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Planning Your Exit Strategy with Tom Gledhill
We talk on this show about how to take back time and what does that mean? It means thinking more strategically so that you can get further faster so that you can compress time. Our guest is going to help you do that. His name is Tom Gledhill. He’s combined decades of his experience from building and selling his companies. He’s helping many other business owners to sell their companies so you can too. He developed XITpro System that helps business owners to make their companies more salable. Tom is the author of the XITPRO System and the online course with the same name. Tom, welcome to the show.
Thank you very much, Penny. It’s a pleasure to be here.
I’m excited to have you because I had my own technology business. I built it up from just me. I sold it to a public company when living in Switzerland. It was a French public company. I’d been through a lot of mergers and acquisitions. It’s so key for every entrepreneur when they’re growing their business to be thinking about selling it even when they’re starting it. Tell me your opinion about that.
That’s interesting that you say that because so few people do that. I happened to do that. I knew what I wanted to do. I either wanted to do an IPO, which I thought was a minimal probability, but have a larger company acquire my company and that’s exactly what happened. Most people or business owners that I’ve seen over the years, they got into their business either by accident or by necessity. There might have been laid off or terminated from their job or they might have been working for a business owner. The business owner had no family to turn the business over to. The person that was working for him was a good employee and been there for years. They give the key employee a good deal and a good way of paying for it over time. Some of them have done either one of those two. Most of them have gotten their business by accident. They don’t think about the exit.
Even people who do it purposely, they may have a big skill. They’re excited to take that skill to the marketplace. They’re the expert in what they do but not necessarily in building a business. No matter what reason you get into it, you have so many more opportunities if you think about that from the very beginning by setting it up like that.
It’s interesting that you said, “Think about it.” I had a great lawyer. He happened to be an expert at mergers and acquisitions. He had a lot of connections. We had been talking about selling my company. We were talking about another subject. He said, “How are you making out with selling your company?” I said, “John, I haven’t been thinking about it. Our cashflow was great. We’ve come out with a new product. Everybody is excited and things are going great.” He said to me, “Tom, now is the time to sell.” I had been busy with my company that I hadn’t thought about it. There’s another part to it too. I knew my company, my market and my product. I could sell my product but I knew nothing about selling my company. I didn’t know who was going to buy it. I didn’t know what they were looking for. Even though I had a lot of experience in the entrepreneurship and business world, I didn’t know a lot about selling a company with an infrastructure in any size.
Tell some of the business owners who are like, “What?” They’re just waking up to this idea. Tell them a couple of tips, one or two things that they should be thinking about now, whatever stage their business is. What are two concrete things that they should start looking at now that you also offer as part of helping them in your system?
The key thing is what are the business buyer types that would be interested in your company at your revenue level? Also, what are they looking for? Those are the two key elements because that determines everything. Who determines value in a business? It’s like anything else. The person that’s buying it is the one that determines the value.
As a business owner, if I’ve just started my business or it’s been in business for a number of years, I can go out and look for who are the potential buyers, who would be interested. How would I complement my business, complement their business and see what it is that they’d be willing to pay for it? What are some of the criteria? How would I know what somebody would be willing to pay for it? What kind of questions do I ask or look for?
First of all, you have to have some history behind your company before you think about selling it unless you have a game-changing technology. There are companies that sold before they even had one customer. People like Microsoft and Google bought them but that’s rare. You need some experience. You need to build it up. You need three or four years of experience before you start thinking about selling it.
I want to challenge you there. I disagree. The way you set up your company from the beginning, I agree with you that you might not find a buyer. However, the choices you make in growing your business and the way you do accounting, the way that you set up your processes and the way that you set up your contracts, it matters to start thinking about it upfront because they’re going to audit your business in its entirety. The more organized and structured you are, the better you’re going to prepare yourself for sale. Would you agree with that?
I wouldn’t disagree with that at all. That’s true. You ask me though about valuing a company.
I want to make sure of that for the people who are reading because you said you don’t need to think about selling the business when you first start. I want to say from the context of finding a buyer, yes, so people reading will understand what the context of the choices and decisions you make in preparing your business. It’s still a value. Back to your point, I just provide that clarification. We’re blowing people’s minds here.
I’m glad you did because improving your company at any point in time is certainly positive. To answer your question about valuing, there are people, me included, that do business valuations. There are two things that determine the value and one is your cashflow. The other is the risk that’s presented to a potential buyer. One is directly proportional and the other is inversely proportional. Those are the two things that determine value, but to get a professional valuation, it takes a lot of time to do that. You need a lot of information. You need to analyze the company, break it down, see where the risk factors are and to see what are the buyer types looking for that may buy your company.
What are some of those risk factors, just so people can start to think about them?
I’ve developed a system to help small business owners in the revenue range of let’s say $500,000 to about $5 million. After that, you start employing professional help, but people under $5 million typically don’t have professional help. They’re running the show themselves. I’ve broken down into sixteen of what I call value drivers. These value drivers are things like the industry that you’re in, your company reputation, the products and service that you have, the competition, your personality, key personnel, systems that you have, your cashflow, growth. Those are the basic value drivers.
If you want to get a premium for your company, there are what I call the big hitter value drivers. They are scalability, the ability to grow your company with minimal capital investment. Recurring revenues, the revenues that keep coming in like maintenance contracts. They are real revenue value enhancers. You have bankability, the ability to get a loan because somebody that’s buying your company is going to need a loan. They’re going to use your company to get a loan. If your company has good bankability, that increases your value. The final one is intellectual property. Everybody has some intellectual property. You just have to look for it.
Something that’s unique. It doesn’t have to be a product. It can be a process. It can be a way you handle transactions. What you need to do is document that so that somebody looking at your company that’s thinking of acquiring it will see that documentation and that adds value also. Those are the things that people ought to be looking at. Probably the two biggest things for a small company to focus on are key employees, hire slow and fire fast. Number two is your systems and they should be documented. If you can automate as many of these systems as possible because the documentation comes with it, so the employees and the systems.The two biggest things a small company should focus on are key employees. Hire slow and fire fast. Click To Tweet
People’s wheels are turning and they’re like, “I hadn’t even spent much time thinking about that.” The good thing is those two key things that you talked about, whether you’re selling your business or not, those are the most important things to be successful anyway. The other points that you made are important that people think about them, at least have it in the background of the big picture. You focus on those two things that are going to move you forward faster anyway. Why not think about those other things as well so that you can position yourself for sale in three to five years, let’s say?
A lot of business owners have a macho attitude that they are indispensable. The most valuable companies are those where the business owner is dispensable. Because the business owner is not involved in the day-to-day operations that allows the business owner to put his or her feet up on a desk and think about how they’re going to grow the company and about innovation. If they were a lifestyle company, they can think about playing golf, going sailing or whatever. Through the years, you get business-free vacations. You don’t get people hassling you while you’re on vacation. I had that situation in my last company. I would call in to see how things were going on and my administrative assistant was saying, “What do you want? Why are you calling? We don’t need you.” Some people might be offended by that, but that’s the way it should be because now you’re a big company. Your company is valuable.
A great point to mention here is the mindset around that. Some people get scared if their business doesn’t need them because they may want to be, not consciously but unconsciously, in control and connected to everything. It’s one of those areas where our brain tricks us because you want to create a business that doesn’t need you. That’s what success is. It’s not growing a big business that needs you everywhere. There is a mindset shift there that people unconsciously need to step into. It’s not about being needed that makes you important. It’s about not being needed.
That’s a huge problem. A lot of people have that macho attitude like, “They need me. If it weren’t for me, the company would be nothing.”
That’s what I heard you say so I wanted to highlight that for people who may not even be conscious of that connection and why they are maybe a little hesitant to delegate and to let go of some of the activities. I find one of the biggest challenges that I see with business owners is that they don’t want to let go. They say they do but they won’t take action to let go.
They don’t know what they’re going to do after the show is over. There are people dealing with that to help people. I wish I had it because I didn’t know what I was going to do. I was in my late 50s when I sold my company. I had long ago given up golf so what am I going to do? I have a friend came along and said, “Why don’t you join me in mergers and acquisitions?” I did and I enjoyed it and learned an awful lot in that whole process because I was looking from the other side of the equation.
New things will always open up. New and better to bring us to that next level of growth. Why is this important to you to create the system and to bring it to small businesses or you said between $500,000 and $5 million?
Primarily because they’re not even aware of the problem. The other part of it is I have done a lot of things in my career. My wife got ill a few years ago and I sold my brokerage. I got involved in writing and doing a lot of researching. When she passed, I could either grieve for the rest of my life or find a purpose. My purpose and my mission going forward is to make small businessmen and women aware of the problem that only 20% of those going to market are going to sell. A lot of them are basing their retirement getting that money. If they can’t sell their company, they won’t have access to that money that they have locked in their company for retirement or perhaps in the next adventure.
Wouldn’t that be a shame that you’ve got all that value that you created and it’s like having money in the bank that you can’t access? Knowing it’s there but being able to access it because you created a job for yourself instead of creating a business.
The other part of my mission is I’ve developed a four-step process to help small business owners fix the problem themselves. A lot of them are reluctant to spend thousands of dollars on a consultant to come in and help. What I’ve tried to do is create a system for them to do it themselves. I’ve written a book about that called the XITPRO System. I’ve also had an online course for those people that need more accountability and structure of the same name. That will allow the business owner to evaluate their company. I’ve developed a couple of tools to help them evaluate their company easily and match what the business buyer type wants with what they have and improve what the business buyer type wants. Those value drivers that I mentioned, it will find out what are those value drivers that are most important to that buyer type and improve those value drivers that buyer type wants.
That is super valuable. Everybody needs to buy that book. If you are a business owner or an entrepreneur, even thinking about starting a business, start with the mindset of saying, “I want to build it so that I can sell it.” Even if you decide not to sell it, you decided to pass it to your kids or whatever. You need to have this basis of information. Tom, I can’t even tell you how important this is that we’re opening up this thought process for people. I’m super excited about what you’ve created and what it means to them.
Thank you very much, Penny. My mission is to yell this from the rooftops and put the message out there. There are five million businesses in the United States between $500,000 and $5 million. If over 80% don’t sell, that’s a lot of businesses and that’s a lot of money. Who does it hurt? It not only hurts the business owners and their family, but it also hurts the employees because they are going to be out of a job. It hurts the community. Who likes to see a locked-up facility? It hurts the country. If you do some basic mathematics on how much money is lost, it’s over $2 trillion. There are a lot of problems here that don’t just affect the business owner.The most valuable companies are those where the business owner is dispensable. Click To Tweet
I want to hear a little bit about some of your stories. What was the most challenging thing that happened as you were selling your business?
The problem was I didn’t know who the buyer types were. I had a good idea that it was going to be a larger company in the same industry. I didn’t know what they were looking for. We had about a two-year period before we made the decision to sell and putting the company on the market. During that time, we were thinking, “What can we do to increase the value?” We did a couple of things. We expanded geographically from New England into New York and New Jersey. That cost us a ton of money. We also developed an electronic medical record. That cost us a lot of money also. It turns out the eventual buyer already had offices in New York and New Jersey. They were not interested in that. They also had their own electronic medical record. They weren’t interested in our technology. It turns out they were interested in our customer base because they had products that we didn’t have that they could immediately sell to our customer base. When they acquired us, they not only got our revenues and profits, they got our customers that they could immediately get more revenue from by selling products that we didn’t have.
That’s a great experience that you shared because when you think it’s one thing and you invest a lot of money and effort, it didn’t change the value of your company potentially for them.
No, it didn’t. If I knew what I know now, we would have hired more salespeople in the different area and I would’ve gotten more customers. I would have saved money because I wouldn’t have spent as much money. That money that I saved would’ve dropped to the bottom line and increase my profitability and my cashflow. My value would have been higher from having more customers that they wanted and having a better cashflow. It affected my sale probably by over 20%.
It’s important for people to think about what decisions you are making now strategically. Where are you investing your time, your money and your energy, and will it make sense for the future value of your company? That’s a key question. I find something that I talk about a lot in a different context is that one of the things that business owners do not do that’s so critical is take time to step back out of their business and ask those critical questions. It’s a schedule, half a day or even if you can only make it one hour a week to step back and look at your business as a whole and see, “Are you investing in the right areas? Are you getting the results that you’re looking for? Are you attracting the right types of people for a future sale or whatever that is?” When you’re working with them, how do you get them to take that time that’s necessary away from their business so that they can think more strategically and work on their business?
A couple of things have to happen. They need to spend time on improving their business. That’s what my book and my system are all about, is making your company by improving all of these value drivers that we talked about. They’re making their company more efficient and effective. They’ll have more time to spend on their business rather than in their business. That’s the first thing they need to do. That’s going to take them some time, weekends and evenings, whenever they can find the time to start making these improvements. The first thing they have to do is find out what they need to improve. Improve those things to make their business more effective and efficient then they’ll have the time.
That’s what we were talking about when we were talking about business-free vacations and being able to go to organization meetings, seminars and not getting panic calls from your office. You’re more dispensable. That’s the first thing they need to do. The second thing is, are they a growth company or are they a lifestyle company? There are people that are out there that are making a lot of money and they could care less about growing. If they’ve got a company working effectively like a well-oiled machine, they can go play golf, they can go sailing or whatever they want to do. If they are growth-oriented, they can do what you were suggesting, think about, “How I am going to grow this? What new products can I come out with? How can I improve the products I have? What geographic areas can I expand to easily?” You can start thinking about these things, how to grow your company.
Even if you’re a lifestyle business, take that time to reflect to say, “How can I get this so that I automate it or someone else takes it over from me and how do I free up my time?” That reflection time is going to help you one way or the other to see things to find out what area to invest that time and energy on. It’s important stuff.
The times that I walked away, when I was in brokerage, from people knowing in the first visit that I wouldn’t be able to sell their company. There were times when I took something on the margin thinking maybe I can sell it and not being able to sell it. The disappointment of these people was so sad. There were people that need to sell their company because of some external event they had no control of. We call them the desperate four Ds: death, disability, divorce and debt. Any one of these things can affect a need for somebody to sell their company. If they can’t sell their company, it affected me to a point.
Why not be ready? I know we could pick your brain for another half a day, but we’re going to have to bring this to a close for people. Perhaps we’ll bring you back and dig deeper into one of those particular areas. Thank you so much for being here.
It’s my pleasure, Penny.
Give us the URLs of where people can find you, get ahold of your book and your system.
Thank you so much. For all of you reading, you need to get that book and you need to take a look at that program because that’s going to help you to step back and look at your business in a completely different way, much more strategically. It’s going to help you to grow it regardless of whether you want to sell it in the future or not. It’s going to help you to grow it or create that lifestyle that you want. At the same time, be prepared then you’d be in a position if you wanted to put it up for sale if one of those unfortunate four Ds come or if you want to retire and move on. Thank you all for being here. I’ll see you in the next episode.
About Tom Gledhill
Tom Gledhill is an entrepreneur, author and business broker. He combines his decades of experience from building and selling 4 of his own companies and helping many other business owners sell their companies, to develop the XITpro System to help business owners make their companies salable.
Tom is the author of the XITpro System, the valuator, and an online course of the same name. Millions of small business owners will not have the retirement that they deserve or expect. Their retirement nest egg is locked in their company and they won’t have access to it unless they can sell their company.
But the sad fact is that over 75% of small businesses that go to market don’t sell and the majority of the business owner’s net worth is in the company. Their alternative is often to shut down the business. This not only hurts the business owner and family, but also the employees, the community, and the country.