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How to Objectively Value Your Business for Maximum Exit Success

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How to Objectively Value Your Business for Maximum Exit Success

By , February 9, 2024
Laurie Barkman_quote

 

 

 

Are you ready for a surprising twist? What if I told you that the most crucial factor in determining your business’s value isn’t what you think it is? Laurie Barkman, an expert in preparing businesses for exit, reveals the unexpected truth about how buyers really determine the worth of your business. It’s a game-changer that could redefine your approach to preparing for exit. Stay tuned to find out how to tilt the scales in your favor and maximise your business’s value, even if it’s not what you initially thought.

Laurie Barkman, a seasoned expert in assisting business owners with preparing for successful exits, brings a wealth of experience to the table. Her multifaceted approach and deep understanding of the valuation process provide invaluable insights for business owners looking to maximise their business’s value. With a keen focus on helping entrepreneurs communicate their business’s unique qualities effectively, Laurie’s expertise is a valuable resource for those navigating the complexities of preparing for exit.

Laurie’s introduction to the world of business valuation came from her own experience as a former CEO running a multi-million dollar revenue business through a successful exit. With 25 years of hands-on experience in mergers and acquisitions, she realised the common disconnect between a business owner’s perceived value and the objective valuation process. This realisation ignited her passion for helping business owners gain a realistic understanding of their company’s worth and effectively communicate its unique qualities. Her relatable journey and deep expertise make her a trusted source for business owners seeking to navigate the complexities of exit planning and maximise the value of their businesses.

In this episode, you will be able to:

  • Discover the crucial steps in the valuation process.
  • Uncover the key factors influencing your business’s value.
  • Learn how financial measures determine your business’s worth.
  • Avoid common mistakes when preparing for business exit.
  • Plan your smooth transition out of the business effectively.

Understanding Business Valuation

Business valuation might sound like a challenging mathematical problem to some, or maybe just a few digits to others. But it’s much more than digits or complex equations. It’s a comprehensive understanding of various internal and external factors that impact these numbers. Knowing the process can empower business owners and allow them to strategically maneuver their business to increase its worth. Our guest, Laurie Barkman, described business valuation as an art and science. The math she refers to is clear— financial figures, growth rates, EBITDA, and addbacks. However, the art involves understanding the nuances of the industry one is operating in and its dynamics, which directly or indirectly can impact the valuation. Having this knowledge, according to Laurie, business owners can make strategic improvements to increase the value of their businesses.

Strategic Storytelling for Buyers

Who doesn’t love a great story, right? Be it a novel or a movie, a captivating narrative keeps us hooked. Why should the business be any different? While hard facts and figures are vital, spinning a compelling story around those numbers can actually catch the buyer’s attention. Remember, you’re not just selling a business; you’re narrating your journey, a story of overcoming obstacles, innovating, and excelling. Laurie Barkman in her chat talks about how strategic storytelling can pique the interest of potential buyers. The art lies in understanding the buyer’s perspective, finding out what captivates them, and how your business could serve their needs. She emphasises that painting this picture through your business story can allow buyers to perceive how your business fits into their bigger picture.

Watch the episode here:

Welcome to the podcast that’s dedicated to helping business owners prepare for exit so you can maximise the valuation and then exit on your terms. This is the Exit Insights podcast presented by Succession Plus, I’m Darryl Bates-Brownsworth and today I’m joined by Laurie Barkman. Laurie is, well, she helps business owners get ready for exit in all sorts of ways. She’s multi talented. So welcome. Thanks for joining me today, Laurie.

Darryl, it’s my pleasure to be with you.

Yeah, and I guess I should be saying happy new year to you. It’s the first one of the new year, so that’s exciting. We’re going strong on another year.

Yeah, absolutely. I’m so glad to be right out of the gates.

Good stuff. So Laurie, we are going to dig into the valuation side of preparing for exit. Why do business owners want to start the process with getting their business valued, ideally by a third party who is not involved in their business.

And we just want to dig into that and the difference between what a business owner values their business and what someone else, a third party, a realistic valuation for the business looks like. So why don’t we start with, in your experience, when you first start working with a business owner and you’re helping them to prepare. What are the common issues that you come up against in, I guess, setting expectations, managing expectations with the business owner around what they think is going to happen when it comes to selling their business and what they think they’ll sell it for?

Yeah, one of the biggest things we start with is just perception. And a lot of times business owners have a perception of what they believe their business is worth. And when we go through the process which is more objective, and let’s face it valuations is an art and a science, and the science part is the math and we can certainly talk through that the art is the subjectivity as to what can make a company worth more or worth less in the eyes of the buyer.

So it’s probably worth first underscoring that the value of a business in the private market is in the eye of the buyer. You can’t just go to Yahoo Finance or some other site and look up the share price it’s an infinite number of values that could be placed on the business.

So we have to try to create a range of value. So just, number one, to set an expectation with the client, we take a look at their financials and the way that we do it with my firm is we take four years. So in terms of where we are. Now in the calendar, we take a year prior to Covid. So let’s say 2019, we do also look at the COVID year and then we look at the recovery. And why we do that is because we want to look at the trending. A lot of buyers are curious about has the business bounced back prior to Covid levels? Yes, no, if not, why and what’s been happening? Well, when it comes to how some buyers take a look at the trending. Some buyers really take more of a close in view.

They’ll look at the less trailing twelve. But I think in terms of valuations, it’s good to have a broader range of information to base the multiples on. So part one is getting the financials organised. If your financials are well-organised, you have your tax returns in order. This will make the process fairly seamless.

Another part of this is getting to know the business and asking some questions that are helping us understand if there should be any addbacks to the calculation for EBITDA, which earnings before interest, taxes and depreciation. And the addback exercise is really, really important. So we can kind of pause on that and come back to it and talk a little bit more about that. I find when I speak with business owners in workshops and a lot of times they don’t understand some of the terminology. So EBITDA is the first one to be familiar with. Addbacks would be the second one to be familiar with so that we can come up with a sense of what might be added back to the business or expenses, as well as revenues or top line income that we might not expect going forward to get a realistic picture. And then the application of a multiple is really a measurement of an industry dynamic. So there’s a few things that go into multiples. We can also dive a little bit deeper into that.

Sure. So where we’re at is that there’s a bit of an art and a bit of a science around valuing a business. There’s some math’s involved, and I guess it’s like pricing anything. You can go down a shop and buy a pair of jeans and you can spend anywhere from ten to, I guess, a couple of whatever currency you’re working in on a pair of jeans. Now, one person might think ten pound or $10 is more than you want to spend on a pair of jeans. And that’s enough because denim is denim, and they’ve all got the orange stitching down the side and they’re all got a fairly similar design. And someone else might go, well, $200 for a pair of designer jeans, because the label on the back makes me feel good, and I like buying the jeans for this much, and I think that that’s good value. So it’s the buyer that determines the value, and it’s the seller who’s got to present the value to the buyer. And I think it’s pretty much the same in a business as well, isn’t it? Like, buyers come and they have a look at businesses and they’ll go, well. This business has got this feature and this business has got that, and they’ve got this hidden around here, or that could really work for us and the fact that they operate in these areas, or they’ve got this product complements what we’ve got, and we can put that through our existing network. They determine where the value is for them. How much awareness do you think business owners have when you first meet with them? That it’s up to them to present the value to the buyers and present their business in the best possible light? And how much awareness do you think there is right at the front around. How their business is valued, if you like, and therefore, how to present the value better.  Bit of a complicated stories out?

There where entrepreneurs have done a great job of storytelling and finding the right fit buyers to tell that story, too. Right? Because there’s two sides to this. Are we telling the right story to the right audience? So part of this, I think, upfront. Darryl, is having a recognition of who should be considered to be an owner after you. And it’s one of the reasons why I put a whole chapter on it in my book. I think from the private markets and companies that are owner led or family led, maybe this business has been acquired. We could have a sense of who we think of best fit buyers are. Sometimes we don’t know. But let’s just take the scenario of one of my friends. He had a technology services company. 100% revenue was project revenue, one time revenue.

And over the course of about six years, he was talking with strategic buyers, he was talking with financial buyers, like private equity groups, for example, about what problems they face. What problems could his business solve for them? Because, let’s face it, when the buyer is not in the room with you. You know what the conversation is, is, can they do what you do?

Can they replicate what you do, and how long will it take them to do that? And how much will it cost? So I think the main thing when we’re thinking about what makes our company special, different, unique, is, yes, what our customers have told us over the years, that’s really important.

But strategically, in the market, when we’re comparing our company to another, what makes it special? What is that unique value proposition? And then what pain points are we solving for the buyer? There’s a professor, marketing professor at Harvard who has been quoted so many times. But it’s not about the quarter inch drill bit, it’s about the quarter inch hole, right? It’s about what problem we’re solving. So when you think about your company. And you’re thinking about what makes it a great potential firm to be acquired by this buyer, it’s a bit of a dance, right?

You might not know a lot about them, but conversations early in the process. Let’s say five, six years out, just. Like this story is talking about, enabled my friend to understand that what he was missing in his business was recurring revenue, a predictable stream of future cash flow. What do financial buyers value highly. That’s it. And that’s why sometimes in the valuation methodology, there’s three core valuation methodologies. And for companies like software businesses, SaaS businesses that have a very high percentage of their revenue is recurring. Not reoccurring with an o, but recurring subscription revenue that they can be valued on a multiple of revenue, whereas most businesses are going to be valued lower down on that income statement, which is more like a valuation multiple on profit.

Yeah. So what I’m taking from what you just said is that there’s two key things. It may have slipped in a couple of more key points, but the big one that I took out is the first thing you need to do as a business owner is think of when you’re starting to think about getting ready for exit and you want to sell your business, you got to start thinking. About your business is now the product, not the product that you’re selling. Your business is now the product. And what problem does your business solve for someone else? So there’s, I guess, a mindset that you want to be aware of when you start getting ready and preparing your business for exit. The next one is that if you’re planning on selling your business, and let’s take the scenario where the owners, once they make the sale, they want to leave the business. Ideally, they want to sell the business, get a pocket full of cash, and then move on with their lives and not hang around for any longer. That selling their business represents a risk to the buyer. And what is the likelihood of the cash flow, or the cash, or the trend of growth or the historic growth of the business continuing after you’ve gone? And if you’ve gone, if you go and it’s going to make no impact to the trajectory of the growth or the trajectory to the revenue, even if it’s flat, if it makes no difference, then you’re de-risking your business significantly, and then everything else you do around your  business is aimed at reducing that risk. Is that where we’re headed on this? And then we’ve got all the technical, mathematical, I guess, details to support that, all the tangible aspects to build that picture?

Yeah, the financial picture, the growth picture, the risk profile. There are many attributes of risk that we can talk about. Owner dependency is certainly one of them, employees, suppliers, customer risk, there’s risks, and. We face risks around every corner. That’s one of the things that I do when I work with clients in pre M & A,  exit planning, what I like to call business transition planning. I work with clients to help them see around corners, look in the mirror on their business in a way they never have before. Once we do that, they see a lot of risks and gaps, and it’s better off that you see them now than when you’re sitting across the table trying to negotiate an offer and they’re pointing them out to you. One of the things that companies can do proactively if they’re large enough company and the budget is there, is to do what in the states we call a quality of earnings analysis. And a lot of times the buyers will do this, and it’s like death. By a thousand paper cuts where there’s a million questions that are going to come at you and your accounting team in the diligence process. And the buy side Q of E can be very important. Well, why not do a sell side Q of E, get ready and understand what gaps your revenues, explanation of different things, why you’re accounting things a certain way, get read for that, try to mitigate some of those gaps. Now, this is, again, not something that every company would do, but just take the idea of it is so important.

Take the time to look at your business from an outside perspective. That’s one of the things for clients working with me. Kudos to them. Or they’re working with you, Darryl, because. It does take a lot of effort to look down on your business like you’re on the fourth floor, right? Just to look down and say, oh, wait, what is it that am I seeing or am I not seeing? And if you have enough time on your side, you can make changes and make impact. Otherwise you might be facing discount as opposed to premium.

Well, absolutely. And time, it takes time. So if we can just go back a step Laurie, you talked about, you slipped in a couple of terms early on. So a couple of quick fire questions maybe. When you first meet a business owner and you start working on them, how many of them have an understanding of how their business is valued?

Not many. Very few. Very few. Some of them have had, maybe their accounting firm has done evaluation some time ago.

 And how accurate was that?

Well, what’s really, I think, good in the process is they typically don’t share that with me until I’ve done my valuation, and then we could compare, and I think that’s wise.

But one of the things that I have found, and someone like myself who’s a business operator, I’m a former CEO, ran 150,000,000 revenue us business with an exit and I come at the mergers and acquisitions field with 25 years of growth experience. So I’m not a bean counter, I’m an operator. And I’m looking for what makes a company special and different, and how do we tell that story. And then from the math side, we’re also understanding that there’s this science that we’re bringing to the table. And I think that’s one of the things why I enjoy working with business owners so much is because there’s no one path on this journey. It’s a very secure type of line. And business owners, I find I’ll just put a number out there. 90% to 95% of business owners do not know what their business is worth. They might hear, anecdotally, they might think they heard a story, maybe at the golf course, and they may have an idea. There’s lots of reasons for why evaluation would go up or down based on your particular circumstances to your business.

And that’s what we’ve got to help them understand. To me, it’s an education process. And I guess we meet a lot of businesses who go, hey, look, we know how a business is valued. It’s EBITDA times a multiple, and we’re in such and such an industry. So therefore, the multiple is x.

And you go, okay. And then they’ll go, and I’ll go, well, how do you know that? And they’ll go, well, such and such a marketing agency sold to one of these big listed companies, and they got this multiple. And I go, yeah, but you’re doing a million in revenue. That multiple doesn’t apply to you because your business has much greater risk and you’re not of the same scale.

And they go, yeah, but it’s the same industry. You go, well, multiple represents the risk to them. So a bigger business is much less risk. So you’ve got to start scaling up and then you start going, well, it’s adjusted EBITDA as well. You realise that they go, what? And I go, well, you’ve got to have a look at what the financials would look like to them.

What are all those one off costs that have been happening? What would your financial statements look like if they were running the business? And there’s different things that you might be putting through your business, which they wouldn’t be putting through the business. And it could be consulting costs, it could be legal costs, it could be any number of costs that are just not ongoing, typical annual costs.

So we need to adjust your EBITDA. And they go, so you’ve got business owners like that who have got a little bit of information, and we all know that a little bit of information is dangerous. And sometimes if you get a little bit more, it’s lethal.

And then you’ve got the other business owners who go, well, I think my business is worth X. And you go, why X? And they go, well, that’s what I want to sell it for, or that’s. What I think it owes me, or so. And so sold his business for X and mine’s better than his.

So I think it’s worth X. So we’ve got to start the education process. We’re going, well, okay, well, that’s a great starting point. We know it’s worth to you X, so let’s have a look at what it’s worth to someone else because it might be two X or half X. We need to know the relativity. We got your number now, and we know that you’re never going to sell it unless you get X. And they go, yeah, well, that’s right. I go, okay, well, let’s have a look at what it’s really worth to see if it is worth X to someone else, because it’s worth X to you, whatever that number is.

And then you can start to have a meaningful conversation and we can go. Well, it might be worth X to you, but here’s all the reasons why it’s not worth that much to someone else, and here’s your opportunity with enough time to start addressing all of those factors.

Yeah, absolutely. I found the same thing. And that’s the main point about having enough time on your side to affect change. We’ve been talking a lot about the first value driver, which is our financial measures. And the financial measures are not just the financial reports, as you’ve been saying. It’s also the quality of the reporting and the consistency. It’s the industry you’re in and the size of your business.

I recall from one of the other episodes that you did, Darryl, you had asked your guest if they see any data around, is there an inflection point around when the multiples start to really shift up for size of company? And I have an answer for you, which is yes. And at least in the US, we’ve seen that inflection point is at 25 million in revenue. And so to your point earlier about, well, why is there a small company discount? It’s because companies that are under a million in revenue, under 2 million in revenue, even under five, there’s an assumption. That there’s more risk in that business, that they’re more owner dependent, because they haven’t yet reached a size and scale. And so that’s how some of those things start to tie together.

Yeah, beautiful. Thanks for that. 25 mil revenue, or approximately two and a half million in profit. If they’re running at 10% profit, hopefully small business will do greater than that you get a step change in the multiplier because it’s perceived overall lower risk. So lower risk, you’re now at a certain scale where it’s very likely the business will just continue on seamlessly once you leave as an owner. So there’s a nice benchmark to remember. We talked about addbacks we haven’t touched on EBITDA. I think EBITDA is a really interesting thing. And this comes up, has come up in another of conversations. Why would business owners or why is EBITDA used as opposed to any other measure of profit?

Well, most common in the lower middle market are seller discretionary earnings and EBITDA. And so let’s cover seller discretionary earnings as well, because that might be another term that people hear the acronym being SDE. SDE is a measurement, essentially, of the net operating income of the business, taking those adjustments into account.

So some of the adjustments that you’ve mentioned, just to give some examples. Let’s say you have a really big project. A one time project that happened two years ago. Well, that would be an example of revenue that we would need to take out, because most likely going forward, the buyer would not see that example of revenue.

Now, on the flip side, on expenses you mentioned earlier, it could be consulting, could be other things in your business where going forward, like interest payments, like depreciation of assets, amortisation, the new buyer will have different decisions that they’re making. And therefore their schedules will look different. So we typically are looking at just cash expenses and not anything related from depreciation amortisation, we take those out. So those are considered addback. That’s why we’re getting to the EBITDA number as more of an accurate measure of some companies look at EBIT, they want to look at the EBIT number, but I see most commonly the EBITDA number because it is a way for us to say if the owner wasn’t in the business. considering the different add backs, we can get to an adjusted EBITDA number. And seller discretionary earnings can be a proxy for that. In much smaller companies, the seller, SDE, is, you’ll see a different multiple factor in the databases when you look at the histories.

And so just to be clear to the audience, when someone says to you I sold my company for a five x multiple, I want you to say to them, multiple of what? And then they will look at you like, oh, wow, you’re educated. Okay. Yeah. And they’ll say it was a multiple of EBITDA. They’ll say it was a multiple of SDE, where they’ll say it was a multiple of revenue.

Okay, so SDE is the number that a buyer of a business could effectively see as cash, that surplus that they could extract out of the business. Have I heard that correctly?

They’re both measures of cash flow. And if you want to think of it in kind of in the basic terms, the difference on the adjusted EBITDA number is that we’ve added back also an expected expense for a new manager. So let’s say the owner selling the business is making 75k all in with tax, just to keep the number simple. And we want to replace ourselves in the new company entity. And in our measurement, when we show adjusted EBITDA, we may show we’re going to add back a general manager compensation of 100k.

Yeah. So seller discretionary earnings doesn’t factor in, I guess, a market based salary for the owner. They just go, here’s the cash you could take out. Being the owner of the business, you’re probably going to take it out tax, effectively pay yourself a low salary and the rest in dividends. Here’s the cash available. EBITDA is kind of normalised, but it’s going, it’s before tax, it’s before depreciation, amortisation, it’s normalising things. It’s not real cash that you’re going to get in your hand, but it’s a normalised cash number that we can use to compare one business to another. Just trying to get a definition here.

Yeah. Just to also add in why that’s so important from a cash flow perspective is that when, let’s say, the buyer is seeking a commercial bank loan in. The US, they might seek a small business administration SBA loan. And the banks need to see that the cash flow of the business can support this debt and they can service the debt. And so an owner of this type of business needs to pay themselves, is what the bank is saying. And if you don’t add in a salary for yourself, you’re underestimating what will be taken out, and therefore, that could cause an issue with the debt service.

Yeah, that’s a really good point. And I guess it’s also important for. Business owners to be aware that the people who are buying their business are probably considering other options as well. So they want some sort of comparative metric that they can use to assess and go, okay, so this one’s better than this, and here’s the pros and cons of each business. And, okay, let’s run with this one.

If you’re not factoring in what it takes to run the business, you’re assuming that person’s not going to pay themselves, which is probably not a fair assumption maybe. You’ve made that decision, but it doesn’t mean they’re going to make that decision.

Yeah, great. So, Laurie, is there something that stands out to you when you see your experience of working with businesses in this size and market? Is there something that stands out to you that is typical or is an obvious quick fix to increase the valuation? Is there like a top five? And this one is clearly number one of the things that they can make a quick change and really increase the valuation of their business?

Nothing’s quick, unfortunately. But I think the top five, in terms of things to be aware of that we can impact would certainly be the consistency and the quality of our financial reporting. Doesn’t matter what size company you are, you can be using an online software package like quicken and be consistent with it, or QuickBooks, excuse me. In terms of the growth potential, I think if there are ideas that you want to be trying, try testing and learning. Try some innovative things that might help move the needle in your business on revenue generation being more efficient, more effective, and turning these ideas into action now can help you see if they have growth potential for the future. It’s not the same thing to tell a potential buyer that you have a big idea. It’s more impactful to say, I have this big idea and here’s how I’m testing it. And therefore, that’s why we believe and we’re confident in this growth potential of this business because of all these factors that you can point to and data. That you can point to. So growth potential and being able to demonstrate that not just wish it is really important.

I think from a risk mitigation standpoint, taking a fresh look at your employees who are your key employees, are they incentivised to stay with you and help you grow this business? What types of burnout factors do you have in your company? Maybe you yourself are at risk for what I call a complacency risk. It’s a complacency risk that we just get so complacent in our business, we. Don’t reinvest, we don’t look to improve. And then when we go to sell. In ten years, we wonder why the market has shifted around us and our company is not as competitive. That’s a company that’s going to get a discount, most likely. Take a look at those risk factors of complacency in addition to risk that you might be facing around your key employees.

Okay, so we’ve talked about a couple of big things that aren’t going to be changed quickly, and we’ve talked about how long it takes and the time for the process. So let’s put a metric on that how long do you ideally like to allow for this whole m a process? 

Well, I think the whole process really starts five to ten years out just to be giving ourselves enough time and space to make an impact on areas that we need to like if you need to implement a recurring revenue model in your business, you’re not going to flip that out in two months.

I’m working with a client right now that’s looking to implement that, and it’s already been about six months, and we haven’t gotten the pilot off the ground as much as he’d like. It just takes a while. So I think you need to recognise that. I think the other thing is, once we’ve made the decision to come to market, if we’ve gotten all of our big risks addressed and we are focused on growing the top line as well as the bottom line, knowing your owner’s metric, knowing what your company is worth, establishing that baseline when you’re starting this process again, five to seven years out is great, because then we can be measuring what the number one metric is for an owner, which is what is the value of the business and what do we need to be doing to move that needle in the right direction.

Yeah, I think the importance, I speak. To a lot of people who help business owners prepare for exit. And the common answer is, when I ask a question similar to that is, how long do you need to prepare a business for exit? And I think they all say, well, the longer the better. Ideally is if you start when you start the business, start thinking about your exit process when you start the business.

If not failing that now, start now, wherever you are. And then worst case scenario, if you can allow two or three years, because things like exactly a nice example that you just gave. We’re looking at the financials as the key tangible measure or the first tangible measure of business valuation. And it’s the reliability of that revenue. It’s the likelihood of that revenue continuing.

If you’ve got some sort of subscription model or ongoing fee with clients, and you can demonstrate that clients are paying continually or keep coming back, then building that culture and that loyalty within your client base isn’t just a case because you changed your price this year. It’s going to take a while at two or three years for that client base to transition over, because some will accept it the first year, some will go, let’s just wait and see. And some will take two or three years to transition to the new model or to bring in and to the point where the new model of subscription or whatever it is you’re looking at is the norm and all new clients coming on, just don’t question it anymore. As you say, it’s not a quick fix, and that sort of thing applies to whatever you’re going to do that is going to build or increase the valuation. So it’s something we really need to get out there, isn’t it? It’s information. If you’re thinking that you want to sell your business, you want to exit your business through some sort of transaction. It’s not a quick refresh the financials. And we’re good to go. It takes years.

No, 100%. And I think there’s a lot of wisdom around what you said, which is how do we think about this earlier? There’s a school of thought around building to sell. right? John Warlow and his book series. And one of the things that I’ve built into the book that I’ve written with the Business Transition Handbook is a big part of this is I assumed. The people who will be reading the book are the ones in this second chapter of their entrepreneurial journey. And what I’m finding is that there are a lot of people who are reading the book in their early stages of building their business.

And what they’re saying in terms of feedback is wonderful to hear, which is, I’m so glad I’m getting this information now. And that’s one of the reasons why I’ve decided to launch a course. I’m making the book into a course. And I’m targeting people not only who are in that second phase of their entrepreneurial career, and they want to start really thinking about this for the next five to ten years, but it’s also for the entrepreneur, the early stage entrepreneur who is building with an exit in mind.

Okay, so touching on that transition point, Laurie, we’ve got business owners who want to succeed out of their business. They want a succession plan. And I often talk about, you need to do a succession and then an exit. So succession is out of the operational role of the business. So you want to get off the tools, so to speak.

And then I go, well, let’s talk about exit being you’re exiting your ownership and therefore you’ve got a two stage process. And if we can capture that altogether as transition, then maybe that meets your definition. So given if there’s a rough guideline to go by, are there some big mistakes or common mistakes that you see business owners make when they’re starting to think or pitfalls around the whole transition process?

Yeah, absolutely.

What are the common ones?

Pitfalls all around? It’s hard to avoid them, which is why we’re looking for them and trying to try to work on them. One of the pitfalls in a family business is assuming that the next generation wants it.

Yeah, that’s a big assumption.

Yeah. They don’t have conversations early enough. They don’t have them often enough, and there’s assumptions being made.

Now, there’s lots of stories, especially from my show called Succession Stories. And I get a lot of next generation leaders who come on and tell their story of succession with their family. And there are success stories there, but there’s a lot of challenges and pitfalls that we can step into. So the basic one, and I have a client, husband and wife that are evaluating three of their three children and trying to figure out, do these children want to be part of the business? If so, how might that work?

And my role is to try to help them see and understand through an independent lens what’s the children’s perspective? Because it’s really hard to have that conversation one on one over the thanksgiving table with everyone else around. And it’s hard to find that quiet time to really do it. And also there’s an age and stage to some of this. Some companies say to their family members, you need to work elsewhere for at least five years, and they’ll set a guideline as to how some family members can come into the company. Others have not yet established some of those frameworks. Regardless of what they are, it’s good to consider what the other side wants.

Maybe they don’t have the acumen to run the company, and maybe they have a desire, but not the acumen. So I think both sides of that are super important to discern. Another pitfall comes to management team. A lot of times, as a merger and acquisition advisor, people come to me and say, well, I think my key manager wants to buy the company, or I want to sell my company to my key management team.

Same thing. When do we recognise whether or not somebody has an owner’s mindset? One quick test is cash. If I was going to give you a $10,000 bonus, and I said, with this bonus, you can buy shares of the company or you can keep it and put it in your pocket, someone who’s interested in ownership will say, no problem, I’m going to buy that and not even hesitate. The other person is going to say, thank you very much, I’m putting this cash in my jeans and I’m going down the street to go buy a car or do whatever. So when it comes to your management team, don’t assume that they want to own your business.

Exactly.

Heavy is the head that wears the crown, and they see that, right? They’ve seen the ins and outs, the ups and the downs with you because they’ve probably been with you for a long time and that’s why you’re valuing them at the same time, they may realise it’s not for them.

Yeah, look, they’re really good points. Let’s not assume that people want to take over the reigns. Some people are quite happy being employed in the business, and some people just naturally have a different risk profile, a different mindset, whereas they want to call the shots, they want to earn it.

So where have we got to, Laurie? We’ve got, hey, look, we need to tidy up our financials. We need to get those in order and have some sort of reporting so we’ve got visibility of what’s happening in our business. We need, ideally, some other reporting as well. I’m not sure we touched on that too much.

We want to not make assumptions around who’s going to be running the business after us. But the longer we take to plan that and prepare it and shift our mindset from, I guess, just revenue growth to what are the things that increase the valuation? We can start to look at those or boost the multiplier we touched on. Is it EBITDA? What is it owner discretionary earnings or seller discretionary earnings? That’s not a term we use in the UK, is what’s the number? What’s the multiplier of? If it’s a profit times a multiple, it’s important that we know what the details are around the profit measure and the multiple being used. We discussed that you need to get to about 25 million revenue to increase the valuation and therefore your multiplier goes up.

We’ve covered a lot of ground focusing on valuation. Is there anything that sticks out to you that you think, hey, look, of. All the things we’ve covered today, dear listener, here’s the most important thing that I’ve shared with you that you want people to remember.

I think it’s important to remember that buyers buy on their time, not yours. And that ultimately, in the private markets, the value of a privately held company is determined by the buyers. And the role of the seller is to try to find best fit buyers and tell the story and solve pain points to help increase the fit and ultimately the valuation.

Beautifully summarised, Laurie Barkmann. Look, we’ll grab all of your details. We’ll put them in with a show note and how to get a copy of your book, the Business Transition handbook. Thanks for sharing your experience and your exit insights with us today.

Hey, Darryl, it’s been my pleasure. Thanks so much for having me.

About Laurie Barkman

Laurie Barkman, The Business Transition Sherpa, is the former CEO of a $100 million revenue company that was sold to a Fortune 50. As a mergers and acquisitions advisor, Laurie provides a structured process for business owners to plan successful transitions of their companies.

Laurie is the author of “The Business Transition Handbook: How to Avoid Succession Pitfalls and Create Valuable Exit Options.” This book demystifies the often overwhelming exit process, guiding business owners who are considering leaving their ventures or simply beginning to think about their next steps.

She is an adjunct professor of entrepreneurship at Carnegie Mellon University, and hosts the award-winning podcast Succession Stories, where she speaks with hundreds of entrepreneurs who have shared their journeys through succession.

Laurie earned her MBA from Carnegie Mellon University, and Bachelor of Science degree from Cornell University. She received certifications from The Alliance of Mergers & Acquisitions Advisors, The Exit Planning Institute, and The Value Builder System.

If you would like to learn more about how to start preparing your business, then you can get more information here: It All Begins with Insights.

Darryl Bates-Brownsword

Darryl Bates-Brownsword

CEO | Succession Plus UK

Darryl is a dynamic, driven Business Mentor and Coach with over 20 years of experience and passion for creating successful outcomes for founder-led businesses. He is a great connector, team builder, problem solver, and inspirer – showing the way through complexity to simplicity.

He has built 2 international multi-million turnover businesses; one now operating in 16 countries. His quick and analytical approach cuts through to the core issues quickly and identifying the context. He challenges the status quo and gets consistent, repeatable and reliable business results.

Originating in Australia, Darryl’s first career was as an Engineer in the Power Industry. Building businesses bought him to the UK in 2003 where he quickly developed a reputation for combining systems thinking with great creativity to get results in challenging situations.

A keen competitive cyclist, he also has a B Eng (Mech) Engineering and an MBA.