“Well, this time I'm not going to spend it all.”
Welcome to another episode of Builder Nuggets, the show where builders and remodelers discover how to build thriving businesses while working less. I'm Duane Johns and together with Dave Young, we share the elements of success that have helped hundreds of contractors like you build better lives. [00:18.5]
Duane: Today's topic should resonate with any of our listeners who own their own business. It doesn't matter if you're in your twenties and just getting started or in your twilight years and ready to ride off into the sunset. How much your business is worth, how and when you can sell it and who might want to buy it as well, we're going to dig into, as we look at the elements of a successful exit strategy. [00:39.0]
Dave: Dwayne, I have the words of Steve Barcos ringing in my ears. Steve was our guest on a recent episode where he talked about his life plan and how he wanted to build the elements of his business around the light and outcome that he wanted. And he actually started his life plan by writing his eulogy. So, if you haven't heard that episode, I recommend that you go back and get it. We found Steve's advice, quite profound and started to take the approach that your business is an asset. Don't wait till you are thinking about exiting to plan its value. You need to start working on the value of your business from day one, to take those things, take how you want your business to be now, take those areas where you want to have the value reside within the business and work on them day in and day out. That's how you create with intention of a very, very valuable asset that you are no longer involved in, that somebody else can take and do incredible things with. [01:47.8]
Duane: And it's no surprise that Steve started his life plan by writing his eulogy. If we talk about business planning, strategic planning for anyone that's read or tried to implement traction OS operating system, or for that matter, any really big long-term goal is, you know, you've got to start with the end in mind. What does it look like? Plan your way to get there. And by putting the end first, you've got something that everybody can work towards also helps to help to create your vision.
Dave: Absolutely.
Duane: When I think of exit strategies and the many folks that we talk to all the time, the one thing I can't help but think about is the countless builders that we've talked to over the last several years that really have no strategy at all. Most of them have simply not put any real effort into planning for the future of their business. The reasons that they're not surprising, they stay in the weeds all the time. They, they say that they don't have the time. And a lot of times they haven't even sought any help to develop a strategy. We work with this every day with these builders, remodelers, some other industry professionals and one thing is clear, you've got to start now. You've got to ingrain it in your DNA, it's gotta be part of your mission. The exit strategy is going to define your decisions and it has to be intentional. [02:58.9]
Dave: Yeah. Otherwise, it's just hope. You know, one of the common things we run into is an unrealistic expectation of what our businesses are worth. I joke around with my brother, who's constantly looking at real estate and properties and I said to him, Hey man, the quickest way for you to increase the value of something is for you to buy it because the second he owns it, it's automatically worth more. And I think our businesses are a lot like that. And I can remember the very first business owner, one of the first ones that we started working with in South Carolina was looking at the investment it would take to put all the things that you need into to transform your business, to make it more saleable, to just have a more valuable and more rewarding business that runs better with less of your time. And as part of his analysis, he went to a business valuation specialist. The evaluator did a full interview. Talked to him about his team, he had four project managers and you know, he’d been in business for 18 years. He was doing X million dollars’ worth of revenue and this many clients and these raise reviews and all that sort of thing. [04:05.7]
And they were getting ready for the big final sit down and they sit down and the evaluator said, Oh, you know, I'm embarrassed, but I forgot one piece of this. I need you to walk me through the equipment and physical assets that you have. And so, they went through where there was, there was not that much, actually. There were some tools, a couple of trailers and I think a truck and it came in at $46,000 or something like that. It was under 50 grand. The evaluator made a couple of notes and said, okay, well, the reality is your business is worth the exact same amount as those assets. And the guy freaked out. It's like, what are you kidding me? I've been in business for 18 years. I've done X million dollars with my team. Well, tell me what stops any one of your project managers from going out and going out on their own? You don't have any systems in place. What, what allows them, one of them to buy your business and run it for you? None. Do you have a family member who's willing to pay more? No. Would any of your competition look at your business and say, well, I'm going to acquire that so that I can expand and he said, no, they would probably start their own. And he came to the sad reality and we're going to get into this a little bit more why, but he had built a business that wasn't really worth anything to anybody, but himself. [05:35.3]
Duane: So how did that feel when you had to tell this guy that his business might be worthless?
Dave: Well, it was, it was a punch in the guts for him. I was lucky in that. I wasn't the one who told him it was somebody else; he, you know, he had hired a professional. In our business Duane, we, we kind of know when you see the infrastructure of a company, whether it's got real value to somebody else or whether it can be automated to some degree or not, but it was, it's a kick in the guts to hear it, but it really resonated with him and ultimately it led to him having more conversations with me and talking about the things that he needed to do to set those up in his business. Ultimately, he did them and since went on to sell his business for far more than he had there. So, it ended up being, being quite a success story. [06:25.5]
Duane: You had said at one point too, that the business may not necessarily be worthless to him. It does have some inherent value. It's just not really set up for a sale.
Dave: Yeah, that's true. And the thing is we fall in love with the things that we, that we create. And we have some things in there that are real and that do have value, but it's only valuable if you're able to transfer it to someone else. And so many of those things are the, are the, are the soft things that you can't do. It's got value because it's creating an income for you. It's familiar, you're committed to it. You've been putting your blood, sweat and tears into it. But the reality is that by exiting, this means that you are leaving. So, if you leave, who would buy it, who could walk in there tomorrow, step into your shoes and run it. Ideally if you've set this up properly, there's a whole bunch of people who can fill that void. And that's what will empower you to have a scalable business. [07:24.8]
Duane: That's something that we talk a lot about with folks is if they're getting in a position where they're building a strategy for selling their business and seriously considering an exit from their business, we have to identify who those buyers are. Well, I guess we'll start off with the first one, that's probably the one that might be the dream scenario some of us have late at night. I know I've had it.
Dave: That unicorn scenario.
Duane: The unicorns there and that investor or mega builder, somebody is going to come out of the blue and just put a pile of cash on my desk.
Dave: I've heard of it happening once.
Duane: Some other folks that we see that are kind of a logical next step may not always be the right, the right option based on your situation, but it's, it could be a family member.
Dave: Yeah. And this is very noble and valuable, and it comes with risks and rewards. But for a lot of business owners, if there's a, if there's a family member or somebody very, very close to you that has come, has helped to grow the business with you has transitioned in, probably some of those relationships that then transferred to them and your culture and they may be somebody who could absolutely take what you've created and take it to the next level. [08:39.0]
There's also the risk that it could go the opposite direction and some of these conversations can be difficult because you're talking about money with a family member. You may be selling for a little bit less to get a preferred scenario, but you may feel good about this. Like this is a very noble route to go. The challenges occur when you look at Hey, is it enough to actually retire on, are you getting maximum value? And only you can make the call when you're, when you're making that. But also do you put yourself in a risky situation, if there's a default or a change in the business, that's tied to residual earnings, something like that. These can be, well they could be the most heartfelt ones. They could also be the most difficult ones and distracted ones, if that's the case. [09:24.8]
Duane: There's also the inherent, you should never do business with friends or family wild card that we throw into this. I talked to a builder not too long ago, that has a, quite a large business close to, I think he had close to 30 people on board. And the problem was about 20 of those 30 was family. And he had built a good business, but he frankly had come out and then told me that he could see no way to even sell this because there was just so many things intertwined, you know, so many different layers with family members involved. Again, it's got its pluses, it's got his minuses and it might not be the best situation, but sometimes it is the most viable path.
Dave: Yeah, emotions can certainly uncover a sale, but they can also inspire passion in the path that you take a business and commitment from the team as well. But it's just something to, to balance. But you, you also see a lot of value in building for your existing team members. [10:19.0]
Duane: Well, absolutely. I mean, I think the team member can be one of the most viable paths for somebody that's looking to, to exit, transfer ownership, step away from their business and for a lot of different reasons. But one of my favorite reasons is the fact that you can start so early in the game. You can, you can begin very early by building a culture in your team and starting to lay out a path for the future to where some team members are involved and they see a path forward. They realize that with some work together that they could be part of this transformation and help to build the systems, the processes, all those things that you're going to need so that this could be a very smooth transition when the time comes.
Dave: Yeah, they are stakeholders in the process. And that's important again, they can, they can take over doing the things that in a lot of other businesses, only the primary, primary or key principle can, can do.
Duane: What specific things can people think about when they're thinking that there might be someone on their team or multiple folks on their team that could be a potential owner? Are there some things maybe just to look at, or to keep in mind, is there, if they have that feeling that someone might be showing signs that they could be a future owner? [11:35.7]
Dave: Well, I think one thing is to just ask them what their own long-term goal plans are and to have an open culture within your team so that you understand, if somebody sees your, their position with your company as a short-term position, or is this something that they want to grow into, they're grabbing the reins, they, they want to climb, climb the ladder, so to speak. Meeting quarterly with your team members around their personal goals, you are going to identify this. You're also through doing the exercises around highest and best use looking at where different team members should be and developing specialists who are really, really core or exceptional at the particular aspect that they're looking after and accountable for in the business. So, you can, you can have multiple team member owners. It's a little bit easier to do that with than with family, family dynamics. You have elements of fairness and, you know, blunt that you're dealing with. Whereas team members, you can work more on a meritocracy type more minutes. So, having open communication, identifying skills, and then having systems and guidelines in place for them to work on to grow those skills. [12:50.4]
Duane: Another thing that is so appealing about a team member being a potential future owner is the fact when done right when properly planned and for, for an exit strategy, there's no one else that's going to know how to run your business better. These could be the folks that have been running your business. And if you've been taking the time to set it up, there's a good chance that they've been running your business without you for a period of years already. That's one of the reasons why we see the, a team member as one of the most viable, and it times one of the easiest ways to transfer ownership.
Dave: Yeah, it doesn't have to be just one team member. Either if you do this right, it can be multiple specialists. But think of the degree of confidence you have in the fact of, you know, if you're selling to an unknown, handing it over and there's any residual revenue tied to it, or performance metrics. These are people that are coming in and learning. You're probably going to get pulled into it. Your exit can be really slick if your buyers are, the team members who were already there and ideally you, you may just be selling them a bit more shares, they already have some. So, you're just selling remaining shares and keeping a portion and your investment remains intact and you can sleep at night. And if you've got the systems in place, so you can monitor their progress much like you would your stock portfolio or other investments that you might have, because you can absolutely view the performance of the business. And so many builders do not have that ability right now. We'll talk about that more in a minute, but there's another group, many of us don't don't usually think about. [14:22.1]
Duane: Yeah. That other group is the other builders.
Dave: Right. So often we look at other builders is just competition. If you set your business up, you've got, you've got to consider this for a moment. This is somebody who does the exact same thing that you would do. If you weren't doing it exceptionally well, why would that builder not want to acquire yours? So that's almost the question, the mindset that you, you need to look at, but we've also discovered a really interesting twists all this of the other builder. And we're going to, we can get into that in a, in a few minutes.
Duane: There is one other option. Unfortunately, we hear quite a bit, and it's the option that you can simply close the doors. And a lot of this is just based on the hope that you will have saved enough money, that you can just walk away from your business. But the sad part is this is actually becoming a very common strategy. [15:25.7]
Dave: Yeah. Back in 2013, 2014, the first conversations I was having with builders are just, you know, as they're coming out of the recession and recovering and starting to do well again, I said, Hey, so what are you, what are you going to do differently this time? What's your strategy? And I felt a large portion of them doing said, well, this time I'm not going to spend it all. But nobody said, I'm going to work on building a more valuable business. A few of them said, I'm not going to do spec homes again. And some of those guys that I've spoken to are doing spec homes again. So, we'll see what happens there. Closing the doors, or downscaling becomes a reality at some point. So, I remember talking to a builder in Clemson, South Carolina, who had at one-point big goals had a great, you know, big company going 15, 20 employees. Well-Known doing great, but he was pulling his hair out. He was frustrated. He was working all the time, banging his head against the wall. He felt like in the weeds, as you say, Duane. He was looking at his bottom line and just saying, Hey, I can't, I can't do this anymore. When I called him to talk about making a transformation, he said, well, this is timing because I just spoke with my wife last night about possibly just shutting down or maybe not shutting down, but scaling down to just me and maybe one project manager, because I can't handle this anymore. There's just too much stuff going on. And I don't want to build, I don't want my business running my life. [16:57.2]
He spoke with his wife about it, and she said, but what about the things that you want to achieve in your community? And he was very involved in his community and with his church and had a number of goals of things and ways that he wanted to get back. He also had a number of trades and carpenters and staff that were counting on him. So that was the catalyst for him and the recognition that, Hey, I need to start working on this. Ironically, his story goes on to become something quite different that we're going to, to touch on in a second. It's a real flip the script type moment. [17:30.9]
A quick reminder that the best way to get the most out of this podcast is to engage with the Builder Nuggets community, visit our website at BuilderNuggets.com and follow along on Facebook and Instagram. [17:44.7]
Duane: There are some very specific things that everyone listening here can do to get started on this. If you're really considering building an exit strategy, you have to understand some of the elements that are needed. One of the first ones I think of is, and this is again, trying to point towards the ultimate end goal, but you've got to have a vision and a mission. Everybody on the team needs to understand why they're doing what they're doing or chaos is going to fill the void.
Dave: Yeah, there's gotta be a plan. And not just a plan that you, as the founder can recite, or you put on the website somewhere. This is a mission that you're in a vision that the rest of your team is behind and can support, can recite, believes in, you talk about it often in your meetings. And that really leads to an empowered team. [18:35.7]
So, one you're informing them there, you're involving them. You're bringing them on the mission or they're bringing you on a mission and there's often times maybe the case, the best leaders will, will do that. But you're empowered. Having an empowered team is valuable to an investor or a potential purchaser, but that empowerment comes from autonomy. You need to be able to have people on your team who can do their job, do it without much supervision from you. They need the authority in order to fulfill that, they need support and they need leadership from you. So, you get out of the way and let them be awesome at their job. but it takes a few more things in order to be able to do that job, Duane.
Duane: Yeah, systems is also a big part of that. And, you know, with a lot of builders and remodelers and other industry folks out there run some very complicated businesses. The homes we build, the projects we take on, and it’s amazing how many things get pulled off. Ultimately, though, what you have to do is this stuff has to stop living between your ears. You've got to get it down into a repeatable process and systems, and you've got to reduce all of your complex thoughts, your systems, and processes down to some simple, clear, understandable instructions. I've talked about it before. Simple is hard, but the results are worth it. And at the end of the day, simple is a competitive advantage. [19:55.6]
Dave: Yeah, if you have easy to follow systems that everybody on your team runs with. These could be CRMs, project management, software, time management, whatever it may be, you need to invest in those and have them in place so that anybody can come in. They're also scalable. When we look at systems, this can't be something that you, jerry rigged. I think about the guy who's got the 110-page 14-tab sheets from, with his estimating formula on there that nobody else can use. You've got to keep them simple. And it's not just a system. I think the fourth element that we look at is having a clearly defined process with procedures, training, and support. These are the rules of your business. This is how you are going to do things. And it's not just how you are going to do things, it's how everybody else in the company is going to do things. The process that you are going to follow. There needs to be dedicated training around that, so when somebody new comes in, they're not just on the job site, trying to figure it out on their own and messing it all up. You've got dedicated training and then support ongoing development of those people in order to make sure that the rails are in place and it's done the same way every single time. That's where you eliminate the chaos. And just like we to say on the show a lot, ‘you cannot scale chaos.’ [21:22.3]
Duane: Another point that we've got to touch on is your marketing strategy. Marketing can be a weak link. Once in a blue moon, you will stumble across the builder or a modeler that is really good at marketing. The vast majority don't want to be involved with marketing. They're not good at it. They don't want to spend any time on it. And frankly, you probably should. You need to have people and systems in place that are going to handle your marketing, a recurring marketing strategy, something that is broadcasting your voice, is getting in front of the people that you need to be in front of while you sleep. It needs to be the kind of thing that's covers the gamut, social media, all of the different platforms that are out there for you to get your voice out in front of your clients. And not even just your clients, but also your, your people that you want to do work with recruiting future talent. This has to be the kind of thing that recurs on and on, and you need to have a strategy for that. [22:15.2]
Dave: Yeah. And that brings us to the seventh and sort of our final element here. And this is relationships, and this is the one that's really interesting because this is the one that as business owners, we place the most value on, but it is also the one that vaporizes or can vaporize when we leave the business. Little piece of gold right here is thinking about these relationships being transferred to being outside of just you. If you can build a team, if you're that, if you're that charismatic salesperson that makes friends with everyone develops relationships quickly has no problem with this, this is going to be fantastic for you. The opportunity for you to then take your key people and transfer your relationships to them while you're still working together is key. Because if your entire team has the exact same relationships as you, then somebody will pay for them because they're not running the risk of those, just leaving outside the door. You're your own internal team members and stakeholders or family member who is looking at buying this, will very much appreciate and be willing to pay for the value that you brought in creating those relationships. [23:33.5]
Duane: And these are the basic fundamental elements of building an exit strategy. And like a lot of the things that we talk about on here, none of this means Jack without implementation and accountability and a strong culture that understands it. You've got to have a dedicated plan that everyone follows. Those are the things that, that we teach and train. There's all sorts of different platforms and paths for that. But you've got to have something that the entire team buys in on it is recurring something that you do in your meetings all the time. And then some folks that are standing back and holding you accountable to make sure that these items would be in met. Because like a lot of other things you've had business plans, marketing plans, lots of things get, get unveiled. There's lots of excitement and fan fair and then they go in a manila folder somewhere stuck in a filing cabinet and just die a slow death. [24:21.3]
Dave: Yeah. What we're going to talk about now is the exact opposite. And one of the ironies of this whole thing, this is, and you know, when we see this light switch, go on for people, the script gets completely flipped, how exciting building one of these businesses becomes. It's incredible to see this, this happen, but here's the deal. When you build one of these businesses, when you put in an empowered team systems infrastructure, you've got a defined vision and mission. You've got a recurring marketing strategy. You got relationships that exist outside of you. That's, that's, that's the wild card in all of this. But when you have all of those things, maybe not the relationships you have built yourself, not only an exceptional nugget for a takeover, but you've actually built yourself a, an acquisition machine. [25:18.5]
And remember the story about the Clemson guy who was getting ready to shut down, putting all this into his business, he's now looking at opening his fourth office. So, it's really paradoxical that by building a business that is designed to sell, you have actually put in all the elements of a steam roller that can go into any other market and provided you get that last seventh piece, the new relationships, that's the missing link that can be plugged in for you to go and expand. And we see this with about 80% of the business owners that we're working with and it didn't use to happen, but about 80% of them are looking at within the next three to five years, opening up to three offices. In fact, we've got builders that are looking at how do I, how do I roll through existing markets or neighboring markets and open up an office here, an office there. We’ve got an owner who wants to have 10, we've got an owner who's looking at opening 30 offices within the, within the next 10 years because they built this infrastructure that can roll like a Sherman tank into, into another market. [26:36.1]
Now that can be very difficult, if you don't have the relationships. You have to build relationships and then plug them in, otherwise, your launches slow. There's a really, really exciting thing happening out there, in that we have probably in North America, I would, I would bet there's over a hundred thousand builders, probably much more than that who are at the tail end of their careers. They have not thought about an exit strategy or they're very, they have a very limited exit strategy left. But they are perfect for an acquisition partnership and a buyout because they have exceptional relationships with the local market partners. They've got an unbelievable name. All of the things that we've talked about are related to relationships that are really only valuable to them up until now are also super valuable to somebody who has already built an acquisition machine. [27:40.7]
Somebody who's got the systems, processes, marketing, everything that can plug in, move into a different marketplace and partner off with that 65-year-old guy who is ready to wind things down and what's going through his mind is, well, if I'm shutting this thing down, there's a whole bunch of people I need to look after. I need to look after my employees, where are they going to go? I'm worried about my trades and my and you know carpenters. I'm worried about some of the relationships that I have with other market partners. I'm worried about, who's going to look after my past clients when they call up to say, there's something going on with their window, their or the roof, or they need extra work done. These are the things these guys are wrestling with. And they also are finding that there's not a lot of people who are able to buy their business. [28:37.2]
By putting these things in place, you can instantly marry a well-structured company with exceptional relationships and put that dynamic together where you each add value to each other and then you do to it to your buyer. If you're an owner who does not have those things in place, we've put deals together in under a year where you can have that and the businesses are already growing, so, reach out to us. If you don't, if you're in that scenario or want to learn more how to do this, either you want to go and be an acquiring builder, or you're at the stage where, Hey, I've got three years left where I'd love to have one more, one more run at this thing with some re-energization in my business and see if I can maximize the value and build and, and take my business to the next level and optimize it and step away while your business is climbing instead of receding. [29:38.1]
Duane: Yeah, this is all good stuff and exit strategy is something that, you know, as you said, not everybody has that on their radar, but I think the vast majority of folks really do. Couple of the quick takeaways that I've got here, a big one for me is start now. You've got to put some effort into it. You can't wait, wait for this. By starting now, you've got to be basing your decisions and your investments in your business as if it were an income producing asset, not just simply a business, that's the way you've got to look at it. And then the other was to empower others. You've got to put some things in place so that the other folks on your team are being empowered and that the business is not then dependent on you. Because when its dependent on you, it has no value to anyone else. You value your relationships, but you need to transfer those relationships in order for the value to be real. [30:24.4]
Dave: Yeah, that that value has to be for the buyer. You need to structure your business, even from day one, like, like you said, Duane, for your future buyers and you need to cultivate them. If you come at it from the mindset of, I'm not just creating a legacy business for myself, but if you look at it like, Hey, I'm creating a legacy business for the next buyer or for the future owner. Then this is going to be super powerful. It's also going to be attractive because these potential buyers or these potential team members who become trusted stakeholders in your company, these are the people who are going to add value to your residual shares. These are the people who are going to increase the, or help you to optimize the business so you are getting maximum value and you're going to feel exceptionally, exceptionally good about it. [31:20.7]
And I think it's important to point out here too, that you don't have to think about this and about your team members or your family members as an all or nothing scale. You can do this in little chunks at a time. It's, it's, it's not like you have to get to the end and boom, somebody's got to absorb this whole thing or have the cash to buy it or put the down payment on it. You can do these during strategically designed periods that are optimized create these asset opportunities for others a little bit at a time. Ultimately what you're doing with this, by putting this in place, by making it one of the most attractive construction companies and most valuable is you are also creating an acquisition machine. [32:09.6]
Your business becomes an expansion weapon. Think of the value that you can create in an umbrella of companies. It could be in five or seven markets, 10 markets, whatever, whatever the case that your plan may be, but you're going to have passive income and whatever role you want in multiple markets. That's, that's just huge. It changes the risk. It changes the opportunity. It changes the tax implications. You can sell one, keep six, dispose them every two years. You have so many more options than just closing the door or selling to a family member, the things we talked about earlier. So, for all those reasons Duane, I think of everything. Remember this, if you are the only one who can run your business, it is worth exactly what you are willing to pay for it. [33:06.1]
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