Do you want to sell your business someday? Or, pass it on to the next generation? Do you fear it might just shut down when you leave?
If you’re already profitable and thriving, you’re moving in the right direction.
But it might surprise you to learn that it’s not enough. As business coach and consultant Christian Muntean says, “A profitable business isn’t necessarily attractive to a potential investor.”
Only when the business can take the next step– and only the owner can do this– will it be one of the only 20% to 30% of businesses that actually sell successfully or thrive when passed on to new owners.
For Baby Boomers, with retirement around the corner, this is especially pressing. That’s why Christian’s wisdom on this topic is a must-listen for anyone considering a transition now or in the future.
Tune in for details, including…
- The business model investors are attracted to
- Fostering trust and respect in the workplace
- How employees respond to different types of leaders
- Why you’re sabotaging your efforts to hire the best team
- And more
Mentioned in this episode:
Adam Lean: In this episode, we’re going to talk with a business coach who helps businesses become more valuable, can scale and so that is not dependent on the owner. We’re going to find out how you can make your business more valuable so that if you wanted to sell it, you can have a business that sells for a higher amount. Or if you wanted to keep it you’ll have a more profitable business. This is P is for Profit.
You’re listening to the P is for Profit podcast with Adam Lean, where it’s not about how much you make. It’s about how much you keep and how much freedom you enjoy.
Welcome to P is for Profit. My name is Adam Lean and I along with the rest of the team at The CFO Project are passionate about helping business owners improve the profit of their business. We do this by breaking down important business concepts into simple and clear language. My guest today is a business coach and consultant who helps businesses become more valuable and allows them to scale so that the business is not dependent on the owner Christian, welcome to the show!
Christian Muntean: Hey, Adam, it’s good to be here.
Adam: Yeah, I’m really excited. I mean, this is a very important topic because whether or not a business owner wants to sell their business one day or just keep it and pass it down to their kids. The bottom line is the business has to become profitable and, and more valuable. And in order to do that, you have to be able to, to scale and have a business that’s not dependent on the owner. So I’m excited to talk about this. Before we dive in, tell us a little bit about yourself. Tell us who you are and why you started working with business owners.
Christian: I’m based in Anchorage, Alaska, I provide coaching and consulting mostly to owners or to boards or to C suites of usually small and medium-sized businesses, usually privately owned. I got into my work sideways. I started out in actually the international disaster relief world and the community development world. And I just started to see that the projects and programs I was working in, were successful or not dependent. It didn’t have anything to do with the security or the, you know, often we were working in war zones or disaster zones. Our success had really less to do with the environment around us. And it more to do with the team leadership and the quality of team life. And so I just became fascinated with that with leadership, and teams and the dynamics around that, and just started working with it. And I originally started out very heavily in the nonprofit sector, but over time started working more and more with businesses, business owners are asking me to work with them and and and now because, in the United States, 70% of all businesses are owned by baby boomers. And they’re all thinking about or most of them are thinking about what’s next. It just becomes this really important question of how do you build a business that can the more you can harvest the wealth and the value out of the business. If you want to sell or create one, it doesn’t require your full-time attention.
Adam: That’s very interesting. What is a primarily what? What do you help your clients do? specifically?
Christian: Well, you meant well, obviously this is a P is for Profit podcast. So there’s this emphasis on profit. But what many, many of the businesses who come to me are very profitable and they’re run successfully. And so what’s a surprise to many of these owners is that profitability doesn’t necessarily translate into scalability, or basically, a profitable business isn’t necessarily attractive to a potential investor. Or even if it is, it might not be attractive to the bank behind that investor or whoever’s providing some of the money on the backside. And the reason for that is many profitable businesses, particularly in the small and medium-size range. There’s something about the way they’re designed or built that doesn’t allow them to come under new ownership and then continue to thrive. So, does that make sense?
Adam: Yeah, I agree. Yeah. I mean, especially with businesses that pass their, their business on to their kids.
Christian: Yep. Of all the businesses that go to market this year, last year, the year before that statistically pending on the industry only 70 to 80%, depending on the size and industry, were never and will never find a buyer, they’ll just shut down. So that’s to me, it’s tragic for people who’ve, you know, slowly, building a business, all those sacrifices, the risks that you take on all the effort, and most of those folks have their full retirement nest egg, or most of it is ideally in the sale of their business and they won’t get that back out. And that’s about the same statistic of failure for families who pass on to management or to family within a couple of years. Most of those businesses are also are not able to return the value. And so the so I but the interesting thing in this is that to, to turn those numbers around for many businesses is not that hard. It’s not that difficult. It’s really about focusing on things like making a business so that it’s not dependent on the owner. Probably the most typical situation I run into is a business where the owners, you know, they’re the chief, cook, and bottle washer, they do everything.
And and so because they’re the one who knows what’s going on in the business, they handle the books, they’re the primary salesperson, maybe they’re the primary service provider, even for pretty large. What people might consider is a pretty large company in terms of the small medium-sized market, you still have people in that place. And that’s it. You’re not selling the owner with the business or, or they do actually and then the owner becomes an employee. They have what’s called a bye period in sales too. And we don’t get all the details. But what happens is an owner then gets converted to an employee and for them to earn out their full sale amount, they have to stay in basically put that value in the business now as an employee that they can’t have a business they can’t control anymore. And it often is not what people expect. But they can do those things in advance. It’s fairly typical for people to increase the value of their business by 300 to 500%. I mean, it’s pretty significant. And just by doing some simple things, like moving away from owner dependence, putting in some systems, changing some of the ways they relate to the customers, it’s and the benefit is it also all of those things make them more profitable business as well.
Adam: Yeah, I mean, most businesses are started by people who are experts in their craft. So a plumber starts a business because there is a plumber. And therefore that person is the one usually doing operations. Or leading the team that’s doing the operations. And you’re right, they’re not able to get out of the day to day operations. Let’s, I want to talk about two things and we’ll get to the how to make the business more valuable are some tips that you can give us on how to make the business more valuable. But what are some solutions that the business owners can put into place now, but let’s, let’s first touch on what you mentioned earlier, you know, you were in the field, working for the disaster relief, and you noticed that, that it really wasn’t the environment that was the problem, or that was the reason why a team succeeded or not it was because of the leadership. So tell me a little bit more about that. And a team. The same people on a team performed differently under two different leadership. So like, in other words, is it really the leader? The business owner? That is the answer? Versus just making sure that you have the best people on your team.
Does Success Rely On Good Leadership?
Christian: Yeah, that’s a great, great question. So I’m here in two questions. One is about the environment and how that does or doesn’t impact success. And the other one is about the same team of different leaders. Yep. So let me tell you a story about the first one. So I used to work in southern Sudan at the time it was before it was its own country. And so we call it Southern Sudan. Now South Sudan, there were two communities, two different tribes. So there are differences going on, but they’re in they were in the same region of Sudan. They’re not next to each other. But in the same area, one of those communities received an enormous amount of support. They were viewed as one of the worst-off communities hardest hit by the war and by famine and by the diseases that were coming through. And they just received a lot of support from agencies from the UN and from various groups.
The agency I worked with at the time Had a medical clinic there and they were the primary medical provider and that for the country, and they persistently just were constantly dealing with problems, like, solutions did not come from the community. They were just constantly needing outside support and engagement. And what you found in working with the leaders is that they were more focused often on how did they take advantage of all of this support and resources coming through as opposed to, like, personally take advantage and benefit from it as opposed to how do they work to benefit the community. And at the same time, you would see issues within our own teams, like if they’re the projects were struggling, it often didn’t have to do with whether or not we were funded.
Well, it had to do with whether or not the team was lead well. Internally, another community and not that many not that far away. had been a recipient of support like this about 15 years ago. And then due to politics and sort of sometimes the fickleness of the way, aid is distributed and all those kinds of things. They fell off the radar. They were still they were kind of in a pretty backwater area. I mean, obviously Dan is fairly backwater, but they were even more so than a lot of other places. And they had experienced receiving a lot of support. And now they’re receiving nothing. And we were only there because there was a new epidemic of I can’t remember anymore was like yellow fever or something was sweeping through. So we were part of a leading edge of trying to inoculate people and vaccinate people before that to try to create essentially a vaccination, firebreak, so it wouldn’t keep sweeping across the country. And while we were there, I was interviewing a lot of the leaders in the area. And it was amazing the amount, the way the leaders were working to build and benefit the community. So even though they didn’t have resources, they didn’t have support.
They decided, well, we’re going to make it happen. Anyways, we’re going to work on behalf of our people in the community as a whole was doing better than the previous community that we had been in that we were the recipients of the enormous amounts of support. And that’s where I began to see that communities that have effective leadership just tend to prosper, they just tend to do better than and they’re more resilient than communities that don’t have it. And there’s more a place than just the leadership. But as I’ve seen that dynamic replicated over and over again, and it’s replicated in companies as well, that regardless of the economics of the situation, if your economy is going down, or the national economy is going down, some companies are going to keep taking off, they’re going to grow, they’re going to expand, they’re going to use that opportunity to dominate the market. And it’s because of the leadership. It’s not because of the economy.
They’re just they have a set of leaders and management teams that are built a culture and they have a mindset that says we can make this happen. And then other groups will just hunker down and hope they survive and they often sometimes they don’t sometimes they take their head but it’s about leadership.
Adam: Yeah, I mean, absolutely. That makes sense. So how can business owners themselves who are the obviously the leader of their business, what can they do to ensure that they are effective at leading their teams? I think a lot of people, you know, don’t know, think about the fact that payroll, you know, your employees are one of the largest expenses that, you know, in your business. And, and it’s what you’re saying is that the success, the effectiveness of that large expense is based on the owners’ leadership ability. So what are some tips that the business owners can do to improve their leadership ability?
Improving Leadership Ability
Christian: Yeah, no, that’s a great question. And, and I think this also ties into your question, the earlier question that it didn’t answer about, you know, does the same team respond differently to two different kinds of leaders and absolutely, it does, and the research is very strong. around that, that leadership has a huge impact on how a team will function and perform a just a couple of tips to kind of depends on you know, you’re dealing with a team that’s, you know, in an ER of a hospital has a different needs leadership dynamic around it, then if you’re dealing with an engineering firm or you know, other kinds of firms, so it depends a little bit on what you’re working with.
But what seems to be pretty universal. What I find is that a couple of things, one is there has to be clarity, leaders, leaders are really the definers of reality, and the definers of the experience for people as well as direction and as well as defining roles and responsibilities and expectations. So this as catch-all leaders really has to ensure that there’s clarity that people understand what’s expected. They understand what we’re trying to get to the purpose. They understand the why, and that they that everybody understands their lane, they understand what they’re responsible for, and when leaders Work hard to create clarity. It helps everyone else just focus on their stuff and work together. I often find that when there’s problems or bottlenecks in an organization, it’ll come up around comments around, we’re not sure what our job is, we’re not sure who to report to.
We’re not sure who’s responsible for what you know the goalpost keep moving, I hear things like that, which are all indicators, that there’s a lack of clarity. Yeah. The second part of that is, leaders really need to create a culture that attracts and retains the highest quality people. There, we’re in this really great, low unemployment economy. So it’s a buyers market for employees and particularly if you’re skilled and good at what you’re doing, and many owners haven’t fully stepped into just what do I need to do to become attractive? And they usually think about like, how do I pay more? Or how do I put a ping pong table in my office or you know, things like that, which isn’t really Really what your high performers are looking for a purpose in their job? And this isn’t a millennial thing, either. This is true. Just generally people want to feel like there’s a purpose to how they’re spending their 40 hours a week. They want to feel challenged, they want to feel respected. This is huge. They want to feel that there are both respects from the senior team and from their teammates.
They also want to feel that just their job has contributes to their sense of significance. They also want to feel trusted, they want to feel like they’re being given responsibility, and they’re being trusted to pursue that. There’s, there’s more to it than that. But those things really help you start to create a culture where you will attract and then if you maintain that you’ll retain the best people. What there are some interesting studies around how you attract employees and most of the studies is just kind of broadly how do we attract any warm body into the into our team, which is not really what you want to target in the ones who look at how do you attract Ideal employees. In other words, the ones who produce have the highest amount of productivity or the highest amount of return for a company.
They’re motivated by different things and they’re motivated by the stuff that I just talked about. The other employees are going to be more motivated by pay. And you know, they’re looking at the benefits package which is valuable and important, you know, an apples to apples the better paying job went out but it’s not the most important thing for high performance.
Adam: Yeah. And I think this goes back to what we were talking about earlier that most business owners are started by crass people are technicians is Michael Gerber and the E myth calls it people that are good at the specific craft like the plumber, or the person who likes to cook they own a restaurant. And so they are operating their business like it’s a job. Yeah, instead of that they’re the leader and they’re the vision caster. I love what you said about the leader the owner, the business has to provide clarity And set the vision and set the why. Where are we going?
Christian: It’s, it’s, it’s really important because it’s interesting I think. I think a lot of owners underestimate a lot of leaders in general, even if they’re not an owner, they underestimate how important that sense of purpose is to employees. I often when I’m doing coaching or in beginning and engagement within a company, I’ll often interview a bunch of the employees in the company. And it’s very common. It’s the most common thing when I’m working with a high growth company where things are working. Well, I mean, there may be some challenges, but overall things are working, okay. For people to tell me they really they’re either very, very committed and loyal to that leader to the owner of the company or some manager, some executives, they, there’s something about that person, that people are committed to that person and that person’s vision, or they just feel really drawn to the culture.
They just like being there, or they really like what they’re trying to accomplish the mission motivates them. I hear those things without asking for someone to describe soft stuff like that. I hear that more than I hear the pain. And that’s just an important thing. And the research supports that it’s not. I’m getting I’m probably providing anecdotes, but the actual studies about what motivates people and that’s what most people, most owners, and leaders forget. Because when people are leaving a company during an exit interview, it’s so much easier to say I found a better paying job someplace else then just say, I didn’t feel respected here and I don’t like you.
Adam: Right, and they might not even recognize it. Then the employee may not recognize that that’s what they were missing. But they didn’t rail it when they see it or feel it.
Christian: Yeah. When they move to a place where they feel like all their lights come on, and they’re really being maximized, and they feel valued. And they’re part of a team that’s doing something meaningful. I mean, they’re like, oh, wow, this and they may be right, they may not be able to articulate it. But even if they can, most of them won’t communicate. That, because that those two hardest things to communicate a little bit more like, you know, I don’t like the identity or who you are as a company. So it’s easier to say, well, they’re going to pay me two bucks more an hour. So I’m leaving, or whatever, you know, x percentage more per year and salary or something.
Adam: So, we only have a few minutes left, but I want to touch on you know, what, what makes a business saleable so that a business owner can sell their business one day and I know, you know, we, we talked about, you know, establishing better leadership in place, but specifically, what are the things that makes a business sellable? And I’m guessing the first thing is not making the business revolve around the leader?
Revolving Around The Leader… Bad Idea?
Christian: Yeah, yeah. Well, there’s, there’s, there’s at least eight drivers of business value. And I’ll just go into a couple of them here. Now people can go to my website. It’s a one too, and there’s a resource they can look at to kind of see the other drivers and score where they’re actually at and their own business if they want to do that. But the major one really is dependent on ownership or dependence on not necessarily even just ownership but dependence on a key person.
So sometimes an owner and her or his buddy, or friends start a business and is really dependent on that other person’s ability to manage things or to organize something or their relationship with certain customers or vendors or whatever. And it’s, it’s looking for single points of failure when it comes to leadership when it comes to sales processes when it comes to providing services. And so being able to make a business so that it can survive and do well. With any good leadership in place, but not any specific person having to be there is one of the key things.
Another key element that a lot of people don’t always pay attention to, has to do with things like really having reoccurring revenues, like some way of making sure that they can show that revenues will regularly come into the business. So setting up some kind of a subscription model or multi-year contracts with clients or finding ways to provide services that aren’t dependent on people just showing up today, but somehow engages them on a long term basis, if you’re familiar with that kind of approach, but that that makes you more attractive to a buyer because you’re not likely that person is not likely to disappear just when there’s a sign up saying under new management.
Adam: And these things that you’re talking about. I’m assuming if the business owner wanted to even keep their business, they would still make their business better because it’s not dependent on them. And it’s something that they can put other leadership in place, and they would have a more solid business.
Christian: Yeah, what builds value is different than what builds profitability. Well, let me say that differently, what builds profitability doesn’t necessarily build value, what builds value in a business will contribute to profitability. So more valuable business will just naturally it’s doing the things that make you more profitable. But you can get out there and hustle and sell more stuff and get bigger contracts and more customers and not become a more valuable business and what what you become what creates value for the business is less about how many customers you have coming in, and how strong your profit margins are all those matters. It’s more about without getting into the weeds, businesses are often like a very, very overly simplified way of valuing businesses to look at your profitability and then you multiply it by some number. It’s usually people just randomly pick three or five in when they do that, it’s kind of the idea of the number of future earnings or profit that you are buying when you buy the business sort of the idea.
And what were you make the most out of value when you do things that increase the multiplier. And the multiplier comes from owner independence of owner having ongoing, regular revenues coming into the business, having a strong management team, having a brand that people recognize and have value connected to it that’s distinct from the owner, having replicable systems and structures and policies in place and there are other elements that go with that as well.
But there’s about eight major things that if you focus on them, and most companies really just need to pull the lever on two or three, and they can triple or even, you know, multiply by, as I said earlier, about 500% there the value of their business within a couple of years, which you’re a business owner, a lot of the owners that come talk to me, you know, the price that they originally are being valued when they do a true valuation is usually pretty disappointing for most owners. Yeah. Most of them actually 70 to 80% will never find a buyer. That’s the statistics, most owners will never find a buyer or successfully, their business won’t survive a transfer to family or to management.
And to change that, you focus on these things that increase your multiplier, which both contributes to profitability if the owner doesn’t want to sell right away like they want to stay involved, but they don’t want to be involved in the day to day, these are exactly the same things that allow you to have a business where you just check in once a month or whatever. And you’re not having to be there all the time. But you’re still able to benefit from all of this hard work that you’ve put into it.
Adam: Yeah, absolutely. Well, Christian, and this has been very informative and we could keep talking about this the matrix This is so important, building the value of and if a business owner does the things that you’re talking about with improving the value, it will improve the profitability which will improve the selling price.
Christian: Yeah, yeah, absolutely.
Adam: So where can people find you and learn more about those eight value letters?
Christian: Yeah. So if they go to christianmuntean.com. And you click on a tab that says value builder system. And underneath that there will be two different assessments one takes about eight minutes and it takes about 13 to go through and it’ll tell you how ready you are to sell your business or to scale. And also the other assessment will tell you how attractive your business might be. And this is really getting to the multiplier to a buyer. And both of those things will give you an idea of where you’re at, they’ll give you a score of one out of 100. And they’ll also help you identify the specific areas that you’ll need to focus on to grow, or at least in the follow-up process, I can go over that with somebody.
Adam: Actually, excellent. So we’ll put your website in our show notes. But Christian, thank you so much for being here.
Christian: Adam was good talking to you. Thanks.
Adam: Yeah. So you know, again, if you’d like to learn more about Christian and see if he can help you improve the value of your business, feel free to reach out to his website. Again, we’ll put that in the show notes. In the meantime, as Robert Kiyosaki says it’s not how much you make that counts, but how much money you keep. Sales are the making part. Profit is the keeping part. Let’s go make more profit.
Thank you, Christian.
Christian: Thank you, Adam.