Peter Sieffert - The Importance of Knowing the Enterprise Value of Your Business Before you Exit (J2117)

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 everyone. Thanks for joining us today. We have a great show, great lineup today. I'm very happy that you joined us. I want to remind you that we have interviewed well over 500 advisors, authors, and thought leaders, and you can find all of their interviews. They've been recorded and archived into 35 different topic file folders, and you can find them all at. Coachradio.com. Just look for our audio library, and you can learn a lot about some wonderful, wonderful, smart people. My first guest today is Peter Siefert, and Peter is joining us from San Diego, California. Peter's with the Swiss Avenue Partners of San Diego. He's the owner of that organization, and he's going to talk to us about why you should know the enterprise value of your business regardless of when you are thinking. of exiting and it's so important we talk about this so much that it's important to know your target. It's important to know where you are now to understand and do some planning about will your business value. Give you enough after taxes to support your lifestyle indefinitely after you leave your business. So Peter's firm helps business owners grow enterprise value in preparation for sale, acquisition, transition to either next generation or employees, or just have less risk and make more money. So Peter, welcome to the show and thanks for joining us. You bet it's my pleasure to be here. Peter, tell us a little bit about you and your background and how you started Swiss Avenue Partners of San Diego. Yeah, so I was, uh, a business owner for, for many years in the, in the fitness industry, and, uh, you know, I got into business because I wanted to make a difference and help people and, and, and all those fun things, and then, uh, after growing a business, first of all purchasing the business and then growing the business, I realized that I'm spending most of my time managing people. And you know, as I speak to rooms full of business owners now and say how many of you got into business to manage people, you can imagine how many hands go up very few so you know I was running into my own issues, but I ended up selling, selling that business, starting another one, selling that one, and then I met the folks from Swiss Avenue Partners up in Sacramento. And uh at a CEO workshop and the tools that they presented, I thought, you know, in my head, where the heck have you guys been and where were you over the last 10 years when I was running a business because, you know, it's, it's all of those business fundamental fundamentals that as a business owner you don't get trained on, you know, you know how to make something or sell something, but running a business is a whole another, a whole another ball game. So it's so so true. Yeah, go ahead. No. So for me, uh, 8 years ago I, I had just stepped out of, uh, I had just sold a business and I, I saw these tools and I thought, you know, my coaching background, uh, my experience as a business owner, having stubbed my toe many, many times, and these tools, this is exactly what I want to do. I want to turn around now and, and give back to the business owner, so. Um, 8 years ago I moved to San Diego. I bought a license for Swiss Avenue Partners Tools and Name, and I've been doing this ever since. That's terrific. Well, tell us a little bit about this. So why should owners know the total enterprise value of their business today regardless of when they plan to exit? Well, you know, I think you mentioned it early on, um, and it's certainly in, in part of what you do is talking to the business owner about, uh, planning, you know, one of the biggest, the biggest mistakes that business owners make is not planning, and you know, they come to you as a financial advisor and say help me plan for retirement, but if you don't know, uh, a very solid number for the, the value of that asset. It's very difficult for you to make any kind of, you know, real plan for, for retirement. So, you know, you got to know where, where the business is starting today, uh, in order to then create some strategy around growing it or preserving it, uh, depending on, on what the nature of your business is at this point. In your, in your experience, do most business owners that you talk with have an accurate feel for the value of their business? Uh, no, generally it's inflated and reason being is, you know, and I do a lot of talks on the difference between a buyer and seller, you know, the seller is, uh, attached to the business emotionally and so they're looking at the business as the story. And the blood, sweat, and tears that they put into it and the value around that. And while you and I understand and we all understand there is value in that, at the end of the day a buyer really is indifferent, you know, they care about cash flow and revenue trends and expense trends and, you know, risk in the business, so. Um, you know, it's important to know these things, uh, and then look at your business from the perspective of the buyer because you're not gonna be able to make the right changes in the business unless you're looking at it, uh, objectively. So what I think I hear you saying is that for most owners, they look at it and go, this is easy to operate. I've been doing it for 30 years. Anybody can do it and it's, it's very valuable because look at the lifestyle that I've been living. But the key issue here is transferability and will it, will that value survive the transfer from the owner who's operating it to a new owner and that's what buyers are looking at, right? You got it. I mean we talk about um evaluation of a business, we talk about the multiple, you know, I'm sure you've had multiple a number of people on on the show talking about multiples, and in reality when we're talking about multiple it's just how many years. Of IEA as a buyer, do I feel comfortable that the business will produce, you know, so for example, if the business EI does a million dollars, uh, which is, you know, net profit or net earnings plus some ad backs, um. And I feel confident that that business is going to earn that over the next 4 years, then I'll, you know, it's equ it to times a multiple of 4. So that's an indication of risk and as a buyer I'm saying to myself, all right, do I feel comfortable and confident in, you know, things like the management team or, uh, customer concentration or. Uh, contracts with customers or any kind of vendor issues that I might have that, you know, those things are all solid and I can count on those over the next 4 years, uh, low risk. So you know, when, when business owners and you talk to them about, OK, we're going to work first on understanding your value, understanding your target, and then we're going to work on increasing that enterprise value, what's the biggest reason to increase the total enterprise value today for a business owner? Well, I think the number one reason is just simply options, um, you know, we are going to exit our business, it's inevitable and whether we exit on our own terms or someone else's terms or just, you know, uh, universal, the universe's terms, uh, it, it's kind of, it, it's kind of out there, but what can we do today to plan for it? You know, you may be thinking that I'm gonna run this business for the next 10 years or 15 years and just use it as a cash machine and, and to your point a lifestyle business, but you know, are you prepared if something happens tomorrow to a key employee or are you prepared if something happens, um, you know, we hear about family issues and now I need to step away from my business to take care of a loved one or something along those lines. I mean, you know, the list is endless as to why. There may be an interruption in the business. So if you're planning today and focusing today on increasing the value, if something like that might happen, then you're prepared, you know, and I, and I talk about things that might be tragic, but how about, hey, you know what, I have maximized value. I've got an owner knocking or a buyer knocking on the door, uh, I am prepared. I know my number. I know why my number is the number, and if the buyer comes in and says, Here's what I'm gonna give you, uh, you know, prior to due diligence I'm confident that that's the number I'm gonna get. Good point. You know, that just happened. To me, with some clients of mine, we were planning on a 5 year timeline according to the 3 partners, and 2-3 years into it, a buyer comes along and luckily they had started their planning and they had done a lot of the the pre-due diligence to be prepared for that. And most importantly I think is having that conversation with an adviser about, you know, what do you say when somebody comes along? I mean, what do you do? How do you prepare for that? What are your terms going to be? So it's vitally important to be ready no matter what happens, good or bad. Life's full of contingencies, we know that. So it's great advice. How far in advance of of a perceived sale, let's say, you know, in, in, in, in a perfect world where a business owner and a lot of them are saying, you know, 5 years from now I think I want to be doing something different. Maybe, maybe it's being an absentee owner, maybe it's selling this thing off. Um, should they, when should they start their planning for that? Well, I mean, obviously depending on the state of the business today, you know, if you've got great cash flow and good profits and, and, you know, you've got a decent, uh, segment of the market, then you know you're probably positioned well, you know, clearly you wanna, you want to prepare yourself today, um, even if you're going to be a year out. But Odds are in most of the businesses that we run into, um, and these are good businesses, they're 2 years out minimum of work that they need to do in order to really maximize the value of that asset. So I would say the minimum 2 years, but boy, if you've got 5 years, you know, now you can start thinking about doing things like, OK, I've put in the infrastructure, strengthen my management team, um, you know, revenues are strong, profits are strong. Business is kicking off a lot of cash. Uh, hey, you know what, I, I, I'm prepared for retirement today, but there's an acquisition out there that I could go get that would really set me up, uh, to, to do some things that I, I never dreamed I could do. So, you know, if you've got 5 years now we can start talking about going out and doing some acquisitions because, you know, as you and I both know, uh, most business owners aren't planning. And frankly don't know what goes into the value of their business, so If uh an educated business owner is sitting across the table as the buyer, you know, there are a lot of things that they can take advantage of. That's a great point. And listeners, are you listening to this? This is great advice. Let me tell you why, because if you can spend time now making yourself less important to the day to day operations of the business delegating that off so it'll run smoothly when someone else buys it, you can focus a lot more time on growth oriented strategies that will make you a lot of money down the road, Peter. That's great advice. Who do they turn to? I mean, who initiates this discussion and Uh, I, I talked to a lot of business owners and they say nobody's talking to me about this so where should they go as a first, uh, a first person to talk to about this? Yeah, you know, it's, I'm really glad you asked that question. It's been a huge frustration for me because, you know, I'm, I'm a value building guy, I'm a value building company, so, you know, at best very few people know about me that I exist, but everybody has a CPA. Everybody is a financial advisor, and there's a large portion of those groups, the CPAs and financial advisors, that aren't having this conversation. And they are well positioned to do so. So you know, I would say that the first two people you, well, there are 3 people you'd want to talk to. First of all, your CPA, uh, your CPA can tell you what your EBITA is, uh, and what we, when we talk about an EBITA earnings before interest, tax, depreciation and amortization, so you know it's your profits and then add back in those factors. But in most businesses we also have some things that we run through our P&L that that uh we at Swiss Avenue Partners called Perks Jerks, and Benny's. So those are the things that you run through your business that you know if a buyer were were to buy it, they wouldn't have to include in the expenses. You get to add those back but your CPA will be able to do, you know, help you with that number, normalize your EBITA. Um, and then the second thing is they could probably run some industry reports, uh, some of the more sophisticated CPA firms can do industry reports and probably find, you know, industry average multiples, so that would give you an understanding kind of a ballpark as to what the, what the business is worth. Um, your financial advisor can also do some of those things but certainly work with your CPA, and, uh, they're going to set the gap for you, you know, here's what your business is worth and then here's what you need for retirement. So here's the value you need to grow. And then lastly, I think that a really important person for this conversation is your banker because if you want to identify the risks in your business, go ask a banker for a loan. They'll tell you exactly what the risks are in your business. Now, now here's a question for you because I, I've been talking with a lot of people about this. Now, your CPA, your financial advisor, your banker, certainly attorneys, they're all team members. You think of it kind of like a, a basket, let's call it a basketball team. Let's say there's 5 members on the team. What would a basketball team hit the floor without having a playbook, without having a number of plays that somebody's going to call? How would they look if they did that, kind of probably disoriented, not very effective. And in your experience, do most of these professional team members talk about this subject? Do they get together and really coordinate their planning on this, or do they need someone who can be a quarterback for this type of planning? Or let's call it a coach in basketball terms. Sure, I, I would say that at least in my experience, very few of these advisors are talking and it's really unfortunate because, you know, look, I understand why CPA has dozens, dozens, hundreds of clients and if they were doing this type of thing, you know, being the coach for each of their clients, that's, you know, I don't know if they'd have the capacity to do it, but at the end of the day. You know, having a coach, at least one of these advisors or, you know, someone such as myself to kind of manage this process, uh, it's unbelievably invaluable because The financial adviser is coming at it from a different perspective than the CPA. The attorney is certainly coming at it from a different perspective than everyone else, managing risk versus, you know, increasing reward. So having a coach, yeah, I mean the basketball analogy is very good. At minimum 5 people. You put them on the floor without a plan and they're tossing the ball out of bounds. Well, remember the coach is on the sideline with the clipboard and the playbook, so The coach is so important because all of those players have their role, the CPAs, the attorneys, the financial advisors all have their role. The problem for the business owner is if they're approached by any one of them without a plan, without a playbook, then Get pulled in different directions and I think a lot of advisers out there and tell me if you agree with this, are threatened by someone who comes along and says, I have a playbook for this exit planning strategy. They're threatened by that, but they really shouldn't be. Wouldn't you agree with that? Um, you know, I, I guess that's an interesting statement. I would say that I've seen both, you know, I certainly have seen those advisors that are threatened and generally they're the ones that just want to stay in their own little world and do, you know, from a CPA's perspective, just do tax returns, you know, or, um, frankly in, in your profession of financial advisor just wants to do the insurance or just wants to do the, you know, investable assets. So you know that's that's part of the side. I think the other side is that you know there are advisors out there that would love to have a business owner with a playbook because then they know what they're striving for. Hey, now I know how to help you get where you want to go, but you know how many of these advisors actually have the time and uh, you know, maybe even the framework to sit down with the client and actually help them create one. So you know that's one of the reasons why we've been such a valuable asset to our clients is we can help them put that playbook together and then bring in the advisors and say hey here's what we're doing and here's why tell us where, tell us where the holes are, you know, tell us where we can strengthen this. if you, if you were the coach, Peter of the team and you had the clipboard or the playbook, about how many how many strategies or plays, let's call them, would be in that playbook for the average business owners, say, to to grow, prepare to sell the business and to exit in the next, say, 3 to 5 years? How many strategies do you think would be implemented during that timeline? Uh, you know, to keep it simple, I would say no more than 5, you know, when we put together strategic plan, you know, we're calling it a strategic plan, it's a 10 point plan and within those 10 points there are probably 4 or 5 things that you would work on over a 2 to 5 year period now, um, some are more labor intensive, others are, are easier but. You know, these, um, these projects don't get done in 3 to 6 months. These are, you know, 12 month, 24 month projects to, you know, if, for example, uh, customer concentration when you talk to any kind of investment banker or business broker, one of the first, uh, red flags they look for is customer concentration, and that is. Do any of you know, do the majority of, uh, is the majority of your revenue centered on 1 or 2 or 3 or 10 clients, the 80/20 rule and so if you do have customer concentration issues, imagine how long it would take to kind of shift your client base. That means going out and getting new clients, that means increasing rates for current clients. It means getting rid of some clients so you know this is not a small short process, so I wouldn't want them to be taking on any more than. I would say, you know, 3 to 5 directives in any. 24 month period. Well, it's a great point, and the issue I think is that they're not all going to be tax strategies. They're not all going to be operational or financial or legal strategies. There's going to be a combination of plays, if you will, in the playbook. And so it really takes, you know, I, I would say for any business owner out there. Ask your professional, ask your CPA if they have an organized process to take you through this. And if they don't, you want to find somebody who doesn't keep your CPA. They're going to be an important part of the team, but find somebody who can walk you through this, this, this multi. I disciplined kind of a process and keep your CPA involved in the planning process as just like the basketball team. They're on the court, they're playing, but they're playing the play that's being called at the correct time for the business owner. Business owners will save a lot of time and energy. Peter, how do our listeners get in touch with you to find out more? Uh, you can email me at Peter@swiss Avenue Partners.com. Uh, you can go on our website, Swiss Avenue Partners.com, and, uh, there's a link in there to to get in touch with us, but those would probably be the easiest way to ways to do so. Well, great. Uh, what's, what's on your website? Are there a lot of uh uh reports or uh interesting um white papers, anything like that? What's there? You know what you can find, um, you could probably find some access to some client examples of some things that we've done, uh, we've got some of our tools up there to talk you through some of the, you know, some of the things that you could do today in your business to to to change that enterprise value, um, and you know just some links to events that we're speaking at so that you can come learn a little bit more about. How to understand the value of your of your business and what you could do today to drive that value. And if someone said, you know, Peter I'd love to talk to you, um, could they, could they have a consultation with you uh what what's your initial offer for a new potential client? Yeah, my, my initial offer for anyone that's interested is just hey, let's sit down for an hour and and talk about your business, um, and, and I'm happy to share. I mean, part of my whole commitment to this process is just education so if uh if you get nothing else out of that hour then just learning more about your business, fantastic. Uh, after that, if, if you're looking forward to when you're looking for value growth, then, uh, you know, then we enter into a discovery process where I learn a little bit about the business and then we put together a plan, uh, we find out what the value is, put together a plan and say here's what we need to do to to increase that. Well, you gave us a lot of great ideas today. I want to thank you for joining us and it's a real pleasure. And you know, at some point in the future, let's get together again, do another discussion about some of the 5 key strategies that you're talking about and get a little bit more in depth. But for today, thanks very much for joining us, and I look forward to the next time. Yeah, it's my pleasure. I love to do so. All right, we're gonna 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. 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.