You’ve invested a lot personally and professionally in growing and sustaining your firm over the years to make it the thriving business it is today. When it comes to selling your business, however, the value for prospective buyers is not how the firm has performed in the past but what prospects it has for the future. To get the most value for your business when you’re ready to sell, make sure it’s in tip-top condition to set up the buyer for success.

In this episode, Gail talks with Kirsten Kaplan, founder and former owner of Haus Interior Design in Rockville, Maryland. Kirsten just recently sold her firm to one of her employees. It was part of her plan from the beginning when she decided to start her own design business.

Gail asked Kirsten what steps she had taken to prepare her business for sale. She said that she had started four or five years ago, knowing that she wanted the financials to be really strong at the time she put the business up for sale. In addition, she focused on what she referred to as the four pillars of maintaining a healthy business:

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• Finances – making sure finances are spotlessly clean, with no intermingling of personal and business expenses or other questionable practices
  
• Operations – everyone on the team is consistently performing every task correctly, in the same way, and according to company policies and procedures
  
• Team – making sure there is proper alignment of personnel with duties, responsibilities and level of expertise and experience
  
• Client – providing a high level of quality service, maintaining contact and clear communication, ensuring clients know they matter and are valued
  

Gail asked if there were any lessons learned or unexpected developments Kirsten had encountered during the selling process. She said she had underestimated how important the quality of the buyer’s legal and accounting team was. No matter how good your team is, she said, if the buyer’s team is not as good or experienced, that will slow down the process and can result in delays or dead ends in the negotiations.

Asked for her advice for other designers who may be thinking about selling their businesses, Kirsten offered:

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• Be really clear about what you’re selling. It’s all about what future you’re offering the buyer.
  
• Never stop marketing and growing the business during the sales process (which can take years to complete). You want the business to be as healthy and strong as possible at the time of sale to get the most value for yourself.
  
• Document the value of the business, both tangible and intangible. Don’t expect a broker or evaluator to tell you what the business is worth. You need to explain to them why the business is worth what you think it is.
  

During their conversation, Kirsten also talked about some of the professionals she engaged to help her with the selling process, what type of sale and what method of evaluation she chose, and why she decided to stay connected to the firm as a consultant and advisor post-sale. For all that and more, listen to the entire podcast.

If you’re listening on your favorite podcast platform, view the full shownotes here: https://thepearlcollective.com/s10e6-shownotes

Mentioned in This Podcast

For more information about Haus Interior Design, go to the firm’s website at www.hausinteriordesign.com. Kirsten mentioned that she chose to use a method called Seller Discretionary Earnings (SDE) to evaluate the firm’s worth and what advantages it had for her as the seller. For more detail, you may find this article helpful.

Note: Transcript is created automatically and may contain errors.

Welcome to the Creative Genius podcast. Kirsten, it’s so great. Great to have you on today. It’s nice to here. Yeah, it’s so fun. And you went through our program a few years ago. And I remember pretty early on that you wanted to sell your business, but you’re still so young. Why did you want to sell your business? It’s a good question. And I remember that too, when we first started, that it’s always been my plan to sort of have this as an exit strategy. And I, you

when you’re river rafting, you know, go through all different kinds of terrain, right? And I think running a business is really similar. So you have those times where you’re paddling like crazy through the rapids, other times where the water’s really calm and you can just sort of enjoy it. Other times where you’re having to portage your raft over the dry spaces. And I really think after doing that for 20 years and loving it, I was just ready to pull the raft off the river and take some time to enjoy the scenery.

So a whole bunch of things just sort of aligned, which we can get into, but it just, was the right time. That is so great. Well, how did you get into designing in the first place? Tell us a little bit about your background, how you got here. Yeah. So, unconventional. So I was an investment banker and, after business school and realized what I really loved was at working on interiors. And I really had a passion and still do for the ways

our built environment can influence people’s lives. And so I always had a passion for understanding how people wanted to live and what the roadblocks were that they were experiencing to creating that kind of a life. And then, you know, having the skills to really tackle that for them. So that’s always been my driving interest. Well, the investment banking part that had to help you when you were starting to get ready to sell the business, right? It did.

It did. think, you you and I always talk about the numbers and having been a banker and understanding the numbers and understanding the accounting just gave me a level of confidence that I think I wouldn’t have had otherwise. You’re kind of unusual in the industry to have that kind of a background and then come into the creative. So you and I have work hindered spirits with my finance and banking. We are. Yeah. So when did you know it was time to sell? What was your trigger?

You know, I think that’s going to be different for everybody, but for me it was, you know, I had a really amazing team and I had gotten the business. Thank you to you and to several other people to a place where I really felt like there was value in the business that wasn’t just me and those there are certain pillars that I think need to be really sturdy. You need to have your operations,

finance, your clients, your team, all of those have to be in a really good place so that you, when you’re selling your business, you are setting the buyer up for success. And so that kind of came together thanks, you know, in large part to my experience with Alliance. And, you know, it also just so happened that I had an employee on my team who, you know, made it clear from the very beginning that she was interested in running the firm and that this was why this opportunity was so

you know, to work for me was so interesting to her because she knew that she was going to get that opportunity where she may not have had it otherwise. Sure. Well, and that’s one of the best ways to sell your business in this industry is to somebody else who’s working for you. What helped you prepare the business for sale? What were some of the things that you went through? All the steps that it took? I know you are so close to it since you just closed like maybe a week ago. Yep. So.

Right. So this is fresh, hot off the press. So now that you still remember that, what are the things you did? Yeah. I think, you know, I really think it takes about four years if you’re starting from scratch to being able to sell the business. the reason that I say that is because when you sell and do the valuation, the business broker and the buyer and whomever else in the lender who’s looking at your deal,

is going to want to look back at at least four years of financials. Sometimes five, but usually four is a good number. So if you’re starting from scratch and you really haven’t done anything, what I’m doing is preparing some checklists that would have been helpful for me in each of those four categories that we talked about. So finances, operations, team, and clients.

you know, it can become clear to somebody what the roadmap is. And if you’ve been working with you and Alliance or boardroom and you already have a running start on all those financials, your business is probably operationally very efficient and runs really well. Then, of course, the timeline is much, much compressed. So there were steps that I took.

you know, along those along the timeline in each of those categories. And I would say that within operations and cut me off if it’s too much information, but within operations, I wanted to be sure that my team was repeating the same process consistently and professionally every single time it came up. we weren’t making decisions anymore ad hoc, you know, each individual circumstance.

When there’s a claim, there was a certain process for dealing with it. When there was a client question, certain process for dealing with it. And those processes were the same every time. So we had a lot of consistency within our team and we just knew, we knew how to do our jobs very efficiently and the operation could run without any one of us because all of us worked together and understood that. From a finance perspective, I think,

One of the steps I took is a little bit controversial and other designers may run things totally differently. And the caveat I would want to say first of all is this was just my experience. This is not saying that this is the one and only way anyone can ever do this. This is just how it was for me. But when I was going through the process, I discovered that my own characteristic of being frugal

and being careful and having really clean books became an advantage. And you and I have talked about that a lot. I don’t run a lot of things through the business that would be considered iffy. And I know that that’s not necessarily the way everyone does it. But for me, it was really, really clear. So that when it came time to the valuation.

There was no question what a certain expense was, whether it was really business or whether it was really personal. was so clean and thanks in large part to you and to Monique Stemper and her team. My books were just like clean as a whistle. And, you know, the broker even said, wow, like I never see small businesses that are run like this. So that was a great testament to everything you’ve taught me. So and then in terms of the team.

You know, was not only my employees and team who I really wanted to make sure understood and could run the business, but it’s the broader team, right? It’s my contractors, my subcontractors, all of our vendors, our accounting team, our community within Alliance, Stemper and her team. It’s sort of everybody understood the ethos of our firm and that we operate by whatever’s best for the client is what we do.

And so we were all in alignment for that. And I think if you don’t have that, it would make it much harder to sell. So that was a big advantage to us. And then clients, know, the things you have taught me and drilled over the years, which is, you know, let clients know how much they matter to you. Let them know that their lives are important to you. Always go the extra mile. Thank them for their business. Stay in touch with them frequently. Make

make your client service such that clients will enthusiastically recommend you without reservation to anyone they know. And so I know that’s a long answer to what steps I took, but that’s why it can take several years to sort of get things if they’re not already there to get it ready to sell. Sure. Well, it’s a big job and I’ve been thinking about it myself for probably 10 years. And in that 10 year period, I’m still, I don’t have a target date yet for when I’ll exit.

But I do know that it takes a ton of work and in all cases, even my team, my leadership team in particular is very clear about we we’re prepping. And whenever I decide we’ll be ready for it because we know that they know what needs to be done to get it ready. So yeah, I think it’s really critical that you’re open and in your case, you have a small team and.

That was your buyer was your team member so that she knew she knew from the inside that you were running a great business. So she got a great deal. Yeah, I hope so. I and some people choose to do an employee buyout and others choose to, you know, just put it on the market and basically, you know, let it be up for sale. And this was just the way it worked out best for

Actually, it’s a lot easier in a lot of ways and you may or may not get the same value that you would get if you were to sell outside of someone else. But you know who’s running the business and I just have a feeling you’re probably a little like I am. You want to make sure that it continues after you’re gone so that there is a legacy behind what you did. Right. Absolutely. Well, let’s talk a little bit about the professionals that you engaged in the process. I heard you say business broker valuation.

your CPA, your bookkeeping team, who else did you have to hire? And at what point did you bring them in on the process? Yeah, so the first person that I hired was a broker because I had no idea how to value the business. Okay. And I can, you know, I know we have another question that we want to talk about valuation so we can do more details and deep dive when we talk about that if you want,

That was the first person I brought in because I needed to understand what was the business worth? Is it worth anything? And how does it get valued? And so that was super, super helpful for me. It took a couple of months to get like all the documents in, to get all the finances sort of straight with my accounting, to be sure that I was providing the right raw data. And then once the broker came up with evaluation, then I kind of knew, okay,

I can run this by the buyer, talk about whether we’re on the same page. And then if we are, then it’s time to move forward and get the rest of the team assembled. So on my side, I had a lawyer who was a rock star, amazing, at doing deals. And she was, I would say she was probably the most experienced person on the team. She was probably more experienced than the business broker even.

So I, and I lucked out on that. just researched and interviewed several and felt like I had great communication with her, you know, almost the same way our clients do with us when they interview designers. so I just felt like we had a great working relationship and she certainly had the experience. And if I had not had a lawyer with that kind of experience, it would not have worked. Interesting. She was the linchpin.

So why do you say that? What is it that made that role so critical? What I thought would be relatively simple as a transaction actually turned out to be far more complicated than I ever could have imagined. There were so many negotiations, so many little details that had to be addressed, so much back and forth, know, provisions that protected me going forward and protect the buyer going

And if you don’t have a lawyer who really knows deals and knows how to do it, it just won’t work. And you’ll end up, I think, in a worse place with more potential liability. this way, having a deal lawyer who’s very specifically versed in this was everything. And how did you find this lawyer? I Googled. Okay. Well, Google’s a pretty good resource.

the interview process. So how did you vet her? Again, having some investment banking experience was really helpful. So I knew the questions to ask. And that was one of the things I’m thinking about, including on my checklist too, is like questions to ask the team, you know, when you’re putting together your team to do this. But I knew I just wanted someone who was really experienced. And I kind of had the sense once I talked to her, she was just…

She was so smart, so on top of it. It seemed like she hardly ever slept. I mean, she was so, she just was energetic and really hardworking and she knew what she was talking about. So I got lucky. Yeah, that’s awesome. Well, what do you wish you had known looking back? What would you have liked to have known prior to beginning this process? You know, a lot because it’s one of

It’s one of those things you just don’t know till you go through it. Sure. And I completely underestimated how important the quality of the buyer’s legal team and accounting team was. I really somehow had this naive impression that if my team was really good, that it would all be fine. And so I had a lot of confidence in mine, but I think it would have been

easier if I had also paid attention to her team and had had worked collaboratively with her to say, hey, let’s build the team together. I know that some of them are going to be representing your interests and some are going to be representing mine. But the mismatch, I think, between the skills and experience of the teams slowed things down more than it had to.

And sometimes what happens is people will pick someone and they don’t really have that criteria. And they also, maybe they’re trying to save some money and not spend a lot and they find a less expensive resource. And then in the end, I think what you found is that the best people are the best people and it’s worth it to spend more to get the right people on your team. Absolutely. And that’s your mantra that you taught

from the very beginning. And I think that’s absolutely true. It ends up taking more time and money as it does with a designer. I don’t know why that was like a newsflash to me because that’s how we run our whole business. yes, you know, trying to save money by hiring an inexperienced team is not gonna work. In the end, this is such a complicated thing. Like you said, it’s very difficult and it’s emotional. We’ll talk about that next, but it is so difficult.

And if somebody does not have the amount of experience that you need, then you’re paying for them to learn it on your dime. And in the end, costs you more money. You’re going to spend more with somebody who’s less experienced. So I would opt for going for the best person you can possibly hire. Yeah, I think so too. And even, you know, I remember when I found my lawyer, she said, you know, if Becky needs a lawyer, I have lawyers that I work with on deals all the time and

I, you know, I mean, I’m not a big one for regrets. think you make the best decision you can at the time with the skills and the circumstances that you’re in. But that would have been easier to have lawyers and CPAs who knew each other professionally, because there’s just a shorthand that they can achieve where maybe people who have less experience or, know, are not connected. It takes much longer. Right. It’s kind of

going down as you were talking about the rafting experience, you want a very skilled guide because they have your life in their hands and your business, your finances are in their hands. So absolutely this is critically important for people to get the right people. Absolutely. Now let’s talk about emotional because the emotional part of this process and maybe, maybe that wasn’t your first intent to think about that, but what was it like through this whole process? I’m sure there was, there were times that you

wondering. Yeah. yeah. There were so many ups and downs. and my buyer initially had a partner, a friend from elementary school who was like, this sounds fun. I’ll do this with you. I’ll buy the business with you. And so, you know, that was sort of exciting and we went down this whole path. And then for some reason her friend couldn’t pass a credit check and had to drop out and the process had to start all over again. So there were

So many times that required the best coping skills I have developed in my life. And you know, I had to, I tried to stay really balanced and detached from the outcome. And that’s, if you know me, you know, I’m not very Zen like that at all. That is not who I am. I care so deeply about everything I do. So I tried to just adopt this posture that if it works

And it sells here are the great things about that. If it doesn’t work out and I end up continuing the business, here are the great things about that. And I had to remind myself of both of those sides constantly as a way to not get too tossed around by all the ups and downs. And there are and there always will be a lot of ups and downs. There will always be moments where you think it’s a disaster and then other moments where you think this is so exciting, it’s going to work.

And I think you never really know until the check clears in the bank. Well, and that’s exactly right. You can’t count it until it’s in the bank for sure. So and I’ve heard so many people go through this. I helped another firm kind of go through their negotiations and that it kind of happened and then it fell apart and. It just ended up with a owner going back and running the business again, but now she scaled the business back and started different or looked at it a different way.

But you know, sometimes that’s for the best too. Whatever happens ultimately is for the best. Some people actually just close the business down. That’s one way of exiting. And it’s maybe not the best, especially in your case. For sure there was a value to the business. So there was something for you to gain financially so that you have that freedom to do what you need to do in your life and also to do what you want to do in your life. So good for you. Thank you.

And I think the other emotional thing is that, and we’ve talked about this before, is running the business, you’re always running at 100 miles an hour. You don’t take the time to congratulate yourself on what you’ve done or to sort of be proud of yourself for what you’ve built. And so I made myself take time out during the process to say like, wow, I really built this from nothing.

Like I had nothing when I started this business and now I have something that’s worth value, you know, for someone else to continue, you know, and create their own value from it. And so that I tried to take at least a couple of minutes to be proud of myself during the process. Well, good for you. should for sure. Well, you, mentioned something earlier and it was, that the, the buyer’s team also has to have great people and

I just think that that’s really critical that you shared that. But also, I think in you as a seller, you had a lot of things in order. You knew what you needed to do. So you were more prepared than most people. And you talked about the four areas of the business that you needed to prepare. But again, there are probably some other things that you would have said, I should have done these things too. I should have had these things ready. So what were, what are a few of those?

There were several and you harp on this all the time and it’s really so, true. Knowing the numbers inside and out, back and forth. Most of the people on your team, the lawyer, maybe even the CPA, I mean, certainly not Monique. Monique and her team know everything. They are like the gods when it comes to this. But you have to understand yourself.

how every piece of cash flow and accounting transaction works in your business. From the minute you propose an item to the minute it gets delivered, you have to understand in your sleep the accounting ledger entries that go along with that. Because there will be many times during the process where you may have to explain to your lawyer or the other lawyer or the CPAs or whoever else is on the team.

No, this is how the accounting works. This is what’s behind this number on the balance sheet where it says client deposits. You may have to explain to them what that actually means, what that number consists of. And if you don’t know those, you will end up leaving a lot of value because the way interior design businesses run is not very typical to the way other businesses run. We have a lot of work in process.

We have a lot of sort of transactions that are a little bit in limbo, you know, after we pay the vendor, we’ve got the client deposit, but we’re waiting for something to come in. So you’ve got to understand the numbers. And so I would say like, start with accounting, schedule a session with the bookkeeper, schedule a session with you, like understand the nitty gritty behind every single number. And the other thing I did was I did this early on when I was

when I was approaching the broker about evaluation. How do I say this? No one in the process is your friend. And what I mean by that is you, everybody that you speak with in every interaction through the sales process, you need to have an agenda in the back of your mind of what you are hoping that person will come away

So the person who’s doing the valuation, for example, you can say, well, here’s the numbers. I don’t really know. I don’t really, I mean, I guess we’ve been successful. I’m not really sure, but you know, this is kind of what it looks like. What do you think? Or you can go into the valuation and your first meeting with a business broker, you can present a document of due diligence, which is what I did that said, here are all the publications we’ve been published in. Here’s how many years we’ve been in business.

Here is the percentage net income we’ve had for the last five years. Here are the number of clients. Here are the areas where we work. Here are, you know, and I laid out every single advantage of my business and how my business was special and how my business was better than everybody else’s, even if I didn’t really think it was. And I positioned it to him like that saying like, this is an incredible business for someone to take over. And here’s why. So

If you go through every one of your interactions with your team like that, I think you have a better outcome. So that due diligence document kept me motivated for sure. that’s great. I love that. I’ve never heard somebody do that before. Of course you would do something like that. Missed organized. All right. So did you choose to do a stock sale or an asset sale? And if so, which one and why? Yeah. So again, disclaimer, I’m not a CPA. Okay. So

Please ask your professionals. So we did a stock sale with a 336E election. So it’s complicated. Sellers would rather usually do a stock sale. Buyers would usually rather have an asset sale. And the reason is that in an asset sale, if you are the buyer, you can depreciate the portion of the purchase price that has been allocated to Goodwill over a certain number of years. So it provides you tax advantages.

The benefits for the stock sale are to the seller because the proceeds are classified as a long term capital gains and taxed at that rate rather than as regular income. In an asset sale, the seller would be taxed as regular income. So buyers and sellers usually have different objectives when it comes to the structure of the sale. And that’s a really huge point of contention, like right up front.

Because I’m an S -Corp, which also turned out to be a great advantage, there’s something the IRS has called 336E election. And what it is is allows it to be a stock sale treated as an asset sale for the buyer’s taxes. So it’s a sort of a hybrid and totally legal only for S -Corp, I believe. But again, ask the CPA. And

In the stock sale, the things that make a stock sale a little bit easier is if you have vendor relationships, which we do hundreds and hundreds of pre -existing with pre -existing terms and all that, those don’t need to be renegotiated. In an asset sale, it’s debatable. So in a stock sale, all those relationships just go with the company, House Interior Design, Inc. All your client contracts don’t need to go through due diligence.

don’t need to be rewritten, don’t need to be renegotiated. Those also go with the corporation in a stock sale. So in a business like ours, where those relationships are a key asset of your business, the stock sale makes it a lot easier from the due diligence perspective. for us, we got lucky that this 336E election is available for precisely this kind of situation. Wow, that’s really good. And something else you mentioned, which

had actually forgotten to ask you about is that it was not in your name. The business is under house interior design. So you smartly already had the company set up so that it wasn’t selling your name with it. Yeah. And I did that from the beginning, knowing that I wanted to do that and knowing that I didn’t want the business to be just about me. And I knew that if my name was on the door, I might have a harder

hiring good talent if they felt like, well, I’m always going to be second fiddle to her. And I knew that it would be easier to sell if it wasn’t my name because there’s a huge perception in interior design businesses that it’s really just about the one designer and why buy an interior design business if that designer is no longer going to be on the team. What’s left? So I wanted to be absolutely sure that we had done everything we possibly could to avoid that misconception and

trademarked the name would be the other thing that we have. when, when, you know, we sold or when I sold, it was not only the vendor contracts with her, which are worth a lot because those were negotiated when vendors were really willing to open a lot of wholesale accounts and those are long standing, the portfolio, the trademarked name. So there’s all of that sort of goes with the business. And I’m super, super thankful that my name is not on the door.

gosh, yeah. Well, very, very smart that you had it set up that way. you also had a little bit of background before you came in to know what you should do. All right. So here’s a big question. And that is, did you finance any part of the sale? Yeah. So when we talked about negotiating, right, and why you need to have a good lawyer and what what is there to it, I thought it was so simple. I thought it was like, OK, here’s ten dollars. Take the business here. The keys. OK, bye. So every little piece has to be negotiated,

including the financing in some cases. So your buyer may be getting an SBA loan, which requires certain terms, 10 % down or whatever, but they may not be able to qualify for the full amount that you have valued the company. It’s very, very typical for a buyer to want to place performance metrics onto a seller note. So if the seller finances a portion of the price,

It’s common. fact, it was in our initial negotiations that the buyer and buyer’s lawyer initially presented to us said, OK, if the business hits this revenue, then we’ll repay the note. But if the business falls below that revenue, whatever that number was, the notes totally forgiven. And so and it was a little more complicated than I’m making it sound, but that’s that’s very, very common for the buyer’s side to want to put performance metrics.

On to that note, and I only knew to anticipate this because of someone in boardroom that I had talked with a lot many years ago who said don’t ever do that. And so she saved me because we came back. You know, my lawyer just said, look, if my client isn’t going to be in the position to be making the business decisions, there’s no way she can guarantee what the business is going to do. So if you are not in control of your business,

you cannot possibly live by performance metrics. So yes, there’s a seller note for a small percentage of the price, but it has nothing to do with performance. Great. Okay. That’s really important. So if she has an SBA loan, she has your partial loan, she puts some money down. Yep. Okay. All right. Well, that’s good to know. And is that over a long period of time that she’s paying you

She pays the, so normally when there’s a seller note, it’ll be subordinate to the SBA note. Right. Right. So anytime you buy a business, have to pay back the SBA first and then you pay back your subordinated debt. So I’m the subordinated debt. So it’ll just be, I’m right behind the SBA. Okay. And yeah, which is fine. I have a great, I have an interest rate that’s reasonable. That’s good. So it starts accruing interest immediately again.

That’s where a good lawyer will be able to tell you how to structure that note because I really didn’t know. And so the structure of the note is beneficial to her and beneficial to me. And if she pays off the SBA sooner, she can pay me off sooner too. There’s no penalty for prepayment. Okay, great. When we did the deal, you know, and it’ll be different for everyone, but I had to really think about what financially my goal was and

What I decided my overarching goal was I wanted to maximize cash at closing because a bird in the hand is worth two in the bush. So that was just what I wanted. we structured the deal through many negotiations so that I felt comfortable with the cash at closing that I was getting. And she felt comfortable with the seller note obligation on her end. great. And in the case of SBA, is it a 30 -year note for her?

No, no, I think the terms are maybe 10 years. No, it’s not very long. And so then you’re you start getting paid at 10 years. I think so. I think so. I’m not going to live another 30. I guess you will. You’re going to live to 120 and that’s probably 50 years at least. Right. Yeah. Well, actually more than that. There you go. OK. So.

What other bumps or surprises did you experience along the way? You’ve mentioned several already. I know there were a lot. You know, there were there are always there are always going to be bumps and things you can’t anticipate. one thing that I really I don’t know how we did it. I wish I could tell you a formula. I’ll have to think about that.

We, the buyer, because the buyer is on my team and I’m still running the business, I don’t know how it worked this way, but we managed to maintain a really friendly, really encouraging relationship throughout this process. And this has been like a two year process at least to get to this point. So we just continue, I think we both just wanted to continue to work together in a really healthy, productive, friendly way.

And it just didn’t disrupt our business relationship. And I think we were still able to deliver on the same level that we always do for clients and our team still functions really well and is happy and like very close knit. So that, that I would say in spite of all the bumps of which there are many, that is one of the best outcomes that I couldn’t have anticipated. you still involved in the business for a period of time or are you out the door?

Yeah, that’s a great question too. So I offered as part of our negotiations, I offered 40 hours at no charge of transition assistance. So what that means is anything that my team needs related to transitioning the business, I will do 40 hours at no charge to make sure they get up and running, whether it’s, you know, submitting work for publication or walking them through how I do a particular thing or

the key performance indicators we look at or anything like that. I’m happy to do any of that 40 hours, whatever they need. Because it’s important to me that they’re successful too. And then there’s also a consulting arrangement that’s part of it. So past that 40 hours, if I’m needed on any projects when they get in a tight spot or for example, one of our team members is out and just had a baby. So if I need to fill in, then I have a consulting arrangement

the new owner will be able to pull me in and say, hey, I need you for five hours this week. Great. Yeah. That gives you a little bit of a taste of what’s going on and, and still you’re connected a little bit. So that’s all good. And I think that positive relationship helps that because it’s so easy for these things to become adversarial. And then you kind of, the separation isn’t as nice or, you know, as collaborative. Sure.

How did you come up with the sale price? We did. So there are lots of ways to value your company, right? So I can tell you what we did. If it’s interesting. Sure. We used something called seller discretionary earnings, SDE. You probably know all about that. That was a little bit new to me, but this is where you get into the fact that the cleaner your books are, the easier this is. Right. So SDE means how much money?

basically is at the disposal of the owner every year. if you, let’s say if the only things you run through your business as an owner, you get a salary, you get your health insurance paid and maybe your car and your cell phone. Those are super easy numbers to come up with. You just add A, B, C and D and you’re done. That’s your seller discretionary earnings.

If you run the business so that I can’t even think of like what are other other things that you can legally run through your business but just get a little bit messier. I couldn’t even think of what they are because I just don’t run it that way. having my books be really clean and only running things through the business that were just a very few categories that were personal things but there were still legitimate business expenses made coming up with that SDE number really easy.

So you look at the last five years of your business and you see your SDE and let’s say your SDE is a million dollars, 700 ,000, 500 ,000 and then 1 .2. Like it can be all over the place. So you can take a straight average of those SDE numbers or you can say, well, this was a slow year and this was a really outlier big year like COVID. So instead of just doing a straight average, we’re going to wait

these years based on how indicative we think they are of the normal course of business. So that 1 .2 maybe an outlier. So rather than allocating that a 25 % weight, let’s allocate that a 15 % and the same with the low year and then the other year’s more normal. So you come up with this average, right? That’s your SDE. Let’s say it’s 500 ,000 is your SDE. Then your business broker will look at metrics of similar companies that have been sold.

and look at the multiple of SDE that those businesses sold for. Could be two, could be three, could be 2 .9, could be 2 .7, whatever that multiple is. And then you take your SDE times that. And this is an oversimplified way of doing it, but the broker will do this. But this is the method that we chose to use because SDE for us really gave

buyer a better view into how much money would be at her disposal to allocate as she wanted to rather than revenue because you can you can have a huge revenue number and be terrible on that income. SDE is the is your net number. So that’s how we did it. That’s how we came up with the valuation and the valuation. Keep in mind is the first step, right? So the valuation gives you a number. Let’s say it’s four million dollars.

That’s not necessarily how much you’re going to get. No, you might get a little bit more. You might get a little bit less. There may be other things you negotiate like so, but it just gives you a starting point to say, hey, are we kind of in the neighborhood? And then if you’re in the neighborhood, great, you can go forward. If the, if the buyer says, my gosh, I thought I was going to pay 10 ,000 for this business, not 4 million. Then you know, okay, I may need to go a different direction. Sure. Well, and think it’s important to know

pretty quickly when you’re in the conversations with people. So in the case of the SD, the seller’s discretionary, not income, what is it? Yeah, so expenses. So when you’re multiplying that and you’re talking multiples, so just want to be a little bit clearer for the listeners. So say your multiple is two times whatever that amount is. So say it’s a half million and it’s two times

then the valuation or the amount that you’re asking is a million dollars. So that’s how that happens. And the more profitable your business for a longer period of time, the higher the multiple is. And again, that depends on the industry too. It does. It really depends on the industry and it can depend on so much, but it will give you a ballpark. And then you negotiate based on all the other things that you want to include. Sure. Okay. Well, I have to ask you this question.

Do you have plans for what you’re going to do now? Now that you have sold your business, you the cash is in the bank, you know what’s coming up. What’s what’s next? Yeah, you know, I love design. I never got tired of design, which is the other really big piece of advice. I would say if you’re tired and burned out and that’s why you’re selling the business. I think that’s a tough road to hope because this is an exhausting process that can take a couple of years.

major ups and downs, major bumps and derailments, it is not a rejuvenating process to go through. It’s a second job in addition to your normal design job. if you let it get to the point where you’re so burned out and so tired and you just can’t do it another day, I think you’ve done yourself a disservice. Like sell before you get to that point while you still enjoy it because you have to run through the tape. And I told myself that every day.

Run through the tape, run through the tape. Do not stop. Do not stop with client service. Don’t stop trying to get new business. Don’t stop anything I was doing, you know, just full on through the finish line. Because if you stop, you risk harming your future and harming the deal. Sure. So that’s a long way of saying I still love design. I’m sure that I will do something design adjacent. I would love to coach.

And I’ve already talked to GW Corcoran School of Design about being a guest lecturer. I’m sure I will do something design adjacent. Okay, great. Well, we expect you to be on the coaching team. I would love to. Yeah, we’ll be doing it soon. So we’ll chat. So anything that you would say to people to manage the stress during this process?

exercise and get lots of sleep. Yeah. Well, really, yeah, I really think those are critical. I couldn’t have done it without, you know, the gym and doing a sauna every day. know, you have to take care of yourself through the process. Awesome. Well, let’s end this with three key takeaways. You gave us a lot today, but if you were going to pick three, what would they

I would say, you know, one would be be really clear about what you’re selling. You’re not selling your past performance. Make sure that you are selling something that you believe in, that the buyer can be set up for success to make it work. Don’t sell on your past. Sell on what you’ve created that creates a future for somebody. I think that due diligence document was important, not just because it guided my conversations with my team, but because when I had doubts,

I could look back at it and say, my gosh, like this is great. Look what, look at what business I’ve created. And it was sort of like my own little hype document. So I think that’s really important. And the other one, you know, which, which you also told me, which has to do with run through the tape is you, you were very clear about never stop marketing, never stop building the business, never stop seeking new clients, never stop providing excellent client service. So I think those are my

takeaways. that’s so great. Well, congratulations. That’s a big accomplishment and I’m so excited for you. And I look forward to you being on the team with us. I know you’re going to help a lot of people. We have several that are interested in selling their businesses. So this will be great. I’m so excited. Community is like the best part of, what you do. And I love being in touch with all designers from all over because we all face, you know, similar challenges. So I really enjoy that.

Awesome. Well, thank you so much for being a part of our podcast today. And I know that this will help a lot of people. Great. Great. Thank you, Cale. It’s always a pleasure. Of course.