John Ovrom – The Exit Plan

John Ovrom:
It’s hard because you’re basically telling an owner that they have to let go of control, and control is not something they’re good at letting go of. And you’re also asking them not to be relevant and to accept change because someone is going to do it different. If I put a new CEO in your seat or you empower your COO or your senior management team to start making decisions, they are going to make them differently. You didn’t get the title for CEO because you earned it. You’re not a CEO CEO. You’re just an entrepreneur. Now you have to turn this into a management company and professionally manage, and they don’t know how to do it, and they’re scared.

Dana Robinson:
Exit Plan is a podcast for business owners and those who want to be business owners. I’m always in search of the lesser known stories of entrepreneurship. In the exit Plan podcast, you’ll hear stories from startup to sale and hear from the professionals who helped business owners achieve their exit. Hosted by me, author and private equity manager Dana Robinson, along with my co hosts and guests, you’ll hear real stories, tips, and tools that will help you plan for the exit you want, whether you are still working at a day job or running a business. Let’s get started with this episode of the Exit Plan podcast. All right. Hey, everybody, it’s Dana Robinson coming to you with the Exit Plan podcast. I am excited to have.

Dana Robinson:
On today’s episode, John Ovrom, both an entrepreneur himself who has been through a business cycle of growth and exiting a business and actually runs a brand of consulting that sounds a lot like my podcast. It’s the Exit Plan podcast with John Ovrom from Exit Consulting, which helps business owners prepare for and navigate the process of selling their business. So we’re going to get a lot of great information from John today. John, thanks for coming.

John Ovrom:
Thank you, Dana. Look forward to the conversation. For sure.

Dana Robinson:
All right, so I’m sure you could write the book on how to prepare a business to sell. We’ll get there. But what I love about a consultant or someone who does investment banking or helps sell businesses is that you did it. So take me back to your business journey when you were an operator.

John Ovrom:
So, I was raised as a military. My dad was military, so I moved around a lot. So my dad’s definition of here, I’ll pay for everything you need, and you got to pay for anything you want. His definition of need and my definition of need were very different. So I pretty much started working when I was 14 years old, pulling weeds, brush, doing whatever I needed to do, just to buy the things that you want, right? If you want new fishing gear, ski gear, scuba gear, whatever you want, right? So I always found working for myself was very. I very much enjoyed that. I never had a job in high school. I would either be refereeing or mowing lawns or fixing houses, doing sweeping or cleaning, whatever.

John Ovrom:
I just did not like going to work at a restaurant washing dishes. That was not my thing. When I went to college, I got an accounting degree because basically, when I was asking around and I was getting advice, I said, if you want to work for yourself, what degree should you get? Is it marketing, a sale? Business finance? And they said, no accounting. They said, if you learn your numbers, you can be much more successful because business makes sense, but accounting doesn’t. And my dad was an engineer, so that kind of math made sense, right? Debits and credits. I mean, it was definitely not a pickup line in college, right? You don’t go to a frat party and say, hey, you want to talk debits and credits and assets and liabilities like, hey, baby, baby. Right? But it was a great platform. When I got out of college, I went and worked for Arthur Anderson.

John Ovrom:
Now I’m dating myself here, right? Did the audit side of things and then turned 25. I’ve been there for three years. They were really trying to turn me into an accountant, and I really didn’t want to do it. Decided to go into partnership with my cousin. He was graduating from Cal Poly San Luis Obispo with a construction management. I’d worked a little bit of summer construction, but he’s like, let’s open up a construction company. And I said, all right, six pack of beer, a couple of napkins later, two knuckleheads, a 23 and a 25, went, sure, let’s go do it now. This is in 91.

John Ovrom:
So if you remember the tech bubble in 91, right? I still remember going to my audit partner and saying, hey, I’m going to quit and I’m going to go start my own company. It’s going to be a construction company. And he was like, where did you go to school, boy? I was up in the Bay Area. He was in San Luis Obispo. We moved back down to San Diego. That’s where my family was. His family was. And so we started construction, and he was a military kid, grew up all through construction, did a construction management degree.

John Ovrom:
And really what we learned is if you just say what you’re going to do for the price, you say you’re going to do it in construction.

Dana Robinson:
Wow.

John Ovrom:
There’s a lot of work. Like, the bar is so low. You showed up, you did what you said you were going to do, and you charged me for that enormous amount of work available if you just do those three things. And I didn’t have a particular passion about construction. I was more interested in the business side of things. So I did more the back end stuff, and he did the project stuff. So I’d help him in the field, and then I’d go back and do estimates or pay the bills or do what we need to do. And then we kind of grew it.

John Ovrom:
And then that was my cousin and I. And then we brought my dad in to help financially back us because we kept growing. So what could possibly go wrong, Dana, with three owners being family members and multigenerational, like, nothing, that’s the essence of the perfect partnership, right? So you can see where this is going. Cousin and I ended up having a bad job. That went bad. We got into a lawsuit because of a basement we were building, and the neighbor is going to be in, and he quit. I’m sitting in the basement with a lawsuit, and my dad and I was like, I’m never going to quit. We’re going to fight this thing through.

John Ovrom:
So fought through there. And then I bought my dad out, and I said, hey, dad, I don’t want a partner. I’m not going to do this again. He’s like, but this was kind of my future, too. And I said, yeah, but I’m just not going to do it. So I’m buying you out. I’m going to give you your money, plus return, and I’m going to do this myself. So that’s what I did.

John Ovrom:
It wasn’t well received, but my dad was very respectful. I mean, he understood.

Dana Robinson:
Okay.

John Ovrom:
And then I ended up building the company up and growing it, and we ended up getting about 50 employees. And then I started picking up other companies, contracting companies, and plumbing and elections. And then I started to get my real estate license and buying properties, fixing them, and flipping them. And next thing you know, you’ve got five entities, some LLC, some S’s, some C’s, different year ends. You start playing the game, and you’re trying. And construction is a tough way to make a living, though, and you can make money at it, but they’re always one lawsuit away, one bad job away. So I was turning 40, and I said, I’ve been doing it 15 years, and I thought, I just want to do something different. I want to go back to being a suit.

John Ovrom:
I’ve checked the box. I’m doing great. But 120 years of the economics of this was saying, because I went through 95. Stay alive to 95. Right now we’re in 2001, 2002, things are clicking. Now I’m in 2005, and I’m like, this is not going to keep going. So I sold everything. I sold my real estate, I sold my business.

John Ovrom:
I sold everything just to get a reboot because I was running so fast, I didn’t have time to really know what to do next. I just had too much going between kids and chamber and rotary and marriage and trying to work out and see your butt. I mean, it was out of control, not out. It was just the way I liked it. I could only blame myself. And so I thought I would just sell it all. And I still remember going through that process, and it was a terrible experience. Selling my business was horrible because the brokers didn’t give me any business advice.

John Ovrom:
They just said, we’ll just put it on the market. Yeah, but there’s got to be some ways about here. And I try to talk to my CPA, but like all good professional service providers, I only wanted to pay what I wanted to hear because I’m a business owner, right? I wouldn’t say I had the highest end CPAs and I wasn’t willing to pay for it. And I didn’t have the highest end attorneys because I didn’t want to pay for it. And I figured I could just do it myself. And it was a bad experience. I ended up getting through it, ended up selling it, selling a bunch of stuff. Unfortunately, I closed in 2006, and by 2008, we know what all happened.

Dana Robinson:
Yeah, your timing was good, despite the fact that you went through the transaction and probably left money on the table, right, exactly.

John Ovrom:
And I took paper, and then he became on the seller carry.

Dana Robinson:
Okay, so the seller carry didn’t get paid back, and there’s probably nothing for you to repossess because the economy tanked and the real estate construction businesses went down.

John Ovrom:
There you go. And so now I’m sitting up, my wife saying, you remember what I told you I was going to get out and I was going to. My wife’s a very supportive entrepreneurial wife, which I will tell you is a gift in itself. I didn’t know that. I thought I was normal, but I’ve learned entrepreneurial is different than a business owner. And so she just said, hey, I’ll support you wherever you want to go. And I said, great. But I had my own little personal burdens that I put.

John Ovrom:
And I came to her and said, oh, we’re in trouble, like all good entrepreneurs. So going back to being, I said, I’m just going to go back to a suit and I’m going to go back and I’m not going to run a service company. And what I found, though, is what I love to do is help people. So I ended up helping some other construction companies because now we’re in 2008 stuff. It’s the fan right now, we’re trying to help them and just trying to peel out different families, different issues, different partners. And I found kind of a niche in helping business owners with partners struggling and trying to figure out what’s the best way to help them through this. One wants to leave, one wants to stay. Two brothers son, particularly in construction, right.

John Ovrom:
There’s a lot of multigeneration, a lot of key employee handover. And I started to do that, and I was just helping a lot of guys through that process. And then I kind of moved into, well, they didn’t want to do it. Can you sell it? And then I found out from a broker’s license. So do you know in the state of California that I have a real estate broker’s license? And I have been buying properties now for 15 years. Qualifies me to go sell your business.

Dana Robinson:
Yes, I have a broker’s license, although I did get a series 79, which is the finral license at one point. It’s how I met Gabe, one of my partners. And sure, I thought I would do better being a fancy FinRa licensee. And it turns out it doesn’t matter. It’s all about relationships. There’s not some jewel in your crown for having a FINRa license versus a broker’s license. But anyone listening, it’s got a California business. A real estate agent or broker can transact your business.

John Ovrom:
I thought when I called up cab, I said, hey, guys, what kind of classes, what kind of certifications, what kind of specialty? They’re like, none. And I went, are you telling me that I have the ability to go represent somebody else and sell their business when I have not done anything but bought houses and condos and things like, yes. Well, that explains a lot to me on why some of these brokers don’t know business, right? Like, that’s why it’s important, right? I didn’t know. No one told me. I didn’t know the difference between an investment banker and a business broker. Someone said, call this guy. And so I did. And so I started to build a business around servicing business owners and entrepreneurs in this one event called an exit, because I always feel, and I still feel to this day, that when people think of an exit, they think of, I have to sell my business and I have to quit.

John Ovrom:
And that’s not true. You can exit your business by not selling it, but still leaving it as an employee and you can own it and get recurring. You can also sell the company and stay as an employee. You don’t have to do both. But that’s not a concept that most people bring to them. They’re always just an exodus. I got to close and leave. And that’s so fearful for people.

John Ovrom:
They fear it.

Dana Robinson:
Yeah. And as you indicated, I think to rephrase it, maybe what you missed when you sold your business was there was no one there to tell you what you didn’t know.

John Ovrom:
There’s no advocate. That’s the piece.

Dana Robinson:
Yeah. And someone to say, here are options you don’t know exist. They just took your business and know, we’re just going to do this. And same with the accounting. I’m sure you didn’t have someone that recast your accounting under GAAP and gave you all the add backs that are going to increase value.

John Ovrom:
Didn’t do anything about cash free, debt free. Didn’t tell me about me having to pay off the debt that I was going to have to pay taxes after, like, nothing. They just said, here’s your sale price. They gave me no understanding of what my actual net. So what we do now is we look at it from a pure owner’s perspective. Like, here’s how much you’re going to get in cash. Here’s how the payments are going to work. Here’s in an after tax base is what you’re.

John Ovrom:
Because as a business, I wish someone would have told me. And then we go through all the different exit options because business owners need to know. They think they know, because we all think we know. But I said, you can just liquidate. Sometimes that’s the right answer, right? Sometimes you have too much in receivables and equipment that’s worth more than the company itself. It’s okay. Wind it down, take all your money out. It’s not bad.

John Ovrom:
That is an exit. A liquidation is a valid, very good exit depending on what you’re trying to achieve, right? You can sell it, but you can sell it to your partner, you can sell it to a kid, you can sell it to a key. Right? You can hire a CEO and just run it. Right? You can stay at your desk and die. Just make sure that I have life insurance. So when your wife calls and says, hey, John, died at his desk. And we have a company here and no one to run it. Fine.

John Ovrom:
Give me a million bucks, I can go hire a fractional CEO. We’ll get it cleaned up. That’s fine, as long as that’s your exit plan for it. I’m totally good with an exit. To die at your desk. Totally good with that. Because it is an exit. Just make sure your wife knows who to call.

John Ovrom:
And make sure that you have life insurance so it doesn’t come out of her portion of the estate because you choose not to deal with it.

Dana Robinson:
Yeah. There’s a lot of business owners that are never thinking about what happens if I die. So from your perspective, when is your ideal client going to enter into a relationship and start using you to consult? I mean, I know the transaction. The exit is sort of like the thing that probably draws people in, but you ought to be involved in some way, two years maybe, before someone thinks they’re going to exit.

John Ovrom:
So here’s the question. What is the definition of an exit? This is where I start with my client. So what’s an exit? Is an exit the last check you receive from the payoff? Is it the last day you worked after staying on for a year or two or three for your earn out? Is it that day? Because then you still give it. Is it the day you close? What is the definition of an exit? And we got to start with agreeing on what is an exit? Like, if you’re saying, I want to be done, done, all the money in my pocket, not go to the office, then I need five years, because that means it takes me a year to sell. Depending on the size, you’ll need to stay six months to a year. And typically financing is three to five years. Traditionally, it’s a five year exit. From the day today, if you said, I want to get out, and I go, great, when you want five years, okay, then we got to sell it right now.

John Ovrom:
And they’re like, no, that’s not what I meant. And I said, okay, well, then just agree on what you’re defining because you need to be clear. And most people. The number one answer, besides right now, what’s my number two answer when people say, I want to exit my business, John, how far out are they? Guess. Dana, you’ve got all the gut.

Dana Robinson:
Twelve months. They want to be done with this in a year.

John Ovrom:
That’s my number one answer. Then the number two answer is going to be, what’s after that? Guess here sooner. Five years.

Dana Robinson:
Oh, wow.

John Ovrom:
Because it’s far enough away that I don’t have to do anything, but close enough that I know that I’m going to exit because they’re either, like, right now or five years.

Dana Robinson:
Yeah.

John Ovrom:
Rarely do I get. I mean, I’d love two to three years. I’d love that data.

Dana Robinson:
Because five years is hard to take responsibility for. They don’t have to commit to things. They can punt on anything. It’s not immediate. Their legacy is not threatened. The ego that’s tied to owning that business is not under attack. Right.

John Ovrom:
We talk about relevance, right? That’s the number one piece of getting an owner ready. So we have, like, owner readiness, business readiness and market readiness. Those are kind of the three buckets we work on from an exit consulting. And the number one is owner readiness and under owner readiness, it’s really relevancy. What are you going to do now? Particularly if you’re a g one owner. Right. If you’re the original founder of Generation One, your name’s on the building. You started it from nothing.

John Ovrom:
You just moved in this country. You’ve raised the kids in this business. This is your identity because you are the founder. G two is a little easier if they took it over from dad or their uncle or their dad or whatever. By G three, there’s no identity issues for them. But for sure, g one, it’s this whole relevant, what am I going to do? And I literally had an 82 year old in here. And he said, I think it’s time to plan. I still got probably 15 more good years.

John Ovrom:
I was like, that is awesome, brother. I love the way you think I do. And he said, but you can’t tell my employees. And I said, I’m sorry. You don’t want me to tell your senior management team that you want to work towards an exit. And you’re 82 years old.

Dana Robinson:
They already know, right?

John Ovrom:
They’re scared you’re not going to walk in every day. They’re going to be excited that you’re finally willing to actually have a conversation. No, they need me there. And I went, you’re not ready to go, brother. I love you. Deal. But it’s just not ready. Because we talk about exiting for cause or for convenience.

John Ovrom:
Like that triggering piece, like when we talk to you and say, why are you going to exit? I’m turning 65. My wife says, I want to travel some more. The business is kind of tight. These are conveniences that you can kind of kick the can down the stream. Right. For cause is going to be. My wife’s sick. My partner’s leaving.

John Ovrom:
There was a death. There are divorces. There are reasons where we know that exit has to happen, but most of them are for convenience. Get kicked down the can because they’ll use price as a reason.

Dana Robinson:
Yeah, they have a number, right. I know from our private equity standpoint and my experience with buying businesses is the sellers always have a number and the numbers almost never market. So it’s a perceived value that says I will sell when I make $5 million on the sale. And it’s uncorrelated to what the business is really worth. Which means that they’re going to be on this treadmill until someone comes along and decides they’ll overpay. Right.

John Ovrom:
Which never happens.

Dana Robinson:
Which never happens.

John Ovrom:
By the time they’re ready to start thinking about it, they’re already on stage four or five and it goes down to six and seven in the world of business, right. And they’re like, but I think, look at my corner, I’ve got a great lease, okay? But it just doesn’t, they don’t. My greatest question my clients will say is how much would you sell my business for? And I said, what will you sell it for? Because that’s more important than what I can sell. If you tell me what you can sell it for, I’ll tell you what the value is. And I said, here’s the value. I’ll make a deal with you. I’ll sell your business at fair market value. That’s all I can sell it at.

John Ovrom:
Yeah.

Dana Robinson:
Buyers are only going to pay what the market asset is worth.

John Ovrom:
So if I bring you three offers that are all within this range, you will accept one of those offers then, because that’s now the value. Well, it depends. It depends on what you just said you would sell it and you want to sell it. Fair market value. That’s how this works. Now we can play terms and we can play some other things, but in the end, what do you want? Do you really want to sell it? Because I can only sell it at fair market value. If you are waiting for some person to walk along and just go, you’re my dream child, that’s fine. But as a business broker, I don’t get paid unless I sell it, right? I can spend a year, 1000 hours on this and never have a transaction.

Dana Robinson:
Yeah. I’ll point out for people listening that in the world of real estate, you don’t do much to make a market. Because we have an MLS, right? There is always a market. It’s almost, it indicates fair market value automatically. Liquidity is to some extent certain, based on whatever you can always sell a property, you just have to lower the price to what the market is business. You actually have to make a market which is done by either broker or an investment banker. And so you’re making a market which takes a lot of effort. Right.

Dana Robinson:
I mean, if you’re talking about a year of making a market, you’re going to target specifically buyers and investment groups that act as buyers. So someone who has a business that wants more of them, or a group, a private equity group, for example, that says, we have platform, or we’d like to buy into this space, making our markets a lot of work, maybe just a quick education for people that are going to build a business, sell a business, talk about the role you fill and the work that goes into that, the interesting stat.

John Ovrom:
And I will try to be more conservative so I don’t overstate, but real estate transactions sell about 97% of their listings. So things that go into costar will sell a little over 97% will eventually will sell businesses, around 20 to maybe 30%, depending on the transaction. Two thirds to three quarters will not sell. And the main reason why is that the assumption of value and the owner’s involvement in the business, higher EBITDA’s higher margin, where you have management teams in place and you have diversification of risk between customers and vendors and things that they’re easier to sell. But the smaller mom and pop businesses that are under 510 million in revenue, where it’s an owner centric business, very low sale chance, because their perception is who they are and they’re not willing to walk away from it. And they would actually rather shut it down than sell it out if they end up screwing it up until they shut it down. And it’s terrible. But there are more qualified buyers than there are qualified sellers.

Dana Robinson:
Yeah, and there’s a lot of sellers coming on the market every day. I mean, as boomers retire and sort of age out of their businesses, and there’s no legacy planning, the kids don’t want it. There are a lot of sellers. And you’re saying there are a lot more buyers who are qualified, capable, willing and able, but no buyer will pay more than fair market value. Right. There’s just a rare. You can’t bank on it. Someone will come along and maybe say, we’d like something special here.

Dana Robinson:
We’ll pay a little more than the other guy. Sure, but no one pays what a seller in their head is magically made up as the number that they are willing to sell to.

John Ovrom:
Well, it’s a house or it’s a real estate building. No one’s going to go pay 30% over market unless you’re going to live in it and it’s a neighborhood you want. So there might be someone once in a while, but for the most part, I might pay a little bit more over if. But in the business world, there’s so much risk that all they do is raise the price and then put the burden on the seller by carrying out financing over a period of time, having to be an earn out versus a payment, spring it out, so they pay with the profits and then they go leverage the crap out of it and put a bunch of debt on it. And it buries the company and they change the culture. And it’s a tough way to make a living. That’s why there’s not that many brokers in the world of real estate, in the world of business over real estate, because it’s just a harder way to go. Proving value to the client is really figuring out how to increase the number of buyers.

John Ovrom:
Pretty straightforward, right. Because that determines price, right. The more buyers I have, the higher the price I can get. I got one buyer. It’s hard to negotiate. So how do you work with your sellers to make it more interesting to more buyers? And this is the part where the business owners don’t understand. They think it’s just like, oh, there’s a bunch of buyers. Someone’s going to love me.

John Ovrom:
Well, no, you got mold in the ceiling. Your house smells like cat piss, right? You’ve got a green. It’s like, you guys, we need to clean your house up and get you some more people want to buy you. You can’t have one good profitable year and say, sell me now.

Dana Robinson:
I’ve been through this as the buyer of businesses that are in somewhat, I’ll say a shambles in some cases. I took over a nursery, a nursery I bought many years ago. Had shade cloth blowing in the wind. It had holes in the greenhouse and it was sad. And a lot of the value I added was to turn all that around and make it less sad. So I’d done some fix and flips, but what are some ways that can be maybe less fix and flippy? But what do people need to do with their business to make it appealing to add value that’s accretive quickly? And is that part of your, do you consult them through that?

John Ovrom:
Yeah. So half our business is in transactions. The other half is really dealing with prep and prepare and getting them ready through either the quality of earnings or go through what we call a business assessment or an exit assessment and really try to help them understand how a buyer is going to look at it and then what we can do to get the number that they want. Because oftentimes the price isn’t what they want and so they want to help developing what it would take to get there. Because our answer isn’t, you can’t get there, it just means you haven’t done it in the last 35 years. Doesn’t mean you won’t in the next five. I’m just telling you, if you want to know what the market is going to bear, here’s where it is. Right?

Dana Robinson:
Yeah.

John Ovrom:
I would say probably the number one deduct in the value of a business is the owner’s involvement and the lack of management team in place.

Dana Robinson:
Okay, I was going to ask, what’s the top thing? That’s a mover. The driver is portable. Management is what we use in the industry. Right. So the owner needs to be capable of not being in the business and own the business as an asset, have it generate profit. That doesn’t require that they work an hour to generate a dollar.

John Ovrom:
Correct. That’s our biggest problem.

Dana Robinson:
How quickly can that be fixed in your experience? You’ve probably seen hundreds if not thousands of people in this position, and they all hear this advice and they all want to do it. So how hard is it? How long does it take? Is it a high failure rate?

John Ovrom:
It’s hard because you’re basically telling an owner that they have to let go of control, and control is not something they’re good at letting go of. And you’re also asking them not to be relevant in the business and to accept change because someone is going to do it different. If I put a new CEO in your seat or you empower your COO or your senior management team to start making decisions, they are going to make them differently. And you didn’t get the title for CEO because you earned it. You’re not a CEO, you’re just an entrepreneur. Now you have to turn this into a management company and professionally manage, which is a different style. And they don’t know how to do it. And they’re scared.

John Ovrom:
They’re scared of letting somebody else in the driver’s seat and drive the. Just. They fear it.

Dana Robinson:
Yeah, I mean, there’s a lot of literature out there. Emyth by Michael E. Gerber is sort of the epic beginning point where people go, oh, I see, I’m the entrepreneur and I need a manager in here. But I’ve seen so many businesses owned by friends, people that are clients of mine when I was practicing law that just couldn’t. They’d see the aha. The moment where they go, I need to be not in the business, and other people need to do that. It’s so hard for them to get, to escape that. And then, as you say, they’ll always be dinged on value because they’re stuck down there in it.

Dana Robinson:
Dana Robinson here. Quick plug for my book, the King’s Flyswatter. You can see it here behind me. If you’re watching this, I’ve got it in my hand. It’s a beautiful hardcover book, printed to make giftable, something that you can share with a family member buy as a gift. So this latest book, it’s a fable about a person who has a really crappy job. Let’s just start there. This is a book that most people can relate to because we’ve all had crappy jobs.

Dana Robinson:
This is the story of Ubar, a servant in the court of a babylonian king who masters his boring, monotonous job and then learns to listen to the king, hearing him rule the kingdom while quietly swatting flies behind a king. Eventually, Ubar becomes the wisest and most successful man in the kingdom. The story is fun, and it’s easy to read, but it’s not mythology. It’s my story. And as I shared the idea with colleagues and friends, I learned that it was their story. And guess what? It’s your story. If you’re at a job of any kind, one that you love, one that you hate, one that’s just enough to get by. This little book gives fresh perspective on how to leverage that job to get you something greater than a paycheck.

Dana Robinson:
The lessons in this parable are entrepreneurial lessons, but not what you might think from the current entrepreneurial zeitgeist. If you or someone you know are looking for a real pathway to entrepreneurship, here’s the secret. Your job is the way out of your job. It’s counterintuitive, but once you see how it works, you can’t unsee it. Learn the way of the Flyswatter from the parable of Ubar and from the stories I share from my 30 year business journey. You can get a free copy of the King’s Flyswatter by going to danarobinson.com.

John Ovrom:
And I would love to know if there was a secret sauce. We deal with it every day. I think what it is is that business owners are actually really bad at managing because the G two s and the G three s that are taking over actually have EOS management professional training. Entrepreneurs are cowboy, street fight and figure it out stuff and their ability to manage. Now, I’m not saying that dictatorship is not a management style. It is. It does work. It’s just hard to scale.

John Ovrom:
So buyers want to scale, and they can’t scale under a dictator. And the problem is business owners, they can’t manage. They don’t know how to facilitate a good professional management team, and they don’t want the boundaries on themselves because they’re going to suck at following the guidelines. And they fear all of those same rules that the program will put in on them, and that’s what they don’t want. It’s fascinating.

Dana Robinson:
It’s very fascinating. I think just to mention that you mentioned EOs. That’s entrepreneur operating system. It’s based on traction, a book by Gino Wickman, which is essentially an application of Emyth, which we just mentioned in terms of the. It systematizes Emyth at a certain inflection point in a business where you need, I think, nine employees and some critical seats. But owners are not good at deploying that. The people who deploy that, the same with six Sigma people sort of following operational excellence, implementation, are people who are paid professionals. Right.

Dana Robinson:
They execute on a methodology and use systems and processes that an owner simply can’t or won’t. Right, right. Because, as you say, they’ve been self employed. They get to wake up when they want, do what they want when they want, and that dictatorship prevents them from really being able to execute on the boring day to day business operations that you need in order to have escape velocity as an owner and get out of the gravity of the business.

John Ovrom:
And my wife will say, john, it’s easy to be gracious when you’re king, right? Because I’d be like, no, I’m giving them all they can do it. And they’re like, no, as long as they do it your way, the way that you’re supposed to, the way you want to do it, then you allow them to do it. That’s not managing. And I go, yeah, it is. Look, I said, go be successful. Just figure it out, budy. I figured it out. You figured it out, right? Like, I’ll meet you at the top of the mountain.

John Ovrom:
And they’re like, no, that’s not management. And I’m like, dude, I don’t have time or patience to teach, babysit, help, hold hands, just go win. It’s pretty simple every day. Go win. And that is just not how employees work. That’s not how management works. That’s not how you grow and scale. And that is a major choke point for so many businesses is that it’s an owner operated business, and we got to convert it to professionally.

John Ovrom:
That’s where the whole lower end PE market is taking these owner operated and turning them into professionally managed by picking up two, three, or four of them, rolling them all in, building the systems, and there’s good return on it because the business owners liked making the lifestyle. They were making half a million bucks. Three quarters of it’s good. Like, why grow? Why get bigger? I just turn those customers down. I just don’t really hire anybody else. That just means more work, needs a bigger office. I’m good. When the business is trying to grow up and move out of the house and go to college and get married, and the parents are like, freaking chaining them to the door going, you can’t grow up and leave me.

Dana Robinson:
Yeah, that’s a great analogy. So many businesses that get stuck there, and particularly in the service business, we saw that when I was working in the HVAC and plumbing space. Lots of businesses stuck at 3 million of revenue. Their owners taken 400,000 out of the business. They’ve all kind of, like, enjoyed the fat of the land, bought a house that’s maybe a little bigger than they’re capable of paying off when they take their exit. And they’re not putting 20% to the bottom, right. They’re not running a 20% EBITDa margin. There’s no portable management.

Dana Robinson:
And getting that business in that position is. I guess you’re saying it’s rare that people actually get over that.

John Ovrom:
It’s rare because change is hard, and the older you get, it gets harder. And business owners, typically, we’re dealing with 60 and 70 year olds for the most part. I mean, kind of when it deals with that kind of exit, they don’t have it in them. They just are like, I just would rather just sell it the way it is. I mean, COVID was a perfect example, right? You literally had people just drop the microphone and walk away and just go sell it. John, I’m done. There was nothing. I got enough.

John Ovrom:
I’ve got the time. I don’t feel like fighting through this. I don’t want to spend the next few years fighting through it. And there were some good businesses that we sold that picked up really well because they were still good. It’s just the business owners didn’t have the fight in them. And unfortunately, that experience forced them to come up with their readiness. And so the business wasn’t ready. But we sold it because we sold it at.

John Ovrom:
For market value because they were like, sell it. I mean, every car can get sold. $1,500, 15,150. I don’t know. But I’m telling you, like, I would tell every client, I can sell your business. I might get you a dollar for it, but I can sell it. My question is, will you sell it for what I can sell it for? And it’s a challenge, for sure. It’s great for clients to understand.

John Ovrom:
And if I had anything, Dana, to try to help the business owner going through considering an exit, understand that it’s not easy. It’s just not. And it’s much more emotional, I think. This is not like selling a car or an RV or a boat. This is their identity. This is who they are. This is their life. This is their paycheck.

John Ovrom:
This is their medical. This is their 401, everything. And for them to come to the place in their life where it’s asking Tom Brady to retire in New England when he’s got everything, like, why go to Florida? Really? Because you needed, what? What more did you need to accomplish? And the reality of it is, he didn’t except for himself. He wanted more. And I will tell you, I was talking to one business owner, and this is my own self rationalization, because I am an entrepreneur. So I will justify it this way, because people say, you need to quit. You need to retire. You need to.

John Ovrom:
You need to. And my comment back was, musicians are still playing in bands. Actors and actresses are still in movies and TV. Right? Artists are still painting. If this is what you are and who you are, and it is who I am. I don’t want to leave because I really enjoy it. And why is that bad? Why do people say, you have to leave? Because if I am an artist, don’t ever stop painting. And if you’re an actor and if you want to write music, write music.

John Ovrom:
If you want to be an entrepreneur and run a business, run a bit. That’s not bad. Just know that that’s who you are. Now, if you’re doing it for other reasons, there might be reasons. But if you are what you are, own it and be okay. And just let the family know that that’s who I am. There are guys that I’ve been seeing now, I’m an 80s guy, so I’ve been to some of these 80s guys bands, and they should have checked off that stage, but, hell, they’re having fun. Like, dude, what’s wrong with that?

Dana Robinson:
Sure.

John Ovrom:
I mean, don’t tell people they have to get out. Exiting isn’t necessarily that you have to leave your job and you can’t do something. Have fun. Yeah. As long as you’re doing it honorably and you know who you are and you’re doing it great if you’re doing it because you fear and you’re scared. We deal in fear every day.

Dana Robinson:
Yes. And there’s plenty of ways to plan for the things that you’re afraid of. For example, life insurance. If you like staying in business and you’re worried that you’re going to leave your spouse with a business, bolster up the life insurance, be sure the business can pay for it or begin to work your way out. Have a manager that you give some equity to and begin to work your way out of the daily grind, but stay relevant to the extent that you need to. Besides the owner always getting in the way, not able to get out of the business, so you don’t have portable management. What are some of the other key movements that a business needs to make to prepare itself for an eventual exit?

John Ovrom:
Over the last probably five years, we’ve seen a pretty good number of deals blow up because of the lease and the real estate because they lease too.

Dana Robinson:
Much space in a market that’s no.

John Ovrom:
The lease rates have gone up so much and they’re like on a five year lease, and then the rates go up so much more, like in the manufacturing side and the distributive side. And we can’t sell it because the highest and best use is not for that business anymore because they’ve been there for 35 or 40 years and didn’t. And a lot of times they own the building. Right. But I’m saying, if you own the building, it’s worth way more if you kick this. So the business is not worth selling it because they have to stay there because they can’t relocate because of all their equipment. And we actually make more by selling the building and just wind down the business.

Dana Robinson:
Interesting. Okay, so that’s a problem I haven’t seen. That’s fantastic.

John Ovrom:
Yeah. We’ve been struggling now with a lot of manufacturing and distribution just because of lease rates. At least down in San Diego particularly, we can’t get a new five year or ten year because SBA wants you to have a lease as long as your note. So if it’s a seven year note, they want a seven year lease and the landlords are going, that’s fine, but it’s going to hurt. And now our EBITDA got dropped because we’re using the past three years not the next seven years. And so then the value decreases and then the owners are stuck.

Dana Robinson:
Yeah, that’s a good one. What about owners that have not kept the pace with inflation on their pricing? You find the inability to sell because the owner who wants to sell hasn’t kind of followed best practices with increasing prices over time.

John Ovrom:
I would throw it in an overall bucket of them not running this like a business, whether it is lack of investment in it stack, whether or not it’s not putting more money into a piece of equipment that they know. And so their CNC machines are just getting slower and slower and slower, and they’re just not willing to put the money into it because they’re not willing to raise the prices. They have one customer that’s 70% of their business that’s always been there. They’ve had friendships forever. They don’t want to do this. They’re not running it like a business. And if I’m going to buy your business, I tell every seller your business is saleable. If I can double it when I buy it from you, I don’t want to buy your business the way it is.

Dana Robinson:
Right.

John Ovrom:
I want to buy your business that I can scale and grow. So you have to prove to me that I can double my business. So every time we take a business to market, we have a strategy on how to grow and double the business. And if you can’t now it’s a little different. Now you’re just selling customers or now you’re just selling your equipment. It’s not that you can’t sell it, but the value. Right. When you deal with value, you’re dealing with the tangible assets and then the intangibles, we can always sell you for your tangible assets, but the intangible is, what can I do with that?

Dana Robinson:
Right.

John Ovrom:
And if they haven’t invested, our intangible value is pretty low.

Dana Robinson:
Yeah, I think that’s wisdom. I’ve seen a number of businesses where we ask, why haven’t you grown? Because the business, it looks great. And the answer in some of those cases is, well, we keep a million dollars a year and we get to live pretty good on that. And we don’t want to take half of that every year and invest in expanding into a new region or hiring and training more salespeople. Yeah, I think that’s super common. The frog in a kettle on pricing. I’ve seen a lot with blue collar businesses. It’s fear that you won’t be able to sell.

Dana Robinson:
And with HVAC and plumbing, I’ve taken over businesses that are selling a system for $6,000, and our target price is ten. It’s a big lift.

John Ovrom:
Wow.

Dana Robinson:
But you have to, again, as a business, measure your gross margin and say, is this sustainable? At ten, we make 20% EBITDA. At six, we make nothing. So all you’re doing is running a business to give away all your money to the customers that you’re not willing to charge the price that you need to. Some of that’s not having the software that tells you what your gross margin is, not running an organization, but that fear of, if I raise prices, I won’t survive. My customers won’t buy from me. I find that super common. And in an acquisition, it’s the first thing you fix. You just take the risk, right? You just rip off the band aid and you say, the price is what the price is.

Dana Robinson:
And if you’re not a customer that will pay that, you’re not our customer anymore.

John Ovrom:
Well, that’s why from a sales side, it’s not a high risk, because I can upsell that to a buyer anytime. I can sit around and go, look, he hasn’t raised his prices, because I’ll tell him, I said, when’s the last time you raised price? He goes. And I go, I need you to raise them 10% right now. And he’s like, but I go, I just need to prove to a buyer that you will lose nothing by raising your prices. So he raised 10%, he bids a higher number, bottom, and nothing changed. And I went to a buyer go, dude, he hasn’t touched this. There’s a great opportunity for you, right? That’s just a great sale pitch because the clients run that risk. But that’s their comfort, though.

John Ovrom:
That’s the funny thing is people’s businesses as entrepreneurs is really their safe place because they’re usually high risk guys, high energy people, right? And they want some kind of comfort eventually to stabilize.

Dana Robinson:
Yeah. So they feel safe in raising the prices. But I’ll tell you, anyone listening, take some advice here. Raise your prices. If you haven’t raised your prices in yours, raise them 10% and then keep delivering great service. I think our operator in the landscape business, we asked him once, what’s the plan? And he’s been through the business, grew one, sold it to a public company, did acquisition integration. So you kind of expect a guru. And after thinking about it for a couple of minutes, holding us in suspense, he goes, all right, so I’m thinking we’re going to show up when we say we are.

Dana Robinson:
We’re going to do a great job and we’re going to charge a fair price. What do you guys think of that? And then we ask him about increasing prices. He goes, if we do that, then when we go every year and we ask for something that adjusts enough so that we continue to put the 20% to the bottom that we have in our sort of target KPI, then we ask for 6% in a high inflation year. We ask for 3% in a low inflation year. We condition our clients to know that we deliver great service, but to do that, we have to keep up with the costs that are associated with running the business. And it was brilliant because we’ve operated businesses, us, as fund managers. But you still sort of are like on bated breath for some seasoned operator to come up with a genius piece of advice.

John Ovrom:
I need that little nugget that I haven’t learned of 40 years out there. Yeah, no, it’s great advice. I mean, the reality of it is people fear price because they’re selling off of price versus value. And what you’re saying, Dan, is don’t worry about your price. Sell value. The price will come up. Because if you focus on the value, that’s what you sell. Don’t sell it based on your competitors price.

John Ovrom:
Don’t sell it on. This is what I did last year. The question is, what’s the value I’m offering? And is that worth it to you? And it is fear. There’s a lot of fear behind it.

Dana Robinson:
Yeah, and there’s. Some of the staff tends to have the same fear. I think in a small team, in a small business, the people that are selling get comfortable with what they sell for. And when you thrust increases on them, they’re afraid they won’t hit their performance or that they’ll piss off the customers, some of the owners. And again, as a fund, when you come in and increase price, there is a sales job you have to do to your own team. You have to say, sure, guys, we’re raising prices. We have to, and we want to pay you what’s fair, but we have to deliver that value to the customer. So let’s be sure that we have our good attitude.

Dana Robinson:
Hats on. Let’s be sure that we’re delivering value for the clients that we’re charging more for. Otherwise, your employees can be a point of kind of negative gravity holding you down from being able to grow.

John Ovrom:
It’s a great point because definitely there are some employees that are often, it’s great because a client will say, hey, whoever I sell to, I want to protect my employees.

Dana Robinson:
Yeah.

John Ovrom:
I go, okay, well, let’s talk about that. Let me give you some advice. If I was buying your company, I will want to keep all of your good employees. They’re all safe. None of your good employees are at risk. The only employees that are at risk are those that have been with you for 20 years, that aren’t really holding their own, that have just been there because they’ve always been there and their job isn’t really clear and they’ve just been around. Those are going to get because they’re not adding value.

Dana Robinson:
Right.

John Ovrom:
That’s inevitable. So I want to manage expectations that if you want to give them some of your sale price to help them along the way, that’s fine. But don’t worry about your good people.

Dana Robinson:
Absolutely.

John Ovrom:
All your good people are safe. So when it comes to protecting your employees, only worry about those that you know. And I swear to you, every freaking owner is like, yeah, I got one. I got at least one or two of those that isn’t going. I’m like, then just own it. I’m cool. Just be aware. Don’t use that as a reason not to.

John Ovrom:
Right?

Dana Robinson:
Yes. And don’t try and hide it because otherwise it’s going to be whiplash. There’ll be morale problems, and every good employee knows that the bad employee is a bad employee, and they’ll be delighted when that person is no longer part of the organization. Because they don’t pull their weight.

John Ovrom:
Exactly. We all want a stroke with a team that’s all stroking the same, that’s the win. And when you hang around, if you tolerate mediocrity as a buyer, I don’t want to, but it’s about finding a good fit. And the owners have to finally deal with all of their laundry and all of that stuff is real. It’s not about the business. Yeah, I probably carried them longer than I needed. Yeah, I probably don’t really have anything I want to do. This is all I know in my life.

John Ovrom:
Yeah, it just is. This time it’s like getting off the freeway and you’re going to get off the freeway and you’re like, I could keep ripping here, going down the fast lane, just keep moving over and then take that exit. And they’re like, oh, but I’m in a groove here. And I’m like, then don’t get out. I’m okay. But you don’t get both, brother. You got to be prepared to go. It’s a very emotional time.

Dana Robinson:
Yeah, I hadn’t thought of it. I mean, when I’ve transacted primarily as principal or an investor, there is some psychology involved with it, but it’s not the same as you as an intermediary, are sort of a psychologist in the sense of trying to understand where they’re really at. And then you become an advocate for them, but also the truth speaker into their life that they’ve never had from anyone else. Employees don’t tell. I mean, they’ll tell you how they feel on their way out.

John Ovrom:
Yeah. And the challenge becomes when, let’s say you and I are partners, right? And then you and I have partners, and then there’s a third partner, or there’s another multigenerational. So it’s you and me and our dad, and then as brothers, we both are very different because siblings are very different. And then we married our opposites. Right? So now you’ve got six combinations of what’s fair, what’s right, what’s not, what’s the value. It doesn’t become about business. It was, you haven’t done this and you haven’t done that. Or the parents want to give it or sell it to their kid.

John Ovrom:
And I go, but do you have any other siblings, or do they have any. Yeah, they got siblings. Well, what about the three other siblings? Well, they’re not in the business. And I said, whoa, whoa, whoa, whoa. You want all four of your kids to hang out over Thanksgiving when you, dad and that their kids and all their cousins will want to hang out together? If you pass this business over to your son, and I don’t care if it’s worth a million dollars, the other three kids believe that a fourth of that is theirs. Like, you just took 250 grand out of there and gave it to him. So how are you going to true up the other kids? And he’s like, I hadn’t really thought. I go, well, I’m helping you understand that this is more than just the business.

John Ovrom:
This is also your goal, is to help set them up to be successful so they can live happily ever after. Because we have. Dana worked with some very horrible experiences with multiple generations where the brothers and the sisters no longer talk to each other. Right? The cousins no longer are engaged. And it’s horrible because that’s not what the parents wanted. That was never what they did. They set them up. They did a great job.

John Ovrom:
But the kids, this entitlement, it’s not fair. This isn’t right. And then they just blow up the relationship. It’s horrible.

Dana Robinson:
So let me ask you one question. As we get toward the end here. You’ve got visibility into how these businesses kind of fail, I guess, or hit a point where their purpose fails, or the family is failed because of lack of good planning. Someone who says that five years, you know, that they’re not ready. But what can we tell to someone who’s not ready, whose five years is like realizing that they’re not ready? There are books to read. Is there things, consultants, that they would bring in? I mean, it might be too early for you because you want to focus on getting to an exit, but are there business consultants that really can be transformative through that process, that get them over the course of three years to a point where they go, okay, now I think I see through line to an exit.

John Ovrom:
Sure.

Dana Robinson:
And I fix the business in a lot of ways that adds value and makes me feel better about that exit.

John Ovrom:
So that is what we do a lot of. But I would tell you that the number one step, when we have a client that says that, our question is, what’s your win? Are you clear on what is your win? Is it money? Is it time? Why are you saying five years? And is there a dollar amount that you need to have? Because if I can get you there in four years, are you okay with that? Right. Because it’s a dollar amount, or is it five years regardless of the dollar amount? So it’s just about lifestyle. But we have to agree on what’s the finish, because if you’re setting a goal, I want to lose 20 pounds. I want to. Whatever you got to make it as a smart goal, you set that exit as a smart goal would be my number one strategy to really understand what that reflection point is, because so many times that line moves, particularly with entrepreneurs who’ve never been able to stay on a line for very long and are happy to move the line whenever it’s convenient. So getting them to understand that, and then what we do is we measure where they are today against what they want to do. And then we set the plan and say, you said you wanted X.

John Ovrom:
So, for example, I want $5 million in after tax cash. Okay. We do evaluation, and it looks like you’re going to get $3 million in after tax cash. Okay? So over the next five years, let’s put in 500 grand a year for the next four years. And you put that aside, and now we sell it for three, and you’re there.

Dana Robinson:
Yeah.

John Ovrom:
Right. And they go, no, I want 5 million for my business. And I said, no, you said you wanted 5 million in after tax. So our strategy is, let’s put that away and then we can sell it for today’s dollar amount and you can put that that is planning the exit. They just don’t know how to think that way. It’s always about, I need to have a certain value for me to self rationalize that. I sold my company for X because I think it’s worth that.

Dana Robinson:
I think that’s amazing. So, smart goals, specific, measurable, achievable, relevant, time bound. Right. Any goal. And that way we don’t set goals that aren’t achievable or that are really vision or something that’s vague.

John Ovrom:
So thanks for mentioning how many businesses, Daniel, have you seen small business that actually have a budget? What percentage do you think of the ones you’ve seen?

Dana Robinson:
None that aren’t private equity backed. I’ve never been involved and I’ve been involved as an investor, which means visibility to the financials in 30 businesses and 35 years of doing business in the businesses where I’m the control party. In other words, I’m CEO, CFO. Property management were my expertise. The closest we came to a budget would be projecting. Basically pull previous year’s PNL and then track to how are we doing to that with each month. But we didn’t budget. But the moment I took over a branch that a private equity group bought in Austin doing HVAC and plumbing the week before the acquisition closed, I sat in front of my computer and built a build up, right.

Dana Robinson:
I did the budget for a business I didn’t own yet because they demanded that. And that way there’s a way to measure success and a way for them to allocate resources because for the first six months, there wasn’t going to be any profit. So you have to budget for that and then allocate capital as a result of that.

John Ovrom:
So that’s our exit win, right, is to convince a business owner who for 35 years has never done a budget. And we’re asking them to define a measurable win and then set target to achieve that based on measurables along the whole way. And we’ll get you there. And it’s just really hard. They see it, they understand it, they understand the concept, but it’s just not. I mean, we currently afford. I asked my team, we have 40 clients. And I said, of the 40 clients we’re working on right now, how many of them have budgets? And they said, you mean the ones that we haven’t built? And they go, yeah.

John Ovrom:
And they go, zero. And I went, dang, how am I going to get someone to do an exit plan for five years if they won’t even do a budget that they want to be held to in one year, and they’ve been doing it for years. But that’s the mindset, that’s the challenge with who we’re working with, is that they’re accountability, control. I don’t know what ifs I want to change. And that’s every day of our world.

Dana Robinson:
Well, your value is creative very quickly then, because you are building their budget and you’re saying, here’s a budget, let’s track it. And then they’re paying for your service and you’re delivering something that they can’t or won’t do. And as long as they follow through, and most businesses that are paying for service, like having you as a consultant, are going to be better at executing, they’re going to follow that. And a year down the road, they’ll be like mind blown how magic it is to see a budget.

John Ovrom:
And that’s where if you can push 200 grand to their EBITDA and it’s a three time multiple and you give them 600,000 door dollars in value and it cost them 100 grand, it’s like, you guys, this is low hanging fruit. You’ve been in these companies, Dana. This isn’t hard to produce an extra couple of hundred grand net, just put in some professional stuff. But it helps them if they’re willing to be ready to do so. So that’s our world every day.

Dana Robinson:
I love it. John Overham, exit consulting in San Diego. What’s a great way for people to connect with you? URL or email?

John Ovrom:
Yeah, our website is www. Dot. I just dated myself right there, Dana. I started by saying www. Isn’t that awesome?

Dana Robinson:
I still do it.

John Ovrom:
I still do it. I was like, dang it. I’m supposed to not say that it’s exitconsultinggroup.com or that’s on the World Wide Web and it’s on the worldwide web.

Dana Robinson:
It is.

John Ovrom:
It’s awesome. Yeah. Exit consulting group. I have a book also called Exit and Answers. It’s a book that I wrote that is from a business owner to a business owner, and that’s on Amazon and all the spots. Or you can email me at jovrom@exitconsultinggroup.com.

Dana Robinson:
Awesome. That’s a great resource. And you’re going to send them a copy of the book, PDF email you? Yes. I appreciate you coming on the show. Stick with me for a minute after we end this and everybody that is out there don’t forget. Hit me up. Hello@danarobinson.com? If you have questions, comments, anything that you want from me, let me know. Thanks for joining me on this episode of the Exit Plan podcast.

Dana Robinson:
I’d love to hear from you. Feel free to hit me up with questions or comments by emailing me at hello@danrobinson.com or leave comments and questions by calling 858-252-7785 call 858-252-7785 and leave a message. You.