The Bookworm – Part VII by Ben J. Pritchett
There’s a huge opportunity I think many coaches are missing out there, and that’s the exit planning market.
Here’s the reality: an awful lot of small to medium-sized businesses are owned by folks with grey hair, white hair or no hair! They’re tired, worn down, want to retire and don’t have a plan or know how to do it. Many of those businesses will end up shutting their doors. The owners will lose their livelihood and their nest egg; employees will lose their jobs, there will be no winners.
You don’t have to be an exit planning expert to help, but you do have to understand what’s going on. If you understand the mindset and the opportunity, you can make your clients and yourself a lot of money.
While it’s only a rule of thumb, the most common multiple used in business valuation is 3x – in other words, every dollar of EBITDA is generally $3 in business value. Help a business owner add $100,000 to their bottom line, and you add $300,000 to the business’s ultimate value.
This added value is important for a couple of reasons. The obvious is pure dollars and cents. The second is that financing small business purchases is extremely tough and getting tougher. The business vendor will often have to do what is known as “vendor takeback” (usually called VTB) financing for 30% to 50% of the purchase price.
If you’ve helped them greatly increase the value of the business, the perceived risk will be lessened. If the business used to have a $100,000 bottom line and you’ve helped them double it to $200,000, and the vendor has to do a VTB of 40%, they’re risking less than the increased value of the business.
There are too many things to go into in this article. Get the recommended books, read them and see what ideas come to your mind about how to help and profit from the opportunity.
Understanding these things are vitally important to the Six Figure Coach, so here are some resources to help you
The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners
by Richard E. Jackim
I recommend you start with this book to understand the size of the opportunity. In the US alone there are about $10 trillion in businesses needing to change hands, given that the economy in Canada is about 10% of the US, that makes the opportunity here another $1 trillion.
This book provides a great introduction to all aspects of exit planning. It delves into the roles of various professionals in the sales process (sadly, they miss business coaches), they look at contingencies, valuations, you name it. They also include some case studies that walk you through a variety of transactions.
Exit Planning: The Definitive Guide
by John H. Brown
My first serious introduction to the concept of exit planning came from a speech I saw John Brown give in Florida at least a dozen years ago. Before that time I only thought about starting and growing businesses, the idea of selling them was something vaguely over the horizon.
John’s talk and his book “How to Run Your Business So You Can Leave It in Style” opened my eyes and thinking to a far different world. It was a world where your business was going to be worth more the further you can stretch your horizon and plan out that exit.
That book was great, but getting somewhat dated, so I was happy to find out that John had published the new book noted above.
Secrets of Buying the Right Business (for you) Right
by Ed Pendarvis
Ed Pendarvis is the founder of Sunbelt Business Brokers, the largest network of business brokerages in the World (as far as I know). He’s helped sell thousands of businesses and trained hundreds of business brokers.
In this book, he covers the nitty gritty details of small business sales. He doesn’t cover all the dirt though. I highly recommend that you, dear business coach, find yourself a business broker to befriend and take them to lunch. Business brokers are often very transactional (much like real estate agents) so they don’t often make great JV partners, but they can give you a wholly different education.
Ed’s previous book was “Buying a Business to Secure Your Financial Freedom,” and this latest book appears to be a great update to that one.
It covers most of the same topics and comes with access to a dozen videos on the topic at www.businessbuyersuniversity.com – That site will give you a business buying and selling education for less than the price of a fancy supper.
An important footnote
I used to own a business brokerage. During my training, I heard some appalling stories about the ways business owners have figured out to hide money and reduce their taxes. I learned how they figure out tricks to shift personal bills into their corporations or make cash disappear altogether.
Why do I mention this? Well, many coaches are taking equity stakes in client firms, or using participation agreements. Coaches think they protect themselves when they base the participation agreement on gross sales because the bottom line can be played with too easily. I hate to say it, but all numbers can be played with, and that’s an important thing to understand. (Like a business with two cash registers, where the money is reported from one, and the other is emptied into the owner’s pocket – those revenues never even make it to the financial statements, and a coach will never get a cut.)
Walk a mile in a business broker’s shoes, and you might learn a few things to make you a better coach and to make better deals with your clients if you’re open to participating in their businesses.
Find the right business broker, and you might have a great JV partner.
About Ben Pritchett
Ben Pritchett started his first business at the age of 15, and began his own consulting practice in 1991. For over 25 years he has worked with clients in many industries including restaurants, direct sales, software development, tourism, dimension stone (granite quarrying and manufacturing), aviation, and optometry, just to name a few. Companies coached by Ben have nearly doubled and tripled their revenues in a single year.
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