Scott Christiansen (00:07):
All right. Welcome Matt Phillips and Gian Ricco, the founders of ExitMinded. Now, this is a new business. The two of you started, you’re longtime advisors, investment bankers, and now you’ve started this business called ExitMinded, where you’re helping business owners. To me, it’s almost like a time machine. You’re like going back in time to where you wish you could have engaged somebody so that they have the time to be prepared for a sale. But on your website it says you helped them increase the probability and a profitability of a future sale. Why is that probability so important?

Matt Phillips (00:44):
Yeah, well it’s a great question, Scott, and I appreciate you having Gian and I on to talk a little bit about what we’re doing at ExitMinded. For us, the probability piece is really critical because most small and mid-size business owners don’t realize how hard it is to sell a business, and they don’t realize that the vast majority of privately held businesses that try to sell are unsuccessful. So that number, what a lot of business owners don’t realize looks like 75-80% of business owners who try to sell are unsuccessful.

Scott Christiansen (01:46):
And nobody knows this. Does anybody know this? Gian why didn’t you tell everybody about this?

Gian Ricco (01:53):
Yeah, that’s right. And there is some selection bias in that, Scott, right, Matt, that the larger you are, the more professional management team. If you have institutional equity in your shareholder base, those improve your factors. But there is no such thing as one company that is guaranteed to sell. And as you get smaller and or less professional, more family owned businesses, that probability of failure unfortunately goes up. And in the 20+ years that Matt and I have been doing this a piece, we’ve certainly run into situations where we either knew something was not sellable out of the gate, or we did think it was sellable. And at some point, collectively, both us and the client came to realize something that was there with the business at its core that was going to prevent a transaction from occurring. And Matt, I mean that’s the most frustrating thing for us as investment bankers you turn into as well as for the client.

Matt Phillips (02:59):
Yeah, absolutely. And that’s candidly one of the sort of what prompted Gian and I to start up ExitMinded, and it had more to do with as investment bankers we’re middle market investment bankers, we’re typically in a position where we have to sign an engagement letter with a new client without perfect information. Candidly, with a limited amount of information about the client’s business, we will usually have seen some financials but not a whole lot more. And in a lot of cases, what we’ve experienced in our careers that we’ve gotten engaged to help to sell a client’s business. And then as we start to learn more and more about the client’s business, we realize that this client is nowhere near ready to go through a sale process. And there’s just a lot of work, not sort of weeks worth of work. There is months and months and potentially years worth of work that needs to be done to really get that business and that business owner ready for a transaction. And so ExitMinded is really geared to really find and speak to those business owners, not the ones who are saying, I want to sell my business tomorrow, but I’m 63 and I want to sell my business in the next 3, 5, 7 years. Those for us are the ideal potential clients.

Scott Christiansen (05:03):
Which is the way people should think about it in a perfect world. You kind of stair-step them into this process, you’ve developed this assessment that you want everybody who’s thinking about selling, who thinks they might sell, who’s starting their pathway to sell, should do this assessment and figure out where they are, what’s working, what isn’t, and get on the right path. Tell me about it.

Matt Phillips (05:29):
Yeah, absolutely. So really the goal is to help them identify all of the critical deficiencies or problem areas within their business that would impede a sale, prevent a sale, or reduce the likelihood of sale. And along with that also typically means the value at which a sale would happen. And so what our assessment is really designed to do is look at virtually every aspect of a client’s business, not just their financial reports, but looking at all their critical legal documents, their organizational documents, looking at their employment matters, looking at their management teams, looking at potential tax issues that they may know about, that they may not know about. And really a wide range of issues, potential liabilities, warranty expense that may be out there, or liabilities that may not show up on a potential client’s books. There are a whole host of reasons, and we’ve kind of seen this through our careers, why transactions fail. And so we realized that we as middle market investment bankers are really in quite a unique position to identify all of those issues. Sometimes the lawyers can identify some of those issues and your CPAs can identify some of those issues, but nobody’s in the same position that we are.

Scott Christiansen (07:41):
Yeah, I mean it’s the lens of who’s going to buy it and who’s going to negotiate against you. So Gian, that sounds like a pretty important perspective.

Gian Ricco (07:51):
Yeah, I agree. Scott, and as Matt alluded to, our assessment will review all the key aspects of a business looking for risk profiles or impediments to a sale. Because what happens is as you go through a sale process, which best case scenario is probably going to take somewhere between four to six months, once you engage with a potential advisor, as you get closer to the end, you are going to get through first round bids and then you get to second round bids and you typically are granting exclusivity. And at that point you’re looking at 60 to 90 days where the buyer’s going to bring in a number of outside consultants and experts to do a deep dive due diligence effort on your business. And again, the very narrow but very deep dive. So as Matt alluded to, it’ll be third party accountants or insurance experts or HR experts, certainly lawyers are going to get in there and review all of your key documents.

(08:58):
And what you don’t want to do is start learning things about your business during that process. And unfortunately that does happen. And when it does happen, one of two things are going to result. Either you’re not going to get a deal done or you’re going to have a significant price reduction. And everybody in our business has gone through that same exercise. And again, like I said before, it’s not fun. One example, and I think it’s easy for people to understand is you’ll be dealing as you go through the process, everybody on this side of the table and the other side table as well will need information. So something as simple as monthly P&L balance sheet statement of cashflow, KPI reports in a timely manner. What does that mean, Matt? What 7, 12, 15, certainly number than 30 days after month end close, you need to produce financial statements to provide to a buyer or a potential lender. And all too often a client that we engage with is unable to do that due to a variety of process. So one of the things we’ll look at through our assessment is to help them figure out a way to get to that, a spot where they need to get, which is produce timely financials in a very short period of time.

Scott Christiansen (10:20):
Alright, so as a business owner, you have to understand that you’re breaking my view of how this works. The way that this should work is I started this business, so it’s special and it’s worth a lot of money, and the way we run this business is really special, so it’s probably worth what, seven multiple. So that’s really all I should have to do. You’re making me do a whole lot of process here.

Matt Phillips (10:51):
Right? Right. No, and look, that’s the other thing that we feel like is really important to be able to communicate with business owners is one, there’s no guarantee that your business is going to be sold. There’s no guarantee that there’s a buyer for your business. We want to help you maximize the likelihood that there will be a buyer and that will be a transaction that meets your objectives. The other thing is it’s really from our perspective valuation. A lot of business owners have numbers in their head that they think their business is worth, their business may be worth.

Scott Christiansen (11:41):
You mean all of them have that number?

Matt Phillips (11:44):
Is that what you mean? They all have that number, and that’s usually not necessarily based in reality. It may be based on what their buddy at the country club told ’em or what he heard

Scott Christiansen (12:06):
From somebody.

Matt Phillips (12:07):
His next door neighbor who sold the business and told him he should get X. That sometimes is the biggest obstacle, Scott, for clients successfully selling their business because truthfully, businesses that aren’t ready for sale, they don’t have a value attached to ’em. A value means there’s a willing buyer and a willing seller. So we try to encourage clients and business owners to forget whatever notions they may have in their head about what they think they should be getting for their business. Because the reality is that the right question to ask for most business owners is how much do you need to successfully move to the next stage in your life? It’s not how much do you want or how much do you think you should be getting? It’s how much do you need? And we always find what that a transaction can meet what they need to move to that next phase of their life. And so that sort of what I think I should get or what I think it’s worth becomes an obstacle to the client, to the owner retiring, moving on, transitioning to the next phase of their life.

Scott Christiansen (13:49):
Well, I’m just thinking, I tease it. This would be a great time machine if you give, when you’re talking to somebody who’s not ready for sale, if they could go back five years, seven years and have done this, just the exercise of going through this assessment for someone who’s 60 years old’s, got a nice little runway before they want to sell their business. The exercise of getting this visibility of what’s going to impact sale because everything that impacts sale also impacts probably profitability that impacts their ability to scale. All of these things, if they go through the process, they’re probably running a completely different business at the end of this process, whether they sell or not,

Matt Phillips (14:35):
Right? Absolutely. Because a lot of, and part of what a lot we’re looking at is very much operational in nature, and so they’re not just legal or structural things. We’re changing. We’re really improving the financial performance of the business, the capital efficiency of the business. There are a lot of times where business owners don’t keep a good eye on managing their working capital, their inventory or receivables, and that’s real cashflow. And so part of our assessment really looks at how are they managing working capital or not managing working capital, because that’s true cash that flows out of if we can improve their working capital position, that’s cash that flows directly into their pocket.

Gian Ricco (15:41):
I agree. No. And Matt, what we see is for those privately held businesses that are being undermanaged, and if they are successful in getting a transaction done, what’s one of the first things that a private equity or professional investor is going to do to work in capital within 60 90 days? They’re going to reduce it. And again, why should they get the benefit of that when you as the business owner should be able to do it 1, 2, 3 years before a sale? There’s no reason why you should let somebody else take advantage of you. And that other things we see, again, sticking on the financial side is how many times have we seen where a client is losing money because they’re unable to produce either revenue or revenue and gross profit contribution margin by customer? They may actually be losing money on a consolidated basis for an individual customers. So having those reports, again, not just high level p and Ls, but more granular KPIs is critical. And again, it is what the next buyer’s going to do. And without those reports available, it’s going to come back and bite you at some point in the process.

Matt Phillips (17:04):
And I think that you alluded to this, Scott, but really what we’re doing through this assessment is really, it’s a cram course for business owners to really understand what they’re going to see and hear through a sale process. And so for most business owners, for most of the clients that we’ve worked with over the years, they’re not serial transactors a once in a lifetime transaction. So the whole idea of a transaction and that process is foreign to most business owners and most of the clients we’ve worked with in our banking careers. And this is really educating them, giving them the tools, the knowledge really to go through that process to improve their businesses, to improve the likelihood of a successful sale and improve the value at which that sale will occur. And they’ll realize on the sale, but it really is educating them about the process and what the buyers and their advisors are going to be asking about what they’re going to be digging into and why. And that’s really critical information. And so yeah, I think most business owners would always love if they could go in a time machine and go back. They would love to have the knowledge that they have post-transaction before they started this transaction. And so that’s really a big part of what we’re doing.

(19:00):
The assessment is sort of the vehicle and that we kind of provide it, but it really is like an education.

Scott Christiansen (19:10):
I love it. You built a time machine. Good job. We thought it was an assessment, but it’s not.

Matt Phillips (19:16):
Yeah. So Scott, if you don’t mind, the one thing I would, it’s important for Gian and I, and I want to point this out, is that the one thing that ExitMinded is not doing, we are not trying to sell a client’s business. We do that in our other jobs, but that’s not the goal at ExitMinded. The clients are free to down the road after they’ve implemented all the great things that we’ve suggested to them. They are free to hire a banker if they want. If like me and Gian and they want to hire us, terrific. If they want to hire somebody else or if they want to do it themselves, that’s their decision. We don’t want clients to feel like they’re being obligated in any way, really. This is just intended to help them for a future sale.

Scott Christiansen (20:23):
It’s a completely different business model than what you’re doing. Absolutely.

Matt Phillips (20:26):
Yeah.

Scott Christiansen (20:26):
Gian, where did you guys get this passion for, I know the middle market, this is below the middle market, these are the people who aren’t ready. Where did you get the passion to really jump in and put your time and energy into this market?

Gian Ricco (20:40):
Yeah, it’s really been, it’s the result of, again, like I said, 20 plus years for each of us of having lived through an M&A process day in, day out. And I would say it doesn’t necessarily have to be smaller businesses. Matt, you and I have both have dealt with very large organizations that effectively are managing their operations on the back of a napkin. I mean, not literally, but it feels like it for us and for the professional investing universe. So it can be a benefit to many or most businesses that are contemplating a sale as long as you have the timeframe in which to make some of these recommendations. And as it comes to that, again, Matt and I are bringing our collective wisdom to each assignment. And if a client does have steps they want to implement, we have a very tight and small stable of professionals, whether it be attorneys or accountants, HR benefits experts that we can point them to and say, look, we’re not the expert in this field. We know, yeah, we’re going to marketing experts who can fix your problem for you.

Scott Christiansen (22:07):
Alright.

Gian Ricco (22:08):
Yeah,

Scott Christiansen (22:09):
Gentlemen, ExitMinded sounds amazing. Congratulations. Now, this is the point in the interview where I stopped talking about you and it’s all about me. This is the Root3 Pointers where I ask you three questions. They’re all about me or my clients. Okay. Number one, I work with a lot of healthcare businesses. So all of this stuff that you’ve said about preparing for a sale, a lot of them are founder owners who they’ve gone through proof of concept phase, they’ve gone through their pilot phase, they’ve scaled the business, and maybe they’re looking for some sort of liquidity event or partner, anything specifically for healthcare B2B that you think, and this is the B2B side. I’m going to ask you the B2C next, the direct to patient, the physician practice side next. But anything that you think is terrifically important for healthcare business to business?

Matt Phillips (23:05):
Yeah, absolutely. I’m glad you brought that up, Scott. I happen to do a lot of work in the healthcare space, including with provider businesses that are dealing directly with patients. But the healthcare world and the transaction process and for a healthcare business is very unique in terms of its complexity and the risk and what that diligence process looks like. So there are a lot of regulations and agencies that govern healthcare providers. And so things like data protection, HIPAA, data privacy, things like stark laws and anti-kickback statutes, these are really relevant to a lot of healthcare providers, even if they deal with other businesses and not necessarily directly with patients. There are a whole host of areas where even the smartest, brightest physician business owners have realized that they’ve got issues. There are payer audits that happen that could happen. And there are questions about, is your electronic medical record system complete? Does it support what you’ve been billing? So that brings a whole different layer of complexity, and it’s another added aspect to a healthcare business that again, presents potential obstacles to a sale.

Scott Christiansen (25:16):
Yes. So expect more complexity. Absolutely. Cook in, cook in some time. Gian, anything you’d add?

Gian Ricco (25:25):
No, Matt’s really the healthcare experts, Scott, I straddle between manufacturing and direct to consumer or consumer businesses in general, whether it be food. And for those on the manufacturing, its tariffs. That’s the concern of the day, both on the revenue and cost side and on the consumer side, it might be as simple as what’s your customer acquisition cost relative to your lifetime value? And again, that’s something that needs to be calculated, but many of our clients are unable to do that until it’s too late. So those are some of the things we kind of dive into in our assessment.

Scott Christiansen (26:01):
It sounds like in any industry you’re in, you’re going to have to be prepared for some of the very specific complexities of that industry.

Matt Phillips (26:11):
And data is key Scott, and it doesn’t matter whether you’re a healthcare provider or you’re a manufacturer, you are an industrial services provider or you’re a consultant. The way to differentiate and be successful is capture and leverage data and information about your customers, about their sales is really critical about your costs. And again, for a lot of older business owners, they’ve not operated their business that way, but increasingly to be competitive and improve profitability, you have to be armed with that kind of data and information. And so some of that, Scott comes in the form of us really looking with clients at the information systems that they have within their business, what data are they capturing? How are they capturing it, how are they using it, and what could they be doing?

Scott Christiansen (27:28):
Well, that leads me in my second Root3 Pointer, which I think if I’m interpreting what you’re saying correctly, is that really marketing and marketing data is the most important part of any sale, and marketing is the most important thing to bring in advisors for.

Matt Phillips (27:47):
Yeah, I’ll let Gian handle that one. Yeah,

Gian Ricco (27:49):
Yeah. No, absolutely, Scott. And having something, somebody like Root3 on your team is amazing. And I would say that even if you weren’t in the room, Scott, because particularly on the consumer side, your social media presence and strategy, so there’s so many ways to get it wrong, Scott, and you see it all day long, and there’s only a few ways to get it right, and you really do need somebody who lives and breathes that world every day, unless you’re a Fortune 500 company, then even they get it wrong on a regular basis.

Scott Christiansen (28:31):
I was kind of joking, but really the information systems around CRM and marketing and sales and pipeline improving your customer.

Matt Phillips (28:45):
Absolutely, Scott.

Scott Christiansen (28:47):
That kind of data is definitely things that we see the businesses we’re getting up to for sale. We see that they’re preparing for sale when they start to professionalize that sales and marketing operational side of things. But Gian, I’m glad you handled that question because my last question is for Matt. Matt, we golf together a lot because other people won’t golf with us because they’re scared of our game. So I just wanted to give you the opportunity really quick to praise parts of my golf gam

Matt Phillips (29:18):
Your golf game. Oh, absolutely. Scott’s an incredible golfer.

Scott Christiansen (29:23):
Do we have time for this conversation?

Matt Phillips (29:26):
Absolutely. He hits the ball a ton, and it’s just a pleasure to watch, right? It’s just awesome. I’m flattered that Scott allows me to golf with him cause I’m not in the same league.

Scott Christiansen (29:47):
Our credibility just plummeted with that last question, but hey guys, congratulations on ExitMinded. I can tell you’re incredibly passionate about helping these business owners kind of at all businesses of all sizes, and I know it’s going to be incredibly successful. Thanks for joining.

Matt Phillips (30:04):
Thanks Scott. Really appreciate it.