Scott Deetz 5:18
Absolutely, yes. And I think you’re absolutely right. The way my mentor taught me was that the best time to figure out how you’re going to get out of a business is before you even get into it. Because it changes everything that you do when you’re running your company. So for those of you that might be listening to this, or watching this and saying, Oh, I might not be exiting for another year, another two, or even another three, you know, I really want to reinforce that topic that, that you start planning for your exit early. And most people don’t do it because they don’t know what to focus on. And hopefully, we’ll give you some things that you can buy focusing on what the mistakes are, is a great training ground for focusing on what you then should be doing to get a maximum value for your company. So what we’re going to do is we’re going to break things down, we call it the Dirty Dozen, the top 12 deal mistakes that you might make, and how to avoid them. And what I want to do is I’m gonna break them down for foreign for four of them that you should be thinking about before you even go to market, four of them that people typically make during the process. And then four of them and actually people make after their deal closes. And I really want to put some focus on that, because a lot of people tend to think that the deal is over when the first deal is signed. And that’s absolutely not the truth. So let’s get into it. And I’ll kind of walk through, here’s the list of the three, we’re going to go through a slide on each one. So I’m not going to read all of you read all of them right now. But a lot of them as you can see, start with the word not that you’re not doing something that you should be doing. And that’s by design when we looked. And by way of background, at Northbound we’ve done about a half a billion dollars of exits in this space over the last six years. So all of the things that we’re talking about are real mistakes that our clients ran into, and that we had to work with them to still try and get a premium deal done. So this is real live things that you can learn from everybody else’s mistakes going through the process, which ideally helps you to get the best exit for yourself. So on to number one, category one, before you even go to market, the number one thing that people don’t spend enough time is eliminating what we call deal killers. Okay. And for each one of these, you’re going to notice I don’t like giving problems out without a solution. So for each one of these problems or mistakes, we’ll outline a way to think about it. And in this one, we call it implementing a compliance and risk management plan. And what we mean by that is that there’s a number of things that you could be building up in your company that are actually deal killers. And they tend to be in the four areas here, you aren’t compliant with your products, maybe you’re selling to children, and you don’t have the right certifications. They could be things relating to you don’t own your trademark or your intellectual property in Europe, but you’re selling in Europe, Amazon health issues, you’re getting a bunch of listing shut down or even your account shut down. And then oftentimes, we see even with people that are entrepreneurs, they don’t have all of their legal documentation in place. And maybe they have a partner, or they lost a partner in the business. So the first thing to think about is building a compliance and risk management plan. Most Amazon and e-commerce sellers don’t have one. And simply what you’re doing here is identifying the risks to your business that could kill a deal and then working well before you go to market to eliminate them.
Josh Hadley 9:00
Yeah, sky, I think this is so important. And this is definitely sets the foundation, right? Whether you are going to exit your business or not. This is like as a business owner, these four areas should already be on your radar, right? Are you compliant? Because another way that you could we’re talking about life changing money, you want to talk about a way of having life changing money taken away from you is being sued that for millions of dollars, right? And so the product compliance, right IP trademarks, like these are just like foundational things. But to your point, Scott, you’re saying that people are coming to you, and they still haven’t buttoned up these items. So I completely agree with you like this is foundational for business success. If you want to scale from seven to eight figures. You’ve got to have these covered, let alone if you’re going to exit
Scott Deetz 9:53
Yeah, and that brings up one of the other adages I always like to say, going through this list what’s good for selling Business is very often great for running a business effectively. I recently spoke at an e-commerce event and I asked for a show of hands, how many people in the audience have a risk management plan in place where they identify the risks of the business and what they’re doing to manage it, and it was fewer than 5%. And so yeah, thinking about what can go wrong, and planning ahead is critical. So if we go from that, and as you can see, we have a pyramid here that builds we go from the deal killers, the next step up that we see is inaccurate financials. And the solution that we have found that works best is holding what I call a monthly CFO meeting with yourself. Most solopreneurs, or small businesses don’t have the ability to have a full time CFO, on staff. So they skip a critical part, which is every month looking at your historical accounting. And as you can see here, 90% of the challenge is typically in physical goods, businesses in the cost of goods sold calculations, they don’t validate their numbers monthly with the appropriate inventory, sub schedules and reviews. And they run in then to problems where they might be under reporting shipping and duties, or other types of challenges in their numbers. So the way to think about it is that you should be looking at not only your profit and loss on, you know, whatever the tool is that you use every day, but actually looking at your books, not just your profit and loss, but your income statement, your balance sheet, and your statement of cash flows. And I recognize for many sellers, they may not have ever looked at these. So the first time that you look at them, they will look yeah, like, what’s the purpose of this, but trust me with the sellers that we’ve worked with, when you implement this process, and start looking at things like the change in your networking capital and other types of things, you’ll really start to understand your business from the numbers to a much better level. And we’ve oftentimes gone to market with sellers that had inaccurate financials, I’m thinking of one about a year ago, they were overstating their profits by over $300,000. And at a multiple of a 5x multiple, it was a $1.5 million adjustment in the price, they thought that they were going to get for their company. And there’s nothing like the feeling of waking up one day thinking that you’re gonna get x and then realizing that you’re gonna get $1.5 million less than that. That’s not a feeling. And it all could have been solved by having accurate financials before you even go to market.
Josh Hadley 12:37
Yeah, Scott, this, this is such a fundamental, just good business practice that we really need to focus on. As we’ve had different accounting partners that have come on to the podcast, I’m astounded in the number of entrepreneurs that are fearful of looking at their books, they don’t understand the accounting reports. And so they just, they, they pull the sheets over their heads, so to speak, and they just kind of pretend that it doesn’t matter, right? Hey, what I see on Amazon, look, our revenue just keeps increasing. So surely the business is doing well. But implementing that monthly financial review is one of the most important business decisions that you can make. It’s been that way for our business. You want to talk about identifying risks, you’re able to see, hey, what costs are creeping up? Am I starting to hire too many team members? Is my overhead expanding unnecessarily while my revenue isn’t expanding at the same rate is, you know, our advertising, PPC clicks, keep the cost per click keeps going up? Right. So do your tacos that overall, you know, return on your ad spend? Does that keep increasing? Because if it is that’s eating away at your margin? Scott, I’m curious, you know, accurate COGS is 90% of the challenge. That’s what you talked about here. We have found that in our business, we have done a lot of cleanup in that aspect. And we’ve been working with an accounting firm for five years at this point. But yet we discovered there were some inaccuracies, with the accrual side reporting of cogs. And to me, I was like, How in the world did this happen with an experienced accounting firm? Is there any light extra light that you want to shed onto what is the proper way you know that people should be accounting for cogs? Because I think this is the biggest adjustment that ends up needing to be made when it comes to you know, negotiating deals.
Scott Deetz 14:34
Yeah, absolutely. The way that I think about it is that having every one of your products having an accurate landed cost per unit that you track monthly on a sub schedule, so if I’ve got 30 products in my business, I literally see 30 products down on the rows, and then each month I see a column of what the latest Um, landed costs and landed costs for everybody is not just the product costs, it’s the product cost plus the shipping and the duties and having that broken out and each month reviewing them. And if you had a large invoice come in, you know, updating that information and making sure that you that’s what I refer to as this appropriate sub schedule, and making sure that that ties off and that you’re getting that information to your accountant, and that they’re giving you feedback. So the second part of this is that if you’re using oftentimes a bookkeeping service alone, they’ll take your numbers. And what you need to do is the second step is produce the sub schedule sheet. But then you need to confirm for them that it matches the invoices that they’re seeing, and not just have them sometimes we see what’ll happen with bookkeeping firms is they’ll just say, Oh, you told me the number was $5. But they don’t go look at the invoice. And there was actually six. So it’s very important that you ask your your your bookkeeping service, whether its internal or external, to say I need your help, you are not just an input the data service, you are a validate against my invoice service to make sure my cost of goods sold is accurate.
Josh Hadley 16:15
Yeah, Scott, we could spend the next hour talking just about cost of goods, and how to track that. But I just want to reiterate this and we’ll move to the next one. Number one, when you’re when you’re purchasing your your products, right from the manufacturer, if you purchase in higher quantities, right, you’re going to pay probably a smaller cost per good. But then next month or three months down the road, when you need to repurchase that inventory. Again, you might need a lesser quantity, which your the cost per unit will probably be a little bit higher. And in addition, we saw with COVID. And you know, the shipping rates and freight has just fluctuated up and down so many times like all of that needs to be accounted for. And so that’s what you know, Scott’s referring to, when he talks about those sub schedules and looking at on a on a monthly basis, you’ve got to reconcile that inventory and say, All right, what’s this, the average cost of goods sold here for this product for this particular period of time, bring it all together. So long story short, if this is news to you, and you haven’t lifted up that hood before, and you’ve just been coasting on whatever cost of goods that you provided to your accounting firm or accounting Partner A year ago, you need to go back and take a look at that, because this is really going to throw things off when it comes to selling and also just reading accurate financial statements for your business.
Scott Deetz 17:40
Yep, absolutely. Okay, great on the number three, so number three then translates from the historical accounting. It’s called not understanding the future potential of your business. And so now we’re shifting, accrual accounting and looking at that I call it that’s like looking in the rearview mirror the car. But as you drive your car for any length of time only looking in the rearview mirror, you’re probably going to crash into something. It’s critical that you understand the future potential of your business. And the solution is that you prepare what we call a worst base and best case forecasts, to present to yourself and to a buyer. So you shift from this historical accounting to forecasting cashflow management and scenario analysis. And the way to think about it is the base case is what you think is going to happen. Okay, the worst case also called a buyer, we’ll call that the underwriting case is what I call the “take it to the bank.” What do I know is going to happen, even if all my new products don’t go, Well, what is going to happen to this particular business, and that’s something that they can, you know, loan against. And then the best case is what could we achieve together, part of finding the right buyer is finding the buyer that has the most synergy. Giving a quick example. We found a buyer for a, it was a eight-figure transaction, but we found a buyer that was aggressively ready to invest in new product development, was willing to commit to over a million dollars of capital to growing new products, and was committed to never running out of stock. So was willing to double the amount of inventory because they knew that it was more important to stay in stock for the business, then try and be really, really efficient with cash for that particular buyer that allowed the seller to then invest on double the number of products they could get to the market. And over a two or three year period, they hit all of their contingent payments, and they’re what’s called roll to equity, the value of the shares that they didn’t sell increase. So it’s very critical for you to know this in advance. And the other reason this is critical is because if you know what your business is going to do in the future, it even impacts when you should decide to sell because the time Hang up when you exit is critical. And it’s impossible for you to know when to sell. If you don’t know what the future growth of your business is not just in the next 30 days, but over the next 612 and 24 months. And most importantly, if you want to achieve that growth, how much cash is it going to cost you to be able to do that. So it’s absolutely critical. You don’t have to do you know, libraries and libraries of Excel spreadsheets to do this. But you have to have some understanding of this in order to time your exit, and, frankly, negotiate the right deal structure for your business.
Josh Hadley 20:33
Yeah. I love that. Scott, because it also highlights what are some of the risks in your business, right? When you have to think about like, what’s the worst case? How do you build upon and say, How do I remove those risk factors that that affect that worst case scenario, right? And how do I solidify that. So I love that Scott, great summary.
Scott Deetz 20:55
And then my last point on this one is that many people don’t do this, because all they hear in the marketplace is that buyers only buy based on trailing 12 months earnings. And nothing could be further than the truth, they calculate the valuation based on your trailing history. But the reason I always say that they don’t care, they only care about the future is that’s the only profit that they’re gonna get. That’s the only cash they’re going to receive what you made last year you already spent or invested in the business. So if you don’t give them the future, picture the business, they’re going to be happy to trade based on what you did last year. And if you’re a growing company, you’re leaving money on the table, we’ve added hundreds of 1000s and millions of dollars to deals by showing buyers, not just a if I get money, and I can double, but a real plan for the growth of the business and getting the buyer to sign off on that plan is critical to them paying a premium multiple for the business. Okay, this is now related to that is a lot of people have heard somebody say, Oh, well, you want to maximize the profit and slow down the growth in the year before you exit. And again, that is a very dangerous or slippery slope. The solution is don’t just look at your profit as the only variable or the initial valuation, even as the only variable, you want to look at what we call your lifetime, affective multiple, or your lifetime affective valuation. And that is the sum total. Because for everybody that’s listening to this, if you have a cash buyer that is paying 100% cash for your business, almost by definition, they are not your highest bidder, because they’re bearing all of the risk. And because they’re bearing all the risk of giving you 100% cash up front, they are going to lower the multiple that they pay. So almost everybody is going to have some form of either rolled equity or stabilization payment or something that’s contingent on the future success of the business. And if you slow down the business rate, before you exit, you have three different things that can happen. Number one, if you sell a business that has a new growth pipeline, you’re going to maybe have a little bit less profit, because you’ve been investing in the business. But you’re oftentimes going to make more than up for that by having a higher multiple. So instead of having a million dollars of profit, that’s not growing, where I might only get a three multiple, that’s 3 million bucks, if I only have 800,000 of profit, but I’m growing significantly, I can easily get a four multiple, and now I’m getting 3.2 million. So oftentimes slowing it down doesn’t even help you get more value. But also having growth will make sure you hit your contingent payments. But it’s this last one, that’s the most critical thing to recognize growth in the business dramatically increases the likelihood that you’re going to sell this business at all, I can’t tell you how many people have come to us, they slow down the growth of the company. So the company is flat, because they don’t have any new products and the other products are already out there. And then you work really, really hard to try and exit it. And you can’t find a buyer because every buyer has seen something that grew, then it flattened up. And what’s the next thing that they think of after something grows and then flatten is going to happen? Josh? It’s only going to go down? Yep. And who wants to go with a call a catch a falling knife. Okay, so you need to have growth in your pipeline before you go to market and exit.
Josh Hadley 24:21
Scott, I think that’s a super, super important, like mindset shift that our listeners need to understand. Exiting a business is not, hey, when I run out of ideas of how to grow this business, that’s when I’ll exit the business. You’re planning the exit of your business. And for example, you’re going to go to exit and say, Hey, buyer, I’ve got 18 months worth of new products that I’m going to launch. I know exactly what I’m launching. I know when I’m going to launch those. I need the capital to fund these. Here. I’m also going to be getting into international channel expansion. Here’s the groundwork we’ve already laid. Things are already moving in the right direction, like, there’s still a lot of meat on the bones. And I think that’s a huge mindset shift. It’s not I’ve tapped out everything I can do. I’m not sure where to take this business next, hopefully a buyer find some good ideas for this.
Scott Deetz 25:14
Exactly. Yeah. And my last comment before moving on to the next phase is, I always like to say I hear a lot of times people will say to me, Well, my business is going great and growing. I don’t want to sell right now. And my answer back to them is that may be true. But always recognize there’s only two times that you can sell your company, one when it’s going well. And two, when it’s not going well, and there’s no buyers. Which brings you back to number one. So okay, so now we’ve talked about some things that you need to do before you go to market. Let’s talk about for those of you who wonder, when I get into the deal process itself, what are some big mistakes that you see, number one is this, they don’t think from the buyers perspective, and the solution might sound kind of vague. But this has been the most helpful sentence that’s helped me in mind negotiating. And in, as I said, hundreds of millions of deals that we’ve done our dollars in deals, you’ll always have to remember, it’s not what the seller is selling, it’s what the buyer is buying. And the corollary to that is every time that you might want to make a statement about what you want, don’t do that. But ask a question instead. And I’ll give you an example. Many sellers will say to me, I want to sell my business, and I want to leave within 90 days because I want to go do something else in life. And they want me to tell the buyer that. But if I go tell the buyer that I am focusing on what I’m selling, not on what they’re buying, and I’m making a statement that’s either costing me a negotiating chip, when I could instead ask a question, you know, you can tell we have a great business here. What is your impression of what would you like from the seller after the transaction, and oftentimes, you’ll find the buyer will say something like, oh, you know, we definitely would like them on for a few months, you know, to make sure that everything goes smoothly, and then we’re going to incorporate it into our larger oil overall platform. Okay. So if I had led with what I wanted, I would have done it the wrong way, and maybe offended them. But once I realized that they’re really buying the skews, and they’re buying the profitability, but they’re not buying me the seller, then I can ask a question. And I can structure the right deal. So every time that you think about saying something that you want out of a deal, focus first on how you can get the buyer what they want, and what they’re actually buying, because that another buyer might look at it and say, Hey, I’m buying Josh, I want you to stay on for a year. And I’m willing to pay you a premium multiple for you to watch over this next holiday season. So this is just an absolutely fundamental perspective. And the last comment I’ll make on it is just think about what you do with your Amazon or e-commerce listings. When you go and list your product, you don’t, don’t go tell people what you want as the seller, you show the benefits to them. And that’s what gets them to buy. All you’re doing with your business is thinking about your buyer, your ultimate buyer is just like your ultimate customer of any of your products.
Josh Hadley 28:23
Scott, I couldn’t have said it any better that was going to be my analogy is to say, how are you marketing your products online? You’re not focused on you first, hey, buy this product. So I can go sit at the beach? That would be terrible. You want to promote? What is the buyer? What’s their intent? What are their goals? What are their dreams? What are their ambitions, speak to them? And then that’s where things come to fruition? Right? So well said, Scott. Absolutely.
Scott Deetz 28:50
Yeah. And whenever you get into a deal, and you feel like you’re at a logjam with your buyer, it’s usually because you’ve lost track of this. And you need to take a half a step back and start asking questions, what is their problem? What are they trying to achieve? And then, you know, leveraging folks like ourselves that have been through the process a lot of times and coming up with creative solutions to see if there’s a match. And if there’s not, then there’s no deal to be had. So related to that is most people think that the way that they get the premium valuation for their company, is by showing the upside of the company. And while that’s important, the thing you need to do first is you need to demonstrate the minimal downside and then show the upside. And it’s due to a very key factor. Most people have heard something called ROI return on investment, or what buyers will often call yield, and they’ll go oh, I want to show them that I’ve got a higher yield. You can pay me five times earnings for my multiple because I’m growing so much that you’ll still earn 30 or 40% on your money, but the actual equation is the yield divided by risk. And this is a critical concept for people. So if you think about this as if my overall yield here is a 40%, return on my money, and my risk factor is a one, then it’s a 40 divided by one. But if I feel another business over here is twice as risky, even if that one might be a 50% yield, if it’s a two on the risk, 50 divided by two is 25%, risk adjusted yield. So most sellers have, you know, don’t think a lot about what the analysis are that the buyers are going through. But if you think about it this way, the easiest way to change the overall number isn’t to increase the growth only. It’s to decrease the denominator and get them closer to thinking that wow, no matter what happens in this business, I’ve got so many new products coming to market, I’m in a protected environment, it’s a clean company, there’s no deal killers, I think my my chance of getting my money back out of this is like 80, or 90%. At a minimum, that gets you a premium valuation. And what costs you a premium valuation is when they say, Wow, this thing could double. But it could also get cut in half. That’s going to keep those multiples low. So most people don’t spend enough time explaining the risks to a buyer, and then demonstrating how low the risk is in their particular business.
Josh Hadley 31:23
Scott, do you have any specific examples that you might be able to share? That might be like, what types of risks? Right, we talked about Amazon account? health risk, right? That’s one thing. We talked about not having your trademarks and things like that. But what are some of those other like risk factors that you feel like sellers can be actively trying to mitigate?
Scott Deetz 31:45
Yeah, so I’ll give two answers to that one general. And one specific, the general rule of thumb is that every new question a buyer has to ask when you explain your business to them, the price goes down. So you want to think about being able to explain everything up front so they can see the whole package and see what it is. And I’ll give you a great example of risk. If you are thinking of exiting in 12 months from now, making sure that no matter what you don’t have any stock outages, and you get the capital financing in place to show the run rate of the business, while it has stuck in place. Because every time there’s a stock outage, a buyer has to ask the question, why did that happen. And it either happened because you didn’t plan accordingly. Or that this business is so up and down and volatile that it’s going to be a lot to handle. So buyers love boring businesses. And so being able to show the ability, I kind of say that in jazz because everybody wants something that’s kind of fun. But flashy and volatile, is not what buyers are looking for. So there if you just think about the risk of your business, demonstrating that you’ve been able to maintain a similar price for a longer period of time, demonstrating that you’ve been able to maintain a stock in inventory, demonstrating that you’ve been able to maintain rank. So the way to think about it is just to look at your p&l and look at what are the numbers that could change that a buyer would be most afraid of them changing. And then designing a risk mitigation plan that shows them demonstrated evidence of why they don’t need to fear those things. And that’s in addition to all of the compliance things that we talked about before. But those are some specific examples of making sure to show that your business is not risky. And then also from an ownership standpoint, making sure that you have all of your documents in order. All of your suppliers are people that you’ve worked with that are reputable, those types of things.
Josh Hadley 33:51
Awesome. I think those are some great points and great examples. Okay, seven, right. Yeah, number seven.
Scott Deetz 33:56
Now, this may seem to some of you, it might be biased, because obviously I’m a professional deal, team. person. But I’ll say that to you in this sense, with even as many deals as I have done in my life, I sold my first company 21 years ago, and my investment banker at the time, got more than three times the price when I tried to do it myself. So that tells you what an idiot I almost was. But I wouldn’t even sell my company myself, even though I’m in that business. And there’s a number of reasons why. The number one reason why is that your job as you can see in the solution is to continue leading your company. And if you have to leave your deal and your company, something is going to get what’s called short shrift. You’re either not going to spend enough time leading the deal, or you’re not going to spend enough time leading the company and the growth of the company is going to suffer and there’s nothing that buyers love to do more than renegotiate for a lower price if they Notice that your company is struggling right before you go to the deal. So bringing a professional team, and this is not somebody that you want to be, quote unquote, rookies, you want to have an independent representative, that’s your deal quarterback, they can push on buttons that you can’t, you want to have not just your general lawyer, but an m&a expert lawyer, you want to have a transactional tax accountant that gives advice on the deal. You want to have somebody that helps you with due diligence and get you all of the schedules that you need to send to the buyer, you want to have a personal wealth management planner. And then if you have key staff that you want to bring into the deal, or let them know about it, you got to step up the bar with them and say, Hey, I need you to help run this company. While we’re running the deal. If you don’t have that last one, that’s okay. But think of this as presiding your team. And if you don’t do this, it is the the age old statement of you’re bringing a knife to a gunfight because you can certainly bet that a buyer is bringing all of the different experts on their side to the table.
Josh Hadley 36:05
Yeah, I think this is so important in so many think of how do I save money, right, and they see, oh, man, I’m exiting for $10 million. And they’re taking x percent of all of this, like, that’s a lot of money, that’s hundreds of 1000s of dollars, right? But the amount of downside there is of not having those experts in place is much higher, just as you noted, your multiple can go up, and also just helping prepare you. So I cannot expand upon this any further than you did here, Scott, because this is just such an important aspect, like, do not try to do this alone. Or else you will just kind of exactly correct, you will get rekt by a buyer, they’re going to take advantage of you, you’re gonna get a lower multiple, you think you’re saving money, at the end of the day, you’re not and it’s probably a lot more stressful for you having to navigate that all alone. And on top of that your business has probably started to go down because of that.
Scott Deetz 37:03
Okay, and number eight, the last one in this section is not locking down a detailed letter of intent, you have to recognize the solution is that all major terms in your loi need to be done there, because that’s the last chance you have to negotiate with true leverage before you go exclusive. So let me explain what this means. When you sign a letter of intent. It is the stage after you’ve agreed verbally that you’ve got a match between yourself and a buyer. And now before you go write what’s called the final legal agreements, the asset purchase or the stock purchase agreement, you are going to write a shorter document that is called the letter of intent, which is non binding. But it basically says in the next 60 days, we intend to close a particular deal. Oftentimes, the mistake that we see is that people will sign an LOI with a lot of gray area. But every loi that I’ve ever seen signed in this industry is a exclusive loi, which means that during that 60 day period, once you sign an LOI with this buyer, you can’t take in other offers. And the reason why that is is because the buyer is not going to invest 100 to $150,000 of due diligence only for you to then walk across the street and sell to somebody else. So if you think about that, the time to get all of the detail as much as you can specify it out is while you still have multiple buyers at the table, and multiple loi is in hand. So the key things you want to be thinking about is number one, you want to give them what we call the pre loi due diligence packet. So we always like to prepare materials for them and say, Hey, before we go under loi, this is what our numbers are. This is what our profitability is. If you have any yellow or red flags in the business, maybe your Amazon account got shut down, you know, eight months ago, you let them know what it was how you resolved it. And most people tend to just generally out of embarrassment or whatever reason they don’t want to put the hard things on the table early, but you’re the one who loses if you don’t do that. So whenever we help you go through an LOI will always work with a lawyer to make sure that we get all the legal terms in there. We’ll get things in there such as, what are the fundamental warranties and representations you’re making about the business? We’ll get in there, what the price is, what the terms are when the cash will move money, and a number of other things. And the critical thing for you to understand at this level is don’t just take the buyers loi and think that that’s a deal done. You want to negotiate when you have the leverage, which is before you sign that loi
Josh Hadley 39:47
awesome, that’s super important. It kind of goes back to what we previously talked about right is being prepared being upfront mitigating a lot of those issues, but understanding the importance of you know, negotiating prior to the LOI is so key. So I love that Scott, let’s go to number nine. Sure.
Scott Deetz 40:06
And so now what I’m going to do is I’m going to actually take a leap from the LOI to you got your deal done. And I did that intentionally. The reason I did that is it’s a whole nother topic, to talk about the negotiating of your purchase agreement. The only thing I’ll say about it is that you’re gonna probably even if you do a detailed loi, there will probably still be 30 or 40, different things that you’re negotiating between the LOI and the purchase agreement, that’s out of scope for this discussion. But that’s why you need that professional deal team to help you. But now let’s talk about you get your deal done. And for most sellers, what they think is they think, oh, after the deal is completed, I’m done. And the act, the actuality is, is there’s still a lot of mistakes that can be made here. The number one mistake is not forming a positive buyer relationship. And you might say, Well, wait a minute, I sold the business to them, who cares whether I get along with them or not. And here’s why it’s so important. You want to see this as an opportunity for you to learn how you can contribute to a larger organization. Now, that’s one major reason why you want an independent negotiator. Because if you’ve had to negotiate really, really tough, there’s no other way to say it is that there’s a little bit of negativity that can get built up during that process. You want them I always say you want, I always want the buyer to like you, Josh. But they have to respect me the adviser, okay, but you’re going to want to work with them after the sale, even if it’s only two or three months, or if it’s two or three years. The second reason you want to do that is because you’ve got money at stake. So stay involved and advocate for decisions to help make it happen. But the last one is what most people don’t think about, if you have a good relationship with your buyer, then the likelihood of any post acquisition lawsuit will go down dramatically. If they see that you’re willing to help this be a success. Most of the time when people get in lawsuits, if the business doesn’t perform after, you know, let’s say you sell the business and the business goes down, how often is a buyer gonna blame themselves? Or how often are they going to blame you? And the answer is, if you’re there actively all the way, part of what you’re doing, it isn’t about how much money you get on day one, it’s how much money you get to keep over the lifetime of the deal. And yes, there’s always going to be an above zero chance that you might get sued if they find out something about the business that was different than what they thought maybe there was an IP complaint in Europe that they didn’t find or something along those lines. So it’s very important for you to stay engaged with your buyers to mitigate that risk.
Josh Hadley 42:45
Yeah, Scott, I think overall, like as we go through these mistakes, one thing I see a common pattern and trend of is that look, when you’re trying to exit your business. This isn’t you saying for the most part, this isn’t, I just want to sell my business and just completely walk away, I’m just not interested in the rest of this. And there might be some dead bodies here or there, I’m not going to disclose those, they don’t need to know about these, it’s all good, they’ll be able to navigate around this, like when it comes to exiting a business, you need to be transparent, you need to be like actually care about the success of your brand. Moving on with the next buyer. Typically, you’re going to have future upside or you should, with whatever deal you structure or some stability payments as well, that you should be incentivized to see this continue to succeed. So it’s all kind of just best practices like actually care and show up. Yeah, absolutely.
Scott Deetz 43:45
And, and many people I like to bring these up, because a lot of these, when you hear them, they sound obvious, but if you aren’t told them, You have like you said this, this thought of oh, I can sell and then I want to I want to kick back because you will be tired by the time you get through a process. But it you know, the concept to think under is that if you think with their lens in mind, you’re also helping yourself. And if we go to number 10, then a lot of people once they get the initial deal done, there’s a lot of legal documents moving around, and they don’t create what we call or what we can build for our clients. So it’s called a deal tracker. It’s a simple spreadsheet that gives the dates and the amount of money that you expect when you’re going to get things to do what I call project manage your deal after it’s completed. So in almost every deal that you do, if you’re in physical goods, you’re going to base the value of the company on what’s called estimated inventory. But you are going to then reconcile it with the actual inventory because it’s a moving target every hour. Obviously, as you’re selling product. There’s going to be a future contingent payment in six months, 12 months or even two years later. And there’s going to be things like when do my general promises about a business’s expire, do they expire after a year or after two years? Well, it’s very critical to know that because that’s when you know that you’re sort of in the clear. And then there’s a number of things in the in the purchase agreement that are specific things that have to happen by specific dates. So for example, if a buyer doesn’t true up to actual inventory within 60 days, but you think that they underreported it, and you don’t take the 10 days that’s in the agreement to dispute what they sent you, you literally create what I call a foot fault in tennis, where you can no longer fight on that particular term. So it’s absolutely critical that you work with your advisory team to understand the deal. And think of it just like any other project that you project manage, this one probably still will have hundreds of 1000s or millions of dollars at stake. It’s worth it for you. And you know, one of the things that I say when you when you work with Northbound, we ride along and stay with all of our sellers well after their transaction to help them with this area, because it’s so critical that you get it right. And otherwise, you can literally have one little thing that you missed up on that can cost you hundreds of 1000s of dollars.
Josh Hadley 46:12
Yeah, Sky think this goes back to the earlier point in the mistake when people tried to do it alone. Could you imagine tracking all of the tiny little details in your purchase agreement. And, you know, make sure you’re truing up inventory. If you have 10 days to come back to us with any feedback, or else it’s it’s history, right? There are going to be so many little nuances like that. Try, you know, imagine trying to track that. So, again, another another reason to have a professional team on your side that’s been through this process, they know what to look out for, they are going to help you stay on top of those things so that you don’t lose out on again, hundreds of 1000s of dollars.
Scott Deetz 46:52
Yep, absolutely. Okay, number 11, then not staying on board to make sure you hit your contingent payments. And now this one’s going to be a little bit controversial, because everybody has in their mind that the thing that they’re gonna go do after they sell their businesses, I always say go hit the beach. Okay. Now, the rule of thumb that I always like to do is if you have a two year earn out period, you want to make sure that you’re around and involved on some level for one year to 18 months, or 50 to 75% of the time that you have money coming in. And the reason is, and I’m sure there’s a lot of people out there that are listening to this that heard about somebody that sold to a buyer or an aggregator that then the business went down, and they didn’t hit their earnout. Okay, now I’m happy to say at Northbound we tend to negotiate things a little bit differently, that we’ve really been able to mitigate that issue by using a different types of transaction structure. But the reality is, is if your business doesn’t continue to succeed, you’re going to find that you’re losing money along with your buyer losing money as well. And the second point here is that most people think that they don’t want to stay around, because they’re imagining their life like it is today. I call it the your the do everything entrepreneur and working 60 to 70 hours a week. But what the buyer wants to do. Remember, it’s not what the seller is selling, it’s what the buyer is buying, they want to buy your strategic brain. So imagine if you could design a role to where you can continue to be the strategic leader of your brand for some period of time, you have more capital than you’ve ever had available to you. And you could get off all of the things you don’t like like maybe managing logistics, managing Amazon cases, and a bunch of other things, it’s a really unique time to ensure that you get maximum value for your company. But don’t most of the time, people don’t want to do it as they’re thinking that I’m going to work 60 hours a week, oftentimes, you’re maybe only sticking around for 1015 hours a week. But just by staying involved and making sure that the buyer doesn’t a make bad decisions, but be that they continue to see the opportunity. And every business has a scarce amount of resources. So the more you can be the squeaky wheel to get more good things going for you. It’s worth it for you, and it protects you. And it’s oftentimes a very different experience. Because they know if they asked you to do everything like you’re doing today, you’re just going to up and quit. So think about it in that light and recognize that if you have money on the table, it’s worth it for you to stick around 50 to 75% of the time, if not 100% But a lot of times if you’ve got a two year earn out, or a year or now by month nine or month 18 The cake is pretty much baked if you really to just want to get out of you know having to work full time.
Josh Hadley 49:44
Yeah, Scott again, I think that’s another big mindset shift for people when they’re exiting a brand, not just saying like, Hey, I walk away and the next day I’m just at the beach like you said, right? That’s that’s not the best way to go about this. And it’s not that That’s way to approach exiting your brand, again, be invested in the long term be invested in the success of that buyer. And again, everything will just grow to a much better fruition. If you continue to stay involved.
Scott Deetz 50:15
Yep, absolutely. Which brings us to the last of the Dirty Dozen number 12. And this one is the most personal of all of them. And it’s not taking your time to figure out your next adventure. And the solution is, is you need to recognize that you’re now going to be seen in a new light in the entrepreneurial community. So you need to take some time off to enjoy your accomplishment, and many sellers will jump right back into something familiar. I hear it all the time, all startup, another Amazon, Brian, or I’ll start up another ecommerce brand. And the thing that you want to think about is that you’re now a as you can see, here, in the last point, you’re a proven commodity. And many investors like to bet on the jockey not the horse is the analogy. And so most people will think that they need to take their own money and start up their next venture when they don’t need to. When I started up my next venture after I sold my first company, it was a software company, I was able to bring in seven figures of capital into my company, even though it didn’t exist on anything other than on paper, because I found an investment partner that wanted to invest in me, because they know that I knew how to build a business toward an exit. And so it’s very important to me that everybody do doesn’t just jump back into the first thing, but take some time I see this mistake all the time is you go right back into something familiar, you think you have what’s called the Midas touch that you can never fail. So you put all of the money that you worked so hard to get into your exit, to put in your your bank account or your investment account. And now you’re putting that money right back out again into your next venture, which might be risky. So really think about whether or not you want to even use your own money, or you bring in an investor into your next idea. Because you’re now the brains, you can partner with the money and make sure that it might be something completely different. I was in the b2b software, business. And then I shifted to b2b, digital marketing. And then I shifted to being an Amazon seller myself for three years. And now I’ve shifted into helping achieve life changing ad sets, for people, very different businesses, but each one has gotten more rewarding than the last one, because they’re new challenges in life. And if you only have so many years that you want to be an entrepreneur don’t just think that your job is to be successful at for E e-commerce businesses. Now, maybe that is your path. But do it consciously and take enough time and meet with enough people, you’ll be in a different community or sphere, once you have capital. And you’ll be meeting with different types of people take advantage of that. And don’t jump too soon, right back into something familiar.
Josh Hadley 53:08
Scott, I love that. For me, I just experienced a mindset shift to when I consider exiting, it’s not, hey, now I’ve got all this money that I could go invest in a new product brand or something like that, or to go start a new business. I love that analogy of like, Hey, you’re the jockey, right? And they want to bet on you. Right? You can go find investors to go fund your next deal, let your money that you just earned go work for yourself. And that that now becomes a super high floor for you for the rest of your life. Right that you don’t need to work the rest of your life if you don’t want to. But hey, obviously you find a lot of passion through work. So go do that through other people’s money. And again, you’re, you’re hanging out in different groups after you’ve probably exited a business than you had before. And so the amount of capital that you can have access to is much greater. Scott, we
Scott Deetz 54:04
we help the seller last to put a fine point on that we help the seller rather than owning 100% of their business, they owned 85% of the business, but we helped them get $1.5 million of capital to grow it. Well. I’d much rather not have to put the 1.5 million in myself and own 85% of something than have 100% of it and have to put all of that money back into your next ventures. So yeah, that’s a very real life example. And so for everybody out there, I’ve really enjoyed going through these 12 And if you think about these solutions, you’ll be a smarter seller and on your way to getting a premium valuation for your company.
Josh Hadley 54:42
I love this Scott Scott, this has been amazing. You have shared some fantastic strategies and insights as it relates to exiting a brand. I think this brings it all full circle here. You should take these 12 You know, mistakes that other people have made when exit in their business, and you need to consciously plan them into your business today, right? Start from number one, and start mitigating your risk. Start with number two and continue. Not only is that going to help you build a better business overall, but it’s going to help you have a much greater exit. And again, if if you’re not actively doing something every week to exit your brand, which is going to be your biggest liquidity event in your life, then you’re making a mistake right there. So, Scott, if people want to reach out to you, they want to learn more. They didn’t get enough from this podcast, and they need to ask you some extra questions. Where could they find you at?
Scott Deetz 55:41
Yeah, absolutely. As I hope everybody can tell, this is my life passion. I want to help every entrepreneur get what they deserve. So if you have individual questions, you can go to our northboundgroup.com is our website, Northbound Group, just all three words together dot com. And if you want to reach me specifically, or if you’re interested, we do a lot of exit strategy planning work with people. Well, before that they’re thinking of exit if you want to have any discussions around that. Or maybe you just are stuck, and you’re in the middle of a deal. And you want to have a second input. I’m always here and reach me at my first name Scott@northboundgroup.com. And make sure to, you know, hear what your situation is. And, you know, I’m here to help as a as a resource on your side. Or if you’re thinking about exiting now or in the future, we’re here to help you as well. So yeah, this has been fun. This has been a lot of new content that I haven’t put out before. So it was really fun to put together Josh
Josh Hadley 56:40
Scott, thanks again for putting this together. I definitely encourage all of our guests if this is something that piques your interest, reach out to Scott, he’s a wealth of knowledge. So Scott, thanks again for your time and coming on the show today.
Scott Deetz 56:53
Yeah, you’re welcome, Josh. It was great talking with you. Take care.
Outro 56:57
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