083 | The Hidden Traps in Selling Your Business and How to Avoid Them with John Martinka

Patrick: [00:00:00] What if selling your business didn’t have to feel like giving away your life’s work? What if you could walk away with not just more money, but more peace of mind, more control, and more confidence in what comes next? Welcome back to the Vital Wealth Strategies Podcast. I’m your host, Patrick Lonergan, and today I’m joined by a guest who has helped countless entrepreneurs do exactly that.
John Martinka. He’s an experienced exit planning advisor. And the author of Exit With Style and Grace and More Money. In this episode, we dig into what it really takes to prepare your business for a successful exit. We talk about the hidden value killers that most business owners overlook. How to make yourself replaceable without sacrificing leadership, and why your financials might be quietly sabotaging your sale.
John also shares how to structure your team, your incentives and your strategy in a way that attracts the right buyers. So you don’t just sell your business, you protect what you’ve built. This conversation is packed [00:01:00] with practical advice and powerful perspective. So if your goal is to grow, protect, and one day exit your business with confidence and clarity, this episode is for you and you don’t wanna miss it.
And if you’re ready to start building a proactive tax strategy that aligns with your long-term exit plan, head over to vital strategies.com/tax. That’s where you’ll find the tools and resources to help you keep more of what you earned and take intentional steps towards your future. Let’s dive into this conversation.
Thank you everybody for joining us here today. I’m excited about our conversation with John Martinka. We are going to get into a discussion about, uh, really what it looks like to position your business to, to sell. And John has literally written the book, uh, exit with Style and Grace and More Money. So we’re, uh, really gonna spend some time looking at what it takes to take a profitable, successful business and, uh, and sell it.
So John, thank you so much for joining us here today. I’m glad
John: to be
Patrick: here. So when I think about, [00:02:00] uh, what an entrepreneur is going through, you know, running a business is hard. Uh, they’ve got blood, sweat, and tears invested in this thing, and then, then these questions start coming up like, man, at some point I’d like to exit this.
Most of my net worth is held in this business. What does it take to do that in my position to do that? And then. Philosophically, it seems like it, uh, just doesn’t seem fair that the process can feel hard. And so I’m, I’m excited to have you join us here today and really just bring some clarity to what it looks like to, uh, exit our business at, uh, the end of our, our career, or maybe even in the middle if we’re looking to make a change and do something else.
So, uh, thank you. If it’s okay, can you tell us a little bit of your, your background, how you got involved in the, uh, the exit planning and succession space?
John: Well, I got into it through serendipity. How’s that? Uh, I was in a, uh, a small rotary club here in where I am in Kirkland, Washington, and [00:03:00] had joined at the, uh, I guess the manager I had at the time.
A completely different industry and my veterinarian both were saying, you ought to join a rotary club and give back to the community. And I did. Mm-hmm. And I, you know, I, this is, I think, an interesting sidelight story. I’m a new member, I’m young guy, and they, you know, they, so we’re doing an auction with another rotary club and everyone has to go out and get at least a thousand dollars of donations.
I went out and got a thousand dollars or more of donations and all the, uh, we’ll just call ’em the, the more senior members were sitting on their, on their hands and not getting them. And they said, wait a minute, this guy’s pretty good. Mm-hmm. Right away I’m on the board and then I’m in the Q to B president and the guy I was president after, uh, we hit it off, uh, our wives got along and one day he said something like, I’ve always thought you’d be good in this business.
And it, it was good timing. He knew it was good timing. Uh, he knew I [00:04:00] liked but didn’t love what I was doing and mm-hmm. You know, when I, when you’re working with people that, you know what I do, whether it’s entering entrepreneurship through buying a business or as a, you know, friend called it re entrepreneurs when they’re purchasing or exiting, it’s usually gonna be the biggest financial decision of their life.
And it carries a lot of risk going in and it carries risk going out to make sure you do it right. We hear a lot about maximum value, but more important than that is making sure you sell to the right buyer. So, and I, you know, I talking to someone recently and he is, he says, well, my financial advisor says, just take the, whoever offers the most money, take it.
Just take the money. And I said, yeah, that may not work so well if that person’s not qualified. The employees bail and the customers don’t like him, and then all of a sudden he’s gonna blame you and you’re gonna be in a lawsuit.
Patrick: Right? Yep. Yeah, no, this is, this is great. So I, we’re [00:05:00] starting to wander into what it it takes to, uh, really successfully sell our business.
And so, you know, one of the things we’re looking at, I, I think about, uh, when I’m buying or selling things, there’s generally. Three, three numbers that I’m interested in. What is my price that’s awfully important, like you, you just mentioned, but, um, what’s my monthly payment? What are the terms of those payments?
Like, you know, tho those things can all start to factor in. And if it’s, you know, SBA financing or seller financing or some of those other factors like those, I think all, um, all play in. So. As we get into this discussion, I, I also wanna highlight, you know, who I think we’re, we’re looking at here, and I think this is really our key audience as well.
This is not the main street business, you know, this is not the mom and pop coffee shop that’s, um, you know, maybe doing a million dollars of revenue. Um, it’s also not. A large established business that’s going to be selling to private equity or some other strategic, uh, [00:06:00] buyers. This is the mature, well organized business that’s been profitable and doing well.
Would you like to define that? Uh, sort of who, who you consider your, your ideal listener for, for, uh, the things we’re gonna be talking about?
John: Yeah. He hit a couple good points there. Uh, our market is, you know. Broadly defined as the lower middle market, which means a lot of different things to different people.
Uh, you know, we’re, we work at companies that we target with a value of around four or $5 million, up to 15 to maybe 20. We don’t wanna play in the same, uh, space as the main street broker, the delis. Mm-hmm. The dry cleaners, the little business where if the, uh, owner’s not there to. Make a delivery some days there’s, you know, people don’t get what they, what they ordered.
And on the other end, we stay away from what the true investment bankers do because they’re, they’re more qualified to do those private [00:07:00] equity deals. And speaking of private equity, though, there are, I have come to realize over the last, you know, a handful of years, there are many different stratas of private equity.
From the, the true private equity firm that’s raised a fund and says we don’t want anything, uh, that’s less than 5 million of ebitda unless we’re gonna bolt it onto something we already have. And it’s an easy fit. You know, you have, you know, three, 3 million threshold. 2 million threshold. You have people coming to themselves, micro private equity, that don’t have a fund, but they’ve got money from certain investors, friends, family, whatever.
And the, you know, it’s legitimate money. It’s not tied to a fund, so they can be more like a family office and buy and hold.
Patrick: Mm-hmm. Yeah. Yeah. I love this. So thank you for clarifying. Exactly. You know, who, who we’re, we’re talking to here and I think this is good. [00:08:00] I’d love to talk more about, like, I really appreciate the, uh, the thinking around selling the business with.
All of those things that are, are in the title of your book, exit with Style, grace and More Money Like that, that sounds ideal to me. Can we lay the foundation for, uh, how we we start to do that?
John: Yeah. And it, it’s a, it’s a topic that’s gonna be touchy to a lot of owners. Uh, and I will tell you that all, everyone I talk to that does, uh, business improvement consulting and coaching.
We’ll usually say what I’m gonna lead off with, and that is, uh, the toughest job is getting the owner out of the day to day. Mm-hmm. Uh, we call it owner dependency. Uh, there is just a, you know, the thought that it’s my business, I started it, or I got it and scaled it, and I’m the one who knows how to do all this stuff.
And, uh, I, [00:09:00] I like doing it, but it doesn’t increase value. What increases value is when you have a team, I. That you delegate to, and they do what they’re, they’re supposed to do. And you can concentrate as an owner on where are we going next? Are we making an acquisition? Are we gonna go for more product lines or service lines?
Uh, how, you know, are we gonna put in a new marketing plan that, uh, has a lot of promise and expanded into a wider area? All those vision type of things.
Patrick: Yeah. Yeah. I, I, I love that. So. Let’s, let’s pretend for a second that I am, I’m interested in selling my business. Yeah. We’ve identified that I, I need to be easily replaceable, right.
If my job is vision, great. That’s good. Then the next buyer can, can come with vision and, and go, if I’m responsible for producing the. Uh, the product or service that’s, that’s problematic. So what do we look at next? What, what is the, sort of the next [00:10:00] piece of the discussion that if I’m really looking to position my business well, that, um, I should have, have in place?
John: Is it what everyone thinks it is truly? Or is your accounting department like Cinderella, a weak little stepsister off in the corner and you don’t know what’s, what’s on those statements as accurate or not? Yeah. Uh, I have, you know, I was asked one about a year and a half ago, I asked, I said, what, how confident are you in your financial statements?
And I get this blustery a hundred percent. They, you know, then why are there balance sheet items on the income statement? Mm-hmm. Uh, you know, another one I saw recently is, you know, a company had like a million and a half dollars of inventory every year. It was the same amount down to the penny. They are not doing inventory.
They don’t know what they have, how, how good it is, or are they expensing inventory, which, you know, actually is showing income less than what it really [00:11:00] should be. So get your financial systems solid in order, have the right people doing them. You know, don’t, don’t call your, uh, uh, your bookkeeper and accountant and your, uh.
You know, that kind of thing.
Patrick: Right, right. And, and, uh,
John: then you’ll have accurate statements.
Patrick: Yeah, I think that’s, that’s a fantastic point of view. And, and it’s something that we’ve spent, uh, a lot of time talking about on the podcast and we talk to our clients about, uh, if our financials are a mess, if we can’t look at those clearly, it just reduces your value of on, on the sale dramatically because there’s now unknowns taking place inside of that business that the buyer’s like.
You know, I’m, I’m taking on a risk acquiring this thing and I’m gonna just start discounting, uh, as much as I can when, when I’m uncertain. And, um, on the opposite side, I see if, if I’m a buyer, I don’t necessarily get, [00:12:00] uh, too spun up about messy financials ’cause I’m just gonna start applying discounts everywhere.
It’s going to be. Um. It’s going to be bad for the person selling that business, but maybe good for me as the buyer, especially if I see top line and I’m like, okay, I know if we’ve got those revenues, we can apply our systems and processes and create some efficiencies in here that are gonna turn out. But, uh, interesting enough, I, I had a conversation with a client this morning that, uh, to your point on, uh.
The financials, right? And you have to have the right finance team in place, right? Whether that’s staff accountants or um, fractional CFOs or controllers like you, you, you need those people in place to make sure that your books are good. And you know, I would say engaging with somebody like you a few years ahead of when you, you actually want to sell, to have you look at things and go, Hey, you’ve got some enormous gaps in this process.
We need to go clean those up. Uh, and then we’ll be in a good position to sell is a, is a critical piece. But going back to my client I was [00:13:00] talking to today, uh, at the sale, the, the seller had no idea what the working capital requirements were and what kind of check he was going to have to write. He thought it was gonna be a 50, $60,000 check.
It was an $800,000 check. He had to write for uh, uh, the working capital. And it’s like if you don’t have a finance team around you that can help. Crystallize those figures. You know, he had, I don’t know, I’ll call it his brother’s cousin, you know, doing the mm-hmm. Um, the, the, you know, accounting for him and it was just, it was a mess.
So I, I think those things are. It’s an ounce of prevention on the front end is worth a hound of cure on the back end. Uh, just making sure that you, you do the, uh, the
John: books well all along the way. Yeah, you’re right. And, uh, brings up a couple of quick things and that is, uh, I know someone who sold the business and, uh, is representative wasn’t on top of it.
And the, the lawyer was [00:14:00] young and inexperienced and the working capital became a real mess. It wasn’t defined. Right. No one really understood it on either side. Mm-hmm. And it is a big point of contention, uh, on that, that, uh, and I’ve seen where sellers will start accelerating receivables and only to come out, find out, well wait a minute, that fits into the working cap formula and target.
Mm-hmm. And I’m gonna have to give that money back. But I want to bring up one other, one other point. It is the shortsightedness. Of many owners who say, I’m gonna blend my personal and business checkbook. I’m gonna write off personal expenses to pay less taxes. And I call it shortsighted because I’ve got a little document on my computer and at the bottom line is, let’s say, I don’t care what you’re making, half a million, a million, whatever.
Mm-hmm. And you say, well, I’m gonna write off a hundred thousand dollars of personal expenses. You know, my second home mortgage payment, the groceries, the gas, the insurance, everything for the family, blah, blah, blah, blah, blah.
Patrick: Yeah.
John: And. You look at it and you say, okay, I wrote off [00:15:00] a hundred thousand, uh, I saved, you know, what, what’s the top federal tax?
And assuming no tax, but federal tax, 37%, I saved $37,000. If I’m selling my business for a multiple of five, that a hundred thousand dollars is 500,000. It takes a lot of years of that to catch up. So if, if someone says, I’m gonna sell in three years, that, you know, it’d be. Point that out and start, start paying your personal expenses from your personal accounts, show higher profit.
You’ll get less discussion on the statements the banks or investors won’t be questioning. Was it really a personal expense or not? Yeah,
Patrick: yeah. No, I, I love that. And we’re just firm believers of. We feel like there’s enough opportunity on the tax strategy side of things to do legitimate deductions versus just shove all this, you know, personal crap in your, your books.
And I guess I do have a question there. [00:16:00] When it gets to the point of looking at some add-backs and, and that type of thing, is there some best practices to, ’cause you know, there, there might be things like, uh, a vehicle, my cell phones, you know, some of these things that like. Lineup is legitimate business expenses that I can take that, um, are also personal expenses that the new owner’s not going to have to, um, account for.
Or am I just sort of outta luck those, I’m, I’m, I’m losing out on a multiple of that, that revenue because I left those things.
John: No, I mean, that’s a legitimate, I mean, I don’t, you know, it’s moved, let’s, let me back up here. It’s moved from the time when, mm-hmm. You know, the owner had a cell phone and now I see a lot of small businesses where the key employees have a company paid cell phone.
I mean, that’s, that’s, we’re talking peanuts there, right? You know, uh, the, the vehicle if it’s really used in the business. Uh, but, but it’s all the, you know, it’s the travel and the other [00:17:00] things that, you know, really aren’t a business expense. Again, it’s shortsightedness. ’cause that multiple’s gonna come back.
And, and the buyer, any buyer’s gonna do the same thing. If it’s an individual, they’re gonna write off their cell phone and they’re gonna write off their medical insurance and all that. And if it’s a professional buyer, like private equity, they’re gonna have a, you know, I’m sure they’re gonna pay for the cell phone for the CEO and yeah.
Yeah.
Patrick: Okay. Yeah, no, that’s, that’s great. And um, uh, again, last point on the finance side, but is there. Uh, are you seeing firms do quality of earnings reports for, um, e either on the, when I’m getting ready to sell, I’m doing my, my QOE quality of earnings, uh, having a firm do that to just say, Hey. These numbers are good, they are legit, and we can explain ’em to a potential buyer.
Are you seeing that happen, uh, pretty regularly or is that, is that an uncommon practice In
John: my market, I don’t see it [00:18:00] happen at regularly. If I’m at the upper end, I would definitely encourage them to have at least a, uh, quality of earnings light, not the full blown 50, 75 or whatever, thousands of dollars on a, on a full one.
Uh, buyers at that level. Buyer’s probably gonna do their own anyway. Uh, yeah. And it’s just, and it’s like, uh, business valuations. You know, a bank will not accept a business valuation the seller pays for. Mm-hmm. So if the bank will look at it, but, you know, they can say, well, the seller paid for this. Uh, yes, there’s an arms length transaction, but mm-hmm.
You know, if it’s a large enough deal, they’re gonna, they’re wanna see what the buyer comes up with from their accountants.
Patrick: Right. Yep. I, you know, I think about, uh. If I go to my bank with an appraisal that I did on my property to have it refinanced or something, and they’re gonna be like, that’s cute, but we’re gonna pay for our own and make sure that it’s, uh, um,
John: no, they’re gonna have you pay for the [00:19:00] one they they do.
Patrick: Yes. Thank you. That’s a great point. Um, very good. Alright, John, so now that we’ve thinking through the steps here, we’ve, we’ve figured out how to remove the business owner. We’ve got our financials cleaned up. What are next steps in this, this process?
John: Okay, here’s a couple things. Grow. You know, show you can grow.
I mean, if you look at ads for businesses for sale, you, you all, you see on almost all of them po the word potential and show you can grow. Uh, and I understand there are a lot of owners out there, been at it for a while. They’re making, let’s just say they’re making, I’m making a million bucks a year in profit.
I got a salary on top of that and I’m really having a nice life. Mm-hmm. Uh, why would I want to grow? Because you’ll get more in the end, uh, you’ll get, you’ll have, it ties into another key factor in that is be able to attract and retain really good to great people. Yeah. And those [00:20:00] people are looking to have career advancement.
Mm-hmm. And if you’re coasting, well, first of all, you can only coast downhill. Yeah. If you’re, if you’re coasting, they might get fed up and go somewhere else, or they’re not gonna give it their all. Uh. Show you can grow. Don’t just say, Hey, we do things and we could grow. Uh, so that, that’s, I think that’s a big one that, uh, I, I don’t care if it’s an in, you know, in my market, again, we’re not talking the drive cleaner, but from the individual buyer who’s come out of the corporate world and they’ve managed people and processes money.
Mm-hmm. And I look that enthusiasm up to the professional buyers of family office, pe, et cetera. Uh, they’re all looking to grow, grow and scale are two words they like to use.
Patrick: Yeah, I, I love it. And, and one of the things that we’ve, we’ve seen when, uh. I, I think private equity’s easiest to, to [00:21:00] use as an example because they’re, they’re so well organized and capitalized.
The first thing they spend money on is sales and marketing. They’re like, we are going to dial this thing up and see what, uh, we can do here to, uh, just continue to drive revenue in into the business. It’s revenue makes the business happen. You know, now we need to run outta business efficiently and effectively to get, I’ll say, good EBITDA so we can get a good multiple.
But at the end of the day, it starts with dollars coming in. Uh, and making sure that that, uh, that’s happening. And I assume when you’re talking about growth, we’re talking about organic growth, right? Like I’ve seen some businesses pick up some small mom and pops, you know, that, that have helped, uh, top line and they create some efficiencies.
But, um, yeah. Can you talk just a little bit more about like the type of growth that buyers like to see?
John: We’re talking organic growth. Uh, and depends on the industry too. There are some where you have to grow by acquisition. Um, [00:22:00] it, it could be geographic, depends on the kind of service that, that there are limits to where you can go and, and service clients without having another location.
Uh, but organic growth is what buyers wanna see. Mm-hmm. They can add growth by acquisition. They can do both ends.
Patrick: Yeah. Yep. Great. Good. Um, and then I think you, you talked about another key piece, and this, this relates back to your first point, but being able to attract great people, right? Uh, if I can build a team around me that can help run the business, well, now I can start focusing on maybe what we’ll call my unique ability to, to run the business effectively, cast vision, and, and drive this thing.
Thing forward. And, and that all ties well with, with growth. Is there anything else to talk about with, with attracting great people when it comes to, uh, looking to sell
John: you? They, you know, they, they want responsibility. Mm-hmm. And, um, I mean, just think back in, in your career [00:23:00] and, and people you worked with, and I go back a long ways and.
I had lunch with a, a lady I was working with, and, and she had, she says, I need a, you know, she’s telling me I need to go to the owner of the company and get a raise. And she said, I’ve been here, you know, for this long a time, and I, I really need a raise. And I said, well, why do you deserve a raise? Well, I’ve been here a long time.
I said, no, you gotta lay out, what are you doing now that you weren’t doing when you were hired? And it was quite a bit, I mean, she’d taken on a lot of roles and responsibilities. And you know, I was, one of your other podcasts I was listening to was a gentleman talking about sales and solving a problem.
That’s what we do. We solve a problem. Problem is my business isn’t ready to sell. Well, let’s get it ready to sell or let’s find a great buyer. And in her case it was, the problem was she was, she was thinking small and yeah, she got the raise because she pointed out all the things she was doing to add [00:24:00] value to the company.
Patrick: Mm-hmm. Yeah. Yeah, I, I, I think about, uh, we’ll call ’em a players in our, our organization, right? They are worth almost whatever salary we could possibly pay them because they’re, they’re, you know, they’re worth a multiple of value, right? If I’m paying them a hundred thousand dollars, they might be worth two, three, $500,000 to the bottom line.
And it’s like, uh, I’ll take as many of those folks as we can. It’s the person that you were talking about that, uh, the concept of like, Hey, I’ve been here a while. Like, pay me more money. It’s like. No, no, no. This is, this is a value equation. And, uh, if we’re, uh, if you’re delivering value, I’m happy to pay you for that.
John: Yeah. So, well, let me, let me add to that because I, whether it’s the luck of the draw or whatever, but I think at least three, if not the last four deals where we’ve helped c clients sell the business, they have taken some of their money and put it into retention bonuses for their key people. Yeah. [00:25:00] And they, it’s not like, oh, you know, sign a sign unemployment agreement and get a bonus.
No, it’s, you’re gonna get it at the end of a year. In one case, it was staggered one, two, and three years. Yeah. Uh, formulas based on seniority and, and job responsibilities, salary and all that. But, uh, you know, helping the buyer out and as one, one owner said, these are the people that built my business to get me where I am.
Patrick: Mm-hmm. Yeah. I love it. Um, so the next thing I think about when I’m thinking about people is the people generally need some systems and processes to run on, uh, when it comes to running an effective business. How are you seeing, uh, in the transaction side of things, like how important is that, you know, we’ll call ’em standard operating procedures or workflows or what have you.
How important is that in the, the, the process?
John: I would say it’s the one thing. A lot of buyers, whether it’s a individual type, [00:26:00] uh, or a small group to professional buyers, uh, that’s where they see they can add value. That the founder, the entrepreneur, uh, has been doing things a certain way and they’re making a lot of money, but they haven’t systemized things.
They haven’t put in those policies and procedures and everything is done. And as you know, we talk about retaining good people. There are all kinds of statistics on different job levels and what it costs to hire and train someone to replace someone. Yeah. And if you have those systems and processes, uh, that, you know, I’m sure that cuts, I don’t know what it cuts it down, but let’s say if it cuts it, the cost of adding a person, not just replacing, but just adding new people cuts that.
That ramp up time in half,
Patrick: right? Yeah. Yeah. It’s so true. And we just see that organizationally for us, you know, we’re, we’re doing all the things you’re talking about. We’re growing, we’re adding new [00:27:00] people. We’re trying to be a culture that is a fantastic place to work. And it’s, uh, just so interesting as our firm has developed, just building more of those systems and processes, how it’s so much easier for the next.
Uh, advisor that joins the team to, uh, be able to get up to speed because it’s not, it’s not me having to download it from my brain into theirs. They, uh, uh, they have a track to run on, so, um. Great. Very good.
Hey, real quick before we get back to the conversation, if you’re a business owner thinking about how to pay less in taxes, keep more of what you earn and ultimately position your business for a strong exit someday, then you’ve gotta check out vital strategies.com/tax. We’ve put together a free resource to help you start building out a proactive tax strategy.
One that goes beyond just write-offs and starts positioning you for long-term savings and real wealth creation. Whether you’re preparing to sell your business in a few years or just want to tighten things up today, this is where it [00:28:00] starts. So head over to vital strategies.com/tax. Grab the free tools and start unlocking the tax strategies.
At high level entrepreneurs used to stay lean and build big. Alright, let’s get back to the episode.
So, I mean, we, we’ve made a lot of progress here, right? We’ve removed the odor, we’ve got our finances in place, we’ve got great people, uh, we’ve talked about systems and processes. If I’m looking to sell, what else should be a part of this discussion that, uh, I need to get organized?
John: Here are three quick things, and I’m gonna preface it with the statement.
When you, a business seller controls the deal when it’s a good business, and that’s what we’re aiming for. The buyer controls it if your business isn’t that good. So we, we’ve hit the big, some of the big ones. Uh, I would say then reduce any other dependencies. You know, get your customer concentration in order.
I mean, yes, small businesses are gonna have a dominant customer, uh, but, [00:29:00] you know, a dominant customer at 18% is a lot better than, you know, uh, at 60% or top three customers at 80% of sales. Yeah. Uh, same with suppliers, even with a key employee that, that one person that if they leave, boy are we in trouble?
They’re the only one who can do this kind of bid or this kind of service, or whatever it is. Uh, and, and these days, as you know, I call it the, the three i’s, the first one is ip. If you’ve got ip, protect it.
Patrick: Mm-hmm.
John: Then do what it takes. Trademark, patent, copyrights. It. Yeah. When’s the last time you picked up any kind of business or, or maybe even non-business publication and didn’t see something on hacking and phishing and all that stuff?
And it is real. Yeah. And it’s dangerous. Absolutely.
Patrick: And, and I, I’d like to [00:30:00] just highlight for a second that they’re not just going after these huge firms. No. They’re, they’re picking on the small guys too, and. You know, uh, data breaches, ransomware, all those things, they can, they can bring your business to your knees if you’re not, uh, uh, protected.
So,
John: yeah. And it’s, and they’re going after individuals too. We have a friend and she fell for it. She got an email. She thought it was from an old friend who said something about, I, can you get, I, I can’t get this to go through. Can you get a $300 DoorDash gift card? Mm-hmm. And is, and as soon as her husband found out, he said.
Too, but it was too late. She got scammed. Yeah. Uh, and then the other third eye is incentives. Uh, you know, I talked about the incentive on a retention bonus. I, I’m gonna talk about a friend who has bought many companies, seven or eight by nine. And on his second one, he went in and we noticed, uh, I was working for him.
On the acquisition side, we noticed the, the inside [00:31:00] salespeople were really poorly paid, and the owner was, you know, after every last dime. And he went in and put in an incentive plan, raised, raised their comp, put in bonuses, uh, and it worked. He grew the company 75% his first year.
Patrick: Yeah. Yeah. That’s incredible.
And, and I, I am curious, uh, ’cause we’ve seen some clients with the understanding of like, their, their aim has been to sell the business and so they’ve created some. Uh, incentive programs for their key people that are tied to the business valuation. And it’s so interesting to see how invested everybody is in that growth.
And so do you see those as, um, worthwhile? ’cause I, I feel like their execution’s actually pretty challenging to, to do well and to do right. But, um. Do you see those, those plans, uh, helping drive the business value when everybody’s sort of rowing in the same direction?
John: Well, you’re, you’re not gonna incentivize [00:32:00] every, every employee probably.
And then you have an, basically you have an esop and those can be the best, best thing around and or the, uh, biggest mess around. Mm-hmm. But our last deal kind of closed the deal. He had two key employees, his two senior managers, COO, and um. I what the other, what the other one was, but it was a C-level.
Mm-hmm. And they had phantom shares and it was in writing. Uh, it, this brings up an interesting point. It was in writing, in the tax returns, there were K ones for these two guys showing zero share of profit. Mm-hmm. But what, what does that mean? It means that when the company sold. They got their phantom shares and paid capital gains tax.
If it was just a letter that said, Hey, hey, when we sell I, you know, you have Phantom shares of a hundred a hundred shares and it turns out it’s worth a hundred thousand dollars. If it’s, if they’re not, it’s [00:33:00] not done properly and they’re not getting a K one showing, you know, zero income, that’s ordinary income tax.
Patrick: Yeah.
John: Yep.
Patrick: And we’ve seen that. We, and I, I love what you’re talking about there, and I think there’s. There’s probably a whole legal discussion that could be had on entity structure and how to, to, you know, properly put those in place. So, uh, you know, they still get that K one without the profit, this distribution, but when they, they recognize the, the sale, they get capital gains treatment.
’cause capital gains treatment versus income tax treatment could be, you could be paying twice as much tax in that easily scenario. So, yeah. Yeah, that’s, uh, that’s a fantastic point. Um, wonderful. Okay, John, we again. This is all fantastic. Is there anything else that we should be talking about? If I’m positioning my business, you know, I love all the eyes, the ip, the it, and uh, incentives.
Like those are all, all great. What else do we have, um, you know, that we need to be talking about?
John: We talked [00:34:00] a little bit about, you know, the, how buyers, you know, they want to, they wanna see a company where they can come in and work on strategy, not on programming the machine. So it’s see a big picture. Uh, I have a, someone who was a, he was a president of one of the divisions at Expedia, and he, his comment to me was, growth hides a lot of operational warts, then you can go back and fix the warts.
Mm-hmm.
Patrick: So see
John: the big picture, I mean, uh, ha. Have, have a vision and go after it.
Patrick: Yeah. Yeah. And, and I love that and I’m, I’m gonna give you an example of, of see the big picture. Um, we’ve got a client who, their business is named something that doesn’t even apply to what they’re currently, uh, like doing.
It’s very like niche specific name. And they’re still growing it, I don’t know, 25% a year. And the owner’s, like, people give me a hard time [00:35:00] about the name of our business. But guess what? We show up and provide tremendous value to our clients. We have a great sales team. I do not wanna get distracted by rebranding and all these other things.
We will, we will fix that at some point in the future, or the future buyer could take care of that issue. But like we are, are working on up and to the right and, and it’s working. You know, it’s like I am not gonna be distracted by these, these little things. And he was telling me a story about, you know, a friend of his that was rebranding and he was like, what is your sales?
And he was like. I don’t know why you’re wasting your time on that. So I, I love that, uh, that distinction.
John: That’s, that’s great. Two quick stories about myths on business by sell. Yeah. Myth number one is, uh, oh, why don’t you just hire a general manager and, and then keep all the profits? And I say, well, there’s still risk.
You’re still the, the owner’s still the one on the line. If the general manager, anything screws up, you’re gonna get sued. Not the general manager, but it’s a story. I, every year we go down through my rotary club to Antigua and the Caribbean [00:36:00] and we spent a couple weeks and we work in the schools and it’s great work.
You know, we were there last fe this past February and we found this pretty new, uh, Italian restaurant, uh, in the Caribbean. The owner is from Rome. And she owns the building that has like three dozen boutique hotel rooms at a fantastic, uh, Italian restaurant. And we were talking to her and she had done some remodeling and she said, yeah, I was, I was back in Italy and I had a general manager and it just went downhill and it went downhill fast.
’cause they didn’t really care. And that, you know, you can’t do that. The other thing is. Sellers have, you know, we, I talked before about sellers have to get the right buyer, and there’s a story in my first book called Buying a Business that makes you Rich about a, uh, guy was an accountant and he just thought it would be great to own a business that made something, and he bought a cabinet shop.
And the short version of the [00:37:00] story is he came to hate not only the business, but he hated the business because of the employees. And he, he couldn’t understand why these, you know, I guess mostly guys cared more about their next cigarette break, getting a beer after work or going fishing on the weekend versus growing his business.
And he just had a culture problem that was driving the business down. Yeah.
Patrick: Yeah. That’s, uh, so there has to be a fit,
John: not mm-hmm. Necessarily direct industry experience, but, you know, the, the, the guy who shows up in a. In a suit to a cabinet making shop is not gonna relate to the employees. Right. If he’s not smart enough to realize I better put on my jeans in a sweatshirt.
Mm-hmm.
Patrick: Yep. And, and back to your first point on hire a general manager. Um, I’ve got a close friend that has built a successful business. He hired, I’ll call it a full executive team, and they promptly ran the business straight into the ground. Um, [00:38:00] he was off, took his eye off the ball, not paying attention to, um.
Uh, what was happening? I’ll say his finance guy was incompetent. Uh, maybe even leaning towards the fraud side of the equation with the things that were going on. And it’s like, I think as an owner, if you’re going to be an owner, the buck stops with you. You’ve got to be at, at least at a high level, paying attention to the financials, asking smart questions, making sure that you’ve got a dashboard that’s giving you a, um.
A healthy understanding of where the business is, is at, you know, where the issues are and what, uh, uh, is not going well. ’cause otherwise you can, uh, you can end up, you know, thinking you’re, you are in one position with a very successful business, and then you, you’re. You know, almost on the brink of bankruptcy with, uh, uh, this thing, you know, falling apart on you.
And it’s, it’s almost too late to, to get it together. Yeah. So I love that people think, oh, business is easy. I’m just [00:39:00] gonna hire somebody and put ’em in and run this thing. And, uh, business is not easy. It’s hard. It takes, uh, time, energy, blood, sweat, and tears yourself. You know,
John: these, these operating businesses I use, I say they need the adult supervision.
Only an other mm-hmm. Owner can provide. Yeah. This is not a popcorn shop in the wall.
Patrick: Mm-hmm. Yep. Absolutely. John, this has been fantastic. When I, when I think about, uh, these things, uh, building a successful business, engaging with somebody like you to help me make sure that, you know, I’ve got all my i’s dotted and t’s crossed when it comes time to sell, I think is a, is a critical piece.
And then ultimately. Having somebody we, we believe in who not how. Right? Like, let’s get a who in my life that can help me run these things versus me trying to understand how to do it. And so, uh, you’ve been there, you’ve done that when it comes to, uh, the business exit process. And so I think, you know, again, I love the, [00:40:00] uh, the title of your book.
I think that’s fantastic. When we, when we start thinking about, um. Exiting with style, with grace and more money like that is what we all ultimately want when that, that process, uh, comes to a completion. And so, um, that sounds like a successful result to me. I think we think about the other end of that equation.
We don’t engage with a professional that has, uh, the experience in the background. You know, the process is hard. We don’t have our business positioned appropriately. Uh, we don’t get what we want. You know, there could be, you know, uh. Lawsuits and all these other things that can come with not, not doing it well.
So I think that, uh, is all fantastic. Now, I think you’ve got a couple things for us. Uh, I, I I love the fact that, uh, you’ve got a book out there. Um, and so people will, we’ll, we’ll have a link to that in the show notes. They can go download that book from Amazon. Uh, I think that’s fantastic, but I, I also think, uh, you’ve got, [00:41:00] um.
A form on your website. If people want more information, you’re happy to get them to ’em. And then also have a free link to the book if that’s, uh, uh, if they mention the podcast in there. So, uh, we’ll have a link to that as well. But anything else to add to, uh, best ways for people to, to get in touch with you?
Yeah.
John: It’s actually not a link, but if they mentioned the podcast, if they mm-hmm. You fill out the contact form, uh, I’ll, we’ll send you a free e-copy of the book. Alright. Wonderful.
Patrick: Well, what we can do is we can just make sure that link is in the show notes so it’s easy for people to find. The website, uh, just it’s martinka consulting.com.
Uh, and so we’ll, we’ll again, have links to that, uh, so people can find your website and, uh, check out, uh, all the good resources you have on your, your webpage. It’s, uh, it’s fantastic. It’s all sorts of. Uh, blog posts and good media. So, uh, we appreciate that. John, this has been fantastic. I think this is a critical conversation for any business owner that is, uh, looking to grow and scale and at some point [00:42:00] recognize the value of their business.
It’s where most of our entrepreneur clients are holding the majority of their net worth. It’s in their business. And so, uh, you don’t want that transaction to go go sideways. So I appreciate the expertise that you, you bring to the marketplace.
John: Yeah, thank you and I enjoyed being here. It was a good conversation.
Patrick: Thanks so much for tuning into this episode of the Vital Wealth Strategies Podcast. I hope you found real value in today’s conversation with John Martinka and that it gave you a fresh perspective on how to prepare your business for a successful and profitable exit. If you’ve got something out of this episode, I’d love for you to share it with a fellow entrepreneur, someone who’s building something meaningful and needs to hear this, and be sure to come back next week.
We’ve got another powerful episode lined up that will help you minimize your taxes, grow your wealth, and optimize your business and your life. And remember, you’re a vital entrepreneur. You’re vital because you’re the backbone of our economy, creating opportunities, driving growth, and making an impact.
You’re vital to your family, creating abundance in every aspect of life. You’re vital [00:43:00] to me because you’re committed to growing your wealth, leading with purpose, and building something truly great. Thank you for being a part of this incredible community of vital entrepreneurs. I appreciate you and I look forward to having you back next time on the Vital Wealth Strategies Podcast where we help entrepreneurs minimize their taxes, master wealth, and optimize their lives.
And if you’re ready to take action now, go to vital strategies.com/tax. Start building out your strategy and unlock smarter ways to grow and protect what you’ve worked so hard to build. Take care and we’ll see you next time.