The Exit Readiness Formula: Profit, Predictability & Independence

0:00Daniel Marcos:How do you test and let people step up? How do you get out of the way and let people become stronger? I want you to start thinking about your exit readiness, okay? Profit, predictability, and independence. Optionality gives you the ability to have choices. The smartest founders mentally exit before they sell. If you run your business like it's for sale, you'll run a better business. So the smartest founders mentally exit before they sell. In fact, well before they sell. You know, if you've followed my podcast, it takes about three years from when you decide to sell your business to actually be ready and complete the transaction.

0:40Today, I want to look at the myth that freedom really only becomes after you make the sale. Remember this, you're going to have an exit from your business, okay? You're either you kill it, it kills you, the

0:53Daniel Marcos:negative exit, or the two positive exits, a passive or a financial exit. Today, I really want to think about that passive exit because the mindset shift from business operator to business leader to then business owner and then to investor is really important for you to understand. Like if, for instance, you're still stuck in operator. You still want to get your hands in every day. You know, the first goal you got to set in business is the day you get off the tools, the day that, you know, you stop doing the work. And I was chatting with one of my team just recently, and they said, you know, well, you know, every now and again, I get bored of doing the same old, same old.

1:36I said, there's only boredom in your business because you're not growing. You know that every year I cut out 80 % of the things I did last year so that I've got

1:44Daniel Marcos:20 % of things, the things that move the needle, I'm still doing. But then 80 % of my time is freed up to do the new things. New keeps it exciting. New keeps it growing. New keeps me developing, innovating, coming up with new ideas. So that stuff is really, really important. So we've got to think about how to transfer control without losing the culture. so if you run your business like it's for sale like if that's the philosophy that we go at this with i'm running my business as if it's ready for sale every day you'll run a better business because you'll have your numbers properly done you'll have everything set up you'll structure it so let's look at the exit readiness formula so what is the exit readiness formula well think about this way if you want to get the best value for the sale of your business if you want to sell your business for the most profitable, most possible.

2:39You've got to have an exit ready. Now, you know, my definition of a business is a commercial profitable enterprise that works without you. If the business needs you, it's not a business. It's a job with overheads. Okay. You heard me say that a million times, and there's a reason I say it a million times. So the exit readiness formula is really three things. It's profit, predictability, and independence. What do I mean by each of those? So profit, EBITDA, how much profit you have. Now, the bigger the profit margin, the less companies that are available to buy or to be sold at that level. Like if I'm trying to buy a company that's doing a million dollars a year, lots of companies to buy.

3:18If I'm trying to buy a company doing 5 million EBITDA a year, lot less companies to buy. If I want to buy a company doing 50 or 100 million EBITDA, way less companies to buy. And the less companies there are to buy, obviously the more multiple. So your profit is one part of your exit readiness formula. The second part is predictability. So when you think about predictability, why do SaaS companies, software as a service, that are subscription-based go for a higher multiple than companies that get a customer, have to get a new customer, have to get a new customer? If you've got that subscription revenue, predictability is high.

3:55High predictability, what does that give us? High predictability gives us a higher valuation. So we're always looking at that predictability of team, predictability of customers. You know, if you've got a singular customer, low predictability. Why? Because that singular customer could leave at any point in time. Anything, the rule of one, I think you've heard me say this too many times, the rule of one, if your business is dependent on one customer, one marketing strategy, one salesperson, one location, one operation, one machine. if your business is predictable on one thing the rule of one means it can also die instantly so profit predictability and the third one independence is it run under management how do the managers run the business is it run by leaders does it grow when you're not there sort of thing

4:45Daniel Marcos:so if it's if you have to be there we know that it's not independent and so that independence is another part of it. So when you think of the three levels of exit, okay, now this is important. So not only is the exit readiness formula important, but the three levels of exit is really important. Firstly is an operational exit. So for instance, in my business, a business coaching company, if I stopped doing the coaching and had all of my team doing all of the work and delivering the service, then I'm operationally exited the company. Okay. So the second level of exit, so that's where you get off the tools.

5:26So set that goal, get off the tools, have an operational exit. The second type of exit is the strategic exit where you're out of the day-to-day, you're out of the management, you're out of the leadership. And that strategic exit happens gradually, obviously, you build up your seat. Well, at the base level, you don't have an operational exit because you're still doing the work. At the strategic exit, somewhere around the three to 10 million mark, you start to build the management team and you start to then build the leadership team. Once you build a C-suite and you've got a CFO and a CMO and you've got the people that are capable of growing the company without you, and then you replace yourself finally as CEO and you become the coach or chair of the business.

6:12Daniel Marcos:Yes, that's right. At a strategic exit, the business runs without you. It's passive to you. Okay. And then finally, the ownership exit. The ownership exit is where you get a financial sale. Okay. You sell the business to hopefully a strategic buyer, at the very least a financial buyer, so that you're getting the highest multiple. Watch other podcasts on those subjects with me. So if you think about it, how you install leadership systems, governance to make you, I guess the word is optional. If you become optional, if you don't need to be there, then you've had that strategic exit. So you think about building and installing leadership.

6:54Now, sometimes you can build the leaders in your organization. Sometimes you can actually do a great job of having internal people get higher and higher in the company. Other times you've got to bring in those people. The faster your company is growing, the more you're going to need to bring in senior people. So I'll give you a simple example of that.

7:14Daniel Marcos:Hiring a new CFO. And if I could have built our CFO, I could have sent him to training, to courses, to all sorts of things for him to get to the level. or I could say, okay, you've fantastic. We've reached a point where the company is outgrowing you. What I'd like to do is have you move off and do this area of the company or do this area. And I'm going to bring in a higher level CFO who's capable of taking us to that billions in revenue. Does that make sense? So you look at installing leadership, it's leadership systems, the framework, as we've discussed earlier, the framework of having the vision, the mission, the culture, All of those things, the objectives, key results, the plans, all of that stuff's got to be in.

8:00Now, the systems, ultimately, it starts with checklists. It moves to paper systems. We then automate it with technology and with AI today. That's faster and faster and faster. And then we take a look at governance, management and leadership. How does the company get run? What's the cadence of meetings, the cadence of planning, the cadence of reporting? What reports are necessary? How do we report? All of those things become a part of making you an option to the business where you're now an investor, the owner of the company. I like to say that your job is ultimately to become the coach of your own business, where in one hour a week you meet with the CEO, you coach them on doing a great job of running the company.

8:42That way you're out of it. Now, eventually, as your CEO gets to know more and more and gets stronger and stronger, you could move to every two weeks coaching session and even move to once a month, a board meeting type thing.

8:53Daniel Marcos:And that's all the involvement that you're needed in. So if I think about some examples, there was one young gentleman, his name is James. And when he came to me, he was looking at his exit and he had somewhere between a six and nine multiple. He was in the logistics business. and in that six to nine multiple, I started looking and I said, well, okay, why is it only six to nine? Well, we looked at the profit. The profits were in a good space. Okay. Then we took a look at the business and saying, okay, if we're going to get a higher multiple, where is the predictability? He had strong predictability.

9:30Daniel Marcos:Then we looked at independence. It wasn't independent of him. We also then looked at his intellectual property assets, the licenses he had, all those sorts of things, because just some of the licenses he had were worth a lot of money, but he'd not value that up to get the sale. Ultimately, when it came down to it, he did more than 30 times EBITDA for the valuation and the sale of his business, because it was a strategic sell, not just a financial sell in that particular case. But until we got it more independent of him, he would have still been stuck in that lower multiple. So think about this.

10:06Daniel Marcos:How do you test your absence. And so, you know, you think about it as stepping back, not stepping away type thing. So whether it be taking a vacation or, as I've taught you earlier, doing work from home Wednesday, where you take a day a week and you work on the business, not in the business. OK, how do you test and let people step up? How do you get out of the way and let people become stronger? How do you make sure that your team is doing the work they need to do on themselves, on their leadership, on their management skills, on their day-to-day so that they can get bigger. I think of it this way.

10:41Daniel Marcos:Don't walk away. Test absence. Go to some conferences and leave the company for a few days and see what happens. Go on a vacation. See who steps up, where they do, what happens with that. The more you can give them your absence, the more you can get comfortable with your ability to eventually step away, not just step out for a little while, if that makes sense. So if you think of it as a, I could put this like maybe a semi-retirement test. A lot of the times, by the way, I find that a lot of owners, when they do try and go passive or have a financial exit, the biggest challenge isn't the company.

11:25Daniel Marcos:The biggest challenge is them getting their, let's just use the word ego, out of it because they used to be the boss, used to be the most important person in the room, and now the company can run without them. They're free. I know I did it in the first time I did this. I would step back in and meddle. I'd get involved. That's where we need to plan. I think in last week's and the week before's podcast, we talked a lot more about that. Lessons from stepping back early, too early, is that you're not really, let's just say it's more like abdication than it is delegation. Unless you've got the systems and the governance and the planning and the reporting in place, it's very hard to step back and allow someone else to do that.

12:12Daniel Marcos:So I would like to think that at some point you start thinking of an advisory board, not really a full board of directors type thing, but an advisory board. So when you do on a monthly basis, meet with your CEO, who's running the company with or for you, you have a board that is helping you ask the questions. You have a board of advisors who's giving them the feedback and that board helps you stay as part of the board of advisors rather than trying to get involved into it, everything. So I like to have a company have more people that it's accountable to, whether that's your coach or maybe a strategic partner, or maybe your accountant joins the board, or maybe two other business friends that you know and trust, many different ways.

13:00Daniel Marcos:So if you think of the success metric here, what we're actually saying is that optionality is like your success metric. Optionality gives you the ability to have choices, the ability to grow, to scale, the ability to go and buy other companies, the ability to move into acquisition and scale mode because the main company is running without you. Even the ability to say, okay, the main company is running without me, I can now put that in 50 locations around the country or around the world type thing. That optionality is really the success metric that I think every business owner should be looking for.

13:37Daniel Marcos:On your way to a financial exit, you need to have a passive exit. So you get off the tools, you get out of the strategic and you move to the position where you are the coach, you are the mentor, you are the chair of the board, if that makes sense, for your own business. So when you go back and start thinking about, you know, whether you stay or scale or do whatever you do, I'll give you my example. I love the teaching part of Action Coach. I love getting on stage. I love creating new training programs. I love those parts. So I've stayed in that role, even though I have other people that run the company.

14:18Daniel Marcos:I have a job within the company, which is something I really enjoy. And also, to be blunt, something I'm good at. So I like doing that. Now, it's not a full-time role. It's a one, one and a half days a week, or I'll go and attend a conference. But I get to do the part of the company that I love, that I'm good at, and I have professionals running the rest of the business. At some point on your way to 100 million, you will have to professionalize your management. It's usually somewhere between 3 and 10 million that you have to professionalize that. So I want you to start thinking about your exit readiness, okay?

14:55Daniel Marcos:Profit, predictability, and independence. independence if you start scoring your profit readiness and your predictability and your independence all of a sudden you start to think of how ready are we to exit and if you think about okay our profits need to be a little higher because once you get to five million EBITDA at that point in time you're playing with the big guns and you're available for sale at a real financial exit to very large VC or home offices type thing so you might want to say okay what do I need to do to get us to 5 million in EBITDA? Do I need to go and acquire other companies?

15:30Daniel Marcos:Like if I acquire one that's doing another million in EBITDA and acquire another one that's doing 2 million in EBITDA and together we're at 8 million in EBITDA or 4 million, whatever the number is, then you're starting to look at that from an exit readiness. Then you look at predictability. What do I need to do to make sure my customer base, my level of predictability around that, Do I need to add more subscription revenue or more retainer type revenue? Do I need to get more customers or more large customers to get more predictability into the business and its profits and its growth? Okay. And then finally, independence.

16:05Daniel Marcos:Where do I need to step back and do I need to hire people? Do I need to systematize? What do I need to do so that my exit readiness is high? Because remember, on the way to a financial exit, you want to have that passive exit. thanks for joining me on the hundred million dollar podcast if you've got value from today's episode make sure you've subscribed and share this with all of your friends never miss a strategy that could change your business and your life and remember the fastest way to scale is to learn from those who've done it that's what this show is all about see you on the next episode