How close are you to living the dream? Are you clear about what that looks like? What’s your endgame? For what purpose are you working so hard in your clinic? In this episode, Nathan Shields talks to Scott Fritz, author of “The 40 Hour Work Year” discusses what all owners should consider – what is their exit strategy? In other words, begin with the end in mind. Whether you’re looking to sell your practice in the next 3-5 years or you’re thinking of retirement in 20 years it’s necessary to know what the goal is because eventually, it will happen. Scott shares with us how to be prepared.
Listen to the podcast here:
Three Steps To Living The Dream With Scott Fritz Of Multiplexit And “The 40 Hour Work Year”
In this episode, I’ve got a long-time mentor and business coach of mine and Will Humphrey’s that I have known for a number of years. Both Will and I knew Scott Fritz. We met him through the Entrepreneurs’ Organization. It is one of the networking things that we did to meet together with other small business owners. Scott was a moderator of the Entrepreneurs’ Organization. He also did some one-on-one coaching and consulting with us over the years, and was influential in our growth and expansion with our physical therapy clinics. Scott, number one, thank you for joining us. We appreciate it.
Thanks for having me, Nathan. It’s great to be here.
Tell the audience a little bit about your history. You are not from the physical therapy space at all, but now you are working in the physical therapy space. Tell us a little bit about where you are coming from and what you are doing now.
As you said, I met you and Will back when I was facilitating Accelerator, which were startup companies under $1 million in EO. You guys went on to not only join EO and have a great exit, but have done great things since then. I had my own company that I sold in 2007. It bridges that time when I had my company, sold it, and stayed involved in Accelerator.
I authored a book in 2010 called The 40 Hour Work YEAR, which chronicles how I grew my company without working in it or on it at all in the last years. Once that book came out, it took off. I have been coaching clients. I started a company called Growth Connect, which coaches, facilitates strategy sessions and educational sessions for companies basically in the US and Canada.
Earlier in 2021, Will called me up. I hadn’t talked to him in a while because he sold his practices there. He said, “I would like to come up with a plan to do roll-ups for other physical therapy companies because they are lost out there in the wilderness having a tough time putting these together and get those multiples up.” That is how you make that nice exit. I have been working with Will. Our company is called Multiple Exit. We have been working since last February on this. We have 22 clinics under our wing or we are going to take that up to 40. We are coaching them and looking to help them have a great exit in 1.5 years to 2 years down the road.
To summarize for the audience who are wondering what you are doing, we had the opportunity to sell our clinics in a loosely held partnership and agreement with other PT clinics. By doing so, by placing the entire group on the market, we were able to get more for the sale of our clinics than we could if we sold them individually. That’s what you are talking about. For those who don’t know what roll-ups and multiples are, that, in essence, was our roll-up. We put things together, put ourselves on the market, and by doing so, we increased the multiple that we could get on our EBITDA.
It’s Earnings Before Interest, Taxes, Depreciation and Amortization. It’s basically net income.
Most purchasers will use a multiple of that net income to buy your practices and the larger than net income, especially in a group setting, the greater the purchase price and so, you can get more. Essentially, that’s what you and Will are doing at this time is coaching companies to not only improve their businesses, their net profit but also make them very valuable and wanted by the purchasers that are out there.When exiting the business, it's not so much about the age of the owner but the stage of the business. Click To Tweet
As I said, we launched that. We fully launched it around August of 2021 but we had been working on it since February. We are going well and looking to add a few more. It’s a part of when we met in Dallas at that conference. That’s the conversation we had and here I am on your show.
The people that are going to connect with or maybe want to look into what you are offering between you and Will, who’s the prime candidate there?
What we have seen basically, is people who are pretty much technicians in their clinic. They still are probably treating patients but not as much as they used to. They are not necessarily great business owners. They might be good business owners but they don’t have the tools, the team or the resources to scale their business to get large enough to get their own exit. That’s where we step in.
We are a mezzanine or a middleman for the PT clinics who are big enough to be profitable and have a nice business. They are not so small that it’s a mom-and-pop but they are not at the point of wanting to take those steps to grow to a size that would get them a nice multiple. That’s who we are looking at. It’s stage versus age if you will. It’s not so much about the age of the owners. It’s more about the stage of the business.
Correct me if I’m wrong but those owners who are maybe looking to sell in the next few years would be prime.
Absolutely. Timing is everything. If you are interested in the next few years if that’s in your strategic plan, hopefully, you have one. You have looked at your vision statement of where you want to go to truly exit your practice in the next few years, that’s our target market from that standpoint.
You know this because you have worked with many small business owners. A lot of owners haven’t made that vision statement. They haven’t gone that far down the line to see what an ending or a sale looks like, how to prepare, what that looks like, and what to do afterward. That’s why I’m excited to have you is because you are going to walk us through some of those steps.
3 Steps To Living The Dream
In our pre-call, Nathan, we went over what your audience and viewers like to talk about. This is near and dear to my heart because this is probably about 60% of what I do on a weekly basis is work on helping people prepare and/or exit their business. I call this, three steps to LTD. LTD is what, Nathan?
Living The Dream.
Most entrepreneurs, like Will and you, when I met you guys, they are living the dream. They have exited their business. They probably have enough now in the bank that they are financially independent. They might still have to work a little bit but they are not worrying about how they are going to pay their bills and how they are going to cover their mortgage and pay for their kid’s college. That’s living the dream and getting to that financial independence. I broke it into some really basic steps. You know me. I like to keep things real simple.
Number one is you need to decide if you are ready to sell. That comes into two areas. I’m a binary guy, so I’m a yes or no person. You are not half pregnant, “Are you going to sell or are you not going to sell?” Again, that’s where I go to stage versus age. You have to have decided this at some point. The next step is the type of sale you want. I’m going to cover that. Secondly is, “I have decided to sell it. I’m yes on one. I have decided on the type of sale I want. Now, I need to prepare to sell.” What’s that preparation look like?
As we already talked about, the first thing is, how am I going to maximize that multiple? If you are not going to maximize the multiple, quite honestly, I don’t think you should enter a sale, a process. It doesn’t make sense. Secondly, the heavy lifting of all this is positioning the business for sale. Lastly, I’m going to talk a little bit about life after the sale. You would probably know this. We have talked to enough owners. A lot of the reasons business owners never sell is they are like, “If I sold the business, what would I do?”
I would share with them my own experience. I sold now many years ago. There’s plenty to do out there. Let me tell you, when you have the cash reserves in the bank and your money is working for you, you are not working for your money. To me, there’s, it’s easier to figure out what you want to do. Let’s begin with the end of mind. This is where I start with anybody. I’m sure you, Will and I had this conversation many years ago.
Would You Buy Your Own Company?
The first question you want to ask yourself is, “Would you buy your own company?” If you say yes to this, you need to take that next step, which is, “What would I pay for it?” I’m not being flippant about this. You need to have this written down in a journal, in your notes or typed up somewhere where you can reflect on this. The next question is, “What’s your number to exit?” We are already getting to that begin-with-the end in mind. A typical client of mine, I will talk to them and ask them, “Would you buy your own company?” A lot of times, they are put off by that.
I said, “Play along. What would you pay for it?” They say, “I will pay $5 million.” I said, “Great. $5 million, that’s not a bad number. What’s your number to exit?” They say $10 million. I go, “We know what we need to work with.” You would pay $5 million, which, believe me, nobody is going to buy you. It’s not going to pay what you would pay. They are going to pay lower. Don’t forget the IRS gets a piece of that as well and then let’s close that gap.
In reality, it’s the terms. It’s not the price because I could offer a great number to any business but my terms can be so onerous that by the end of the day, they only get 20% of what I offered them to begin with. That’s where Will and I are also very complimentary and helpful to these PT owners in getting those terms. A strong and as in favor of the owner as possible.
To share my own experience. I shared this with a client. We had 3 to 4 offers to buy our clinics over the previous few years. It was the terms that were the deal-breakers. The money was nice. We were like, “That’s cool that someone would pay us that much for the clinics.” Most of the time, and I know a lot of PT owners out there that have gotten offers such that, they are selling probably 70% of their business, mostly cash. The other 30% is either left for them to be partners in this new ownership deal and they end up becoming essentially clinic directors, office managers with their stake in the business.
That’s not what we wanted to do. We didn’t want to step down. One of these also was having an earn-out that could significantly, as you said, be onerous on us to hit certain metrics, targets, or else we didn’t get that extra 20% or 30% that we wanted on the backend. The terms are huge. I know a lot of owners might be looking specifically at their number but the terms make a big difference. It wasn’t until we were clear as to what we wanted with the terms that allowed us to know what we wanted when we sold them and what we’ve got.
Don’t fall in love with the numbers is what I like to say. It’s not the price. It’s the term. You mentioned those earn-outs, performance guarantees and holdbacks. When you read the fine print of a lot of these documents, the $5 million turns into $1.3 million pretty quick and that’s a whole different number. It makes a life-changing difference.
Lastly, this is something you need to think about. Are you looking to transition, or to your point, stay on and work there for a while or do you want to completely tap out? If you are saying, “I want to completely tap out,” the number and the terms have to align because that’s a whole different mindset. That does now get into age more than stage a lot of times.When your money's working for you, you're not working for your money. Click To Tweet
What Type Of Sale?
Older owners are done. They are in their 60s and maybe early 70s. They are not going to go to work anywhere else. They are not going to stay on and have an earn-out, and that comes into play when you are thinking about this. Again, you’ve got this figured out. You have made that first step. We are now moving towards the concept. Now, we need to talk about what kind of sale you want.
I’m not going to spend a lot of time on these in detail but the first one is a business sale. You sell the business. The value of the business is often much less than you expect. The reason is simply that you are too close to the business and see all the positives and not all the negatives. Your buyer is going to attach a risk discount and multiple one-sided terms.
You have to factor in the amount you pay yourself. How are you going to recover that income that you have been living on if it’s not there anymore? You have the money you’ve got from the sale but there’s no monthly income. Lastly, I say, the business may not have the same value once you leave if you are heavily in the business. A business sale is a simple way. When most people talk about selling their businesses like, “Let’s do a business sale.”
The second type is a management buyout. It can also be known as an ESOP or Employee Stock Ownership Program. This can be a great option since the management knows the business and they are often motivated to make it succeed. They might think they can do better without you and are happy to see you exit. I always remind one of my owners.
A lot of times if you have a strong team, if you get out of their way as I did, your business can be worth a lot more money but the main issue in an ESOP is the funding of the buyout can be complicated and tricky. It is very tricky to do an ESOP. Quite honestly, unless you have about 100 to 150 employees minimum, ESOP doesn’t make that much sense. There isn’t enough employee payroll to cover the ESOP buyout, management buyout.
Management buy-in, again, is where it’s a reverse of a buyout. It’s rare but in effect, it is a sale to a management team that is brought in from the outside. This management team was quasi investors. It’s more of purchase with the aim of an exit quickly. They are coming in and buying in but their goal is to do what Will and I are doing. Get that business as pretty as they can in 1.5 years to 2 years and sell it. That’s management buy-in. Sometimes you may be involved in that as you may stay on as part of that buy-in. They may buy you out.
The fourth one is going public. This can also be a roll-up. It can be a roll-up style without going public. They act the same. This option is difficult since the shares of the company value only go up if the business has lots of potential and not many people want to exit a business when there’s potential. Your business is killing it. Your rock and rolling with 100% growth. That’s the time you should want to go public but a lot of people pump the brakes because that’s the time they want to keep growing the business.
There are multiple regulatory hurdles and extra reporting. Plus, it can be very expensive. Going public, pretty much the rule of thumb is around $1.5 to $2 million to go public. For most privately held small businesses, going public doesn’t make sense from a financial standpoint. The owner is usually locked in for a couple of years before he or she can sell their shares. It’s like an earn-out but it’s even more onerous because you could be sitting there. Heaven forbid you sold and you sold the stock and ‘08 happened. You might have sold that $40 a share and now it’s $4 a share, so much for that return on your investment. That’s going public.
The fifth one is liquidation. A lot of people don’t think of this but this is a way to sell your business, especially if you have inventory. You can liquidate a company if you want to exit the business. Liquidation is not for insolvent businesses. This is a way you can exit a company. Liquidation means turning a company’s business and its assets into cash. From the standpoint of what is this called out in the world of buying and selling businesses, it’s called a Members’ Voluntary Liquidation or MVL.
This is where someone is like, “I’m retiring. I’m locking the door behind me. Sell the equipment and the book of business.” Is that what you are talking about here?
Correct. I knew someone. He wasn’t my client but he had a large company that sold accessories for cellphones, iPads, and all that stuff. He had well over $10 million in inventory. He basically liquidated the inventory along with the business and that’s how he got out of his business. It was a members’ voluntary liquidation. Again, this doesn’t apply much to a PT world but I’m only showing everybody the different types of exits that you could have.
Lastly and honestly, this is how we started our conversation is we sold our business. It is what’s called a recap or a private equity recapitalization. A recap is where business owners can sell a portion of their business to Private Equity, a PE firm. This gives the owner a cash reward and still gives them the benefit of forecasted growth or if you are in a low turnaround in the economy, you can ride the wave back up in the economy.
This is what’s different than a venture capital deal. PE firms not only provide capital. They can add value as a business partner. This additional benefit can come in the form of industry, operational and organizational expertise. This is all used to increase the value of your business. When we were first approached by our CPA, he said, “We’ve got some PE firms that are interested in your space. Would you be interested in doing a recap? Take some chips, some money off the table, and ride the wave of growing the business because they are going to put money behind it and maybe at some point go through a roll-up or go public down the road.”
Preparing To Sell: Ownership Paradox
A lot of times, a full exit can start in the form of a recap. That gets us through the deciding. You decided you are good to go. You decided the way you are going to sell your business. Now, you need to prepare. You’ve got to prepare. I like to start everybody with The Ownership Paradox. Nathan, I know you have seen this. It’s a simple exercise. When you have decided you want to sell, I take everybody through this exercise first. I know I’m going through a lot of stuff. Anything you want to add or questions before I move on?
No, questions at this time.
Now, you are going to prepare to sell, execute yourself against the ownership paradox. It’s real simple. It’s two arrows that intersect, forming an X. The upper end of the left arrow going down as owner in the business, 100% and the upper end of the right arrow going up as company value maximized. The bottom end of the up arrow is a company value. It could be negative or it’s as low as possible.
The bottom end to the down arrow is an owner in the business, 0%. I want to be clear here, Nathan. This is in the business, not on the business if you are a PT owner and still treating patients and you are doing administrative work. Quite honestly, if you didn’t go to the office for a month, the thing would fall through the Earth, you are in the business.
Your arrow trajectory is downward into that.
Correct. When I first did all this exercise, I circled the on the down arrow. I was in the business for about 75%. I saw this at a conference and the guy said, “Now that you have circled your down arrow, draw an intersecting line and draw another circle. That is the quickest, most accurate evaluation of your company you will ever see.” I went back and showed this to my team and I said, “We’ve got problems, right? I want to be on the right side of that arrow. I want to get my company value up. I’m going to start working with you, my team, to get me out of being in the business as much as possible.” You know the rest of my story. I wasn’t in or on the business for years and we’ve got a maximum price for our sale because Karen and I had not been in or on the business for years.
What was the management team’s response when you showed them this? When you said, “I’m in the business too much and I need to get out of it.” What was their response?
I always say to people, as you know, I’m not saying any of this is easy. I’m saying you can do it. At the time of our exec team of 5, we had 2 or 3 people who loved this. This was right up their alley. This is what they had been complaining about online. “You and Karen are too much in the business. Stop doing seagull management, flying over and pooping on everybody. Get out of our way. Let us run the business.”
Conversely, we had 2 or 3 other people who were more doers. They didn’t want to be an entrepreneur, grow the company, find ways to be creative, and scale things. Quite honestly, they weren’t with us two years later on the executive team. They were still in the company but they weren’t on the executive team any longer. Part of the battle or the challenge is finding those good A-players who believe in and are aligned with the mission, vision, and values of your company.
Owners need to be aware of that. They are not going to satisfy everybody as they are going through this process. If they want to maximize the value of their company, not everyone is going to be on board and maybe you need to expect that going into it. Start looking for those who are aligned and find places for them to grow and progress so that you can maximize the value of the business.
Thinking back, I remember the first strategy session I did with Will. I don’t believe you were there at that time. You might have been but there were 10 or 11 people in the room because Will wasn’t sure who all should be on that executive team. By the last one we did, which was a few years later, there was that core of six people who got it. They were laser-focused and aligned with the culture. They knew Will and you were taking the company. Being patient is part of this and that’s tough for owners. They want everything done yesterday but you’ve got to be patient. To your point, “You’ve got to get the right people in the right seats,” as the saying goes.
Let me show you real quick. This is the power of the ownership paradox. I call it paradox monetized, which is known as the add-back feature. This, again, is something we are working with these PT owners, Will and I, very heavily on. In fact, it came up on our call. I will take you through a quick scenario. Let’s assume you have an offer to buy your company for five times EBITDA, which is what we already talked about, which is net income. Your EBITDA is $2 million. Basically, it could be a $10 million sale, everything else equal.It's not about the price; it's about the terms. Click To Tweet
Your annual salary plus benefits are $500,000. Your total compensation, distributions, pay and everything is $500,000. You work in the business full-time. You are on that arrow I showed. Now, you’ve got a good business, obviously. You are making decent money but your EBITDA is low or lower than it should be because you are in the business full-time. Here’s the reality. The buyer will probably allow $100,000 at most of that compensation to be added back due to the fact that they will need to hire one or more people to replace you or in the earn-out scenario, you still need to stay on and work. They’ve still got to keep paying you some salary.
It’s not going to be $500,000.
No. They are not going to give you that $500,000 add back because they’ve got to replace you or add a couple of people.
What’s the right value to replace you and it’s not $500,000?
What should be $2.5 million because they would add that $500,000 back to your $2 million if you were not in the business at all. When Karen and I sold, all the compensation, we’ve got annually, got added back to our net income line. In this scenario, the $2 million becomes $2.5 but they are only going to allow $100. Now your $2.1 is what’s called an adjusted EBITDA or your add-back EBITDA. It’s $400,000 difference.
Let’s do a little math here. Instead of getting a $12.5 million buyout, you are going to get a $10.5 million buyout. $2 million left on the table because you were too much in the business. As I like to remind people, you can make more money. You can’t make more time. All that time you spent in the business is gone. You are never getting that back.
The reality is if you don’t execute when you are positioning your business for sale and get yourself out of business, which is what we are working with our members on, Will and I, you are leaving a lot of money on the table. $2 million isn’t only pocket change. It probably pays your tax bill. That’s the monetization of the ownership paradox. Instead of saying, “That’s a cute little diagram. What does it mean?” This is what I’m trying to get through to people now because what I kept missing the boat on this one is you are leaving a lot of money on the table. Get out of your business. Get out of the way.
That’s hard for physical therapists to do. I’m sure you recognize this in other industries. Let me know your experience but in the physical therapy realm, as I’m working with clients and telling them, “If you want to achieve these goals and grow your business, you have to get out of treating full-time.” That is a very difficult transition to go from technician to administrator because honestly, that’s what we spent several years of our life in our professions doing to build up to be a licensed physical therapist. Now, you are telling me to discard that identity and take on a new one. Honestly, I don’t know what to do in that administrative space. I’m sure that’s what you and Will are doing.
What I’m doing with my one-on-one coaching clients is to show them this is how you manage. This is how you lead it and this is now what you do with your time that you are not treating with patients. What I love about this is that you are showing them there’s a monetary value to doing this. Your business is not only going to grow and you will gain more fulfillment by serving more people. Monetarily, you will be rewarded.
It’s spot on. Will and I tell people, “Once you have decided you want to join our group and be part of it.” Again, we have answered that. Am I ready to sell? Here’s the vehicle we are going to use. You need to be all in. That’s what this is about. This is about being all in because if you are not all in, don’t even bother deciding to sell. Keep doing what you are doing until you decide you want to be all in.
Improve your business, keep going, be happy and achieve your goals both personally, professionally and financially. This is for those people who are focused on the next few years.
On making an exit and you know me well enough. Everybody should always be thinking of their exit, whether it happens next year or ten years. Your exit will find you if you don’t find your exit. It’s the way to look at it.
You are going to exit sometime. It’s best to be prepared.
15 Quick Points
One more thing I wanted to talk about here before we move on to life after is you have decided you are selling. You have figured out your ownership paradox. You figured out your add-back. You are getting yourself out of your business. Now, let’s talk about fifteen quick points. By the way, I meant to mention, if you buy The 40 Hour Work Year or you go online and get the Audible, all of this is on there in detail.
This is straight from the book because it’s my story of how I did what I did. Let’s talk about this position thing now. If you did nothing else from reading this and you decided you want to sell it, you can start executing against these points and your practice is going to be running way better 6 to 12 months from now than if you did nothing.
First and overall, a CEO is overseeing the entire company. The CEO is not the founder. I’m not hung up on titles but the point is you have somebody else overseeing your company. It’s not you. You are less of the focal point of the business. The executive team of entrepreneurs is accountable for every aspect of the performance. Again, that’s the concept where you’ve got your executive team. They are running the business. You are there more as the visionary and a coach. You are not there to run the business. Strategic planning, exit planning session every year with a mid-year pulse. This is what I do with you folks, having that annual planning session.
Strategic planning is exit planning. That’s what you are doing. Top five priorities for the company over 1, 2 and 3 years. Again, get yourself ready to show the buyers where you see your company going over the next 1, 2 and 3 years. Owners are passive investors and visionary in their leadership. You have taken on the role of a passive investor and founder. You are not CEO or president any longer.
What would your definition of a passive investor be? What qualifies as a passive investor?
You probably remember this from our days working together. A passive investor has no direct reports. You may get on a monthly call to go over financials or key metrics but there’s nobody reporting to you directly, other than the CEO or president of the company and that’s only on a monthly reporting basis. They are not reporting to you daily, “How did I do?” You are not overseeing their work efforts. They are strictly reporting to you as a board of directors. Almost think of yourself as a board of advisors member or a board of directors’ member.
You are over your costs while increasing sales. A buyer wants to see that. As a percentage, they want to see that you have kept your costs under control as you have grown the business. You haven’t gotten fat and happy and spent all the money. You have brought it on the top line. Systems-dependent operations can’t talk about this enough. “Hire people to run the systems. Don’t hire people to run the business.” Even though it’s halfway down the list, it might be number one from the standpoint of positioning your company.
Does that particular action item come up frequently in your annual planning sessions to become more systems-dependent?
For people who have not done this, have not systematized or put their standard operating procedures in place, it’s always in the top five until it gets done.
That’s what I’m seeing. As I’m working with my clients in doing these annual planning meetings, creating and systematizing their policy and procedures manual, it comes up number 1 or 2 almost every time.
A great tip and I’m sure we have talked about it. He used to be in the Accelerator group in Arizona. It’s Chris Ronzio who owns Trainual. That’s a web-based platform for all your systems and training for your company. In fact, everybody that’s in our member group is all going on to Trainual to systematize all their clinics, whether it’s Trainual or somebody else, you need to get that stuff out of your brain. Get it documented. Put it into your documented procedures and processes, so when you hire somebody, you can show them what they need to be trained on.Everybody should be thinking of their exit. Whether it happens next year or the next 10 years, your exit will find you if you don't find your exit. Click To Tweet
Buyers want to see that.
Again, in our case, Karen and I had had nothing to do with the business for four years. It was evident that we didn’t say we had systems. We had systems, otherwise, we wouldn’t have been as profitable as it were without the owners being involved. A great reputation in the industry, it goes without saying. Good luck selling if you are known as the black sheep of the market. That’s not going to work so well. No company debt. Again, you can sell with debt but when you have a company that’s running without debt, it makes the positioning for an exit so much easier. There are no funky warrants, reps, guarantees or you’ve got to buyout Uncles Sal who put money in many years ago and you forgot to pay him off. None of that.
If you have $100,000 in debt, does that go against your EBITDA?
What they would do is and again, not always but in most cases, they would back that out on the sale price. If you were to get $1 million for your business and you had $100,000 in debt, they would pay off the debt on the bank, let’s say, and then pay you the $900,000.
Are they not going to multiply that debt like they multiplied the net income?
No. It would be subtracted because it’s a balance sheet item, not a net income at or above industry standards in all margin areas. Again, this is one of the things we are working with our members on getting those margins up. Year-over-year client retention and top 10% of the industry. You want to keep those clients, the ones that are the ongoing clients.
Year-over-year growth and top 10% of the industry and a nationwide footprint. Again, what Will and I are doing comes in handy. We are able to say, “You may be great in your market of X City and Y State but imagine the power you have when you have 40 other clinics joining you in 8 other states and 12 other cities. That gives you that power, that economies of scale that buyers are looking for.”
What was exciting about our purchase when the purchasers bought us is that we had a large footprint in Metropolitan, Phoenix, and some clinics that are outside of Arizona, in Southern California, and even some in Louisiana. That footprint, especially specific to geographic Phoenix, was a big deal.
I put nationwide in the book because that’s what we had done. We were in 42 states. We were pretty much nationwide but when it gets to things like what you were doing, this could be like, to your point, a geographic concentration. It’s the same thing. That’s what buyers are looking for. Typically, they are not going to want 20 clinics spread over 20 states. They want maybe 4 states with 5 clinics each or in your case, 3 states with 8. Get some concentration. That helps to get your sale price.
No outstanding litigation. Here’s the problem. If you have outstanding lawsuits and you go to sell, the buyer is going to do what is called a holdback. It’s typically three times the estimated settlement amount. By the way, now they bought you. They’ve got three times the settlement amount out of you. How likely do you think they are going to fight this litigation and get you the most money you can get? They are not. In my case, Karen and I, my business partner, had to pay off two pending lawsuits. We’ve got them off the books because it wasn’t worth going to the sale with those on the books.
Lastly and again, this isn’t tough in the PT world but in some businesses, it’s very difficult especially SaaS businesses. No single client 5% over total sales and margin. Make sure you have a very diversified client base. I have had clients who had 50%, 60% of their business coming from one client. I call that the golden goose sitting on a stack of dynamite. You are waiting for that to go off and when it does, game over.
The companies that we are looking into our clinics, wanted to see our payer mix. They wanted to make sure that we didn’t have 60% Medicare and 70% of our referrals from a single physician. They wanted to see the payer mix and the referral mix to make sure that we weren’t isolated into certain insurances and doctors.
That’s a great point in your industry. That’s what it is. It has been interesting working with all these other PTs and owners out there that a lot of them are in the top five. They want to make a priority shifting to more of a cash pay percentage of their business. They are coming up with services and offerings that are cash pay only. Cash is King for a reason. It’s exactly what you said. In my case, it was client percentage. In your case, it would be a certain percentage in certain buckets of payables.
You can look at it that way, too. If 100% of your business is insurance-based, that’s typical for the profession but if you could diversify and show that, “We only have 75% or 60% of our business is insurance-based and this other 40% is cash-based.” That could be huge.
For a buyer, especially, because they are not worried that something goes sideways in the insurance world, which as far as I know, Nathan, insurance carriers aren’t paying out more.
No, they are not inclined to do that.
Life After Exit
I know you want to keep this on a time limit here, so I’m going to go right into life after. This is pretty straightforward. Honestly, it’s like, “Begin with the end in mind.” You need to be thinking about this all the way through. Don’t wait until the day it closed and the money got wired to your account. You never even had this conversation with yourself, your family or your spouse. You said, “I sold. Now what?” I was doing a talk in Florida and this guy came up to me. He said, “I sold my first business and I thought I was going to fish the rest of my life. I love fishing but I don’t love fishing 365 days a year.”
You’ve got to know what you are going to go to. Again, I have said this already, stage versus age. The life after has a lot to do with stage versus age. Meaning, are you totally tapping out and you truly are going to retire because you are at that age of your life or are you going to go into something else, stay involved, and transition into something else? I like to say this. Secondly, plan to take a deep breath in several months to a year off. Will went to Europe for a year, six months or something.
Will took his family to Europe for six months. This was a tough part for me because I hadn’t figured this part out when we sold. It was a good year or so before I figured out what I wanted to do next. I’m still playing with things.
That’s fine. There’s nothing wrong with that but you are doing something and moving forward. That’s why I say this is three steps. You decide you want to sell, get your company ready to sell, and also, this goes in congruence with it, thinking about your life after. Don’t wait until the very end. Define your life and what you will do in 1, 2, and 3 years after the sale.
You sit down and think about this. Even if year one is do nothing, travel the world, go to Europe or whatever, what are you going to do in years 2 and 3, when you come back? Be specific about this. Be intentional. Don’t wing it. Sit down and put a top five together for what you want to do with your life. Recognize and forecast your new reality and cashflow situation. I touched on this a little bit before.
Hopefully, those of you reading, having a net worth or a cashflow statement that you look at as a personal standard for your life or a budget for your life, you need to forecast what’s this going to look like once that income has gone. You are living off what you’ve got off the sale and/or other residual investments. It can be a shocker if some people are living high lifestyles and that cashflow is gone and you start to see, “My bank balance keeps going down and nothing is replacing it.” It can be all hands on deck. Let’s not forget, the economy is going to go up and down. Things are going to happen. Don’t expect to be a constant rocket ride in the stock market.
That money can go quick.
Communicate your plans to family members. Don’t leave them in the dark, especially your spouse and people close to you. “By the way, I sold my company.” A long story I won’t go into but I went in on a deal and bought part of a company, the majority with my partner. The seller never told his wife. Two days later, we’ve got the phone call, “I need to buy you guys back out or I’m going to have to get a divorce.” Keep your family members included in this conversation. It’s not a secret. When you go on one morning and say, “I’m not going to work now.” The wife says, “Why?” and you go, “I sold the company.” That’s probably not a good place to be.
It’s probably not a good place in the relationship.
Get your finances in order and create a new forecast, a net worth statement. I hit on this already but make sure that this is all in place. You are not going into a blind. You can forecast this out based on what you are going to get paid. It’s not going to be that difficult. That’s it.
Thank you so much for sharing all that. You shared a ton of information. Even the different ways that you can exit your practice are much more than I have shared with the audience in the past. It might have even gone over their heads. You hit on some key points and that it’s important to be intentional about this, essentially. What do you want to get out of your business and when? What does it look like? Let’s prepare, so we can maximize that exit but to what extent? Why are we doing this? What is the purpose behind this?
I had a client who sold last year and I was worried about him because he was selling a singular practice. As I asked him the different questions, what are you going to do and why is this a good time and how is this going to work out for you? I found myself saying, “Maybe this is good for you.” I gave him my thumbs up. Not that it mattered. He was going to go through with it anyways but what was initially a concern was not so much because he had thought through these things. He knew exactly why he was doing it. He had full faith and confidence in what he was going to do next.
Honestly, he knew if that didn’t pan out, what he was going to do after that. He had a plan B and C. It’s easy to go into this situation and it’s much more comforting when they have thought that through. It’s even more comforting. Honestly, Scott, the cool thing about what you and Will bring to the table is that you bring much experience to the table so that owners know that they are not going to get taken advantage of.Hire people to run the systems. Don't hire people to run the business. Click To Tweet
Obviously, you know Will well. I know both of you well but you know Will well, being his business partner and all that. It’s not bragging but I don’t need to do this. I’m doing this because as you can probably tell, hopefully, in the presentation, I’m very passionate about entrepreneurship. I’m passionate about helping business owners. When Will told me this story, quite honestly, most PT owners don’t get anywhere near the value for their company they should get.
That’s what sold me to go into this with them. It’s fun to see the excitement and the positive attitude that comes out of these owners when they start to realize, “This isn’t unicorns and rainbows. This will happen. Here’s how we are going to do it. Here are the steps we are going to take.” 1.5 years to 2 years from now, we have a successful exit.
At the very least, you have a very successful business. That’s essentially an ATM. Your goal is to get them to be passive investors, whether they sell or not.
That is an approach we have taken with several of them. Most of them now, are in the mindset but in the beginning, they were like, “Maybe I want to create an ATM.” We said, “That’s fine. There’s nothing wrong with that.” As I say in my book, if your business is running as if it could be sold for the maximum amount at any time, that’s going to naturally kick off the most cash for you and make your life the best it can be. I lived the dream for many years before I sold my company. Living the dream to your point, it can be an ATM. That’s still living the dream if that’s what you want.
There are many possibilities at that point. It opens up a whole new avenue. A lot of opportunities are then afforded to you when you get to that point but it takes some of this guidance, leadership, the grind, and the sweat equity to get to that point. It’s not like you said before, as you were transitioning from that 75% in the business to 0% in the business, that’s a grind. It takes some work.
It took us months to totally transition out of business, which is why I tell people. Depending on where you are at, 12 to 24 months to transition yourself out of business to whatever degree that means. The other thing I will say real quick, too, because we have some members who have talked about this. Doing this not only positions you to sell your company but also positions you to buy other companies. Let’s say you have gone out and raised some money or you have some investors that want to have you be the lead purchaser, you could then go out and purchase, acquire and merge these other companies into your operation.
That’s cool. I love that concept. If people wanted to get in touch with you and what you are doing, either you personally or learn more about multiple exits, how do they do that?
My email is Scott@GrowthConnect.com or you can go to GrowthConnect.com and you can find me there. You can see all the different services and projects I’m involved in. If you are interested in the book, you buy it on Amazon, Audible. It’s 40 Hour Work YEAR or you go to 40HourWorkYear.com, either way. Look me up. I always talk to Nathan. I will send Nathan the PowerPoint. If anybody pings you for that, feel free to send it out to anybody that wants it.
Thank you so much for your time. I appreciate it.
It’s my pleasure. Thank you.
- Entrepreneurs’ Organization
- Growth Connect
- Amazon – The 40 Hour Work YEAR
- Audible – 40 Hour Work YEAR
About Scott Fritz
In 2010 Scott authored The 40 Hour Work YEAR | 40hourworkyear.com. The book chronicles Scott’s entrepreneurial journey first hand, as he shares strategic business methods, action focused exercises and the mindset philosophy that allowed him to achieve The 40 Hour Work YEAR and become a passive investor in his own business. Using his book as a platform, Scott speaks to hundreds of entrepreneurs and business leaders each year.
Scott founded Growth Connect | growthconnect.com in 2008. By leveraging business coaching and exit planning services, Growth Connect specializes in transforming businesses into assets. Since 2008 Scott has facilitated over 400 strategic focus sessions.
As an active Angel Investor since 2000, Mr. Fritz has invested in over thirty separate ventures. His involvement with these companies ranges from passive investor to business coach and advisory board member.
Mr. Fritz founded Human Capital in 1997. He grew the company into a nationwide player with 2007 annual revenues of $170 million dollars. This hyper growth landed Human Capital and its affiliate division on the INC. 500 list in 2003 and 2004 with growth rates in excess of 1,000 percent. Human Capital was sold to a nationwide staffing firm in 2007.
In addition to various business pursuits, Scott held multiple local and global volunteer positions within the Entrepreneur’s Organization (EO) between 2001 and 2015. Mr. Fritz is also an EO Certified Facilitator which allows him to pursue his passion of working with leading entrepreneurs in the areas of strategy, sales, leadership, people and finance.