Part of the life cycle of a business is the founder’s inevitable exit from the company. To make sure that you are able to make the most of your business, you need to have an exit strategy. In this episode, Victoria Wieck talks about selling a company with the president of Provenance Hill Consulting, Martha Sullivan. Martha and Victoria discuss building systems and adding value to a company and how these make your business more attractive to buyers. Hear the best practices for crafting the right exit strategy from Martha. Tune in and learn more of the ins and outs of selling your company in this conversation.
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Always Have An Exit Strategy: Building A Salable Business With Martha Sullivan
We have an amazing guest and her name is Martha Sullivan. I want to ask you if you have started your business and things are clicking, you’re finally getting some traction on your business. It’s growing and you wish you could grow more but it’s growing. You hope that maybe your children, some family members or whoever is going to go ahead and take your business. That’s what I dreamed of when I started my business or at least envisioned that.
If you’re in that category where you have started a business and want to grow it and scale, you’ve probably done all that, you want to look at an exit strategy, you haven’t thought about it or maybe you’re beginning to think about it, I’ve got the perfect person for you. Martha, what she does is helps you do just that. Basically, she will work with family-owned businesses. If you have a family-owned business, that’s great because you can enjoy the fruits of all these together or maybe you have a business that’s even bigger than that.
Either way, it’s important to have your business structured in such a way that you have the option to exit any time. Life is strange. Things could happen to you, voluntarily or involuntarily. Having those options is everything these days. Martha is the Founder and the President of Provenance Hill Consulting where she helps you accomplish all those. She’s written articles for Forbes, Authority Magazine, Forbes Financial Advisor Magazine, Milwaukee Business Journal and so much more. Without further ado, welcome Martha to the show.
Thank you so much. I’m thrilled to be here. I’ve been looking forward to our conversation.
It’s important that we have an exit strategy. Many people think, “I have an exit strategy,” but do you really have an exit strategy? Your strategy might be, “I’m going to grow this for twenty years or I’m going to grow this to $20 million and I’m going to sell it.” If you even think about that, you can never start your exit strategy. Meaning that you need to have a strategy and have your structure in place before anything could happen. Is that not correct?
That is so correct. It’s 100% spot on. A story brought that home, where our two-door down neighbor, a 34-year veteran of owning his business, decided not to wake up on Monday and he had no plans in place. You go from that perspective all the way to you have a great business, the market is going well that it’s like, “Maybe this is the peak and we should get out now.” You want to have a business where it will be attractive for somebody else to want to buy it or if it is a family business, you want your next generation to be able to look at it and say, “I want to be a part of this.”
You want to have a business that is attractive for somebody else to want to buy it.
As opposed to, “Mom and dad handed me a rock and I feel pressured into taking it.” Getting a company ready to sell, for example, as a transition strategy is not “I wake up now and do it tomorrow.” It takes time and thoughtful preparation from day one. Having a vision of where you want it to go and making sure that it’s always ready for sale. Even though it’s not on the market, it’s always ready for sale.
Martha, maybe about 35% of our readers are on the verge of starting their businesses or have started a side hustle. I would say that even your day one if you have a mindset of starting a business that you could sell someday, you’re going to be thinking about things like brand names that other people might want, all the different things that go with a sale of a business. Number one, we have to differentiate between a business that’s a profit and loss business versus building a brand, for example. What does your business stand? That makes it easier to sell it someday.
Even if, let’s say hypothetically, a family has three children. The mother and the father started the business. They now have to transition it to their kids. I know somebody who went through this. They had four kids. Two of them didn’t have anything to do with the business. One was a dentist and one was a professor. The other two wanted to have the business but one didn’t want to do any sales, all that but the four of them inherited it. How do you then value the two that don’t want to have to do with that? They’re entitled to something. The company that I was telling you about is a $25 million company. That’s a good size company.
Eventually, they did sell out to 51% ownership to an investment firm twenty years down the road but it came after huge family fights and several divorces. It went through all that stuff. It was ugly. This uptick is very important. I know you’ve been doing this for most of your adult life. You were in a consulting business, worked for a consulting company and then went out on your own and did this. What are some of the tips from the very beginning stages? If you are now thinking about selling, it might be almost late. You need to hustle at this point. What are the tips?
In terms of the tips at the outset, when you’re starting your business, you need to think about it from the perspective of setting up good systems that are helping your teammates learn and carry on the business, as well as setting up a management team. The number one thing that kills deals when you go to market and sell your companies is if the company is overly dependent on the owner. Meaning all the relationships are with the owner, all the institutional knowledge, all of that stuff.
You want to ideally get it to the point where the company can operate without you. I like to simplify it. Can you go on vacation? As a new business owner or entrepreneur, you probably don’t feel comfortable going on vacation. Your goal should be to get to the point where you could comfortably and confidently go on vacation, not just for a week. Any of us can shoehorn that in. Would you be comfortable going on a vacation for a month and know that the company is going to be able to function without you?
My advice to people that are further down the development path in their business and thinking about potentially selling, maybe that’s in 2, 5 or 10 years down the road, it’s important to start putting on the lens of a buyer and looking at it from the perspective of, “How it’s somebody independent look at your company, how would they look at your baby?” They may not say your baby’s ugly but they may look at it and say, “That is one ugly baby,” because there are no systems because it is dependent on the owner. There’s too much concentration on all the businesses with 1 or 2 customers and they’ll walk away.
They’re putting on the lens and saying, “Would I buy my company now? What risks would I see if I were walking in fresh?” That’s challenging to do but it’s vitally important. Think about it in terms of if you were going to go buy a house or if somebody was coming into your house and saying, “Would I buy this house?” The paint’s peeling and the roof is leaking or does it have fantastic curb appeal? It’s in tip-top shape. It’s not all that different when people are looking to buy your business or your kids are considering, “Do I want to take this on?”
Honestly, everything you said is something that you should do for your business whether you’re going to sell it or not every single day. Number one, for example, having your business so heavily dependent on 1 or 2 customers basically, they pretty much own you at that point. I would say that in my own consulting world, I tell small business owners not to take on a huge customer until you can be sure that no single customer is more than 15% of your business.
At that point, that single customer dictates your product development, services, hours of operations, what employees you hire. It’s changing the character of the company. That’s a no-no in the first place. In terms of making sure that you can go on vacation, I would argue that in order for you to scale your business, you have to depend on other people. There are going to be limitations on how many hours you can work.
I’m sure that you find this to be true. When you consult with a lot of entrepreneurs who are very passionate about what they do, they want to do everything. I don’t know about you but I find that to be true. They’re passionate. They love their customers and employees. They look forward to going to work every day.
Many people don’t realize that when you first went about owning a business and starting a business whether it was your mother or you did it, most people will say that the ability to work fewer hours is at least at the top or the second to the top reason why you start your business. It’s emotional, financial and freedom of time, yet they spend more time working in their business and oftentimes for less money.
You want to ideally get your business to the point where the company can operate without you.
What you’re advising to do now is even if you don’t ever think you’re going to sell it, this is something that’s good for you every day for your own sanity. If you’re doing everything, how are you ever going to nurture any employees to do more than you do? You’re going to need many employees who can do more than you do, who you can trust?
It’s who you can trust, help you scale up and grow that vision that you have into something that has traction, value and whatnot. It’s interesting you bring up the whole concept of freedom and what drives us entrepreneurs to become entrepreneurs. It backfires on you because it was like, “I have all this stuff I have to do. There are so many plates spinning.” If you can accept the concepts that as you build your team and a company that is always ready for sale, it does give you that freedom and flexibility.
If I have the confidence to go on vacation for a month, I also have the confidence to lean on my team and say, “I started this business because I love doing this but now I have to do this and this.” Now, I have a team and I can get rid of that, this and this. “I’m going to focus on what I love. I do my best. You focus on what you love and do best. We’ll all be much better.” Having the right focus on building that transferable company helps you get back to achieving that daydream that every entrepreneur shares of that freedom and fun to build a business.
I’m sure that many readers will agree with you on the concept of working less, building a team, building trust in your employees and to some degree to some customers as well. You know as entrepreneurs we are a very stubborn group of people. We don’t know how to do it. That’s what drives entrepreneurs. I come from a family of five kids. I’m the oldest of the five. A couple of my siblings will never, ever be an entrepreneur. They don’t want to be one. If you tangle them $1 million an hour, they wouldn’t do it because it’s not their life. I’ve got a brother who’s a lawyer. He refuses to go start his own little practice.
He wants to work as a General Counsel for a very large company. We’ve got a couple of other kids who will never be able to clock in a day at work because she can’t handle being told what to do, the routine every day, the grunt work. How would you advise an entrepreneur who understands it conceptually but can’t do it? They don’t have the basic trust in their employee. I’m not saying that they’re going to steal from you or anything like that.
“What happens if they screw up and my customer gets mad while I’m on vacation? What do I do?” They have this anxiety. What advice do you have for that entrepreneur who wants to follow your advice? Other than, Martha has a workshop series. If you go to ProvenanceHill.com/millions, she’s got the little workshop series. You can get a little coupon or other free things. Give us a couple of hints.
To piggyback on the Finding True Value Workshop Series, what I teach entrepreneurs and business owners is to understand and appreciate that to grow a valuable company, you need to be balancing the rewards like the revenues and the cashflow that you get from the business with the risks in the business. Take that buyer’s mindset again. Where are the risks? What you’re talking about with that anxiety is a risk. “Do I risk empowering my employee to do this stuff for me?” Appetite for risk, entrepreneurs tend to be more risk accepting because you don’t go into business for yourself without taking some risks.
We also have the tendency to do what I call in terms of white-knuckling the golden goose. We hold on to our control so tight that we choke it off. You start small with your employees in terms of the risks that you take with them. Are you going to hand over the management of your best customer to your employee? It’s probably not right away. We all hate to lose a customer but there are some customers frankly if my employees step their toes on, I either have a good enough relationship with the customer to prepare them and say, “I want you to have continuity in our relationships. I can’t always be here. I’m bringing Junior along. Will you work with me on it?”
You take smaller risks where the stakes aren’t as high. It gives you practice taking those risks and helps you build trust that your employee isn’t going to drop the ball. At the same time, it helps to build confidence and competence on the part of your employees. They can step into that larger customer relationship, for example.
What you’re saying is that trust your employees. You are saying, “You’re minimizing risks by minimizing managing the risk.” I’ve had employees for a very long time. I want to say my first employee ever hired in 1989 is still with me and a couple of them retired. Employees are not mistake-free. You’re not mistake-free. Customers are not mistake-free. Things will happen. When they happen on a very small scale like that where stakes are not so high, which is not life-threatening, where a customer didn’t blow up at something. You didn’t get your package at 4:00. Maybe you got it the next morning at 8:00. It’s not a life-threatening thing.
Letting your employees make those small mistakes and learn from them. You should hire them well but my employees have made some pretty big mistakes. I’ve had one that made like $150,000 mistake. I didn’t fire him. What I did was I looked and figured out how the mistakes happen. We changed the system. This was a case where I got a huge order from a TV network and they wanted an Emerald suite. They were an Emerald necklace, earrings and pendant.
When we placed our order with our manufacturer, 2 of them were in yellow gold and 1 of them didn’t have a designation for metal so it came in white gold. This was a matching suite. I ended up having Emerald earrings in white gold, a matching pendant in yellow gold, the ring in yellow gold and then the bracelet in white gold. The whole order was $300,000.
We learn more from our failures than we do from our successes.
I would imagine replace it out so it was all consistent.
This was bought for May, which was Mother’s Day and May’s gemstone was Emerald. She said she didn’t want to buy it because nobody wanted to have not matching suite, all that stuff. Basically, what we ended up doing was I contacted the buyer and I offered her to do this at Christmas time because by the time we had to redo the whole thing, it was several months. I gave her a discount. I also agreed to take back merchandise that she couldn’t sell because that was the best I could do.
What we ended up doing is that now our purchase order system, every single item has a WG for White Gold, YG for Yellow Gold or RG for Rose Gold. You cannot put anything into a system unless you put in that metal color. You learn these things. Since that incident, nobody has ever made that same mistake again because it’s impossible. What you and I are both saying is that employees can make mistakes. Unless it’s catastrophic and the decisions they’re making isn’t that the firm. It is things that aren’t going to make a huge difference other than maybe your ego, whatever. It is almost better to train those employees with those small mistakes.
We learn more from our failures sometimes than we do from our successes. What I like about the story that you shared there, Victoria, was that we’re developing your coworker through that mistake but you also built your system stronger. The hallmark of a great transferable company is that you have systems that allow you to grow faster, as well as they’re replicable. If there’s turnover, maybe there were other reasons and you had to let that individual go. You have systems where somebody else can helpfully come up to speed faster and do the work as well, if not better.
There are a lot of drivers in what makes a company valuable to a buyer, probably more than we have time to talk about now but we do talk about that in the workshops quite often. It changes or can change a business owner’s focus from the bottom line to understanding what it takes to have a healthy bottom line but also an asset that you’re growing over time so that it can pay dividends later. I like to say and it’s a quote from a dear friend of mine through the Exit Planning Institute, “If you’re focused only on income, you may not have value but if you’re focused on value, you can have both.”
Let’s get back to how do we now structure a business that’s saleable from day one. A lot of times in the jewelry business, it’s a very archaic business. I’m in the jewelry business and I’ll go to a trade show and there’s one coming up. We can go to these trade shows where millions of dollars are being traded and they’re still using those three-part carbon copy things. They’re not using any technology. They’re still writing scratch notes. I’m saying reporting systems, reporting your numbers, your sales, doing analysis, having great inventory if you’re selling physical inventory and recording your changes in inventory accounts receivable.
These things are all things that need to be in place because that’s how they judge a business. This is the other thing. It’s like a chain reaction. If you don’t trust your employee’s ability to keep the house running, for example, and then you don’t have a system to record your sales or whatever. “How many did you sell?” “I can’t remember if I sold 15 or 16 of those pendants but let me check.” They’re going through the three-part thing. If you have a system of reporting that’s already computerized, your inventories are computerized, it keeps track of what you receive and what you take out.
Having these systems in place where any employee can come in and perform that day’s job, that’s absolutely critical. When you’re starting your business or maybe you just started your business, whenever you start your business, I know in my case I started my business in ‘89 and I’ve had to upgrade change systems over time because the whole world changes. When you do that, listen to someone like Martha who has gone through this.
I started my business as a small hobby. I wanted to only make $3,000 a month. I wanted to work twenty hours a week, $3,000 a month but $500 million later, I can tell you that each time I’ve upgraded my systems and I’ve done anything was because my systems crashed. It wouldn’t work anymore. I had computers crash on me. I had systems crash on me where we were down for a week at a time. Don’t wait for something like that to happen because as a company gets bigger, the stakes are higher.
What happens is when you hire somebody upfront, someone specialist like Martha, she’s not going to cost you millions of dollars. I’ve had times where it didn’t cost me several hundred thousand dollars to upgrade. Don’t wait until your systems crashed and you don’t have a choice. Not only do you not have a choice to buy companies but you also don’t have a choice on systems.
I’ve had times where I’ve had to take the one that I could hook up with as fast as we can. It’s important. A lot of the things that you’re preaching and advising are things that you really need in your own business anyway. Having employees that are competent and you have confidence in is one thing. It’s the same thing with having vendors that are competent and confident. All customers are not the same. Some customers are going to work and grow with you. They’re going to matter when you sell your company. Some other customers are a lot of trouble. I’ve had customers that I got because nobody else wanted them. You don’t want that either.
You don’t want the whole portfolio to be that. When we talked about companies that are salable, you want to look at all the pillars, your vendor system, your employee system, your customer system and then the marketplace overall. Everything that you’ve shared with me and our audience is very sound advice. I know that if you are smart and adventurous enough to start a business, grow it and scale it, you’re capable of doing anything,
If you’re focused only on income, you may not have value, but if you’re focused on value, you can have both.
Starting a company is akin to giving birth, you think about it, nurture it, you feed it, do everything 24/7. This is what entrepreneurs do. If you want to detox from the entrepreneurship, the pitfalls of entrepreneurship, find someone. If it’s not Martha, it’s somebody like her who will teach you. It’s a shame that we have to talk about this being an exit strategy because it’s also a growth strategy.
It is. An exit strategy ultimately comes down to its simply good business strategy. It’s doing the right thing for your business so that it is sustainable. The Exit Planning Institute shares a statistic that 1 in every 2 business owners will be forced from their ownership because of death, divorce, disability, disagreement and distress. That’s one of the reasons why I’m so passionate about having good systems in place.
Having your management team, financial statements that are current, accurate and a valuable management tool, all these different factors because from day one, we’re giving birth to that baby. We want it to be beautiful, attractive and go on to live a wonderful life. After they hit eighteen, checkout time has come and gone and it’s time for it to go someplace else for us to do something different. It’s not always retirement. It could be growing a business to flip it and then move on to your next adventure. All of these principles come into play. It is a matter of executing a good business strategy and having the systems in place to make that happen. Systems determine performance. I agree with you, Victoria.
An exit strategy ultimately comes down to good business strategy. It’s doing the right thing for your business so that it is sustainable.
Martha, how do people find you if they want to have a deeper conversation. This conversation is deep.
The easiest way to get in touch with me is to visit our website, www.ProvenanceHill.com. I also have a blog there and that will also link to In Business Magazine, IBMadison.com, where I have a blog, Exit Stage Right, is the name of it as well. Those would be ways to connect with me. If you’re interested in the Finding True Value workshops, check out www.provenancehill.com/millions. If you use the coupon, thank you code of VICTORIA, that will give you a 20% discount. It’s my way of saying thank you to you, Victoria and your audience. This has been a delightful conversation.
Remember, I always sign off by saying until next time, please stay healthy and happy. Happiness is a choice. I hope you make great choices. Until the next episode, thank you so much.
- Provenance Hill Consulting
- Finding True Value Workshop Series
- The Exit Planning Institute – Article
- Exit Stage Right – Blog post
About Martha Sullivan
This one-time information systems analyst turned her most brilliant act of rebellion into a career as a CPA, CFO, COO, business owner, and profit & value growth strategist, consulting to hundreds of clients and colleagues over the past (gulp) three-plus decades.
Martha Sullivan, President of Provenance Hill Consulting, LLC. founded her firm with one purpose: Help companies build strong, profitable businesses that are attractive enough for someone to want to buy it when the owner decides to chase their next adventure.
She recognizes that exit planning is a topic, like death, that most business owners avoid. Yet life’s realities have a tendency to catch up to even the best of us, so building and maintaining a kick-tail business that someone would be thrilled to buy or take over is the best “business life insurance” possible.
Martha’s work supports owners, and their next-generation leaders, as they take the company to the next stage of its life – be it continuing growth or navigating all exit options available to the owner and his or her family.
Together, through roll-up-your-sleeves workshops, business analysis, a good sense of humor, and tough love, business transformations begin.