1644 – Selling Your Business With Increased Value with Blue Sky Exit Planning Services’ Joe Gitto

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0:58with us right now it's joe gito joe you are the managing director at blue sky exit planning services you're on the web at bluesky exit planning.com joe thanks so much for joining us josh thanks for having me today looking forward to our conversation absolutely so yeah explain who you're typically working with uh and what you do in the world of exit planning Sure, I'd be glad to. So my focus is on the lower middle market, which we define as companies with revenue of five to 25 million, which is typically an underserved market when they're going to sell their businesses. And so what we've tried to do is bring the level of expertise and, and, and, oh God, I'm stumbling.

1:40Sorry. What we're trying to do is bring down the level of expertise and resources that are available to larger companies to that lower middle market. Yeah. So why is that? I mean, so it's typically underserved then. And obviously, that presents pretty good opportunity. That world has got to be very different that when you're talking about exiting, you know, a$500 million company versus, you know, a$5 million company. Absolutely. So think about it. If you're running a hundred million dollar company and you're looking to sell, you've got an investment banking team, you're getting tax expert, you're getting estate planning advice, you're getting financial planning advice.

2:16You get all these people that are helping you, but also looking to sell you product. Right. But that's why they're there. But they're there to help you. And you're getting the benefit of all this experience to make this the most efficient outcome for your business. When you're selling a five million dollar business, the larger companies are not looking to come downstream and do that. It's cost prohibited usually. And so what we're trying to bring to that level is some level of a cohesive plan, not just for you selling your business, but what does it mean to you personally? So what we've developed is an integrated process that will look at you as an individual, your personal financial planning, what does it mean from an estate planning standpoint, and then working with you to also maximize the value of the business.

2:53My typical client is typically going to be a blue collar business who has run a great business. They probably have had it for 20 or more years. It's generally their largest asset. And they've just been working with a local accountant, a local attorney who may have done great work for them over the years, but aren't necessarily used to doing deals or selling businesses. And so what we try to do is bring to them the opportunity to increase the value of that business and maximize that one asset that they've devoted their life to building. And then also making sure that they're leaving a legacy, right?

3:23Because you're a business owner. You know this. This is like another child to you. And when it changes hands, you want to know your employees are doing well, that they're being taken care of, that your clients are being taken care of, your vendors, et cetera. And so we really try to create this holistic approach for business owners to have a process, to have a plan, and not just post it up on a website, hope somebody's interested, take the best offer, let's move on with our lives. Yeah. Yeah. When you're talking about SMBs, does that factor into, you know, say a potential multiple that you'd be looking for?

3:57Or is it really just a matter of how is that money coming in? I'm just curious about like, how do we actually value, you know, a company for a good exit price? That's a great question, Josh. And everybody tries to use the rule of thumb of a multiple of four, but every business is different. So at the end of the day, there's always a multiple applied to it, but that's not necessarily what drives the deal. And especially on the lower end, a lot of our blue collar, smaller businesses are becoming bolt-ons for private equity firms that have a platform company and they're looking for add-ons. And so a lot of times, if you're earlier in the game, you're going to get a higher price because they're looking to build out that platform, whether you're later in the game And a lot of times, you know, the buyer is not buying what you think you're selling, right?

4:42They may be after technology you have, or they may just really want to get into a market. So there's a lot of, there's more art than science to really positioning the company for sale. Yeah. And I know that one thing that is, you know, looking through your website, you mentioned that you can kind of point to some surveys that it's a many as 75 % of former business owners are unhappy or they have regrets a year after their transition. What's going on? Yeah, that's a great question. And that's one of the reasons why we've tried to develop this holistic approach, because what we're trying to get the business owner, look, especially the boomer generation, right?

5:21We define ourselves by our work. And we work 50, 60 hours a week. And it sounds really romantic to say, I'm going to get up in the morning and have a cup of coffee, play around the golf. And that grows old pretty quickly. And so what we do as part of our value creation process is we're working with that business owner to say, how are you going to fill this time? Do you have a charitable bent? Do you want to volunteer time? Do you want to sit on boards? What are the things you're going to do to fill your schedule? Because that's why business owners have the regrets. It's never for the money they got.

5:49It's because they're bored or they lost their identity. Yeah. So, okay. So what can we be doing to kind of, I'm curious about the kind of the psychological transition that we have to make, you know, for talking about, well, listen, the money is the money, but tell me more about what's going on emotionally and psychologically. Sure. Think about it, right? Like, Orlando is not a small town anymore, but a lot of the businesses that I work with, they're coming out of small towns where the business owner who's selling is known in town as the employer. He's at the country club. Everybody knows who he is.

6:23He's created wealth. He's created jobs. That's his identity. Then he sells the business. And what's his identity at that point? So we're working with them to find other ways to be in generally in the smaller towns. These are the folks that really want to get involved with community or stuff like that. And that's what we're trying to help them make that transition early on. And it also increases the value of the business because nobody wants to buy a job. And so if you're a business owner and you're still grinding 50 hours a week, it's a different sale than if you have a management team in place.

6:51I always tell people, my job is to make you irrelevant in your business. That's really part of what we do. Yeah. And so as they're gradually exiting the business because management team is taking over, we start to work with them to fill up their time with other things that are going to keep them motivated. Wow. So like at the SMB level, what does a management team look like? Yeah. So, you know, on a$5 million business, you might have, maybe you have a CFO, maybe you have like a strong controller, you have somebody who's running your day-to-day operations, you have somebody who's running sales, but you have a leadership team.

7:24And we use a platform called the Entrepreneur Operating System known as Traction. And we use that as our baseline for how we help these companies transition people into leadership roles and working with the communication and making sure that they're all firing on all cylinders and so that the owner can gradually start to step away. Yeah, well, and obviously that's going to be, that's going to impact, you would think, the sale price because any buyer, they don't want to do what you've been doing in the past necessarily. I don't know, maybe they do, but unlikely. Very unlikely. They do step in. They're like, well, listen, if they didn't put the management team in place, I'm going to have to figure out how to do that.

8:04And, you know, that's a little bit more risk. Yeah. And that's going to crush your valuation because they're already thinking, all right, what is the salary I need to add and the time I have to train? And then there's my time. And so it's a less sellable business, which is why it's, you know, we always tell business owners, if you can give us a window of six to 24 months, depending on your size and the complexity and how much structure you have, we, that's what we do with them is to get them into that position so that it's really a sellable business. Yeah. Give me maybe an example or two of companies that you've worked with and what that transition looked like.

8:38Sure. So we have one right now that we're doing. It's a little, this is an internal transfer. We're doing a business succession between a mom and the daughter that, you know, the mom started this business 40 years ago and the daughter is now stepping in and mom was the person and everybody, you know, rotated around her orbit and the daughter is looking to build a leadership team. And we've worked with them now for about eight months and we've put people into key positions and the daughters taking over the day to day. So that's that is one example. And then we're working with another company in Texas that we've actually got out on the market now.

9:10And we spent a year working with them, not only getting a person in charge of running the day to day of the business, and they're in the flooring installation and retail space. But we also process documented everything that went on in the business. And so under the theory, if the business owner left the office, got hit by a bus, how would this company function? And so literally an owner could walk in there and be able to run that business probably about 80 percent of the level that he did prior to leaving. So those are the kinds of things that we're doing so that when you take over the business, it's not a mystery.

9:44Because the other thing is, right, every buyer thinks they want the seller to stick around for a long period of time. And I'm talking from experience. My wife and I sold a health care business in 2019. and the buyers thought they were going to want us around for six months. And honestly, after three or four weeks, they didn't want us around as much as we didn't want to be around. You know, a lot of that is right. Your employees are still, there's a new owner, but the employees still identify with you. And that's frustrating to the new owner. And they want to make changes. And they're hesitant to make changes because they feel like they're in, you know, they're criticizing the way you did business.

10:12So they really want that clean break. And they also realize that it's not as complicated as they think it is stepping in. So if you've done a good job of, you know, building the team, having your processes documented, it goes a long way in making the transition smoother. You know, I want to go back to this. I just want to make sure that because this is important to me, you know, thinking about this psychological and emotional transition. So obviously, I think one of the biggest things is start working yourself out of a job so that, and I think naturally, you know, if you've got a good management team in place, you're not, you know you're just not as required if you've got those i mean i think that that's absolutely going to um kind of assist that with that so you're not going from you know 50 60 hours a week down to zero correct you know you're maybe you know you you're kind of whittled it down to like 15 hours a week or something like that of stuff you had to do otherwise you know what company's running.

11:12They got it. Is there, are there any other, like, I would say emotional or, you know, kind of psychological considerations other than just stop doing quite so much in your company, get the team in place and kind of ease your way out? Yeah, I know. I'll go back to what I said earlier, which is that there, you do have this, like, and I experienced this when I sold one of my businesses up in New York. We had a great offer. It was going to a great firm. I was actually going to be part of the transaction. And yet the day we went to clean and clean out the office, I was sitting in the car going, I don't think I want to do this.

11:47I was just, you know, it's, you're letting go of your baby and you're just wondering what changes are they going to make? How are they going to treat my employees? That all of that emotion comes there. We'd like to think, look, even when we got out of the healthcare business, it's probably the business that I've owned that I leased the light. I liked the least. And I was on one level thrilled to be getting out of it. And yet when we went to the closing, I was still thinking about the families we were dealing with and our caregivers and stuff like that. So yeah, it's, it is really, it's an emotional tug.

12:14A lot of times the business part is the easier part. It's, and that's why a lot of deals fall apart. You always hear people are almost at the goal line and then the deal falls apart. It's usually because the business owner is just not emotionally and psychologically ready yet. So they find a way to kill the deal. And so what we really work hard at is making sure when we get to the finish line, they're going to punch that ball over the, into the end zone. I'm curious, because you've been through this cycle as many times as you have, what do the folks who exit, what do they end up doing with their time in their life?

12:49Yeah, great question. Some folks are just, they start sitting on company boards, or I had one gentleman who sold this business and then became a volunteer at SCORE and started working with entrepreneurs. I have one gentleman who was younger. He was in a blue collar business, but he sold out early, said he was going to retire. And six weeks later said, Hey, I'm buying this business. Can you take a look at it for me? So that was, you know, he failed retirement, which is a good thing, I guess. But yeah, you know, folks get involved with a lot of different things. I've never seen somebody who's run a business in my experience, who is that type A personality who just, you know, kicks backs and says, I'm just going to vacation and play golf and chill out.

13:28It just doesn't happen. Yeah, I could see that happening maybe for a few weeks. And then I know if it were me, I'd start getting a little itchy and antsy. It was enough golf. I got to go do something. My wife has already told me to. She loves me and wants to stay married, but she doesn't want me home every day of the week either when I'm ready to. So I'm positioning myself to work less, but not necessarily ever retire. Yeah. So Joe, what does it look like when when folks with you, like, how do you begin that process? You know, if someone's like, well, you know, I'm contemplating an exit over the next few years.

14:05What do those initial conversations look like? Great question. So we, what we'll do is we'll really try to understand why they're exiting. Sometimes they're just burnt out and there's options other than selling, but if they really are sure that this is the time and they want to get out of the business, what we've done, and I put a lot of thought into building this process. I went back and looked at some of the businesses that I sold and said, what was the experience and what didn't I like? And so I developed a four-step process for business owners and they're not required to use all four steps.

14:35But generally, if you came to me, Josh, and said, look, I'm thinking of selling, I'm tired of this, what can I get for my business? So the first thing we're going to do for you is we're going to do a fair market valuation just to make sure that you and I are at least in the same church, if not the same few, right? Because if you think your business is worth 20 million and the market's telling me it's worth 10, I'm only going to upset you in the long run anyway. So we might as well stop right there. But let's just assume we agree on the valuation price. The next thing we're going to do is go out to the market and pull some cops to understand what similar businesses have sold at.

15:05So we have a baseline of where you are going to fall in. And then the third thing we're going to do is say to you, well, what does this money mean to you, right? $5 million means different things to different people, right? For some people,$5 million becomes a generational type of change. And for other people, it may get them through the decade. So the next thing I want to do with you is your financial plan and say, what does this money mean? At that point, you can stop and say, I don't think I'm ready or I want to build up value more because I need more money for my retirement or I want to move to phase two.

15:33And generally what happens is phase two, the business owner is focused on, all right, so you said my business is worth$10 million and that, you know, that reequates to a multiple of six. But other transactions were in nine. Why am I a six? And so we use two software products. We don't even charge for phase two because this is also now a vetting stage for me. I'm going to give you links to do two different software products that we have that will really help. They'll take you about an hour to take these assessments. But at the end of it, we're going to get a bunch of data. We're going to compile some reports and I'm going to sit with you for an hour at no charge.

16:04I'm going to walk you through all the things we've identified in the business and talk to you about how if we implemented these things, it'll drive the value of the business. And this is where the vetting part comes in, because the business owner who says to me, wow, this is really great. I'm going to do this with my team and I'll be back to you. that's probably a business I'll never be able to sell because this is not a business owner who's ready to let go or make changes but the business owner says how do we do this then we'll go to phase three with them which is retainer based and it's depending on scope right it's how many problems you have how many things you want to implement how fast you want to do it and then what we'll do is re revalue the business every six months for them with no no additional cost but all things being equal equal in the macro environment we should start seeing the value of the business increasing as we're implementing these changes.

16:48And then we'll have that conversation at the end of the year and say, so Josh, here's what the new valuation is. Here's the number. What are you thinking? And if you say, well, you know what? It's a good number. I think I'm comfortable. I want to go to market. Then we work with you to start really towards in the middle of that phase three engagement is when we start moving you out of the business a little bit, building the team. But now we're having the conversation. Who's the most likely buyer? Is it strategic? Is it financial? Is it internal? We're going to start putting together the materials.

17:14We'll prepare you for due diligence. We'll start working with corporate counsel to put together the documents that we need to take you to market. And then we either, depending on the industry, there are some that I will take out to market myself or I will partner with some of our investment partner, our investment banking strategic partners to take the company to market. Yeah. And so that's our process. Yeah. Just out of curiosity, what are some of the higher multiples that you've seen and what are the conditions that influence that? Sure. So the high multiple that I've had was a cyber company that was looked at it.

17:46I mean, they're in a hot space. It's not going away. And that was a multiple of 12. Wow. Yeah. But it's a hot space. And they were in an interesting part of the market with a unique team. But our typical transactions, and it's been a little tougher out there right now. But we generally see things between three and seven. Yeah. Yeah, for sure. All right. Joe, your website is blueskyexitplanning.com. For someone that is listening to our conversation right now, what are their next steps? What would you recommend? And what might be some things that if this is going on, this is going on, this is going, we should definitely have a conversation.

18:24Sure. So the best thing is if somebody wants to go to my website, and I'll offer this to your listeners, let them go. We have buttons right on the top of our page there. they can take two different assessments, value builder and exit map assessments. If they go take those assessments, I'll do a call with them, take them through just what the feedback was and what they could possibly do and give them some insights into their business. So I think that's a great place for them to start. And I would say, if they're experiencing turnover, a lot of these businesses don't really manage cash the way they should.

18:56They don't have a plan, right? So they get caught off guard with. So we're very big on putting in cash planning. If they're really looking to upgrade the talent or if they're looking to expand, those are all areas where we can help them ahead of thinking of. We'll do some CFO oversight. I have a couple of good, really outsourced CFOs on my team that would work with these business owners to kind of professionalize because a lot of business owners are on QuickBooks. They have a chart of accounts that's alphabetical. It doesn't really tell a great story. So we'll professionalize their financial statement.

19:25So when the due diligence comes around, it'll look a lot more professional. It'll help the buyer understand the story a little bit better. Yeah. Joe Gito, again, your website, blueskyexitplanning.com. When you go right to the website, there's a couple of assessments you can take right there, the value builder assessment, exit map assessment, and then you can fill that out. And Joe, it's been great having a great conversation. Appreciate it. Thanks, Josh. I really enjoyed it. Enjoy.

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21:11When the right is left, we can heat it up.