like, “You need to just zip it and stop telling clients that they’re going to get five times revenues.” When I gave the guy the real story of what his business was worth, he was extremely disappointed. He’s like, “I can’t afford to sell for that.” One of the big reasons that businesses don’t sell is because a lot of advisors and brokers will take that listing for $10 million, put it on the market, and that business will never sell. If the seller gets upset or they’ll do 3 or 4 price decreases while it’s on the market, then that looks bad because the same buyers are looking at the same businesses.
Isn’t it always the gross revenue number that creates the buzz among people who don’t know what they’re talking about? We see this marketing, coaches and everything. You see people on social media. The worst is they’ll screenshot their Stripe account showing the revenue for the month or the week that’s a big number, but they never show you the overhead costs, the marketing, ad spend or anything like that because we know sometimes it’s the same number or it’s worse than the number.
Everybody refers to me as the EBITDA queen because all I ever talk about is EBITDA. You never heard me talk about gross revenues because it is irrelevant.
It doesn’t matter. It’s ego and bragging rights. For the readers know what EBITDA is, explain that to them.
Earnings Before Interest, Taxes, Depreciation, and Amortization. You have your P&L. You get your tax returns. Your CPA is going to have so much on it for depreciation. They’re going to allow depreciation, amortization, interest, etc. We write all that back because it’s a non-expense item.
To simplify things, if you’re in a smaller business, that’s similar to a net profit. It’s what you take back at the end of the day after you pay all your bills.
It’s net income. In larger businesses, you always hear us talk about EBITDA. In smaller businesses, it’s net income, but it’s also your seller’s discretionary on small businesses because many business owners run personal expenses and non-recurring through the business. We have to normalize the financials and get to the sellers’ discretionary. If you go off of the number of the tax return, businesses aren’t going to be worth anything.
The first book I wrote was called Sell Your Business for More Than It’s Worth in 2013. I’ve had different people would ask me, “That sounds deceitful. It sounds like you’re deceiving people when you say, ‘Sell it for more than it’s worth.'” I go, No, “I’m not. If the tax returns say that the business has $1 million in EBITDA, but I just found $2 million in personal and non-recurring, and I got the business to $3 million because I’ve normalized the financials, plus I know how to evaluate the databases, contracts, patents, trademarks and everything else, how is that too simple? On paper, that business is not worth anything close to what I appraised it for.” You can’t ever go by what’s on paper.
We are talking to you, Mr. or Mrs. Business owner who pays yourself way too much and tries to hide money to avoid paying taxes and then you’re reporting at the end of the year, you’re not making any money in your business.
Let me tell you how to make your life easier. Let’s say you’re going to run personal expenses through the business, and that could be insurance for your family, mail, or travel. You go on a business trip where you’re going to stay for two weeks and treat your family to a vacation. Let’s say that you own the building and have to replace the roof because of storm damage, and it costs you $50,000 to replace the roof. We can normalize the financials and all that back. The problem is that business owners don’t remember. They have amnesia. They’re like, “You should know.” I’m like, “how should I know? I’m not operating your business. I’m not in your business every day. There’s no way for me to know.” “Talk to my CPA.” “Even if they know, your CPA doesn’t want to tell me.”
Business owners need to start keeping an Excel spreadsheet, month-to-month, year-to-year, what personal expenses they are running through to the penny and what non-recurring to the penny because they’re like, “I think I got $30,000 worth of health insurance.” I don’t want, “I think.” I want, “I know,” because when we go to due diligence, I don’t want surprises.
The better your accounting is, the easier it’s going to be to find the valuation and the more enticing it will be for the potential buyer.
It is easier to make due diligence. After due diligence, you’ll get the actual price. They won’t try to discount the purchase price after due diligence because they don’t know what your outbacks or true numbers are.
What do you find that most people end up building themselves a job versus a business? I know there’s a distinction there. A lot of people fall into the other trap.
In my book, we talk about all of that. We talk about valuations, but the first half of the book is about how to build a sustainable, scalable business, so you have a sellable asset. One of the number one reasons that 80% of businesses don’t sell is because business owners don’t have a business. They’ve created a glorified job that they go to work at every day versus a business that works for them, and the business is 1,000% dependent upon them. We had a dentist that came to us. He has been in the business for 50 years, 1 dentist and 3 dental hygienists. The three dental hygienists are his daughters.
The whole family was there.
I said, “I can sell the business, but I can’t maximize value.” The purchase price will have contingencies like clawbacks, earnouts and seller financing, which are all contingent on how you and your daughter stay for 2 to 3 years. He said, “We’re not staying.” I said, “You’re not selling.” Many business owners have created a job, not a business. That’s why we take them through what we call the infrastructure of the 6 Ps. That very first P is People. You don’t build a business. You build people, and people build a business.
Does this dentist have a business?
On paper, but not to a buyer.
He does not have a business. He has a job. If he doesn’t go to work and does people’s teeth, he doesn’t get paid. He can’t go to The Bahamas for a month and get paid. He doesn’t have a business. He has a job. When I say entrepreneurs create a job that they work in every day versus a business that works for them, you have to look at your business and say, “Can I leave for 1, 2 or 3 months and the business will still be there, sustain itself and I could still make money, and there’s not going to be any issues?” That’s a business versus a job. The dentist has a job. If he doesn’t work, he doesn’t get paid. If the chiropractor doesn’t have any other chiropractors, he has a job. He doesn’t have a business.
I had a lady call me from Texas, and her husband dropped dead from a heart attack. He left her with a mountain of debt. She knows nothing about finances. She said, “Can you sell this business? He had this business for years.” I go, “How many employees?” She goes, “None. He has subcontractors.” I said, “Processes and procedures?” She said, “It’s all in his head.” When he died, the business died. A lot of entrepreneurs have jobs, not businesses. When we build the infrastructure, we work with our clients to identify their strengths. Entrepreneurs always have this misconception that, “If you want them right, you have to do it yourself.” That’s not true. We’re not good at everything. I can tell you my strengths and all the things I’m weak at.
We need to focus on our strengths and power our weaknesses. The entrepreneurs are control freaks. I always tell them, “You’re never going to grow unless you let go of control. You need to hire the right people, put them in the right seats, and ask who question, ‘Who handles customer service, marketing, accounting, legal, environmental, manufacturing, logistics, and quality control?'” The list goes on and on. The clue is you should never be next to who because we want to build a business to run without you. You got to get the right people in the right seats. You got to make sure you have a layer of management when you start to grow your business. If you want to sell it for millions, you got to have that layer of management because, otherwise, the sale is going to be contingent upon your staying.
That was part of the valuation of the company I built. I had 75 people on staff. Most of them were 1099 and freelance contractors. I built it where I could spend less than an hour a day and didn’t even have to do that because of my career in oil and gas. I was international. Sometimes I was in the middle of the ocean. Sometimes I was offline for 1 week or 2 at a time. I had to build a company with processes and people in place that it could operate without me being there, which made the company extremely valuable because it was a cash machine at that point.
You’ll build up your next company, come to me, and we’ll sell it for a lot more. People is huge. I always put people number one because nothing else happens without people. It doesn’t always have to be W-2s. It can sometimes be 1099s or interns. A lot of times, clients will say, “I don’t have the money to hire someone.” I’m like, “If you don’t have an assistant, you are the assistant.” They always say, “I can’t afford to.”Put people number one because nothing else happens without people. Click To Tweet
I’m like, “You can’t afford not to hire somebody, even if it’s a 1099 or you’re around colleges.” I’m in between five colleges. We have a waitlist of people who want to be marketing and analyst interns. Go to your colleges. They have internship programs. Most of their students come and graduate unless they go through an internship. You got to look at building your team. The sooner, the better.
What’s the next P? You got people, then what?
The next P is Product. Before I get into the product, let me give you a little history. When I wrote my very first book in 2013 called Sell Your Business for More Than it’s Worth, I did the research and learned that 90% of all startups between 1 to 5 years would fail. We know that. That’s common sense. Here’s what you don’t know. Here’s what’s not common sense. When I did all the exact same research for Exit Rich, I learned that the business landscape flip-flopped. It’s changed dramatically. Only 30% of startups will go out of business. Out of 27.6 million companies, those businesses have been in 10 years or longer, 70% of them will go out of business.
Small business is the backbone of our economy. There are 30.2 million businesses in the United States, employing over half the US workforce. If we lose 70% out of 26.7 million, we’re in big trouble. You hear about the big public companies all the time, Toys R Us in business for 75 years so and goes out of business. You got Kmart, Stein Mart, Pier 1. Disney stores are closing. GNC closed down to 100 locations.
The media doesn’t talk about private companies on every street corner, town or state. These business owners are exiting poor. They’re selling for pennies on the dollar, closing their business or even worse, filing bankruptcy. In America, when you are filing bankruptcy, you’re not just going to lose your business assets. You’re going to lose your personal assets, too, because what do most business owners do? Commingle assets, sign personal guarantees, or take loans out against their home.
The number one reason why 70% of businesses are going out of business is because of a lack of AIM. Business owners stop innovating and marketing. AIM is Always Innovate and Market. Business owners get married to their original concept. Look at Toys R Us. They’ve been nothing new in 75 years. Even when they ended up going out of business and tried to rebirth, they didn’t innovate at all. Look at Blockbuster. They had the opportunity to buy Netflix. They sat back and did nothing.
They had two opportunities to buy it. They said, “We’re good. We’re the big name. They’re just the little thing.”
Xerox had the chance to own the mouse that was created. I used to work at Xerox. They turned their nose up at the mouse and lost millions or billions of dollars worth of revenue from the mouse. You have to ask yourself, is your product, service or industry on the way up or out? Is it thriving or dying? Do you have an Amazon, and you’re in your prime? That’s when you should sell. Most business owners don’t think about selling, and a total catastrophic event has occurred, internal or external. Don’t sell during the catastrophe. You will never maximize value. Sell in your prime.
If you are a Blockbuster and you’re about to go out of business, that doesn’t mean you close up shop and go out of business. It means you got to pivot. I always tell my clients, “Ask yourself these three questions. Amazon did this back in the ’90s, ‘What business are you in?’ The business you think you’re in is probably not the business you’re in.” Amazon asks themselves, “What business are we in?” They said, “We’re in a fulfillment business. We fulfill book orders.”
The second question is, “What are our USPs or Unique Selling Propositions? What do we do better than everybody else?” Amazon said, “We do fulfillment better than everyone else in the industry.” The next obvious question is, “What business should we be in?” Amazon said, “We should be in a fulfillment business for products all around the world, not just books.”
Those three transformational questions transformed them from a small book fulfillment center to a multibillion-dollar worldwide conglomerate. If you want better answers, ask better questions. The other problem with the product is you got to have congruent revenue sensors. In your business that you sold for $2 million, you probably had congruent revenue centers. That’s why many businesses went out of business during COVID is because a restaurant has one restaurant. One way they make money is that customers come in and eat or customers take food to go. Do they have an eCommerce business? Do they sell anything? Do they have any private labels? No. You have to have multiple congruent revenue streams.
The next P is Processes. If you didn’t have the right people and processes, you would’ve never been able to be in the middle of the ocean with your job and have your business run. Processes are huge, but processes are like exit strategies. Business owners don’t think about them until something happens in their company. If something bad happens, they’re like, “We need policy and procedure for that.” You need to design your policy and procedures from the beginning.
This is where most owners get it wrong. They design the processes around their own agenda. Let me explain. Doctors, when are they open? Monday through Friday, 9:00 to 5:00. Are they worried about the patients, “When can we get in to see them because we’re working during the day?” No, they design that process or hours around their own agenda. Chiropractors are the worst. I love chiropractors. Don’t get mad at me. My husband is a chiropractor, but he doesn’t do this. He has several locations. Chiropractors say, “We’re open Monday, Wednesday and Friday from 9:00 to 12:00, then we open again from 3:00 to 5:00, then we’ll close on Tuesday and open Thursday morning.” Who can keep up with that?
You have to design your processes with the customer experience in mind in the beginning. Ask your customers. McDonald’s did this in 1950. Did you ever watch a movie, The Founder?
Excellent. I love that movie.
Back in the 1950s, McDonald’s said, “We want to develop a fast food restaurant,” because there wasn’t one back then. They said, “We want to develop fast food systems processes, but we’re not designing around the customer experience.” They asked themselves, “What do we want our customers to experience? We want our customers to get something they’re not getting, great tasting food that’s hot, fast, 30 seconds or less.”
Do you remember when they went out to the empty tennis course? They talked, bought their employee, drew out all the processes, and they were bumping each other step by each other’s toes. They were out there for nine hours. Even though those processes were developed decades ago and have been tweaked along the way, that’s why you can eat at a McDonald’s anywhere in the world and get the same experience.
My very first job at age 15 through 17 was at McDonald’s. While most of my coworkers would complain about their minimum wage fast food job, I was paying attention to everything and understanding the efficiency. I would take mental notes of how they were the number one franchise in the world and what they were doing differently, the food processes and the layout of the kitchen. We even had different-sized condiment dispensers for each size of hamburger because you had little and big hamburgers. The condiment ratio is different on those. They had different size squirt bottles for each of them. Even though they’re both ketchup, they’re two different ones. Everything was very much in an order that was like the process flow.
As soon as they took the order and they hit the total button on the register in the drive-through, the clock would start counting down, and you had to get them out of there within a minute. There are a lot of efficiencies built into every single thing they do, even all the frying machines. They had Filet-O-Fish, pies and fries. Every one of them had a different alarm. You start to realize like, “That alarm is this,” and you know which one to go to without even having to look inside each of the vats.
There are many efficiencies. It’s also why they can fire and hire someone within 30 minutes and have them working any position at McDonald’s. We got to stop and ask our clients, “What do you want? What do you need? How can we make it easier for you to do business with us?” Amazon is winning because they practically make it so easy to purchase anything. They have changed consumer buying habits single-handedly and dramatically, and so has this pandemic.
This pandemic has changed how we purchase up. We have to go back to the basics and ask our clients. We’ve got to develop those processes around the customer experience because if we don’t create wow experiences for our clients, our competitors will be happy to do it for us. Have you ever had a bad experience with a bank, a retailer or a social media company? You go to call, and it’s like, “Push this number.” You finally get a live person. You tell them your entire issue, and then they’re like, “Sorry, I have to transfer you.” They either hang up on you by accident, so you get disconnected or transfer you to another person, then another person. In social media, they don’t even have a phone number. I got hacked twice. It took months to get my account back and get my money back in my account.
I’ll give you a tip on social media like Facebook, Instagram and stuff like that. If you go through their legal channel, you get a lot of faster results. If you could make it a legal basis, like identity theft or come up with a legal aspect of why this is a problem, you usually get a response within one day.
Processes are huge. It can make or break your company. They need to be designed with the customer experience in mind, productive and efficient. They must be well-papered. You need those policy and procedure manuals. Policy and procedures are always ongoing. Leave it open. When something new happens, add it to the policy and procedure manual. You need those SLP checklists, employee handbooks, etc.
A lot of businesses don’t have this paper. In due diligence, one of the first things buyers want to see after the financials is your policy and procedure manuals. They want to see your processes. That’s very important. I also wanted to mention this to you since you saw the movie The Founder. Do you remember Ray Kroc, who was played by Michael Keaton? Remember when he was in the bank trying to borrow extra money because he was over-leveraged because the franchisees weren’t paying, and his royalties were slim to none?
He took a mortgage out against his home, which I tell everybody not to do. The lender said, “No, you’re upside down. I can’t lend you more money.” I remember when he walked out, and a gentleman followed him out and said, “I’m sorry. I didn’t mean to eavesdrop, but I heard the whole conversation. I think I can help you. What business are you in?” Ray Croc said, “I’m in the restaurant business.” The gentleman said, “No, what business are you in?” Ray Kroc goes, “What are you talking about? I’m in the restaurant business.” He was very frustrated. A gentleman said, “No, you’re not. You’re in the real estate business. You need to be in the real estate business.”
That was key. You got to think about those pivoting moments like that. He’s like, “You have to buy up all the real estate. You have to build the buildings and sign a lease with the franchisees. If they’re not compliant, kick them out. Get another franchise in there.” He started McDonald’s corporate royalty and got all the leverage because he had so many franchisees leasing from him, went to McDonald’s, and stole McDonald’s from McDonald Brothers because of that.
Can you imagine? McDonald’s would probably never be here if it wasn’t for that one gentleman asking that question, “What business are you in? What business should you be in?” It’s also why McDonald’s is the largest real estate holding company to this day. Ray Kroc would’ve never figured that out on his own, I don’t think. That’s why that line of questioning is important. The next P is Proprietary. This is what you were alluding to earlier in the show when you sold your business.
This is the number one value driver. This can take you from a 5 multiple to an 8, to a 10. Let me give you a quick crash course on valuations. I don’t know what the EBITDA was of your business, Tony, and you don’t have to tell me. For businesses that have under $1 million in EBITDA, the multiple is typically one, which I know sounds low, but 1 to 3, 3.5 depending upon your synergies. This is the sweet spot that you need to get to. If your EBITDA is over $1 million, then the multiples typically start at 5 and go up depending on your synergies. The more proprietary assets you have, the more we can sell your company for the higher multiple you’re going to get.
There are six pillars to proprietary. First is branding. The more well-branded your company is, the more I can sell it for as long as your brand is relevant in the mind of the consumers. Is anybody paying any money for Blockbuster? No. The most valuable brand on the road is Apple, $359 billion. That’s just a brand. That’s not cashflow, assets, real estate inventory or anything else. Also, trademarks are huge. Trademarking company name your slogan, your logo products. People forget about trademarking products. Here’s a mistake that business owners make. They come up with a name, go to GoDaddy, type it in, and they’re like, “We got the dot-com.” They’ll get a trademark in Texas, but they never checked the federal database.
They give me an operation 5, 10, 15, 20 years and all of a sudden, they get a cease and desist letter, and they have to stop using that company name. They hire a lawyer and throw money at it, but they lose. Check the federal database before you ever decide on your name, and make sure you get a federal trademark. Products are big, but people forget about products. We have a client who is selling his business for between $50 million to $60 million. They have twelve products. They’re all half-agile trademarks, and one is exclusive to Walmart, Target, and TJ Maxx. There are strategics. There are five different types of buyers. Strategics will pay a lot more money for this proprietary. Patents are another one. If you’ve ever watched Shark Tank, what do they always ask?
“Do you have any patents or government contracts?” It’s always something proprietary.
“Do you have any patents? Do you have a patent pending? Do you have a utility patent?” Their offers are always contingent upon you proving that you have that patent. We sold a business for $18 million. It wasn’t making very much money, but they had eighteen patents. We’re talking about synergies that drive value. Contracts are another value driver. Manufacturing, distribution, franchise orders that have franchisees or any type of exclusive contract. Customer contracts are the biggest value to buyers because they want to make sure you have reoccurring revenue coming in, especially if you have that subscription model, as you talked about at the beginning of the show.
Here’s a mistake that business owners make with contracts. I have never seen a business owner do this. Maybe you did it. You’ve got to always make sure you have that transferability clause that says, “This contract is transferable upon the new entity,” because 98% of sales are asset sales. If a buyer doesn’t agree to stock sell and your clients want to agree to consent to transfer, then the whole thing can fall apart. Plus, if you have 2,000 clients, are you going to go to all 2,000 clients to get consent to transfer? No. You have to have that transferability clause.
There was a brokerage company that sold years ago to a private equity group. The private equity group had the whole due diligence team, but nobody looked at the contracts or the franchise agreements. They closed on to sell all the business, and then private equity goes to our loaners team. Franchisees are saying, “I noticed you purchased a company, but I’m not going to be part of your franchise because I don’t have to be. I don’t have to transfer over.” They start looking at the contracts and go, “We don’t have the transferability clause.”
They threw these huge parties for all this money, and only one franchisee transferred over and signed the consent to transfer because they didn’t like the private equity group. They thought they were arrogant and had no experience. They filed for bankruptcy within 90 to 120 days and sued their entire legal team. If you’re on the buying side, make sure that you look at those contracts. Databases are big. They can be sold independently too. Facebook paid $19 billion for WhatsApp, and WhatsApp was making how much money?
They weren’t just making zero. They were bleeding, but they had a billion users that had synergy, and Facebook knew they could ROI and monetize that. Celebrity endorsements are big. We have a client that has products with Oprah. Strategics will pay a lot of money for that because they want to get their products in front of the queen of everything. This is huge, celebrity endorsements and radio personalities. Here’s the reason why radio personalities are so valuable. Let’s say you have a skincare company. They can only endorse one skincare company. Nobody else can bump you from that prime digital real estate spot unless you allow it to happen. That’s prime digital real estate.
It’s the same thing for eCommerce businesses. If you have a niche, if you make pillows and you’re number one on Wayfair or Etsy, strategics will pay a lot of money for positioning. Also, content. It is key. There are many things we haven’t gone over, like a home builder that has floor plans, architects and engineers. There’s so much IP in businesses, and most business owners, buyers, and advisors don’t know how to valuate it.If you have a niche and you're number one in that niche, strategists will pay a lot of money for positioning. Click To Tweet
I’m excited about this kind of stuff. I could talk about all this stuff all day long. I’m sure that the readers crank out their pens and take crazy amounts of notes. They’re going to have to read this a few times to catch all that. Every single one of those topics is a $1 million subject. We’re on the fifth P.
This is Patreon. This is your customer base. Most businesses follow the 80/20 rule, or 80% of the revenue comes from 20% of their clients. What happens if you start losing some of that 20%? Your revenue goes down. We were selling a media company. We’re selling them for $15 million. They have five clients only, but their clients are casinos. During the sales process, they lost two clients. Their revenues and EBITDA dropped in half. They were no longer sellable. We had to merge them with another media company.
You want customer diversification, not customer concentration. Many businesses have customer concentration. Let me say this. If you have customer concentration, that doesn’t mean we can’t sell your business. We had an oil manufacturing business that we sold. You’ll appreciate this being in the oil industry. We appraised this company for $9.8 million. They operated in all 6Ps except for Patreons. That 65% of the revenue is tied up in BP. We appraise it for 9.8 million. We have $550 buyers that look at it. We narrowed it down to twelve letters of intent. All the letters of intent have callbacks, are announced, and everything is contingent upon the BP contract.
My two seller partners said, “We’re not going to do that. We’re not going to agree to callbacks. We’re not going to agree to earn outs. We’re not agreeing to all this stuff, and we’re not going to make it contingent upon the contract.” I said, “We’re going to have a hard time selling it.” Luckily, I found a strategic that has similar products and services and was also in oil manufacturing. They’ve been trying to get into BP for years and couldn’t get in the door.
They’re like, “We don’t care what the customer concentration is. We just want the BP contract so we can get our stuff in the door.” They paid $15 million for 70%, which is 129% more than the appraised price. One of my owners stayed for 30% plus their $300,000 salary and benefits. That’s how we’re able to create bidding wars. We valuate synergies. The name of the game and evaluations is finding out what those synergies are and what buyers are willing to pay top dollar for those.
Also, companies that have been in business for 20, 30 or 40 years have their client base aging out. These owners talk about innovating. Innovate is not just a product. You got to innovate your products, industry, service, processes and customer base. These owners have to start innovating and start a marketing campaign to appeal to the new generations because newer generations don’t buy the same way Baby Boomers buy. You got to pay attention to customers’ age now.
The last P is Profits. It’s the reason we’re all in business, to make money. Everybody is like, “Why do you put profits last and not first?” It’s because lack of profits is never the problem. It’s always the symptom of not operating on one of these Ps. Clients call me all the time and say, “I have a profit problem.” I’m like, “No, you have a people or a process problem. You don’t have a profit problem.” Those are your 6 Ps. That’s the infrastructure every business should be built upon.
I agree that the profit is last because that’s a result. It’s a score. You’re doing everything right. That’s a score. It’s like you get paid for the value you create in this world. Your profit is based on the value that you create in this world as well.
There are many ways that you can lose money. I was going to come out with another book about profit mistakes. One is embezzlement. Did you know that 2 out of 5 business owners get embezzled every year for billions of dollars? Not only partners but assistants or secretaries. I’ve had companies come to me and say, “I don’t know what’s going on.” We figured out it was embezzlement. You need to get the right people in place, but you never turn everything over without checks and balances. You need to inspect what you always expect. Trust but verify. I had one client that was embezzled eight different times.
I’ve had a contact that was in a manufacturing capacity. Their delivery drivers were loading their trucks up with extra goods and selling them off to the side while they were doing their delivery routes.
We had a candle manufacturing company. Her children were stealing candles and selling them on the side of the road. The mom didn’t know about it. There’s embezzlement in all kinds of different ways.
That’s a tough one. You got to have the right people to trust, but also, if you can’t trust them, put security cameras up. It keeps people honest.
You have to have checks and balances in place. You have to trust but verify. I sent all my own checks. You always got to trust but verify.
What are some of the biggest profit mistakes that you can think of?
One of them is embezzlement because business owners don’t know their numbers. I can’t tell you how many times I have asked business owners. They’ll tell me right away what the revenues are, but who cares about revenues? I ask them, “What’s your EBITDA and your net income?” They just look at me like a deer in headlights because they don’t know because they’ve been running things for so long.
One of the biggest profit mistakes is not knowing your numbers, your KPIs and where your money is going at all times. Another big profit mistake is taking your eye off the expenses. You got to always look at your expenses and where the money is going. One thing that came good out of this pandemic, or the one good silver lining, was a lot of business owners stopped and started looking at their P&L and saying, “We don’t need this.” They would cut and decrease overhead like that.
One thing I always told them to do, because then they start cutting marketing, is you don’t cut marketing. That’s the one thing you don’t cut. You look at your marketing and all the different avenues of your marketing. If you’re running Facebook ads and it is not giving you a good ROI, then cut to Facebook ads. If pay-per-click is doing good for you, double down on what’s working. Not knowing your numbers is a huge profit mistake. Not trusting and verifying and having those checks and balances in place is a huge profit mistake. Stealing is done in many different ways. It’s not just stealing money, like you said, stealing products. It could be stealing stuff. It could be like in a restaurant, stealing food.
Another is clocking in and not doing anything productive. That’s still a form of theft.
Usually, when I talk about profit mistakes, I do them through the 6 Ps because they’re always in the 6 Ps. A big profit mistake with people is having around with people in the wrong seat and they’re not productive and efficient. They’re costing you money. If an owner’s doing everything themselves, then that owner’s never going to be profitable because they can’t scale. If you’re in a dying industry and you haven’t done something to pivot, you’re going to be losing money. That’s a big profit mistake. If you don’t have additional congruent revenue streams and all your eggs are in one profit center basket and that one profit center dies, you’re in big trouble. You’re practically out of business. That’s what happened to all the restaurants.
I wanted to also rewind that segment there because you mentioned not turning off the marketing, and you’re the first person that’s said that in over 200 episodes. That’s the things I teach my clients because most people think you only do marketing when you’re slow, and then when you get busy, you turn off the marketing. They treat it like a throttle. I’m always like, “No, you got to keep marketing no matter how busy you are because as soon as you fall off and lose momentum, people start thinking negatively. They think that you went out of business or things aren’t going good.” It’s always about top-of-mind presence rather than trying to fill what your capacity is.
You always got to market. There are different marketing avenues you can cut out if they’re proven not to be cost-effective and generate enough leads. You need to know your customer acquisition costs, but you need to double down on the ones that are working. You’re either growing or dying. If you don’t start marketing, you’re going to start dying. Marketing is growth. That’s what happened with Toys R Us. They did some marketing, but they never did any innovation. When clients go out of business, I always say it’s a lack of AIM because of its lack of innovation and marketing.
I want to get your take on some philosophy here because there’s a little bit different management style when you’re trying to grow and scale the business initially versus going into an exit strategy, usually the last years for the accounting records, slight management changes. What are some distinct differences you’ve seen in managing a company from when you’re trying to grow early on versus trying to exit?
I’m trying to get all business owners to build their business on these 6 Ps so when they’re ready to exit, they’ll have a sellable asset. If you’re trying to exit in the next 2 or 3 years, 1) You do need to operate in all six cylinders. 2) You need to have the right management team in place to listen. If you’re a $500,000 company and then you become a million-dollar company but want to become a $10-million company, what got you here won’t get you there. You got to change people and management sometimes. You always see these big companies that change CEOs. Why do they change the CEO?
It’s because the current one’s only good to get them where they are, not where they want to go.
The one is only getting them where they are, or they’re taking them backward. What got you here won’t get you there. It goes back to making sure you’re running on the 6 Ps. If you’re trying to sell your business, you got to have clean financials. You can have personal expenses and non-recurring, but you need to know your numbers. You need to be able to prove your personals and your non-reoccurring. If my clients can’t prove it, I don’t add it back because my buyers are going to want the proof in due diligence. I want to make sure we’re not going to have any surprises in due diligence. You need to make sure you know your numbers. In many cases, if you’re trying to sell your business for $10 million, $15 million, $20 million, $30 million, $40 million or $50 million, you need to audit the financials.
They dig deep. They go back three years and look at every single decimal.
When we do valuations, we go five years. We don’t just go three years. Buyers do what’s best for them. If you’re having the best year ever, because there are a lot of companies that 2020 was the best year ever, buyers are like, “We’re not just going to look at 2020, but a 3 or 5 years back,” or whatever’s better for them. Whatever gets them the lower EBITDA, that’s what they want to go with. A lot of buyers are agreeing to throw out 2020, but let’s say 2021 is bad, “We’re just looking at twelve-month rolling.” I’m like, “No, you’re not.” “We’re going to do a three-year average, and we’re going to throw out 2020.” They typically do what’s best for them. That’s why you need a good advisor who knows how to valuate businesses, push back, and how to tell buyers what they need to be doing instead of what they are doing.
Michelle, I love this conversation, and we could go on all day about this kind of topic. I could tell you have a lot of energy and excitement about what you do. I want to give you some time to talk about the book here, the Exit Rich. Give us an idea of what they expect from that.
Exit Rich was endorsed by Steve Forbes, who says Exit Rich is a gold mine for entrepreneurs as they leave way too much money on the table like you feel like you did. Sharon Lechter is my co-author of Exit Rich, and she wrote Rich Dad Poor Dad with Robert Kiyosaki. For those of you that don’t know her, she’s a five-time New York Times bestselling author, a CPA, a financial literacy expert, and an advisor to many different presidents. She writes the Mentor’s Corner at the bottom of each chapter. Plus, as a bonus, her husband is an IP attorney. He writes some content, too, in a proprietary section.
Kevin Harrington, an original Shark on Shark Tank, wrote our foreword, plus we have endorsements from Jack Canfield, Brian Tracy, Brandon Dawson and Grant Cardone. We also have Brad Sugars from ActionCOACH. We have some great testimonials. Exit Rich is just not about selling your business. I don’t want entrepreneurs or business owners to go, “I’m not interested in selling.” Let me tell you. You probably don’t even have a sellable asset. What you need to do is build your business so it’s sustainable, so it can operate without you, scale it, and so when a time comes, you do have something that can be sold, and you’re not like the lady to called me and said her husband just dropped dead of a heart attack, left her with a mountain of debt and she’s going to have to file bankruptcy.
That’s so sad, and nothing can be done. Exit Rich is for any entrepreneur or business owner because they need to build that business on a solid foundation, so they don’t become part of the 80% of businesses that don’t sell or the 70% of businesses that go out of business. We have some great giveaways for anybody who orders before or on June 22, 2021. First and foremost, go to ExitRichBook.com. For $24.79, which includes shipping, we’ll email you the digital download so you can start reading it. We’ll ship the whole stuff to your doorstep for no additional shipping to anyone that lives inside the United States.You need to build your business on a solid foundation, so you don't become part of the 80% of businesses that don't sell or the 70% of businesses that go out of business. Click To Tweet
In addition to that, we’ll give you a lifetime membership into the Exit Rich Book Club where there’s video content of me training on different techniques and strategies I’ve been teaching over the last many years in the trenches and documents to operate or sell your business, like sample employee handbooks, policy and procedure manuals, org charts and sample letters of intent. A lot of business owners have never seen a letter of intent, purchase agreements, due diligence, checklists, or closing docs. All the documents you need to operate and sell your business are there for your review and download.
If you want your attorney to recreate all this, it will cost you over $50,000. They’re all there if you buy the book before or on June 22, 2021. We’ll give you a 30-day free membership in two Club CEOs. This is an entrepreneurship mastermind that we ask transformational questions like, “What business are you in? What business should you be at?” and help our business owners pivot so they can build that sustainable, scalable, sellable business all for $24.79 at ExitRichBook.com. For any of your readers that buy ten books each, I’ll do a one-hour free consultation. Anybody that buys 20, I’ll do 2 hours.
That’s an awesome opportunity. Thank you so much for being on the show. I love the people that you’re working with. Kevin Harrington and Sharon Lechter have been on the show, and now I’ve got Michelle Seiler-Tucker, a trifecta of people on the cover.
Thank you for having me. It’s a pleasure. I love talking to entrepreneurs who have sold their businesses before.
- Exit Rich
- Episode 182 – Past Episode
- Sell Your Business for More Than It’s Worth
- Rich Dad Poor Dad
- Club CEOs
- Kevin Harrington – Past Episode
Love the show? Subscribe, rate, review, and share! https://www.seilertucker.com/podcast