Gary Lillian - Hey, Sellers: “What’s Your Enterprise Value Proposition to Your Replacement”

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. Hi everyone, thanks for joining us today. Great information ahead. Stay tuned, get your notepad. You're going to want to take some notes. Our next guest is Gary Lillian from Reinventures. In Rancho Santa Fe, California, we're going to talk about how to take you out of something called the customer value delivery equation. So let's get right into that. Gary, welcome to the show and thanks for joining us today. Hey Bill, thanks. Great to be here. Hey Gary, tell us a little bit about your background and about reinventures. It sounds like a very interesting name for a company. Yeah, sure. I have had a a rather a different sort of a career. I've had about half of my time, especially early on, was spending large Fortune 500 companies, places like the Clorox Company, PepsiCo, Pizza Hut, etc. running, you know, large, generally marketing and sales organizations. But then I've also spent about half my career time. In startups I've had 3 separate startup situations, maybe not unlike many of your listeners, all 3 of which I exited successfully in different ways. And so I've had a bit of a mix between folks who in small business atmospheres as well as those in large companies. My experience with reinventure started about 4 years ago when I joined a longtime collaborator, actually a A partner that I met in business school some 32 years ago by the name of Dr. Len Phillips, and he has, and we have a boutique executive consulting practice which yes you called reinventures, and you may even recognize some of the concepts that Dr. Phillips developed early in his career at Stanford University. They include some very notable concepts like customer value proposition, value delivery system, and maybe most famously day in the life of the customer research. And over the last 3 or so years or so, I've been directing my personal practice towards helping small business owners to apply these concepts when they're seizing opportunities or overcoming challenges in their business. It sounds fascinating, you know, and I like the fact that you've had big company and small company experience. You can bring a lot of, a lot of things to the table and really help business owners relate into that. And um you know, one of the things that we're going to talk about is this customer value proposition. Tell us a little bit about that concept. Well, the way that we do that educational concept with the the my clients is to first of all, help them to begin to understand and investigate the mindset of the customer and to be able to, rather than listening to the customer and doing what they ask, to doing something quite different, and that is to become the customer and to infer a superior set of experiences that would actually benefit them. Uh, the truth is today that as technical as many of your listeners' businesses are, they're actually in a better position to propose solutions to customers and customers are prepared to ask for them. And so we, we sort of return people to the, to adopting this mindset and it won't surprise you, Bill, that many of my clients, their biggest challenges are not only in their businesses but in they're struggling to overcome the need to transition their business as they prepare for their retirement and So I've had a number of instances where I've been asked to help them adopt the mindset of the investor or the future buyer, and to help them understand that selling their business is very analogous to the kinds of instinctual practices they've had in selling their products and services. I get it. OK, so when a business owner's in business, they're thinking about what the customer's going to need and anticipating that when they develop their, their products and services, and it's no different now when they're looking at the overall package of the business they have what we're calling what we're going to call the enterprise value proposition. To the buyer of the business, so it's a different package. It's the whole package, and business owners need to be cognizant of what that looks like as they get ready to market their business. Is that it? Yeah. You know what I've helped folks come to understand is, you know, customer value proposition is something that they understand and perhaps have some familiarity with their business. It's really a promise about a set of experiences that customers will have if they choose to do business with you. What what seems novel to them and especially novel to the advisors that they've surround. themselves with in marketing their business as opposed to their their products is what I call an enterprise value proposition, and that's simply the answer to the question. If I buy your business, what are the outcomes that I can expect and what's the journey going to be like for me in actually achieving those outcomes? So And that's, that's very not a question that most investment bankers, CPAs, other sell side advisers actually invite them to answer. Their approach is much more, let's just say, product centric. It's about, hey, here's the facts, you, the investor. You know, good luck discovering how this might, what this might mean in your hands. I like that. Yeah, it's, you're right, it's, it's a we do a good job. We have a great product. We have a great service here it is, by it, but it's not like that. It's, it's kind of like entering your favorite restaurant through the kitchen. That's where the real work. That's what you're buying when you're buying a business, right? So, so for owners that are preparing to sell their businesses, what do you see as their their typical biggest challenges that they have? I think it's, it's, as I said before, it's understanding the mindset of the investor, and I think it will not come as any surprise to anyone who has spent even a cursory amount of time working on selling and transitioning their business to know that there's, you know, there's 3 different categories of buyers out there. There are strategic buyers, that is. People in your industry who could acquire your business and fold it into theirs. There are entrepreneurs, entrepreneurial owners who like the people who are selling the business, are going to take it over and run it as their own small business. And then there's financial buyers, typically private equity firms and now new breeds of cat-like search funds. etc. And you know, it, it's surprising when you ask people what's the value proposition you're offering each of these different buyers. They have different interests, different unmet deeds, actually different, different dominant mindsets that they bring to their acquisitions. And when I ask sellers, you know, what What have you done to investigate the unmet needs of the buyer, you typically get, you know, some blank stares, and it's actually the answers to those questions which can help the seller to best sort of cross the chasm, as it were, of building buyer confidence that they indeed would achieve the outcomes they expect. Very good point. I've heard it referred to in the past as different value worlds. You live in these different value worlds and let's say you were going to visit that world, you need to know the rules of that world, how it's going to operate so that you can position your business to be most valuable in that space in that world. And so that's what we're talking about is the enterprise value proposition. And so for a business owner who says, well, I want to get the maximum value no matter where I go, is that possible or do they have to get into these detailed planning arrangements of of each different world and, and how would they be different I guess is my my third question in that question. Well, I think that the concept here is that you should expect a higher valuation or optimizing the value you receive and potentially the and more and just as important, the cash you receive at closing by understanding the buyer's motivation. The goal here, Bill, is to create a motivated buyer, right? And most research supports the contention that motivated buyers will Pay at least you know 10 to 20% more for a business. So my question to your audience members that are thinking of transitioning their business is what have you done to discover the buyer's motivations? an entrepreneur looking to buy your business is, you know, looking at the transition aspects. They're looking at how secure do I feel that when the the current owners leave, that intellectual property and key employees don't walk out the door with them. And maybe some lifestyle issues about what would it be like running this business, an entirely different sort of decision architecture than someone who's a pure financial buyer who's looking at, uh, you know, hot sectors, growth sectors, timing buys, PE ratios, multiples of EBITDA, etc. Those, those are a very different decision making criteria. And so, I'm just saying, as I say to my clients, look, understand who this individual buyer is, what their decision making architecture is, and help them to cross the chasm. And generally where deals fall apart is not in the financial outcomes that they might expect, but buyers ultimately deciding that they don't have enough confidence that they could get to those financial outcomes because of Certain transition what I call transition obstacles, things that could fall apart along the way. OK. Transition obstacles, a great topic. I think we could spend probably just an hour on that on transition obstacles, don't you? There's there's so many of them. Yeah, there's, there's plenty of them, and, and they have to be addressed and mitigated because if you leave it to the buyer to make their own interpretation about the probability that One can be managed. They're not likely to put a very high percentage on it, and we can address things like lack of a strong bench or customers not in a lockbox or competitive risks in a different way if they've got, I'm not saying, you know, bend the truth here. What I'm saying is, you know, put all the cards on the table and let them know how you've, how you've addressed those issues in the past and what the prospects might be for the future. And more importantly, since we're talking to a business owner audience who is contemplating not maybe not selling their business tomorrow but planning to sell or transfer their business in the next several years, it's very important that they begin years before to put these things on the table and then and then clean up the messes that they can and address these issues. Is that? Oh Bill, yeah, you, and I'm sure that many of your past guests have emphasized this as well, but the most severe and most prevalent obstacles, transition obstacles, you know, can take a year or two to, you know, fortify and to mitigate, you know, those would include obviously hiring and training a strong. bench perhaps changing your customer model to more of a subscription based model which locks customers in for longer periods of time. And so all of those things that that lower transition risk typically take a bit of time to sort of adopt and develop some history with so that the buyer says, OK, I can put a checkmark by that one. I feel comfortable with that one. Let's move on to the next one. Yeah, and there are a lot of those you're you're absolutely right. There are processes and systems and locking in key employees and you know we can again we can go on and on about this, but these are things that need to be put on the table and and understanding what value world you're working within, you know what your target is or at least your primary target. Um is is so important. Now one of the things I've heard is that you advocate working backwards when thinking about how to get the highest value from your business. What do you mean by that? Well, working backwards means beginning with those insights about what your transition obstacles are or what your buyer's motivation is or what you're, you know, at this point you're thinking about, you know, who might be the potential buyers of this business and You know, all of your listeners are savvy enough business people to, you know, sit in the chair of the buyer for a minute, uh, identify what those obstacles and value detractors might be, and then just simply uh put down what are the things that I could do. Uh, in working backwards, what can I do in my business to take those off the table or at least reduce the level of risk? So rather than working forwards from here's my business, here's its economics, here's my management team, here's my growth agenda, etc. And hoping to hoping that will resonate with the buyer, you know, take each of the types of buyers. Perhaps if you're focusing just on strategics, work backwards from what you imagine their issues might be if you were them and begin to look at your business from a lens, a lens of how the buyer would look at it and begin to address those one at a time. OK, great point, because each one might have different tax strategies, legal strategies, financial and operational strategies, but starting with the end in mind means that you need to know your timing when you hope to be transitioning out of your business. And usually there's a time after you sell or transfer your business that you're expected to stick around. So you need to know that. You need to know what you need to get out of it financially to make yourself whole, and you need to kind of have a. Good idea of who your target is, right? So those are the three typical areas that we start with. Is that, is that where you start with business owners is those three areas? Yeah, start there but not in there. Don't keep this private. Let's say that you've identified transition risk of the owners and transition risk of customers leaving after the after the current owner departs. You know, why not develop a transition plan with detailed with details by month for 6 months after the purchase of the business and give that to your seller. Usually due diligence processes rely on the seller to sort of develop these transition plans, but they don't know your business, you know, why not help them with that? Let them see that the journey from date of acquisition to 6 months out and achieving the financial outcomes they they imagine. is actually already documented for me and the owner's role, the previous owner's role in that plan is delineated. So yeah, not only think about it in the way you described it, but also document it in a way that, you know, when the potential seller is saying, Hey, here's some of the things I'm concerned about, so I'm glad you asked. Page 32 has exactly my involvement in, you know, that transition plan. That's a great idea because owners like to see, you know, the, the, it's the blueprint of the plan spelled out so that they can see this is, this is where we're starting, but we have thought through where we're going to need to be at several points along the way. Gary, it's great stuff. We've just started to scratch the surface, but we're out of time unfortunately, and tell us, tell our listeners how they can find out more and get in touch with you to talk about these issues. Well, you can connect with me on LinkedIn. Happy to do that. We also have a website, very simple, reinventures, R E I N V E N T U R E S dot com. Um and those are two pretty easy ways to connect with me and glad to, to, you know, help out for any of your listeners that might want to explore this in more detail. And if someone were to say, well, I don't know if I should call or not, what would you, I mean, or if I should get in touch or not, what are some of the points, the change situations that people might be at when you get a typical call from someone? where are they in the process? typically they're they're very early on in the process because, Bill, I'm generally advising them on their businesses in general. Uh, and the topic of transition comes up and so I've been fortunate to be able to help a number of companies to better understand their their strategic options in terms of buyers and how to prepare. But if any of your listeners would like to get in touch, happy to sort of just, you know, have an initial platform meeting and talk about their situation for 1520 minutes and see if, see if I can help and um. And nothing attached. Just let's talk and see if I can help. That's a great resource for our listeners, and again, I would love to continue our conversation at another time and go deeper into these topics because I think we could dissect this and go, you know, one by one and just spend a A lot of time just on the different types of value worlds, the different types of buyers that are out there and some rules of thumb for that. So Gary Lillian, thanks very much for your time today. Really enjoyed it and I look forward to the next time we speak. Thanks. Bye. We're going to take a short break. We'll be right back after this, so please stay tuned. 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. 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