Latest / Exit Algorithms / How to Build a Business That Sells: Exit Planning Lessons with Steven Pivnik (#71)
Transcript
- Pete Vera, Exit Algorithms: Welcome to Exit Algorithms, the podcast where we decode what it really takes to unlock growth, streamline operations, and prepare your business for a high value exit. I'm your host, Pete Vera, and today I'm excited to introduce Steven Pivnik. He founded and built his first business called Binary Tree into a 200 person, Inc 500 IT company before exiting. He's a Harvard Business School alumni. keynote and TEDx speaker and bestselling author of Built to Finish. He's also an Ironman triathlete and now is partner at the CEO project, advising founders on how to exit and scale. Steven, great to have you on the show. So excited to have you here. Steven Pivnik: Thank you very much for the opportunity. I'm looking forward to our conversation. Pete Vera, Exit Algorithms: Definitely, yeah, and I gave a brief overview of some of your accomplishments, but I'd love if you'd start off, can you share a bit about your background and business journey and what led you to the work you do today? Steven Pivnik: Sure. So I consider myself a recovering entrepreneur. Like you mentioned, I ran my last company ⁓ up to just over 200 employees across 12 countries before realizing a successful exit. ⁓ focused, it was a very, very niche company. And I love to say there are riches in the niches. Super, super boring. We helped large companies convert email data, but we did that to the tune of over $40 million a year until we were acquired by our number one competitor, which was a $4 billion. software company. So now that I have exited, I'm really enjoying, you know, paying it forward and helping other entrepreneurs and founders of middle market companies go through a similar successful end via a strategic acquisition or a majority investor recapitalization. Pete Vera, Exit Algorithms: it. Yeah, I'd love if you could share a bit about that journey, any lessons you learned along that 26 years building Binary Tree on how to grow and scale and think long term. Steven Pivnik: Yeah, I mean, there was a ton of lessons. did a lot of things right. I did more things wrong and it's really rewarding helping other founders not go through some of the same pitfalls that I went through. Lessons learned, I think some of the bigger ones is measurements and KPIs. Based on the work that I do now, I find that I definitely wasn't alone. in not having proper measurements and KPIs and reporting infrastructure in my own company. I eventually did, but once I actually implemented one, it was amazing to see performance go through the roof, across every single department. And what led me there was interesting. I started, as you mentioned, Ironman. My midlife crisis was getting into endurance sports, and my Garmin sports watch became my best friend, and I producing all these great rep... reports and charts and trends and I realized after a little bit that I had more information about me personally than I do about my company. So I implemented a new monthly operating review meeting at the company where every and I met with every single department head and we jointly came up with a set of reports and KPIs that they would produce and it was like a little internal competition ensued. So it was really great to see performance go through the roof. So reporting is one major lesson. ⁓ Leadership team is another one. As founders, we are very dedicated to the folks that started the company with us. But unfortunately, as the company matures, the individual skill level, it's not their fault. They just, let's say, I love to pick on sales because it's an easy, it's a number, right? The person that started with you who was running sales, once you get to $10 million, they've never run a $10 million organization. ⁓ So it's... Not always, but most of the time it's pretty good advice to bring in somebody that's run a larger sales organization so they can easily pull a $10 million company up to 20 or 20 to 30, et cetera, et cetera. So leadership team is huge. And another thing I should have done a lot earlier is surround myself with advisors because I was young and cocky and I thought I had all of the answers. Nobody can run this company better than I can. And I proved myself wrong. Towards the end of my journey, I actually hired a professional CEO to run it for the final three years. And he did a ⁓ phenomenal job and really positioned us ⁓ perfectly for the exit that we had. Pete Vera, Exit Algorithms: Yeah. Wow. Awesome. A lot of good takeaways. Yeah. I love that idea using KPIs and kind of transparent reporting as a way to stimulate competition in the team. That's great. Yeah. Did you have, you know, how did you keep the culture intact? And, you know, I was reading employee turnover was really low. You build a nice ⁓ company culture. How did you do that while scaling internationally? Steven Pivnik: Yeah, I mean, I know this term is overused a lot, but it was a typical, you know, work hard, play hard type culture. You know, if I had the opportunity to interview somebody, depending on the level of position that we were bringing on board, told, from the get go, I said, if you're expecting a 40 hour work week, this is not the place for you because there was no such thing as a 40 hour work week. There was always a ton to do. But we also celebrated a lot together. We celebrated all of our wins, no matter how small, even though we were a virtual company. Well, before we became virtual, we just did a lot of social events together. There was a lot of late nights at the bar or at restaurants or playing sports, whatever group activities we can come up with. But even after we became virtual, because we had so little rent to pay, we spent a lot of money on corporate get togethers. You know, we had an annual holiday party where we flew everybody in, even international folks, know, year after year after year. I think our last party before the exit cost us over a quarter of a million dollars, but it was worth every penny of it because, you know, folks that work that are working together on these virtual teams, they had an opportunity to see each other and the friendships that developed within the company were excellent. And that's actually a great score of employee engagement. There's something called a Q12 survey. One of the questions that's asked is, do you have a best friend at work? The higher percentage of folks within your company that answer yes, the better. Pete Vera, Exit Algorithms: Love that. Yeah, no, that's great. And I think that's a good, a great use of funds, especially if you don't have ⁓ a corporate office, right? At least invest in building that, those relationships between your team. Steven Pivnik: Yes, agreed. Pete Vera, Exit Algorithms: Man, that's great. yeah, and I want to also talk about the the exit process ⁓ How was that for you? And was there any kind of mistakes or things you wish you would have done differently in that? Leading up to that exit Steven Pivnik: Yeah, so the process was pretty methodical. Again, I had the right advisors at the time, advisors that do one thing and one thing only. They help companies exit. So they're really, really good at it to date. And I've actually joined them and I work with them now. Together we have over 30, I think it's the number 38 exits totaling $1.1 billion in founder wealth generated over the last eight years. having an advisor that knows how to do this, that does this for a living was Priceless it was very methodical like once we actually decided to sell the company We went through a process of evaluating various investment bankers So we had three we met with three different investment bankers, know gave them the entire story They went away for a month, know to put their pitch together to us. ⁓ I went to climb a mountain in South America I came back they they pitched their services to us. We selected one and they went through a very methodical, you know, go to market process with us. They contacted close to 200 potential acquirers, both strategic and financial. The best outcome is when you can get a little bidding war going for your company. Unfortunately, you know, two of the three interested parties didn't go forward with a letter of intent. So it was down to one, but it was a strategic who, you know, understood our business cold because they were in our business. We competed with them. and they didn't want to lose to us anymore. So we wanted to do diligence and because we ran a really, really buttoned up shop and we had a lot of great processes in place to close our books and provide financials and have everything else incredibly organized and ready to present, we closed in a month. Pete Vera, Exit Algorithms: Wow. Yeah. Steven Pivnik: Sorry about that. Pete Vera, Exit Algorithms: No worries, closed in a month. Yeah. Wow. You must've had everything just dialed in all of your financials and systems. Steven Pivnik: Yeah, we had everything ready to go and this is like one thing that I advise a lot of founders. ⁓ It's actually a chapter in my book called Always Be Closing. A lot of people refer to always be closing from a sales perspective, always be closing deals. I advise folks to always be closing your books and always be ready for due diligence because you never know when an opportunity is going to present itself. It may not be an exit. It may be a strategic partnership. It could be bank refinancing. It could be an investor that comes along. and they're going to give you an information request sheet, the quicker you can turn that around and the more accurate the information is and the better their perception of you is going to be. And most due diligence processes will not last only 30 days, it's going to be 60, 90, if not more and they will continuously ask you for information. And if you can present that information quickly and accurately, then again, your valuation and perception of the company goes up. Pete Vera, Exit Algorithms: Yeah, wow, absolutely. What were some of the things you did to organize your business in a way that made it sellable? Like, are there some, maybe some weekly or monthly, what are the actions that you took to make it ⁓ sellable? Steven Pivnik: Yeah, I mean, just from an organizational ⁓ perspective, we just make sure that every single department head had all of their data as organized as possible. not that we had a data room per se ready to go, but once we needed a data room, was like, boom, everybody knew exactly where their files were that were necessary to put into this data room. So we made sure every single department head was incredibly organized. From a finance perspective, that was part of the interview process. How quickly, give me your examples of how quickly you've closed books in previous companies. If anybody said that it always takes 10 days or more to close books, they wouldn't get the job because you can close books in under seven days, five days ideally. If you have your financial processes buttoned up enough, you should be able to close your books within five days of the month ending or the quarter ending. So that was super important and that type of discipline and organization just permeated through the rest of the company. Pete Vera, Exit Algorithms: Yeah, love it. Yeah, and those same things that are gonna make your company more valuable at exit and easier to sell, those are just good practices also, right, to just have and implement in your business throughout from, probably from day one. Steven Pivnik: No, exactly. I mean the difference in perception, you're really going to be hurting yourself from evaluation and perception perspective if you can't produce information quickly and accurately to whomever is asking for it. Pete Vera, Exit Algorithms: Yeah, that was a great takeaway. Yeah, and you mentioned your book a little bit, you know, Always Be Closing. I'd love if you could talk a little bit more about your book, Built to Finish, and maybe some through lines, some other takeaways for business owners listening. Steven Pivnik: Yeah. Sure, so I love Jim Collins' term on b-hags, big hairy audacious goals. I call them big hairy ass goals. My two big hairy ass goals was A, to sell my company, and B, to qualify for and compete in the Ironman World Championship in Kona, Hawaii. So once, and I accomplished both about 12 or 13 months apart. When I did, I felt that I I should memorialize my journey with the hopes of not only leaving something to read from my grandkids about their grandfather or great grandfather, but I also just wanted to inspire folks to create really, really big goals for themselves and give them a methodology to go and accomplish big BHAGs. One of my favorite takeaways from the book is visualization. I'm a huge fan of visualization. ⁓ These two b-hags, I had a check made out to myself with a very specific amount of money and I hung it next to my computer. So I saw it in my peripheral vision all day, every day. I also had a little mini poster of the Ironman World Championship hung right next to that check. So when you go through proper visualization, and it's not hard at all, there's a million and one YouTube videos on how to go through a visualization exercise, you're subconsciously programming your mind. to make better decisions and to take the necessary actions towards those goals. So there's an entire chapter dedicated to this. And I actually give it away for free. It's available on my website just because I love to give this information to individuals because I think it's a super powerful free tool we can all use. Pete Vera, Exit Algorithms: Yeah, no, that's great. Would you say visualization has had a key impact in your life in general? ⁓ When did you start doing some of those practices? Steven Pivnik: Yeah, I don't remember when I learned about it. I think I learned about it ⁓ probably in the 90s. And I'm like, wow, that's a great idea. I just love doing that religiously. And when you do it so often, like I'll give the Ironman example. When I finally got to Kona to compete in the world championship, it was literally as if I was there a dozen times. I literally knew what every single street looked like. I knew what the bike course looked like. ⁓ When I was experiencing the insane heat of Kona, know, 90 degree temperatures and 90 % humidity, I felt that I was there forever. So it's a very, very powerful tool. Pete Vera, Exit Algorithms: Yeah, wow, that's huge. Yeah, I wanna ⁓ switch tracks here a little bit. You advise businesses that are gearing up for sale. I'm curious, what do you look for in a potential client or what's your onboarding process and some of the first few things that you advise on typically? Steven Pivnik: Sure, so I actually start the advisory work way before an exit. mean, obviously, I mean, if a customer is just about to sell, I can help as well. But my preferred client is somebody that is just in a super, super early stages of their entire exit journey. I firmly believe that you cannot start planning early enough because the earlier the planning begins, the better the outcome is going to be. For many reasons, the biggest one from a tax perspective. I'm not an accountant and I don't play one on TV but I have a huge Rolodex of them which I can share. There are many very legal tax strategies that you can put into place to save money on the actual exit and the only requirement there is that you do way ahead of the actual exit event. If you do too close to the exit, ⁓ will get audited and you will get penalized. Pete Vera, Exit Algorithms: Mm. Steven Pivnik: Definitely from a tax perspective, you can't start planning early enough. ⁓ So what I typically do is I start off with an exit planning assessment with the company. It's a really short, like with the owner of the company, it's a very short 15 minute questionnaire that they go through and it provides an exit readiness score across multiple categories. ⁓ Financial performance, growth potential, the Switzerland structure. which is basically independence from any specific customer, vendor or employee. Evaluation teeter totter score, which is a cash score on how much cash the company is either generating or draining. ⁓ Our recurring revenue score, which is really important. Something called monopoly control. How deep is the company's moat? If a competitor came along tomorrow, would their special sauce be easy to replicate or not? So there's a score there. Pete Vera, Exit Algorithms: Mm. Steven Pivnik: And then the score and customer satisfaction, which is really important. And lastly, something called hub and spoke. You know, how dependent is the company on the owner? Does every major decision need to go through the owner? Does the owner own two or three of the biggest customer relationships, you know, with a company? The higher the score on the hub and spoke, the lesser the valuation is going to be because people, acquirers don't actually like to see that. So. We start off with a score across those eight categories and then we jointly put together a plan on how to increase the score there. And that process can be 12 months, that process could be 36 months, but there's always things that can be improved because an acquirer is gonna see all of these and is going to ding you on valuation if they're not as high as they could be. Pete Vera, Exit Algorithms: Hmm. Yeah. Wow. Incredible. There's so many different tangents we could go on from just that. He just said, ⁓ and my follow-up was going to be, know, any tips to maximize exit value. And there's just so many different things you could go on. How about we focus? I was really curious about the, you know, how do you score recurring revenue? What does that look like? Steven Pivnik: Yeah. Yeah, it's actually really simple like what percentage of the revenue is recurring and contractually guaranteed to repeat and then what is the, even though it's contractually guaranteed, what's the retention and what's the renewal rate that a customer has? If those numbers are really high, you're in great shape. And I learned the hard way because even though my business generated over $40 million a year in revenue, We only had about 10 % of it that was true recurring revenue. So we started every single year, let's say, with only a guarantee of about 10%. So only like 4 million. Yeah, only 4 million of that was guaranteed and we needed to go hunt and kill $36 million more of business. And we did so successfully year after year after year. But once you get to certain point, it just gets really, really hard. Pete Vera, Exit Algorithms: through contracts. Steven Pivnik: to replace that much revenue with new revenue every single year. Pete Vera, Exit Algorithms: Yeah. How long do you like those contracts to be in place for? know, because there's some conflict there with businesses and their customers. They don't want to be locked in. Is there, yeah, what do you prescribe on the? Steven Pivnik: I mean three years is something I think everybody should shoot for. Obviously it may or may not get negotiated. If it gets negotiated down to two, you're still better off than, two is still better than one and if you absolutely positively have no choice then obviously a ⁓ one-year contract is okay as long as you have a really high renewal rate. Pete Vera, Exit Algorithms: Yeah, got it. That makes sense. And I love the other thing you said, the hub and spoke model, the test, basically testing for a key man risk, right? Steven Pivnik: Yeah, exactly. mean, there's just there's so many founders that have their, you know, identity wrapped up, wrapped up, you know, in their company, and they just insist on being in the trenches, you know, all the time. And when they when they when they do so, they're just they're just hurting themselves from a valuation perspective. Pete Vera, Exit Algorithms: Yeah, what does that ⁓ test look like? How do you measure that? Steven Pivnik: Yeah, there's basically there's a set of questions that are behind that. ⁓ Who owns your top three ⁓ customer relationships? Who's part of the major strategic decisions that need to, I'm sorry, not strategic, strategic is fine. Who's part of the daily operational decision making process? Who owns the relationships with your top three vendors? For your business if they answer to most of those questions is me you've got a problem Pete Vera, Exit Algorithms: Yeah, yeah, absolutely. And how long does it take, would you say, to reduce some of that, to start delegating some of those customer relationships, or maybe hire on someone to manage operations? Steven Pivnik: Yes, I mean sometimes it takes over a year. It took me, for instance, when I orchestrated my exit so that I would not be part of it. I was running my company for a long time and I loved it to death. It was my first child but it was time for me to go. So in order to ensure that I wasn't part of the exit, I brought on a COO with the hopes of promoting him to CEO after a year and extricating myself from the daily management of the company. I thought it would take a year, it took me three months because I found the right person, I trusted him, the company respected him, and I just felt that it was the right thing to do sooner versus waiting a full year. And there's ⁓ a lot of folks out there feel that they or somebody in the company is completely irreplaceable, and it's just not true. I've seen it proven time and time again that people that are deemed completely irreplaceable are. Replaceable. Pete Vera, Exit Algorithms: Yeah, I love it. Great takeaway too ⁓ for business owners listening. ⁓ Let's switch tracks here and talk, open up the can of worms a bit on AI. I'd to hear your perspective on AI. How are you leveraging it personally? And yeah, maybe some of the businesses you work with, how you see it's been successfully implemented. Steven Pivnik: Sure, so how do I use it personally? Actually, we're here today because of AI. I use an AI service that helps find guests for my podcast and helps get me booked on other people's podcasts like I was booked on yours. So AI knows what I speak about, it obviously knows the topic that you speak about on your podcast and it sent you an email introducing me to you and here we are. So podcasting, great tool. From a social media perspective, I like to promote a lot of know, what the things that you know, we spoke about it's a Great tool to come up with, know social media strategy in terms of you know What to post the images to post with it the scripts for the videos so I use it I use it there a lot and ⁓ Training plans as well. I love to use it. I don't have pay for training plans anymore. I want to have a race coming up I just go to AI and I tell it Pete Vera, Exit Algorithms: Hmm. Steven Pivnik: Hey, I've got to, actually, I just did an Ironman last Saturday and I started training for it on January 1st. I do not recommend that people only train three months for an Ironman like I just did, but because I've done so many of them, I had a great foundation. A year is what it normally takes, at least nine months to properly train for an Ironman. But yeah, I use AI for training plans a lot. Pete Vera, Exit Algorithms: So long. Yeah. ⁓ I love it. Yeah. There's a lot of, ⁓ you know, personal, ⁓ productivity hacks or just, you know, I've, I've heard of people creating a space in there that they've given it a bunch of data on themselves and, ⁓ they can kind of talk with it. ⁓ yeah, it's interesting. A lot of, hear a lot of different people using it for different things. ⁓ have you seen AI been, you know, improperly? implemented say in a business context? Like where do some businesses go wrong? Steven Pivnik: That's a great question. ⁓ I personally haven't seen too many horror stories yet. I I've seen it used inefficiently. I I've seen it used as just another search engine and it's not. People, I think, don't fully understand the power of it and the power of the proper prompts. And I think anybody that's using it as just another search engine is doing themselves a disservice. It's such an incredibly powerful tool. and they should educate themselves on how to create better prompts and custom GPTs. It's not hard at all and it's incredibly eye-opening once you learn how to do that. I taught myself how to develop an app. I had a long flight from San Francisco two weeks ago and I said, and so in addition to my book, sorry for the tangent, but it's AI related. In addition to the book, I came out with a built to finish journal, because I love journaling. That's one of my other tips and tools that I use all the time. and I just wanted to create a built to finish journal and I did. And in the back of my mind, I'm like, you know what, this would be a really good app for people that just don't like to write. Unfortunately, I think writing is still the best way to journal but there's a lot of people that just love apps and I have like a monthly section, a weekly section, a daily section in the journal. I'm like, let's just turn this into an app and by the end of the flight, I had a completely working app. I haven't released it yet, I'm still testing. And I'm still like putting finishing touches on it, but like I was amazed that during the course of a flight, a full blown production quality app was created. Pete Vera, Exit Algorithms: Yeah, that's awesome. Where did you use vibe coding or what was your Steven Pivnik: I used to ⁓ clode, just clode, not even clode code, I just want to clode. like, hey, help build me an app that looks like my journal. And it said, okay, give me pictures of your journal pages. So I literally on the plane, I'm taking pictures of my journal, of the monthly section, the weekly section, the daily sections, and it created screens, you know, based on those images. Pete Vera, Exit Algorithms: Yeah, incredible. ⁓ yeah. And like what you said too. I think where people go wrong is, is viewing it as a search engine. ⁓ you know, it really needs context in order to generate quality, quality outputs. ⁓ I I've been focusing on, you know, the reverse prompting strategy where you ask it to, interview you basically. ⁓ and that, that seems to be, you know, Steven Pivnik: Mm-hmm. Pete Vera, Exit Algorithms: the quality of the outputs after you take the time to basically train it, it becomes a much more powerful tool. Steven Pivnik: Absolutely, absolutely. Pete Vera, Exit Algorithms: Yeah, thank you so much for your insights today. Stephen's been a real incredible conversation. ⁓ I always ask at the end to summarize if we could ⁓ give one practical tip in this case, you know, for a business trying to have a successful exit, what would that one practical tip be? Steven Pivnik: The big, this is going to sound self-serving and it doesn't have to be me. There's a million and one advisors out there. Don't just pick one. Go through a similar process that I went through with investment bankers. I brought three to the table and I had them present their capabilities and their go-to-market strategy to me. So if you don't already have an exit advisor by your side, that's tied at the hip for your success, not the company's success, your personal success, because there's a lot of things that go through that an exit results in for a person individually. So find an advisor that's tied to your hip, to your success, and that's actually number one requirement is much more than textbook knowledge. It has been in your shoes multiple times. And you'll thank yourself for it. And their fee is worth ⁓ more than gold. Pete Vera, Exit Algorithms: Yeah, well said. Awesome. Where can listeners find your content in your book? Steven Pivnik: Sure, ⁓ everything about me including all of my social handles is on my website which is stevenpivnik.com, S-T-E-V-E-N-P-I-V-N-I-K dot com. my social media handles are all at stevenpivnik, one word, LinkedIn, Instagram. Pete Vera, Exit Algorithms: Great, I'll leave that in the show notes. Thanks so much for coming on today, Stephen. I love this conversation. Steven Pivnik: Pete, thanks for having me. I enjoyed it as well.