EP 29 | Ready to Sell? Your Business Valuation Says Otherwise

Welcome and Guest Intro

Speaker 0:01

In the world of business, not all deals are what they see. Fortunes rise, empires crumble all with the stroke of a pen. Mergers, acquisitions, hostile takeovers. Welcome to mergers she wrote where we examined strategies and stories behind the biggest. Deals in business because in m and a, the real risks are the ones you don't take.

Why Valuation Matters

Paloma Goggins 1:12

Back to another episode of Mergers she wrote. I'm Paloma Goggins, your host and the owner of Nocturnal Legal. Today I have a special guest who is someone that has a personal experience with determining their valuation of their business and the trajectory of potentially selling it. I'd like to welcome Wes Towers all the way from down under. Thank you so much, Wes, for being on our show today.

Wes Towers 1:37

It's, it's good to be with you. Nice sunny day down here in Melbourne. So, ready, ready to talk.

Paloma Goggins 1:42

Awesome. Well, I am so glad that we were able to find a time, we were joking when Wes was going to be on the show that the time difference is quite substantial. So it's just his morning is just kicking off as we're recording this in the afternoon in Phoenix. So I'm really glad to have you on.

Wes Towers 1:57

Yeah, and I can see that on the camera of the, sun's starting to glare that sun sunrise is, just hitting the, the camera right now. Sorry about that.

Wes Origin Story

Valuation Surprise and AI Risk

Paloma Goggins 2:05

All good. All good. so I'd like to kick off our discussion today. So. Wes and I originally, you know, got to speaking about his personal journey in determining that he was thinking about selling his business. You know, what are the next steps, what potentially could be the purchase price for his business. And so that kind of took him down the path of getting a business valuation. And from there, a lot unfolded that he found very fascinating and it kind of changed his perspective on how he was gonna continue to operate his business. So. We, I would love to hear sort of your origin story, as I like to call it, how you got started, what you're doing now and, and what really made you start going down this road of looking at a business valuation.

Wes Towers 2:48

Yeah, well, I, I run a digital agency and I've always been intrigued by how businesses are valued simply because early on in my business, someone approached me saying they wanted to branch out into my region, and the easiest way for them to do that was to buy a little agency. And, and it was just a freelancing business back then, just me, very little work. so that didn't get pursued, but it, it did intrigue me about the whole process. of what it takes to build a business that's sellable. And so I think it was four years ago now, I got the proper, deep dive business valuation done, and it came in lower than what I had thought. I think that's probably common to all of us, our little babies. so valuable to us because we've invested so much, you know, blood, sweat, and tears into it. And so, and there can be different differences of opinion, of course, in these things, but it was. Fantastic to see where true value is measured and and to see how we could potentially improve those things moving forward. And the other massive challenge, what he suggested was AI was a massive threat to our entire industry. So whilst a lot of the figures were good and things were in the right place, as you would hope. The, the threat, selling uncertainty is a pretty difficult thing. So four years ago, AI was just starting to be realized as something that was potentially going to change a lot of businesses, and certainly as a digital agency, building websites and so on, people realized working behind a screen is probably the most at threat right now.

Catalyst and Business Changes

Paloma Goggins 4:16

I, I think that that is. The ever presence of AI being a threat to every individual industry. Don't get me wrong, we, I feel like we get bombarded in the legal industry as well about how we're all sort of going to be replaced at some point. And I, I think it's, it's too premature, in my opinion, across the board. I think there's so many ways that, AI falls short. So anyone listening who. Is he hearing us speak about this and thinking, oh, no, another, another reminder that AI is coming from my position. I think we're a long ways from that happening quite yet, but, yeah. So let's go backwards just a little bit in your timeline. So what, what made you start thinking about wanting to sell your business?

Valuations as Early Checkups

Wes Towers 4:57

Yeah, because I, I always want to build so it's sellable. And so whilst I don't need to really want to sell it right now, the time came, it was actually, I needed to get the valuation done actually because of, de divorce separation. So that's the catalyst to get it done, but it was always in the back of my mind that one day I wanted to get that done and then fine tune. work out an exit plan and, and what, what I needed to improve upon. So I was really curious to see what the, value had dug into in my circumstances. I mean, in some ways the low value helped me for the, circumstances I was in at the time. but it was also really helpful moving forward. So we've changed a lot of things. Even the, the standard operating procedures done better them down. So whilst a lot of it was in my head and in our team's head, little gaps because things change all the time in what we do. It wasn't rock solid enough. so we fine tuned that and also made use of the, the technology. So reworked, revamped everything that we did really. So streamlined a whole lot of things. so it's, And had a most profitable year, yet the last financial year. So, as a consequence of, you know, tidying up some of these key things.

Paloma Goggins 6:14

Well, I like that you mentioned that while you got the valuation kind of out of necessity, but that you still had in the back of your mind that it was something that you wanted to do to just get a better sense of your business. And I think too often individuals think that they need to be. Actively selling their business or actively planning to sell their business in the next couple of months in order to require to get that valuation. And I almost think if you're, you know, streaming along and you're growing your business and the plan is at some point to exit, which there's nothing wrong, I feel like sometimes people think, oh, you know, telling people that I wanna sell my business in the future is like this, like dirty phrase. Right? And, and the reality is. Pretty much everyone we know on Shark Tank is successful because they built and sold their businesses, and that's their calling card is like they're flipping businesses and and reinvesting their cash, cash flow. And so I like that you mentioned that the business valuation was something that you used as a tool to refine your business long before this, you know, potential exit.

Niche Value and Market Position

Wes Towers 7:16

Yeah, and it was fantastic. So even some of the things we've done websites for companies planning to exit, and I've always thought, Hey, why didn't you do this earlier? The, marketing material would've been pretty helpful for all of these years of trading, but all of a sudden you wanna tidy these things up, up at the last minute to to sell. So building out the brand a little bit better and the website and so on. So. These things are, are valuable because they are valuable. They, they produce, produce income and help the, a business grow and, and all of these things. So it's worthwhile doing them seem, even if you're not ready to sell or, or want to sell right now. I was talking to another guy, I host a podcast as well, and he was talking about an instance where he was the, the key man. He had a few employees, but he got really sick all of a sudden was hospitalized. and so he had no systems in place to run anything, and all of a sudden his wife had to, you know, know who to pay the, you know, bills were coming in, invoices for subcontractors and so on, and she had no idea who to pay and even how to get to the bank accounts and all that stuff. So without these proper systems in, in, built into your business, and these are the key things that valuer looked at, you know that you're vulnerable to so many other things that could go horribly wrong.

Paloma Goggins 8:32

Well, and I was gonna say, one of the things that Wes and I both, have in common is that we work a lot with trades and his agency is actually very specific to this industry. And, and our, I would argue, even though we're industry agnostic at Nocturnal Legal, we work a ton with trades and construction based businesses and Yeah. I was curious in the business valuation. Was you having a niche, something that helped provide, additional benefit? Or was it something that was kind of overlooked in the business valuation?

Wes Towers 9:01

yeah, reading it through, he didn't really mention that too much. It was pretty broad in terms of the description of who we served. he was more interested in. Know what we're doing, websites, SEO, so search on engine optimization and branding and, and so on. He didn't really list our niche at all, which I found curious. and, and the, the geographic locations we're in. He, he mentioned, but he didn't mention the niche, which I thought, I dunno why. maybe you can, you've got views on that. I, I dunno, but I, I think there's valu in, in being recognized in a niche. I just don't know how you, how you, how you measure that. maybe he found that difficult to measure as well, so he just didn't mention it.

Paloma Goggins 9:44

Yeah, I was curious only because I've seen valuations where they look to your industry competitors or your, your current market position. And I know not every valuation is the same and not everyone uses the same valuation metrics. And so in some ways a valuation can be be very much a fingerprint or a snowflake, or however you wanna use the analogy in that. You go from one individual firm and the, the, the process and the analytics and the math and the calculators that they use are not, I mean, one size fits all for sure. but I do think, I think there's value in the open market in having a specific industry, having a specific, population or industry that you serve because it makes you special in a really noisy world. And so I was just curious Yeah. Whether the valuation mentioned it, because I would think that it would provide you. A competitive advantage being known in the marketplace as an agency that serves a specific niche instead of just, you know, we do everyone.

Wes Towers 10:46

Yeah, I think so. I mean, it was, in my view, so similar, the way in which he valued it from a, you know, an accounting sort of standpoint. It's the same things that we look for in, in marketing. So one of the things was building out a database. So, so we're so keen for our clients. To build that database, obviously through the website is a, is a mechanism that that can be done to gather leads and so on. But to have that in a structured and systemized way, so you've got a, a, a big list, a big database of potential clients, but also clients as well that you're serving. it, it was helpful for me to understand these things from, from his perspective because when I'm speaking to tradespeople, just to remember to mention, Hey, you, you should be gathering your database together. If every inquiry that you ever get, because that's a, that's a person on your database that potentially might become a CU customer and to contact them in some way, whether that be email marketing or SMS or whatever it is that you can do, it's all value, for someone in the future potentially.

Recurring Revenue and Values

Paloma Goggins 11:47

Absolutely. No, and I, I would say that that resonates. I had a, an earlier conversation, with an individual on merger. She wrote, her name was Carol Tyson. She does community building. She was lamenting how, kind of a, a, not similar, but very, I would say the journey had similarities in that she went to go get her business valuation as part of an active desire to sell and same kind of concept, which was. The level of uncertainty, like they looked, they drilled down into metrics that she really wasn't prepared to share. Right. How many recurring subscribers in your community, how many people are on your newsletter? kind of these like social currencies that we just take for granted now. Like what's your follower number on Instagram? I mean, most people. The average individual isn't viewing their follower reach as their value in life. Right. and so it kind of redefined her as well in the same way. And it sounds like in a lot of ways your experience was very similar in looking at the valuation and seeing kind of areas where you had gaps.

Wes Towers 12:50

Yeah. And so the recurring income was an interesting one because, we've got a fair bit of re recurring incomes simply because, you know, we're doing the website maintenance or the optimization, which might be monthly, and the website hosting. So that's, annually. So there are recurring, aspects, but there's no, we, I've never believed in contracts, long-term contracts. So it's always people can bail out any, any given month. So that was. In some ways unhelpful because they, they love contracts because that's another solid something, you know, so I, I haven't pressed go on on that, but I realize the, you know, the value of, of having contracts, it's just a, a position of mind that I don't want anyone to ever feel locked into our service. So it's, it's a decision, that I know may be detrimental from, from a valuation point of view.

Paloma Goggins 13:42

But you know what? I think that underlines something exceptionally important for anyone who's listening that has values about how they want to work with their clients and the potential repercussions for evaluation and potential exit down the road is that just your values may not always be aligned with the ability to have a higher valuation, right? I mean, this is key. You're telling me and everyone listening, that you would rather someone be happy with your service than stuck with you. Having a recurring bill, which I think is way better in my opinion, than someone to say, oh yeah, I've got everybody locked into one year contracts, whether they like it or not.

Wes Towers 14:20

Yeah, I know.

Paloma Goggins 14:22

So I think, on some, on some level, you've gotta like maybe leave some pennies on the table to be just a better business person, is what I'm hearing from you.

Wes Towers 14:31

Yeah, I think so. And I mean, there was other little things that I didn't even consider that popped up that affected the valuation. Here in Australia, we had a, instant tax write off for, for vehicles up to whatever price it was. And so we, we had two of them in the company, so myself and my wife at the time, and, and we had written 'em off a hundred percent through tax at the time. But that means of course, if you do. partway with the vehicle, you sell it, then that's considered equivalent to income, and so there's a tax burden as a consequence of that. So it made everything a little bit funky, so you to value it as if, you know, figuring out what the asset value was. And that two vehicles was a big push and we don't have many assets. We have, we have computers and so on, and, and that's about it, you know, so a bit of furniture, so. yeah, that was really interesting how all these metrics move things around and change things, so, yeah, fun and games. It was a lot to wade through to figure it all out.

Paloma Goggins 15:32

Oh, 100%. And I was gonna say too, one thing that everyone listening should keep in mind, and, and, and obviously this is unique to each business' situation, but I don't think people quite realize that when a business valuation is completed. In light of having a breakup, right? Or a disagreement with a business partner, where you're trying to, to get out, right? You're trying to kind of get out of this business situation and be bought out. A lot of times, if you have debt, the debt doesn't always have to be what you envision as debt. And I, I say this from a place of experience where, you know, individuals had received a business valuation and then were shocked to see that the two new locations that they were opening. That had no revenue, but were expected to open and immediately make significant revenue that were pretty much near completion. Were being treated as giant liabilities on the book of the business, and so. What was a million dollar business on paper all of a sudden was in the red, and the membership interest was valued at very little, and I just felt like the valuation was so unfair because it was based on book value and not future revenue earnings. Or projections, which in my mind, I'm not a business valuer. I'm, I'm not in that space. So I don't quite understand or appreciate why we wouldn't have had that projection in there, right? Because the minute those two other locations open, there's going to be revenue. There might be, you know, less revenue based on, initial operating expenses. But the thought that someone would be bought out at a price that was in the red. for something that is arguably gonna be two, $3 million at the end of that fiscal year. Just seemed wild to me. So, yeah. I say that as a warning that the business valuation is, could be very much a surprise depending on your situation.

Wes Towers 17:23

Yeah. I think you, you would get a different outcome no matter, you know, various people that you, you go to. So maybe if it's not aligned with. With what you need it to be, maybe get another one. I don't, I don't know. I'd imagine they'd be quite vastly different in the way in which people interpret the figures. I mean, working with lots of trades, business and, and certainly not my business, but a lot of trades businesses might do cash, cash jobs, so that income never gets reported properly. And, and they, you know, those types of businesses might be thinking they're getting a little win, evading the tax man, but. It's, it's also not showing up in their, in their books properly. So then if they do want to sell, then it's not valued properly. It's also on a, on a side note, hurting your capacity to, to borrow if you want to get a mortgage and, and buy a house and all these sorts of repercussions. if you're unethical. So. You know, I've always been really diligent in doing everything by the book and never, never trying to cheat the tax man, because there's just so many things that can go wrong. Unintended consequences.

Founder Dependency and Systems

Paloma Goggins 18:29

Oh, for sure. And I was gonna say too, if you were planning to evade the tax man and then the, the party that you, you know, essentially were paid by files, something on their behalf, and all of a sudden there's a mismatch on the backend that like

Wes Towers 18:45

Yeah.

Paloma Goggins 18:45

You know, I always think of like the 10 99 situation where. People, all my clients send me, you know, the, the NEC form in the US here. And like if I wasn't reporting that income, there would be a mismatch because they're reporting my, you know, payments. And so, don't think that just because you've got somewhere to hide it, that the other party doesn't have somewhere that they're hiding it as well. It's actually to their benefit to report it. so, well I, I wanna go back in your story a little bit before we run out of time, because I think this is really important. And I work a lot with clients that are thinking about exiting their business in the next couple of years. And the things that we work on are kind of the same things that you were describing, which is how do we decrease founder dependency? How do we get the business operationally optimized so that when you go to sell, it's an easier transition, you're increasing your business valuation. You're kind of closing those gaps that you talked about, that you found in that business valuation. So I'd love to hear, you know, in, in a little bit more detail, you talked about optimizing your systems, getting things kind of squared away and, and closing the gaps that you knew existed in your business. You know, how, how did you go about it and was the business valuation key in determining those gaps? Or was it just kind of broad brush strokes and you guys as a team kind of sat down and was like, okay, how do we get this better?

Wes Towers 20:01

Yeah, well, I, I kind of knew because things evolve in our industry so fast. So the opportunities, opportunities and the technology in which we build websites changes all the time. So, and because we're so busy, and the team are excellent at what they do, kind of let things go, and they kind of realize that that part of the process documented isn't quite right anymore because we've changed. so there was a lot of cleaning up to do. And so whilst everything was functional, I thought, Having gone through the, deep dive and, and cleaning it all up, and changing a few things around, we streamlined the process so much. so I, I thought things were functional to their highest capacity, but once we documented it to actually what we should be doing and, and streamlined it, things got a whole lot faster. And I, I suppose to your point, like it, it became less about me managing things as well. So, and particularly. If, so there's a, a, a bunch of team members and if someone's away sick, for example, which happens, from time to time and they're halfway through the project, well, someone else can pick it up so much easier. Now, when previously. Would be a bit of a headache because it would, you know, be half, half done and they wouldn't really know what's going on. So, now that it's so, regimented, I thought I was really diligent in these things and, and for, for process and systems, but not till I dug in and go, Hey, this is, this is a little bit wacky. refined it, the business and we'll need to continue doing that just simply because of our industry. But also AI is changing opportunities for software as well, so. yeah, and I guess one of the key things is for me to, to realize where the, where the gaps are is. What happens when I go away? So, you know, I've been on a few camping trips and, and whatnot and just traveling for, for short term. what happens when I'm not managing everything? Where are the, where are the gaps? Where am I still, a massive bottleneck. and so yeah, that's been really, a good way of doing it. Just take yourself out of the business and where are things falling down.

Paloma Goggins 22:05

No, I love that question because the reality is, is most of us as business owners. Can't really step away, or if we do step away, things start to fall apart pretty quickly. And I think we all have, at our heart, of our entrepreneurial journey, we're all a little attached to checking our emails a little too much, and, you know, responding to things right away, taking phone calls when you should be out of office and things like that. So I think that that is the key question that every business owner should ask themselves is, could, could I take the, the, you know, week. What would happen in that week if I did take the week? And then if once you can take a week, expand that two weeks, three weeks, what's, can you step away for a month? I feel like there's some businesses where you really couldn't do that, but,

Wes Towers 22:48

yeah. And what happens if you get sick? Like that gentleman that I was talking to? Yes. And, and all of a sudden everything falls on your wife or husband or whoever's closest to you, they have to pick up the pieces. that would be a horrible, situation, but something. Ideally, we'll, we'll, plan for so that you've got contingencies in place.

Action Steps and Wrap Up

Paloma Goggins 23:08

No, absolutely. And I was gonna say too, I had, you know, a sad, sad experience of working with someone that had their father pass away and it was a trade space business, and the daughter ended up having to step in and, and operate. A bunch of things and, and unfortunately, they did not have an operating agreement in place and in the us One of the things that can be difficult to realize is that the operating agreement in an LLC is so critical and it avoids probate. So if there had been that operating agreement, she could have just stepped in and started operating and instead she had to go through the whole probate process. And so it's one of those things where, you know, you were talking about, you know, getting your systems and processes in place so that you're, you know, I'm assuming based on what you're describing, you know, you go from. A lead to onboarding, to to work completion project management, all of these like nitty gritty things that we deal with on a regular basis in our businesses. But there's also all of these like uncovered parts of our business that, you know, you might only be the, the only owner and operator of the business on paper, but you have the right organizational documents to help those individuals like your story about the wife that had to step in and operate the business. And so,

Wes Towers 24:20

yeah.

Paloma Goggins 24:21

It's, I feel like unfortunately it's something that we could, we could speak to, to, for like a couple of hours on this topic.

Wes Towers 24:27

Yeah, I know, I know. Definitely. I mean, cutting corners if you haven't got the papers in place and then things can, a couple of friends, had a, a dissolving of their partnership and, and so, you know, everything's fine until it's not. And so for them it was an incredibly difficult, situation. So you save a few pennies. by not getting the documentation done, but it's so expensive in the long term potentially.

Paloma Goggins 24:50

Absolutely. Well, in your decision to optimize and create some efficiencies in your business, if someone is listening right now, who's thinking to themselves, I probably should do the same. What would be the first recommended steps that you would say that a business that's pretty universal, that someone that's listening could just be like, okay, I could do that tomorrow or schedule it next week. What would be some good first steps for them?

Wes Towers 25:14

Get a website with me. No, that's, well tidying up your brand and your marketing materials, the whole, image of, of the business, because that's what people will first notice, is important. even if you don't win a lot of your, your work through marketing, maybe it's all word of mouth. You still need to, present your brand in a professional manner. but think about. how the business operates, the procedures, and how you can make it systemized. The more systems, the better. if it's systemized to a point in which it's foolproof, even better.

Paloma Goggins 25:47

No, I, I think if, you know, you're thinking about selling your business in the next couple of years, maybe it's five, eight years, it can be way down the road. I think Wes' story is a strong reminder to all of us that. You don't know your business' valuation until you get one. And so if you're curious, there are business valuations that you can get that are not 10, $20,000. You can get the the ones that are just for internal use just to get a pulse on where you are. But it is immediately prudent to everyone, not just for a potential future sale, but also for your sanity to get your systems and processes in place and sit down with your team, even if your team is just one or two extra people, and figure out how to optimize your business because. Maybe then you'll be able to take one or two weeks of vacation and not have your business completely pause. So, Wes, if someone does want to get a website built by you, where can they find you?

Wes Towers 26:44

Yeah, uplift three sixty.com au is the website. And, you can book a strategy call with me there. There's a big button on the homepage, so you'll find it there.

Paloma Goggins 26:52

Awesome. Well, Wes, it was a pleasure speaking with you. Is there anything final that you would like to share with our listeners before we close out our episodes?

Wes Towers 27:02

no, it has been a fantastic episode. Thanks so much. And oh, LinkedIn is a, a, network that I love to join, connect with. so, and I accept anybody, so if anyone wants to find me there that they can, connect as well.

Paloma Goggins 27:15

I'm a big fan of LinkedIn too, and I have found some of the coolest people that I know through LinkedIn. So if you are not using LinkedIn as part of your networking profile, I think you are missing out. well thank you so much Wes. I think this was an excellent conversation. I think it's a strong reminder that getting a business valuation is not something that you need to wait to get just because you're selling your business. You can get one now. It's kind of like. An annual checkup for your health in some ways because it gets you some good financial data. You don't have people that are doing your bookkeeping, you even have less financial data, and I would argue you should probably get on that sooner than later. But I think Wes, your story is a wonderful story to share with our listeners, so thank you so much for being on today.

Wes Towers 27:57

Thank you.

Paloma Goggins 27:58

Well, if you like this episode, please like Cher and on any of our social channels, you can put a comment down. I always check them. I will, if I see a question for Wes, I'll ping him so he can be on there and answer your questions and tune in next week for another episode of Murder She wrote.