Scott Deetz 9:40
Sure. Yeah, the best approach and I think where a lot of times people don’t spend enough time, it’s interesting. I was recently talking with one of the first exits that I did in the space or at least in the you know, in the in the first 10 And I asked him I said, you know, what was the biggest value that you got by us working together and he said actually before We got to the business, the biggest value was that you forced me to focus on what I wanted as an owner of that business. And the the example was he came to me and said, I’d like to sell my business. It’s only was worth about a million dollars, he said, but it’s time for me to get out. And so we do a lot of financial modeling at northbound. So we modelled up the business and I came back to him and I said, Well, I got some bad news, I said, Either you’re lying about your forecast. Or you absolutely shouldn’t exit the business, because your forecast shows that within a year, you’re going to be worth a lot more money. Tell me what’s going on. And what his real issue was, was that he didn’t know that you could raise capital for your business without having it be personally guaranteed. And so what we did, the actual project shifted from helped sell me for a million dollars to help renegotiate my supplier terms so that I get better cash flow. And we were actually able to get supplier terms where half of his payments didn’t need to be paid until 210 days after his order, which was a really unique situation. So I’m not guaranteeing that for anybody else. But but it really allowed the supplier to partner with him. Yeah, that got him the cash flow, we grew the company very rapidly, because we could order five times more. And then a year later, we were able to exit rather than $4 million for $5 million. And, and the exciting part about that was that he originally thought he wanted to sell for a million, then he thought he wanted to sell for 20 million. But then he realized that actually for his lifestyle, he’d never have to work again, if he could sell for 5 million, and why not spend more time with the family and the kids. So that’s the important point is you have to design your exit Strategy to match your owner goal first. And that can change. And actually it should change. But if you haven’t kept up to date with that, you’re kind of running off an old playbook. So that would be I would say a step one. And we have a number of tools that we use to help people get to that answer. Because for some people, even if they can get to 5 million and not have to work again, they’re passionate about the business, and they want to grow into 50 million. And then that’s what their owner goal is. So I’ll stop there. But I think that’s the the first thing. And then when you realize your owner goal, then you start to go what type of a company do I have to be in order to reach that particular valuation? And then that starts to drive capital needs team building those other types of scaling things. But if you don’t know how far you want to scale it to and you can’t even make those other decisions?
Josh Hadley 12:40
No, that makes a lot of sense. So if we kind of reverse engineer that, right, with his lane to where you’re kind of exiting 100% of the business, and you’re like I, I’m just done, I’m ready to kind of move on and enjoy a more simple lifestyle or work or whatever that may be, is that one where, you know, you don’t necessarily need a team, maybe walk us through those different, you know, ways people based on that Strategy that they have for their exit, what are the different needs that they should be focused on? Got
Scott Deetz 13:13
it? Yeah, so the way I think about the different lanes is Lane one would be is if you went and sold, we use the aggregators, because they’re common in the in the e-comm marketplace. And the typical transaction structure is a multiple, and let’s just say so I can do easy math that the multiple is five times earnings. And, and 20% of that is going to be at risk 80% is guaranteed. So you’re gonna get a 4x Multiple, like closing, and then you’re gonna get an extra 1x Multiple, if you stay stable, or you’re on an earnout, or some type of program there. And that even marketplace is changing, where you should plan on staying on longer to make sure that you can make sure that the growth is going to happen and be an active part of new product launches and those types of things. So that’s Lane one, when I think of lane two, you can actually and we’ve done a number of transactions in this space where you sell the company or the majority of it, but you actually roll a minority portion of equity going forward to incentivize you to stick around for generally, let’s call it you don’t have to stay around in a full time capacity always. But you have to be meaningfully contributing to the value of the company. And think of that in that one to three years. So in that transaction structure, I may be selling to a, you know, an aggregator or a strategic buyer, and I’m selling 80% of the company and let’s use that exact same 5x Multiple, I get 80% of the company, but that second 20% isn’t on an earn out. You either hit it or you don’t. It’s that if we double the size of the company, I sell the other 20% At some point in the future, and I can Get the upside of staying involved almost like thinking of it, you still own 20% of your company, you just don’t own 100% of the company. And always I like to make the caveat that I’m not recommending any approach, what I’m recommending and loudly recommending is that you need to consider all of these scenarios before you just pick the one. That’s right. Because it’s very often you pick the one that’s most familiar, not the one that’s most valuable. And I think that’s the learning lesson. So. So the action item on that is to get very clear about what do you want as an owner in terms of the ultimate economics? And what is your runway ramp? How long you want to stay involved? And what’s your desire to go build a team, because if you don’t want to go build a full team for private equity, you can still do lane to roll equity going forward and be what I call the brand strategist, but get rid of the operations and the logistics, and the, you know, Amazon types of things that a lot of entrepreneurs don’t like. So, when you think about that middle lane, that’s what I’m referring to.
Josh Hadley 16:07
Okay, that makes a lot of sense. And I give, I think that gives everybody a lot to chew on and think through. And I know, we’ll be talking a little bit more about this towards the end, but having a kind of a guidebook to think through, all right, what are all my different options? And what is the right thing for me. So thanks for sharing that with us, Scott, I want to turn kind of our attention now to maybe more of the case studies with brands that you’ve been working with, and you’ve helped multiple people exit at this point you have experienced and I think all of those lanes that you talked about, right. And so what I would think I would like to focus on is the entrepreneur that wants to scale their team, right? They want to go to eight figures and beyond, they’re looking to, you know, maybe sell multiple times they do an initial, you know, sell to private equity for minority interest in the business. And then they’re planning on, you know, taking it to the moon, so to speak. What are some of the actions and maybe some case studies that you could share that, as your team’s gone in, and they open, you know, they pop open the hood of the business, so to speak, and they’re like, Ah, okay, here’s where we can maybe, you know, tweak a few levers in the business to really help them prepare for that exit to look appealing to a private equity investor, you have some examples or case studies that you could share and about that.
Scott Deetz 17:31
Yeah, absolutely. So the first thing that I think about is, when you’re going to scale up to that level, you have to turn your thinking from what your definition of knowing your numbers is today, to what I call what the real definition of knowing your numbers should be. So the action item, if I was going to write it down, is most people think the action item is to have accurate accrual accounting, and probably a lot of your sellers have either gotten over that hump, or you would be amazed, we have sellers that we’ve worked with 5070 $500 million of revenue that don’t have accurate accounting, complicated. You know, there’s a lot of nuance to it. And sometimes you have entrepreneur types that are really good at growing in the accounting is always lagging. But here’s the real important dynamic, when you want to sell to a private equity or any type of scale buyer, there’s a difference between accounting and what I call Strategic Finance. And there’s actually multiple pillars of Strategic Finance. And even before you get to accounting, you get to a pillar called compliance. And the number one thing that a CFO Imagine that you were, we are a outsource, in essence, a lot of times that outsourced CFO type resource for our clients, the first thing that a buyer is going to ask isn’t how well this company can grow. It’s what can go wrong with it. And so and so most sellers, when they’re going in front of a buyer, they keep wanting to talk about all the good things. The most important thing, if you take one big lesson from talking here is the number one thing that gets you a higher value isn’t showing how great it can be. It’s showing how low risk that it could go down. Because that’s the ultimate thing that if a private equity company loses all of their money, you know, and something goes to zero, it doesn’t matter how many winners they hit after that. You know, so first thing to think of is that the goal for you is to build a true Strategic Finance capability, which starts with compliance and being able to show a buyer you’re compliant across product, financial, legal, you have your operations in place, then you build up to accounting, but then you actually build up to forecasting of being able to show accurately the potential of the business. Then you build up to what’s called scenario modeling to where you can show a range of worst case is the best case, and then you build up to the valuation modeling based on that. And that’s sort of the top of the, of the pyramid. And so if you don’t have that today, that’s not something that you wake up a week later. And you feel like you’ve really got a sophisticated Strategic Finance function button, that is something you will need at the end. And if it takes the longest to build, it’s better to start now. Because it does take a little while to build that capability. And so whenever I’ll give you a case study of somebody that we started working with, and they were worth a couple million dollars. And what they thought was the project was to build it to one level. And what the case study was, is that we came in and analyze that they had the capability to grow this to a true platform. But they didn’t have the working capital and the growth capital to do that. So the first transaction that we did is we said, We’ve got to get your numbers and your forecasts in order under Strategic Finance, because if we’re going to bring in money, that’s the first question that they’re going to ask. So we did a lot of work. And we built what’s called a bottoms up forecasts. So don’t just say, a lot of people will say, Oh, I can grow, I can double my growth, if I get a bunch of money, and the buyer wants to see show me per product per units per day, you know, build up a real true forecast of the business. And what that forecast showed was that the right answer was to take on a 10 to 15%. Owner. So we went and we brought in about, let’s call it somewhere between three and $5 million worth of capital, gave up equity in the business. To do that, that scaled the business to another level. And then what we did is then we brought in a couple of other businesses that were synergistic to it to get to the next level. So then we did a partnership transaction. And then two and a half years later, we exited. And it was something that went from 2 million to let’s call it 75 to $80 million worth of value when we exited, because you built the functions in there, starting with Strategic Finance, and then and then then accelerating with cash and growth. And the final thing is then designing the right exit partner once you’ve reached that next level of scale, so so it was a it’s a great case study of recognizing that you could have sold that business for five $6 million along the way. But the but you really once you built the financing, and you put the cash in sure you weren’t no longer the 100%, owner of a $5 million business. But if you’re an 80%, or 75%, owner, something worth 50 million, you know, obviously that would be a much better scenario for you. So that’s the lesson is numbers, then look at your capital Strategy, and then look at your exit and drive the value first before you go. Otherwise, the buyer, I guess last comment I’ll make on that. Otherwise, the buyers, they love that they find somebody that’s got a $50 million idea, they haven’t done the work to bring in the capital, they insert the $5 million worth of cash and they’ll grab the $45 million worth of upside. That’s, that’s almost by definition, what a lot of private equity likes to do. And so why not do some of that yourself to then then go there with a stronger hand and a bigger number.
Josh Hadley 23:16
I love that. And Scott, maybe we can dive a little bit deeper into that case study at the beginning. You talked about you know that they were you identified that they were a good platform, right, so that they could continue to grow? What does that platform mean? Yes,
Scott Deetz 23:32
so the pillars of a great platform, the way that I think about it, my mentor, and it has done over $20 billion of transactions. So you know, you know, old school, 3040 years in the investment banking world any his number one thing that he said to me was Scott, it’s not what the seller is selling, it’s what the buyer is buying. So I would encourage everybody to not think about what you think is valuable in a business. But think about what buyers value in a business. The first thing that buyers value is not growth, but it’s risk diversification. So the first thing that you need to think about is that you need to be compliance as a part of risk diversification, but also true diversification of your products. So that no one product has, you know, more than, you know, 20% of your revenue, otherwise Amazon shuts it down or new competition comes in. A buyer can’t get comfortable with that risk profile. So so the first thing I would say is you analyze your risk. The second pillar of valuation is your profitability percentage. And so a lot of people think that if they have more profitability that they’re more valuable than if they have smaller profits. And while that is one of the pillars of company that has 25 or 30% profit margins is just much more flexible and therefore valuable than a company that’s 10 or 15%. So the second thing that we saw in this company was that they had a ability to have profitable products. And then we went to growth percentage, which is the third pillar. And I would, if you wanted a benchmark, a minimum growth percentage is 20% per year. Now, with COVID, and COVID, bumps, you might not all be there. But remember, you’re not selling what you’ve done, you’re selling what the business can do with the buyers capital infusion. And their definition is that minimum 20%, ideally, 30%, year over year growth is required. Well, if you think about what that capability really is, what we saw on this platform was a capability to successfully innovate and launch new products into the marketplace. Because once a product gets up to a certain level, it kind of is what it is. So for people that are looking at action items that they can have today, it’s that ability to have a successful launch model to drive the growth rate to that particular output. And then the fourth one becomes the size of the earnings, if you can prove that you can do it over a longer period of time, then you become more valuable because 30% growth on a company with a million of revenues is a lot different than somebody with 10 million of revenue. And so I think it’s just important to think along building in and that’s where that capital need comes in. Because, you know, in this situation, the back to this case study, we saw in them even what they didn’t see we saw the platform, but they were think of it as borrowing money from Uncle Bob. And if you go by borrow 50 grand from your uncle, that’s no problem. But when your business is that 10 million ego ask him for 1.2 million. Yeah, Uncle Bob says, you know, I love you, Josh. But I’m not the right investor for that level. So you have to think of your capital Strategy, not as an event, but as a process where you’re always looking at what capital at the lowest risk and the lowest cost of fuel that growth, and a lot of people get to a certain level, they don’t have the capital planning. So then the growth rate levels off. So we saw the platform, and we brought the capital Strategy to place. And we did it through a combination of debt and equity. And that’s what continued to fuel the growth, because the person already had in place, the ownership group already had in place a repeatable growth model, they just needed more cash to go into the system.
Josh Hadley 27:29
Awesome. I love that. So I want to kind of reiterate what you just talked about there? Because you know, this basically sum up what is that platform? What is it? You know, what’s that criteria that you guys identified? Like, hey, they’ve got all the right parts, in order to actually take this business to the next level to get to that 75 $80 million valuation? Right. So you identified four things to your pillar to make it a are four pillars to make it a platform company, so to speak, that you talked about. So number one, was profit margin, right? You should be shooting for greater than 20% profit margin. Number two was that growth rate year over year growth? Right, you should be above 20%? Number three was the size of the profit, right? And the growth of the business, obviously, the bigger the business, the better. And then the last thing you talked about is just kind of like risk diversity, right. And risk mitigation. And I think that goes in hand with, you know, is all your profitability in one SKU, you know, what’s your Amazon account health standing? Right? All of those things that could derail something overnight and making sure that you’re, you’re kind of clean? Is that correct? Is that summarize those four pillars directly?
Scott Deetz 28:46
Absolutely. And then if we want to go even a little bit deeper, those are what I call the output metrics, right? Giving you the metrics of that success, then you get inside the system. And you say, what really drives that and the words that I use is, first you have to have profitability, right? And now you might not be profitable at a lower level. So you have to have a path to profitability, you know, so if you’re launching a bunch of products, you might not be as profitable, then you have to have scalability, right? You know, you got to have that ability to to drive scale. And that has to be repeatability. You have to be able to prove that you can do it over time, you know, multiple times. And then once you have profitability, scalability and repeatability, you want to focus on defensibility which is the ability to recognize that if it’s all in one niche with a bit bigger and better audience I’m now creating moats, you know, around my particular business, and if I’ve got the profitability that the scalability, the defensibility, and the repeatability, then I’ve got the scalability, that right, because now that pillar of how to think through that and that that will start to show up in those metrics from that side of things, so
Josh Hadley 30:05
I love that I think you did a really good job that profitability, scalability, repeatability, and then the defensibility. And we’ve had numerous podcast episodes, in regards to defensibility. We had rich Goldstein on the show, right. And we talked about IP intellectual property that can, that’s where you can create that moat and show that this isn’t just a one hit wonder, like we’ve protected ourselves. And there’s a way that we can continue to defend ourselves. We’ve had other entrepreneurs on the show that have talked about Matt Altman’s is another one where he talked about that launch formula that they have. And they’re aggressively launching products on a regular basis. And they have certain metrics that they need to meet, or else they just get killed. Right. And they continue to bring out new products to make sure it meets that profitability. And then that repeatability. And then we’ve had numerous entrepreneurs that have been on the show as well, Ryan Deiss, did a great job, Aaron Javion, they’ve talked about systems and creating an operating system that allows your business to scale. Because you’ve got to have that team in order to execute on all of these ideas. So I love that you kind of went into the weeds, so to speak, and showing the and discussing and helping the listeners realize that, you know, if your metrics aren’t there, right now, start implementing today, the things you need to do to increase your scalability, the profitability, and the repeatability. I mean, regardless of you wanting to exit, that’s a healthy business to begin with, right? If you want to have a healthy business, you should have all of those metrics going, which is obviously why somebody would want to acquire that anyways. Right? They want to acquire a healthy business that has a future growth. So Scott, I want to go back to that case study. We had a good tangent there. But you talked about they brought in a small minority investor, right to infuse the business with extra cash is what they needed, because you’ve done that Strategic Finance, planning. Okay, so 10 to 15%. Then you talked about them, you know, they had additional partnerships that they made, right? Can you discuss, it doesn’t have to be specific brand names, but can you discuss, like what type of partnerships you’re referring to, that really helped them continue to grow and scale to a point where they were able to exit at a valuation of 75 80 million?
Scott Deetz 32:37
Yes. So and think of it in this way. The before, there’s different types of ways of doing either partnerships or other things. But the key part goes back to what you’d mentioned about with Ryan, and some of the other folks is nobody that we have exited. And we’ve done, you know, multiple, multiple, multiple, you know, eight figure exits, even low nine figures. Nobody gets there, as owner owns 100% of the company with nobody else involved. Very rare. Interesting, okay. Almost everybody is building a team of people, and incentivizing that team of people to try and all climb the mountain together. So the way that we did it in this particular case study was that we brought in additional partners, and think of it in the context of a merger where you bring people together at different valuations. But another way that you do it, if you don’t do it that way, is that we spend a good amount of our time at northbound actually advising clients on how to incentivize incentivize management teams. So if I’m going to bring on a head of operations, a brand strategist, I’m gonna start building out a team of people to be worth eight figures, the way to get the best talent and get the best out of that talent is to have some incentive alignment. And there’s actually six different ways that you can incentivize people you can do just a cash bonus upon exit, you can do a percentage contract upon exit, you can do stock options, you can do actual equity where you give people you know, literally, you know, direct equity and you can do that either by dollars or percentages. And so, the way to think about your you have two different ways that you’re taking some dilution below 100%. But to get to a bigger outcome, one of them is you might be bringing in an outdoor, outside financial partner, equity partner, but another way that we happen to do it is we did it through partnerships of bringing multiple entrepreneurs together. But another way to do it is to say no, I’ve got my brand I want to continue my own thing, but I’d like to give away x percent of the company or x dollar amount to a management team in order to grow and scale the company and make sure that we’re all aligned towards. And there’s some very specific ways that you do that, that can lead to good things. And there’s some mistakes that you can make along the way. Oftentimes, the mistakes that people make along the way is that they bring in people that haven’t done what they needed to get done before. And maybe they brought in a big corporate type that’s now working in an entrepreneurial company. But once you get the right people, you also want to get the right alignment, you know, with yourself as an owner and think of it for percentage wise, I never want to give away more than, you know, 10 or 15%, to a management team. And this all depends on how big you are. I’m not saying you have to give away that much. But but there is a concept that if you’re giving away zero, you just might not get that extra alignment toward growth. And so you know, in this scenario, we also incentivize, you know, a management team in key functions to have, you know, from an action item, one of the things that we found is that if you incentivize people based on a percentage of their salary, rather than a percentage of the company, you can end up giving away getting the motivation with giving away less equity. And I’ll use an example with your with with another case study, company’s worth $10 million. Okay? We want to incentivize the marketing person, and we want to give them $100,000 worth of equity in the company. So that’s 1%, right? A million dollars. 1%. So is it better for me to incentivize that brand strategist and saying, you know, you’ve done a really great job, Josh, I’m gonna give you 1% of the company, or you’ve done a really great job, Josh, I’m gonna give you 100% of your $100,000 a year salary in stock options that will appreciate with you. Okay, one of them sounds like, great, Scott, I got 1%, who’s Oh, you have the other 99%. They don’t feel very good about that. The other one is, I just doubled my pay. And now I’m making $200,000 a year, because I’m getting 100% of my salary as a reward investing over four years to stick around to be there and same amount of dollar economics. But if you structure it and motivate people correctly toward what it is, it anchors them to something that is real, rather than I call it once you start giving a percentage, it’s like giving out cookies. And I just never seen it and given up a lot of dilution. But to the person you’re incentivizing, it doesn’t seem like a lot, because they’re comparing it to how much you still own, rather than to what their previous salary was. But incentivizing management teams almost always becomes a part of an eight figure exit, you know, and so start thinking about that now, I guess, is the action item.
Josh Hadley 37:59
Awesome. I love that. Scott, thanks for sharing that case study with us. Do you mind giving our listeners just an overview of like, what are those core like management roles that you see entrepreneurs needing to invest in, right? You talked about, you know, somebody that’s in charge of operations, you talked about, you know, somebody that’s leading the brand strategist? Can you give our listeners, just the more of the roles so that they can start rolling those over in their mind? And have an idea of like, Oh, these are the type of players that I need to have on my team to really, you know, take this to the next level?
Scott Deetz 38:34
Yes. So I can give you the roles. And then different people have different philosophies on how they like to structure I’ll call it that titles. Okay. So some people like more of the traditional, I have a chief marketing officer, a chief operations officer, a chief financial officer, you know, you know, a supply chain and logistics, you know, those types of things. So, but here’s the way that I always think about it if you’re stuck in learning how to scale the business. And I say this from advising dozens of companies and owners on how to scale. First thing to get rid of is the if I could clone me problem. And what I mean by that is, most people think about scaling a company and saying, If I could just clone myself, then I’d solve my problems. And the answer to that is if they could just clone yourself, why would they work for you, they’re gonna want to have their own company. So then what you do is you organize what are the things that you know you’ll never delegate, because either you’re so good at them or they’re so valuable to the business that you you know, that you’re always going to keep onto that aspect of the business. And that might be somebody that is in operations and that I we’ve got a seller that we helped exit eight-figure exit and all they wanted to keep on to was interestingly enough the operations and supply chain because they have large numbers of variations of their products. So they knew that staying in stock was the key to that success, then we brought in a marketing person to be in charge of product, sourcing and innovation. And we incentivize somebody that was in the finance area, because even though they were in operations, they didn’t want to have to deal with the numbers. So the best way to think about the different roles I like to start with, what’s the first thing that happens all the way through the chain, and the first thing that has to happen is product creation and innovation. So that’s the first role whether you’re doing that, or somebody else, or whatever title, you want to put that on. The second thing that you have to then has it, you have to have product sourcing, which is supplier negotiations, you know, picking the right suppliers, those types of things, then you move over to the left, then you get right to logistics, which is again, different than sourcing, I got to get the goods from here to there, then you get to launch. And then you get to optimization. And then you get to what I call back end functions, which would be customer service, finance, and some people like compliance, even different than finance. But I think that’s the easiest way to think about the roles. And then how you want to organize the titles is something different. But the main thing to do to get yourself unstuck from scaling is to think about which one of those are you never going to give up? And then look to bring your team in around you. And most people don’t think of it that way. Because they think of themselves right now as the CEO of everything. And really, are there certain things that in the new structure you’re going to stick on to?
Josh Hadley 41:33
Yeah, Scott, I love you dismantled that myth of I, I just need to replicate myself, right, I need to copy and paste myself over and over again. And your statement is very true. Number one, there’s no human being in the world, it’s just the best at everything, right. And I think as an entrepreneur, you should be as a business owner, you should be looking to hire people that are smarter than you. Right? For myself, I did a decent job at running our supply chain. And staying in stock, I did a decent job. I was not the best by any means nor what I claim to be. But we just hired on a VP of operations that comes with that experience, right? He come he worked at Procter and Gamble in supply chain and logistics, right? So he has a lot of that experience. And so being able to give that to somebody that’s like this, this guy’s better than me, and let him go make of that what it needs to be right and say, All right, you gonna take care of this? Because to your point, Scott, I think what’s most important for every entrepreneur as an actionable takeaway, is you’ve got to identify your zone of genius, you have to identify what what is bringing value to the business? And what is something that is uniquely you, the only kind of you have this capability of doing in the business, and it’s bringing value, right? Because at the same time, you could say, I’m really good at customer service. I’m really good at those relationships. But like, how impactful is that to the value of the business? Not? Not so much, right? Right. If you’re talking about value creation, you’re really good at innovating new product ideas, and seeing what’s trending and jumping ahead of that, then that’s going to be hugely valuable to the business, right. So identifying something that you’re uniquely good at. And then it’s also highly valuable to the business, identifying that first, and like you said, kind of building out your superhero team of management staff that can then be the best at each of those different areas. And so, you could go through numerous case studies, but I love to hear that, you know, you had a case study where somebody was actually really good on the operations, but they could, they could go focus on hiring other people that could do a better job at you know, product innovation. For me, it’s product innovation for our business, and I need to hand off operations, but other every entrepreneur is going to be unique. So use that
Scott Deetz 44:06
example because it was the minority. Normally you want to keep that product innovation because you’re the brand strategist but I always like to use examples where it opens people’s minds that you are what you are and and you can still be very successful building a company, you know, on that. And that did spark you talked about actionable. There’s sort of if I said three things that I feel are like now really nitty gritty, but people don’t think of when they’re starting the process, one of the ones that comes up in my mind as you’re building out your teams and your systems. We have every one of our clients that we start working with and even now start building your data room today. And what a data room really is, is it’s a series of folders that are organized in the way that a buyer is going to eventually want to see your company on. And so most people collect up all of this information. So think of it is that it’ll have a subdirectory called legal. And that’ll be all of your organizational docs for your company, your, you know, your operating agreements, those types of things here, the second one will be financial, and it’ll have two years worth of supplier invoices. And it’ll have your different, you know, financial bank statements, those types of things. The next one is operations. And there’s a couple other categories there. But here’s the the the nitty gritty action item is that buyers are more sophisticated today than they ever have. And so if you show up in front of a buyer, and they say, you know, what are you thinking of Josh and you start negotiating, you might get one level of valuation, if you show up and you say, you know, hello, Mr. Buyer, here’s my data room, I’ve built it out. Over the last two years, I have all my invoices in order, I’ve got all of my suppliers. And I’m not going to show all of you to that. But I’ve already been thinking about that process, and you’re starting to organize your room, I call it like your room, the buyer wants to see it, as opposed to having the messy junk drawer in the kitchen. And then you have to go figure out how to do it while you’re having to build your data room right at the time that you’re the most busy, because you’re in the middle of negotiation. So really tactical item number one, and we’ll talk about what we can provide. But we can provide people in an example data room structure, so that it’s very, we’ve called it from, you know, 5060 different buyers and how they like to see it, you can do it in Gmail, it doesn’t have to cost anything, you don’t have to go buy a big virtual data room software, but start organizing your buyer and interesting, then your mindset will start to think like a buyer, which gets back to that earlier point. So that sort of tactical item, you know, number one, tactical item number two would be implement this Strategic Finance on a monthly basis, where every month, you don’t just update your accounting numbers on your profit, but you look at your balance sheet, your cash flow, your forecast, and the actual valuation of your company, what am I worth, and don’t see it is a pain, like most people see accounting is a pain, get excited that Oh, my valuation went up $250,000 This last month, because I, you know, hit the Next Level tier, and it’ll start to relate your valuation, to your day to day economics. So that’s the second one that I really always recommend that people get going on early in the process. And then the third, sort of, I’ll call it nitty gritty, tactical items that I think everybody, regardless of what seller you should have is you should start organizing your accounting, being thinking of add backs in mind and thinking about your structure in mind toward your exit. So I’ll give you an example is you own a brand, but you also own a consulting company, well, why not organize things so that all of your consulting expenses are in a separate entity, they never even hit your brand. Because otherwise I’ve got to go to a buyer and say, you know, I go to five conferences, and I had $50,000 of expenses. And you know, that should be, you know, added back before you calculate my earnings to then calculate my multiple, I call it the five for one mentality, when you’re growing your business, it’s very easy to you know, throw away a lot of money, but at some point you have to have, every dollar of profit that you can show is worth $5, or whatever multiple is, and most people don’t think like that. And so that that software that’s costing you 100 bucks a month, it’s not costing you $100 a month, it’s costing you $1,200 A year or $6,000. upon exit, you start to think about your business differently. So organizing, if you do have owner expenses, get all of your structures in place so that you’ve been tracking them for years, or getting into different companies. Otherwise, what ends up happening is that people, when you go in front of a buyer and you’re in you’re making a million dollars a year, but you showed another million of add backs, what do you think a buyer does, you know, they kind of go really, you know, and so that’s the third one is to think with the five for one mentality in mind, and structure your company well before you exit in these ways. And I almost guarantee you that it will help. This will add hundreds of 1000s of dollars to your valuation if not millions, by just adopting data room mentality from day one, Strategic Finance of all looking at all of the tear that And then third, designing your systems in your numbers structure so that you’re incorporating your add backs for right from the get go and getting expenses out of the company that don’t belong there.
Josh Hadley 49:36
I love that, Scott, that was amazing. Those Those are some knowledge bombs that you just dropped on us all. And I love to summarize you know the episode with giving people three actionable takeaways, but you did the job for me. So Scott, you’re the first you’re the first guest I’ve had that you summed it all up and like, here are your three actionable takeaways from listening to this episode. So thanks for doing My job for me, Scott. But I did want to go back to that that third tip that you shared there in terms of like setting up your accounting properly. And looking at the Add backs. Now did you say you should create a consulting company and run? Because I attend multiple mastermind events? I go to conferences, right or speaking or even running a podcast like this right? Are those types of you’re saying, like, create a consulting company to run those expenses through that, but then you’re kind of building the business so that it’s more Hey, tell me more about more about how
Scott Deetz 50:38
the nitty gritty of corporate structure is, there’s two ways to think about it, the horizontal and the vertical, the horizontal is what entities should I have? I’m Josh, should I have all of my assets in one entity? Or should I actually be horizontal and have Josh, Josh’s brand entity, okay, let’s say I’m selling a baby products. So I have Josh’s baby brand, Josh’s consulting company. And I might even have Josh’s payroll company where I keep my team, because if my mentality is that I don’t want to go sell the private equity, but I want to keep the goose and sell off the eggs, then what I want to do is I want to have a separate brand company that has a separate it’ll my consulting business is stuff that shouldn’t hit any of my companies. And then my team, I want to keep there and I can rent my team out there. So based on your Strategy, you designed the right horizontal, corporate structure. And you were right to ask me to dig deeper, because the Add backs are what are on the vertical side. Once I’m inside of an entity, what things do I add back. So the easiest way to get a buyer to sign off on an ad back is to never have the expense there in the first place. Yeah, that’s the move that that $5,000 trip to prosper from your, your brand company into your consulting company, because you legitimately do consulting, so then it never even hits the p&l. But if you’re somebody that doesn’t have a consulting company, don’t just create one fake good, because buyers will sniff through that. Now, they’ll look at it and say, I believe that this was an owner add back, because this is my professional development. And you’re not going to have that expense going forward and set up your structure. So that in your in your travel budget, let’s just say you travel, and then you have owner related travel. And then that clearly shows the buyer that owner related travel is meant to be an add back operational travel for your CFO that is going to be expensed in the business. Most people don’t do it that way. They just have travel. And when they get in front of a buyer, they got to go back through two years and try and figure out what’s this owner related or not. And they didn’t document it all along the way. And then the buyer pushes back on the add back and says hey, you really need this to run the business. If you set it up in different account codes, you know, literally a different chart of account of what expenses, you want to be add backs. That’s the vertical part. So if you do this on the corporate across there, and you do it on the vertical as an action item, I guarantee you that we can add hundreds of 1000s of dollars of valuation to your company when I sold my first company, you know, adopting this five for one mentality, we came up with over a quarter of a million dollars and added over 1.4 $1.5 million to the valuation by having a mentality of just not spending money unless it really is generating return for growth. It’s that powerful.
Josh Hadley 53:41
Awesome. Yeah. Thanks for diving deeper on that. All right, Scott, thank you so much for everything that you’ve shared with our audience. We’ve already wrapped up with our three takeaways that people should be implementing. I do want to get to the final three questions that I like to ask all of the Arla are guests. But before we get to that, Scott, where can people go to learn more about you? I think you also have a gift that you wanted to give our listeners as well.
Scott Deetz 54:08
Yeah. So the best place, northboundgroup.com is the website. But oftentimes people have specific questions about their situation. And if you want to reach me, I always want to be an advocate for helping sellers. My mission in life after I sold my company is I couldn’t believe I didn’t know. And then my mentor showed me, I did it wrong. And I tried to do it myself. I failed and then he got more than three times the price that I got. So that was when my eyes opened up. I said wow, I thought I knew how to sell a company because I knew how to run one. And so reach me at Scott my first name SC OTT at northboundgroup.com. And happy to take any individual questions and then we have a a workbook that walks through examples of a lot of these topics that we did here. So if you’re if you really want to say I want to move beyond theory to actually seeing a template of how to do some of these types of things, use that Scott at northbound group.com. And then what we’ll do is, someone from our staff will send you that out, you know, it’ll be one version will be blank, and the other one will show it filled out. So you can really kind of look at an example of how do I take this and make it more actionable. And then the last thing that I’d like to offer, I always like if there’s people that want to take action right away. If you’re thinking about exiting in the next year or two, and you just want somebody like myself to say, what do you see in my business? What should I be focused on, you know, those types of things, I always like to offer up, that won’t all happen in the next week, but the first five people that email me and say, I’d like a free 30 minute analysis. Me or My head deal person will hop on, and we’ll just tell you, you’re gonna run into a buyer, they’re gonna ask you about this, this, this and this, because I always like to reward people that say, You know what, I really want to take this to the next level. And basically, what you’re getting is somebody that’s going to beat you up about your business before the buyer does. In a good way, you know, in a polite way to help point you to some of the things that are going to be concerns that they might see that you can start working on now rather than waiting.
Josh Hadley 56:28
That’s a very generous offer from you, Scott. So to our listeners, I definitely highly encourage you to reach out to Scott, I know that just in our brief conversation we had before and even during this podcast, I’ve already had a lot of different mental and mindset shifts as to how we need to structure our business, the way we should be doing our accounting and running our books. And so definitely so much knowledge. And like you said, Scott, it came from your experience of when you are selling your business, you thought you could do it on your own. And then, you know, as you talked about your mentor that kind of guided you was like, Oh, he was able to get three times the value that I was initially thinking I could get to, I definitely think that everybody should speak with somebody like Scott, before you have those exit conversations or before you ever exit. And Scott, my final question there on that topic would be how early should people be reaching out to somebody like yourself in preparing to exit? Is this a five year game plan? Is this a one to two year game plan? At what point does it make sense to reach out to you?
Scott Deetz 57:35
Yeah, so there’s two different mindsets, some people think, right from the beginning, I want to design with the exit in mind. So for example, we’ve worked with people and actually helping form the actual vision of what they’re accomplishing. That’s kind of a minority, because most people get it up and going get it, you know, get it run and get it to a certain level. For people that are in this audience that are already at seven and eight figures, think of it this way, the buyers going to really look at your last 12 months numbers. So you know, at a minimum, you want to be thinking about this a year in advance. But if you want to do some of the key part that gets a premium valuation, most people think that you get a premium valuation by some magician named Scott that just couldn’t negotiate better, you know. And I would say, I, this is what I do for a living, I’m pretty good at negotiating. But what it really is, is that we work in collaboration to say, take one to two years out, take six to 12 months actually get these pillars get these systems get these things in place. In other words, realize the value before you exit can mean 100% increase in your valuation, whereas negotiating the premium value, you know, you’re not going to get somebody to say, oh, you know what, instead of a five, multiple, I’ll give you a 10. Right? But what you can do is say if I do these things, right, and I get this growth trajectory, I can get things going to where I’m twice the size, so that even at the same multiple, I’m better off, but then I’ll get a bigger multiple. So I would say the you know, the larger companies, if you’re just, you know, if your half a million dollars of earnings, and you want to just get out, you can do that in you know, six months. So we do those engagements as well. But for real strategic exits, I think six to 12 months, you know, at a minimum. And if you want to spend some time realizing the value before you exit, then thinking that 12 to 24 months. So you set the systems up and then know your numbers are going to be scrutinized the last 12 months. So you want to you definitely don’t want to wait to the last minute on that side. So I think that’s the bulk of it that how I’d answer that.
Josh Hadley 59:36
Awesome. Thanks again, Scott. All right, let’s wrap up with our final three questions. Number one, what has been the most influential book that you’ve read and why?
Scott Deetz 59:46
Yeah, I’ll go all the way back. As you as you notice, you know, I’m not my first exit was 20 years ago. So as I’ve been at this a while, the book that fundamentally changed our company was at the time I was called Good to Great on. And there were two major things. We had I, my first company was a software company, we had 75 employees, there were two major mindsets. One was there were lots of times that I thought good was good enough and I was missing out on great because I just thought good enough, move on to the next thing were great really rewards you, you know better. So if you have a good employee, or a great employee and software, a great a great developer is worth four to eight times as much as a good so always a really big mindset of you know, really go for great not just settle for good enough. And then the second one was they called it the having the right people on the bus and then have them in the right seat. And it was that constant shuffling of your team, I’ve got the right person, but they’re just in there miscast or, you know, I need an eight player, if I want an A company, by definition, I have to have a bunch of eight players. So that was that for those two reasons that was absolutely changed my whole way of thinking about companies, I was too easy on allowing B players in the company and I was too, you know, good was good enough. And then now I strive for great and what I want to do in life,
Josh Hadley 1:01:12
I love that I think those are big, important mindset shifts and, and that that book is a great book, to have those shifts of, we can always take our, you know, level of thinking to a whole nother level. So love that Scott. All right. Next question is, what is your favorite productivity tool or software that maybe you’re implementing throughout North bound? Or maybe something, you know, that you would recommend for sellers as well?
Scott Deetz 1:01:38
Sure, yeah. There’s the standard answer to this question. You know, yeah, we use, you know, monday.com as our kind of internal project client tracking. When you’re in my field, my favorite program of all time is, you know, this new product called Excel.
Josh Hadley 1:01:56
You know, and never heard of that. How do you spell that? Yeah,
Scott Deetz 1:01:59
you know, we built out an entire e commerce valuation modeling system, all in Excel. It’s a series of eight interlocking workbooks that we can look at any business and we can look at things and really understand where your valuation is going. And it’s all literally done through Excel. It’s so my point of where how I would really answer that is that very few sellers have a tools map. And what I would encourage as an actionable takeaway, is rather than thinking about the one tool that’s going to do it have actually a tool Strategy of what tools are in my company, why are they there? And how do they fit together? And we literally design a tools map, either in a PowerPoint structure, or you can do it right in Excel. But the point is, is that that’s when you start to look at the what are you trying to solve? So my answer to that would be other than my on my pet favorites would be create a tools map. And a lot of times, I’m telling you, we do a tools on it all the time on clients, when we force them to look at every subscription that they’re paying for back to five, for one, they all have three, four or five tools that they got excited on late at night, that they’re not using the testing of money, and they never got up and running on it. So it’s a great way a tools map forces you to get disciplined about what tools that you have in your company and identify gaps in what you need.
Josh Hadley 1:03:20
Awesome, great feedback. All right, last question, who is somebody that you admire or respect the most in the E commerce space? And why?
Scott Deetz 1:03:28
So there’s, I mean, there’s such a long list, you know, because what I love about this industry is that you’re literally working with the future innovators in Marketing and Entrepreneurship. I mean, you know, so for me, it’s been, you know, kind of the most valuable thing in my life, I came from the insurance industry, which was, you know, pretty stable, pretty boring, you know, kind of thing, and this is all about innovation. I’ll call them out and they may be embarrassed that I did, but we were the advisor that this is public knowledge that can be shared that help the helium 10. Exit, and so Manny Coats and Guillermo Puyol, I got to know really well. And for me, they’re some of the people I admire and respect the most not just because we got to work together and do a very successful transaction for them and for Providence, strategic growth and assembly, who they exited to. Because the when I first met them, and I was talking with Manny and he, they started from their own podcast, not about what they could talk about that was going right. But what was going wrong that we could be open about and share something and fix it. And I always just respected that mindset of how do I deliver value? How do I not blow sunshine, but how do I really doubt the nitty gritty of the problems and they built a whole company, a very successful company that happened to be in Software. But what it really was, is it was in mindset, and it was in brand and it was in engaging with people in the right conversations that actually move them forward. And you know, and so, you know, obviously, with what you’re doing is very similar. When you have that as your mindset, you just have a different way of thinking about it, because you get down to what the failures are, and how to fix them, rather than just trying to either sell a product or those types of things. So two great human beings, but came from the right mindset that, that are kind of near and dear to my heart, and now I’ve sufficiently embarrassed them. So that makes me feel good, too.
Josh Hadley 1:05:37
I love that I didn’t know that you worked with them. I had met Manny at a War Room Mastermind group meet up. And yeah, I mean, their story is just amazing, right, and what they did with helium 10. And that’s become like the industry leading software, right, who doesn’t know about Helium 10, and one of the vital tools, so very cool, glad you have that opportunity to work with them. And Scott, thank you so much for sharing your knowledge with us today. Is there anything that you think, you know, we needed to share with our listeners that you didn’t get a chance to share?
Scott Deetz 1:06:11
Um, yeah, I think the biggest thing actually would be probably on that topic. You know, if we recorded whatever we’re going to do a follow up, it’d be Scott told me about the 15 things that went wrong in a deal. So that I can avoid those, you know, dig through the failures. And kind of, you know, I’m glad with this was, you can only cover so much in an hour. But you know, every deal that we do, we do a post mortem analysis on it. And as many deals as we’ve done, we’re constantly picking at ourselves, you know, we could have done this better, we could have advised the client better there and it for you as a seller, you know, to learn from the experiences of exits that didn’t go well can be very valuable. It’s not just about saying that turnouts are bad, I’ll give you a perfect example. A lot of people have that myth now, no burnouts, good or bad. But you got to understand what goes wrong to then design so that the reward of it is worth the risk, you know, and those types of things. So yeah, that’d be the one thing. You know, if you’re thinking about exiting, you know, don’t use failures as a reason to say I don’t want to do it, learn why it failed, and then design it around that particular topic. Because, you know, you really can learn a lot by not just forming ideas about things, but actually, you know, learning about what went wrong, and then designing your company to avoid that.
Josh Hadley 1:07:34
Awesome, Scott. That is one question I had that I know we didn’t get the time to ask is for case studies of failures and what to avoid. Let’s see if I can bend your arm to have you come back on another podcast. And have you share those because I think that’d be super, super valuable to our listeners. So yeah, that’d
Scott Deetz 1:07:52
be a great part too.
Josh Hadley 1:07:53
Awesome. Well, let’s plan on that. But for now, we’re gonna wrap up this episode. Scott, thank you again for joining us. We’ll look forward to part two.
Scott Deetz 1:08:02
Awesome. Sounds great jazz, take care.
Outro 1:08:05
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