The Hidden Reasons Companies Leave Millions on the Table When They Sell

The Hidden Reasons Companies Leave Millions on the Table When They Sell

Tim Fitzpatrick
You've worked hard to build a valuable business. You're growing revenue, and on paper, things look solid. But when it comes time to sell, many companies are shocked to learn they're worth far less than they expected, often because of hidden risks and issues they didn't realize buyers care about. In this episode, we're unpacking the true CEOs don't want to hear, the most common reasons businesses sell below their potential value, and the real drivers behind valuation and risk assessment. Hi, I am Tim Fitzpatrick with Rialto Marketing, where we believe marketing shouldn't be difficult and it definitely shouldn't be guesswork. Thank you so much for taking the time to tune in. I am super excited to have John Kalusniak with me from Kaluz Consulting Group. John, welcome and thanks for being here.

John Kalusniak
Thank you. Glad to be here.

Tim Fitzpatrick
I'm excited to dig into this with you today. Before we kinda jump into the heart of what we're going to talk about, I want to ask you a few rapid fire questions. Help us get to know you a little bit. You ready to jump in?

John Kalusniak
Let's go.

Tim Fitzpatrick
Okay, man. When you're not working, how do you like to spend your time?

John Kalusniak
Hunting and fishing, man. I'm an outdoorsman, and I just love to be outside hunting and fishing.

Tim Fitzpatrick
Cool. And with fishing, lakes, streams, both?

John Kalusniak
Oh, I'm a river fisherman. I love to fly fish. And my favorite species is the salmon runner in the fall.

Tim Fitzpatrick
Okay. Very cool. I love it. What's your hidden talent?

John Kalusniak
My hidden talent is seeing clarity through the mess. I like to keep things super simple, and I like to think I'm a simple guy and able to see the way to the end.

Tim Fitzpatrick
You and I are very similar in that regard. It's very easy to overcomplicate things. But that gets in the way of actually implementing and executing a relatively, in my experience. What's the best piece of advice you've ever been given?

John Kalusniak
It dates back to probably 20 years ago. I had a boss, and his advice was, If it isn't fixed, if it isn't broke, don't fix it. It's just simple. It's the simple stuff, right?

Tim Fitzpatrick
Yeah. What does success mean to you?

John Kalusniak
Success? It means being able to help people and be able to grow my business.

Tim Fitzpatrick
Cool. What about your happy place? Where's that?

John Kalusniak
I belong to a sportsman's club in Baldwin, Michigan. We have a thousand acres up there, and just being able to spend a weekend up there. I was literally up there yesterday. It brings calm and gives me a great feeling. So that's my happy place.

Tim Fitzpatrick
Yeah. For those that don't know, is a club like that similar to to a country club from a standpoint of you pay membership dues to be able to access all the facilities and amenities? What does that look like?

John Kalusniak
Exactly. We have seven or eight club cabins up there. So you book time in a cabin. We have a kitchen in the dining room, so you eat together. It's special. It's really a special place.

Tim Fitzpatrick
Yeah, very cool. What qualities do you value in the people you spend time with?

John Kalusniak
To me, this is easy. Honesty and integrity. If you don't have honesty and integrity, I'm sorry, I just don't have time for you.

Tim Fitzpatrick
Yeah. So, John, tell us more about what you're doing at Kaluz Consulting Group. Who are you working with? How are you helping them?

John Kalusniak
I'm working with small to medium-sized businesses, and specifically businesses that are struggling to, you'll figure out where next month's revenue is coming from, or next quarter, or even next calendar year, or they don't really have a plan. And there are so many of them out there, but people have to admit they need help and be willing to have a conversation. And that's the area where I thrive.

Tim Fitzpatrick
Yeah. With that do you focus on sales and marketing? Do you focus on one or the other more heavily? What does that look like?

John Kalusniak
So I do touch on marketing, but in reality, I'm a sales guy, and it's not always about revenue. Some people say, let's go grow the revenue, and we can do that, and that's important. But sometimes it's equally as important to have an established system so that that engine, if you will, that revenue engine can act independently of an owner. Somebody gets hit by a bus tomorrow, you want to know that the process is there and it's going to continue to function.

Tim Fitzpatrick
Yeah. I was on a call last week, and this is in the managed service provider space, but there's a lot of M&A activity going on in the space. And for the first time since I've been involved in the space, it's starting to come up that a lot of the acquirers are really starting to put a heavy premium on growth engines, whether it's sales and marketing engines being in those businesses. Previous to this, they're just acquiring revenue. And now they're really starting to say, You know what? We need to have organic growth. We need to see organic growth in these companies that we're acquiring. And so those that are not focusing on taking the time to build a sales and a marketing engine are going to suffer.

The Truth that CEOs Don't Want to Hear

Tim Fitzpatrick
So I think this is a very relevant conversation, and we're going to dig into this. First thing we're going to dig into is the truth that CEOs don't want to hear. What are they?

John Kalusniak
Yeah, this is a great question. And first, I should I say everybody will exit their business one way or another. Yes. I have a broker friend of mine who says, dying at your desk is a plan. Probably not a very good one, but it is a plan for exiting your business. In fact, as funny as I have an uncle, that's his plan, unfortunately. But the truth are, 70 % of businesses listed for sale will never sell. 70 % will never sell. 20 to 30 % of those businesses who get an offer won't close on that offer. The deck is truly stacked against the person trying to sell the business. It's like a battle of Titans, right? It's the guy who wants to buy your business, and rightfully so, he wants to buy it at the best price he possibly can. And the person who's trying to sell the business, and rightfully so, they want to sell the business at the biggest number possible. Forget about multipliers. It isn't about multipliers. Multipliers is an equation. It's about the total amount of money that you get for your business. And buyers are buying one thing and one thing only. The confidence that your future cash flow is predictable. Transferable and low risk.

Tim Fitzpatrick
Yeah. Do you feel like those 70 % that list but never sell? Is it because there's at least Is there just one thing about that business that just makes it unsaleable? I mean, is that an accurate statement or what are your thoughts?

John Kalusniak
Well, no. There can be a lot of things, right? The owner could heard that the guy down the street, Joe, who has a business that's very similar to his, sold at a multiple of 4X. So he wants 4X because Joe got 4X. Well, you know what? Their businesses aren't the same. Their business is completely different. And to have a realistic view of what your business is worth is super, super important. And then, you have a workshop, and I'll tell you, the whole workshop in literally three bullet points. One, to have a plan. Two, forgive me, get your personal shit off the books. Clean the books up. Nobody wants to see that. And you got to have a good track record of clean books. And then three, and that's really where I come in, the most important thing is derisk your revenue. Customer concentrations are bad. Big winners, big losers are bad. You got to have something that is predictable or you're not going to get the money for your business that you want.

The Most Common Reasons Companies Sell Below Their Potential Value

Tim Fitzpatrick
Yeah. So what are some of the most common reasons you started to touch on this? What are some of the most common reasons companies sell below their potential value?

John Kalusniak
So the first thing is to look at the statistics. The statistics show that 94 %, I was shocked when I looked this number up, 94 % of the business owners have no formal transition plan at all. They may have it up here, but they don't have it written down. And if you don't have a plan, somebody will take you through their plan. I already said it, weaker untrustworthy financial records. Big win-years, big win years, big loss years, your personal stuff on the books, all that's going to affect the valuation of your business. Then owner dependency whether you want to hear this or not, you got to kill the name on the side of the building because they don't care that it's Smith Electronics or whatever, fill in the blank. They're buying the business. They're not buying the name. Then we talked about over-unrealistic valuations. Joe got 4X, therefore I should get 4X. Well, that's just not true. Inconsistent or volatile earnings. I mean, everybody had bad years in 2020, right? Those were the COVID years. Then everybody had great years in '21 and '22. Well, when your profitability or EBITDA is vastly up and down that makes people nervous. And then it happens more often than not, Tim, that you want to think about is there's hidden legal compliances. So-and-so owns part of the business or so-and-so has a claim X, Y, or Z. Those can be very risky situations if they're not dealt with properly and quickly. Those are really the big reasons why owners see their business sell below potential value.

Tim Fitzpatrick
Yeah. One of the things you mentioned, too, was derisking, right? And having a high concentration of revenue with one or two clients, it's common, but it is not a good thing when you're selling a business. One of the things when I look at it-

John Kalusniak
Tim, let me interrupt you. Look at it this way. If that one client who you never will lose ends up walking away from you, you're left with nothing. And that makes people very, very nervous.

Tim Fitzpatrick
I had a conversation with the prospect two or three months ago. 30 % of their revenue was with two clients, and they lost them both because they were acquired. So it wasn't that they were doing a bad job. They were doing a great job, but they got acquired, and the acquirer already had systems in place. They did not need this company anymore. And that happens all the time. And so I know the general rule of thumb I've always heard, and I'm curious to what you're seeing, John, is you shouldn't have more than 10 % of your revenue in any given client. What do you say to that?

John Kalusniak
That is actually a perfect, that's the number that I would have arrived at, percentage with a given client. The other topic in client concentration is very important. But having worked in the business for more than 35 years, we all have winners and losers. And we have sometimes big winners and sometimes big losers, and we justify the business as a whole. Well, somebody that's coming in from a private equity or venture capitalist wants to think that, what happens if you lose your big winner? It's equally as important as if you lose your major client.

Tim Fitzpatrick
Yeah. The other thing, too, that I think a lot of owners, and you touched on this, is they are too involved in the business. If they get pulled out, the wheels come off in certain aspects of the business, and that is not attractive to somebody that is buying that business. So you talked about having a plan, right? You can't plan to sell your business six months from now. This needs to be, what, three to five year process, would you say?

John Kalusniak
Yeah. I'm glad you asked that question because a lot of people want to think, well, I'm going to sell in the spring. Therefore, let's get busy. And I just use a little phrase, Nobody wants to see lipstick on a pig. It doesn't work. They see right through it. I would say the sweet spot is absolutely three years. If you could get five years ahead of it, it's even better. Be prepared. I talked to a broker friend of mine, and he'll tell you this, when they show up, they'll ask you a thousand questions. It's much more than the financials. To the extent it takes you a long time to answer those questions, they'll give you another hundred questions. They'll keep pummeling you with questions until you catch up. So be ready. I don't want to say you have a war room where you are for sale all the time, but be ready to answer those questions and have your plan. Even three years ahead of time. Even three years ahead of time, Tim, if you know you don't have a good sales, documented sales process, that's fine. At least you've identified your weaknesses. And when somebody comes to you about them, you can respond in a court, if that's the right word, you can respond to them as if you understand your business.

Tim Fitzpatrick
Yeah. You need three to five years just to work through this because every business has problems. Nobody's perfect. And building a sales engine, building a marketing engine, they take time. As the owner, if you're knee deep in operations and you need to pull yourself out, that takes time. And you can't work on all of these things. Most businesses can't work on all of them at the time. So you got to put that plan together and start banging those things out, right? And get them done. So plan ahead. Really, really important.

The Key Drivers Behind Valuation and Risk Assessment

Tim Fitzpatrick
So I think we've touched on some of these as well. But one of the last things I want to focus on are those key drivers behind valuation and risk assessment.

John Kalusniak
It's super simple, I think. And I'll give you an example. There's two companies, let's call them Company A and B, right? A and B have identical EBITDAs, but B will sell for twice the value of A. And the reason is this. There are some must-haves. One, we talked about it, clean financials, predictable revenue, and to have a process. Two is strong margins and diversified customers. Get rid of that customer concentration. Be real careful about winners and losers because they show up. Then ultimately, you derisk the most when you have a growth engine transferable team, and that's a big deal. We could probably talk an entire episode on having the right team in place so that if it's all dependent upon one guy and that guy isn't the owner, that's still dangerous. And then ultimately, low dependency on the owner. And they don't want to hear it, but I say, You got to kill the name. Those will change your risk level. When you change your risk level, times EBITDA, you get your multiplier, right?

Tim Fitzpatrick
As you were sharing that, John, one of the I believe this came from Dan Kennedy. And he said, the worst number in business is one, right? One large client, one key employee, right? And so I think if those that are watching and listening to this, if you keep that in mind, all of this stuff really does come down to a lot of that. It's like, you don't want to have just one. You need to be diversified. If they are buying additional risk, that is going to impact the valuation negatively. So the more you can derisk things, the higher valuation you're going to get.

John Kalusniak
Yeah. I just want to touch again back for a minute is, strengthen your management bench. Make sure you have, as you said, more than one person involved. I can't say it enough, document, document, document your processes so that somebody else can see it. And then lastly, I think the thing is important, and this is hard for owners to hear. Nobody cares what happened to you during COVID. They don't.

Tim Fitzpatrick
I know.

John Kalusniak
Nobody cares that your kids sat and did their homework at the conference room table because you're trying to build a business. They don't care. It's a buyer's job to buy you at the lowest price possible. And obviously, you want the highest multiple that you can. It's a battle of Titans. It's brutal. It can be brutal. So get prepared.

Tim Fitzpatrick
Well, like you said, with the statistics, it doesn't bear out well, right? And so the more attractive you can make your business, the higher likelihood of success you're going to have.

John Kalusniak
Yeah, and Tim, it doesn't get any better with generational businesses. I mean, if you look at handing your business down to your kids or the second generation, I mean, the statistics are as bad there. 70% of second generation businesses don't make it. And of those 30% that do, half of them won't make it to the third generation. So it gives you chills down your spine to realize even in the family, it's not, do you want to make it happen? The statistics say that you won't.

Tim Fitzpatrick
Yeah. You know it's interesting. Whether you want to sell or not, all the things that we've talked about today are important. It doesn't matter whether you want to sell. It's just if you want to have a thriving business, these are things that you need to consider no matter what.

John Kalusniak
The other thing to leave with your listeners is, don't be afraid to ask for help. I'm a consultant, and yes, consultants cost you money, and yes, they're not free, and yes, they can be expensive. But the amount of money you pay to get prepared for a sale that can generate an extra million, $2 million, $10 million for your business, it's this big compared to $10 million increase in valuation or $2 million increase in valuation, don't be afraid to ask for help. There's a lot of people out there that will help you.

Tim Fitzpatrick
Yeah. Look, we all have our strengths. And if something is not in your wheelhouse or your skillset, you have to bring somebody in. Because a consultant, whether it's somebody like you or myself, we can help bring visibility to pitfalls, to roadblocks that they can't see because it's not their thing, and that's okay.

John Kalusniak
But owners think it's a weakness. Many owners that I've run across, they see it as a weakness, admitting that they can't do something is admitting that they have a weakness, and we all have weaknesses.

Tim Fitzpatrick
Yeah. You know what? I felt the same way for a long time. And then I got to a place where I shifted that. And it's like, no, asking for help is a strength. It is a strength because you are showing confidence, vulnerability, just saying, Hey, look, I don't know this, and I need help. That comes from a place of strength, not weakness. So we all need help on this journey. I interviewed somebody quite some time ago on the podcast that said something, that shared something that always stuck with me, and it was like, we're all trying to figure it out. Nobody's got it nailed down. Even all these people that you look at that are famous business people, they do not have it all figured out. We all have problems. We are all figuring things out as we go through this journey of life. Just keep that in the back of your mind. And hopefully, that helps ease people's concern where it's like, Hey, man, I'm just trying to figure it out, and I need help to do it.

John Kalusniak
Well, I'm trying to figure out how to turkey hunt. I have a friend of mine who's helping me so in April here, we're going to go spring turkey hunting in Michigan. And we all have our strengths and weaknesses at all different spots.

Tim Fitzpatrick
Yeah. Okay, so let's talk about hunting for a little bit. So you're learning how to turkey. What do you normally hunt for?

John Kalusniak
So I love... I mean, if I had one day left of my life to hunt, it would be spring turkey, because when you're calling them and they're calling back, and they come up with their fans all fanned out, it's a magical It's just magical. I love to deer hunt. I'm deer hunting 24 hours a day, seven days a week. I have a window right over here. The deer were out there this morning, so I'm always on the hunt, if you will. Went up bear hunting one time. Bear hunting was a lot of fun in Quebec, Canada. That was a good time. But I can tell you in your listeners, if you've never had a 17 pound king salmon on a fly rod in a river, You don't know what a thrill it can really be.

Tim Fitzpatrick
That's a big fish.

John Kalusniak
Big fish on a fly rod.

Tim Fitzpatrick
Yeah.

John Kalusniak
I can say over the last three years, I've snapped three fly rods on three big fish, and it was worth every minute.

Conclusion

Tim Fitzpatrick
It's awesome. John, I really appreciate you taking the time. Any last minute thoughts you want to share with us before we wrap things up?

John Kalusniak
Tim, I want to offer something free to all of your listeners and yourself, and that is, look me up. I have a assessment, a sales assessment. It's absolutely free. It'll take you 3-5 minutes to fill out, literally 3-5 minutes to fill out, and it will give you a good idea of where you're at. It won't give you the blueprint, but it'll give you a good idea. And then an engagement with me to do an assessment. I have a small assessment and I have a big assessment. Just spend whatever costs for the assessment, and at least know your strengths, your weaknesses. On the simple version, I give you 5-7 action items that you can do now, high impact action items. You walk away with the blueprint that if you want to do it yourself, do it yourself.

Tim Fitzpatrick
I love it. We'll make sure that all of your links, they can connect with you on Instagram, LinkedIn, your website, kluzconsultinggroup.com. And I will also add to what you just said with an assessment. When you're working with somebody as a consultant, you got to have an assessment. You have to start there because you cannot create a plan to get where you want to go until you first know where you currently are. An assessment is an absolutely critical part of that. So if you like what John had to say today, go connect with them, take advantage of that assessment so that you can figure out what you need to do to get where you want to go. And Clarity... A lot of us talk about clarity, but gosh, so few of us have it. But having clarity on what you need to focus on is it is freeing, it reduce stress, and it just lets you know exactly what What the priorities are so you know what the next step is to get where you want to go. So, John, thank you. I appreciate you. Those of you that are watching, listening, appreciate you as well. You want to connect with us, you can do it over at rialtomarketing. om. The other resource we've got for you, similar to John, marketingenginescorecard.com. If you want to know which of the nine roadblocks are slowing down your growth, your marketing engine, that's where you can do it. It takes less than a couple of minutes. So take advantage of that, marketingenginescorecard. com. And until next time, take care.