Your Multimillion-Dollar Exit with Wayne Zell

0:01Boom! Shake the room, Fire Nation. JLD here and welcome to Entrepreneurs on Fire. Brought to you by the HubSpot. podcast network, the audio destination for business professionals with great shows like online marketing made easy. Today, we'll be breaking down your multi-million dollar exit. To drop these value bombs, I am brought to Wayne Zell in the EO Fire Studios. Wayne is an expert in business succession planning with a unique process who has been the architect behind hundreds of transactions that have made his clients millions. And today at Fire Nation, we'll talk about the different ways to sell a business, the secrets that lawyers and investment bankers used to gain the upper hand in negotiations.

0:38We'll talk about valuing your business and so much more. And a big thank you for sponsoring today's episode goes to Wayne and our sponsors. Business Made Simple, hosted by Donald Miller, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Business Made Simple takes the mystery out of growing your business. Join my friend, Donald Miller, each week as he shares value bombs on topics like the secret to making better marketing decisions. Listen to Business Made Simple wherever you get your podcasts. Many EO Fire listeners have launched non-food franchises and Fran Bridge Consulting has guided them.

1:16Fran Bridge's founder and frequent EO Fire guest, John Ostenson, has done more placements than any other in the country and his service is free. Sign up for a consultation with John or get a free copy of his book, Non-Food Franchising, at FranBridgeConsulting.com. Wayne, say what's up to Fire Nation. and share something that you believe about becoming successful that most people disagree with. Well, John Lee, thanks for having me on the podcast. It's an honor and a privilege to be here with you today. And something that I believe about being successful that most people disagree with, I think that being successful doesn't mean just economic success.

1:58It doesn't mean achieving nine figures of wealth or whatever it is that you believe is success on the economic realm. I believe that being successful is achieving something that you haven't achieved before that is a goal that you set for yourself that allows you to be recognized by other people as being successful or just inside your heart you feel successful because you've helped somebody out. You've been charitably inclined. You've achieved certain levels of performance in athletics or academics or in your profession. All of those things mean success. And I don't think everybody agrees with that.

2:37Wayne, what a great start to what Fire Nation will prove to be a fantastic conversation about your multi-million dollar exit. Now, there are, Wayne, a lot, and I mean a lot of ways to sell a business. Let's talk about a few of those now. Sure. I mean, obviously the most exciting one and the one that gets people salivating is, I'll take my company public, like all the folks out in Palo Alto or Texas, or even here in Northern Virginia, there's a lot of people that take their companies public and they can get liquidity from that event. But most people aren't as fortunate and they cannot achieve an exit by selling your stock in the public market.

3:22So you can sell it to a strategic partner, somebody that is really interested in buying you because of your services or your products or your technology or unique things that you have about your business that will fit nicely into their business. You can sell it to a private equity firm or a family office or an investor group that really sees the long-term wealth projections that your business will generate for them as they integrate them, you into their business. You can sell it to your management team if they have capital or if they're so inclined. That's not an easy task. And you can even sell it or gift it or do a combination of both to your family.

4:03So those are the most common exit strategies that we see in our practice, at least. In Fire Nation, this is one reason why we bring experts on to talk about their areas of expertise because it allows you to get the full picture, to look all around the topic and the subject. And as a little segue to the next conversation, learn some secrets that you might not otherwise know because there are secrets that the lawyers and the investment bankers use to gain the upper hands when it comes to negotiations. So if Fire Nation, Wayne, finds themselves in a negotiation with lawyers, with investment bankers, what are these secrets that we need to know?

4:47Well, first, get a good lawyer representing you. Yes. That's real important. But then also get somebody who's been through this to help advise you. And some of the secrets are, having been on both sides of the transaction for many, many years, some of the secrets are, you know, how can they buy you for the least amount and get the best tax write-off that they can get? So from your perspective is, how can you maximize your proceeds and minimize your tax out-of-pocket costs? So a lot of what I do is tax planning associated with the exit strategy. as a tax lawyer from day one and an accountant as well.

5:27I've learned that you've got to really take into the tax considerations from day one. If you don't do that, you're going to be missing out on perhaps millions and millions of dollars in your exit. So that's one of the secrets. Another secret is how do you negotiate with these people? They are always thinking of angles to try to get the best of you, Not because they want to hurt you, but because they want to get the best deal for themselves, for their investors, right? So how do you do that? The best way to do it is to know and anticipate what they might be saying to you and anticipate the responses that you're going to give them.

6:04Why your business is worth more than they think it is. Well, you've done some analysis of your own, and here's why you think it's worth more. Here are some of the secret sauces that you have in your business that they haven't taken into consideration in valuing you, or maybe they discounted it heavily. And there's ways of influencing the price upward by taking these secrets into consideration. So the investment bankers, the buyers, and the buyer's counsel are always looking for angles to get the best deal for themselves, for their clients. So why not know what it is that they're going to do and what it is that they're going to propose to you?

6:40And that's what the book, Your Multi-Million Dollar Exit, tries to anticipate. There's a lot of guidance in a couple of the chapters on what to anticipate and how to react to when they come up with some of their twists and turns in negotiating with you. And there always will be twists and turns because like Wayne shared, Fire Nation, they're doing their job. I mean, that's what they're supposed to do is try to get the best deal for themselves, the best deal for their clients. And it's like when you go and buy a car, you don't just walk in and say, hey, I'm just going to pay whatever is on the sticker price.

7:12You say, hey, I know there's a little wiggle room here, and I'm going to see what wiggle I can get in this room. Now, I want to talk about something that I think a lot of people are interested in. I mean, that's one reason why Zillow is such a popular website. Everybody just loves to say, how much is my neighbor's house worth? How much is my house worth? How much is my parents' house worth? How much would this house in this location, this neighborhood be worth that I would potentially like to buy someday? We love knowing the value of things or the estimated value of things. How can we, Wayne, value our businesses today?

7:51And then let's talk about how we can increase that value before we go to sell. Great question. One of the first things that I would suggest to you is don't talk to another person that sold their business in your same industry or even your same size and just extrapolate what they sold their business for to your situation because every business is different. And so you hear that there's a multiple of earnings that you can apply. And so if you take this multiple that everybody else is using in your space and apply it to yourself, then that's what your business is worth. Maybe, maybe not. There are techniques and methodologies that we use to value businesses.

8:32Appraisers, certified valuation analysts, are experts in doing this. And they take into consideration your earnings. They add back things that may not have recurred or that may not recur in the future. They add back extraordinary items. They subtract things that may have been super profits that you generated in one year that you might not generate in future years. So they smooth out your historical earnings, but they also have to know what your projections are. You have to be able to project into the future with some reasonable certainty what your revenues are and what your expenses are and therefore what your earnings are.

9:08Because the value of a business typically is based on some multiple of earnings before interest, taxes, depreciation, and amortization. And if you don't know what those terms are, and if you don't know how to calculate earnings and the methodology that they use, you need to get your CPA or evaluation person involved to help you do that. That's number one. So what are my earnings today? What are my projected earnings tomorrow? And then that multiple is going to depend on a variety of factors. It's dependent on the cost of capital. So as interest rates are increasing, so does the cost of capital to your business.

9:46and the discount rate that you can apply in valuing your business and the multiples that you can use will decline as the interest rates rise. And so all of these things are facts. So it's the time when you're selling it. What is the marketplace looking like today? So the marketplace is a little bit light in terms of mergers and acquisitions. If you look at 2023 as an example, but things will change things will will turn around and so many of our our clients are asking whether they should wait to sell their business until things have turned around until the the fear of recession has passed so valuing your business today is understanding what your earnings are today what your earnings should be and will be in the future based on your projected growth and then applying a discount rate and a discount and a multiple that allows you to accurately calculate what the value is today.

10:43And most people tend to overstate the value of their businesses because they believe it's worth a lot more than it might actually be. And so if it's not worth what you think it will be and what you need it to be when you exit the business, meaning that there's a certain amount of money that you want to be able to take out of the business as you work in it, but then there's also a certain amount of money that you want to be able to take out of the business when you sell it after taxes. So if it's not enough today, then there's a gap in the value of what you want it to be worth versus what it's worth today.

11:15So we have to figure out what the value drivers in your business are. Is it a lack of sufficient marketing and sales activity? Do you not have a good enough management team to transfer the value that you've built without you being involved? Do you have sufficient processes and policies in place so that a buyer can look at your business and say, hey, this is a turnkey operation and all I need to do is pay for it and plug it into my business and it'll work beautifully. So it's figuring out the value drivers and what your gaps in those value drivers are and how to fill them. You're going to involve different people to help you with different things, whether it's financial, whether it's business development, whether it's manufacturing and product development, whether it's protecting the climate, if that is something that you're concerned about and being socially responsible, whether it's protecting your employees and keeping your employees motivated.

12:13All of these things are value drivers that might affect your business, and you need somebody to come in and evaluate that. And so the book does talk about that in significant detail as part of the strategy that you have to use to figure out what your business is worth today, what you need it to be worth tomorrow, and how to fill those value gaps. Wise words from an experienced man, Fire Nation. And I hope you are asking yourself those questions. What are the value drivers of my business? And we have a lot more to talk about around this topic when we get back from thanking our sponsors. Fire Nation, the holidays are near, and I know you're rocking your year-end goals.

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15:35John has served as an Inc. 500 franchisor and is a multi-brand franchisee himself, and he does more placements than any other in the country. Sign up for a free consultation call with John today or get a free copy of his book, Non-Food Franchising, at FranBridgeConsulting.com. That's FranBridgeConsulting.com. So Wayne, we're back and we're talking about your multi-million dollar exit. And in every equation, there are buyers and there are sellers. And in this conversation right here, we're talking about potentially our listeners, Fire Nation, being a seller of their business, exiting their business, hopefully for multi-millions of dollars.

16:17So let's get detailed about what the buyers are actually looking for in their purchases. So most buyers are looking for a really strong management team that can continue running the business even if you're not there. So if you're a founder and you own 100 % of your business or 40 % of your business and there's two founders and maybe you've allocated some of your equity in the business to your key employees, you've got to make sure that if you're not there, this business will continue to hum along. And so the buyer is looking at the management team and the capability of the management team to continue the humming of the business so that it can generate the profits and the revenues if you're not there.

17:00That's what we call transferable value when we're doing business exit planning, business succession planning. That's probably the most important thing. Then another factor that the buyers are looking for, they're evaluating your source of revenues. Do you just have one big customer that's generating all these revenues? If you lose that customer, what's that going to do to your business? It's going to decimate the business. There's not going to be anything left. So they're going to deeply discount the value of the business if there's one customer versus having a great variation or diversification among many customers where one customer doesn't consist of more than or comprise more than, say, 5 % of your total revenues.

17:42I've got a client that's getting ready to sell, and they've been doing some analysis on the valuation side. And about 25 % to 30 % of their revenues comes from one government agency, a significant government agency. And that's highly risky, except that within that agency, there are many different departments that utilize this particular client. And so if they have many different departments utilizing the client, then it is actually more diversified than you might imagine. So that's number one. Number two, rather, is your diversification of your customer base. Here's another example. When you're getting ready to sell a business, the buyer is also looking for your source of supply or your source of manufacturing.

18:30Way back, I took a company public in the early 90s, and it was a pen computing company. and all we had was one source of supply. We had IBM as the manufacturer of our product. So IBM really dictated the terms of the manufacturing and they were quite harsh because they could control how they were going to manufacture this product and what it was going to cost us. And because there was only one source of supply for this particular product at that time because it was cutting edge, it was state-of-the-art, there was nobody else out there doing this, they sort of dictated the terms and it ultimately led to the demise of the company so one vendor with one source of supply so the buyers are looking at all of these things in terms of evaluating whether or not they're going to pay full fair market value or full value in terms of what you're looking for that's why you can't just apply any you know any single multiple to your business because you've got to take all these factors into consideration if you've got a government contractor, for example, is the government contractor doing work directly with the government or are they doing it as a subcontractor as opposed to a prime contractor to the government?

19:43If you're doing it only as a sub, again, you discount the value of the business because the prime dictates the terms, not the government and the government's not your direct client. So that may have an impact on your valuation. All of these things are what the buyer's looking for. If the buyer's looking at your company for intellectual property or technology or software prowess, how likely is it that you're going to lose that edge that you've got in the market, particularly if it's not a patented technology? If it's just a technology that is something that is really cool and you're first to market with it, how easy can you be displaced or can your technology be disrupted?

20:23And you see how fast technology is changing in the marketplace. So the buyer is looking at why are they buying your company? Are they buying it just for the revenues and profits? Highly unlikely, unless it's just a private equity firm that's looking to bolt on your platform onto their platform. If they're looking for something special, particularly a strategic buyer, they're going to be really digging into all the nuances of your business. But it always starts with the management team. Fire Nation, we call this a value bomb heavy episode. For those of you that aren't driving or running, you're taking pages of notes because Wayne keeps dropping these value bombs.

21:00Now, let's be honest, Wayne, a lot of business owners, especially within Fire Nation, they love their team. Their team's the reason why they were able to build such an amazing, successful business and help them hopefully get this multi-million dollar exit. So they want to take care of them after the exit. How do we do this? You know, that's a great question. I've seen situations where the seller does not take care of the team and the team leaves. The company sold and everybody bolts. I saw it in a sale of government contractor to a big government contractor back in the early 2000s. The founder got what he wanted.

21:37He could retire, basically, and everybody else had to leave because the purchaser did not care about the employees. They just cared about the contracts that they were buying. And I've seen this a lot with private equity buyers, unfortunately. I mean, not to disparage private equity because I deal a lot with them. But the private equity buyers are looking at the metrics, the finances, the profits. And if the management team doesn't deliver what they had promised to deliver from the get-go, their jobs are in jeopardy. So how do you protect them? As a seller. Number one, try to get employment agreements with the buyer so that your team can remain employed for at least some reasonable period after the closing of the sale.

22:23Number one. Number two, and maintain their base comp. So these are discussions that should be had early on in the negotiation of the transaction. It's not just about the purchase price. It is about taking care of the team. Number two, perhaps we can negotiate retention bonuses. Maybe the seller has to pay for some of that retention bonus or all of it. Maybe the buyer will subsidize it as part of the purchase price. But a retention bonus will incentivize one of your key employees or all of your key employees to stay with the company for a certain period of time after the company is bought. And you want to protect them from being terminated without cause by the buyer.

23:05Or if the buyer tries to reduce their salary or change their arrangement after the sale, then that would be good reason for the employee to leave and still get the retention bonus. and then making sure that the non-compete agreements that are being negotiated with these employees are reasonable and fair so that they're not prohibited from going out and trying to earn a living after the closing if they are not happy working for the buyer's company. So there are lots of factors that go into this, but I think those are a couple of suggestions that I would make to make sure that your team is happy.

23:42But I think even more than all of the economics, you have to evaluate the culture of the buyer. What is the culture of the buyer? What type of environment do they operate in? How are employees treated by the buyer currently? So that requires some due diligence by the seller to actually sit down with the buyer's management team and some of the people that may have been acquired by them in the past and doing some due diligence to find out, is this a place where I want to be or I want my employees to be after the deal is closed? Some of the founders just want to get out, right? They want to sell their business.

24:20But the ones that really care about their employees are going to evaluate the culture and the values and whether the values of the seller are going to mesh and mix nicely with what the culture and the values are of the buyer. And so that would be one of the first things that I would investigate if I'm really concerned about my employees and preserving their happiness and taking care of their families going forward. So much fantastic advice. Fire Nation, I know you're loving this. So Wayne, what does Fire Nation need to do if they want to learn more from you, if they want to connect with you? What is your one key piece of takeaway advice you want to make sure our listeners really get?

25:04I'd encourage you not not to sound mercenary, but I'd encourage you to buy the book your multi-million dollar exit It's available on Amazon. It's available on my personal author's website waynezell.com And in that book their checklists there are strategies their processes That it's based on 37 years of experience as a lawyer and 43 as a cpa I've been doing this a long time and I really love to teach If you want to get in touch with me and talk about your specific situation, you can reach me at wayne at zelllaw.com. But I love to help entrepreneurs. And we've helped hundreds and hundreds achieve successful exits.

25:47And it's all about thinking about the exit at the beginning. So don't wait until the last minute when you're ready to sell the business. Start thinking about it when you're building the business. Today. Now. So Fire Nation, that's a great takeaway because why wait? Start now. Employ these strategies. Learn from them. Listen to this episode again. Read Wayne's book. Reach out to him. When somebody gives you a way to contact them, to reach out into their minds, do that thing. Take that action because you're the average of the five people you spend the most time with. You've been hanging out with WZ and JLD today.

26:25So keep up the heat, Fire Nation. For links to everything we talked about, visit eofire.com. Just type Wayne in the search bar. The show notes page will pop up with links to everything that Wayne mentioned today. And Wayne, I want to say thank you, brother, for sharing your truth, your knowledge, your value with Fire Nation. For that, we salute you and we'll catch you on the flip side. Thank you so much. It's been a pleasure being with you today. Hey, Fire Nation, a huge thank you to our sponsors and Wayne for sponsoring today's episode. Fire Nation, are you ready to rock your very own podcast?

26:58Check out our free podcasting course where I will teach you how to create and launch your podcast for free, freepodcastcourse.com. I will catch you there or on the flip side. Business Made Simple, hosted by Donald Miller, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Business Made Simple takes the mystery out of growing your business. Join my friend, Donna Miller, each week as he shares value bombs on topics like the secret to making better marketing decisions. Listen to Business Made Simple wherever you get your podcasts. Many EO Fire listeners have launched non-food franchises and Franbridge Consulting has guided them.