After The Webinar: Built to Last - or Built to Leave

Today we follow up from our Webinar, "Built to Last - or Built to Leave", and discuss some of the details that we couldn't cover in the event.

What happens to your business after you’re no longer running it?

At some point, all business owners have to think about what's next for themselves and their company. Their actions impact their families, employees, customers, and community. Richard Veltre and I will spend 60 minutes going beyond the paperwork and planning to address the hard questions most leaders avoid. This is for all business leaders that are looking forward and wondering what's next.

[00:00:10.19] - Alice

Hello. Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:44.12] - Dan Paulson

Welcome Back to Books in the Biz. Here we are. Rich, how are you doing?

[00:00:48.14] - Rich Veltre

I am doing well. How are you?

[00:00:50.20] - Dan Paulson

I am doing good. I'm doing good. Seems like a long time since we talk to each other. I think a whole 5, 10 minutes maybe, right?

[00:00:57.20] - Rich Veltre

I don't know. I'm not even sure it was that long.

[00:01:00.13] - Dan Paulson

Might not have been that long. But anyway, our episode today is basically I'm calling after the webinar. So we just did a webinar called Built to Last or Built to Leave, and basically talking about what you need for succession. And I thought, what the heck? Let's take 20 minutes to do our own debrief here, and maybe I'll share a couple of slides that we got from the event. We're not going to redo the entire event, but we can give you a have a peek into some of the concerns that we had, which was what we were bringing up here. So let me share this. It's over here. We don't need to show the whole thing. But how do you think it went?

[00:01:45.25] - Rich Veltre

Well, I thought it went well. I mean, I think we definitely have organized the fact that it doesn't always come down to the financial. And I think the vast majority of what we talked about in the webinar was not financial, other than maybe alluding to it. And so I think it really comes down to a little bit more to the owner's mental state or mental capacity to talk about this subject, because it's a difficult subject. It's coming to a close. Or as we said in the seminar, it's really not coming to a close. It's leading the company to where it's going go after you maybe relinquish control. So that doesn't necessarily mean end. And I think that's something that people need to get past. And don't call it end, because you may still be involved with it after you relinquish control. But set it on a path that makes sense, because you want that legacy to continue.

[00:02:52.06] - Dan Paulson

Yeah. Well, and in some cases, you might not even relinquish control right away. Maybe it is more of a gradual sell off. You've probably worked with or know of some ESOPs out there where maybe the owner still has a lot of controlling interest for the first three to five years before enough other employees buy out that equity. So there's a number of different ways that it can go. We try to touch on things that I don't think are always discussed in other topics related to succession and open up questions from the group on it. And I think we covered some key points. But like you said, a lot of this is really boiling down to, it's more about the owner, the emotion that's tied in, some of the challenges are more internal, really, when it comes down to talking about things like succession. It's building comfort in, maybe things aren't perfect for you, and nobody always wants to share the things that aren't working right. We always love sharing when things are going extremely well. But it's the things that aren't working right, or really the things that we've to fix if we are going to pass the company on to somebody else, because that's where the value, that increased value is going to come in.

[00:04:08.19] - Dan Paulson

So I pulled up one of the slides here, the succession gap. I should have a plan But we always make excuses of why not or why not now? And it's everything from don't have time to it's too early, team's not ready, too complicated of a process. All these things are good excuses. But really think of all the other stuff. I don't have time. Well, did you ever have time to start a business? You must have made time for that. And I'm sure there's client needs, there's employee needs. You still end up making time for those things. As far as too early, maybe we should spend more time talking about this. A number of examples that we brought up in the podcast were situations where the owner admitted that they weren't ready to sell yet, but due to health reasons, due to accidents, due to a number of other issues that were unexpected, it forced their hand. And then it's a mad scramble to actually get it done.

[00:05:06.13] - Rich Veltre

Yeah. I think that a lot of the conversation that we had, really, when you talk about it's too early, I don't think there is any too early. It doesn't necessarily have to be where you are ready to do a full-blown plan, where you're really nailing down to this is what's going to happen. Maybe it's just a little bit of how can I start to prepare? And for that, I'm starting to look at it internally. I'm starting to look at it myself and saying, I'm not ready to retire for another 10 years. Should I just use one of these excuses and not think about it anymore? Or should I say, Well, this year I made this much, or if I take this and I assume what some of the adjustments would be on a buyer, what would my value be? What would my value proposition be? What would my growth rate potentially be? What can I assume that I can grow this to so that when I'm ready to actually pull the trigger on the retirement or on a true succession, what value would I want to be at? Maybe I'm not there. Maybe I'm off a little bit.

[00:06:18.11] - Rich Veltre

Maybe my calculations change over now to 10 years from now. But I have that option because I'm starting to think about it now as opposed to waiting 10 years and then say, Okay, I'm done. Because I can't have any options at that point. Once I say I'm done, that really means I'm done and I take whatever value I can get.

[00:06:39.19] - Dan Paulson

And sometimes that's okay. I mean, there are certain businesses that I would call the more lifestyle business. It provides a good lifestyle for you. It provides a good living. Maybe it provides you with enough to put away for retirement. So you just do put up the close sign and call it a day. But we mentioned in the podcast or in the webinar about some of our other podcasts, and when we were talking with Paul Curtis a couple of weeks ago, he mentioned that about 90 % of the people that he's meeting with are counting on the sale of their business as being their retirement fund. So when you consider that there's that high of a percentage that are counting on that business to provide enough for them so that when they're no longer working, they can still maintain at least as close to the same lifestyle as they had while they were working in their business. That's that to me is a huge factor and something we all got to consider.

[00:07:38.28] - Rich Veltre

Yeah, and I think that the other thing maybe we didn't talk a lot about is that a lot of these business owners that are coming up against this now are the baby boomers, right? They're at that point where they're already in that retirement phase and they're looking to figure out what's the next step. And the prediction right now in the financial markets is that there's, I forget, some ridiculously high number, like 80 to 140 trillion is the range. They're basically looking at in the trillions of dollars of wealth transfer from these businesses that either need to go to a child or down to the next level, or they need to be sold, because otherwise the businesses close. So the expectation is you've got $80 to $140 trillion of business value that's going to transfer to another owner over the course of the next, say, 20 years. And so when you start to think about that, I want my biggest piece of the possible pie. Because 20 years from now, I'll be 75. So I would love to take advantage of that pie, while there are people who are actually interested in it, because I don't know what it'll be in 20 years.

[00:09:02.23] - Dan Paulson

Exactly.

[00:09:03.14] - Rich Veltre

Why can't I get involved now? Why would I want to wait till the end of my 20 years, in 20 years from now, say, Gee, I wonder what the value is left, and how many buyers are still available to buy my business at that point? Because what if they've all bought businesses up to that point, and I'm the last one at the table? The run of the litter, the last dog gets no pretty much doesn't eat.

[00:09:29.27] - Dan Paulson

Well, and there is going to be some truth to that because we have fewer and fewer people being born. So you've figured 20 years from now, you're talking about the kids that are probably in grade school getting to the point maybe in their career where they would start thinking about buying a business. And are there going to be enough people to buy the companies that are going to be out on the marketplace? So you really have to put yourself as the most attractive girl on the dance card if we're going to use other analogies here, you got to be the one that they want to talk with. And that's going to be a big part of when you look at selling, what's your competition look like? If you can look across your industry for similar businesses like yours, and there's going to be other ones out there, what's going to make your business more attractive than theirs? Are the balance sheets clean? Is it profitable? Can that profit be shown to go to the bottom We're going to use Paul Curtis a lot here because we've had him on a couple of times. But he's talking about things where there's addbacks, and depending upon how you take money out of the business, affects how you can add money back in.

[00:10:45.10] - Dan Paulson

Towards the value of that business, of that asset. And if there aren't ways that he can backtrack and say, well, this is where that money went, and this is why it's an expense, and now that expense goes away when you take over the business, it's very hard to justify the number that you probably want to get.

[00:11:05.03] - Rich Veltre

Yeah, I think it's interesting, right? Because I think for some people, it's a change of how they may have managed their businesses up to this point, right? I mean, there's plenty of people out there who are fighting for the lowest price option, right? They want to be the most efficient because they want to sell it at the best price and they could beat everybody else in the market. Now, that's still a competition with your competition, right? It's still It's still that you are competing for the sale. Now, when you compete for the sale of your business, you don't want to race to a lower price. You want to race to a higher price. So you do have to change a little bit of which way you're trying to look at this. But it's still the same game. It's still the same process. You're still trying to beat the other player at whatever game it is you guys are trying to play. So your strategy has to switch. You don't want to be the low price. If you're already a high priced player, you're already selling things at a higher price, you already know the game.

[00:12:06.29] - Rich Veltre

You're a leg up already because you're already able to sell because your product is better. And you're not forced to get into a punting game over, let's get the lowest possible price and beat the other guy out. So if you're already in that game of selling things at a good value and having the best product, now just sell the You're the business the same way. You're the best business.

[00:12:33.21] - Dan Paulson

And you got to look at opportunity. I guess is the best way to explain it. You have to be able to share that story, that opportunity that your business is over somebody else's business, showing growth. That buyer has to see what heights they can take your business to versus where you're at. If they see something that's going to require a lot of fixing up in the beginning, it's going to be very costly that way, it's going to be very hard to convince somebody to buy on for a good price. They're going to want to low ball the offer because they realize they're going to have to make significant investments in talent, possibly equipment, possibly building And then there's the whole sales aspect of it. So then you start looking at the numbers. We touched a little bit on due diligence, but maybe you can talk more about that here. There's a whole due diligence process that goes in. So there could be a letter of intent given for a specific amount of money that they're willing to buy the business for, but that's based on a number of contingencies. It's based on once they dig into the books and do some of the forensic accounting, what are they going to find?

[00:13:42.23] - Dan Paulson

Are they going to find something out that they didn't like or that really is going to detract from the profitability of the business? And then it's going to lead to them wanting to pull out of the deal or significantly reduce the deal. And you probably dealt with some situations like that where you're going through the paperwork and all the numbers, and all of a sudden numbers aren't adding up the way they should, or there's something that wasn't mentioned. And we're not saying that anyone's trying to be deceival on it, but there's a lot of information that gets shared. And Sometimes you don't realize what's important until somebody else starts asking.

[00:14:20.04] - Rich Veltre

Yeah, I think first point, everybody likes to talk about EBITDAs and adbacks. You come up with your EBITDA, you do your adbacks, because the goal here is somebody wants to buy the... They want to put a multiple on your normalized earnings. They use EBITDA, right? And then they figure out what a normalized every year, what they can expect the business should do. So they go through and they take everything out that's an anomaly or a one-time expense. So they take that out and come up with normalized EBITDA. And then they apply a multiple to it. And that's where you want to get to adjust it EBITDA. You want to add back anything that, oh, when I take this business over, I'm not going to have that expense. So they'll do that as an add back, and that actually helps you out because it raises your value. Problem is, they're not all addbacks. They can be negative. They can be the wrong way. So everybody likes to talk about the add back because that makes it like, oh, the value is so much bigger, and everything is so much more wonderful. Then you hit the one that takes you the other way, and Everybody.

[00:15:30.15] - Rich Veltre

And all of a sudden, it's doom and gloom. Clouds come over, your lightning strikes. It's crazy stuff, right? Because nobody wants to talk about the bad one, right? But they happen. And the other thing you want to make sure of, like you said, due diligence. I had one example where somebody came in, and I thought the books were the cleanest I had ever seen. They were perfect. There were a lot of people working on them for a long time. They were audited. There was no audit adjustments. And all of a sudden, somebody said, did you Have you paid all your sales tax? Have you paid all the sales tax on? And we're looking at it going, we rent space. Like, majority of what we did, we had warehouses all over the country, and there was all these rentals. But the problem is, sometimes when you do the build out of that warehouse, you buy personal property. And when you buy the personal property, certain places will actually tax personal property under the sales tax laws. And two of our biggest warehouses were in Indiana, and Indiana does that. So we had to go back and now do an additional piece of an audit to basically see, did we pay all the sales tax we should have?

[00:16:40.17] - Rich Veltre

And there were a couple of pieces there that we didn't pay sales tax on, and we knew it. Now we had to go back and extrapolate what's the risk? What's our number? What's the expectation here that we're going to sell this to someone who's coming in as a partner? And when they come in as a partner, they could be on the hook for the sales tax.

[00:16:58.21] - Dan Paulson

Right.

[00:16:59.22] - Rich Veltre

Okay. So we had to indemnify them. We had to do all these legal steps. I forget the amount of money that it was going to cost. They wanted to put it in reserve or they wanted to pay it. Essentially, the existing owners realized the mistake, said, We'll take care of it And they were basically telling the new guys, You won't have to worry about it at all. But it was a costly piece. It was a costly number. So you never know what you're going to find when someone asks a question that you didn't know to ask or you didn't think to ask or internally, it just got missed.

[00:17:36.11] - Dan Paulson

Right. Yeah, you need to protect yourself as much as the other person is protecting themselves. So this is where knowing more in the beginning and really preparing, looking at those numbers ahead of time. It's almost like doing a home inspection before you sell your house. It can really be helpful to minimize some of that risk. I don't think you're going to catch everything, nor should you expect to. The main thing you're to do is minimize the surprises to yourself, to anyone else that's looking to buy the business. The more prepared it is for sale, the better off you're going to be. And I'll look at it from another perspective. Let's say you're not going to sell your business. Wouldn't it be great, though, if your business operated well without you being there? Isn't that more valuable to you? Can you go do things you want to do? If something were to happen to you, let's say you just get injured and you can't work in your business for three months. Wouldn't it be better to have that business run and keep paying your bills, and your health insurance, paying everything else. And when you come back, still no things are trucking along the way they should be.

[00:18:39.16] - Dan Paulson

It's not always about selling the business, it's about getting it prepared so that it can run on its own. I usually use the phrase turnkey because to me, that's really what you want to make your business do. You want to either automate it enough or you want your employees involved enough that it could run well without you, and in some cases, better without you, in my mind.

[00:19:00.25] - Rich Veltre

Yeah. I can definitely say that there's plenty of surprise stories out there, right? I got a call one time from a woman I knew who said, hey, Are you interested in buying an accounting practice? And I essentially said, Okay, what are you talking about? She was like my son's tutor. She's not in accounting. What are you talking about? Her brother was an accountant, and he passed away. He had a heart attack, and just out of the blue, no one expected it. So now she's got to practice. She's trying to help because the wife didn't know anything about accounting. She didn't know anything about accounting. She knew very little, but she worked with the brother during tax season. So she's trying to basically hold the thing together with some duct tape and a couple of pushpins. And there was no succession plan. There was nothing in place, there was literally nothing they could do other than try to find somebody to take it over. So she was essentially trying to hold up enough that they could try to sell it to somebody, and that would be something they could use to support the wife or whatever in the family.

[00:20:18.17] - Rich Veltre

So you never know what's going to happen. And like you said, had he grown it to a certain point, had there been employees in place, had there been Sort of a takeover option, doesn't necessarily mean that you have to take it. Have the option in place. Have something in place that, if something were to happen to you, you'd know that it could go this way, and your family is protected. Because now, at that point, if it were me, I'm done. None of this helps me, necessarily. But I don't necessarily want to leave that to my wife and kids.

[00:20:59.26] - Dan Paulson

Right. Well, and the other part that we touched on in the webinar was, really, this is more than about just you. If you have employees, you have employees that have families. I would want them to be protected. I would want to make sure that they had something to make sure that they were okay. And if I can do my job or I can actively be involved in the company every day to make sure it's going, I'd want to make sure that they have the power to do that. Because in the end, if I'm not here to take care of those folks as the business owner, then somehow something's got to happen because otherwise the business goes away. You now have employees and families that are put out immediately. And let's face it, if if things go south right away, you get hit by the proverbial bus, who's going to cut that paycheck that week? If that's you and you're the only one that can do it, well, now somebody's not getting paid They're counting on that money. They're also counting on any benefits they've racked up, any vacation, whatnot. If they have to find a new job, that's going to be a start over process.

[00:22:12.12] - Dan Paulson

Then there's your clients. Your clients count on you, and they need you to be around. And if you're not available to them or your company is not available to them, that also creates a lot of problems for them as well, especially like manufacturing. I think most manufacturing now is more just in time approach. So it's not like people are sitting on tons of inventories of parts that they can get by for a couple of months till they can find another supplier. Usually, the suppliers they're ordering are going to be utilized within that week and going to be gone at most. Sometimes if you're large enough, it could be almost daily your shipping parts out. And now all of a sudden that business drives up and you're putting your clients out on a ledge as well. So there's a lot of things you have to look at here. I strongly encourage businesses to really start taking a snapshot of what they got going on, what they need to do. They can ask you or I any questions, and maybe that's the best way to wrap this up here. What's the best way to get a hold of you if they want to start looking at their business and seeing what they need to do?

[00:23:18.16] - Rich Veltre

Yeah, best bet is send me an email at rich@xcxo.net.

[00:23:23.01] - Dan Paulson

And you can get a hold of me at dan@xcxo.net. Rich, great webinar. And And great talking to you today. And I'm sure we'll have some interesting subjects to talk about next week.

[00:23:35.19] - Rich Veltre

Absolutely. 100 %.

[00:23:36.25] - Dan Paulson

All right. Want to take it away. Bob, take it away.

[00:23:38.11] - Bob

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