Episode Transcript
[00:00:30] Speaker A: Welcome to Power CEOs the truth behind the business. I'm Jen Gode, entrepreneur, investor and business strategist. Why are we here? Because iron sharpened iron. And when industry leaders and other entrepreneurs, investors come to the table and share what's working in business and even what's not, we're all able to learn and grow. As a result, our businesses grow and the impact affects not just ourselves, our teams and their families, but also our communities and our world.
You are in for a treat today because we're going to dive deeper into that exit planning conversation. You have been getting in touch with me, letting me know what your questions are, where your hang ups are, and I am delivering today. I have brought back my friend and fellow expert, Jordan McMillan. Because most founders build a business worth running, but very few build one worth buying. If your business needs you to breathe, think, approve and solve, you don't own an asset, you own a job with a revenue.
She is here from Samson Partner Group and Jordan has been a deal maker and advisor and a contributor to the owner's manual, guiding founders and CEOs through the sell side. Like they're buying tomorrow if you've ever thought. We'll just prep later. Your exit risk just rose. Welcome back to the show, Jordan.
[00:01:46] Speaker B: Thank you for having me. It's great to be here.
[00:01:48] Speaker A: Oh, I'm so excited about this. So today I want to really strip this down to the fundamentals because a lot of the previous episodes we've talked about the money side and what it looks like to partner and a little bit about due diligence. But you know, I really want to talk about the foundation of our business as the value multiplier with you, you know, operational discipline, that it's not just the financial clarity but it's also that leadership leverage that we're looking for when we're going to exit a building a business. So talk to me a little bit about what is the earliest signal that you see that maybe a founder is too involved or the company's too dependent upon them and how quickly or how much does that hurt the valuation?
[00:02:37] Speaker B: Well, typically what I see is there are a lot of folks who don't have a leadership team in place. And so a lot of times when people come to us, they're saying, I'm ready to exit, I'm ready to leave. I'm just so tired. I'm just exhausted. And what this signals to me is the next question that I would ask, what's your leadership team look like? The answer to that question will tell me a Lot. And a lot of times people say, well, it's just me or I'm by myself or I wish that I had a team. But that's really one of the most critical signals for me that says we have some work to do.
[00:03:12] Speaker A: So let me ask you a little bit further because sometimes they come and they have a leadership team, but they haven't empowered their leadership team. How do you like get that nugget out? What does that look like?
[00:03:24] Speaker B: Oh, yes, this usually happens when we start to map out processes and key functions and responsibilities. So what I usually ask people is show me your leadership team and show me your org chart or your functional accountability chart and let's map that out. And if they can do that, then all of a sudden we start to see things come to light. Well, what are the core processes in this function or in that function? And how many of those processes are dependent on your approval?
A lot of times the answer is shoulder shrug, shoulders down.
And this happens because founders are the most passionate people and the most knowledgeable people about their businesses. And so ultimately it leads to some behavior where they get stuck, stuck in the business and they get stuck in the day to day. And that's one of the first pieces that we really, we really work on is how to get them out of that kind of decision making process.
[00:04:15] Speaker A: And, and so let's talk about that even more. We're going to dive deep on that because a lot of times what I find is I'll get there and, and they're like, I want to empower people, but they just don't make the decisions like me. Or conversely, they empower the person and they don't make this same decision or with the same thought process. So they pull it back in.
Talk to me about that and what's actually going on internally and what mindset shift needs to happen. What do we need to do as founders to get out of that cycle?
[00:04:46] Speaker B: Yeah, ultimately this indicates to me something that I'm going to say the, I'm going to say the T word and it's not a bad word, but it is something that's just there, which is a lack of trust.
Trust is one of the biggest reasons why a founder is, is involved in the weeds.
The company is dependent on the founder. It's just a lack of trust. I tried it before, it didn't work three years ago when I tried it with that team. Therefore, why would it work now? And a lot of times what we have to do is we have to build the scorecards and KPIs and the data that the founder will feel comfortable with so that the founder can take a step back and say, if these KPIs, if these results are met, then the sausage is being made and I don't need to be involved in every link.
[00:05:32] Speaker A: I love that analogy. And so let's dive into that a little bit more because when founders come to me and you, the first thing they're thinking about is they're obsessing over their margins and their ebitda because they know that a lot of companies are valued based off of a multiple of EBITDA or there's other evaluations as well. But why is it sometimes the wrong metric for founders to really zero in on first if they're thinking about buying or selling well?
[00:05:57] Speaker B: I see EBITDA and operations as a symptom and either health or the illness. So EBITDA will indicate that there are issues or that there's great health. Now, not always. You can hide a lot with great accountants. Thank you for those of you who are out there.
But typically speaking, if we see problems in ebitda, it leads to the operational noise, chaos or operational dependencies that come, that come with founder led businesses. So typically speaking, I would look at the operational health, the health of the leadership team and the ability for the company to move and to scale and to grow dependably and with certainty and
[00:06:38] Speaker A: without the founder presence.
[00:06:39] Speaker B: Oh, yes, absolutely.
[00:06:40] Speaker A: One of the first things I love to do is when they're, when they come to me like that, I go, okay, I want you to take two weeks off. You're not allowed to touch your phone, you're not allowed to answer your phone, you're not allowed to do anything. And the first thing they go is, I can't do that. And that tells me that they are way too involved in the business.
And so I'm like, okay, well what do we need to put in place immediately? What breaks first?
[00:07:02] Speaker B: Yeah, so I do that, but I do one, I do a different side of it, which is show me all the things that you have that are written down. I'd like to see what's written down. And usually I get the same reaction.
Well, it's all just tribal knowledge or it's all in my head or this is just how we work here and we move too fast to write anything down. And that's always an indicator again that the concentration is in one or two or three individuals. And that's a great way to just stagnate your growth.
[00:07:31] Speaker A: Absolutely. And you know, with today, with the AI tools available. All we have to do is speak out loud while we're going through the process. And it's already documented. So, like, there really, folks, is no excuse, if that is what your answer is.
Today's the day to find some sort of transcription tool and just put it on and talk your way through every day and decision so you can start to document some of the. Those processes. Because it's never been easier than it is today.
[00:07:55] Speaker B: Oh, it's incredible. It's incredible. And I've actually just worked with folks where I have them speak directly into AI with me in the room so that I can be consultative. But they're. We're generating job descriptions, functional accountability charts, even scorecards. There's the uses and the possibilities are endless. And there really is no excuse anymore to not have anything written down.
[00:08:16] Speaker A: That's exactly right.
So let me ask you from the, from the buy side, like, I'm going to buy a business. I'm going to evaluate the company's operational core.
What are, what am I, what am I really looking for as a buyer? And how, what systems or scorecards do founders need to think about developing or having in place? Because it separates them from the amateurs.
[00:08:38] Speaker B: Yeah, you do really need to think about presenting your own scorecard to a buyer. A lot of buyers, especially, especially institutional private equity type of guys may be coming in because they're looking at a market and they're looking at returns in the market, but they don't necessarily know how the market operates. This is a great opportunity for you to create your own benchmark and for you to create your own scorecard. Anytime that I see a business and I look at their last three years of financials or even three quarters, and the business metrics, their cogs, their gross margin, their net income are up and down, that signals to me that there's a problem. If we look at consistent growth or consistently within the same range. A lot of times that gives me peace of mind to say, okay, I kind of understand what the expectation is for our results.
[00:09:24] Speaker A: Yeah, absolutely. So let's go a little bit deeper. When you look and you see that up and down income or revenue or profitability, like, what is the first question that comes to mind? What is the first, first thing that if, Because I know there's a lot of people watching who are like, that's me. And I'm thinking I can exit my business right now, like, what's the first thing that they can do right now to sort of clean that up?
[00:09:51] Speaker B: Well, you can, you certainly are going to have to tell the story. So you need to really understand what happened in the business. Did you invest in in a certain aspect of the business? Did you try to fix your client concentration issues, which is why your revenue dipped for a year? Did you? There are reasons why your numbers went up and down. And so you need to have a very good handle on what happened there. But on what you can do today.
What you have to do if you're going to prepare for an exit of any kind, or even preparing to step away from the business, is really understand how to drive profitability. Ultimately, that is the key metric that everyone cares about. That's how you will end up selling your business. And that is ultimately how you'll end up. If you just want to take a step back and empower a team, that that's where you're going to end up having a wonderful life full of vacations and fun and maybe a motorcycle or two.
[00:10:44] Speaker A: I'm not condoning that or not.
[00:10:46] Speaker B: No, of course not.
[00:10:49] Speaker A: But really folks, it's about what's going on. What is the story of what are the financials saying about your business? And does the story of your business match that? Because if you have a real reason you invested maybe in technical architecture and infrastructure, that's now showing up in the profit margin.
It just was a little bit of an expense up front. Like what is the story that you're telling? Does it match the financials? Because if those don't tell the same story or if your numbers don't jive with the story you're telling, that's an immediate Nope. No thanks. Too much work for me on the buy side. So this was invaluable. If you're loving what you're watching, be sure to join our Facebook group, Power CEOs Facebook group and check out LinkedIn and send me what your feedback is. We do have to take a brief break, but after the break I'm going to dive in and ask Jordan if she had six months to bulletproof a business for scaler exit, what would she do? Stick around. We'll be right back folks.
Welcome Back to power CEOs Truth behind the Business. Loving what you're watching? You're going to want to download our app now, our Now Media TV app on Roku and iOS so you can catch all of your favorite shows wherever you are. Prefer to listen in podcast format. Go to www.nowmedia.tv, click on shows and catch all of your favorite shows in podcast format. We are always here streaming for you. Ready when you are. Without further ado we teased this before and I'm here with Jordan McMillan talking about what do we need to do if we want to really maximize the value of our business at an exit or if we're looking to set ourselves up for scale. It's all about fundamentals. It's about being operationally sound. It's about having the right leadership team in place as we scale so that we're not burned out and just going to have a fire sale as a result.
So, Jordan, I'm going to, I'm going to hit you with it. We asked the question before the break, but I'm going to ask it again. In case you didn't remember, if you had six months, six months, that's it to bulletproof a business for either scale or exit, what would you prioritize?
[00:13:17] Speaker B: First, I'd probably start with three key areas. One, we've already talked about being the leadership team itself. If the business can't function without the founder, we need to really put the leadership team in place. That starts with the operational team, but it also usually correlates to market facing and sales oriented leadership, which is the second area that I would look at. A lot of founder led businesses have that double C client concentration.
And not only is the client concentrated, meaning that a disproportionate amount of your revenue is associated with one or two clients, but also those key relationships tend to sit with the founder themselves or a family member of the founder. And so I would start by one, deploying a really seasoned leadership team and two, starting to look at my customer concentration issues that I have and really breaking that apart. And the last thing that I would say is really starting to put, if we don't already have it, the controls in place in the business, both financial controls as well as those operational controls that we need in order to make sure that we are able to deliver dependable margin every single time.
[00:14:31] Speaker A: And so talk to me a little bit about what does that mean? Because we have some people who, they're sitting there, they're looking at this and they're like, okay, dependable margin. What's your definition of dependable margin?
[00:14:41] Speaker B: Well, again, we talked about kind of living within your existing benchmark, so living within the place where your business has performed. And if we're increasing top line, but we're not increasing that margin, what is going on there? So we would expect to see the same relationship between top line and margin. And it depends on the sector that you're in. But there are good benchmarks available really anywhere you can ask one of those AI engines that we talked about earlier, what those benchmarks would be depending on your sector.
But that is really one of the key determining factors for me when I look at buy side to say, well, would I buy that business? Are they dependably kind of performing to those clip levels every single time?
[00:15:28] Speaker A: That's a great explanation. Thank you for that. Can you give me an example of a company that initially kind of passed that sniff test, those first three, but then when you dug in, something was off, maybe it didn't match what was actually happening?
[00:15:45] Speaker B: Yes. So I think of an example of this is a professional services organization where the leadership team was highly seasoned. They had already gone through because they had talked to some outside folks and some advisors about their customer concentration.
But the business was really still very up and down the margins and month to month and certainly quarter to quarter was kind of anyone's guess.
And so what we did at Samson as we were deployed and we went in and really started to map out those processes, those functional accountability charts in that operations. And what we found was that no one had an understanding of what their key metric was. No one actually knew what SOP. There were many SOPs in this business or what SOP they were supposed to be using. And one of the things that I believe always is that most people that show up to work, they want to do a good job. But the problem is that we're not clear.
We can be kind and clear and consistent about what it is that the expectation is of that person. So when we started to put roles, responsibilities and KPIs and not too many in front of our ops people, they nailed their numbers every single time. And then we were consistent in our
[00:17:03] Speaker A: performance because they were clear. They were clear with their expectations. And folks highlight something that you said. Not too many. This does not mean give your people five, seven, nine metrics to follow.
I find three to be perfect.
[00:17:17] Speaker B: Three, Honestly, I just like one, two or three.
You don't need a. When I say scorecard, a lot of people get confused and they think I have to have something with flashy colors and, you know, bolded headings and it has all these sections. A scorecard for me is something that I could put on an index card and I could write three sections on it and it should be very clear, very achievable in terms of the actual metrics themselves. And then, then you're not. No one is confused about what it is that they're supposed to spend their time on.
[00:17:48] Speaker A: Can we talk about key performance of a key business initiatives for a minute here because one, this is a huge trap that I see. It's towards the beginning of the year and all, all the businesses that, that come into my flow, it usually happens on January 28th when they're like, well, a month's down and I haven't met my goals. Well, of course, because I'm still in like hangover from, from holiday mode.
But they have 10, 12 key performance initiatives that they want across the year. Is that too many like, and they're. Oh, and let me, let me give you the other caveat. They're working on all 12 of them simultaneously.
[00:18:21] Speaker B: Great.
[00:18:21] Speaker A: Okay, so can we talk a little bit about why that's not the way to go and how that further, even if we have one, two or three metrics, can be confusing to our leadership and our teams?
[00:18:31] Speaker B: Yes, absolutely.
First of all, I think I'm a big believer in sprints and I think this has been proven out now that even highly performing teams, agile or squad or pod based production capacity, always does best with shorter sprints with a determined rest. And what that translates to with business initiatives is typically quarters are your biggest sprint, not an annual initiative, but quarters are your biggest sprint. And you always have to reevaluate and recalibrate because one initiative may be deprioritized after 60 days and you find out that there were two or three dependencies that fell through and you need to de or reprioritize something. So 12 month initiatives are absolutely not a great way to spend your time. Notwithstanding, as you mentioned, the communication factor, which, you know, I have executives sometimes in these newly formed teams who often come to me and say, I'm concerned about my rocks, my milestones, my initiatives.
Those are really highly dependent on the business on my team. How am I supposed to get those done? And I say, welcome to work. This is exactly what having an initiative means, is that you must collaborate with your executive or your leadership team. What that means is these quarterly initiatives are big, they're heavy, they're hefty and, and they take collaboration and precision to get done. Having too many of them means that everyone's going to be off on their own, doing their own thing, and no one will be helping Jen to get her milestone or her initiative complete.
[00:20:10] Speaker A: Right. And then what I also see is when you have too many of them, department A picks the one that they like the best. Department B picks a different one. So you have, you know, six or seven different areas of your business all working on different things. Nobody's like really moving in tandem, yoked to together. Together to drive forward.
[00:20:28] Speaker B: So which, and even worse, if we tie our your compensation up and your completion of your milestones. My goodness.
[00:20:35] Speaker A: Oh yes, a huge mistake.
But you know, this is really about having a North Star. It's about what is the one, two or three most important things right now in the business and understanding that priority and then clearly articulating them. As Jordan said, having one, two or three key metrics associated with your roles. Having one thing that everybody's really laser focused on, sprinting and, and I like to say focus to finish.
Let's focus to finish. If this is our, if our top need is to get more clients in to reduce our client concentration issue, then all hands on deck. What is every department doing to make sure we move forward and are able to drive that to completion so we can close that one, two or three other clients that we need to help with this scenario?
[00:21:25] Speaker B: Yes, these initiatives should be so mission critical to the business that everyone is on board. May not be that every department is involved in the solution, but certainly everyone is a customer of the solution and cares about the outcome. Unless you're doing a turnaround, which I would expect 12 initiatives to be part of a turnaround. Unless you are doing a turnaround. Your business has been functioning and you've built a great business. But now you need to focus on a few things every quarter to turn and refine, find that margin to turn and refine those areas that you're focusing on. Taking on too much is overwhelming and ultimately it creates entropy in the system where you leak energy out of all different places instead of focusing it on a few outcomes.
[00:22:09] Speaker A: So folks, you're hearing it here. This is expert advice, expert knowledge from one of the key advisors in the space, Jordan. How can people reach out if they're loving this and they want to learn more about you, the work that you're doing or maybe the book that you guys have produced that can help founders.
[00:22:26] Speaker B: Yes, feel free to reach out to us. We Seth, the founder and CEO and my 15 year partner in this business is always available. Sethamsonpartnersgroup.com I am @jordanamsonpartnersgroup.com look us up online. Samsonpartnersgroup.com and we are all over LinkedIn. We are known for our silly, ridiculous things on LinkedIn, funny commercials and things like that.
But we are highly responsive. We care so much about founders and we care so much about folks who really have a desire to scale or exit their business. This is a passion of ours. We want everyone to get what they deserve in an exit and the support that they need in the here and now.
[00:23:12] Speaker A: Thank you so much, folks. Be sure to reach out catch that book. It's an excellent book. I've read it. It's phenomenal. I recommend it actually to all of my clients as well. And as well as business partners. We do have to take a brief break, but after we're going to talk about how how often do teams look strong in the pitch and unravel under due diligence? What daily behaviors are founders signal signaling to a buyer that maybe they're not quite ready to let go? And more after these messages.
[00:23:46] Speaker B: Foreign.
[00:24:09] Speaker A: Welcome Back to power CEOs the truth behind the business. We have been talking about what kills deals faster in the than anything else. Is it the financial red flags? Is it the operational chaos? And Jordan McMillan is here from Samson Partner Group and she has shared that it's a little bit of all of the above. But we've really dove deep into operationally what we need to do as founders because let's face it, as founders we're really good. As entrepreneurs we're excellent at solving problems at growing a business. But when it comes time to exit, we need help because that's not what we're good at. And she's part of that advisory group that really helps to make sure that you're set for success instead of getting all excited about an exit that then maybe doesn't look like what we anticipated. So I want to dive deeper into that. Now we've talked about this, we talked a little bit about organizational chaos, but how often do you find teams look really strong at the pitch and before loi but then once we get into diligence, it completes completely unravels what daily habits are founders exhibiting that gives you that clue that hey, something ain't working right right here.
[00:25:22] Speaker B: Yeah.
So typically I will see in terms of diligence and teams falling apart in diligence, usually the, you know, the person who is selling the business initially to a buyer is the founder themselves. And so there's never any lack of confidence there.
The buyers are very excited about the founder and very excited about the opportunity. And then we get into the diligence room and management presentations. And sometimes what happens there is that is a red flag is either the founder is still answering all of the questions for the management team, which indicates either an issue where the founder is micromanaging or perhaps overbearing and over managing, or we have a team that may not be as enabled as we think.
[00:26:13] Speaker A: And so if the team's not as enabled as we think. What are we doing as buyers?
[00:26:17] Speaker B: We're starting to devalue the business because this means that the team has not already been enabled. And so either they have to be enabled post close and we will have to be the ones to do it or it's not worth buying anyway.
[00:26:32] Speaker A: Yeah. And I that as a buyer, I go risk, risk, risk, risk, risk, risk, risk.
Folks, if you're watching and you're an entrepreneur, you're a founder and you haven't transacted a business before, haven't exited a business before, it's really important that you put yourself in the shoes of the buyer and, and take off all of the everything that you've done, all of your blood, sweat and tears.
Cast that aside and ask yourself, if I was just introduced to my business today, would I buy it or am I buying a job? Like, ask yourself those questions and start to put yourself in that perspective. We're really good at sales as entrepreneurs. We believe in what we're doing. We're solving a problem which makes it really easy for us to get into the shoes of our customers.
Well, we sort of missed the buck a little bit when we were selling the business and we don't put our shoes into the, into the buy ourselves into the shoes of the buyer. It's the same as sales.
It just looks a little different. Our customer becomes the buyer and it's so incredibly important that we do that. So talk to me about how can founders sort of shed that this is my business, this is my baby. I've blood, sweat and teared it all
[00:27:41] Speaker B: the way and actually achieve that and
[00:27:43] Speaker A: put themselves in the shoes of the buyer and understand like what they are looking for.
[00:27:48] Speaker B: Yeah, I think a lot of this again has to do with trust and the team that you build around you. But a lot of this is also indicative of the schedule and how the seller is and how the founder are actually spending their time. So anytime that I see a seller whose calendar is busy, whose calendar is jam packed, and who is really taking a lot of operational meetings all of the time, I know that this person is not ready to step away.
This person either doesn't believe that they're part of the issue, or hasn't put the trust and found the team who can take the operational headache away from them. I do like the term visionary and integrator because I think that it really encapsulates the best I've found encapsulates what a founder really is. Founders tend to be very good with clients, tend to be very good in the market and usually are not the best at, at operating the day to day of the business. And this is because their heads are always thinking about the future, about growth, about clients. And that's a great thing. But what that means is that it necessitates someone to run the day to day operations and thereby freeing the founders up to go do things that are highest and best use of their time.
[00:29:10] Speaker A: And to talk to me about this because you're talking about execution, really you're talking about execution. And so we know that when we're building a business we need people to execute and to follow up with with the day to day. I, you know, I found companies I'm not interested in delivering the technical details or being tech supporter customers like so we know those things already. As we grow the business we release some of those easier things but it's harder to release the operational control. So what give me an example of a company where you've helped them through this really difficult transition and letting go and trusting and when things didn't go the way we thought they were going to go. Because it never does, folks. No one we hire will ever think like us and make the same decisions and we don't want them to. We want somebody who is complementary and going to add to that overall skill set.
Give us a story where this really is illustrated well in that transition and how to let go and who's the right hire for me.
[00:30:06] Speaker B: Yes, I again think of our entire Samson Partners group is really focused on professional services. And so most of my stories come from the professional services space. Space. And in this particular instance I came in to help a founder of about 12 years and this person was still entrenched in the business and this person had gone through two leadership teams.
Soup to nuts. Brought in a whole leadership team, exited a whole leadership team, brought in a whole one, exited a whole one twice. And this person had some real trust issues because the leadership team in their mind had really let them down and the P and L showed it and so the founder had to step back into the business and they didn't really want to. And ultimately I came in and I used that founder as a subject matter expert for a long time and I said I just want to learn from you.
And that was also my way of building the trust that I wanted to give that founder the opportunity to tell me all of the things about the business that they knew. And every nook and cranny of the business the SOP says this, but you do this, you've got to check on this client daily, but you have to check on this one weekly. All of those little things that are so important to someone who cares and is passionate about the business. And then what I did is I documented those things and I said, this is wonderful. I want you to know that now I have what is in your mind and I want to come up with an agreement with you of what an outcome will be that will allow you to give me control of this little department and then this department and then this department. Then we built a budget and then we built scorecards, then we built a leadership team. And now we're about 15 months after that. And this founder is still involved in the business, but by no means is the business dependent on the founder. I mean, every single approval had to go through this person. And now this person is free to go travel. This person is free to pick their children up from school. This, this person is now freed from that day to day. But because we have developed the trust and the cadence and data that anchors our trust and our relationship, this person is now, I think, and I'm very proud that the person is, I think, very happy with the business.
[00:32:25] Speaker A: That's excellent. Okay, so let's shift just a little bit more because I want to move to a different topic after the break. But we've talked a lot operation operationally, but we really haven't talked very much legally or structurally. Like what blind spots do you see? I also work with professional service based businesses and so I'm really excited to do this. And we'll carry the conversation after the break if need be. But what's costing sellers post close in these businesses that they're not considering from a legal or structural standpoint?
[00:32:56] Speaker B: Yeah, I think that from a structure standpoint, certainly it's really important that you understand how you'll be compensated and what contingency is put on those comp on your compensation post close.
That can be a really confusing thing for sellers up front. And what I find, unfortunately, is that people tend to not ask the question, they tend to not get clarification. And a lot of times there's attorneys involved and lawyers are redlining this and redlining that. And what gets lost in the mix is what does this mean for me after this whole thing is done?
[00:33:31] Speaker A: Absolutely. And we see that a lot. And I really want to dive into that deeper. So we're going to table that for just a moment because we do have to take a break. But buyers pay for what is provable in your business. If it's living in your head, it has no enterprise value. That's what Jordan is talking about. She's like, we have to document every process. And if you're watching this, you're like, I'm not going to exit. I'm going to be in the business. Well, great.
Today is the day for you to get it out of your head.
It has to get out of your head and into onto proverbial paper so that you can then start to delegate some of these things and trust whoever you bring in on your leadership team, your management team, to be able to deliver the things that you want. It's time for you to develop those metrics, those scorecards, and to be very laser focused on what it is that's going to move the needle in your business. This whole episode we have talked about how to set yourself up with a foundation for success. And this. It doesn't matter if you're not exiting, if you want to grow or even if you want to step back and maybe exit your role a little bit so that you can have more free time. This is essential for every one of you to consider in your business.
So I just wanted to really summarize that because we're about action here. And if you've just been listening, that's worthless.
You have to take action on something that was said today. But just remember that founders get paid for what they can defend under pressure.
In modern deals today, pressure includes technology.
It's a multiplier. Use it, leverage it, use transcription, get it out of your head and onto paper. That's the easiest action step for anybody watching. And if you're on the, if you're a buyer, do the same thing. What is it that you're looking? What is your buybacks? What are the things that you're looking for? The things that are most important to you so that you can filter faster through deals that might not be a good match for you. Coming up next, we are going to dive deeper into this. Like how, how do I think about the structure? How do I think about how I'm going to get paid when I exit my company? Because this is a very big area where founders struggle and there's not enough information out there. So stay tuned. You're not going to want to miss it. And don't forget to join the Power CEO's Facebook group and stay informed. Let me know what your questions are and I will bring the experts to you. We'll be right back after these messages.
Welcome Back to Power CEOs, the truth behind the business. Loving what you're watching Download our app, our Now Media TV app for iOS and and Roku or you can catch it in podcast format at www.nowmedia.tv where you can watch any of your favorite Now Media programming anytime, anywhere. We're ready when you are. We're gonna dive right back into our topic today and shift to what do I need to know before I structure my deal? If I'm a founder and I'm looking to exit what happens after the deal?
So many times, Jordan, you have seen founders win big and then struggle after.
We are entrepreneurs, we're founders, we're running business and maybe we're staying on now for an extended period of time and oh, I'm now an employee. I didn't think about that beforehand and maybe I didn't have the right deal structure. So talk to us a little bit about what are some of the structures out there and what do we need to consider as entrepreneurs, as founders, when we're looking at that deal structure.
[00:37:22] Speaker B: Yes. So Jen talked about it a little bit. You need to consider your role in the organization, in the company.
After you transact, are you looking to just walk away and ride off into the sunset? That's certainly one option.
You should know that that may come at a price on your valuation. So 100% cash up front deal will have some strings attached to it as it relates to the valuation because there's always a risk that there is something in that head of yours that is going to ride off into the sunset and then depreciate the value of the business that was just purchased. So you do need to consider are you willing to stay on and if so, for what period of time. So the other mechanisms that you'll see in a deal structure will be an earn out of some kind or a rollover. So rollover simply means that part of your cash consideration can be put into equity in the company, in the larger company after you close. So you typically wouldn't receive that cash, you would just immediately roll it over. And that usually is a good indication for a buyer because it does mean that you are invested in the long term success of the business and you're willing to actually become an investor yourself. Also a great way to get some great returns on that investment later on.
I always tell people that's a way to kind of show the buyer that you're willing to bet on yourself and that's a good thing to be able to do. Now if you don't want a roll, but the buyer might say, well, I need performance out of you because there's still some risk in the business, whether it is in some of the things we've talked about like customer concentration or key processes, or you haven't quite yet figured out how to install your successor and make that person ultimately the leader and the successor of the business, you're going to be looking at some kind of earn out structure. And what that means is that there will be some KPIs or metrics that will be put in front of you that you will have to hit.
Usually earn outs are between two and five years. So expect something along those lines. And that is also a point of negotiation, of course for you with the buyers. But you will receive certain tranches of cash of your cash consideration tied to those metrics. Now, there's all kinds of negotiation that can happen in an earn out. And that's I think what you're talking about, about folks not having a grasp or understanding of what levers they can pull for themselves in that scenario.
[00:39:49] Speaker A: That's exactly right. And so shed some light on this because if you're exiting for the first time, folks, it's exciting, it's exhilarating, it's exhausting in diligence.
And a lot of times we don't really understand all of the terms and maybe we don't even have the right bench, we don't have the right team behind us to go through everything and we don't understand. But as founders, one of the things and Jordan, you and I actually talked about this off, off the air earlier and that's we don't want to admit that we don't know. We're not sure what something is being discussed, especially in the earnout conversation. So shed some light on some of the negotiation power that we do have and some of the things that it's common for founders to always we keep quiet. We don't admit that we don't know and we miss on. So let's, so let's divulge some of that.
[00:40:40] Speaker B: Yeah. So as it pertains to an earn out, the more specific that you can get, the better.
So a lot of times what I will find is again, some of these folks that are buying a business don't actually know how your business works. They are not experts. Now if it's their first time in the space, you'll know that they don't know. If they have a few other companies in their place, platform as an example, or they've been active in the space, they may know a little bit more enough to certainly convince you that they know how your business functions. But you are the one who knows how your business functions best. And so if they are tying any piece of your compensation as an example to profitability, you should get extremely specific on what is included in that profitability, what the benchmark is of that profitability, and are there any carve outs or any considerations outside of that. If you're in a business where there's some kind of contingent revenue or contingent margin based on the outcome of something that is outside of your control, is that considered or not in that profitability? These are things that really you must advocate for yourself when it comes to an earn out. And only you can make those specific carve outs with your attorney.
[00:41:55] Speaker A: That's exactly right. And you know, now let's talk about the employment side of things because this is where it gets fuzzy. Maybe we've negotiated, we've done everything that we want and it's our first exit. And now I have a pot of gold and my motivation goes, this is normal folks. And also we're like, I don't really care for my new boss or I don't like the direction that they're going in. Talk about that and how do we mitigate that from happening both before we get there?
[00:42:26] Speaker B: Yes.
Getting to know your buyer is so important and understanding the vision. And truly as an entrepreneur, I think if you're going to stay on for any period of time, you have to have ownership in that vision. You have to be, because by nature of you being an entrepreneur, you thrive off of passion and vision. And so you need to align and find the right buyer who aligns with the vision that you can get on board with.
You're going to have to report out to somebody, somebody's going to end up being your boss. But if you guys can have the vision as a foundational piece that you both agree on and you can both get excited about, it creates a lot more opportunity for you to hit the goals that they want you to hit. And ultimately you want to hit too. As it pertains to feeling a little bit tired after a deal is done.
That's certainly something that is very, very, very normal. My suggestion is you have to show up for the first quarter. It's super important, especially for your employees who very likely don't know about the deal. It's very important that you show up day one, post close that you're involved in those communications, especially if you've been involved in the day to day. Any change can honestly spook people and any change can ultimately erode value in the business. But again, if you're on that earnout, you want retention and you want very little turnover because you need the business to perform as it was so that you can also achieve what you need to achieve from a metric perspective.
[00:43:56] Speaker A: So how do we manage the fatigue? Because fatigue is real.
[00:43:59] Speaker B: Oh, yes, yes.
My suggestion is that you lean on and Jen, you mentioned this in your introduction that you lean on your friends, your family, your support system. They are the ones who are going to get you through this and it's really important. I have seen so many people, when you go through diligence and you're on a sell side diligence team, you are getting to know the sellers and that means you're getting to know their families. And that means sometimes late in the day, after fatigue sets in, you're getting to know some of the issues that they're having, I would say on the field and then off the field.
And I consider it an honor, a privilege and I take it extremely seriously and with the most compassion that folks, we're all living our lives but you have to depend on your support network. And so I would also recommend that before you start the process you understand what your support network is going to be and you lean on those people hard.
[00:45:04] Speaker A: Yeah, absolutely. I couldn't agree more. So Jordan, this has been really phenomenal. How can people reach out to you to learn more and give me the one takeaway that you want everybody to have from this conversation.
[00:45:14] Speaker B: I would say if you can pick up the owner's manual, why, when and how to sell your business to private equity. Even if you're not considering selling to private equity, you don't even know what private equity is.
There are so many great nuggets in this book that help you to prepare just to take a step back from your business.
It's rich with resources.
I wrote very little of it. It was written by Seth Moseley and so many wonderful contributors who have so many fantastic success stories to share from all different types of industries and experiences. And then if you can go to our website, SamsonPartnersGroup.com and engage with our EVRS toolkit exit value Realization.
It is just full of assessments and tools that you can use to implement our business system with your team today.
[00:46:04] Speaker A: Thank you so much for being here today. I really appreciate it and we'll definitely be having you back.
[00:46:08] Speaker B: Awesome.
[00:46:10] Speaker A: And you, yes, you. Now is the time where we take action. Go interact with that toolkit. Whether you're exiting or not, it is valuable. There is a lot of things that you can implement into your business as the foundation of your business so that you could actually breathe a sigh of relief because you know you have the foundation set so that your business continues to operate without you. If you do choose to go for a three week, six week, nine week sabbatical, your business is going to continue to function.
So I just want to leave you with you don't sell a business. You're transferring leadership. Your legacy is whether it thrives without you.
If this conversation challenged how you think about scale, risk or exit preparation, be sure to connect, engage and then do the work. Because exits are not engineered in the final year, they're engineered from day one. Each and every one of us has an exit from our business, whether we plan for it or not, in a good way or not. Today's the day we take control of that asset and really take control of our future and the legacy that we're going to leave. We will be back here same time, same station next week. So until then, win today, win this week, and we'll see you next time. It.
