Planning to exit your business with Kevin Pendergest

Dave Crysler

Hello and welcome to the Everyday Business Problems podcast, I’m your host, Dave Crysler. In each episode, we talk to business owners and leaders to learn about their story, their business, the challenges they’ve overcome, and the challenges they still face. You’ll hear fresh insights, real talk, and get inspiration to grow your business.

Hey everybody, so excited today to welcome Kevin Pendergest who founded Strategic Alliance Network, which is an independent business consultancy specializing in helping business owners plan their exit.

Kevin, thanks so much for joining us on the Everyday Business Problems podcast today.

Kevin Pendergest

Thanks, David. Thanks for having me. Glad to be here.

Dave Crysler

Yeah, I’m excited to get into this with you because, you know, you probably already know this, but it’s one of the topics that I think a lot of business owners and entrepreneurs kind of shy away from because we think, you know, as a business owner, well, we have plenty of time to figure things out and right.

And that is exit strategy exit planning, right?

Kevin Pendergest

Right. That’s it. And as it probably is, the name exit planning is probably a poor name to use and probably accounts for a lot of confusion that arises and gives people reasons not to do it. You know, I just called this, you know, strategic planning or business planning, it’s probably a more applicable term and something that they probably could relate to and perhaps be more interested in even doing it. So.

Dave Crysler

That’s a great point, and I could kind of see that because even in my business, a lot of the ramp-up to the actual exit or potential exit, there’s a lot of work that has to be done on that side of things.

I know you do a lot of content around building up the value of your business because I’m sure that is a, you know, a consideration for a lot of people that, well, wait for a second; my business is worth what? It probably comes as a surprise.

Kevin Pendergest

Yeah, yeah. And unfortunately, that’s too often the case. So I think, you know, entrepreneurs tend to have what they call the Rose Glass syndrome, where they always look at things through rose-colored glasses and things look rosy and always going to get better.

And that’s just not always the case. So, you know, part of the education process is really to help them understand how do buyers look at your business? You know, how do they view it, you know? And you know, is it attractive to them or is it something they’re interested in buying?

If so, is it considered a business they would pay a premium for? Or is it something they would be less than average for? You know, just because of certain things that the way the business is structured or maybe too dependent on a single customer or too dependent on the owner, to have the business continue.

And so a lot of is just education process, you know, helping them understand how buyers look at businesses. I happen to be the CFO of a company that grew from about 20 million to a half-billion in four years, and it was all basically acquisitions and we did over 20 acquisitions during that time frame and I have a pretty good understanding of how the buyers look at businesses and how they assess them and how they view them both strategically and just from a financial benefit perspective. And I can share that with business owners who probably haven’t looked at their business through somebody else’s eyes before. So.

Dave Crysler

Yeah, I think number one, I think that’s a really important part of this because, you know, it’s interesting when you own a business [or] when you start a business and grow it into really into anything, you obviously put a lot of blood, sweat and tears and, you know, long days and nights and weekends, all of those things. And to your point, right, a buyer coming in doesn’t really care how many Saturdays you’ve worked.

And if there isn’t enough value built-in, it’s going to be difficult to generate any type of payback, and the interest level is probably going to be pretty decreased.

Kevin Pendergest

Yeah, yeah. Ironically, you know, they probably not only care less how many, you know, Saturdays, the weekends and family events you miss, whatever they probably would view that they would penalize you for all that extra time that you’re having to spend in the business working in the business.

Because again, it’s a reflection that the business is too dependent upon you. And you know, the first issue you know, companies have to look at is really, are you running a lifestyle business? Or are you running a value-based business?

And I have several friends and a couple of I counseling right now that have great lifestyle businesses. I mean, and they are making seven figures a year from the business, and that the problem is the business is totally dependent on them.

You know, they generate anywhere between 60% and 100% of the revenues for the company. You know, they do a good portion of the work itself. The business can’t stand alone without them. And so, you know, I’ve had to explain to them that in the current situation, you really don’t have a business to sell.

I mean, you can keep doing what you’re doing and make a great living and enjoy the lifestyle you’ve created. But it really isn’t a business that has a lot of value to somebody else coming in. Because if you retire on the job or if you get hit by a car or get sick or you’re disabled, or whatever the case may be, the value of the business disappears.

And so that’s really the first test they have to figure out is okay, if my building a business that has that, I’m building value in the business or am I building a business is just supporting me a wonderful lifestyle and both are fine.

You just. What kind of business you’re building and understand what the limitations are if that’s the case?

Dave Crysler

Yeah, that’s I mean, really interesting. So talk a little bit about it because I’ve seen both. So when I had my corporate job, we you know that that company grew through acquisition, much like the company that you were responsible for.

And I’ve also worked with a lot of business owners that are building, and currently, you know, operate a lifestyle business. What is a conversation like that from a lifestyle perspective, look like when you have that with a business owner?

Because in my experience, a lot of it is kind of that disbelief of, well, what do you mean that this isn’t valuable? You know, we’re doing x amount in sales. We deliver x amount in profitability. What what is that from your perspective, if you could talk just a little bit into that because I think there are a lot of business owners that are in the marketplace potentially looking for an exit that are in that situation but don’t necessarily recognize that they’re in that situation. What does that conversation look like for you and between that owner and yourself?

Kevin Pendergest

Well, it’s kind of it’s an interesting one, and it can take several variations of, you know, well, this is our business may maybe unattractive. But there are other issues with companies that are trying to build value but still have some issues.

And, you know, a good friend of mine who I just I’ve been working with us for the past several weeks to a month, I guess. And, you know, advising him, you know, because he’s been approached by a few people that have expressed interest in, you know, possibly buying his business.

And so I said, well, some of your information, I’ll take a look at it. You know, when you look at it, you know, they generate, you know, five or $6 million in revenue, but he generates 60% of it himself.

OK, that’s one point. He’s got one client that accounts for about 25 to 30% of their revenue. So that’s another red flag. And then, you know, so we’ve kind of gone through that and said, you know, you know, you got a great business guy, you know, owns, you know, a couple of beautiful homes you know, and he lives a great lifestyle and he works very hard. But he’d have a hard time selling the business to somebody else because, you know, they would look at and say, Well, we’re going to discount the value for that one large customer if that goes away.

It’s a big chunk of revenue and earnings that go away. And, you know, we’re going to discount, you know, a little bit the fact that you know, your other partner is really only generating 40% of the work in the business.

So it’s pretty dependent upon you. And so I mean, he could sell it. But at the end of the day, what he would get for it in terms of the multiple of its current revenues would be less than what he made if he just kept running the business for another two or three years himself.

And so there’s really no incentive for him to sell for that low of a price, and he’s not going to be able to get, you know, kind of the multiple that he would like to get. And you know, it just it’s just a frank; you know, he and I have been friends for over 30 years. So it’s, you know, it was easy to be kind of frank and open with them, but you know, the situation he finds himself in. And so, you know, it’s just one of those, you know, anyway, I mean he’s OK.

You know, just keep doing what he’s doing. It is probably not going to change the fact that his business partners aren’t generating a lot of revenue. You know, you can’t just change that overnight. But I think in many cases when you have situations like that, the easy question asked those owners is, okay, you know, walk away from the business or what would happen if you walked away from the business for the quarter?

Let’s say you were sick and you had to have surgery and you were out of commission for 90 days or whatever. Do you know what would happen to your business during that timeframe?

Would it continue to sustain itself or would it grow or would it just kind of fall off the cliff? And so I think if they’re honest with themselves, they would. When asked that question, they would have a pretty good idea whether the business can sustain and grow by itself, or it would suffer significantly if they weren’t there so.

Dave Crysler

Yeah, I mean, as with any kind of change management initiative or really any type of change, a lot of it is some self-reflection and, you know, asking yourself those difficult questions and more importantly, being honest with yourself in terms of where you’re not where you’re at, what you know, what you want to do.

So talk a little bit then you know, for owners that maybe are in that situation that, you know, they are kind of better off continuing to do what they’re currently doing, recognizing that maybe there isn’t a real sound, at least, you know, quick exit strategy to start putting in place.

What do those conversations look like? Do you know, do you start from the standpoint of figuring out how to systematize and, you know, get other people involved from that exit strategy standpoint and looking at like a longer, you know, obviously a longer runway, right?

Kevin Pendergest

Yeah, I mean, that’s kind of the option you have to discuss is like, OK, can you change your business? Can you change the structure of your team so that you’ve got people doing certain things that you’re doing today that you can train them to do and they can do it in your absence?

And or if not, then you know, you’re kind of, you know, they don’t get, well, how long do you want to keep doing this? Because, you know, at some point you can keep doing this for as long as you’re able and willing and want to do it.

But at some point when you decided to retire, you’re probably just going have to liquidate the business, you know? And at that point, maybe they can sell for something. Some discounted value. But, you know, if they don’t, it doesn’t really matter because you know, it’s either that or nothing, you know?

So it’s kind of the options; but you know, with with with companies that have like a high customer concentration like this when you know, does we just mentioned before, I mean, the, you know, the plan there is, okay, how do we get business with other companies?

And he has been very successful in getting a lot of the business with other companies. It’s just that this company continues to be good long-term. You know, he’s been in business for 15 years and they’ve been his largest account the whole time, you know, and at some point, he’s going to that.

That’s that could end. And also this is going to have a 25% drop in his revenue. And so now luckily, their cost structure is such that they pay a lot of fees. It’s a consulting-type business. A lot of the other expenses are tied to the revenues associated with it.

For the people that do the work, they pay them to do it. So, you know, there would be some offset to that loss in revenue that wouldn’t all drop to the bottom line. But it’s still going to be a big, big issue in particular for somebody that’s thinking about buying the business.

So yeah, I think it’s just, you know, it’s one of those conversations that some people are content just continue to do what they what they’ve done.

I mean, I have a lifestyle business. You know, I can never sell my business to somebody, you know, when I decide I’m going to hang it up and quit because it’s basically all driven off of, you know, I’m a sole practitioner. Basically, I do use subcontractors, but you know, I generate my own work and a lot of referral work and things. But you know, I wouldn’t it? You know, there’s nobody who would say, OK, I’m going to buy your business and or if they are, they’re not going to pay, you know, a lot of money to do that, right? It would be, and it would be dependent on me continuing to work anyways.

Dave Crysler

Yeah. And kind of to that point, you know, I tell people it’s, you know, you’re going to exit your business one way or the other, right? And it’s a matter of kind of to your point, you just said, you know, just recognizing it for what it is and there’s nothing wrong with either, you know, that’s what I

try to tell people. You know, I think there potentially is some, you know, potentially is some kind of maybe negative connotation for people that think that they have a lifestyle business and that just is what it is.

But you know, to your point, earlier, right, there’s a lot of really successful lifestyle businesses out there and you can have a tremendous life. So there’s by far nothing wrong with going with that approach.

Kevin Pendergest

I’d be happy to have this guy’s business.

Dave Crysler

Right? Yeah. You just have to understand where you’re at and where you’re going and you know, and kind of go and go at it appropriately.

Kevin Pendergest

But I think for the businesses that actually have a value-based business, have a business so they can sell, you know, the key is, you know, they need to be thinking about, you know, you know, call it exit planning, call it strategic planning, call it whatever your contingency planning, whatever you want to call it, these things need to have their businesses ready to be sold.

They need to know what that looks like when they, you know, there are two options. You have one option where you can decide when you’re going to sell your business. You have another option, which really accounts for about 50% of all the sales that take place.

And that’s one kind of a forced situation that forces you to sell your business. You know, it could be death and be a disability. It could be a divorce, could be disagreeing with your business partners a number of reasons that you know you don’t anticipate occurring that are going to force you to have to sell your business.

So that’s, you know, that’s one reason why you should always be ready to sell because if something does happen, you need to be able to do it and do it quickly and at least maximize the value you can maximize at that point in time.

You know, I’ve seen situations where that hasn’t been the case and you know where somebody died suddenly and all of a sudden, you know, the spouse was left with a business and you know, it just takes a long time to figure out what they want to do.

You know, a longer time to sell. It’s not ready, you know, reduces the value it takes, you know, increases the length of time it takes to sell the business. And you know, they end up with less than they could have if they’d have been ready to sell.

You the other, you know, couple other reasons they should be preparing to sell, is it; I have a perfect example. I just got off a caller earlier today where I’m a guy I’m helping with, you know, look at his alternatives happens to be in a business that is red hot right now.

There’s private equity money chasing it; those businesses like crazy. So the multiples that they’re paying for the business are probably two times what they normally are. You know, in a situation and you know, this guy was thinking, you know, you probably would sell a year or so from now and then retire.

But given the market and he’s been approached by several potential buyers, you know, given the market, you know, we’re looking at, well, maybe it makes sense to accelerate that timetable because this kind of market may not be here, you know, a year and a half for now when you’re planning on, you know, selling.

So you know, you need to be ready to take advantage of those situations when they do occur and they seem to occur in almost any industry at some point in time. And then the third thing is, you just need it’s just, you know, if you have the ability and you’re fortunate enough to define kind of when you want to retire and you know, you still need to and hopefully you’re working with a financial planner, you have a plan in place that said, OK, when I retire, you need to have accumulated the assets of this much, you know, to be able to retire.

Well, in most of the business owners’ cases, you know, 70% to 80% of that value is in their business. So if you don’t know what your business is worth today, you know you don’t know how there’s it’s impossible for you to plan.

How do you take it from point A today to point B, you know, whether it’s two years or 15 years from now to get it to this point? You know, and that’s the other reason you really need to kind of have a plan in place is to look at what you’re saying earlier.

You can try to you. And if you do it early enough, the time to say, you know, OK, here’s my baseline. Here’s where I’m at, you know, here’s what I need to get to in this timeframe. So, you know, I need to develop a strategic plan that the how do I get from point A to point B?

And so it’s. You know, there’s a lot of, you know, just good reasons why people need to just begin some planning or whether we want to call it exit planning or whatever you want to call it, just need to do you know the plan.

Dave Crysler

Yeah, it’s it is so important, and to your point, doesn’t really matter, you know, don’t get hung up on the terminology is what we’re talking about. So you don’t get in your kind of experience in talking to all of these business owners.

I’m really curious if you can put some thoughts around it, but why do you think that people do procrastinate with this? What is holding them back from understanding that, you know, kind of to your point earlier, right? Whether it’s, you know, death, disability, divorce disagreement, you know, the 4 D’s, right?

Whether it’s that or whether you really are planning your exit, you know, one way or another, you’re not always going to be involved in the business that you’ve built. And so what do you feel like is that driver behind like the procrastination of it?

You just feel like people think that we have more time. I mean, that’s kind of my thought, right? Everybody, I think, thinks that you have more time.

Kevin Pendergest

I think probably one of the main reasons is people think they can do it. It’s not my highest priority, right? There are other things that are more urgent to deal with. I’ll deal with that later. You know, you’ve got plenty of time to do that.

But again, which is, you know, not always, always in control, that I think there’s some as they get older and start contemplating that in conjunction with retiring, there’s kind of that mortality factor that sets in as like, Oh my god, I’m getting old, you know, and how much longer I’m going to live and what am I going to do? You know, when I, you know, if I don’t, if I saw my business, what am I to do after that? And so it’s I think it’s, you know, some of that. I think there’s so I’m just thinking it’s I think there’s a lot of misinformation or misunderstanding.

Just think it’s confusing and going to take a lot of time to do. And that’s not necessarily the case. So I think there’s a lot of those reasons it kind of feed into why they procrastinate or don’t take action.

And again, I think it may go back to the terminology. I mean, when you call it exit you that seems to have a finality now and it seems to have a, you know, if you’re young business owner, you know, it seems like it’s more retirement oriented than it is, you know, trying to build my value.

And really the, you know, the core business is the core concepts of the exit plan is really to build the value of your business today and maximize the value of your business and maximize the income from that business today and then have it ready to be sold when you’re ready to exit whenever that, you know, that’s going to be 20 years from now. But, you know.

Dave Crysler

Yeah, I think that’s spot-on in terms of, you know, people, especially younger people that are either A just getting started B in that, you know, early growth stages or even, you know, kind of in that growth and stability standpoint where, you know, people just think, Well, yeah, I’m not quite ready to think about that.

And you know, at some point, yeah, I’d like to sell my business or what have you. But I think I know as I’ve gotten older, those types of things sneak up on you, right? Like, you know, it doesn’t seem that long ago that I had all kinds of time to do different types of planning and in those types of things.

So, you know, I think to your point, it’s an interesting kind of exercise in terms of not necessarily focusing on the words exit planning, but more of a strategic plan to build value in your business, which, you know, we both know is obviously going to help in both the short term and long term, especially if you’re trying to, you know, exit your business with a sale. So to really anybody, a private individual and equity group or, you know, a large organization, so.

Kevin Pendergest

The other the other thing is is that when you’re trying to build value, you know, you really need to understand what does the buyer view as value, you know, so that you’re actually taking the right steps and investing in the right things in your business that are actually going to create value for the business?

I guess it’s kind of like home improvements. You know, there are certain home improvements that you make that really create no value, you know, just something that you want to do. It makes you feel better in your living environment, and there are some home improvements that significantly increase the value of your home.

And it’s the same same thing with your business. I mean. So, so part of the benefit of going through the actual planning process and, you know, establishing the baseline of what your business is worth a day is understanding why it’s worth is that amount and what is what can you do to increase the value of the business so it does get to your target level when you’re deciding to retire?

You know, a lot of people just don’t understand, you know what the real drivers are that increase the value of their business. And so, you know, they may be making investments in things that really add no value to the business and they don’t understand that.

And then they’re going to be frustrated down the road when they say, wait a second. So that’s, you know, millions of dollars doing this. And somebody said, Well, that’s great and wonderful, but it doesn’t have any value to me.

So I think that’s another thing that, you know, just even as you’re trying to build a value, your business is understood, how does a buyer look at your business, you know, and what is it that you should be investing in and doing that’s going to have a return? You know, that’s going to be a benefit to you.

Dave Crysler

Yeah, that’s smart. I really like the analogy of, you know, the improvements to your home because that’s something easy for people to grasp a hold of. You know, there’s definitely things where you know, you’re not going to get that money back on a resale, but it’s creature comforts, you know, it’s things that you just want to have.

And it doesn’t matter, right? Versus there are things that you can definitely do if you’re looking to increase the value of your home. So let you talk a little bit about that. I don’t want to get too into the detail of it, but you know, maybe you could give people just one or two things to consider in terms of building that value in their business versus something more along the lines of like a, you know, a lifestyle improvement, if you will just have maybe just one or two things.

Kevin Pendergest

Well, I think there’s a couple of things. I mean, the obvious ones are things that you can do to increase and increase the cash flow in the EBITDA of your business, you know because ultimately, most businesses are required based upon some multiple of EBITDA.

So if you can improve your bottom line, you know, or even by, you know, $100,000 and somebody’s going to pay you five or six times EBITDA for your business, you know that 100,000 dollar improvement in your earnings is going to have a value benefit of half a million to $600,000.

And so I think they need to understand that, you know, how again, it goes back to how buyers buy businesses and what are they looking for. And so that’s one thing on the profitability side. I think the other things are, are more management issues.

You talked a lot about systems and processes. You know, buyers like to see good systems and processes in place to see that the business is operating efficiently and effectively. And there are policies and procedures and people know what they’re supposed to be doing.

And again, it’s not something that, you know, they’re running by the seat of their pants and you know, the owner has to direct them every day to what they’re doing. So I think that’s another thing. They should be investing time and money and effort to put in place because that does help increase the multiple that they’re going to pay.

So you’ve got the earnings number that is going to apply some multiple to, but then a multiple number will go up or down based upon things like whether they’ve got good systems in place, where they’ve got good people in place and employees don’t have a lot of turnover, but a continuity there.

And then, you know, you know, the business owner does not depend on a business owner, you know, have a business owner to work with right now who maybe spends. 10 to 15 hours a week, and his business is very profitable.

That’s a very attractive business for somebody to come in and take over because it’s not dependent on that owner to be there every day and working weekends and evenings and everything else in order for it to function. So I think those are things that you need to know, you know, you can put in place that’ll help you increase the value and attractiveness to a potential buyer.

Dave Crysler

Yeah, that’s really great. You know, one of the things that kind of jumped into my mind, especially on the profitability of the EBITDA number; you know, a lot of the lifestyle businesses that I’ve looked at throughout the years and even the ones that are trying to build value depending on what the ownership structure is one of the easiest places to impact that number is by taking a look at some of the more personal expenses that get run through the company.

And it’s interesting as you bring those things to light, you know what kind of an impact that can have on your profitability where you think, Wow, you know, I’m just going to run this membership through or that membership through. And I’m not saying that there are not legitimate expenses that should be run through the business, but I am saying that there are more times than not an opportunity to evaluate some of those expenses and just say, how appropriate is this?

Because again, back to your point about looking at value from the buyer’s eyes, right? Is this something that the buyer would potentially have to spend money on? And if the answer is no, you may be better off starting to back those types of expenses out because you are going to show that the business is generating more net profitability and therefore impacting, you know, your overall value of the business. So I think that’s one area at least that I have seen, you know, have an impact and kind of an easy one, right? Let’s face it, if if you.

Kevin Pendergest

Those are, those are OK because again, particularly in privately owned businesses, when there is one primary owner, you know, your objective is to generate cash and to avoid paying a lot of taxes. And so you can put more expenses in the business and keep your taxes down and increase your cash flow, which is fine while you’re running the business. I would say that they just need to be cognizant of what those are an issue. They should keep track of them. There are things that when I work with a business owner, you start with, Okay, what are you making today?

But what’s the normalized business look like? You start adding those, then again, because a buyer is not going to have those things, they’re not going to continue those operations. And I understand that a private business owner is going to put, you know, personal expenses and things through their eyes to kind of keep track of them and be able to demonstrate, in fact, they are kind of personal expenses that will go away when you leave.

I mean, there are certain things that they do that may seem like their personal expenses and donations are others do, but they’re actually kind of critical in keeping their customer happy and, you know, continuing the relationship with them.

So they just need to keep track of those things and identify what’s really part of the business operation than what’s really personal so they can segregate those kind of expenses out later?

Dave Crysler

Yeah, I mean, for me, it all gets back to having clean financials that are easy to follow and easy to you, you know, highlight those key areas versus saying things like, Well, yeah, it’s this or it’s that. And it’s difficult to demonstrate year over year because again, looking at it from the buyer’s perspective, you really are, you know, kind of building a case in terms of, you know, just justifying that value. So I appreciate that.

Kevin Pendergest

So there’s another couple of other subtle things, a couple of subtle things that they need to look at that you don’t really think about sometimes. And you know, probably two good examples are, you know, the one person I think I’ve mentioned on my post before who died suddenly and it wasn’t prepared to sell, you know, they had a contract in place that had been grandfathered for some period of time, but basically, it increased the revenue they were being paid for that service significantly. And when the time came to transition to somebody else, you know, they weren’t the agency they were working with wasn’t willing to grandfathered that any further.

And had they addressed that upfront or worked through some things before with the agency, they might have been able to, you know, either allow that to happen or at least they would be something that they could have told the buyer upfront.

Just as you know, this is, we have needed to adjust the numbers because this is going to change. And so what happened in that case, it scared the first buyer away, you know? And so when the second buyer came in, you know, they came in and pay a lower price or whatever.

But another good example is, you know, they had a gentleman was in his eighties and was starting to do some estate planning, and he earned a number of businesses and happened to be a health care company that you know, I was helping him with.

And he had four facilities, one of which was a, you know, kind of the gem of the whole group. It was newer, it was modern, and it was very esthetically pleasing and did very well. And he had a daughter that was the administrator running that facility.

And, you know, as kind of a nice father, he decided. He would give her some equity ownership in a business, and I think 25% ownership in the business as well. When he decided he wanted to sell these assets, she was able to block them.

She had 25% ownership in the sales of real estate require that you have 75, 70 or 75% of the owners approve the transaction that you wouldn’t approve it, know they were sitting there, suing each other over Thanksgiving and Christmas holidays that year.

And it was a situation where, you know, somebody would have sat down with them many years ago and said, Hey, you got a problem here when you’re going to sell the business, you know, let’s try to resolve this.

And if you’re going to give equity away to people, you know, make sure it’s structured in a way where maybe it’s non-voting equity or something where they can’t block a sale. But it’s, you know, there’s little things like that, you know, people just don’t pay attention to until it’s too late.

And then, you know, they have to deal with it at that point in time.

Dave Crysler

So yeah, I think that falls under the category. I would say for most people if you just don’t know what you don’t know, when you set out to do something you know, really good in terms of, you know, that story, you just laid out how it can really hurt you in the long run.

And you know, it doesn’t, unfortunately, I’ve seen it too many times, but you know, the family aspect of it, right, that that is quick to go out the window. And, you know, people really dig their heels in. And it’s really unfortunate because, you know, obviously you’re you know, you’re losing a struggling battle for your business.

But then the, you know, the personal side, the family dynamics will be impacted, most likely forever. So it’s, you know, it’s really a sad situation.

Kevin Pendergest

Yeah, very, very unfortunate.

Dave Crysler

Yeah. So Kevin, can you, I’m going to kind of do a little bit of a two-part here, but you know when’s the best time to get started with exit planning or some strategic planning? And also give me a couple of things in terms of, you know what, what are a couple of fundamentals that really go into, you know, this planning? I feel like we’ve talked a lot about it, but if you could just, you know, kind of make that a little bit more concise for people I think really help people out.

Kevin Pendergest

Well, my personal opinion is, you know, you’re right, you should have an exit plan when you start your business. I mean, you should know why you’re starting your business and if you’re planning to exit or not.

I mean, there are some companies that don’t have ever had any intention of exiting; they built a company for some mission or purpose. They’re going to do it as long as they can. You know, they hope that maybe they can pass it down to somebody in their family.

But if not, that’s OK. They didn’t build the business for the purpose of building value and creating worth and monetizing that at some point time. But you should know when you’re starting your business, why you’re starting it, and you know what your plans are for that business to make it and run it for five years and try to maximize it by two and sell it and take those proceeds and go do something different?

Or am I going to run it for my entire life and then retire off it? Or but you know, so my opinion would be, that’s the time where you really just begin to talk about or think about what your exit strategy is. And then accordingly, you can build your plan to meet those. So that’s the one thing. I think the second thing you need to do is soon enough, so you have time to affect a change. So again, I get involved in a lot of companies. They’ve already made the decision. They’re going to sell. So I’m going to help. I’m just helping them through the process and guiding them through the process and trying to do what I can to manage or maximize the situation around.

But you know, realistically, they should start this process at least four to five years ahead of when they think they’re going to retire or, you know, ideally probably eight years, you know, before that time because, you know, when you think about it, you know, first of all, once you go to sell your business, that process is going to take probably nine months to a year to close, OK? In many cases, the buyer is going to require that the owner stay on for another year or two, you know, so now you’re three years or so for three, you know, three years away from retiring, you’ve got three years tied up just in, you know, going through the process of selling in the state involved with the business afterward, you really have no time to affect any changes up front to make it more valuable. And so that’s why I’m thinking that you know, basically, you know, 58 years before you’re thinking you want to exit or retire or whatever the case may be, that’s why you really should, at a minimum, sit down and start looking at, you know, is my business ready to sell? How attractive is it? What’s it worth? What do I need to get out of this business that proceeds, you know, in order to achieve my goals and objectives?

And what’s my, you know, what’s my gap between where I’m at now and where I need to be? And then you’ve got some time where you said to do some things to try to affect the value of the business and then get it closer to where your target value is if you’re not there already.

So I think at a minimum, probably five years before you’re planning exit is where you really need to be serious about the actual planning. But I would contend that you should have that in your head, you know, from day one.

I mean, it’s kind of like private equity investors, you know, they’re really into an investment for five to four to seven years. You know, they’ve got an exit plan in mind as soon as they invest in a business.

You know, what they want to do with that business is where they want to get it to and how and when they’re going to exit. And I think business owners should be kind of doing the same thing, you know when they start their business.

I think that some of the core fundamentals of the business, basically as I mentioned before the first one is really trying to build value in the business. You know, you’re trying to buy you now to increase the value of the business now and increase the actual income structure.

You know, the income coming in that you’re deriving from that business so you can see the benefits of that. The second thing is that the owners are actually ready to exit 75% of the business owners a year or so after they’ve sold their business have serious regrets because they’re, you know, they’re not prepared to exit.

They don’t know what they’re going to do after the exit. They don’t. They never think about it. And so you really need to have kind of a plan in place is OK. When I get out of my business, here’s what I’m going to do.

You know, it might be starting another business or maybe retiring. But if you can retire, what are you going to spend your retirement, you know? Are you going to still continue to dabble in some businesses? You can try to serve on some boards or you’re going to be a philanthropic endeavor.

You need to do something. You know, these people are used to working and working hard and just walking away from a business and then just, you know, having a pile of money there, but not knowing what they’re going to do is, you know, that becomes very dissatisfying for them.

So I think they need to understand what their plan is. And then, you know, in conjunction with that, they need to assess both themselves and the business in terms of what’s its readiness to sell. And there’s a few tools and things that we have that, you know, questionnaires and different things that we share with business owners that determine whether they’ve got, you know, personally. Are prepared to sell, you know, do they have estate plans in place, do they have the financial plans in place? Do they have any idea what they’re going to do next and how they’re going to spend their time and all those types of things from a personal readiness standpoint?

But then secondly, you need to look at the business and look at the readiness of the business, both in terms of is it ready to sell? You know, going back to your point before your financial systems in order, you know, are your legal contracts and documents in order?

Do you have all the things that you need to do to be able to effect a sale smoothly? Or are you going to have disruptions like, you know, some of these other situations I mentioned before? And then you need to just look at the attractiveness of the business so that things like that, you can just sit down.

And if you’re going to be an honest assessment and go through that and say, OK, yeah, this is good, this is good. That’s not so good, you know? And, you know, just assess whether the business is attractive to someone else to buy, then you or you’re in a position to effect some changes and do what you need to do. So those are kind of the three, the three key tenants, I guess, basically.

Dave Crysler

I mean, all of that’s amazing. You know, it’s interesting, too, because you said something in there in terms of starting with the end in mind. And I feel like lately, that has been a theme with things that I’ve been running across.

I recently started this new book called Working Backwards. It’s an inside; have you read this book? It’s an inside story.

Kevin Pendergest

You know, a guy who has a business called that. So yeah.

Dave Crysler

Yeah, it’s super interesting this book, in particular, a good friend of mine recommended it to me. It’s kind of an inside perspective of the things that Amazon does in terms of planning. And you know what you said in there as far as you know, like a private equity company, they already know what they’re going to do with these investments, right? And so starting with the end in mind, just understanding again, not that there’s a right or wrong answer is just about understanding what you’re really trying to build here. And that way, it makes it easier along the way to do that.

So I just, you know, I really appreciate that, and I think it’s super, super appropriate. So appreciate you sharing that. So. So, Kevin, as we kind of wind down here, you know, a question that’s on my mind.

You’ve been a business owner for a really long time and you have been working with other business owners for an equally long time. What’s something that you’ve picked up kind of a best one of your best nuggets of information to pass along?

I always appreciate hearing this from other business owners and people that have worked in, you know, just in the business world in general. But do you have something; one or two things that you can share in terms of, kind of, best lessons that you’ve picked up along the way?

Kevin Pendergest

Well, I think it really goes back to what you said before, I think you need to spend some time with the business owner to understand their goals and objectives, why did they get in the business? What are they trying to accomplish?

They’re usually pretty open and good about that. But then you have the do you know when you ask them the questions about, well, two things what’s your business worth today and what does it need to be worth when you exit?

Not so many know the answer to that question. And so I think it’s really the best advice, I guess I would give somebody who’s working with a company, you know, along these lines would just have that discussion with them and say, You know, what are you trying to accomplish?

What do you want to do when you retire or you sell the business? How much money do you need to have? Okay. You know it. Your business is worth today what it’s really worth, you know. And you know, and do you have a gap between, you know, worth now and what it needs to be worth when you exit? And you know, and I think a lot of them if they’re honest with themselves, I’m really not sure.

You know, they might think they have an idea but are really not sure. And I think that’s probably the key, if you will, for them thinking, Well, gee, maybe I should find this out, you know, maybe and maybe my business is worth plenty and I don’t have to worry about anything. But that’s fine too because that’s a big relief for them to know that. But you know, it’s a bigger problem than if they think it’s worth so much money and then they said, OK, no, I’m going to take it to market. And then they find out its worth 60%, 70% of what they think it’s worth. Now they’ve got a problem. I said, Well, I can’t retire on that. What am I going to do? And so I think that’s the those are the questions.

I guess I would be asking business owners and trying to have them be honest with themselves because, you know, at the end of the day, they’re the ones that are going to either reap the benefits or suffer the consequences of whatever those decisions are.

Dave Crysler

Yeah. No, 100%, I appreciate you sharing that. Well, Kevin, thanks so much for coming on the everyday business promising cast. If somebody would like to contact you or connect with you, what’s the best way for somebody to find?

Kevin Pendergest

Probably the easiest way is to go on LinkedIn and just looked up Kevin Pendergest. I do have a company page, but I don’t really put anything on there, so I think if they just put my name up on LinkedIn, I also get a lot of history and background do and they can always, which may be a message there. And why is that being happy to have a discussion with business owners about, you know, what they want to do, what some of the issues are they’re facing and they’re used to call and chat with them to share some ideas with them.

And then at some point time, if they decide it’s worth working together, that’s fine too.

Dave Crysler

Perfect, yeah, and I know you put a ton of valuable content out on LinkedIn specifically, so I will make sure to add your profile into the show notes so people can find you easily and again. Thanks so much for coming on the podcast, Kevin.

Kevin Pendergest

Thank you, David. I enjoyed it. Take care.

Dave Crysler

Thank you so much for listening today. If we brought you any value, please rate. Subscribe and share our podcast. Also, be sure to connect with us on social media by searching at the Crysler Club. Until next week, I’m your host, Dave Crysler.