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Do you want to sell your business someday?
Did you know that 40% of businesses are in some state of transition – from one owner to another? And that 75% of a business owner’s net worth is directly tied to their business?
Looking into the future is critical to your future. Understanding what things you can do now that will positively affect your future can help you get out at the right time, get paid and live, as Dave says, your Life After Business.
In this podcast, I talked with Dave Driscoll from Metro Business Advisors about exit planning, business succession and all kinds of other selling-your-business things. Dave is truly a wealth of knowledge when it comes to preparing a business for selling!
BONUS Video Footage for Red Canoe Elite Members:Dave Driscoll has been an entrepreneur since his graduation from St. Louis University. Early in Dave’s career, when he was only 24 years old, Dave s
tarted a company that manufactured consumable paper products. After 28 years, he sold that business and began his second career working with fellow business owners to maximize value and facilitate the successful sale, merger or transfer of their businesses – the single, most critically important financial event of an owner’s professional life!
Dave has lived in St. Louis his entire life. He married a local girl, raised two sons and is well known throughout the St. Louis business community. Dave takes pride in confidentially connecting sellers and buyers.
Will: Hello, everyone, I am Will Hanke from Red Canoe media. Thanks for joining me today on the Navigate The Rapids podcast and broadcast on video. Today we are going to be talking about selling out, but maybe not in the way you think about it. More along the lines of preparing your business to sell somewhere down the line so that you can end up somewhere warm such as Tahiti. Today is January 16th 2015, and my guest today is Dave Driscoll from the President and Order from Metro Business advisors. Dave’s understanding of business and ownership makes him uniquely qualified to help business owners with their preparation and sale of their most valuable asset, the proceeds of which will fund their life beyond business. Dave has genuine enthusiasm and the experience to pride this valuable service to fellow business owners by creating a roadmap for them to realize their dreams. Dave, happy new year and welcome to the show!
Dave: Thank you ,Will! Nice to be here!
Will: Tell me a little bit about your past ownership prior to starting Metro Business Advisors
Dave: My past owner is the while reason why I started Metro Business Advisors. I started my own manufacturing company when I was 24. Did not know anything about it, kind of learned everything on the fly, had a degree in finance going forward. By very much mechanically oriented as well as I felt a very good sales representative. So I started my own company after working with someone for about 18 months, 1 thing lead to another, bought some equipment, got some accounts here and there. after 30 years the business grew to about 20 million in revenue and about 165 employees. During that period of time I had learned a lot about the business, about planning, looking ahead, dealing with current situations, insurance, labor, products. We were a manufacturing business that interfaced on a b to b level, so we were constantly dealing with clients selling products and calling.
During that period of time I felt that I learned so much. The circumstances came up in about 2006 that the industry itself had changed so dramatically I was in the envelope manufacturing industry. Here we are, sitting a webcam environment, it defines what happened to the envelope. Technology has completely obliterated that industry. I was such a smaller player at 20 million dollars in revenue I was competing with guys 10 times my size and even bigger than that. (03:35) principles so I thought I better just get out of the way, so I sold the business. I was at an age, 56 years old, where I felt that I had gained so much knowledge about building a business, working in that business then getting out of the business, selling the business. I have done something that few people do and I thought what I can do going forward is to share that knowledge with fellow owners and that is what started Metro.
Started out as exit planning, preparing everyone for the transfer or sale of their business, going in and doing corporate hygiene, going inside and helping them prove the value. Moved from exit planning to buying the operation into business evaluation so we can determine what the value of that asset is for that individual. So it is their life’s work, they have been working at it for 20, 30, 40 years, yet they never knew what it was worth and 9 times out of 10 they think it is worth more than it actually is. So when it comes time to planning, when you are getting closer to that part where you really need to know what planning is, then you have to know what that value is.
I went from there developed more into selling businesses. You can see we have the entire process, from the planning side, the evaluation side to the actual transfer of the business either through succession planning when we have an insider, either key employee, family or selling to an unrelated 3rd party. So it really is a continuum that we have and take all this through. I find it extremely rewarded, I started in 2008, which was not the best year to start a business, everyone was in a marketing mode so you had a lot of opportunity to interact with people, networking and all of those stuff. It served me well. So here I am today, in this business which I am very fortunate to have a second career.
Will: That is very cool. 2008 – 2011 was some of my best times too because like you said everyone is in market mode, we needed to be for the customers.
Dave: That is right! Everyone was out reaching for everyone to have a conversation, it was good
Will: I have actually been in business for around 17 years now but only in the last 5 or 6 I have really started pushing, going out there and building a business around things. What are something things financially that I should have in place? I guess what you would consider to be a young company
Dave: Businesses need revenue. You have to have a marketing engine that is working to provide that engine. Once you have the opportunity to gain that revenue you have to have processing procedures sitting behind it to support it because getting it is 1 thing, holding onto it is another. You have to be able to hold onto it. You can go out as the best marketer all of time but if you do not have a process sitting behind it that that is flexible enough to handle that and make you satisfy that customer then all you are doing is marketing, you are never cashing a check or you are going to get something in and your are going to lose the client because your processes cannot sit behind it. The 2nd thing would be cash flow, watch you cash flow, plan those expenditure. Always monitor what your cash flow is, do not get into too much debt, get yourself overly anxious and out in front of you from the marketing side, make sure your capital structure is all settled down. You are at an ‘I have to have this business kind of situation.’
I had a salesman 1 time when I was in envelope and normally it took about 18 months for an envelope salesman to really start getting their legs. He was struggling and struggling but he was getting really anxious, he says ‘Dave what am I doing wrong,’ I said ‘you are selling angry, you need that sale so bad that it is written all over your face and it is like you are going strangling someone around the neck for the order.’ You do not want to get into the situation. So it is marketing, have a process to sit behind the marketing and watch your cash flow
Will: I really like especially the process part of that. Something that we have really started doing a lot lately. I have my daughter that works with me and I am teaching her a lot of new things that she does not know a lot about. The 1st thing I always say is ‘open up Word and let us type this out so that have it for next time,’ I think that is hugely important. Along with that next time, it needs to be done, all she has to do is open up that Word document and I do not have to spend my time teaching her again, I can continue to run the business
Dave: There is a famous book out there for yond entrepreneurs and small businesses called (09:35). What you are doing right there is you are creating a repeatable business and processes to the point where you are building that business away from you and putting it into a piece of paper that someone can reference and say ‘okay, here is this situation I am in, open the notebook or whatever and this is what I do,’ they do not have to call Will and ask him. You do that as much as you can because to build the value of your business you have to build it away from yourself.
Will: That is really good. What is 1 of the most critically important financial events during a business owner’s life?
Dave: When he sells his business. All that work and preparation, un my case it was almost 30 years doing the same thing, building that value just by your actions, building your business and your clientele and your network. But you really do not know what that value is and secondarily it is totally eloquent, it is not montoxed. You do not know truly what the value is. The market will place a value on that but you have to convert it from a (11:13) to a liquid asset and the way to do that is through building value.
Will: Say you go to a networking event, what percentage of the people there do you think are actually in the mindset of building something they are going to sell at some point ?
Dave: Zero. Let me qualify that, maybe those in the mid 50s. Everything goes in cycles, so as you get older you start thinking about other things. If you have been running your business for 20 years you start thinking is there all there is, is there anything more to life? Those people are different, but the normal person is so buy working in their business every day, responding to all the crises, phone calls, customers or the to do list, they very rarely have an opportunity to work on their business. Why am I doing this? What am I building? What is its value? How do I maximize? What are the key elements for building value within a business from a buyer’s perspective? Not from yours, you cannot look at it and say this is what I think. No you have to look at it through the eyes of the buyer because that si the person who is going to write you the check.
Will: I would totally agree with that. I think there are so many people out there trying to get those business cards out, including myself it is really something that I have kind of just started thinking about in the last 2 years maybe, that at some point I want to go fishing. I saw on your website that around 75% of typical business owners’ net worth is tied directly to their company. Tell me a little bit about that.
Dave: If you think about it, you start a business, put your own capital into the business to start it. then you start operating the business and hopefully that business gets to the point where you can gain income off it. You start developing it, and by the development of that business you are building value. It might take addition capital from you along the way or borrowing from a bank or something like that to continue building that business. But when they statistics say 75% of their net worth because that is their largest single asset. For them to be able to build that net worth outside of their business it is very hard for them to do unless you are in a business that has very low capital requirements and you can make a lot of money. Those are out there but they are very few and far in between. So all of your building and your capital is being dedicated to building your own business. Over time that builds and amasses and all that and if you do not really keep track of the value of that business, I have seen people where 90% of their worth is in a business which is totally eliquid. When it comes time to sell that business to fund their retirement or something like that, you really can end up in no man’s land. You might not know what the business is worth, they might think it is worth a million dollars, the market might say it is worth 500. All of a sudden that person has been thinking he has an asset worth a million dollars and he is going to be able to retire and do all that stuff and it is not going to happen. That is a big issue, business owners have to realize the value and this size of that asset as it relates to the total assets for their retirement.
Will: So knowing the value of your business as an owner can help you make other decisions from there on out
Dave: Absolutely. Think about it. For example, and I use this example in seminars all the time, you have a business worth 3 million dollars and you want to get into some initiative whether it is online marketing ecommerce, buy another machine, do whatever which is quite expensive. Let us say that whole initiative could cost 1 million dollars. You ask yourself if you are willing to put that 1 million which is basically 1/3 of your worth against an offering going out there. It causes you to pause and makes you think a little deeper. I remember when I bought my 1st machine in the envelope manufacturing business and it cost $400. It was 1988, I was sweating bullets. But I thought it through and I figured out this is what the company is worth, this is what I am wagering and with machine you can always sell it, maybe take out a little haircut and sell it, but with a marketing program, not so much. So you really have to be cautious about what kind of risk you take going forward and knowing the value of your business really helps
Will: You talked earlier about business cycles too and in particular how they can change over time. Tell me a little bit more about that.
Dave: Business cycles are a very interesting phenomenon. I was in the envelope manufacturing business and there is always this role up and down and you have to be very careful as to read what kind of cycle it is. Are we in an up cycle, are we kind of moving along, drifting downward, whatever. To me, being able to keep your eye on the horizon, as a business owner you are always kind of looking out ahead of yourself about on the horizon about what I see out there. Make some judgments and try to anticipate those business cycles. When it comes especially to the time you want to sell your business you always want to position the time you want to sell your business what I say 2/3 way up the up cycle. Always want to give the guy who buys it a chance to make money because if you feel you are at the top the ride down is going to be quite bumpy for some new owner. He just gives you a million dollars and all of a sudden it craters, he might owe you money, you might be financing the project and all of a sudden it goes down. You want to always give the new owner a chance to see how good it is and keep going with it. Never ever think as a business owner you are in control of the day you sell that business. If you think I am going to run this game, I am going to reach a certain age, and I am going to be 8 years old, I am going to put up a sign in the yard and someone is going to give me a big bag of money, it does not happen!
Will: Oh crap! Now I am going to have to replan everything.
Dave: When you least expect it, someone is going to make you an offer that will turn your head. That happened to me a couple times, I was so young and bulletproof, just like you, charged up ready to go. I missed some tremendous opportunities to sell the business because I was completely unprepared for someone coming to me and entertaining and having conversations with you about buying your business. My ego was as big as the all outdoors. When you start thinking of things and your minds tarts getting in the way it really clouds your vision. So do not ever think you can plan your exit unless you are succeeding and have a succession plan with a child or key employee. Do not ever think that when it comes to selling that business 3rd party you are going to control it.
Will: Do you think that if someone comes along when you least expect and asks that kind of question, should you be armed for some sort of answer? In other words should you know what your business is worth? Is that something that you would have to have a coach like yourself or something in the back pocket? Best case scenario is that what it is?
Dave: Best case scenario, have you ever heard the phrase the 1st 1 who speaks dies?
Will: Sure
Dave: You do not want to be the 1st 1 that speaks but you want to know what the value of your business is, you want to get that person’s name on your dance card, waltz around with them a little bit, talk to them, get them to know you business or whatever, you want to know what the value of your business is, and you want to engage and talk to them, give them enough information to have him/her make you an offer. The 1st 1 who speaks dies meaning if you go out and say I want to make a million dollars who knows you might have gotten 2. Or if you go out and say 1 million dollars the guy might just walk because it is not worth more than 500.
Will: Or it has not been educated and that relationship has not been built
Dave: Exactly. It is hard to do when you are in the business of selling businesses because everyone expects there to be an asking price. That is a different scenario because now you as the owner are going up and marketing your business for sale just like selling a product. But if someone is coming to you, you really want to be coy, you want to provide the information, have the knowledge, provide that information to have them make an educated decision then you want them to come to you and for you to say yay or nay or negotiate.
Will: What did you do when it happened the 1st time?
Dave: I was the guy who had a very high opinion of what his company was worth, did not really know, I did not do what I am advocating now which is know what the value of my business is, and I approached that totally emotionally. I was probably 50% higher than what they buyer thought it was and it was still a lot of money. I was the 1st 1 to speak, then the dance stopped because I was so off the mark that the suitor or buyer said ‘there is too much emotion wrapped in this, it is going to be too unrealistic,’ he just did not want to go down that road. So always, the 1st 1 to speak dies, always know what the value of your business is, entertain and form their conversations but do not be the 1st to put the sign in the yard that says ‘for sale $10.’
Will: Let us say no one shows up and offers you all kinds of money, and you get into an exit planning type situation. I know SBA says around 40% of businesses at any one time are in some sort of transfer of ownership situation. I also read that the primary cause for that failure is lack of planning. So that is something that Metro helps with
Dave: Absolutely! The succession planning piece, people who start this process timeline a little further away from the day they want to exit, it takes planning and preparation. For example, the biggest driver in planning is tax organization. Think about it, you have a partner in your business, I have a partner in mine called the US government. When you sell your business the minimum they are going to get is 40% so that is a big shareholder in your business. What do you want to do? You want to be able to employ tax strategies that we get you legally to minimize that fight. For example, if you are a sole owner sea corporation your tax load on the sale could be up 60 – 65% because you not only have to pay corporate tax but earnings tax and capital gains and earns tax. So you take your 40% rate, add a 20% capital gains rate to it, there you are, at 65%! So those types of strategies need to be developed over time, time is you ally. If you want to try and do that within the year that you are going to sell the business your options are much more limited than they would be if you wanted to start planning your transition from your business 4, 5, 6 years prior to when it happens. You will be able to take advantage of tax minimization strategies, that is a big deal. The other thing is preparing your management. The single most valuable employee group within your company is your managers, you are the least important when it comes to selling that business. There is where a lot of people’s emotions get in the way, they think they are king and everything revolves around them. If that is the case your business is almost worth nothing because when they walk out the door, so does the business.
Will: Then you are back to the whole thing we talked about earlier with the procedures and having that kind of sign already in place.
Dave: Absolutely! It is very important to build the organization away from yourself. If you can go out and take a month or 3 months off and that business does not miss a beat, it just keeps going, you are in the right place.
Will: That is real good. Is there a difference between exit planning if your son is taking over the business versus some internal employees and even versus Joe average who just happens to want to buy your business?
Dave: Well there are 2 different events going on, Joe average is an unrelated 3rd party buyer, we treat those differently. When you have your son or a key employee buying the business there are 2 things you need both this, both of those entities have no money and they will not be able to write a check and you go off to your life beyond business. There is going to be financing, when does control move from the organization from an ownership standpoint, all of those things start getting into a more complicated. They have to earn their position in, do they have the skill and the intellectual ability. Part of our process in succession planning is to do analysis, assessment of individuals against peer groups to see if they have the financial management abilities, people skills and all these things that are so important for people running a business. We all start a business and learn that stuff OJT, sometimes we learn it sometimes we do not. It gets very hard. You have to find out because you are handing over your business to someone who is going to owe you money. You are going to be carrying risks into the future, you have to minimize your risks with proper due diligence, elect the anointed 1 to take your business forward because they are going to have to use that business to pay you back. So you have to be really careful in there because they do not have any money.
Will: Those are good tips. You also help people buy businesses. So what kind of tips do you have for people in the situation where they may be looking to purchase a business?
Dave: 1st thing is developing a passion, you have to have a passion for the business. It cannot just be a financial plight. Something is going to have to get you out of bed in the morning to light the fire, help you be creative and drive the business. 2nd you have to make sure that the business itself can support your lifestyle. Is it in the cards? Can you make money at this business? Can you support your family and pay the mortgage? Can you put gad in the tank? Can you make a living at it? Those to me are the 2 nest elements, you have to have the passion and can you make money at it. The final thing would be what kind of industry are you in? Is it a service industry or a (31:4), think about it. I would not invest in an envelope company right now. Someone might be as jazzed about envelopes as I was and look at it and see that they would make a little money out of it, but then the technology is just like look out you are drinking out of the fire house with all the change coming at you. So I think those 3 elements are critically important
Will: So if someone just want to buy a business you guys can help with that side of things as well
Dave: Correct! Typically we represent sellers, but every seller needs a buyer. So having the knowledge of what buyers are looking for helps put buyers and sellers together. A lot of times we will put those folks together without even going out to the public markets. When you see someone with this aptitude and you introduce them, talk together and all of a sudden there is a deal made.
Will: How can people learn more about building their business value?
Dave: Talk to me, go to our website metrobusinessadvisers.com, tremendous amount of information on their as far as tips to build your business, build value, how to start positioning your business. I am very open, I am an not transaction driven as much as process and accomplishment. I am not out there looking, we are going to list your business, then we are going to sell it and I am going to get my commissions. If you are close to selling your business then I want to start looking at it in a hole and say ‘okay from a tax standpoint this is going to be your walk away from the closing. Is that going to be enough, can you live on it. what is your tax structure? Is there a way for us to build the value of this business?’ Let us say we do a business evaluation and find out the business is worth 500 but you need it to be a million, what can we do possibly to increase that value to a million? Those types of things, it is not all about transactions, it is all about the process and what I truly believe in is helping a business owner achieve their life beyond business. That is what we are all doing this far, to some day have our own freedom.
Will: To go fishing!
Dave: That is right, go fishing!
Will: I really appreciate you coming on the show today. So people can go to your website, metrobusinessadvisers.com, they can also give you a call and ask questions I assume. There are also things on your website that they can tons, more information on too, I know that you have a podcast out there that answers a ton of other questions about some things. My guest today is Dave Driscoll from Metro Business Advisers! Thanks for joining us today and I hope that we helped you navigate the rapids a little better.
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