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Exit Planning is a Team Sport, Part 3 | Grow Your Business Value for a Profitable Exit
Looking to grow your business’ value, maximize your exit results, and ensure financial freedom, even during a recession? To learn how, tune in to this episode! This is Part 3 of our series, Business Exit Planning is a Team Sport.
In this episode, hosts David Armstrong and Jessica Gibbs wrap up their three-part discussion with Greg Maddox of Cultivate Advisors by discussing how to maximize your business value and your exit results, all while prioritizing business freedom, financial freedom, and personal freedom.
Doubling down on the importance of hiring a wealth manager during exit planning, Greg talks about how to grow your business as an asset and diversify your income and wealth as a business owner. He then highlights what you should consider if you’re looking to maximize your exit options and sell your business during a recession. Finally, Greg addresses the 3 main problems business owners face in planning an exit and how to discern if an all-cash offer is right for you.
Bonus: We’ve teamed up with Greg to offer a free resource to help evaluate the health and value of your business. Get Cultivate’s Business Health and Value Assessment here: https://bit.ly/3COxTMW
Please see important podcast disclosure information at https://monumentwealthmanagement.com/disclosures.
“Instead of chasing profit, if we focus on value first, revenue and profit come along for the ride. If you focus just on revenue and profit, you could probably make a lot of money, but whether or not you built an asset somebody else would pay you for, that’s less likely. So, I think it’s just a mental shift there.” – Greg Maddox
Episode Timeline/Key Highlights:
[00:22] Introducing Greg Maddox & the topic of today’s episode.
[01:51] Growing Your Business: The difference between multiplying value and adding revenue.
[03:44] How to multiply the value of your business.
[10:44] Separating Your Business from Your Personal Wealth: Ways to diversify income and wealth as a business owner.
[24:11] Maximizing your exit options during a recession: Evaluating buyers, deal structures, and future roles after exit.
[35:26] Is an all-cash offer worth it? How do you know if it’s enough?
[37:02] Greg’s final advice: Begin with the end in mind & Build a good exit team.
[42:12] How to connect with Greg.
Listen to Part 1: https://bit.ly/gregmaddoxpart1
Listen to Part 2: https://bit.ly/gregmaddoxpt2
Learn more about Cultivate Advisors: https://cultivateadvisors.com
Business Health and Value Assessment (Free): https://bit.ly/3COxTMW
Listen to Best Practices for a Successful Business Exit with Kevin DeSanto: https://bit.ly/3prdBGo
About Greg Maddox:
Greg is a Senior Business & Exit Advisor at Cultivate Advisors in Chicago, IL. As a serial entrepreneur, Greg Maddox provides his clients with the same long-term planning he used to make his own businesses successful. From owning a mortgage company that went through the housing bubble crisis to a financial services company during the ’08 financial crash, Greg steered his businesses with clear foresight no matter the turbulent environment. Now, as an advisor, Greg brings exit planning into the present and helps his clients live their Ultimate ExitLifestyle—even if they never sell! And for those ready to move on to the next chapter in their lives, he ensures they are mentally and financially prepared to fund their next step and live an amazing life.
Connect with Greg:
Connect with him on LinkedIn: https://www.linkedin.com/in/gregorymaddox
Visit his website: https://www.myexitlifestyle.com
Email Greg: email@example.com
Jessica Gibbs Okay. Welcome back to Off the Wall. This is our final part in our series about business exit planning with Greg Maddox, a senior business and exit advisor with Cultivate Advisors. So welcome back, Greg.
Greg Maddox Yeah, great to be here.
Jessica Gibbs If you’re listening to this and you haven’t caught episodes one and to make sure you go and check those out and Monument’s library for Off the Wall. But before we start jumping to the conversation today, I actually want to highlight a free resource that cultivate is made available to our listeners. It’s a business health and value assessment. This assessment takes less than 15 minutes and you’ll get a report that includes things like what your business is worth, a business value and growth roadmap and value acceleration strategies. So you can find a link to that in our show notes. Thank you, Greg, for making that available to our listeners.
Greg Maddox Yeah, our pleasure.
Jessica Gibbs Let’s dive into the episode. In this episode, we’re turning to phase three in Cultivate’s exit planning process, which is called the Exit Lifestyle Accelerator. And phase three is really focused on personal freedom. So in other words, how to maximize your business value and your exit results. Again, if you’re just tuning in and exit has not happened yet, everything that we’re talking about yet right now is pre-exit. And you should go back to episode one and listen to what’s the distinction between exit planning and actually leaving your business because they’re really different and Craig talks about that there. So jumping in, Greg, when it comes to growing your business, you advise business owners to focus on multiplying value, not adding revenue. What’s the difference?
Greg Maddox It’s really interesting, especially if you’re a founder, you know, and you started this thing from scratch. And in order to get it off the ground, you’ve had to force yourself to go and chase the dollars. You’re focused on adding a dollar of revenue and adding a dollar profit just in the beginning just to get off the ground, then to keep the lights on. And eventually we just kind of settle into that as normal and a business that is, you know, making the business owner a lot of money is not necessarily valuable if the business owner is, you know, extracted from it and the whole thing falls apart. So I call it business owner math. And it’s not about the addition, it’s about multiplication. And so the way businesses are valued is, you know, some range of multiples in your industry times your typically your profit and so easily put the the less involved the business owner is in having to you’ll be the key person answer all the questions lack of documentation no leadership team, no systems, no processes, etc.. The lower the multiples going to be, the more that stuff is solved, the higher the multiple is. So the more value, the more someone will pay you for the business. And so I think it’s just it’s it’s a mind shift that instead of chasing profit, if we focus on value first revenue and profit come along for the ride. If you focus just on revenue and profit, you could probably make a lot of money. But whether or not you you built an asset somebody else would pay you for, that’s, you know, less likely. And so I think it’s just a mental shift there.
Jessica Gibbs Can you expand on specific ways that you can multiply value of a business?
Greg Maddox Sure. So we use a framework methodology that we developed called the propeller methodology is because the the the way that it looks looks kind of like the front of a jet engine. And so it’s the center is financials for us. And then on the the growth side of the house, you’ve got sales and marketing and then you have leadership and recruiting on the capacity side and then productivity intertwines through it all. And so that’s an easy way to think about some of the hats that you have to wear as a business owner. And what can I do to professionalize or systematize those areas of my business? And so if you think about it from the financial standpoint, are we using data to make decisions? Everybody probably has a PNL, a balance sheet prepared for them monthly, whether they use that information for decision making…that’s just the financial accounting. There’s operational accounting about the way that money flows through your business. With that, there could be some operational reports that come out of that that are more important for your daily decision making. And are you utilizing that data? Is your bookkeeping or accounting team helping you take the financial information of how money flows through your business and how you eventually get that money to land and how you use that money into reports that make sense. So it’s just on the financial side. And am I creating forecast? Do I have a target? You know, next year I want to hit X millions of dollars. And have I created a plan of attack of how to get that? So if I want X million next year, now I move into sales. Well, what’s our average widget size? Like, what do we sell? So how am I going to go achieve that? And do I know what my sales funnel looks like? So I have step one, step two, step three. And then eventually somebody says, yes and gives me money. Well, do I know what my conversion metrics are? In other words, if I do, I can reverse engineer how many at bats or leads that I need so that my team can see enough people ask for the business, enough times to get enough yes’s to hit my financial targets. And so now that I know that number, a number of leads that ties in the marketing. So now if I know I need X number of leads over the course of the year or the month or the week, then what is my plan to go and get those leads? What channels am I going to use? What’s my budget? How am I going to track effectiveness? Are allies so that I know what’s working and what’s not working. And I can make, you know, intelligent choices to, you know, get rid of the losing propositions and double down on the stuff that’s working.
So just on the growth side of the House, going through a process to solve those things I just mentioned are things that will help you improve the value, the multiples, because in order to solve that, you’re probably going to have to create some systems and documentation of process and training, and you’re going to have to teach the team and communicate what’s working, what’s not working, and create more of a performance culture. On the capacity side of the House, we have leadership and recruiting. So leadership is a big tent. So yes, it’s how you lead the team, but it’s also. How do we actually produce the result? And so that has to do with, you know, what’s the way that we lead the teams. What’s the rhythm of our meetings and communications that we have so that we are building culture, but also holding attention to accountability and finding that balance of how do we actually produce the results? Do we have KPIs and metrics tied to each role? Have we figured out a way to take some portion of the of their compensation and attach it to those KPIs and metrics so everybody’s motivated to row the boat in the same direction that’s in alignment with what the owner wants. And if I look out into the future on those forecasts and say, okay, if I start hitting those numbers X months into the future or whenever, at what point am I going to kill my team? And so am I going to have a capacity problem if I actually hit those targets? And then if so, how are we going to solve that? So that means that we have to bring more people on.
Now we get into recruiting and do I know how to go out and actually sell top talent to come and work for me, especially if you’re a small business, you have to find the right person who enjoys the idea of something is not fully baked yet and has the ability to come on that journey with you and understand that there’s not three floors of people and two departments that handle that one thing that you don’t like to do that we all have to kind of chip in even though we have a lane. And so and then the last thing is productivity. What’s usually the main thing there is tech enablement. How do we leverage the various tools and tech that are specific to your industry or your business so that we could, you know, limit human error and also accelerate how fast people can get the job done well so that we can save time, save money. So these are all examples of things that have to be solved as business owners to turn your business into an asset. This is what we do at Cultivate. We partner with the business owners and their teams and help them figure that out, create a plan for it and help them execute against it. And in many cases we help them build out the content systems, etc. that fills that system with the things that the team actually uses. So at a high level, hope that your gives you, you and your listeners some idea of the kind of work that needs to get done to turn a business into an asset that somebody else would pay you a lot of money for versus you could just own a job that is paying you well, but, you know, really wouldn’t be great for the next person. Nobody wants to pay you a ton of money to step into your shoes and have to do all the work.
David B. Armstrong You know, when I hear you talk about the business as an asset, it really makes me reflect back, you know, because for listeners who don’t know, Jessica and I are two of the four owners of this business, but I was one of the founders, so I’m older. And I look at my business as an asset and I tend to view it as this thing that some day is going to be the golden egg and it’s going to be the thing that yields me this huge payout, right?
Greg Maddox Someday I hope, right?!
David B. Armstrong And it’s interesting because we’re actually going through our annual valuation right now, and you look at it, you’re like, Wow, You know, sometimes I complain about the cash flow I’m taking home. But then you look at the you look at the valuation, like, I’ve really got I’ve got this real thing that I own. And I’m like, okay, well, someday, right, Someday is sort of the mantra, but I’m wondering if you can talk to listeners (and I’m going to take notes when you answer this by the way, too). But can you talk about the other ways that a business owner can diversify wealth in income? And specifically, I’m thinking about in the first episode you talked about some retirement plan stacking and you know, how to separate wealth from business and how to create those multiple income streams. I’d love to hear you talk about that for a few minutes.
Greg Maddox Yeah. And so to to quickly reframe for the people who haven’t listened to the first two episodes, you know, regardless of how much money somebody is making, how many commas in their revenue lines or profit lines, there’s three common problems that I see most business owners have to deal with. And number one, that they own a job, not a business, you know, and that might feel rewarding to be the go to answer person, you know, who solves everybody’s problems in the beginning. But eventually that gets really exhausting being the center of all action in your company, and it’s limiting. Number two is that they have all their financial eggs in the business basket. And that’s because, as we talked about at the top of this show, you know, most business owners haven’t been thinking about building an asset. They’ve been built, they’ve been building income. And if they stop working, the income usually stops and oftentimes the wealth comes crashing down, too, which is why your question is super important. And the third problem just around that out is in trying to solve those first two issues, we tend to over sacrifice on the personal family and health front, thinking that, you know, we were able to white knuckle it up to this point, so I guess I can always just burn the candle at both ends. But the truth is, you’ll have a wall will eventually be hit and all things will suffer. You know, family, health, relationships. And if you’re not careful, you can burn it all to the ground. So the alternative is just saying, well, how can I find a balanced way to solve those problems, turn my business into an asset that can, you know, grow and thrive without me or with as little of me as I want to to give to it. So that it gives me time and money. We call that business freedom, and then I can take some of that time and money working with folks like Monument and start creating liquid assets and income producing assets separate from my operating business. I have more than one horse pulling the wagon, which is how you start creating financial freedom while you own it, because you could be financially independent on paper right now with the current value of your company.
But that doesn’t take the stress away. If you have not separated wealth and liquid income-producing assets separate from the business. And so that does a lot for and we’ll talk about that in a second. And then so that’s how you create financial freedom. And then on the personal front, you have to be able to build a business that has team and systems and process so that you are not working around the clock so you can actually take and put the oxygen mask on yourself. And because it’s hard work pulling off stuff as an entrepreneur and it doesn’t get easier, you know, you have to get stronger as the business grows and orders show up and pull off big stuff, not just in your business, but in life. You’re going to have to have some downtime to rest and recharge. And so and part of that, a big key that is the financial piece. And so a couple of ways when it comes to how can you separate wealth? Well, number one, need to create a plan where you understand my growth plan and how much I need to reinvest into the business, how much I want to take as personal income. And I have to have a plan with folks like you guys at Monument for what can I be doing and creating budgets for this. And so that on the business side and the wealth management and tax and legal side, everybody knows what the game plan is so that we’re all working off the same plan. But there’s I have, you know, many clients who are putting multiple six figures a year into their retirement account. So most business owners think of the 401k as a benefit for their employees. If you’re a successful business owner, what’s the cap, $25,000 or $30,000 a year, something like that, depending on your age, is the most that you can put into a 401k? Well for most successful entrepreneurs, that is not going to make a dent in their, you know, wealth gap adding $25K or $30K a year, but adding a few hundred thousand a year or more – that can make a serious gap. And so there’s I call it and I should also preface on this, that this is not tax, legal or investment advice. I don’t hold those licenses. I used to own a financial services company, but I partner with folks like Monument to pull this stuff off.
David B. Armstrong Right. And we should say the same thing, which is anything you hear on here, run it by your designated tax expert. And we are not the final authority on any advice, but we’re going to talk about a few things that, you know, could could create some some creative thinking for the listener.
Greg Maddox Yeah, I’ve found that lots of business owners are just not aware of what’s available. Their current advisors aren’t showing them what’s possible or the team is just operating in silos. And so, you know, some one of the advisors has a great idea, but it never gets passed around for the whole team to each put their stamp on it to come up with an integration plan that works for the business owner.
Jessica Gibbs I don’t want to play like a contrary opinion here, but, you know, I think some of these things, when it comes to setting up what you’re describing is called a, you know, defined benefit plan. You know, there are a lot of administrative hoops and costs, potentially, you need to be restructuring your business in order to accommodate it. So not to be contrary. I’m just saying that a wealth advisor can help you think through and help you determine if the benefits of setting it up, potentially restructuring your business are going to be worth it for you.
Greg Maddox It’s not a one size fits all, but there are lots of strategies that are available and there’s many flavors of that defined benefit, defined contribution, cash balance, right? The profit sharing, there’s lots of different ways that you can choose to stack that up. There’s also more advanced things if you qualify, like captive insurance, and there’s just good old fashioned take money out, whether that’s a distribution or you take it as a salary or what have you and put it to work someplace else so you don’t have to get fancy with it. Some of these things have tax deductions to the operating business and allow you to, you know, save money in a tax advantaged way like the cash balance plans or defined benefit or contribution plans. I call it stacking retirement plans. Or you could just choose to take money out, you know, as instead of just spending it as lifestyle income or reinvesting everything back into the business, you might have to find a balancing act that says, “How do I also start stacking up some money separate from the company that gives me some more peace of mind today and some more choices tomorrow.” And I guarantee you that if you asked your if you’re married or have a significant other and if your spouse or significant other is not in the business, you ask them how comfortable they are with your level of liquidity, I guarantee you it doesn’t match yours as the business owner. You know, they can be comfortable in the fact that, you know, you guys have had cash flow for a while and so they’re confident that the bills are getting paid. But if you actually ask them, you know, if something happened to you, meaning the operator of the business, how comfortable are you, non-operating spouse, with your financial position? And you would probably hear a different story. And so when you go through this planning, that’s so critical, I think having that partner comfortable and in your corner gives you so much energy and focus and ability and drive to move forward and knock out great things. This kind of planning, you know, holistic tax, legal, and wealth financial business planning increases a lot of positive things in your life, not just the money.
Jessica Gibbs Yeah, underscoring what you’re saying, it speaks so much to how we operate at Monument. We just believe so strongly in cashflow based planning and how important it is to balance things like contributing to retirement plans or regularly investing cash flows from the business, you know, versus, treating your your business, the funds that come out of it as as available for living expenses. Because as you’ve talked about in past episodes, you know, once you sell that business and those funds dry up, I mean, where are you going to fund your lifestyle from? And also, I just love what you’re saying about involving your spouse. This is something we see all the time, particularly when we start working with new clients through we call it our our “Monument Blueprint.” It’s designed to be a conversation that’s really delving into people’s goals. What’s the money for? Kind of what do you have in mind for your big what ifs? You know, what are the things you’ve always dreamed about? And I just I’ve been doing this for so many years now that I always find it fascinating that each spouse maybe there are you know, they’re they’re aligned on a few things, but there’s there’s inevitably always some differences. Like some spouses, like you said, have a different risk tolerance about something. And I just think it’s so interesting to see that a partnership is not a monolith. It’s not one group of people. Each person has their own thoughts. And it’s just always been that way. And I just think it’s always so interesting and but it’s hard to have that conversation openly with your spouse. I mean, sometimes it takes an outside advisor to kind of ask a few gently probing questions to get the conversation going.
Greg Maddox And it doesn’t mean that that the situation is, you know, bad currently, like I give an example of a client where he, you know, was the operator in the business. They had it for like 20 plus years. They were doing well. They’re pulling out, you know, close to $1,000,000 of personal taxable income a year. It wasn’t always that big, but for the past, you know, multiple years, they’ve not had to worry about money. Right. But he was getting to the end. He had to exit it operationally. In other words, his leadership team was running the business, mostly. He wasn’t in the office on the regular. He and his wife were traveling, seeing kids and grandkids. And he was, you know, Zooming in to leadership meetings, etc.. He’s proven that his business is sellable. His issue was mentally he wasn’t ready for what was next. And so we were working together to say, well, if you’re not ready. And he hadn’t hit his freedom point yet either meaning the target sales price, that would fund everything so he didn’t have to take a haircut in lifestyle. So well, we have time then to grow the business while you’re figuring the rest of that out. And so as we delved into our process, it turns out that he didn’t have a wealth manager. He managed to save up about a million bucks liquid just DIY-ing it, which is better than a lot, but not enough for what he needs. He had a 20-30-year old very basic estate plan that was out of date and inadequate for his current complexity of everything that he owned and his current net worth. And so as part of it, we plugged them in, made some introductions. He found a wealth manager, found a tax attorney. They start building the plan out and going through that process as a team with the wealth manager, the tax attorney, myself and the husband wife.
The amount of relief that the wife expressed when we were executing on the plan, which was not cheap, by the way. He had write some checks to attorneys and move some money and do some stuff, but the ROI was massive for them. So but it was a it was something that most business owners shy away from, it’s why they haven’t done the work yet. But I can tell you that his wife was so excited because now we had a game plan in place because if something happened to him, she doesn’t know anything about the business. She doesn’t know how to run it. She does know how she would get the cash flow out of that business to keep funding her lifestyle while we dealt with the fact that she just lost her husband, whether that was disability or death or whatever. And so when we went in and solved all of that with proper planning, she had a sigh of relief. And she expressed it verbally like she really felt taken care of at that point and said, okay, we have a plan. You know, I don’t think anything’s going to happen, but if something does, I know that myself and the family, the kids were taking care of the business is going to get taken care of as well for the, you know, the leaders that are in it, etc.. So everybody is going to come out okay in spite of a bad thing happening to her husband. And so I think a lot of people underestimate, you know, you have a spouse that has been you’re ride or die helping you build something has been in your corner. And but chances are they don’t feel the lack of stress in the way that you do. They feel the risk of your business heavier than you, probably. So this kind of planning, it’s good for you. It’s good for the family, it’s good for everybody. And it’ll probably lead to elevated energy to pull off bigger stuff in the business.
Jessica Gibbs I want to kind of switch gears because the last step you talk about is cultivating your exit and maximizing your exit options by evaluating different types of buyers or deals structures or roles that you may play out after an exit. And for listeners, if you haven’t already, go back and find in our catalog, we have a great episode with Kevin DeSanto, who is an M&A advisor with KippsDeSanto. He talks a lot about those types of buyers deal structures and roles in that episode. But, something that we were talking about recently was was someone we know, you know, who’s a business owner that, three years ago, pre-COVID,he thought he was going to sell his business. He thought it was on track for selling, for $40 million. And now, you know, post-COVID in the current economic environment, you know, he’s getting ready to sell the business and he is now targeting a sale price of, you know, $15 to $18 Million. So, less than half of what he was originally thinking he may get from his business. So I’m wondering, in your opinion, if there are additional things that business owners should consider or do if if they’re looking to sell their business during a recession. Does that economic environment change your options or does it change the way that you plan.
Greg Maddox No, you change your options. What should that person do? Go back in time, 10 or 20 years and start separating wealth. And I’m not being like flippant about that. I don’t know if I said this on a previous episode, but I had a client who, right before COVID was about ready to sell. It was a small company, was about a $2 million transaction and we were like two weeks away from the closing. And then COVID happened. The money from the buyer dried up, got pulled back. COVID also severely impacted her business, had to lay off a bunch of people. She had to downsize her real estate footprint, and then she had to spend two years trying to reinvent the business and build it back to something. And then a little over two years later, it was sold for less than half. So similar situation that you’re talking about, less zeroes, I should say, the good news is she had already separated a bunch of wealth along the way. Though it had nothing to do with me. She was just wired that way. She had multi-millions liquid in her savings. She had a very profitable business. She lived a great lifestyle. But she didn’t want for anything, but she also made it a priority to to take some of that cash flow and save it. And so even though it stung when you thought you were going have a $2 million payday, in her example, and it got the rug pulled out, and her 20 years of blood, sweat, and tears got demolished inside of that business, she had to figure out how to, from a pride perspective, rebuild it back up. And that ended up selling it for $800,000 instead of $2 million. Well, guess what? It didn’t change her life at all financially because she did this work ahead of time. So I think that we can’t control the ebbs and flows there. It’s cyclical. If you look back, there’s still there’s been research on this. The ten year windows tend to be cyclical around if it’s a buyer’s time or a seller’s time. But then, you know, who would have predicted a COVID? Right. And what about technology? Right. Taxicab companies, who would have predicted Uber coming in and just killing the value of your business? There’s a lot of things like that that we just can’t control. And, what worked for you now or in the past as far as making your business successful might not always work into the future because business models and markets shift over time and technology can accelerate that. So I would say, yeah, be cognizant of that. Understand that, you know, you’re not always going to be in a bull market and just because it’s worth $40 million today, you know, thinking that it will always be worth $40 million. Now, obviously, this this client or friend of yours learned unfortunately the hard way. So I would say, you know, part of what they should be looking at, they should be valuing their business along the way. And if they’re doing that while they’re growing the company years ahead of schedule, they’ll see those ebbs and flows before it matters. Like, hey, last year was worth a lot more. This year, not so much. Geez. Good thing we’re not selling this year, right? Maybe that changes how I think now about my tax, legal and wealth planning. Like, what’s the balancing act I’m going to find between separating some wealth, creating other resources, like a lot of entrepreneurs like real estate. It seems like an operating business to them. You know, I buy this thing, I can touch it, I can feel it, and it kicks me money back in the form of rental payments. You know, so whatever it is, people should be doing something along the way, not keeping all of their eggs in that one basket. That will help.
The other thing that people need to do that, you know, that speaks to, there’s three main problems when it comes to, you know, kind of cultivating your exit is that your business and personal finances are inadequate. So the business itself is not ready to be sold and your personal finances are inadequate. So what we’ve just been talking about and so if life throws you a curve ball and you have to sell, or you’re forced to to sell, you just have to take what you get and figure out how to live on less. And hopefully it’s enough. The second big problem is that the personal identity is fused to the business ownership. So like my client, I told you about who mentally hadn’t figured out what he wants to do next. He doesn’t know. He already has a boat. He already has an RV. He already travels around and does fun stuff. But that’s if he has to do something that he feels is creating value in the world, doesn’t mean he has to build another business, but he has to do something that has meaning for him. Everybody’s different. That could be hanging out with your family, that could be taking care of your own health. That could be a giving back to your community. It could be taking up hobbies that you’ve been ignoring for 30 years where you grew a business. It doesn’t matter what it is, but, you have to figure out, what is it that’s going to have meaning in my life. Because now if I’ve exited, I have more time and more money than I’ve probably ever had. But that’s something that tends to kill deals because if I’m not ready to leave, I can find lots of reasons to make a fuss during the during the due diligence or just the sale process and find a reason to fight and walk away. Price Waterhouse Cooper has done the research on this: One year after selling, 75% of owners report being miserable and profoundly regretting selling. And it’s not because the money wasn’t good, it’s because of this. They didn’t figure out what was next yet. And we talked about this in the previous episodes where, you know, they start making bad decisions and start blowing through their cash. And now they don’t have a pipeline of cash coming from the company. They have a pile of cash from selling the company. And so it’s harder to recover if you don’t have a pipe of cash refilling it.
And then the last common struggle that I found is that they’re reluctant oftentimes to prepare for less than all cash offers. Everybody wants to get paid top dollar. I want it to be all cash for the closing. I don’t want have any transition. I want to just take my money and be done. You know, those deals exist. They’re just not always the highest paid ones. And the reality is, there’s lots of different ways you can to sell your company, potentially. You know, if you’re one of the people who prepares and actually beats the odds because only 20% of businesses that, you know, go up for sale actually sell because of all these problems we’ve been talking about. Well, if I want to sell it to my kids or if I want to sell it to my management team, if I’m going to sell to a third party, sell to private equity, sell a piece of it and then work with the private equity company for a period of time to grow it and then sell it again and have my my extra little piece be worth more and that second bite at the apple. Well, who you’re going to sell it to is going to have an impact on what you have to do to prepare. So if you have somebody who wants to sell it to their kids or to their leadership team, the chances that the kids in the leadership team have big checkbooks to write you all cash at closing and you can just write off in the sunset, it’s probably not going to happen. So you need to be prepared to be the bank. Maybe we need to do some stuff, like with a client right now, it’s totally transparent and stated in in the next three years we want to be prepared to start selling 80% of the business to the leadership team. At that point in time, three years from now, we’ll start selling that over time, so a chunk a year for a period of time. Well, in addition to building the business into more of an asset, we have to level up the team to be to see what it’s like to act as an owner, not just as the manager, to actually take over. And that’s important for him because if he’s going to be the bank for a big chunk of this, then if he actually wants to exit mentally and not just be micromanaging them over the shoulder to make sure he gets paid, we need to develop these guys ahead of time and and do it in a way that gives the current owner confidence that he can actually go divert his attention to other stuff and still feel good about the fact that, you know, the business will grow, he’ll get paid and these guys will build their own wealth behind him. Well, that means he better separate some wealth too. He better have other assets so that he’s less inclined to worry about just this one thing. So we want to hedge our bets. Let’s build the business asset better. Let’s level up the team to make sure that they understand and have them acting with their job responsiblities more like an owner. Over time, the responsibilities and the way that they’re held accountable. But then also he should press up separating wealth. He should be building other assets, liquid and or income producing so that he feels less pressure about the ebbs and flows of his payout on this business. If you’re going to sell to a third party, you know, you might get a big chunk at closing, but there’s usually an earnout or some kind of transition period. You know, for a piece of your money.
David B. Armstrong As we transition into the wrap up here, I’ll do it by by revisiting something that you said a few minutes ago where people get offered the all cash deal. And of course, everybody wants the biggest deal. But if you’re going to get all cash and walk away, there’s going to be discount for that, too. The disconnect there is, from our perspective, that people really don’t know if that all cash offer, even though it’s discounted off of what they thought or they wanted. True or false, is it enough to actually fund all of your goals and objectives for the rest of your life with some sort of probability of success. And people make that decision without that variable being known. And the best case scenario when we meet somebody in this situation is they come to us well in advance and we’re doing the holistic planning, so we know what they want to do with their life, and they come and say, I just got an all cash offer for $15 million. But there’s this other thing. If I stick around for an earnout or whatever and get $20M and we’ll say something like, but a year and a half ago, when we built this plan, you told us that your main goal was to stop working. And guess what? The $15 million is more than enough to fund what you told us. What your goals, objectives. Why would you even consider the $20M? And what they’ll say is, well, because my friend got $19M for his or something like that. But without the context of knowing that, you can’t really you can’t really tell if enough is enough. Is that all cash offer enough? So yet using that as sort of a backtracking story and a segue way into our wrap up question, do you have any one final piece of advice for listeners from your perspective?
Greg Maddox Yeah, begin with the end in mind. So that’s why our very first step in this process is to identify your freedom point. That’s the target sales price at which it would fund your wealth gap, that’s what you’re talking about. Saying that after taxes, after fees, after debt, payoff, after my percentage of ownership, that the amount of money I would walk with when I add that to the pile of resources I have equals enough to fund whatever’s next, which could be retirement, or it could be a new business, or other endeavor, whatever that is. And so we start there. And if we’re collaborating with folks like you, that number will shift over time because you guys are doing work that increases their current pile of resources separate from the company. So that means that either we can hit that freedom point faster. Or if we hit the same freedom point, they have more cushion. And so it just it gives us more flexibility to deal with, you know, the ebbs and flows of the market and what the business might be worth as well as life throwing a curve ball. So I would say: Begin with the end in mind. You need to build your business with an exit in mind, even if you have no desire to sell at all or any time soon.
Because the exit, as we alluded to at the very top of this show, is not about the transaction. Exit planning is about building an asset that takes into account your business, creating business freedom, financial freedom and personal freedom so that you could have the choice of control over your life that you want and you could still own your company while that happens. And then we’re all going to leave at some point. So why not turn your business into a sellable asset that you can get paid for? But let’s not wait to the end. You know, let’s make sure that you’re financially stable and have liquid resources and our financial freedom while we’re growing the company, not just if I sell it, because you might find yourself in the spot like your one friend who, you know, it was worth $40 million and he had all his plans for a $40 million exit, and now it’s worth $18 just because of the economy. So he just needs to hang on for another cycle. Which a lot of people, depending on your age, lots of business owners have gone through this over the past 15, 20 plus years, you know, 2008 and 2009, you know we’ve had of lots of this stuff. So, yeah, it’s beginning with the end in mind would be my my biggest and then find the team that knows how to collaborate and give you good insights so that you can make good decisions. So the team needs to be able to work together, share information, have differing viewpoints about how to do something, and then everybody come to consensus so that you can make, as the owner, an informed decision about what’s right for you.
David B. Armstrong Yeah, you know, it just dawned on me when you start talking about a team like people who are listening to this, I mean, you can call Monument to be on your team.
Jessica Gibbs It just dawned on, you know.
David B. Armstrong It just dawned on me, right? So boom, there you go. There’s the mic drop.
Jessica Gibbs So for me, I feel like listening to you. Greg, the biggest thing that I’m taking away is, I love that phrase: exit planning is a team sport. And yes, you as a business owner, you need to be a player in that game. But to have focus on, you know, as you said, tax, legal and wealth as your top three advisors and bringing them all together. Because, you know, if you’re calling up your wealth manager when a sale is on the table, it’s probably too late. So, you know, having that team in place way in advance, that’s that’s really what I’ve heard you’ve been talking about this whole series is that’s where you really got to optimize your personal planning opportunities.
Greg Maddox I can tell you from a tax perspective, it’s probably going to be significantly worse if you don’t do any planning.
David B. Armstrong I mean, you’re still going to sell your business and walk away, it’s just that the money is just really suboptimal.
Greg Maddox Yeah. How much do you want to give to Uncle Sam? And most of it I found that to be a big motivator. Most business owners hate paying the amount of taxes that they do, and so use that as a motivation to look into this type of planning because you can optimize the amount of taxes you pay to day, protect yourself from frivolous creditors and lawsuits, tee up opportunities to create more wealth inside of the business, but then also keep more of it eventually when you do either exit operationally, sell, or transition out, whatever that looks like for you. Use that as the motivator if that’s what it takes to talk to the folks at Monument and start moving down this path. And also the stuff takes time. These are decisions that you don’t want to be rushed into. You know, you want to be able to, you know, do it at a pace that makes sense for you, you know? So another reason to do it without the rush of “I got to sell in six months”.
Jessica Gibbs Absolutely. Yeah. So one last time, Greg where can people find you.
Greg Maddox Can email me Greg at Cultivate advisors dot com. You can check out my personal website my exit lifestyle dot com.
Jessica Gibbs Great And for everyone listening please subscribe to OFF THE WALL on your favorite podcast player also Monument’s YouTube channel. We have all the videos there where you can see us talk.
David B. Armstrong Leave a review – five star maybe? 🙂
Jessica Gibbs We have a review and I just want to remind everyone, we talked about this at the top of the episode, take Cultivate’s free business value and health assessment, the link to which is in our episode Show Notes. So thank you so much, Greg, for these three fantastic conversations. I’ve walked away learning a lot.
Greg Maddox My pleasure. Yeah, thanks for having me.
David B. Armstrong Thanks, Greg.
About “Off the Wall”:
OFF THE WALL is a podcast for business professionals and high-net-worth investors who want to build wealth with purpose. A little bit Wall Street, a little bit off-the-wall; it’s your go-to for straightforward, unfiltered wealth advice on topics that founders, business owners, and executives care about.
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