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Brian Kinahan is a business coach who helps CEOs and business owners improve business performance and prepare for an eventual sale or generational transfer. His philosophy: run your business like you're going to sell it, even if you're not.
Questions Asked: 1) Are there steps an owner can take in the short term to increase the selling price of a business? 2) Aside from being ready for the transaction process, how does financial performance affect valuation? 3) What else can an owner do to have a significant impact on the price a buyer will pay for the business?
Exit Coach Bill Black interviews Top Advisors for Tips, Ideas & Precautions for Business Owners who want to grow and protect their company value and plan for a successful Business Sale or Transfer. Listen daily so you can be well-planned!
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February 15, 2024 Welcome to the Exit Coach radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for. Their best tips, strategies, and precautions so you can be well planned. And don't miss our one minute exit coach tip of the day on exitcoachradio.com. And now here's your host, the exit coach Bill Black. Welcome to the show. Thanks so much for joining us today. I'm very excited about my next guest. He is Brian Kinnahan, and we're going to talk about business coaching and how you can improve business performance and prepare for the eventual sale of your business, which of course is something that we talk about a lot. Brian's philosophy is run your business like you're going to sell it even if you're not. And we really adhere to that strategy when we talk to business owners. You have to look at it as if you're going to sell it. What is a buyer looking at? So Brian, I'm really excited about our interview. Welcome to the show. Well, thanks very much, Bill. Great to be here. Brian. The name of your company is Alliance, and you're in Beverly Hills, California, I understand. Tell us a little bit about your background and what Alliance does, the types of clients you work with. Uh, well, I, uh, I went to UCLA to the business school here uh in the late 70s and then worked for a bank doing uh in the workout department and so that gave me a good grounding on what works and what doesn't work at companies. Uh then I was recruited to be the chief operating officer of a couple of manufacturing businesses in the LA area. Uh one making fabricating incinerators, another was an apparel company. Um, and then I got into doing some turnarounds here locally for 4 or 5 years of fixing companies, moved to North Carolina to raise our kids and started and ran a technology company for about 7 or 8 years. And then in around the 2000s I got into coaching because really I'm, I'm a really a student of business and how businesses operate. I love the variety of multiple businesses and I love to help people. So for me the biggest charge is to work with CEOs and business owners and And to help them understand what works and what doesn't work, things that I've learned along the way and through practice and through study. Great stuff, you know, and you know we talk a lot to business owners on this show who are considering their eventual exit. It might be a few years out or it might be something they need to get ready for in a hurry because of circumstances. Are there steps that an owner can take in the short term to increase the selling price of a business, Brian? Yeah, I it's, uh, certainly it's like anything. The more time you have, the more you put into it, the more you get out. But certainly at the front end, uh, you can really have an impact on the business. In fact, it could be the difference between selling the business or not if you are well prepared. Everybody understands that there's a due diligence exercise that takes place when a prospective buyer is looking at the business, but I think what most people don't understand is how rigorous that is and how much information the buyer wants. Um, and, uh, how much time it takes to prepare that. So if you, uh, prepare that information beforehand, it does a couple of things. One is, uh, it saves you time during the due diligence process rather than taking you away from running the business on a day to day basis. Uh, you already have the information, um, otherwise it'll have an impact on you and your financial people and other senior members of the team because they'll be so distracted gathering information. I won't be running the business. And that often has a very negative impact on the performance at exactly the wrong time. The other is that if you have the information, it's not just contracts and agreements and resumes and org charts and so forth, it's also information about the market, your competition, your customers in terms of ranking them by maybe profitability or growth, your products. If you have all that information, it gives the buyer a lot of confidence that you really understand. What your what your business is. If you don't have that and you're collecting it along the way and sending it and in dribs and drabs and sometimes having to correct it, the buyer gets very nervous. They get buyer fatigued, but they also start thinking, well, you, you must be pretty disorganized. There's a lot of risk in your business because you don't really have everything you need and, um, and then from that sometimes they just peel off and go find another opportunity. So being prepared is a lot of advantages and the bottom line to that is not only is it binding. as in, you know, perhaps you won't be able to sell the company if you're not prepared, but in addition, it adds to the value. So a nice, it's like a nice shiny car is worth more than one that's dirty. I mean they may be the same car, but a nice shiny 1 may get 10-20% more on the sales lot. So it does add value to the business as well. Great point. And you know one of the things we talk about is that, you know, you may think you know when you want to sell your business. But you don't know what circumstances or opportunities are going to happen that will require you to sell it or be an opportunity for you to sell it along the way. And like you say, if you have this basic package of information put together and you've started to think about this on a regular basis, you're a lot more likely for whatever happens to have a successful outcome as a result of that. And aside from being ready for the transaction process, how does financial performance affect valuation? Well, the buyer is really buying a stream of earnings just like if we buy a treasury bond, we're looking for a stream of payments, and that's essentially what any investor does when they buy an asset. In this case they're buying your business and so what they want to see is, uh, good earnings, but they also want to, uh, they want to buy growth if possible. So the best thing that you can do is put together a, a growth plan, um, that shows, uh, the company growing, um, while you're doing that. Uh, I always advise my clients to, to look at the profitability if you really look at the profitability of each product or service that you offer and, um, apply some of the, uh, sort of the invisible costs, the overhead, uh, that, uh, you don't really normally see in the cost of goods sold or cost of sales number, if you rank all your products and services that way, you'll be surprised that some are very profitable and some are not at all. So that gives you a chance to adjust pricing, adjust, uh, how you do your work and improve that. And maybe even uh get rid of a few products because we end up having too many SKUs or too many services. So look at the margins, look at the profitability, and then put together a good growth plan based on a sound strategy with good market positioning and then, um, then and this requires you have some more time like, you know, 6 months or a year, but then start showing progress along that plan and what it does is that adds credibility to the plan and when you do that, whatever earnings you have. The prior year, let's say it was a million dollars and you've been kind of bumping around at a million dollars in earnings over the last few years, if you're showing that you're on a trend to grow to 12 in earnings and then 14 and 16 because you have a good plan and you're executing it on it, then the owner will pay you a multiple of a larger assumed earnings number because they'll take those future earnings that have credibility and they'll give you credit for it. So if they're doing a multiple of, you know, 5. Times earnings, it won't be 5 times 1 million. It may be 5 times $1.5 million because they give you credit for those future earnings and that right there in that little example, that's $2.5 million. So it makes it makes a big difference. And that comes right back down to the fact that most people hear those formulas, you know, 3 to 5 times ebi off for most small to medium sized businesses, and they don't really understand what goes into that, that it's really a discounting of the future 10 years earnings, for instance, use. A discount rate based on the risk of the business and the more together your business is, the less risk there is. So there's a lot that goes into that that a lot of people don't understand. Would you agree with that? Yeah, very much so, and we can talk about that multiple in a minute, but as you mentioned this IBEDA, the other thing to keep in mind is you have, you know, there's an adjusted IBEDA that needs to be formulated when you look at where you present your your financials to a buyer. The adjustments have to do with what's called ad backs because privately held businesses typically have expenses related to the owner's lifestyle, let's call it, that would not continue with the business when a new a new buyer owns it with a new owner. And so if there's a million dollars in earnings, but there's $200,000 in miscellaneous owner-related expenses, you need to identify those and add those back. An example might be somebody in the family is quote unquote, working for the business. but really not spending much time there and not necessary to the business for the new owner. And so that salary might be an add back among other things. And if you can increase your earnings or EBIDA from 1 to $1.2 million and you have a 4 multiple, that's $800,000 in valuation difference. And that's a good point and that is certainly on the top 10 list of things we hear from advisers that cleaning up your books early will pay dividends because You'll come back in a multiple down the road. A lot of business owners say, Well, I don't want to, you know, pay a lot of taxes as we go here. So I have my accountant build a lot of things into there. But taking those out well before a sale will pay you back in multiples if you, if you take the time to clean those up. Is that right? Yeah, that's a really good point. Yeah. And so what else can an owner do to have significant impact on the price a buyer will pay for a business? What are some of the other factors? Well, the part that gets me most excited because it's most controllable is how they run the. Business and um you mentioned before the multiple. The multiple is a is a proxy for risk. In other words, they'll they'll pay you a multiple of those earnings like 235, whatever, 10 times the multiple based on the likely their sense of the likelihood those earnings are going to continue. So if a company's earning a million dollars but you think it's a, you know, 50/50 chance they'll earn it again next year, you're not going to pay a lot of money for that stream of earnings that you're buying because you're not sure if it's going to materialize. But if you, if you're pretty sure that that million dollars is going to continue and grow, then you'll pay quite a bit for it. You'll pay 7 or 8 times because the you know, the implied return is, you know, let's say 10 to 20%, and you're willing, um, to not add in a big premium, um, and hence the multiple is larger and we can talk more about the math on that. But the point about the multiple is it relates to risk and risk is a in large measure is a function of how you run the business and uh what what I mentioned before. gets me excited is that is that it's the fundamentals. There's no mystery really in how to run a business, and I, I, I contend that anybody that is, you know, generally qualified, but every CEO who's already doing a reasonable job can do a very good job of running their business if they'll just take care of the basics, and the basics are not complicated and they're not necessarily hard, but you need to pay attention to them. So if you want to be stronger and lose weight, yeah, you have to eat a little bit less and go to the gym more. I mean, it's not that complicated, and the people who do it get the results and those who don't don't. And the better you run the business, the less risk there is, and I can go into some of those elements in a minute, but it's really about how you run the business. And by the way, that relates to that comment we hear a lot that I think Michael Gerber coined in EMI, which is, you know, it's a function of how much we work on the business, not in the business. We have to build the foundation of business practices to support growth and to make it more. are sustainable and like you said, when it comes time to impressing a buyer and giving them confidence, we have to demonstrate that beyond just having it all in our heads and and you know, in disorganized systems. So the better story and the better demonstration we can make that this is a transferable, reliable, cash flowing business, the better off we'll do. So great tips and tell us a little bit about how you work with business owners, how you get started in working with them. Uh, uh, yeah, and that was a really, uh, good point, Bill, uh, but to this particular question, I, I, I essentially I'm, um, you know, I'm a business coach. I do, I, I separate coaching from consulting. I used to do a lot more consulting where I would actually go into the business and roll up my sleeves and, and work, uh, on the strategy or the financials or the or the people side of the business with different groups inside the company, and I still do that from time to time, but increasingly my focus is. Is helping the CEO leverage their capabilities and so there's a direct one on one coaching and then I also have groups where kind of mastermind groups where CEOs get together once a month for a morning and they help each other solve problems and then we we input new information but throughout all of this there's a methodology and the methodology is focused primarily on these fundamentals of which there are 6 primary areas. And very briefly, the six areas are our purpose, which is the sort of the the the setting long term goals, the mission, the values, uh, the why, uh, if you watched Simon Sennek, you know, why are we doing this, um, the next is planning, and it's amazing how little we plan because we're always so busy doing, but a company that plans ends up being a lot more successful and it's planning at the strategic level, it's planning at the financial level, departmental, uh, and one very Powerful area to beef up planning is in project planning. Companies always have a lot of projects, but many don't get completed or completed on time or very well. Project planning is very easy and it's an important habit. The next is too are people in process, you know, how are we hiring the best people and training and developing and motivating processes? Are we mapping them out and are they repeatable and are we improving them? And then the last two are metrics. Are we running a fact-based organization? Do we have near term sort of weekly KPIs to keep our finger on the pulse? Do we have budgets? Do we have departmental data and and financial information to lay against the budgets? And then the last is rhythm, and rhythm is a concept that's known to people who work at GE and other successful companies, and rhythm is kind of where you fold it all together, where you say, OK. We have some goals. We've made some plans. We've taken action with people and through our processes. We have metrics and measures to see how we're doing, and then we sit down, we look at all that, and we ask ourselves how's it going and how can we do better. So it's really a continuous improvement cycle or rhythm in an organization, both at, you know, I mentioned projects before project reviews, strategy reviews, budget reviews, and so forth. So I work with them on those six fundamental that I call. The big sick and as they as they improve in those areas, you know, magically the company just does a lot better and frankly the owner has more time off and is more relaxed. And if somebody comes to buy the business, the multiple goes up. Fantastic information very clearly put, listeners, you can tell that this is a person who takes great pride in their process and putting it all together. As a matter of fact, you can benchmark yourselves in each of the three areas of being prepared. For due diligence, having a credible growth plan and getting out of the middle by taking a set of surveys that Brian has available. If you send him an email, he'll send you back a link to the confidential surveys, and he's also happy to spend 15 minutes on the phone with you at no charge to discuss your goals. So the email, if I may, Brian, I'll share that email. Is that OK? It's Brian at alliance A L L I A N C E dash CEO.com. or if you want more information, visit the website at www.alliance CEO.com. Brian, it's fascinating. Unfortunately we're out of time today, but I'd love to have you back on in the near future so we can delve more into the 66 aspects of planning because I think that's very fascinating, great information for our listeners, and I want to thank you again for coming on the show today. It's been fascinating. It's been great. Thank you, Bill. We're going to take a short break. We'll be right back after this, so please stay with us. Just thinking about what will happen to your business if you're gone keep you awake at night? Will you get the price you need from your business to carry you through retirement? The BEI Network of Exit Planning Professions is the world's leading advisor network with the power to help business owners transition out of business on their own timeline and terms. Ask your most trusted advisor to create a BEI plan for you, or visit us at exitplanning.com. That's exitplanning.com. You're listening to Exitoachradio.com, the information station for age 50 plus business owners, where we're interviewing top advisors for their best tips, ideas, and precautions so you can be well planned. We upload new one minute tips every day. Exitcoachradio.com. Come listen for a minute. Thank you for listening to Exit Coach Radio.
