Enhancing Value With Your Exit in Mind

Knowing what your competitors don't know can give you and your business a huge advantage. How well do you know your own customers, your competitors’ customers, and the market in general? The answer to this and other important questions about your distinct competitive advantage will help lift your company's value as potential buyers are looking for a business that stands out in the market. Successful entrepreneur Andrew Cadwell shares with us how looking beyond business metrics like EBITDA, gross profit, cash flow, etc., and how understanding your customers and the market could help improve your company's value. 

Questions Answered For You

  • How critical is a long-range view as opposed to just working to drive value day to day?
  • When a company has lost its competitive edge, what is the first thing they can do?
  • What are some of the key areas business owners need to be focused on in order to improve their company's value on the way to eventually transitioning out?
  • What are some of the key metrics that many business owners may not have a full understanding of that they need to understand so they can be more in tune with the performance of their company?


If something doesn't relate absolutely to your competitive advantage and how you have an angle on the market, it should be deprioritized. Because in every business - it doesn't matter what type of industry you're in - somebody's going to always catch up, and you're going to wake up someday and somebody's going to be eating your lunch.

- Andrew Cadwell

Key Takeaways

  • It’s important to understand your competitor's market in addition to your own market and why one demographic happens to be winning.
  • Defining your competitive advantage helps everybody in the business understand how to prioritize. If something doesn't relate absolutely to your competitive advantage and how you have an angle on the market, it should be deprioritized.
  • It is essential to have a good second in command, because when the owner wants to exit the business, it's almost impossible to get top dollar for the company unless there is somebody there who can run the business after the owner steps out.
  • As time goes by and markets change and people change, a business owner must be willing to look at the business with a fresh lens and understand their differentiators.

Read Full Interview

Jeff: Thoughts on driving value with your eventual exit in mind, and why it's important to understand some very important things that many of your fellow business owners don't understand. If you want to know what those things are and also about those value drivers, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world, this is “Deal Talk,” brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.

Jeff: Hello and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on “Deal Talk” it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

It's going to be a very interesting program today on “Deal Talk.” I'm glad that you've tuned in because we're going to talk about value drivers, always important. Business owners everywhere kind of interested in knowing what they need to be looking at, whether you're having problems or whether you're trying to kind of maintain value and you're just trying to stay on top, it's particularly important when you in fact are planning to sell your business at some point down the line. And joining me to talk about this and other issues today on our program is Mr. Andrew Cadwell, consultant, investor and strategist. Andy, welcome to the program. It's nice to have you on board.

Andrew: Thanks for having me.

A large percentage of the Fortune 500 companies that were on the Fortune 500 list in '70s are no longer even in business because they waited too long to re-tool. And there's no such thing as too big to fail. It's just about willing to make change.

Jeff: We're very pleased to have you. And you have a very, very successful background and you've owned multiple businesses. And I'd just like it if you could kind of set the stage for the program, telling us a little bit about you, your background, where you've been and who you've helped.

Andrew: Yeah, sure. Basically, if people ask me to describe myself I would describe myself as a serial entrepreneur, a business mentor and now an angel investor. Most recently I just exited a business. I was running a half a billion dollar system integration firm in technology. And through that, I grew that organization from literally dollar one. And through a series of acquisitions, mergers and eventually a private equity exit, basically through that organization I was able to complete many buy- and sell-side transactions anywhere from a few a hundred thousand dollars to a couple of hundred million dollars. Right now I'm basically investing in businesses, mentoring startups and then possibly looking for a company to take to the next level.

Jeff: That was great story Andy, and again, I appreciate you joining us today. There are so many small business owners today in this day and age, and it seems like particularly after the great recession wound down and we had so many folks starting their own businesses, this would be interesting for them to listen to. But this program is also interesting, I think, for a lot of folks listening today who are seasoned business owners, maybe they've owned their companies for 10, 15, 20, 30 years. Family-owned business, it's been in the family for generations. I think that people will get a lot of interest and mileage hopefully out of this program today.

What I'd like to kind of talk to you first of all about today, Andrew, is just kind of the importance of working to drive value not just in the day-to-day and trying to lift values up and kind of see how we can do and improve from quarter to quarter. But with the exit in mind, kind of that long-range view, how critical is that?

Andrew: As far as defining value, I guess one of the things that always surprises me ... I talk to business owners, I talk to CEOs, presidents, CFOs, and it's shocking to me how often companies really don't understand or they're not crisp on what their competitive advantage is. And not only just how they compete in the market but really what is their angle versus everybody else. And during the normal course of business defining your competitive advantage really, really clearly helps everybody in the business understand how to prioritize.

If something doesn't relate absolutely to your competitive advantage and how you have an angle on the market, it should be deprioritized. Because every business, it doesn't matter what type of industry you're in, somebody's going to always catch up, and you're going to wake up someday and somebody's going to be eating your lunch.

I can't stress that enough around competitive advantage and understanding what those are. Also, with regards to transacting a business, I've been a buyer and a seller. Buyers can sniff out a company that's in sync with their competitive advantage. When the whole entire company understands it and they're moving forward in the same direction, versus situations where maybe only the owner understands it or they're paying lip service to it. A company that's truly unique, that understands their value is always a more attractive buy for sure.

Jeff: Why do you think there are those companies out there where, Andy, not everybody is on board? Even leadership just underneath the owner, perhaps key managerial team members that don't have a real solid understanding of what their competitive advantage is.

Andrew: Yeah, it's a good question. I think sometimes people down inside of an organization or just showing up to work. I think other times leadership or ownership is maybe forgotten along the way or they might have enjoyed some success in one type of business model and haven't felt the need to continue to evolve. And so therefore their whole organization just sort of becomes operators and forgets about some of the entrepreneurial aspects required to have an industry class organization. But it doesn't matter what company you are. If you look at the biggest Blue Chip names, from maybe the '70s, '80s, and even '90s, companies like McDonald's, Coke, or whatnot, they seemed insurmountable, but there's upstarts coming at them and eating their lunch now. That with new business models, maybe more agility, understanding what their competitive advantages are, staying on top of those things, always continuing to evolve.

And honestly that's very, very hard work. It takes a ton of energy. You can sense energy or lack of energy when you look at a company. And typically when I look at it it's usually related to culture around understanding why you kick butt in the market.

Jeff: Is price a competitive advantage anymore?

Andrew: I think price can be a competitive advantage if you're dealing in a highly commoditized market. But most businesses still offer enormous amounts of value added. Think about the 800-pound gorilla on price right now. It's duking it out between Wal-Mart and Amazon on the retail side, right?

And both of those companies try to offer competitive advantage beyond price. Wal-Mart being, "Hey, have lots of boxes out there that you can come visit.” And Amazon doing things like offering expedited shipping, and even maybe drones someday dropping your package within hours. Those things are not cheap to do, and those companies are still seeking competitive advantage. So I think unless you're selling just the bare bones commodity, typically price isn't enough.

There's no substitute for understanding that customer and just simply asking something that a sales person might be scared to death to ask, which is why do you buy from me? Why are you buying my product? Why did you buy from us? Why did you make this choice? And then listening and asking the customer follow-up questions.

Jeff: Andy Cadwell is joining us today on “Deal Talk.” Andy is an angel investor, a consultant and strategist, and he's worked with many companies throughout the years. Andy, when a company has lost its competitive advantage and they start to see that go away, what is the first thing that they can do? We saw that happen somewhat recently really with McDonald's, it happened, and you mentioned their name just a couple of moments ago.

Over the period of the last couple of years we've seen their earnings and their market share continue to decline, and decline rapidly. And now all of a sudden we understand, here it is at the start of 2016 as we're recording this program today. And all of a sudden they are on the rebound because they've come out with this new way to appeal to their, I guess these taste crafted burgers. And I'm not exactly sure what that is yet. I haven't been in there yet, but when you've lost that competitive edge, what's the first thing you should do? Is it just a matter of kind of circling the wagons and getting everybody together and saying, "OK guys, now what?" What do you have to look at?

Andrew: I think there are several things. In tech where I come from business changes constantly. So you'll always have to stay on top. You're always on the treadmill. But I think the very first thing is absolutely when you're starting to lose your competitive advantage, circle the wagons and try to learn some things about your business. One, understand your market. Don't just understand your specific market but understand your competitor's market and the demographics that they're going after. And why one demographic happens to be winning versus not. And then secondly, related to that is understand your customer, what he or she wants. If he or she doesn't want a plain old burger anymore but wants something that's more fresh, then you have to be able to serve that, and understand that broad customer base and what they want. And then I think understand why you're winning now and what the resistance is to change, because typically resistance to change stems from, "Hey, we're doing OK." Is this a short-term trend or is this a long-term reality? Understand why you're winning. But then more importantly absolutely why you're losing, and if that reason for losing becomes sustainable and starts to grow.

And then finally just re-tool, re-tool, re-tool. Re-think, bring in new blood if you have to, but do anything you can to make sure that you're able to re-tool your business and get back into the game. I think there's lots of companies that were ... I can't remember the stat, but there's a statistic out there, something like 75% of the, and don't quote me on that, but a large percentage of the Fortune 500 companies that were on the Fortune 500 list in '70s are no longer even in business because they waited too long to re-tool. And there's no such thing as too big to fail. It's just about willing to make change.

Jeff: Indeed. And, Andy, this is a great conversation started out so far. We're going to take a short break. When we come back I'd like to talk a little bit more about maybe some key value drivers that we can discuss a little bit. And maybe we can get you possibly to share a story maybe from your travels and the people that you've talked with a bit. Those business owners that you had to kind of sit down with and kind of get them to see the light, as it were, before things got too late for them. And we'll try to do that when we come back. Andy Cadwell, he is a consultant, investor and strategist joining me today on “Deal Talk.” My name is Jeff Allen. We'll be back with more after this.

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on the future edition of Deal Talk. Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty, and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com.
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Jeff: Jeff Allen with you, my guest Andy Cadwell is on the other side of the Skype connection. He's an expert in the area of M&A, and also too, of course, a consultant, investor and strategist. We're talking with him today about value drivers and driving value with the end in mind. If you've got transition somewhere here in the near future, we're talking about three to five years. Heck, you can even look maybe 10 years down the line. There's some things that you probably would like to get some answers to with regard to value drivers, what you need to really be focused on.

And, Andy, you've had 25 years’ experience running your own business, of course, talking to so many other business owners, and being involved in M&A activity. What are some of those key areas business owners really need to be focused on in order to drive that value, get it up to a level, improve your company's value on the way to eventually transitioning out?

Andrew: Yeah. First of all, you're making me feel old with that 25 year comment.

Jeff: Hey, we're all in there with you, man. You've seen that picture of me on the website, that was taken years ago. I hate to show you what I look like now.

Andrew: Exactly. I guess along those lines, I've looked at a lot of businesses and bought a few. I think one of the first ones, and many owners they don't think about this, is just absolutely make sure you have a good second in command. Many times the businesses want to transition for whatever reason, but it's almost always related to the fact that the owner, or the proprietor, or principal wants to exit the business or wants to leave the business, sometimes not and sometimes not right away. But typically that's the case. And so in that situation it's almost impossible to get top dollar for your company unless you have somebody there that can run that business after you step out.

And what I'm talking about is when you sell your company to a larger firm, that's maybe a competitor, or a private equity organization that wants to be in your business, those organizations are always looking for a very strong management team that's in place. And that usually starts with a strong second-in-command so that the owner can maybe stick around for a little while but then can leave and the business will operate as normal and potentially grow under new leadership.

Jeff: How far out should you be making these considerations? Obviously, the second-in-command knows that they're going to be involved in some way, hopefully after the transition is done and with the new ownership at the helm. But how soon should people start planning for this?

Andrew: Well, I think it's never too soon. I think if you start thinking about exiting in three or four years that's the time to start putting people in place that can take on the business after you leave. I don't think it's something that you can hire for immediately because somebody needs to be integrated into the DNA of the company. And then when the business transacts, there's so many ways to take care of that person.

They could take a piece of the frontend and typically a buyer will make sure that that person is heavily incented during an earn out period. Or the buyer will make sure that that person gets a piece of the success on the ongoing business. There's a lot of different ways to structure it, and good, savvy buyers of lots of businesses always understand how to structure this and are always looking for that person. But I don't think you can start too early.

Jeff: And, of course, too it's incumbent on current ownership to communicate their wishes to the new buyer to let them know and understand that there are people fully capable with the company as it stands right now to move with them under new ownership and help in that transition period. And so I think it's really important to keep that line of communication open at all times.

You talked to me about some key metrics that really many business owners don't really understand. And I don't know whether that's something that they don't understand because maybe they don't have a CFO that they work with full-time. Maybe they work the books and they've got an accountant who works with them or a bookkeeper. Maybe they've got some managers who everybody's got their own little department to worry about and maybe they run their books, and so everybody kind of has an idea of how to measure the performance of each of their divisions and sales coming in and revenues.

But what are some of the key metrics that many business owners may not have a full understanding of? They really need to kind of get their arms around so that they can be more in tune with the performance of their company?

Andrew: Sure. There's the basics, EBITDA, sales numbers, gross profit, operating profit, cash flow. Those are basically kind of the table steaks of metrics. We understand how the business is performing in entirety with those types of metrics. And I think a lot of business owners stop there. I just think that they don't understand what's underneath those numbers. And what's underneath those numbers are a lot of key performance indicators that are levers that you can move to improve the business.

And so as a buyer of companies I go and look for those types of key performance indicators. And if an owner doesn't understand them then number one, I know I can drive the price down on that business because they don't maybe necessarily see where the opportunities are. But I think more importantly the owner just misses certain opportunities. Some of those might be like, I call them KPI's. Other people call them key metrics. Someone might be on the sale side. My background is B2B businesses, so business to business and not necessarily business to consumer. But we do a lot of these in business to consumer consulting too. Sales KPI's might be things like gross profit per head, or revenue per head, gross profit per customer, revenue per customer, length of time or lifetime of a customer, lifetime spend. Those are all good metrics, but where the power is in those metrics is in the relational aspect of them.

If I understand what my gross profit per rep is and I understand the length of my reps, I might see that newer reps have less gross profit as something pretty typical. But I also might see that I'm pointing them at a particular vertical like maybe a mid-market segment that slows them down when I should be pointing them at a small business segment or even an enterprise segment. So understanding how those metrics relate with one another is super, super important. I had a lot of billing professionals in my businesses like engineers and project managers and so forth.

We would look at KPI's like utilization per client. So we might have a project manager that had a really poor utilization. But when we took a look at certain clients it might be the client that's dragging them down. And so where other businesses or my competitors maybe would let that individual go, or that individual would be miserable in a job, we wouldn't do that because we'd understand that sometimes it's a client and that we could just make some moves and shifts and put that person in a better spot. But those types of KPI's are so powerful if you're willing to spend the time to get under the numbers.

Jeff: So my next question would be someone listening today is interested in doing that. Maybe they don't know anything about any of the data points you just talked about. What's a good way for them to learn more about it? Do you have any suggestions for resources or how they can learn about these particular metrics, why they're important in order to start looking at them very seriously?

Andrew: There's a lot of reading out there, but I think it almost boils back to your differentiation. And everything boils back to that, understanding why you're winning in your segments. So the first thing you need to do in order to get there is understand your segments, and that's understanding your customer. If the lion share of my business is in SMB, and a very small percentage of it is in enterprise but I'm spending an equal amount of effort in both, that's a pretty easy KPI to figure out, right? And so I know that maybe I shouldn't be spending time at all in enterprise. And that's a function of going back to understanding your customer. But that's a very, very first thing, is understanding who your customer is, and even potentially who you want your customer to be and how you're going to invest.

And then really carefully measuring your level of effort to the actual results. That's a fairly standard KPI, which is a KPI per segment. I wish I could give you books that talk about these types of things and so forth, but it's really at the end of the day understanding your customers, and understanding your market, and how you differentiate.

Jeff: Let me kind of camp out on that real quick here, Andy, for just a moment. Understanding your customers. A lot of business owners, I think, and me included in the old days. I think I've tried to make some improvements, but I think as long as we continue to see those sales come in we're happy. The revenue's coming in. I'm pleased. As long as Tom's company, as long as ACME is buying X number of widgets every quarter and as long as those orders keep coming in I'm pleased about that. But it seems to me, and based on what you're saying, and just kind of doing business differently I think than I used to do it, there's a lot more to getting those orders in to ensuring that you have a satisfied customer, right? It's not just making sure that you keep the price down and you continue to deliver the products and services that you're looking for but it goes a little bit deeper than that, does it not? In order to understand who your customer is and to understand more about them at kind of a deeper level, right?

Andrew: Absolutely. Understanding why they're buying from you, not just that the revenue keeps coming in. I think as a president and CEO myself I would talk to my customers a lot. A lot of owners, a lot of CEO's and presidents, when they get their businesses to a certain size it's harder to interact with the customers on a daily basis. You've hired sales people, you've hired front line people.

But there's no substitute for understanding that customer and just simply asking something that a sales person might be scared to death to ask, which is why do you buy from me? Why are you buying my product? Why did you buy from us? Why did you make this choice? And then listening and asking the customer follow-up questions like, "Hey, if all things were equal, would you buy again? If my competitor came along with the same story would you buy from them?"

And you learn things. You might learn that relationships are the most important thing to your customer. You might learn that your value proposition is the most important thing to your customer. You might even learn that your price was the best and they just bought on price. And that becomes a problem because that's a race to zero. But you're finding out those types of things then you're able to make the adjustments where you need to or keep going. If you hear the value of your company, "The reason I bought from you is because Frank was a great salesperson." Then you either need to figure out what Frank's doing to be so good, hire more Franks, or possibly there's a risk there because if Frank leaves you might be in trouble. But it's understanding those nuances in the business.

As an owner I think it's absolutely owner and CEO prerogative. When I was buying at companies and looking at companies I was not just talking to the owners and the management team, I was talking to the vendors, I was talking to the partners of that business. I was even talking to their customers. And I'm looking for the same story from all those different perspectives. And if those things line up you know you have a good business. If those things aren't lining up but the numbers look good, I'm trying to buy that business at a discount because I know that there's potential for problems down the road.

When the whole entire company understands it and they're moving forward in the same direction, versus situations where maybe only the owner understands it or they're paying lip service to it. A company that's truly unique, that understands their value is always a more attractive buy for sure.

Jeff: And we're winding down, Andy. Last question for you. You have, I think, really kind of an advantage here of having talked to a number of business owners throughout your career, owning a number of businesses yourself. What is it we don't know that we should know that you have the advantage of understanding a little bit better than we do as a serial entrepreneur?

Andrew: Well, I can tell you this about serial entrepreneurs. They're usually terrible employees with a touch of ADD. Most serial entrepreneurs I've ever met they're never satisfied with the status quo, and they're typically creative and energetic, and that can create some strife as an employee. But what I will say is a serial entrepreneur does a couple of things. They do things their own way and whether they succeed or fail they usually try again, and again, and again. But through that process they create a formula. And typically that's a repeatable formula that scales across different types of businesses. And so I think that's been the foundation of my consulting career, is being able to look at many different types of businesses and look for things through a formula that I know that works. And I think when one person owns a business for many, many, many years that is a huge advantage too because there's nobody that knows that business or that industry more deeply than that individual.

But sometimes as time goes by, and markets change, and people change, that information or that knowledge can become kind of dated. And so looking at businesses with a fresh lens, being willing to look at your KPI's, being willing to, even if you're winning in the market, understand your differentiator and being willing to look in the mirror, understand why you lose, which is really important. I think all those things can help long-term business owners act with a little more agility. And then ultimately when they exit their business, exit it with the best possible multiple.

Jeff: There may be folks listening today Andy, to the program, who'd be interested in chatting with you about their own particular situation, and potentially working with you to help them improve the value of their companies, or improve their operations in some way. How can they reach out to you and connect with you?

Andrew: Sure. My email address is andrew@andrewcadwell.com, or they can find me on LinkedIn and send me message there, @andrewcadwell.

Jeff: Very, very good. Andy, I appreciate all your time. It's been a real pleasure, and I would like to have you back on the program another time if we could and we can go into maybe a little bit more deeply. Any one of the things we talked about today, or something else that we might be able to talk about where our listeners can glean some information from your wisdom. We appreciate your time today. Thank you.

Andrew: Thanks, Jeff.

Jeff: Andy Cadwell, consultant, investor and strategist has been my guest. If you're new to “Deal Talk” you can find us on multiple channels, on iTunes, Libsyn, Stitcher.com, and also of course morganandwestfield.com. And “Deal Talk” happens to be brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thanks so much for listening. We'll talk to you again soon.

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