BEFORE THE EXIT

THOUGHT EXPERIMENTSFOR ENTREPRENEURS

By Dan Andrews

2018

i

Table of Contents

Foreword iiiPreface v

Introduction 1

Part I - The Five Thought Experiments 10Thought Experiment #1 - The Lifestyle Ladder 10Thought Experiment #2 - The Mock Tax Rebate

featuring the Mediocre CEO Test 19Thought Experiment #3 - The Hidden Upsides 30Thought Experiment #4 - The Cash Conundrum 35Thought Experiment #5 - The Dirty Secret 40

Part II - The (Emotional) Decision to Sell Our Business 48

What to Expect When You’re Selling 54Letter of (Mis)Intentions 64Why Didn’t Our Broker Protect Us From Deals

Dimitri? 68Conclusion - Have the Exit Mindset Before You Exit 75Afterword - The Devil’s Advocate 79Appendix I - More About Two Tree International 82Appendix II - Where Are We Now? 87Next Steps for Readers Entering the Exit Phase 89Acknowledgements 91About the Author 92

iii

Foreword

A long time ago, but fortunately not for a long time,

Dan was my boss. When we first met, both of us were

fresh out of college and hopelessly broke. I had just

finished a degree in Product Design; Dan’s degree was in

Philosophy. Against all odds, he had arranged for himv

self to have a job and, more surprisingly, one where he was

managing people.

I learned that Dan solved problems much differently

than I did, asking questions about things I thought were

completely unrelated. At first, I found this confusing.

Sometimes he even started by pulling the answer out of

thin air and working backwards to fill in the gaps to match

(like I said, he was a philosophy student). Eventually, I got

used to his unorthodox mind - he challenged me to think

differently. I hope the thought experiments in this book

can do the same for you.

Around twists and turns, through hours of

deliberation, and often over bottles of wine, we have

always had fun solving our business’ problems. Without

a doubt, the journey has been more interesting than any

one result - and selling our business was no different. In

fact, it was entirely consistent with the way we’ve always

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operated, working to collect multiple currencies along the

way.

These currencies have included knowledge, mobility,

and free time. And money, of course. But, as a reminder

to myself and those about to build - or sell - a business:

money cannot be the end all, be all. It does not solve every

problem. In fact, it creates new ones.

In our current climate, this truth might be hard to see.

But, from my limited experience, there’s something far

more valuable on offer; it’s the people you meet along the

way - and the friendships you build - that will ultimately

make you richest. Thanks to my friend and business

partner Dan for taking the time to document the last 10

years of our adventures.

Ian SchoenAUSTIN, TEXAS

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Preface

In his 2007 book How to Get Rich, Felix Dennis writes

about how the goal of becoming wealthy can ruin people.

“Seeking substantial wealth is almost always a fool’s

game,” he says, and the search for riches will “take up a

great deal of your working life for many, many years.” He

offers a different perspective on wealth: “If you are young

and reading this...you are richer than anyone older than

you, and far richer than those who are much older.”

For Felix, the young are wealthy because they have

years in front of them. And yet Felix, like so many of us,

sought wealth precisely to win that same prize: time.

Of course, whether you’re young or not, starting

a business can help you do exactly that. But because

building a business can be such a consuming endeavor, you

don’t necessarily get a lot of shots at it. If you blow a sale

on a key account, you can always re-tool, improve and try

again. If you blow the sale of a business you spent a decade

building, though, you might never recover.

Bo Burlingham, who interviewed over 100

entrepreneurs for his book Finish Big, found a full 50% of

those who exit their businesses are dissatisfied with the

way the transaction went down. And not only are they a

little miffed, they’re “miserable.” If anything, this book

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is designed to ensure that you end up on the right side of

that divide. Most young entrepreneurs think that if they

build a great business, the sale will take care of itself. That

couldn’t be further from the truth.

For us, selling was as difficult as any other phase

of business ownership. At many times during our exit,

we were out of our element, confused, and emotionally

drained. At one point, we were driven to the verge of

selling at a million-dollar discount. In that scenario, you

might think that our business broker would say something

like, “Do you realize you’re leaving a million bucks on the

table?” He didn’t. Instead, he said, “It’s up to you. You

might never get another offer.”

The point of this story? It’s tempting to think that

smart professionals will be on your side when you sell

your business, but I encourage you to develop your own

instincts and trust them. As a business owner, you’ll

ultimately take 100% responsibility for the direction you

choose. You need to navigate your options wisely - and the

thought experiments in this book can help.

For most of us, it seems, the ultimate goal is the time

and freedom to live how and where we want. And since

we know with certainty that our time is limited, it’s worth

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revisiting Felix Dennis’ conclusion: we’re wealthier in this

moment than we’ll ever be in the future.

To your adventures,

Dan AndrewsBARCELONA 2018

1

Introduction

A practical approach to building your business with the exit in mind.

In the summer of 2015, my business partner Ian

Schoen and I signed the papers on a deal that meant a

life-changing sum of money for us. Plunk! Right in the old

bank account. A game-changer - but not quite in the ways

we expected.

In exchange, we had to give up the reins on our first

business. In seven years we had recruited a team of 15 and

designed four product lines - including portable cocktail

bars and modern cat furniture. Our annual sales were in

the millions. It was our greatest career accomplishment.

Our business also afforded us flexibility. We traveled

often, ran the business remotely, and even started a side

business.

Initially, we didn’t lose much sleep over selling

because: Hey, a boatload of money!

However, over the next two years, we went to work

second-guessing our decision. And if we could turn back

the clock, we would have thought about many things

differently.

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In particular, we would have thought more about

our motivations to sell. Because the fact is, we had

gotten ourselves into a rut. Despite the freedom our

business afforded, we felt weighed down by the risks and

responsibilities of ownership. We resented the tedium and

the anxiety of keeping the cash machine alive and healthy.

And as a result, when it came time to sell, our thinking

was narrow and scattered.

If you’re thinking about your own eventual exit,

this little book is for you - a bit of hindsight from one

entrepreneur to another.

FINDING THE EXIT MINDSET BEFORE YOU EXIT

Since building and selling a business can take years -

or even decades - you can’t exactly “practice” exiting your

business. The best you can do is learn from others. In fact,

almost all of the entrepreneurs I spoke with while writing

this book felt they could have learned many of the critical

insights they discovered while selling their business before

they actually sold.

Most of the information you’ll encounter about selling

your business comes from people who benefit from giving

you advice. Naturally, then, much of this advice isn’t

tailored to address the internal concerns that drive so

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many of us to dedicate our lives to growing businesses in

the first place.

When Ian and I were selling our business, we got

advice from every direction. But rarely did we hear a

memorable story from somebody who had actually sold

their own business. I was foolish not to seek these people

out more proactively; after all, hearing other people’s

narratives allows you to get some distance from your own

and see things a bit more clearly.

And, as with professional advice-givers, the message

of many business books is simple: “Follow these steps and

you’ll find success.” But you didn’t build your business by

following a mold. Why would you do so when exiting?

Many of the people who offer unsolicited guidance in

the entrepreneurial world believe that selling your business

is inherently good. The reality, of course, is that it’s more

complex than that. Sometimes it’s good. Sometimes it’s

bad. Sometimes it’s somewhere in between.

And this is why it’s so important for you to consider a

potential sale with your own priorities foremost in mind.

You’ve built an asset - your business - that can serve you

in any number of ways. But those who make a living

encouraging entrepreneurs to sell their businesses don’t

have the same priorities. For these folks, you’re an asset

too, and they aren’t particularly concerned with how you’ll

feel after the transaction is done.

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Let me give an example. One of the largest online

repositories of businesses for sale declares that “the

decision to sell is often stalled by important questions.

Is your business ready to sell? Does your business offer

a compelling proposition to a new owner? How much

should you ask?” The site suggests that you address

these questions by filling out a series of charts and rating

yourself and your business’ salability on a scale of 1 to 10.

The implication is that selling your business is a

matter of checking the right boxes.

But most of this advice simply isn’t sophisticated

enough. Building a business for any old exit can hamper

your business’ profitability and power - as well as your

own satisfaction along the way.

A savvier exit strategy might revolve around building

relationships with potential buyers or creating products

that threaten or augment powerful incumbents in

fast-growing or volatile industries, especially if the key

players in those industries have cash and a track record

of acquisitions. As you engage in these more nuanced

considerations, you’ll also be less tempted to leap at the

first pot of money that someone puts in front of you.

Instead, you’ll have options.

We’ll dive into more of these questions as we go

along, but it’s important to note that this book isn’t a

comprehensive ‘how-to’ on exiting. Instead, it’s a series of

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thought experiments. How might you think about your future

business exit? How much wealth do you want to build? What

does that wealth mean to you?

Unlike the gurus and professional advice-givers,

however, I won’t be coming up with the answers; you’ll

have to do that for yourself.

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HOW THIS BOOK IS ORGANIZED

• Part I is the fun stuff: five thought experiments

to help you determine what you value in life

and business. These exercises are designed to

give you clarity and confidence as you think

through what it might mean to sell your

business. I hope you’ll find them both fun and

profitable.

• Part II focuses on the emotions Ian and I

experienced as we approached our own sale,

and how our mindset impacted the process.

Part II also offers a sneak peek at the kinds of

characters you’ll meet if you decide to sell - and

how to prepare to maximize your business’s

value and enjoy the exit process.

• I’ll conclude with some parting thoughts. Then,

if you’re interested, the appendix sections offer

more about us and our businesses. Because

the story of our business isn’t necessary to

understand the lessons in this book, I’ve only

included the very broad strokes. If at any point

you feel you’d benefit from more context, flip

ahead to Appendix I.

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BEFORE WE BEGIN, SOME CAVEATS

I am not an expert in the buying or selling of

businesses. There’s a whole group of people - lawyers,

accountants, brokers - who do this for a living, and if you

decide to sell, they’ll play an important role. Ultimately,

however, their role will be limited to specific phases of the

process. In the end, you’re responsible for the quality of

your exit.

Also, this book isn’t meant to be a step-by-step

guide to exiting your business. Instead, it’s designed to

encourage you to think about two things: 1) building a

business you want to sell one day is something you ought

to start thinking about from day one, and 2) the process

of selling is about much more than ensuring you get a fair

price.

Intellectually, I “knew” some of my mistakes before

I made them, and you will, no doubt, recognize many of

them as I tell our story. But don’t be tempted into thinking

that this inoculates you! Just knowing about a problem

doesn’t mean you’re ready to solve it.

I also recognize that making a great deal of money

from selling our business is probably one of the most

fortunate things that’s ever happened to me. But I do wish

I’d thought about these questions more seriously when we

were weighing the decision to sell.

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Mostly, I wish I’d considered how emotional the

process was going to be. Emotions are everywhere in the

selling process. They both blind and motivate us, and they

lead many of us settle for less when it matters most.

After all, we’re the owners and the builders. It’s no

coincidence that we often say we’re “selling our baby.”

Research suggests that gazing upon your company logo

can activate the same areas of the brain that light up when

you recognize an old friend, or even when you look at your

newborn child.

In other words, selling your business isn’t a transaction

that can be captured on a spreadsheet or by numbers like

“three times earnings.” The questions involved are much

more personal. What does money mean to you? What is

your identity as an entreprepreneur? What do you want to

do with your life? (And I’m just getting warmed up.)

When I hear business owners talking about the

possibility of selling, they rarely say, “You know, I’ve got all

these buyers competing. I’m gonna make this great deal,

and here’s the plan.”

Nine times out of ten they say, “I’m sick of running

this business. I think I want to sell, free up some mental

space, and focus on new projects.”

We understand. When we sold, so many of our

decisions were guided by how we felt about our business.

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But it’s precisely that short-term emotional reactivity that

can lead you to make bad long-term emotional decisions -

and bad financial decisions. Because remember: the folks

you’ll encounter on your journey will be professionals.

They’ll analyze the opportunity, and they won’t care how

you feel.

I’d ask you to keep that in mind as we dive into the

five thought experiments below. Of course how you

feel counts. But we’ll also be evaluating the assets in

your portfolio. Today - whether you feel like it or not - I

encourage you to think like an investor.

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Part I - The Five Thought Experiments

Fun thought experiments designed to help you brainstorm your future business possibilities.

Thought Experiment #1

What is the next level on your lifestyle ladder?

We sold our business because we wanted to make a

bunch of money. Oddly enough, though, I didn’t think

about how that ‘bunch of money’ would affect my life in

detail.

Had I considered my financial goals in more detail, I

might have realized that this money wouldn’t allow me to

attain them.

CONSTRUCT YOUR LIFESTYLE LADDER.

Write out each level of money in your personal bank

account that you’ve moved through that has made a

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meaningful difference in your life. This calculation will be

separate from your business finances. (A bunch of money

in your business’s bank account is not the same thing as

the money that you’re saving for retirement or your kid’s

college education.) Here, we’re thinking about lifestyle

money, not the money that you need to borrow to buy

inventory.

We’ll call this a lifestyle ladder. This is what mine looks

like right now:

• STEP 1 BEING IN DEBT

Which is basically being screwed. This is the position

I was in for the lion’s share of my life, and it sucks. I still

remember the moment that I got out of debt. I was in

the Philippines with a team member, David, and we were

planning to go out for a beer. Before we left, I thought,

“You know what I’m going to do? I’m going to pay off my

credit cards.” I still remember that moment; afterward, I

thought, “All right. Now I’m merely broke.”

• STEP 1 BEING IN DEBT

• STEP 2 BROKE (OUT OF DEBT, BUT PAYCHECK TO PAYCHECK)

There’s a big difference between Steps 1 and 2, right?

Well, maybe not. Being broke is using your credit card to

buy the last tank of gas before your paycheck comes in.

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Being broke is being a slave to your job or your business.

It’s still not that much fun.

So, I’d be willing to sacrifice a great deal to get to the

third level. For me, that means having $20-$40K in the

bank. All of a sudden, life looks different. You have a

contingency fund. You have career flexibility. You can do

some traveling and explore options outside of your core

job or your core revenue stream.

• STEP 1 BEING IN DEBT

• STEP 2 BROKE (OUT OF DEBT, BUT PAYCHECK TO PAYCHECK)

• STEP 3 BASIC SAVINGS ($20-40K IN THE BANK)

For me, the next level is having somewhere between

$100,000 and $250,000 in the bank, plus owning the

business that has generated that income for you.

At this level, you can start to consider investing,

create a meaningful retirement plan, perhaps start a side

business, or take some spectacular vacations. You can even

buy some toys. The moment I got to this level, my life

looked significantly different than it did when I was in the

$20-$40K range.

Let’s review:

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• STEP 1 BEING IN DEBT

• STEP 2 BROKE (OUT OF DEBT, BUT PAYCHECK TO PAYCHECK)

• STEP 3 BASIC SAVINGS - ($20-40K IN THE BANK)

• STEP 4 A FINANCIAL PLATFORM - ($100-250K IN THE BANK + BUSINESS)

Now, consider what selling your business might mean

in this context. Does selling get you to the next level

on your lifestyle ladder? Does it make an appreciable

difference in what you can afford to do?

I’ve asked a lot of people about this, and the answer

is different for everyone. My assumption was that a low

seven-figure payday, which is what we eventually sold our

business for, would represent Step 5 for me.

I turned out to be wrong. In fact, I significantly underestimated the amount of money that would make a meaningful difference, given my goals and lifestyle ladder.

After the sale, I didn’t really have enough to start

making high-risk investments in early-stage startups and

entrepreneurs. I didn’t have enough to take care of my

family for the rest of my life, particularly if they get sick. I

didn’t have enough to start a passion charity and focus all

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my energy on that. And I certainly didn’t have enough to

stop working.

Well, what was it enough for? My business partner,

Ian, has joked that although it hasn’t been a complete

life-changer, at least it’s enough to “always order the extra

guacamole.”

So what is the next level for you? After you’ve got a

bunch of money, what’s the next bunch of money that

makes a real difference in your life?

• STEP 1 BEING IN DEBT

• STEP 2 BROKE (OUT OF DEBT, BUT PAYCHECK TO PAYCHECK)

• STEP 3 BASIC SAVINGS - ($20-40K IN THE BANK)

• STEP 4 A FINANCIAL PLATFORM - ($100-250K IN THE BANK + BUSINESS)

• STEP 5 ????

Jason Cohen simplifies this exercise in his article “Rich

or King,” where he discusses the reasons he sold his first

software business in 2007.

He observes that “cash in personal savings” has

a nonlinear relationship with “financial freedom,”

something that our thought experiment has already

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illustrated. Going from broke to $20K in the bank is much

more meaningful than going from $20K to $40K, even

though both are $20,000 jumps.

Credit: A Smart Bear Blog - Jason Cohen

For Jason, the most important level to identify is what

he calls the “Freedom Line”- the point at which “your

savings alone will fund a comfortable lifestyle,” free from

“restrictions about what you can do with your life, family,

and career.”

One of the implications of the Freedom Line might

be to only sell when you can get above it (but not before),

regardless of your business’s future potential.

Let’s say you get an offer for your business that’s

higher than your Freedom Line, but the business still has

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a great deal of upside potential. If your interests are purely

financial, you’d consider taking the offer rather than

risking trying to grow the business. The implication of a

Freedom Line is that simply getting past it is much more

important than going way past it.

A commenter on Jason’s original post whimsically

pointed out that, if you knew someone’s Freedom Line,

you could construct the “perfect game of chance to extract

money from them.” Jason replied:

[Business buyers] play exactly that game. If you look at

smaller acquisitions like mine, valuations like “N times

revenue” or “N times profitability” [are] less correlated

with sales, whereas “N times number of founders”

is closer to what happens. I have a friend at Borland

M&A (I know, it doesn’t exist anymore) who confided

that this was exactly their policy with these sort of

transactions. They know founders think like this...

How each person arrives at their own Lifestyle Ladder

or Freedom Line is a different matter altogether. If we

believe the implications of the Freedom Line, this process

might be the single most important exercise in this book.

For most entrepreneurs, selling a business is an event

that happens once, or a handful of times at most, in a

career. Most business books will encourage you to ask, “Is

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it a good deal?” When we think in terms of the Freedom

Line and the Lifestyle Ladder, however, the better

question might be, “Is it a good deal for me?”

How do you go about determining your Freedom Line?

Ricardo Semler suggests a rule of thumb: “Take

whatever you need to spend [in a year] and multiply it by

20.”

He adds, “I thought the point at which all millionaires

become the same was $12 million.”

Mario Lucibello, an accountant who deals with many

wealthy clients, told me that the most common number

he hears is $10,000,000. A friend of mine, who lives in the

mountains of Chiang Mai, Thailand, said his number is

$1,000,000.

There is no one method to find your Freedom Line.

However, unlike in the early days of building a business,

where income goals mostly revolve around expenses and a

level of lifestyle, Freedom Lines capture much more than

your ability to buy stuff. Instead, Freedom Line thinking

generally captures long-term aspirations for family wealth.

MAXIMUM LIFESTYLE VS. FREEDOM LINE

The conclusions to this thought experiment are yours

to draw, but I can’t help but give you a nudge towards one

of them.

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Many entrepreneurs who are aiming to sell their

businesses are already at their own “Maximum Lifestyle.”

They’re already living in a way they love. If they have the

desire to buy big things, or take big trips, they have found

ways to meet these goals.

That’s why the difference between Maximum Lifestyle

and the Freedom Line is so important. The Freedom Line

isn’t so much about consumption; it’s a philosophical idea.

It’s a question of values. How much money do you need

to have in order to deal with all of the responsibilities and

desires that you foresee in your future, with a contingency

fund thrown in for good measure?

From the conversations I’ve had, the numbers vary

greatly, but the gap between what people need for their

Maximum Lifestyle and what they need to shelve financial

questions for a lifetime is generally very large.

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Thought Experiment #2

Determine how much money you’ll pay in taxes and professional fees if you sell

your business this year. Now imagine what you could do if you invested part of

that money back into your business.

The second thought experiment is a sort of “soft

exposure therapy.” As owners, we imagine many calamities

befalling our businesses, but we rarely stop to consider the

very real one that we’ll face if we sell:

YOU WILL PAY TAXES WHEN YOU SELL YOUR BUSINESS.

If you run a business for many years, you can begin

to experience a lot of fear - because you have something

to lose. For a long time, Ian and I feared that we had too

much of our net worth caught up in our inventory. (Ours

was a relatively cash-intensive business.) We not only

had to pay taxes on our income, but we had to buy more

inventory to sustain growth. The lion’s share of our net

worth sat in a warehouse in central California, and we

didn’t like it.

We also feared a global financial crisis - the dreaded

GFC. We are old enough to have lived through one in

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our professional lives, in 2007, and it wasn’t pretty. Lots

of people lost their jobs. Lots of businesses lost their

revenue.

We started our business in 2007, so we’d more-or-less

dodged any large-scale financial shakeups. How much

longer would our luck last?

We also feared Amazon.com. All ecommerce

entrepreneurs have some relationship with Amazon, and

ours was based on fear. If somebody took our products and

sold them for a quarter of the price on Amazon, we would

be out of business the next day.

We even feared driverless cars, because they could

potentially eliminate the need for valet parking altogether

(at the time, valet parking equipment was our most

profitable niche).

Some of these fears were specific to us. But the taxes

and professional fees involved in making an exit are a

reality for almost everyone. In our case, we were looking at

nearly 30% in taxes alone. That’s a financial crisis focused

solely on our assets.

So why mention all of this fear? Hang on - it’s about to

get fun.

Imagine the kinds of experiments you could run

if you started thinking like an investor, and not as the

person who has to run your business every day. Because

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the moment you decide to sell your business, you are an

investor, right? You’re thinking like one - or you should be.

So let’s run some experiments.

I’m going to give you back some free money. Think

of it as “house money.” Your first step is to calculate

approximately how much your tax burden would be if you

sell your business today.

But of course, you won’t sell your business today. Oh

no. That’ll take a lot longer.

You have time to sell your business, and thus, a lot of time to play around with these experiments.

It took us 547 days to sell our business - and that’s

not uncommon. Richard Mowrey, business valuator

and acquisitions expert, writes that “the vast majority

of [business sales] will fall into the 12 to 24 month

timeframe.” Also consider that a great number of deals

require founders to stay on through an earn-out period.

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Bo Burlingham, who researched over 100 exits for his

book Finish Big, observed that a sale “isn’t an event, it is a

phase of business, just as the startup period is a phase.”

While you’re in that phase, you might think about

what you could have done with all this house money. In

retrospect, I can think of a lot of things that I would have

liked to do.

So here are some experiments I’d try running if I could

do it all over again.

HIRE A CEO

This is an experiment a lot of entrepreneurs consider

but don’t execute. Perhaps they think that nobody in the

world can run their business as well as they can.

Turns out it’s pretty typical for businesses to have

CEOs or general managers. There are even people who

specialize in it! You can find one, and you can do it for

less than the cost of a global financial crisis or an Amazon

competitor (or whatever else you fear). Joking aside,

surely it’s worth considering.

To explore the CEO idea, let’s run a related thought

experiment:

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THE MEDIOCRE CEO TEST

People toss around the term CEO a lot in the small

business space. It’s probably a bit more appropriate to use

the term “general manager.” But it’s your business, and

this is your experiment. Do whatever you want!

Let’s say your business broker has projected that your

business’s value is 3x EBITA. (Earnings Before Interest,

Taxation or Amortization, or the cost of an intangible

asset over time. More on this later.) So, after the sales

period, you’ll be forwarded three years of income. Of

course, if you sell, you’ll have no future earnings beyond

those 3 years, and no asset either. You’ll have no idea-

generation platform, nor a financial vehicle to shelter your

earnings. On top of all that, you’ll pay taxes.

Now imagine an alternate scenario where you hire

a mediocre CEO. Between their salary and lazy job

performance, half of your annual profits get flushed down

the toilet in the first year.

Let’s say your mediocre CEO is decent at keeping your

business churning along at its current rate. Under this

scenario, it would take you six years to earn the same

amount of money you could earn in three years (or if you

sold your business).

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But consider::

• By doing all the things you used to do

(admittedly not as well), Mediocre CEO gives

you the space to focus on other projects.

• You still own the asset after six years of

Mediocre CEO.

• Perhaps Mediocre CEO has an undiscovered

talent and stumbles onto some big

opportunities. Perhaps you do. (After all, with

Mediocre CEO at the helm, you’re now free to

do more networking and horizon-searching.)

Perhaps Mediocre CEO tells good jokes.

And here’s the crazy bit: hiring and training a CEO

takes much less time than selling your business.

Of course, hiring a CEO won’t take away your

fundamental responsibility as an owner. Or many of your

fears. If things go south for your business, Mediocre CEO

will take his salary and head on to the next job. But, as Ian

once said, “What gets fixed is that you go from your time

operating the company to just having weekly, monthly, or

quarterly meetings. That was kind of our vision. I think it

could have worked...”

Now, of course, we’ll never know.

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BUILD WITH THE SUCCESSOR IN MIND

When I asked Finish Big author Bo Burlingham what it

took to find a successor in a business, he replied, “Almost

nobody gets it right the first time.” Books like Built to

Sell, The E-Myth Revisited, and Work the System encourage

entrepreneurs to build with standard operating procedures

(SOPs), but they almost always ignore a powerful

opportunity: grooming potential successors from day one.

It’s a time-consuming process, no doubt, but it can also

be tremendously rewarding - and it offers huge upside

potential.

We’ll cover more “hidden upsides” in the next chapter.

Before we get there, though, let’s talk about a few more

experiments.

LEAVE YOUR BUSINESS FOR A MONTH OR MORE

Ok, this is cheating, because it’s not a thought

experiment - it’s a real experiment. If you’re planning on

walking away for a lifetime (exiting), why not test your

plan for a few months?

Jason Eckenroth, who sold his Software as a Service

(SaaS) business ShipCompliant for eight figures, said he

wouldn’t have sold his business if he “knew what he knew

now.” He claimed that all the realizations he had after

the sale - the 20/20 hindsights - were things he could

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have learned on a shorter break - while still retaining

ownership. He reflects, “I hadn’t been away from the

business for more than two weeks in over a decade. I had

no perspective.”

COULD YOU MAKE YOUR BUSINESS FUN AGAIN?

Attend a quarterly retreat with your team. Get rid of

your office. Institute a shorter work day and see what

happens. Fund a creative or charity project. Look at your

business as a platform.

How can you and your team stand on that platform

and achieve new heights? For a fraction of the money

you’ll owe the government after a sale, you could take

trips, do team and product development, run contests,

and contribute to worthy causes.

SELL ON AMAZON (OR TAKE ON THE COMPETITORS/THREATS YOU FEAR)

Why not? You’re here reading a book like this, so you

clearly know your stuff. And if you don’t, you can learn it.

Every one of your fears is an opportunity. You can

stay scared, or you can respond with skill and clarity. Fear

isn’t always a good guide - and sometimes, it’s downright

terrible. (Remember all that inventory Ian and I were

worried about? Turns out it was a great investment.)

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TAKE SOME CHIPS OFF THE TABLE

If you really want to mitigate risk, consider bringing

on investors or partners to share it. From an investor’s

perspective, this could be an incredibly attractive move.

Jason Eckenroth points out, “Many of us have a

mortgage, we have college debt, our kids’ education to

pay for, our retirement to seed. How much money really

does that take? You don’t have to sell the business to

get that nut taken care of. You want to add glory money

on top of that? You can get there through cash flow and

profitability, or by bringing on a strategic investor that’s in

line with your view.”

WHY NOT RETIRE TOGETHER?

The woman who bought our business was a successful

executive at Universal Studios. I imagine her looking at

our little ecommerce business and thinking:

“I am going to buy this business. And, in doing so, I’m

going to mortgage my entire life savings, including my

homes. I am going to take an enormous loan from the

federal government, which I will have to pay back, and

I’m going to do it because this is my future freedom

machine.”

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Here’s the thing: we could have given her that deal. She

wanted to work for 10-20 years building a business, and

she’s extremely capable.

What if she had chosen not to mortgage the house?

What if she had not taken a million-dollar loan? What if

she had joined us to run the company as a CEO? We could

have invested into retirement together.

At the time, she told us that one of her core

motivations for leaving the corporate world was a fear

of becoming “institutionalized.” She said that although

“my house [and] retirement is on the line… I feel so much

better and less stressed than I did when I worked for

someone else. Isn’t that weird?”

We understand 100%.

We worked our butts off for seven years building our

retirement vehicle with similar motivations, and then

somebody else came along and took it off our hands. It’s

not hard to imagine how the three of us could have formed

a partnership that would have enabled everyone to feel

more satisfied with the outcome.

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THESE EXPERIMENTS CAN BE AFFORDABLE

And they’re especially affordable compared to the cost

of selling; even if the experiment goes badly, your core

asset is still there.

But beware of the power of your business broker and

other professionals whose job it is to tell you ‘the way

things work.’ They aren’t likely to help you construct

creative deals like the ones I just outlined. And they might

not express any confidence or encouragement when you

present an unorthodox deal structure of your own. Why

would they? It’s not to their benefit.

So I’d just like to remind you: you’ve already done the

improbable by building a successful business. If you’d

trusted the advice of professionals since day one, you’d

probably still be in a 9-5 job.

Why trust them now?

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Thought Experiment #3

Are there hidden upsides in your business or platform?

COULD YOUR PLATFORM ATTRACT BIG OPPORTUNITIES IN THE FUTURE?

When you have a business that’s pretty consistent

(you’re good at running it, and you’re seeing similar

numbers year after year), it’s easy to assume that it is

going to look more-or-less the same next year. Beware

of this kind of complacency. Projecting the present into

the future can blind you to risks. It can also blind you to

opportunities.

One of my business mentors, Brian, lives in the

Philippines. He’s got a successful business distributing

SCUBA diving products through his own network of

stores across the country. Year after year, same business.

Nothing’s gonna happen, right? It all seems pretty

predictable, and I suppose Brian could have easily decided

to sell the business, free up his mental RAM, and focus on

new projects.

But one day, Brian found himself in conversation with

a supplier - one with whom he’d had a competing contract

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for years. This supplier manufactured diving computers,

one of the core products for any diving operation.

For a variety of reasons, the supplier wasn’t happy

with his current partner and wanted to give Brian’s

company a chance. The new supplier insisted that Brian

invest $60,000 in an initial order of the new computers.

Brian thought their expectations were too high, since

his purchases of the competing brand had been less than

$25,000 per year.

He decided to take the risk. And when he delivered

the new dive computers to his stores, they turned out to

be incredibly popular with his customers, outperforming

Brian’s projections by large margins. Brian had no problem

with the $60,000 minimum; in the coming years, his

purchases grew to 12 times that number.

Sometimes boring businesses aren’t so boring. Having

experience, relationships, and a platform in place earns

you access to opportunities, many of which are difficult

to predict. Brian never allowed himself to get bored with

his company. He always found a new angle, a new stone to

turn over, to keep himself challenged and engaged.

If you’ve run the same business for a long time, it’s

easy to focus on the downsides. Knowing this, Brian

always seeks to re-evaluate and keep things fresh. He

happily admits to living between two truisms: “If it ain’t

broke, don’t fix it” and “Never stop turning over rocks

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looking for opportunity.” Brian’s story is also a great

reminder that owning a business can offer an interesting

angle on a common business practice: networking.

IMPROVED MECHANICS OF NETWORKING

I’ve often written that networking in business -

building relationships - is simply a multiplier. If you don’t

have a lot going on, it doesn’t matter who you associate

with because it’s tough for those interactions to be

“explosive” and create meaningful opportunities. It’s when

platforms and resources connect that real opportunities

present themselves. When you consider selling a business,

then, ask yourself: will your position in such interactions

improve by exchanging your platform for cash?

Brian’s story is an example of the mechanics of

networking. He’s a compelling guy, but it was his platform

that gained him access to an interesting opportunity.

Are you over-estimating the freedom an exit will

give you? Do you already have time and money to offer

potential deals and seek partnerships? Is your current

business really holding you back from investing in new

opportunities?

I’ve seen it over and over in discussions with investors

or other entrepreneurs: owning a business and platform is

like arriving at the poker table with an ace up your sleeve.

Time and money, while valuable, are commodities. But

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your business, and the opportunities it exposes you to, are

unique.

SMALL BUSINESSES ARE TAX-EFFICIENT STRUCTURES

A variety of tax-efficient strategies depend on the

structures you’ve built. What’s the hidden value of this

advantage over time? When you’re preparing to sell a

business, many experts advise you to ‘back this stuff out’

so your valuation can be a little bit higher on the balance

sheet. But try running the opposite thought experiment,

too. You could say, “What’s the value of actually running

all that stuff through my business over the course of a

decade?”

YOUR PLATFORM TURNS IDEAS INTO MONEY

Your business might feel boring or frustrating right

now, but it’s also something extremely special – a platform

that turns ideas into money. Something you can dump

your creative energy into and have it create profits.

This is the value of having your own dedicated team –

designers, accountants, staff that work for you on a day-

to-day basis – instead of people that you pay to do one-off

jobs.

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To this day, Ian still has physical product ideas – “Let’s

get into the light fixtures business!” – but we can no

longer realize them. It’s like having a phantom limb. In

fact, we’re still not out of the rhythm of firing off emails

to our product managers and asking them to give our ideas

a go. But to recreate that platform properly would take us

years and years.

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Thought Experiment #4

How will you invest your cash?

What are you going to do with this money that you

want so badly? Do you have somewhere to invest it? Do

you really want to spend more?

Many entrepreneurs dream of angel investing, but few

think it through. It’s expensive. It’s risky. It’s a whole new

skillset.

When we were preparing to sell, I didn’t sit down with

a pen and paper and actually think about any of this. I was

simply sick of running the business.

Since we sold, I’ve been looking for investments.

Because I spend so much time around up-and-coming

entrepreneurs, I’m in a pretty good spot to identify them,

but I can’t find anything that gives me 20 percent year over

year like the business we once owned.

Businesses create cash flows, which behave differently

than cash piles. Cash flows are adaptable: you can dump

gasoline into them and watch them create more energy.

Cash piles just sit there and get exposed to the elements.

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In the image above, the rain represents everything

that can wash away your cash pile: professional services,

financial advisors, your cousin who has a startup idea,

taxes, and so on.

NOT ALL MONEY IS CREATED EQUAL - THE BUSINESS MODEL CHALLENGE GAME

My friend David and I used to sit around and play the

business model challenge game. We’d say something like,

“Would you rather make $15,000 from clients or $3,000

from ebooks??”

You can play a similar game with cash in the bank

versus cash flows. Would you rather make $65,000 a year

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from a business or have $245,000 in a bank account? From

a financial point of view, this is the kind of calculation that

you’re making if you sell. It’s worth getting some distance

from it, and asking yourself about the pros and cons of

having a cash flow vs. a cash pile.

Write out why you’d love to have x dollars in your bank

account (or a similar cash store).

Then write out the cons. What would worry you about

having thousands or millions more in the bank? Would

it introduce any problems into your life that you don’t

currently have?

Do the same pros and cons lists for keeping your

current cash flow. Forget about it as a business for a

moment, and consider it simply as a source of money and

wealth.

Pros and cons lists aren’t always great ways to make

decisions, but in this case they function as a way to see

alternative realities. Back to my story: it never occurred to

me that there would be any downsides to having a bunch

of money. To me, having too much cash felt like having too

much ice cream. I mean, what’s the problem?

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FINDING THE FREEDOM LINE THROUGH CASH FLOW

Robert Kiyosaki’s bestseller Rich Dad, Poor Dad tells

a story of entrepreneurial freedom through real estate

investments - a decidedly pre-internet strategy for gaining

wealth. (If the book were written today, perhaps it would

focus on building ecommerce stores.)

In the book, Kiyosaki defines “financial freedom” as

the moment when your monthly income from passive

investments begins to exceed your monthly expenses.

Part of the reason the book was so successful is that

this model of financial freedom is approachable. Let’s

say that most people’s monthly expenses fall somewhere

between $3,000 and $10,000. Those same people would

probably locate their Freedom Line somewhere between

$1,000,000 and $10,000,000.

So a business that takes relatively little time to

manage, and spins off $6,000 a month in cash flow, might

very well give you a type of financial freedom. But that

same business, assuming you get a 3x multiple for selling

it, would only be worth $216,000.

Of course, perhaps having that cash now is important

for you. The goal of the thought experiment is to put

these considerations down on paper, and then make an

informed call for yourself.

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Our last thought experiment might be the toughest.

It’s not for the weary, so if you were thinking of taking a

short break, now’s a good time!

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Thought Experiment #5

Is it possible you’re ever so slightly deceiving yourself? Are there painful

truths you don’t want to admit?

I saved this one for last because it requires the most

honesty and introspection. Plus, you might not be able to

do it alone. I recommend discussing these questions with a

few people you trust – and who gain or lose nothing by the

business decisions you come to.

ARE YOU USING BOREDOM AS A WAY TO MASK INCOMPETENCE?

You may have heard of the Peter Principle, which

suggests that employees are often promoted to a level

beyond their competence. To show how this can work,

I’ll adapt the Wikipedia definition and apply it to

entrepreneurs:

An entrepreneur’s potential for growth is often based

on their performance in their current role. If you are

competent in your current role (say, president of a six-

figure business), you’ll likely proceed to the next level

(for example, president of a seven-figure business).

This results in the entrepreneur, at some point, finding

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themselves in a role in which they are incompetent -

their ‘level of incompetence’ - thus reaching a potential

ceiling for growth.

I say “a potential ceiling” because entrepreneurs are

incredibly resourceful people, especially when it comes to

addressing our limitations.

At the time of our sale, however, Ian and I weren’t

really in the mood to think in these terms. We honestly

thought we had gotten to a point where we knew

everything that there was to know about our business.

The Peter Principle suggests that these feelings of

frustration and boredom might actually have disguised

our incompetence. I would look at our business, roll my

eyes, and say, “I don’t want to go to another trade show. I

don’t want to make another sales call.”

Someone who knows what they’re talking about would

probably have sat me down and said, “Dan, you’re not

going to turn a three-million-dollar business into a ten-

million-dollar business by going to trade shows. That’s

not how people do it.” Well, I didn’t know that at the

time. I was bored, I was stuck, and I was quite possibly

incompetent.

As Ian recalls, a few years before the sale we were

“making a decent amount of money and starting to ask

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what the next step might be. Is it bringing this thing to

ten million? Is it selling it?”

And somehow, sell it became the only possibility we

recognized as a clear and achievable step. In hindsight, of

course, there were many possible alternatives.

If our muddled thinking resonates with you, ask

yourself: Do you know how to challenge yourself in your

business? Can you see a path to the next level? If not,

what would you need to do to gain that clarity?

WHAT CAN I DO IF I SUSPECT I’M INCOMPETENT?

Many readers may be perfectly willing to ask if they are

the right person for the job. Let’s say you’re not; what are

your options?

It’s certainly possible that your company will continue

to grow despite your incompetence. We’ve all seen the odd

company achieve wild success despite its founder. (At the

time we sold, our business was roughly the size and scale

of the business I had helped run in my previous career.

Were my abilities, and my ceiling of potential, defined by

that previous experience? Perhaps.)

All of this jibes nicely with the most promising

piece of advice I’ve heard on the subject. Seth Godin,

an experienced business growth advisor (and famous

43

blogger), was asked by a woman how she might grow her

$10M company to $100M. He replied that she should hire

somebody to run her $10M company, and go off and work

for a $100M company to learn how they operate.

I like this story for a few reasons. First, it emphasizes

the importance of actual working knowledge and

experience over information you pick up from books and

seminars. Second, it emphasizes the long-term mindset at

the root of so many “next level” metamorphoses. It also

suggests that more of the same isn’t going to get you to

the next level. It’s a cliché in the business community, but

it’s true: what got you here won’t get you there. Finally, for

the bored and frustrated entrepreneur, it’s an opportunity

to do something completely fresh and challenging while

creating the opportunity for tremendous upside.

WHAT ARE THE CHANCES YOU CAN ACTUALLY BUILD ANOTHER SUCCESSFUL BUSINESS?

David Heinemeier Hansson (a.k.a. DHH), founder of

Basecamp, observes that entrepreneurs are very quick to

associate “the success of their business” with their “ability

to create successful businesses.”

DHH muses, “How convenient it is to forget all the

things that fell your way the first time around. Those

who’ve sold their business and ended up regretting it

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assume that recapturing success will be relatively easy, but

many realize ‘oh, actually, that was harder than I thought.’”

DO YOU HAVE THE DESIRE AND ENERGY TO BUILD ANOTHER BUSINESS?

Jason Cohen, founder of WP Engine, reflected on a

similar phenomenon. In an article titled “You Can Have

Two Big Things, But Not Three,” he argues that between

careers, major hobbies, charity initiatives, family, spouse

and startups, you can only have two main focuses.

Ambitious people hate to hear this kind of thing. We

think we can do more and defy the odds. But the math he

points to is compelling. “40+ hours per week is the amount

of time it takes to tackle something huge. A career. A

startup.”

Sure, passion and vision can help your chances, but

investing a great deal of time and energy is indispensable

for growing any successful business. As we get older and

take on more responsibilities, finding that time can be

more challenging.

Generally, it takes entrepreneurs about three years

of full-time effort to replace their professional salaries

with income from a business they founded. (My good

friend David McKeegan of Greenback Expat Tax is

the source of this insight. We have since called it “The

1,000 Day Principle.”) And those three years often take

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place after a long period of training, employment, and/

or apprenticeships. What’s more, three years isn’t a

guarantee - it’s an average. It could take longer. Where are

you going to find those three years? Do you really want to start

all over again?

DHH writes, “I don’t want to be 22 again… I had that

phase of my life… [S]ome people, they look back on their

glory years… and reminisce. I try to set things up in such a

way that I don’t have to [go back and repeat the past].”

ARE YOU MAKING THE DECISION BASED ON STATUS OR PRESTIGE INSTEAD OF STRATEGIC SENSE?

Ian said, “I really saw [our exit] as a success point in

my life. You never exit from most small businesses. You

either wind them down or they go out of business. It was a

challenge to see if we could sell it.”

When I asked him how he felt after achieving this goal,

he said, “I feel relieved, but not as much as I thought I

would.”

Jeff Giesea, who built and exited a multi-million-dollar

business, observed, “There’s this mindset where you’re

not successful as an entrepreneur until you’ve had an

exit or sold a business. I think that I bought into that a

little bit too much in retrospect.” Ian and I did too; we felt

46

vaguely that our entrepreneurs’ bio blurbs were somehow

incomplete if they didn’t include the word “exit.”

Ricardo Semler comments on this absurdity: “‘I’m

going to exit, and so forth’… they are essentially being

goaded...by the one out of 100 guys who [built a billion-

dollar company]. It is in people’s minds as a measurement

of success.”

There’s a popular expression for this sort of empty

prestige marker: those who mind don’t matter, and those who

matter don’t mind.

It’s up to everyone to decide for themselves. My bio

blurb does now say “exited a business,” but so far nobody

has seemed to notice or care.

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TO REVIEW: THE THOUGHT EXPERIMENTS SUMMARIZED

1. The Lifestyle Ladder – Will selling get you to the next level financially?

2. The Mock Tax Rebate featuring the Mediocre CEO Test – What sort of fun experiments can you undertake with free money?

3. The Hidden Upsides – Are there hidden upsides in your business or platform that you might not be acknowledging?

4. The Cash Conundrum – How will you invest your cash?

5. The Dirty Secret – Are there tough truths you’re unwilling to face?

If you’ve taken these thought experiments seriously,

you’re way ahead of the game. In Part II, we will circle back

to our story. We’ll discuss the motivations Ian and I had to

sell, and why some of them may have been misguided. I’ll

also introduce you to some of the characters we met along

the way, and how one of them almost convinced us to sell

at a million-dollar discount.

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Part II - The (Emotional) Decision to Sell Our Business

Our business had a host of problems, and we naively thought that selling would make them go

away. In retrospect, the problem was us.

In this part I’ll share some of our story and

motivations. After that, we’ll take a look at some basic

information about how business valuations work, and how

they can depend on timing and business size. To conclude,

we’ll take a look at some of the archetypal buyer types we

met along the way, and how we narrowly avoided being

taken advantage of by a few.

Would Ian and I have acted differently if we had run

the thought experiments from Part I? It’s hard to know.

Perhaps we would have lowered our expectations for the

exit. At the very least, we would have had some additional

clarity.

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OUR BUSINESS PROBLEMS AS WE SAW THEM, CIRCA 2014

• We were “bored” with running our business.

• We were unwilling to do what it would take to

get our business to the next level in revenue.

(This was critical, because businesses with

valuations over 10M tend to sell for better

multiples. More on that shortly).

• We didn’t want to have to hire and train

another key team member.

• We were worried about competition and

technology changes affecting our business.

• Ian and I had disagreements about how to run

the business.

Given all of these challenges, selling seems like the

obvious solution, right?

I hope you don’t think I’m killing the suspense if I say

that selling our business didn’t solve our problems.

But we didn’t really care at the time. Instead, we were

excited about the process of selling. And, after speaking

to a handful of business brokers, we felt even better:

everybody wanted to work with us! We’d gone from having

a pile of problems on our plate to being the belle of the

ball.

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What looked like a great sign at the time - brokers

expressing enthusiasm over the opportunity to sell our

business - wasn’t so great in retrospect. Of course they

wanted to sell our business. That’s how they make money.

Worse, our business might have been too good to sell.

We managed the business remotely. We rarely, if ever,

visited the office. All it took was just a few phone calls a

week. But one of those phone calls changed everything.

“I QUIT”

On one of our regular weekly management calls, a key

employee dropped the news that no business owner wants

to receive.

We’d hired him way back in 2008. He was our first

employee and we were his first company. He had just

graduated business school, and for some reason, he

decided to work for two unproven entrepreneurs only a

few years his senior.

At the beginning, we paid him more than we paid

ourselves. He oversaw every functional area of the

business. His skills and ambition increased, and so did our

revenues. So when he told us he was ready to move on, it

was hard to imagine the business without him. The idea

of replacing somebody who’d been there since day one was

daunting.

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Eventually we did exactly that, and in the process, we

discovered a business maxim: everybody, including you, is

replaceable.

At the time, though, our employee’s announcement

led us to do a lot of soul-searching, and that’s how we

stumbled on the idea of selling the business in the first

place.

The whole idea of jumping back in for another half a

year – the time it would take to train a new manager – felt

like a slog. I mean, if the business really interested us,

wouldn’t we naturally want to spend more than six hours a

week on it? And hey, what about our summer travel plans?

Our “Should we sell?” thoughts went into overdrive.

So, instead of solving the problems created by a staff

member leaving, we decided to take on another one. We

essentially packed up all of our latent, un-addressed issues

- the list at the beginning of the chapter - and treated

exiting as the way to cure them all.

And it was going to be an awesome challenge, too.

Neither of us had ever exited a meaningful business. What

an incredible accomplishment this would be! A bold line on

the resume. A universally-lauded achievement in the world

of entrepreneurship. At the very least, “multi-million

dollar exit” sounded better than “cancelled my Mexico trip

and trained a new general manager.”

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So, in an immense display of naivete, we offered our

employee a bonus to stick around “for a few months” until

we could sell the business.

Whew. I didn’t need to jump on a long-haul back to the

US, and Ian still got to head off to Mexico (though he did

pack a list of potential business brokers).

A FEW MONTHS BECOMES A FEW YEARS

“The few months” we asked our key employee to stick

around passed without any action on the sale front. We

were selling to avoid replacing a key employee, and now

we were going to have to replace him anyway. Ian was

faced with the triple challenge of keeping the business on

the market, hiring and training a new general manager,

and ensuring that fidgety prospective buyers didn’t use

our staffing changes as a chance to lowball us or bail out

of a deal. When we created our seller’s prospectus, part

of that document described each staff member in detail.

Ian recalls, “Whenever something changed there, that was

definitely a point of negotiation and anxiety.”

And we understood buyers’ feelings; it was a staff

change that had started this whole thing for us! Ian told

prospective buyers, “Don’t worry about it. I’ve replaced

this position five times. It’s going to be fine.” But nobody

believed him.

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Ultimately, Ian did a great job juggling a lot of

flaming torches. In fact, he hired and trained a new staff

member who brought fresh energy into the company.

In the process, we managed to make the company more

profitable as well.

And right at that moment - when the new GM got

entered into the seller’s prospectus – would have been a

good time for us to run the thought experiments.

But slowing down the sales process wasn’t ever under

serious discussion. We had been in motion for many

months. And momentum, both positive and negative, is a

powerful force.

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What to Expect When You’re Selling

Or how we almost lost $1,000,000 by listening to the wrong advice.

When selling a business, there are two critical

elements to consider:

• Are your target buyers strategic or financial?

• How will the sale price of your business affect

the market for it?

Let’s take a quick look at each question in turn.

FINANCIAL SALES ARE BASED ON THE BOTTOM LINE

Our business was valued at three times our earnings,

plus the inventory we had on hand. In the business

buy-and-sell world, this is called a “financial sale.” The

approach used to arrive at the valuation takes your annual

earnings and multiplies them out over a number of years,

based on a variety of factors.

The industry standard, all things being equal (they

never are!), is that your business is worth about three

times your EBITA plus your assets. Again, EBITA stands

for “Earnings Before Interest, Taxes and Amortization”;

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it’s a fancy way of saying “your earnings” or “your net

profit” with some caveats.

Multiples can be low for businesses with less perceived

durability, like a new ecommerce business that has no

brand or unique products and depends on Amazon.com

for most of its sales. Strong brands with long track records

can achieve higher multiples.

In our case, we had a solid business with a good track

record, which made us think that we could achieve the

3x standard multiple. But a financial approach to valuing

businesses also takes assets into account, which can mean

things like equipment, real estate, or intellectual property.

In our case, it meant our inventory.

The punchline? We got three years of our earnings in

advance, plus money back for our inventory.

STRATEGIC SALES VALUE: WHAT A SMALL GROUP OF BUYERS IS WILLING TO PAY

It’s harder to generalize about strategic sales because

the marketplaces are so small. It might only take one

buyer to value your business; think of a larger software

company approaching a smaller one and saying, “If you

build a tool that does xyz, we’ll buy 51% of it.”

Strategic sale valuations can also come about when

one buyer tries to prevent another from obtaining an

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asset. Back in 2012, I wrote a small blog as a side project. I

was taking a “journalism” approach to blogging, covering

the growing opportunity for entrepreneurs to hire in the

Philippines.

At some point, I decided it was too distracting to

continue, so I emailed the guy who was making the most

money in the space – a “guru” type – and asked, “How

much will you pay me for this blog?” He sent his number,

which I promptly forwarded to someone in the same

blogging space (whom I preferred) and said, “This guy

offered me x amount for this blog. I’m willing to give you a

discount off his price, but if you don’t buy this asset I’ll be

forced to sell it to him.”

The site was sold within the week.

Of course, there are other ways to motivate strategic

buyers. One is adding revenue, or even entire categories,

to an existing brand. Another is buying into new niches

without the risk of finding product-market fit. But, to

understand how that works, we need to take a look at the

overall size of the businesses being sold.

SALE PRICE AND ITS EFFECT ON BUYERS

Businesses under $500,000 sell relatively easily, both

financially and strategically.

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Businesses in the $500,000 to $10,000,000 range are

relatively difficult to sell financially. There are not a lot

of individual investors with that kind of capital sitting

around, and businesses of this size don’t really move the

financial needle for the larger institutional investors that

do have the cash.

Businesses over $10,000,000 tend to be strong targets

for acquisition by larger investors and companies, both

from a financial and strategic point of view.

HOW BUSINESSES OF DIFFERENT SIZES TEND TO SELL

The implication is that businesses under $500K in

revenue have a lot more buyers than those over $1M,

and that getting from $1M to $10M makes an enormous

difference.

As Ian and I approached our own sale, we were aware

of this reality, and it played into our frustration and

boredom. We thought about the prospect of moving

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our revenues from the mid-multi-millions to the golden

number of $10,000,000, and we felt deflated. We knew it

would be a long road.

But almost every professional we spoke to - that is,

the folks who are in the business of selling assets - told us

that we had a great and saleable asset on our hands. They

didn’t offer information; they offered encouragement. Of

course they would be happy to work with us to get it off

our hands. They didn’t emphasize - and how could they

actually know?! - what a long and tedious process it would

be to get a few years of earnings forwarded to us.

WHEN IS THE BEST TIME TO SELL A BUSINESS?

When I asked Ian, he said, “When it’s not growing,

apparently.”

Why?

“It’s hard to get a good valuation. I mean, we’d had

good growth since 2008. According to our broker, this

wasn’t normal for a business, and it’s very hard to value a

business when you’re seeing that much growth.”

From a financial perspective, Ian reflected, “It’s best

to sell a business when it’s leveled out, or growing just

slightly – single digits per year, 5 percent, 10 percent.

Or when it’s tanking, because then people really feel

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like they’re getting a good deal. But we weren’t in that

position.”

We also discovered that the things we thought were

amazing about the business turned out to be head-

scratchers for prospective buyers.

You guys only work a ten hours a week?

You spend half the year in Europe?

Wait a second, this business is growing 20 percent year

over year?

For opportunity-seekers, these looked like downsides.

“They want to see something screwed up, and they also

want to see something that they can contribute to,” Ian

observed.

IS YOUR BUSINESS TOO GOOD TO SELL?

From an ownership or profit perspective, how good

your business is has very little to do with how saleable it

is. The return Ian and I achieved, for example (three times

earnings), was simply average.

The fact that we wanted to sell our business, and

that it was technically a good one (solid profit, process,

and people), didn’t help it fetch a higher valuation on

the market. Neither did our masterful seller prospectus,

which made it clear that we knew what we were doing. The

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entire business was built and run on standard operating

procedures that anyone could read. We had clever

marketing campaigns and relationships with key clients.

We were growing and profitable. It was pretty cool to

describe what we had built in such detail: Look at this thing!

It’s amazing! You should buy it.

In the landscape of available businesses, this stuck out

like a sore thumb. As anyone who’s spent time browsing

“businesses for sale” listings can attest, it’s tough to find

great stuff on public lists.

The executive who eventually bought our business

noted that of the 50 she’d reviewed, “With 50%, there was

something not right about what had been pitched.”

Keep in mind, your broker also might not be in a good

position to help maximize the value of your business on

the market. Why? Because they only make money when

you sell, so their advice tends to look something like this:

• Buyers love businesses in which owners aren’t

tied up in bringing in revenue.

Make sure your bookkeeping is airtight, and back out

as many expenses as you can to increase EBITA.

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The reality is that none of the excellent exits I’ve

observed had anything to do with the above. They had

much more to do with:

• Key relationships built with peers, competitors

and investors.

• Competitive or strategic value amongst

investors, opportunists, or those with a lot to

lose.

Significant brand or asset value to institutional

investors and brands.

The reality is that, on the low end, great exits come

from quickly scaling streams of revenue. (This is known as

“flipping” assets.) On the high end, great exits come from

strategic relationships with investors, buyers, partners,

and opportunists.

Take, for example, a business that sells on the

Empire Flippers marketplace, one of the leading online

marketplaces for buying and selling online businesses.

Let’s imagine a business is selling for $100,000, or 2x

annual profit. On the surface, perhaps this looks low. But

if the seller is capable of producing many such sites, and

has a process for doing so, it might very well be strategic

to sell. They can then take the cash and continue to build

assets, rather than rolling the dice and hoping that the

success with the first business will continue.

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You could also imagine taking a bad deal - that is, a low

multiple - because the amount of money you’d receive is

enough to meet your lifetime financial goals.

After all, the calamities that befall businesses are very

real. Ian and I were lucky to get out while we could; many

business owners never can do. Of course, it’s not possible

to plan for every possible disaster scenario. However, it

is worth thinking about risk, and one way to do so is by

taking the “no website test.”

THE NO WEBSITE TEST

The no website test asks: what would happen to

your business if we took away your website or marketing

channels for a year?

The idea is to test how strong your relationships are

with your customers. Most businesses that depend on

their websites also depend on one marketing channel –

they’re what Rob Walling calls “one channel businesses.”

This channel could be a search engine, a social media

website, or a traffic partner. Your business might also

depend heavily on one client or source of clients.

Perhaps surprisingly, one-channel businesses sell quite

well under $500,000. They represent a ‘jump start’ that

investors seek and feel they can improve. If you own a

one-channel business, however, you may be vulnerable. It’s

often difficult to protect and expand smaller enterprises.

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If you don’t feel you can do so, it might be a good idea to

sell and build something more robust with your experience

and cash.

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Letter of (Mis)Intentions

Ian estimates that, during the 547 days it took to sell

the business, “on the busiest weeks it consumed 30 hours

of my time. On the low end, just a few. So, when potential

buyers do finally show up with an offer, it’s hard to turn

it down emotionally. Yeah. We almost lost a million bucks

because of that.”

A critical aspect of vetting prospective buyers is

something called a “letter of intent” (LOI). An LOI is a

non-binding informal agreement that essentially says,

“We really like your business. Go ahead and take it off the

market for 30 days so we can do our due diligence. If all

looks as advertised, we’ll pay you what you’re asking, or

close to it.”

The survey Expensive Mistakes When Buying Your

Company found that around 1 in 10 conversations with

qualified buyers results in an LOI. Industry professionals

estimate that 40% to 80% of LOIs result in a deal.

During the LOI phase, your financial records will be

scrutinized. Your add-backs – personal spending you’ve

made on your business, but now want to “add back” in

order to represent the “true” bottom line – will be quibbled

with and argued over. Seller financing options will be

discussed.

It doesn’t take a genius to see that this LOI period

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is a leverage-killer for the seller. Yeah, we’ll put the biggest

project of our lives on hold so you can pick through our books.

Meanwhile, we’ll let you have exclusive access to this deal because

you made a small deposit to a broker.

That nearly cost us a small fortune.

A PROSPECTIVE BUYER: “DEALS DMITRI”

“It wasn’t during our first few conversations, but Deals

eventually revealed to me that he’d bought 26 businesses

before,” Ian remembers.

Deals wasn’t the first prospect to give us an LOI, but

he was the first buyer that looked serious enough to close.

Not only did Deals have a lot of experience buying

small businesses, but he had the cash to do so. That was

his leverage. Most deals of our size require some kind

of financing - either from a bank or from the seller. In

Dimitri’s case, he could simply write a check.

Dimitri knew exactly how the selling process works

and what to expect. In some ways, he was leading us

through the sale. Ian said, “I felt uncomfortable with that,

being the alpha dog that I am.”

But, at the time, it didn’t set off too many alarm bells.

From an emotional perspective, the lure of a hell of a lot of

money was strong – and Dimitri was a cash buyer.

During the due diligence period, our conversations

66

with Dimitri intensified. At one point, he even introduced

Ian to his family, suggesting that they would help him run

the company at some point.

Like many buyers, Deals needed to feel like he was

getting a great buy. Fair enough, you might say – but

sometimes, a buyer’s idea of a ‘great deal’ means you’re

over a barrel.

Deals treated the LOI period, and the family visit, as

leverage in the negotiation. And a great deal for a deal-dog

is a huge discount off the market rate. He was never going

to pay 3x EBITA to buy this business.

Ian remembers the end of the LOI period: “I was

obsessively checking my email to see how this deal was

going. Then, a day before the LOI period is up, I roll over

at 7:30AM. There’s an email that says, ‘We have to talk.’”

Deals ended up using his crony’s “accounting firm”

letterhead to let us know that our asking price wasn’t

acceptable, based on a purported discrepancy between our

income statements and tax returns. In truth, there was no

discrepancy, and we said as much. It was useless.

“Take it or leave it,” he wrote back.

What a farce. Almost a year later, our actual buyer said,

“What I liked about you and the company especially was,

once I got your tax returns and compared them with your

financials and everything else, everything matched.”

At the time Deals Dimitri was pulling his maneuvers,

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we felt like idiots. Even worse, we weren’t pursuing other

buyers at that point. Our myopia – and our desperation –

led us to make a counteroffer. And that counteroffer was

so low that, had Dimitri taken it, we’d have lost close to a

million bucks.

Why did we do it? Because we were exhausted by the

process. We weren’t practiced professionals. We had very

little perspective. And we simply weren’t prepared for a

two-year dance with multiple prospective buyers, LOIs,

and neverending scrutiny.

We’d already failed with a previous buyer who wasn’t

really serious. We then spent another two months with

Dimitri. There was a big part of us that just wanted to get

it done.

As I said at the outset of this book, you can ‘know’ this

stuff is going on, but it’s still hard not to get swept up in it.

That’s why real professionals have a process to keep deals

moving along: they know it’s important to ensure that all

parties are advancing toward a goal together.

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Why Didn’t Our Broker Protect Us From Deals Dimitri?

To be fair, Ian reflects, “Our broker helped to push

the deal forward. In many cases, that would have been

awkward for me to do. Having a broker in board was

tremendously valuable in that respect.”

But it’s important to remember: brokers are on “Team

Deal.” They’re in favor it going down, however it happens.

That’s the only way they get paid. And, because they work

on commission, brokers have relatively little incentive to

maximize deal size. Let’s say that they get 10% and you

sell your business for a million bucks – the broker gets

$100,000. Now, if Deals Dmitri says, “Let’s get this deal

done quickly for $750,000,” the broker gets $75,000.

That’s only only a $25,000 swing for the broker, but it’s

a $250,000 swing for you, and you lose your asset. The

only asset your broker has in this situation is the business

listing.

If the deal falls through, however, you still made

income during the process, and you still own the business.

You’re all good, whereas the broker’s got zero. So, whether

the deal goes through or not, your incentives aren’t in line

with your broker’s.

Remember too, that when brokers talk to prospective

buyers, they aren’t talking to your customers – they’re

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talking to theirs. Deals Dimitri might not be a great guy for

us, but as somebody who’s bought 26 businesses, he’s a

great contact for the broker.

If we were organizing the sale again, ideally we’d

ensure that all potential buyers were competing. That’s

Business 101, but most brokers can’t afford to do that.

Buyers are their clients, and they want brokers to present

them deals on a regular basis.

The point? As long as you’re cognizant of these things,

you can have an open conversation. Our broker wasn’t

hoodwinking us. He was honest. But the pitfalls are

obvious. I am reminded of Nassim Taleb’s advice when

going to the doctor: Never ask the doctor what you should do.

Ask him what he would do if he were in your place.

Consider asking brokers to:

1. Let you co-list your business with other brokerages (that is, only cut a deal with a broker if he gives up exclusivity on the listing).

2. Ensure that the LOI period remains strictly competitive.

Another option would be to keep the LOI period

shorter. Serious buyers can always request an extension

for legitimate due diligence. In our case, the lengthy LOI

period gave everyone, including the broker, time to drag

their feet and lose a sense of urgency.

You’ve got to hand it to him: Deals Dimitri made our

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sales process far more adventurous than it might have

been. But he wasn’t the only one. There were several other

buyers who deserve to live on...

TIRE-KICKING TANYA

Most buyers are a relatively small, refundable deposit

away from enjoying a month of unmolested tourism

in your business. These buyers can suck your time,

preventing you from pursuing more serious buyers.

Tanya was a perfect example; she wanted to monopolize

our days, live in the details, and just sorta feel her way

into figuring out if this was something she was maybe

interested in.

How to vet this? One approach that worked for us was

requesting a personal financial statement to ensure that

prospective buyers actually had the money to cut a deal.

Our tire-kicker had the dough, but Private Equity Paul

definitely didn’t.

PRIVATE EQUITY PAUL

PE Paul came in under the guise of a private equity

firm. It turns out, however, that all you need to have a

private equity firm is a decent suit and a website with

some stock photography. The reality – one we learned

too late – is that established PE firms are rarely, if ever,

focused on acquiring businesses of our size.

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But there are lots of people out there who think they

can pull together a deal by sheer charisma. They identify

a company with potential, then turn to their friends and

pull together the investment funds required. I guess PE

Paul’s golf buddies weren’t as enthusiastic as he was.

SYNERGISTIC SAL

“I approached a couple of competitors when we started

to sell this business,” reflected Ian. “I knew, in the back of

my head, that this was a bad idea. But when I approached

Synergistic Sal and said, ‘Hey, you’ve got these capabilities.

I think that you might be interested in our business,’ of

course Synergistic Sal wanted to hear all about it.”

So Ian had tipped our hand to a competitor in our

space. “I did everything short of sending him our actual

financials. He even ordered a product from us at one

point, which in our small manufacturing world is always

code for one thing – he intended to reverse engineer and

copy them.”

Ian called him out on it. “It was uncomfortable for

him.”

Ian said to Synergistic Sal, “You’re under a non-

disclosure agreement. I hope that you didn’t order this

product with the intent of ripping it off, because that’s

certainly what it looks like to me.” At first, Sal denied it,

and then he didn’t deny it, saying, “‘I don’t think that NDA

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is official.” Ian pressed, “I’ll be happy to have my lawyer

call and explain how official it is, if you’re interested.” And

that’s how our relationship with Synergistic Sal ended -

with us threatening him.

We were mistaken to approach a buyer like Sal,

especially as late in the game as we did. Given that Sal

had no history of acquisitions, and that his company

had comparable capabilities it was always possible that

he would try to recreate our products and steal our

customers. After all, that’s a lot cheaper than buying a

business!

Here’s the lesson: we sold our business as a cash flow

opportunity. That’s different than posing a threat to a

competitor. Sal could continue to build industrial furniture

and market it online without buying our business.

In your own situation, then, look at your marketplace

and the type of business that you’re growing, and ask

yourself, Does it pose a threat to anyone? Our business

didn’t.

WHAT THESE BUYER PROFILES CAN TEACH US

All of these buyers were opportunity-seekers - people

looking for a good job, a first investment, a great deal, or

even a retirement option. These were not people packaging

assets for institutional investors or ambitious companies

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seeking new growth engines, or even aggressive companies

looking to protect their territory.

But thankfully, our story wasn’t over – because in

walked CEO Sally.

CEO SALLY

In general, the CEO Sallys of the world don’t evaluate

your business like the Deals Dmitris do. (“I want to get

an asset at half of its value and then capitalize on that

difference.”) Instead, CEO Sally is looking for a retirement

vehicle, a long-term wealth play.

These buyers also often have the right experience to

run a business. They’ve either been at the executive level

of a big company or at another smaller business. They’ve

got the money because they’ve been saving their whole

lives or have access to attractive financing. In the latter

case, this can mean a little bit of leverage in your favor,

because they aren’t highly price-sensitive. (It’s not their

money anyway.) Unlike Dmitri, who is essentially buying

a house with a check drawn directly from his Bank of

America account, CEO Sally is doing something more akin

to working out a monthly mortgage payment.

LEFT IN GOOD HANDS

Strategy aside, the best part about selling to CEO Sally

was that our business was left in good hands. Part of our

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legacy was building careers not only for ourselves, but also

for our team, and CEO Sally came in doubly motivated to

grow and improve the platform we’d built.

I learned that getting a good deal financially, and

getting a deal you can live with are much different things. I

hope that hearing a bit of our story will motivate you to to

define and craft a wholly satisfying exit.

Before we go, I have some brief concluding thoughts.

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Conclusion

Have the Exit Mindset Before You Exit

Jason Eckenroth’s talk at the 2017 Business of

Software Europe conference was aptly titled “The Agony

and Ecstasy of Selling My Business.”

He had waited a long time to share his story. “I was

ashamed… No one’s feeling sorry for me… ‘Why aren’t

you more grateful for this?’” When I asked Jason if he

regretted selling, he said “Last year, I was a mess. I spent a

year regretting it.”

After lots of introspection, though, he’s made peace

with his decision. But, like Ian and me, he believes that

there’s an alternative world in which he didn’t need to sell

his business in order to achieve greater clarity about his

goals. Jason observed:

I run across so many entrepreneurs that are going

through the same ‘boil the frog’ scenario. Their

optimism has gotten clouded a little bit. They’re like,

‘I’m just kind of tired of this space and I have this idea

for another start-up.’ I want to say, ‘You have no idea

how hard it will be to build it without a platform,

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without the programmers or a ready-made audience of

customers to test it on... You’re starting from zero and

looking back in time, in rose-coloured glasses.’

A 2016 Columbia Business School white paper titled

“Life after the Exit” makes a similar point: “It is surprising

to find so little written about what happens to an

entrepreneur after a liquidity event and how to go through

the process.”

The Columbia paper does identify some patterns,

however. The authors note that “selling a venture

often represents a loss of identity and community” and

“entrepreneurs often struggle with how best to use their

new freedom and how to define their legacy.” Finally,

they point out that “the qualities that make a good

entrepreneur are seldom the ones that make a good

investor.”

If you sell your business, you’re very likely to

experience a sense of loss. In some cases, you may go

through a period of regret and second-guessing, and

perhaps even extended listlessness or depression.

But you aren’t powerless. As part of your thought

experiments, consider trying to anticipate those feelings.

Work to create a plan for your future that features

elements of community, routine, and purpose.

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Jason Eckenroth told me that he wished he’d walked

away from his business for an extended amount of

time before he pulled the trigger on his exit - “to get

perspective.”

If you do sell, it’s a perspective you’ll have forever. It

makes sense to test it out.

DEVELOP AND TRUST YOUR INSTINCTS

At the beginning of this book, I expressed my hope

that you’d find something that resonates with you in these

pages, and that you’d listen more closely to your own

instincts about what your next move might be.

It’s easy to be swayed by other people’s advice – and, in

some cases, you should be. But often the best answers are

already inside you. You might discover wisdom by asking

the right questions and taking a careful inventory of the

answers.

That’s why the thought experiments in this book are

so open-ended. There isn’t a right way to do this stuff.

Many of the hopes Ian and I had for selling our

business didn’t quite pan out. We still have lots of the

same business challenges to reckon with. If anything, I’m a

bit more anxious to figure out what’s next.

But I also find myself thinking about the relationship

between cash and opportunity in a different way. As I

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consider new opportunities, I now ask myself: “For which

of these is cash a constraint?” More often than not,

I’ve found that it isn’t – and even when it is, that’s not

always a bad thing. Less cash can lead directly to more

resourcefulness, and capital partners can not only be

strategic but can offset your risk and add value through

contacts and/or experience. In other words, the vision

of cash that motivated our sale is turning out to be less

relevant than I once thought.

That’s my experience, anyway. Ultimately, you may

find something very different in your own case. But

whether you’re starting a new business or thinking

about selling, my ultimate hope is that you’ll tap into the

potential fun and excitement of the exit mindset before

you exit.

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Afterword

“The Devil’s Advocate”

I first scribbled these thought experiments in

my notebook in advance of a Dynamite Circle event

in Barcelona in the summer of 2017. A few dozen

entrepreneurs were gathering to share ideas, and I thought

that this kind of informal event would be the right place to

share some of my misgivings about our recent sale.

The response from my fellow entrepreneurs was

enthusiastic, and they encouraged me to prepare a

version for our largest event of the year - DCBKK - only

a few months later. The response to this second talk was

overwhelming. I heard it over and over: “Put it in a book!”

The feedback from those DCers in Barcelona and Bangkok

helped create the book you’re reading today.

Naturally, that feedback varied. In addition to lots of

support, I heard everything from, “You haven’t thought

this through all the way” to “That made me rethink my

career and I don’t even own a business” to “That was a

total gut check – thanks.”

I’ve taken it all into account and I hope that, even if

you don’t agree with everything I’ve written, you at least

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found something useful to take with you.

There’s one response I’ve received, however, that

makes me uncomfortable.

It’s from people in a similar position that we were

in – small business owners who are thinking of selling

their enterprise for a 1-5x multiple through traditional

channels.

That response usually goes like this: “The book was

incredibly relevant to me. I’ve decided I’m not going to sell

my business.”

When I first constructed these five thought

experiments, I titled them “The Devil’s Advocate.” It

was an homage to the former process of canonization in

Rome. Up until the mid-1980’s, when someone was being

considered for sainthood, the Vatican ceremonially invited

someone to argue against granting the honor. I don’t know

all the details about how it played out, but the image my

mind worked up was stark and humorous: one heretic

arguing against the soldiers of God.

In the world of entrepreneurship, selling your business

is the closest thing to being canonized. What could

possibly be wrong with exiting your business?

This book is my effort to answer that question for

myself – and for those around me.

As I did so, I took on the role of a lawyer or ‘devil’s

advocate’ arguing their case. My aim wasn’t to be

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objective; it was to provide a counterpoint to the common

mythology around exiting.

But I can only be comfortable with that if I’m very

clear about this: I’m not saying that you shouldn’t sell your

business. I have no idea what’s best for you, your business,

or your future.

I can’t help but worry that a reader will decide to turn

down hundreds of thousands of dollars – or even millions

– for a business that suffers a terrible tragedy the next

day. Like I said at the beginning, all the hard work and

responsibility is yours. But, as a business owner, you’re

used to that.

Here’s what I really believe: whatever you decide to do,

do it with clear intentions. Do it in a spirit of passion and

exploration. And take full responsibility. And make sure

your choices are aligned with your values and your vision.

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Appendix I

More About Two Tree International

“It has a ring to it,” I told Ian over sandwiches during

our 30-minute lunch break. “And there are two of us.”

So we decided on the name “Two Tree” and added an

“International” for good measure.

Our business grew out of the relationship between Ian

and myself. Ian was the entrepreneurial one. He’s the kind

of guy who buys a car for $4,000, fixes up a few things,

and flips it the next week for $8,000. He also has a degree

in product design that, at the time we met, he was only

starting to use.

In 2005, we both worked for the same company in

San Diego, California. Our job was to design retail display

fixtures (the racks that hold products in stores like

Starbucks and Petco). It was a classic services business:

each design was tailored to our clients’ exacting standards.

Ian was the new guy on the team. We had both moved

to Southern California for the same reason most kids

from the East Coast do - to find a sunnier life. Perhaps the

good weather and beautiful landscapes would brighten the

prospect of having to work in an office for the rest of our

lives.

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A few months in, Ian started dropping by my desk

in quiet moments to talk. We discussed our clients’

limitations, as well as the drawbacks of manufacturing as

a service business model. Essentially, all of our productive

energy went into building assets that our customers would

eventually own. Sure we got paid – once – but at the end

of the day, we were left with no products or intellectual

property.

We talked about changing our approach and finding

ways to create products that our customers would buy

over and over again. It was a simple insight that changed

my life. In order to get rich, we’d need to own and sell

products.

A few months into these conversations, Ian’s voice

took on a more conspiratorial tone:

“I’d like to show you a few

things,” he said, “but not at

the office.”

So, it was at the Whistle

Stop bar in uptown San Diego

that Ian first revealed his new

design.

“What’s that?” I asked.

“It’s the future of cat

furniture,” Ian replied.

He went on to describe

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how, all across the nation, dog owners were spending big

bucks to buy luxury items for their dogs, and that the

same would inevitably happen for cat owners. He said,

“Nobody wants those ugly carpeted cat condos, but those

are currently, and inexplicably, the only options.”

Even though I worked in a business, I’m pretty sure

this is one of the first “business ideas” I had heard. I didn’t

know if it was a good one, or how to determine that kind

of thing.

“What do you think?” Ian asked.

“Let’s do it.”

BUSINESS TO BUSINESS

As it turned out, Ian’s “genius” idea for a funky-looking

piece of contemporary cat furniture never really took full

flight, although it was a respectable business in its own

right.

Instead, it was a completely different product that

changed our lives. Ian had worked part-time as a valet

parking attendant, and he’d noticed some things.

“You know those valet stands with the umbrellas that

hold all the keys at fancy restaurants?” he asked.

“Not really,” I replied.

“Well, their quality sucks, the keys aren’t stored

efficiently, and they don’t even collapse for shipping.

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We could make them way better. How do they rank

on Google?” After running some diagnostics on the

marketing terms around the niche, we had found it. We

went on to start a valet parking podium business and

ended up becoming one of the largest producers in the

United States.

Eventually, we expanded our line to include many

other products that valet parking companies require to

run their businesses. Then, just a few years before we sold

our company, we got into a related industry – portable

mobile cocktail bars.

Our business could broadly be described as a small

network of ecommerce stores. We custom-designed and

engineered most of the products, contracted with factories

(mostly) in China to build them, and marketed mostly to

customers in the US.

Financially, our story is not one of spectacular success.

Our exit, our business, and our careers have always been

somewhere in the middle. That’s where most of us live,

after all.

Our products weren’t revolutionary, either. They

solved our customers’ problems and, because they did

so, we made a good profit. That’s the reality of most

businesses, even on the internet.

But although our business didn’t change the world,

it certainly changed our lives. In our mid-twenties we

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were two middle-class kids with no money, staring down

decades of cubicle drudgery. But, thanks to Google’s search

engine and a few products we designed, that’s not the way

it went down.

Instead, we built an interesting career and worked

where and when we wanted – from apartments in Europe,

villas in Asia, and our homes in America – all while making

much more than we’d have made in our jobs.

During the process we had the pleasure of working

with a truly global team of our own making – apprentices

from state schools, design whizzes from Manila, expats in

Thailand, and hard-working dreamers in California. We

honed a culture unique to our tastes and cobbled together

a system for managing the whole thing remotely.

The company continues to grow to this day.

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Appendix II

Where Are We Now?

In 2009, Ian and I started The Tropical MBA Podcast,

documenting the journey of growing our business. Most

Thursday mornings (and lately, every Thursday morning),

we’d share a bit of our story and what we were learning. To

my knowledge, we were the first physical goods business

to document the story of “location independence”

publically on the web. We celebrated the fact that our

business allowed us to live anywhere on the globe and

work when we wanted; in fact, we designed the business

specifically to do so. And, because we did, we benefited

in ways we might not have predicted. One quick example:

our web marketing strategies were executed by a staff of

Filipinos and Western expats – people with state-of-the-

art skills, but all living in Asia and willing to work for a

fraction of the cost of US-based staff.

It might have been nice to hire at home, but we simply

didn’t have the cash. And that limitation ended up forcing

us to be far more nimble and resourceful than we would

have otherwise been.

Our podcast resulted in a second business, created in

2011. The Dynamite Circle is a private membership group

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for entrepreneurs seeking to meet and support each other.

Over the past seven years, we’ve hosted events all around

the world, facilitated hundreds of masterminds to give

meaningful feedback to entrepreneurs, and connected

members in our private forum. And, as with Two Tree,

we’ve done it all remotely.

The Dynamite Circle has had thousands of customers

since 2011, and its success was a big part of the reason we

felt comfortable selling Two Tree International. And yet,

despite having a second business to work on, we still went

through all of the sale-related emotions I discuss in this

book. I can only imagine how our feelings would have been

amplified if we’d had to start over from scratch.

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Next Steps for Readers Entering the Exit Phase

First, read Bo Burlingham’s Finish Big. It is a dense

and wise book. I’m not sure that I would have understood

many of the ideas in that book had I read it before our

exit. But hopefully your experience of reading this book,

and my strong recommendation, will inspire you to study

Burlingham’s volume and take his suggestions seriously.

Second, find a mentor who’s been through the process

and who is willing to share their experience with you. This

will take some effort, but it’s time well spent.

Finally, if you’re thinking of selling a business for life-

changing money, you might be a good fit for our global

community of entrepreneurs: the Dynamite Circle. The

DC lets you meet with like minds, join masterminds and

meetups, attend conferences, and discuss the issues that

affect your business.

There are other communities and resources as

well. We’ve pulled together a quality list of them at

TropicalMBA.com/BookResources. There you’ll find

interviews with my business partner, “CEO Sally,” and Bo

Burlingham, as well as a curated list of articles, podcasts,

and books worth exploring.

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The quality of your exit - and your own level of

satisfaction with the process - will likely correlate with the

energy and focus you give to it. Attack this project with

the same passion you had when you started your very first

business.

DID YOU ENJOY THIS BOOK? WE’D LOVE TO HEAR YOUR REVIEW ON AMAZON.

A special thanks to readers who are willing to review

this book on Amazon.

If you’d like to send me your thoughts about the book,

please do so at Dan@DynamiteCircle.com. If you have an

inquiry regarding our products or services that needs a

reply, please reach out to our talented team at Admin@

DynamiteCircle.com

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Acknowledgements

To those in the DC Community and Ian Schoen, who

encouraged me to write this story in book form. To Jane

Beresford for helping us to craft our voice. To The Weave,

Bob Marten, Eric Miller, and Josh Weinstein for always

talking books (including this one, on occasion). To Jessica

Malnik, Catalina Alvarez, Arison Cain, Tammi Relles, Kyla

Gardner, Joel Runyon, Karlie Rosenberg, Joe Magnotti,

Justin Cooke, and JP Ji for their helpful feedback and

assistance in this project. To Marnelle Rubinos for

entertaining chapter readings and, most importantly, to

my family for being endlessly supportive of my ventures.

This book was edited by the tremendously talented

Matt Bieber of Born Strategies

The cover was designed by Tammi Relles.

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About the Author

Dan Andrews has published a weekly business podcast

since 2009. You can subscribe to the podcast on iTunes

(or your favorite podcast app) by searching for “Tropical

MBA.” If you’d like to keep in touch with us and all of our

projects, subscribe to our mailing list at TropicalMBA.

com/Subscribe.