Dave Lorenzo (00:01):
Hey, now it's Dave Lorenzo and this is the Saturday Side Hustle. Grab a cup of coffee and join me today for exit planning and the 10 areas to look in your business to increase the value. One of the things that I regularly discuss with my clients who are business owners, the CEOs and entrepreneurs, is exit planning. And I discuss this as early [00:00:30] in their business life cycle as possible. Now, you're probably thinking to yourself as you're listening to this, Dave, I'm not ready to leave my business. I don't want to sell it to anybody. I'm 10, 15, 20 years away from retirement. Or you're thinking, Dave, I just started my business and I'm not ready to leave. So I don't even have any infrastructure in place yet. Why should I think about exit strategy? This is exactly the right time for you to think about exit strategy.
(01:00):
[00:01:00] And you know how I know that because there are two times to think about exit strategy. The first time you should be thinking about exit strategy was the day you started your business. The second time you should start thinking about it is today. Here's the thing, you should have your business structured so that you're prepared for an exit immediately. Why? Because you could have to exit immediately. You could become disabled, you [00:01:30] could unfortunately pass away. If you have a partner or another key person in your business, that key person or partner could become disabled. That key person or partner could pass away, or either one of you could decide you want to leave the business. So having an exit plan in place is essential at every stage. But when you think about how the business ends for you, you put [00:02:00] systems and practices in place that will increase the value of the business over the longterm.
(02:09):
Let me give you an example of why this is important. So 15 years into a business, one of my clients in a two partner professional services business, a two partner consulting shop focused specifically on cybersecurity consulting, we're approached by a competitor [00:02:30] and they were made an offer to buy the business. And the reason they were approached is because they had several large contracts that they had secured, and those large contracts were for recurring revenue. And those large contracts made the business incredibly valuable, and the competitor candidly wanted to make inroads into a specific market segment that these guys had gotten into. The competitor made an offer to the business that was [00:03:00] solid. It was a decent offer, but it was less than my two clients had expected. That would be the value of the business. So we brought in a professional to do a valuation of the business, and the professional valued the business slightly under what the offer the competitor had made was.
(03:21):
So the competitor knew what they were doing. They offered slightly more than the market value for the business. And when we went over the valuation with the [00:03:30] company, the representative of the company who had done it, the things that representative had pointed to were things that we hadn't thought about. The things that could increase the value of the business were things that we hadn't thought about focusing on. We had focused on all of the traditional things we had secured the revenue made sure that there were diverse revenue streams, multiple revenue streams, and different types of revenue coming into the business because [00:04:00] they were an IT company, they had focused on their cybersecurity risk and they had mitigated it. The company had no lawsuits. The company had few employees that were company employees, but the ones that they had were treated very well, and the top talent was very well compensated, and we felt very secure in the top talent.
(04:22):
But there were other things that we hadn't looked at in order to make sure that the business would receive the highest [00:04:30] valuation possible, and we didn't look at a potential exit as an option until much later down the road. So today on the Saturday side hustle, I'm going to share the 10 points in an exit strategy, in an exit plan with you. And when I share those 10 points in the exit plan, I want you to think about your business and what you can do to enhance the value of your business. By making sure that each [00:05:00] of these points is the best it can be. Each of these aspects of your business is the absolute best it can be. Just thinking about this and putting some steps in place to shore up each of these areas will add value to your business area. Number one, the first place you should focus on in your business is the revenue streams.
(05:23):
You not only need to have multiple revenue streams coming into your business, so if your [00:05:30] main product is widgets, you also have to have a secondary and a tertiary product. So if the market for widgets goes into the tank, the secondary and the tertiary products are producing enough revenue for you to keep the business alive. So revenue streams means diversity of revenue streams as well as type of revenue. You'll remember from a previous inside BSS show that I've done with Nikki G, with Nicola, my partner. [00:06:00] We talked about repeat recurring and passive revenue in addition to ad hoc revenue. Ad hoc revenue is you go out, you find a client, you secure the client and you do the work. Client moves on, you move on, you go find a new client. That's ad hoc revenue. Repeat revenue is same client, different type of revenue, same client, different type of work.
(06:27):
Client comes to you and they say, I want crankshafts. You [00:06:30] make 'em crankshafts. And then the client comes to you and says, Hey, what about widgets? Can you do those? You say, yes, you make the widgets. That's a repeat client. Two different types of revenue. Recurring revenue is same client, same work. You do widgets over and over and over again. And then finally, passive revenue is revenue that comes from referrals, revenue that comes from your thought leadership. It's revenue that comes in the door without any active effort [00:07:00] on your part to drive the revenue to you, you need to have all four types of revenue in your business in order for it to be secure. So if you're only have right now ad hoc revenue, you got to go out and get repeat recurring and passive revenue and make sure it's coming in. The second area to look at is your management team.
(07:23):
So if your management team is full of talented people, make sure they're locked up with [00:07:30] employment agreements. Make sure that they are well compensated at or above the industry average. Make sure they feel like they're valued and they will stay with you for a significant period of time, hopefully their whole careers. Securing your management team, making sure your management team, especially the key players, is stable, is an essential part of your long-term value in your business, and it will help you enormously with your [00:08:00] exit plan, and it will enable you to get a premium when you're ready to sell your business. The third area is operations. Standard operating procedures. You are good at what you do and that's why people are going to want to buy your business. Your business is good at producing the products or the services that it produces. It offers your clients a fantastic experience.
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You do this through the operations aspect of your business. So you need [00:08:30] to be able to make sure that the person who buys your business or the company who buys your business or the fund or the family office that buys your business, you need to make sure that they still can receive the same operational excellence that you produce. This comes from documenting all your business processes and procedures, and that is done through what we call standard operating procedures. Every activity in the operations aspect of your business should [00:09:00] be documented so that it can be reproduced by anyone else who comes into the organization. The fourth place to increase the value of your business is through human resources. So your human resources standard operating procedures should be solid as well. Your human resources practices must be locked down. You want the next person who comes in to be able to take care of your people as well as you have.
(09:28):
So your training programs, [00:09:30] your compensation programs at every level, the procedures and the practices for progressive discipline. When employees go outside of the guidelines of acceptable behavior, all of the promotions processes, so performance management processes, everything should be documented and it should be easily replicable. The fifth area of focus is legal exposure. [00:10:00] Businesses will get sued, so your business should not worry. You should not worry if your business has a lawsuit or a lawsuit that was settled or a pending lawsuit. You don't have to be concerned about those things. But how you handle and dispose of those lawsuits is critically important. So if you have a lawsuit and you had to settle it and you had to make a payment to someone, [00:10:30] did you fix the underlying issue that caused that lawsuit in the first place? Did you eliminate that point of exposure? That's what's critical when it comes to the legal area of your business.
(10:42):
You want to show that your business is not a risky investment. So if you've had lawsuits, you've taken care of the areas of exposure where those lawsuits found that you were vulnerable, you've eliminated those vulnerabilities. The sixth area is [00:11:00] your brand reputation. Will your clients recommend you to other people? Will they use you over and over again? Does your company have a solid brand reputation in the industry? If you've done surveys or if you are able to point to a financial study which can demonstrate the strength of your brand or highlight your brand reputation, this will be incredibly helpful when it comes [00:11:30] time for you to exit. You can work on your brand reputation right now by improving your overall activity and value proposition to your clients, as well as getting involved in industry trade associations at a high level, demonstrating your expertise and creating thought leadership and it out into the community of your industry.
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The seventh area is your sales and marketing systems [00:12:00] and support. Do you have an engine that brings clients in on a predictable and regular basis? This is essential if you produce a product or a service that is so hot that the market can't get enough of it, that shows that that product or service is in high demand and you have a pretty good or an excellent brand reputation. You also need to be able to demonstrate what you will do when the demand starts to [00:12:30] wane for that product or service. So this is where your sales and marketing comes in. Sales is about conversion of people who have an interest in your product and services, and marketing is about creating that interest. Do you have systems and practices in place that create interest? Do you have a team that can convert those people who are interested, those suspects into prospects and then eventually into clients?
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If you do, you're in good shape, and if you [00:13:00] can replicate that over and over again, that's going to add to the value of your business. The eighth area to think about is the market, the industry, and the supplier conditions. Years ago, I worked with a company that sold checks. They sold paper checks to companies, and they were excellent. Their sales team was excellent, and I did sales training for them. Well, no matter how much we went out and sold, no matter how [00:13:30] great the sales team was, the paper check industry was dying. It was on the swoon. So the value of that company was decreasing each and every day, each and every week, each and every month, each and every year. You could have had the best sales team in the world and nothing would change that. So making sure and you can present to a potential buyer what the market, the industry, and the supplier conditions are is critical.
(14:00):
[00:14:00] If you need a specific type of part to manufacture your product and there's a shortage of those parts, or you need a specific type of raw material and there's a shortage of that raw material, the value of your business is going to go down. So you need to have contingency plans in place for how you will handle supplier or supply chain issues, market issues or industry issues. The ninth area to focus on are your financial reports and the financial [00:14:30] condition, the financial health of the company. This is an area where you absolutely need outside help. You need to get a fantastic accounting firm on board. You may need a bookkeeping and an accounting firm on board. You may even need to bring in an outsourced C F O an outside C F O A fractional C F O to help you to structure your accounting team so that you have all the standard operating procedures in place.
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You have all the required reports in place, and then look at those reports [00:15:00] and determine the financial health and financial condition of your company. So the three people to focus on to help increase the value of your business by working with your financial reports are a fractional C F O A bookkeeper and your C P A firm. The C P A firm helps mitigate your tax exposure. The fractional C F O will get your reporting house in order, and the bookkeeper will make sure that your books and your systems for doing your [00:15:30] books are the best they can possibly be. The 10th area to focus on is your technology, your cybersecurity, and your cybersecurity risk. This is a huge area of focus, one cyber breach, and your company could be finished. So making sure that you have systems and practices in place to protect your company is essential.
(15:54):
Making sure that your technology systems for your company to be able to communicate and function [00:16:00] across all platforms and across all geographies, that's essential. Having your technology buttoned down is critical. All 10 of these areas need to be assessed and reviewed on a regular basis, at least annually. When I work with my clients, we do a review of these every quarter, and we make sure we're continuously improving them on a quarterly basis. When a company comes to me and they say, [00:16:30] Dave, we want to sell within the next three to five years. I look at all of these areas. I do an entire audit of the company, and then I go to them and I report out on what improvements we're going to make in each area, and I quarterback that process for them so that they can continue to run the business. Exit planning is something that takes place throughout the lifecycle of the business, and candidly, it shouldn't be called exit planning.
(16:59):
It should be called [00:17:00] increasing the value of the business. If you have a shortfall in any of these areas, if any of these areas are places where you are not completely solid, that's called a value gap, and that value gap needs to be filled, and that's one of the things that we do. That's one of the things that my team and I do to help you increase the value of your business. So review this episode again, down in the show [00:17:30] notes, you'll find all of these areas, all 10 of them clearly laid out for you. Do an assessment of each of these areas of your business, and once you do, you'll figure out where the value gaps are and you'll fill them. This is a Saturday side hustle. My name is Dave Lorenzo. We talked about exit planning today. Join me tomorrow for the Sunday special. We'll see you back here first thing tomorrow morning.