Episode Description
Imagine discovering that your life's work could vanish overnight. John Rodriguez, co-founder of Hill Country Business Strategies, reveals just how fragile many small businesses are, especially when their owners go through a divorce. With his unique background as both an entrepreneur and advisor, John provides invaluable insights into what happens to businesses in a divorce.
In this podcast episode, we talk about implementing buy-sell agreements, valuing a business, and creating long-term exit strategies. For couples who co-own a business together, John offers valuable advice on how to handle a divorce without tanking the business.
If you or your spouse owns a business (either individually or together) and you’re contemplating going through a divorce, today’s episode needs to be on your “must listen to asap” list!
Show Notes
About John
John has spent his whole life around privately held businesses. From growing up in the restaurant started by his immigrant Father, to becoming it’s second-generation owner to coaching hundreds of founders into becoming more effective business owners. Equal parts entrepreneur and advisor, John is just as comfortable talking business with owners as he is talking planning with their advisors.
Connect with John
You can connect with John on LinkedIn at John Rodriguez and follow John on YouTube at Hill Country Business Strategies. To find out how to work with John and the services offered please visit his website at Hill Country Business Strategies. You can email John at [email protected].
Key Takeaways From This Episode with John
- John Rodriguez is the co-founder of Hill Country Business Strategies, which helps business owners grow their businesses into sellable assets.
- Exit strategy for a business is a complex process that requires preparation and usually takes about 3 years to plan properly.
- The value of a business is not just its current success, but its transferability to new owners and how much of its value can exist independent of the owner
- Most business valuations are inaccurate because they're not done by qualified experts. A Certified Valuation Analyst (CVA) should be used for accurate valuations.
- Buy-sell agreements are crucial for businesses with multiple owners. They should outline how a partner can exit the business and be bought out.
- In divorces involving business owners, the business is often the primary asset. Options for buyouts include capital on hand, structured payments over time, or third-party financing. Continuing to run the business together post-divorce is sometimes the only option, though it's challenging.
- Proper legal paperwork, especially a comprehensive buy-sell agreement, is crucial for protecting a business in case of unexpected events (the "5 D's": disagreement, disaster, divorce, death, or disability).
- Lack of proper exit planning can severely impact or even tank a business when unexpected events occur.
- When planning for the future of a business, owners should focus on specific, meaningful personal goals rather than vague concepts like "retirement."
- In a divorce involving a shared business, it's crucial to consider how to exit in a way that doesn't destroy the business, as it may still be a source of income for both parties.
- Options for buying out a spouse's share of a business include using capital on hand, structured payments over time, or third-party financing.
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Transcript
How to Divorce-Proof Your Business with John Rodriguez
SUMMARY KEYWORDS
business valuation, exit strategy, buy-sell agreement
SPEAKERS
Karen Covy, John Rodriguez
Karen Covy Host
00:10
Hello and welcome to Off the Fence, a podcast where we deconstruct difficult decision-making so we can discover what keeps us stuck and, more importantly, how we can get unstuck and start making even tough decisions with confidence. I'm your host, Karen Covey, a former divorce lawyer, mediator and arbitrator, turned coach, author and entrepreneur. And now, without further ado, let's get on with the show. With me today I have John Rodriguez, and John is the co-founder and fractional chief value officer of Hill Country Business Strategies, a company that provides strategic planning and financial planning for business owners who want to grow their business into a sellable asset. John has spent his whole life around privately held businesses, from growing up in the restaurant started by his immigrant father. Businesses. From growing up in the restaurant started by his immigrant father to becoming its second-generation owner, to coaching hundreds of founders into becoming more effective business owners. John is equal parts entrepreneur and advisor, and he's just as comfortable talking business with owners as he is talking planning with their advisors. John, welcome to the show.
John Rodriguez Guest
01:21
Yeah, thank you so much for having me on. I'm looking forward to it, Karen.
Karen Covy Host
01:24
I'm excited because and you and I know because we've talked a little outside of this but I'm excited to have you on to talk about business, because a lot of the clients that I work with are business owners, right, and they're going through a divorce and they're facing having to value the business and do something with the business, and that's where you come in. So let's talk. I know you're a specialist in helping small businesses plan an exit strategy. For people who might not be familiar with that term, what does exit strategy mean?
John Rodriguez Guest
02:00
So exit strategy really the easiest way to understand it is. First, you have to understand that exiting a business is very complicated. It can be a really lengthy process that can have a lot of variables in it and a lot of very significant consequences. So what we do my partner is also a certified exit planner when we work with owners, we get them thinking about what they want that exit to look like, because it's something that takes a lot of preparation.
02:28
The owners that do take just selling their business for granted usually aren't able to, and they're met with a lot of disappointment when they just rush their business to the market and they have an idea in their head about what they want to sell their business for. What they want the terms to look like and generally what the owners have in their head is not really the market reality, and our job is we never want any of our owners to get there. We want them to be very well educated on what to expect in the process of exiting their business and we want them to be really happy with the outcome.
Karen Covy Host
03:01
So let me ask you if somebody is thinking that, long term down the road, I want to create this business into a sellable asset, right? How much time should they give themselves before actually putting the business on the market? How soon before then should they start to get ready?
John Rodriguez Guest
03:20
So it's going to depend on a couple of factors. Number one it's going to depend on how much planning they've already done. We see some businesses where they have enough things in place where it can actually be done probably within a year. It's also going to depend on what their expectations are. You know how? What is the distance between where their business and their planning is at right now and what their expectations are? I generally tell people plan on about three years, but that's typically what we see.
Karen Covy Host
03:50
Wow.
John Rodriguez Guest
03:51
Yeah, there's a lot of work that has to go into this. One of the mistakes that I think owners make, or one of the things that they take for granted, is that they make the assumption that, because the business is successful for them, that that is what makes it transferable to somebody else, and those are actually two very, very different characteristics.
Karen Covy Host
04:09
Okay, I want to talk more about that, because part of a lot of my clients have businesses, and some of them have what I guess would be called a lifestyle business where it runs because of them. But as far as whether it's transferable to your point, that's a better question. And so, in terms of divorce, you've got to value that asset. Or does that asset have a value over and above the person who's running it? So how do you figure that out? How do you figure out if the business is dependent on just this person, it's a lifestyle business or it's something that's sellable?
John Rodriguez Guest
04:46
So, that's a really nuanced question, and that's a lot of what my work is the really simple answer is a very simple equation, which is you have your business and then you have the business without you.
04:59
And what's the difference in those things? I've seen businesses that were cash flowing millions of dollars, that had zero equity value because the owner was so tied to the performance of the business and the owner's knowledge relationships just weren't transferable to somebody else. So there's the kind of technical answer of you know, if we looked at the balance sheet and the P&Ls and if we poured through, you know some of the market considerations. You know we have this value. The actual value of the business is how much of that value can exist independent of the owner, and that can be a really, really different number in a lot of cases.
Karen Covy Host
05:39
That's so fascinating because a lot of times, obviously okay, so you've got a divorce situation. Let's just say it's a situation where one spouse owns the business, the other one's not involved, and then the spouse who owns the business, of course, is going to say, it's not worth anything, it's just me, and the other spouse is going to go oh yeah, right. So how do you figure that out? How do you come to a value that's meaningful?
John Rodriguez Guest
06:08
So in that instance where we're not talking about an actual exit, for the owner or for one of the spouses that's involved in the business.
06:16
This is a point where I would like to encourage everybody to engage a very good valuation expert. Valuations in the small business market are incredibly complicated and they require a lot of expertise to be done properly. I will tell you about 90% of the valuations I see are just complete fiction. They have nothing to do with the actual marketable, sellable value of a business. So I would encourage anybody anybody can reach out to me. We work with very qualified valuators. Make sure that you're getting a valuation from an expert that specializes in valuation. The unfortunate reality is most of the valuations that are floating around out there are done by people that have no idea what actually happens in the transactional markets there. They could be financial advisors, it could be CPAs, it could be insurance people. There's several platforms online where they can take two to three numbers, punch those in and they can get a very fancy looking report that comes out the back end. That has almost nothing to do with what actually happens in the marketplace for small businesses.
Karen Covy Host
07:27
Wow, sorry, I'm just. I'm so surprised by that. But I do know that a business evaluator or I think that a business evaluator needs experience or expertise in whatever the industry is that the business is in, because it matters, doesn't it? If you're evaluating like a restaurant versus a professional services corporation versus a manufacturing company, it all matters, right.
John Rodriguez Guest
07:53
It does. You know, having experience within the industry, within the sort of size of the business, sometimes even within the geography, is really important. If they are a certified valuation analyst, if they are a CVA, then they have gone through training and they have to answer for the valuations they produce. I would say, just in my experience, I only see CVA valuations maybe one out of 20 times. Most of the times they're performed by other professionals.
Karen Covy Host
08:22
Why would somebody go to another, different kind of professional if the valuation that they're performed by other professionals? Why would somebody go to another, a different kind of professional, if the valuation that they're getting is garbage?
John Rodriguez Guest
08:30
I'm trying to be diplomatic. Those valuation tools are business development tools for other professionals, for financial advisors, for insurance people, sometimes even for business consultants. That that's how they're sold and sometimes they can be. Those platforms can be useful and I've actually used them every now and then, but they're entirely dependent on the input, and that's what the problem is. A lot of these platforms are advertised as hey, you just need revenue and profit from the last 12 years or for the last year or 12 months. You put it into here and then it spits out this valuation. And what I have to tell people a lot of the times is believe me, when you go to sell a business, the qualified buyers on the other end are a lot more interested, or they're interested in a lot more than just two numbers. So a lot of those platforms even the ones that are good they require the right kind of input on the front end, which is a lot more than just two numbers from a tax return.
Karen Covy Host
09:29
Yeah, let's talk about that input for a moment, because if a couple is facing divorce and one of them owns a business right and the other spouse says, well, I want this business valued, what's involved in getting a business valuation? What kind of data and numbers does the valuator need from the business owner in order to make this valuation?
John Rodriguez Guest
09:54
Sure. So they're going to need a couple things on just the pure numbers end. Well, let me back this up a little bit. So the way that people on the buy side are going to arrive at a valuation is actually a very simple equation. It's going to be your earnings times a multiple. That's about, I would say, 95% of business transactions that are going to be above the fixed asset value of the business are going to be arrived at.
10:22
It's some version of that equation. That earnings number is going to come from the financial data in the business and then that multiple that they're using is going to be a combination of what's happening in the marketplace and all of the intangible value of the business, if that makes sense. So you've probably heard people refer to valuations before as one and a quarter times revenue, or maybe it's six times EBITDA or maybe it's. You know, what we're seeing in the market right now is, you know, four to six times. You know SDE, things like that. They're all variations on that same really simple equation. So if you think about the left, side of the equation. Those earnings numbers are going to generally be some proxy for cash flow in the business. It's going to be EBITDA, it could be net income, it could be what's called seller's discretionary earnings. These are all nuanced metrics and they're all a little bit different, but they're all designed to predict how much cashflow is going to come out of this business in one year. Is it 150,000?, is it 600,000? Is it 2 million?
Karen Covy Host
11:33
So can a business owner, by the business decisions they make, affect that number? And here's what I mean. Let's say you had a business owner who owned hair salons, right, and they decided in the year of the divorce that they were going to do all these capital improvements which definitely would affect their cash flow, their debt load, they're all that kind of thing. Does that really affect negatively the business valuation? Is it net equal, because presumably they'll make more money when the improvements are done. How does that work?
John Rodriguez Guest
12:15
So again, it's nuanced. It will all be factored in very carefully by either the buyer or by the buyer's team.
12:24
Generally, really qualified buyers, they want to understand these things at a high level, but they have professionals that are actually going to go in there and do a lot of the really nitty gritty kind of accounting work. So the short answer is number one there's not that much on the balance sheet that most buyers are going to care about. That's just the reality. The way most businesses transact in this space is going to be as an asset sale. The buyers are going to be bringing their own cash and debt to the equation. So the debt or the retained earnings that the actual seller has on their balance sheet are going to be completely irrelevant to most buyers. They're just not going to be interested in it because they're not buying the past performance of the business. They're buying the future performance of it. So the debt that's on the balance sheet is not going to be a huge factor because, again, it's going to be the seller's responsibility to settle that debt Most of the time. It's not going to be the buyer.
13:26
I would say it's hard getting data on this because most private transactions aren't reported in any meaningful way, but in my experience, I would say about 95% of transactions, particularly in the sub $5 million market. They're transacted as asset sales, meaning the buyer is only buying what they absolutely need for the business to function, and the reality is that's mostly going to live on the P&L and not on the balance sheet. So the things like how much cash you have in the bank, what does your debt load look like, those things don't really matter to most buyers, because the way I explain this to owners is, let's say, first off, it's the buyers that have all the leverage in this marketplace, it's not the sellers. Don't let a business broker or M&A advisor tell you otherwise. The qualified buyers are the ones that have all the leverage in this space.
14:17
If I'm a qualified buyer, let's say I'm a financial buyer, I have a portfolio company, an PE group, something like that. If I have two businesses and they both have the same expectations in the future and they're doing 5 million top line, they're getting a million to the bottom line. Whether one of them has been around for 20 years and has a ton of retained earnings, or whether one's been around 10 years and has less, or whether this one has a big debt load or this one doesn't, that doesn't matter to the future performance because again, it's going to be the buyers that are going to be bringing their own debt into the transaction. They're going to be bringing their own cash. So all of these things that have accrued over time, that aren't going to influence the future performance. It's just it's not that meaningful for a buyer.
Karen Covy Host
15:09
Well, let's, let's change the scenario a little bit and say that you know, there's a couple, somebody, one of them owns a business and they're not thinking of selling it. In a divorce, one spouse, the spouse is just going to buy out, essentially, the other spouse's marital interest because the other spouse has no, they've never worked in the business, They've never done it. But the business? Let's say, some business valuator says the business is worth a million dollars, right? So theoretically, 500,000 is the spouses, right? So you've got this business. What happens? Where do businesses if the business is the primary asset? Right? What are their options for coming up with the money to buy out the spouse?
John Rodriguez Guest
15:57
Yeah, it's a good question. This is one of the problems my partner and I see all the time with buy-sell agreements is, even if they outline a lot of the terms, they never have any mechanism to fund them. And if you actually don't have access to the capital to make this transaction take place, the rest of it's all irrelevant. These can come from a few different places. I mean the easiest one is just capital on hand. That's difficult for most business owners. I understand that. The other one is the buyout can be structured in such a way that it's not a lump sum. You know it can be paid over time from the cash flow of the business. The other option is you can go to a third party and find lenders that will sometimes finance an arrangement like that.
16:48
That's complicated and it's really going to depend on the health of the business. In that instance, if we do want to go to a bank and go, what does it look like for you to write this $500,000 check? So we don't have to worry about this, they have the security of that money? And then we're making debt payments for four or five, six years or whatever.
17:09
That scenario can put a lot of financial strain on the business a lot of the times and lenders are risk averse by nature, and if you have a business that doesn't have adequate debt capacity to be able to take on a loan like that, then what's usually going to happen is that that second scenario I outlined, where you know this is going to have to be paid over time from the business, and it's less than ideal because you know the party that's being bought out now has to deal with all the future risk of what happens if something goes sideways in this business in two years. By the way, I don't control anything of it. That's really not the best scenario, but it's usually the one that most owners have to settle for.
Karen Covy Host
17:52
Yeah, you mentioned buy-sell agreement. What is that?
John Rodriguez Guest
17:56
So a buy-sell agreement and there's lots of different versions it's basically just an agreement amongst shareholders or members of a business that's going to outline if one of us cannot remain in the business, doesn't want to remain in the business. Let's outline the mechanics of how this person is going to leave the business and be bought out. That's the easiest way to think of it.
Karen Covy Host
18:20
Okay, so if I understand it right, let's say that it's a business that has a couple of partners or shareholders, whatever people co-own it, and one of those, the buy-sell agreement, would say hey, if anybody wants out for whatever reason, would it set the price of the sale and that the other owners get the right to buy out that person's shares for X dollars.
John Rodriguez Guest
18:46
It can. I generally don't like there being a price on a buy-sell agreement because it doesn't take into account what has happened in the business from the time it was written until what could be years later when they're actually effectuating a buyout. The best buy-sell agreements I see generally outline that there will be a third-party valuation done by a professional, the time of the buy-sell agreement or one that's been done in the last 180 days, one that's going to have some relevance. I think that's generally the best solution.
Karen Covy Host
19:23
Okay, so I'm thinking in terms of one person. Let's say there are two people that are, or three people that are business owners together. They have a buy-sell agreement and the agreement says that if somebody wants out or well, let me stop here Can it be triggered by a divorce. Can we say that if somebody needs to sell their interest because of a divorce, that the buy-sell agreement kicks in?
John Rodriguez Guest
19:50
It can be. It can be triggered by all kinds of things. It could be. You know we say the five D's in my business disagreement, disaster, divorce, death or disability. So you can outline all of those events and that the more specific it is, the better. Those can all be outlined in a buy-sell agreement. It can also be you can also have a trigger that is just one person wants to leave, for whatever reason. What I always tell the people I work with is you know it can be, it can be a difficult conversation, but the more specific a buy-sell agreement can be, the better it's going to work.
Karen Covy Host
20:27
Because it seems to me that if that buy-sell agreement is in place and let's say it says that we'll get a third-party evaluator and whatever that third-party evaluator says, your percentage interest in the business based on that value is what we will pay you right If you put that in the context of a divorce, because a lot of the arguments in divorce over business is what is this really worth? And no, my valuator is better than your valuator, and blah, blah blah. But if there's a buy-sell agreement in place, it would seem to me that it would make it a whole lot more clear that the husband and wife can say whatever they want to say, but this is the amount that the partners are going to pay for the business.
John Rodriguez Guest
21:11
And I will say again, if it's a certified valuation expert, there's no way to come up with a perfect number. There's too many variables, there's too much uncertainty in this marketplace. But it's going to be close. It's at least going to be a basis for grounding the rest of the conversations in some reality, because I've seen instances where one partner says $50 million and the other one says $2 million. I mean they can be wildly different. Getting that certified valuation is at least going to give everybody a baseline to start the rest of the conversations, where everybody's at least in the same ballpark.
Karen Covy Host
21:51
Okay, that makes sense. Now let's complicate life a little bit. Let's talk about it's a husband-and-wife business right, which is, in my experience, one of the hardest situations, because somebody is not only losing their marriage, they're probably going to lose their job or their business right. So what happens when? I mean I would think that in a husband-and-wife business, a buy-sell agreement is not worth much, or is it?
John Rodriguez Guest
22:23
It can be. I mean again buy-sell agreements. I mean you know from your background, you know those documents are in and of themselves not very valuable. It's really the specificity and the professionalism that's in those documents that's going to dictate whether they're actually useful documents. That's going to dictate whether they're actually useful, in my opinion, whether they're spouses, best friends, people that met two weeks ago, I think. Any time that there is multiple stakeholders in a business, I think there's got to be something that they talk about at the front end that's going to address hey, what if? Because those conversations we were just talking about this before the show coming to all of the decisions about what's going to happen when one person has to leave, when there's already some disagreement or there's some tension, it makes it so much more difficult, like you said, trying to have two parties that are now separating come to an agreement on valuation. I mean it's almost impossible.
Karen Covy Host
23:30
So what happens in that instance? You've got two people. They can't agree on what the value of the business is, or they have overinflated ideas about what the value is and one of them, like neither one of them, wants out right. What happens to the business?
John Rodriguez Guest
23:52
a lot of times they both stay there, believe it or not because it's really the option of last resort. You know they don't have any means to pay somebody to leave the business. They might be dependent on the income, the business might not have a lot of sellable value and they end up remaining business partners despite not being married anymore.
Karen Covy Host
24:17
So I would think I mean just from, as you said, from my background in the law like that is a, you need everything spelled out in a written agreement which would be over and above your divorce papers, right? This is an ongoing business relationship that should probably lay out what are the terms, what if someone wants to get out Like how, what are the buy-sell terms of that, and what is everybody's role, what is everybody's job, how does this work, right?
John Rodriguez Guest
24:45
And I've seen scenarios, too, where it's not just the only option available. A lot of the times, neither one of them want to give up the business. They're both attached to it, they both like their jobs, they both feel like that business or the success in it is due to their effort, and they don't want to walk away from it. I mean, I have seen it work. There are times where it can work, but again, I think the real value for everybody that's listening to this is to start thinking about these things before you find yourself in that situation and really thinking about, if the worst does happen, what do we want life to look like? What do we want this business? Things before you find yourself in that situation and really thinking about, like you know, if the worst does happen, like, where do we want life to look like? What do we want this business to look like? The earlier those conversations can happen, the better.
Karen Covy Host
25:31
And what kind of you know? Because I would think that one of the important things when you're selling a business whether or selling your interest in it, whether it's divorce, death you just want to sell the business, no matter what is to have the right legal paperwork in place, like to have that buy-sell agreement, to have whatever operating agreements you need to be in place on the front end. And I also know from having worked with plenty of small business owners, and being one myself, that oftentimes that paperwork is sorely lacking. So what would you say to people Like what, if they're already in the business, things are going, but it's kind of on a shoestring, like things are not, the I's aren't dotted and the T's aren't crossed. What would you tell a business owner in that circumstances? What kinds of paperwork and agreements do they need to have in place that are going to serve them, whether they ultimately sell the business together or whether something happens in the business is imploding right?
John Rodriguez Guest
26:40
I think the biggest one is that buy-sell agreement. That is first and foremost. Sometimes I'll see buy-sell language incorporated into operating agreements or into shareholder agreements. It really needs to be a separate document. It needs to live on its own. That, to me, is the most important one, because the way I explain it to the owners I work with and the advisors I work with is that buy-sell agreement is it's like a valve. You know if things aren't going well in the relationship. You know whether it's spouses, business partners, friends, whatever it is. That buy-sell agreement takes all that pent-up pressure and just releases all of it. You know, we know how this is going to be handled. We've talked about it, we've been in agreement about it and now we can just go through this difficult process, but with some agreement and with some clarity on what it looks like.
27:28
When you don't have that release valve, everything just becomes more tense, it gets more difficult to do, coming to an agreement gets infinitely harder and I see a lot of scenarios where you have a pretty good business and then there's something like this that happens whether it's a divorce, there's something unexpected that happens personally, you know it could be the death or disability of, you know, one of the partners. When something like that happens, we don't have that mechanism in place. It can go on for years. That mechanism in place, um, it can go on for years. I mean, you can have a business that's just in this turmoil, where there's this one partner that has their own attorney and every month there's another, there's something that happens. I mean this can be a huge disruption, a huge distraction to a business. I've seen this. I've seen this process literally take years and the reality is, when the process takes that long, if that exiting partner or shareholder is vital to the business, the business is going to go to zero before any agreement comes to place.
Karen Covy Host
28:33
Wow. So basically I mean it can tank the business.
John Rodriguez Guest
28:36
It can very easily, very easily. One of the realities about this space and one of the things that I have to talk to owners about is I sometimes have to get them to understand that their business is probably a lot more fragile than they realize, that taking one key person out of this business can just have an enormous impact on the financial viability and the value of the business, and it can happen almost overnight.
Karen Covy Host
29:03
Wow, that is. It's a little scary actually it is.
John Rodriguez Guest
29:07
I mean the way I explain this. I think you know I've owned businesses; I've always been an entrepreneur and I think it's really easy to underestimate sometimes the impact that the owner or a key partner in a business can have over what happens their day to day. I, the way I explain it to owners is I go, look, let's say you go to an island for a month and don't bring your phone, what happens to your business? And that that's a really easy way to kind of frame it, because I think that's a good reality check. That like what is business really going to look like for those? You know couple of weeks, you know what are the problems that aren't going to get solved, you know what are the leaks that are going to happen, you know to revenue, to profit. That can be a big eye-opener for a lot of business owners.
Karen Covy Host
29:54
Oh yeah, it can.
29:55
I mean, I'm spinning in my head thinking about it right now and thinking about, you know, for those people, so if you've got, if there's a couple and they're business owners and they're thinking that they're building the next big thing, that they're going to sell it, for you know, they're going to build it and sell it for millions of dollars, some new app or tech thing Right, tech thing right what would you advise them to do now, while they're still getting along, that will give them the best chance of actually getting to their goal someday, because part of what you do is not just in the moment of okay, we're going to sell now, but you help people plan because, like you said, it takes a long time.
30:43
So what kinds of things should people be doing in their business today, whether they're thinking of divorce or not, that will help not divorce proof their business, but that will strengthen their business so that, whether they want to sell it, whether they want to sell their interest in it, whether it's a divorce or a death or any of your D's, they're in the best position possible to do that.
John Rodriguez Guest
31:08
Um, it's a great question. Uh, I, the place I always start is. I want to get a really good sense of what success looks like for them, not just today. You know, down the road like I, um, and I think this is part of the symptom of being, you know, an entrepreneur and probably having ADHD, like most entrepreneurs do but whenever I ask that question to an owner, about 90% of the time they'll give me an answer that doesn't have enough specificity to it to be an actual goal. So I'll ask an owner what do you want ultimately from your business? They'll say retirement, or I want to hit 5 million in revenue. They'll give me these sort of milestones that don't tell me anything about why that's important to them.
31:55
So, getting an owner to think forget about $5 million in revenue, what are you going to do with that? What is that going to do for your life and your long-term planning? Well, I want to buy a boat. Okay, great, now we're getting some. What kind of boat do you want? Why do you want to buy a boat? What do you want to do with it? Kind of boat do you want? getting a lot of clarity around what this business is ultimately going to provide them. That's going to be successful.
32:20
That's where I start with every owner. I don't let any owner tell me retirement. I don't know what retirement means. You can probably retire today. Go lock your shop up and you're retired.
32:28
What are you doing in retirement? What does it look like? What does your lifestyle look like? Getting a lot of clarity around those things. Instead of saying retirement, saying I want the freedom to be able to travel three months out of the year. I'd like to work 15 to 20 hours a week and in more executive capacity in my business. I want my business to look like this because it's important to me as its founder. Those are goals. So once we get our heads wrapped around what success really looks like, that's when we can start building the roadmap backwards. That's really what my job is. We go okay. We know exactly what you want life to look like in the future and we know exactly what your business is right now. Let's start filling in the gaps, whether it is more revenue, more profit, whether it's headcount, whether it's the impact of the business whether it's just freeing you up so you can play golf three times a week.
33:22
Whatever that is, I cannot, and no other advisor on the planet can do this either. They cannot buy you. They cannot build you a meaningful roadmap without having a really clear goal of what that destination is. So that's always where I start.
Karen Covy Host
33:37
Oh my gosh, you are like I'm getting so excited here. You are preaching to the choir, right, and it's fascinating to me that the exact same thing that you're saying about business is what I say to my clients about divorce. What do you want your life to look like? You don't want divorce to be the defining moment of your life, right, and people will say, well, I want to be happy. Great, what does that mean? Happy can mean a hundred million different things to every different person. So I love that you start with the goals, because if you don't know what you want and you don't know why it matters to you, then you'll just sort of float around and whatever happens is going to happen.
John Rodriguez Guest
34:17
That's what most small business owners do, unfortunately. So I have a slide in one of decks I use with this where it sort of looks like a pyramid. When most business owners think long-term, their initial thinking is almost always going to be about retirement or it's going to be about some financial benefit, whether it's selling for X, getting missing their proceeds. That's where they always start. But then as you start kind of peeling back the onion, you start having these conversations. That's when it starts to really spread out and you can find out that you had two business owners that had, you know, really similar businesses and they both said you know, I want to retire with $5 million. You start picking at that a little bit and you can find out they actually want two completely different things.
35:07
You know, this person wants to get a check for $5 million so that he can donate it to his church. This person wants a check for $5 million because they want to go set up a venture where they're an incubator to help other founders or something. Those two goals that sounded identical and those two businesses that looked identical. They're going to have completely different strategies because what they actually want is something completely different than just, you know, a $5 million business.
Karen Covy Host
35:35
Yeah, that makes, oh my gosh, this makes so much sense and I could I, as a business owner myself like I could sit here and talk to you for hours, but in consideration of your time, I just want to say, you know, ask you one last question. If you have a couple and, things aren't going well and they're wondering if they're going to go down the road of divorce, but they own a business together, Do you have any last words of wisdom that you would share with them for how they can do this and have their own personal exit strategies in a way that doesn't kill the business?
John Rodriguez Guest
36:13
own personal exit strategies in a way that doesn't kill the business. So I think the easiest way to think of it is you know, let's imagine how difficult divorce would be. You know personally, emotionally, I mean, you know firsthand how difficult that is. Imagine having to deal with all of these other things, with the business and with income and with figuring out. Think about how much worse that experience is going to be and then think about how much worse the outcome is if the business doesn't survive.
Karen Covy Host
36:45
You know, that's a really good point, in a way, to put it, because a lot of people, whether you know, there's the issue of the business value that's got to be divided as an asset. But there's also the income issue, which we haven't even talked about. And if you've got two spouses, that one of them is going to be unemployed because they're out of the business right Now. You've got disparate income and they're both going to still be relying on the business for that income, directly or indirectly. So this is such an important conversation.
John Rodriguez Guest
37:19
It is it is
Karen Covy Host
37:21
John, thank you so much. Where can people find you? If they've got questions, if they're, if they're looking for a business valuator, if they're looking for somebody to help them build their exit strategy, where do they find you?
John Rodriguez Guest
37:42
Go to hillcobiz.com. That's H-I-L-L-C-O-B-I-Z. We have a contact form on there. You can just go in there, drop me a line. You can also find me on LinkedIn. Those are probably the two best places and anybody that has any questions always happy to talk to anybody about this. You can email me. It's john at hillcobizcom. Yeah, I could talk about this stuff all day.
Karen Covy Host
37:57
Yeah Thank you for talking about it here with me. This has been a fascinating conversation. I have truly enjoyed it.
John Rodriguez Guest
38:05
Good. Thanks again for having me on, I appreciate it.
Karen Covy Host
38:08
It's been my pleasure and, for those of you out there who are listening or who are watching, if you enjoyed today's conversation, if you want more conversations like this, do me a big favor. Give this video a thumbs up. Give the podcast a thumbs up, like subscribe, and I look forward to seeing you again next time. Thank you.
