ALWAYS BE EXITING: BUILDING THE PREMIUM BY DAY 1,000 | EP10

Bill Canady: Two businesses, same industry, industrial components, both of them, both inside the same 18 months. And in the last four year before each sale, both of them put up about $28 million of EBITDA. So not bad. Nice little business there. Do a lot with that. One cleared seven times earnings. The other cleared ten to half. Now what made the difference? Same $28 million, $98 million dollars of difference in what the shareholders walked away with. That's a big difference. Now I have met a lot of CEOs to hear that and assume the answer is timing. Or the banker or a strategic buyer happened to be hungry for that particular quarter. So maybe they had a ninja banker and a really desperate buyer. Well, not typically. What I will tell you is that the difference actually was because I've been in both kinds of rooms and it's never mysterious. The seven times business had one customer at 31% of revenue, its forecast had missed by double digits for four quarters running. And about a third of the EBITDA in the book was ad backs, and the CFO was the only human being who explained them. And when the buyer's advisor asked casually near the end of a Thursday session, who runs this that the CEO leaves? Well, there's about four seconds of silence in that room. That's never going to be helpful. The $10 and a half business had none of those problems. Not because it got lucky, because somebody spent two years talking to each one of them, taking each one of them off the table on purpose. Or about one per quarter starting around day 400, 98 million dollars. That's what the second term is worth. So here's the proof. Enterprise value is EBITDA times a multiple. Every operator alive works the first term. almost nobody works the second one on purpose. And the second one is where the money is. Because a turn of multiple on $28 million EBITDA is $28 million. And you know exactly how hard you had to work for that last two points of margin. It's a big deal. So here's the second piece of proof. It's the reason the first term and the second term are connected rather than separate. Discipline simplification. The work we spent episodes five, six, and seven on lifts margin three to six points and lifts asset productivity ten to twenty-five percent. That's a lot. Now that's not a forecast. That's an observed range. Procurement complexity alone adds two to five percentage points of cost of goods. Same work. Two payoffs. The earnings go up and the business gets simpler to underwrite. Simpler businesses price higher. I've watched that hold across 100 plus companies in 30 some years and something north of $3 billion worth of shareholder value. And I've never seen it once run the other way. So here's my promise: by the end of the next half hour, you'll be able to score your own business against a list of things the buyer actually prices for. Not the list your banker will hand you 90 days out. The list they're scoring in their heads the whole time. You'll be able to name the single biggest discount you are currently carrying. It's one item. You'll know which one it is. And here's the plan. Four levers. Revenue quality, margin, capital efficiency, and the multiple. In that order. Because the order is the whole thing. Then three moves you can start with this month. Then I'm going to close out the thousand days Because this is one of the last episodes of this season, and I want to put the whole clock back together before we're done. This is the Thousand Day CEO. I'm Bill Canady Let's finish it. All right, the problem. let's stay with the equation for a moment because it's short and people nod at it and then go operate as if it only had one term in it. Enterprise value equals EBITDA times the multiple. Every management meeting you've ever said in was about the first term. Every budget, every bridge, every cost out program, every pricing corridor. We talked about in episode six, the first term. And that's correct. That's the job. I'm not here to talk you out of the first term. but watch what happens mathematically. Take a business doing $30 million of EBITDA at eight times. That's $240 million of enterprise value. Now go to work on a generally hard year and put three more on the board. 10% EBITDA growth, which is what we said back in A episode one is roughly what a deal underwriting underwritten today requires just to keep that promise. Three million times eight is twenty-four million dollars of value created. Now that's a real year. And that's a year where you can have a hard conversation and somebody quits. Now hold EBITDA flat and move to multiple one turn. $30 million of value created. In a business where nothing about the earnings changed at all. Multiple expansions, a big deal. I'm not telling you that to make the operating work sound small, I'm telling you that because most CEOs treat multiple as the weather. Something just magically shows up, something that happens to you. Something to banker negotiates in the last 90 days in a conference room you're barely even in based on comps you didn't get to pick. Well, that's wrong and it's expensive. And I won't name specifically why it's wrong. The multiple is a price on risk. That's all it is. A buyer is writing a check today for earnings they hope arrive over the next five or 10 years. And every single thing about your business that makes those future earnings less certain comes straight out of that price. Not as a conversation. As a number, concentration risk, key man risk, forecast credibility, earnings quality, contract structure. A buyer's investment committee has a line for each of those. And each line has a haircut attached. And nobody is going to read you that list. The second term isn't weather. It's a scorecard you have to get graded on since day one Without seeing the Rubik. This episode is the Rubik. Now here's the trap, and it's the one that costs the most. The multiple is one lever you cannot sprint. Everybody tries. I've watched this play out more times than I can stand. Day 880, somebody says the word process, and a banker gets hired. And suddenly there's a work stream to fix customer concentration, a work stream to build a management bench, and a work stream to clean up the quality of earnings. 90 days of frantic tidying. We've all been there. And it does not work for the reason that it's almost physical. The thing that de-risk a business is are all the things that's taken years to become true because they're all forms of a track record. You can't manufacture forecast accuracy in a quarter. Forecast accuracy is eight quarters of hitting the number you said. You can't manufacture a management bench in a quarter. A bench is a set of people who have run their own numbers in front of a board repeatedly and been believed. You can't manufacture revenue predictability in a quarter. with that contract structure and renewal history and a churn number with enough periods behind it to be a number instead of an antidote. Buyers can tell the difference between a business that was built and a business that was tidied every single time. You could too if you're sitting on the other side of that table. They've seen it four hundred of those and you've seen it once. The tidy business has a beautiful data room and a management team that's all joined within the last eleven months the built business has boring, repetitive evidence going back years. That's why the phases are ordered the way they're ordered. And it's why this is episode ten and not episode two. Margin and cash move first. The multiple re-rates as a business de-risks. And de-risking is not a phase four activity that you do in phase four. Derisking is the result of phase three. It is two years you spend on a team and the cadence, episode eight and nine, showing up in the prize. You gotta have been there and did the work. You got the time now. Go do the work. So that means the actual work days of 731 to 1,000 is mostly this. Don't break it. Prove it. And the free cash that's still trapped in your own balance sheet. All right, the framework, four levers of an enterprise value. I'm going to teach them in order, and the order matters because pulled in order, they multiply rather than that. And we like multiplication. Lever one, lever one, revenue quality. Not revenue, revenue quality. The right customers buying the right products, pricing the right value, they can actually receive. We did the diagnostic work back in episode three, the quads, the quartile mix, the discovery that the bottom 20% of your customers deliver about 5% of the revenue while consuming something like 30% of your capacity and 60% of your complaints. By day 731, you should have already acted on that. Lever one at this stage is not the discovery. It's the proof that it held. Here's what a buyer is looking at when they look at your revenue. They're not looking at the total, they're looking at the shape. Is growth coming from the top two quartile or is it coming from the tail? Is average order value going up or down? Is the customer count going up or down while gross margin per order goes down? Because that's a business buying its own growth and it prices like one. Go look at power band parts. The business we've been running all season, $310 million, 32% gross margin, 8% EBITDA when we started. After the minimum order value and the SKU level minimum mortar quadrants went in, order count came down 38% and gross margin per order went from 19% to 31%. Now a naive buyer looks at that and sees a company that shrank its order book. A real buyer looks at that and sees a company whose revenue got structurally better, whose capacity got structurally freer, and the second one pays a premium. That's right, they're gonna pay more for the company. Lever one question, write it down. What percentage of your revenue growth over the last eight quarters came from your top two quartiles? If you don't know, that's not a data problem. That's a segmentation problem. And it's episode three. Lever two, margin. Strip complexity, re-rationalize the tail. This is episode five, six, and seven. And I'm not going to reteach them here. What I want to add here is the number that connects margin work to the multiple because most people think of margin as purely a first-term activity. Discipline simplification lifts margin three to six points and lifts asset productivity two to twenty-five percent. Two effects one program. The first effect grows EBITDA. The second effect, asset productivity, is a balance sheet effect. And it feeds lever three and lever four. Both. And keep the complexity tax in view because it's the one nobody carries on the PL. Procurement complexity alone adds two to five percentage points to the cost of goods. That's not a supplier negotiation. That's the cost of having 11 vendors when four would do. And 19,000 active parts, where 6,000 would do. And twelve people whose actual job is reconciling the difference. We don't need them. Get rid of that complexity. You can get rid of those headcounts. Lever two question name the two decision in the last four quarters that move gross margin in dollars, not initiatives, decisions. If you can't name the two, the margin move you're seeing is a mixed drift or the market mixes drift reverses. Lever three, capital efficiency. Now here's a lever almost nobody pulls, and it makes me a little crazy because it's the cheapest money in the building. Free cash trapped in inventory and receivables. my lord, working capital. It's like stacks of cash setting on your shelves. Think about where the cash comes from in a middle market company. You can raise it. That costs you dilution or interest, and it costs you a conversation with your sponsor. You can earn it. That's the whole first term. And it's a year of work. You can also go get the cash that is already yours sitting in your warehouse in the form of 4100 SKUs that turn less than twice a year. and sitting in a receivables ledger where the average customer is paying you in 63 days against terms of 30. That third bucket requires no one's permission, no board approval, no sponsor conversation, no new headcount. you don't have to earn it. You already earned it. You just have to go collect it. And it compounds into each lever in two directions. It's cash today where the sponsor notices, and it's asset productivity, which is a direct input on how our buyer models the business. A buyer who sees inventory going from 2.1 to 3.4 over eight quarters is looking at a management team that understands its own working capital. That's a credibility signal, and credibility is price and it's priced up. Now here's how to start, and it's genuinely not complicated. Two lists. The first list is every SKU that turns less than twice in the last 12 months, sorted by dollars of inventory. The second list is every receivable over 60 days sorted by dollars with a name next to it. The name of a person at your company who owns that relationship, not the name of the customer. I've never run this exercise in a business over $100 million and found less than seven figures. That's right, million bucks or more. Not once. Lever three question How many days of working capital are you carrying? And what's that number eight quarters ago? Lever four, the multiple. Derisk the business, break the owner trap, build the bench. And here's the sentence I want you to take out of this entire episode. Lever four multiplies the value of the other three, which is why the owner trap is the single most expensive problem in a middle market company. That's not a motivational statement about delegation. That's arithmetic. Levers one, two, and three all land in the first term. Lever four is the coefficient. You can do a magnificent job on revenue quality, margin, and working capital. Put six million of incremental input on the board and then hand all that to a buyer at seven times instead of nine and a half because the answer to who runs this without you is still four seconds of silence. You got to fill that in. You got to go get that. Bench. So let me be specific about what actually moves the multiple. Seven things. Every one of them is inside your control, and every one of them is worth turns. One, customer concentration, the number that gets circled first. Any single customer over about 20% of revenue draws a haircut. And over 30%, it starts drawing structure, escrow, earnout, and holdbacks. The fix is not firing the customer. The fix is two years of deliberately growing everybody else faster. Plus contract structure that survives a relationship manager leaving. Two, owner and CEO dependency. Who signs? Who prices? Who the top 10 customers call. If the honest answer is all three is you, the buyer is not buying a company, they're buying an employment agreement with you attached, and they will price it that way. And they will also want you to stick around for three years, which you may not want to. You might want to go spend the money you're trying to earn. Number three, forecast accuracy. And I mean this one plainly. Has the forecast ever been right? Not the annual budget, the rolling quarterly forecast called 90 days out compared to actual. Go pull the last eight and look at the variance. If plus or minus is 15%, you are telling a buyer you do not understand the mechanics of your own business, and they will discount every projection you show them accordingly. A business that lands inside 3%, eight quarters running gets belief. Getting belief is worth the turns. Full stop. Four, management team durability post sale. Not whether you have a good team, whether the team stays and can run it after you don't. That means retention structure. That means each leader owning a number publicly. And that means a bench, a named successor in development for every one of your direct reports. Episode eight, the rule of three, is what this is for. Okay, number five, quality of earnings and how much your EBITDA is added back. This one quietly destroys deals. If you reported EBITDA's twenty eight million, but eight of its ad back, one time items, owner expenses, pro forma savings from a program that hasn't finished, you're not selling $28 million of EBITDA You're selling $20 million of the EBITDA with an eight million of argument. And arguments in a data room don't get settled at your multiple. They get settled at a discount or they get settled with an earno. The work here is to convert ad backs into realized run rate results. Well before anyone's doing diligence, which takes, say it with me, time. Number six, revenue predictability and contract structure. What share of the next year's revenue is already contracted? What's the renewal rate? And over how many periods? Are you on evergreen terms with price escalators? Or are you requoting every order? Two businesses with identical revenue and identical margins will price differently by multiple turns on this alone. Because one of them has a forward book and one of them has hope. Seven, data room readiness. Now this sounds administrative. It is not. Diligence is a test of operational discipline conducted through documents. When a buyer asks for four years of customer level profitability by quarter, and you produce it in two days, clean, with a consistent methodology, that tells him something true about how the company is run. When it takes five weeks and three versions that don't reconcile, that also tell them something true. Every week diligence drags, the odds of retrade go up. I watched deals close at a half turn in less than 30 days, purely on friction. Don't lose that half a turn. Seven items, score yourself on one to five on each. That's the rubric. Okay, good to go on. Now here's where I want to spend a minute on the part that isn't analytical because it's the part that actually stops people. The phrase and literature on great companies, built to last. Wonderful book, genuinely useful ideas. But inside the structure you and I are operating in, built to last is not sin quo non It is not the required condition. The business itself may be treated as a product, designed, improved, packaged, and sold at the right moment in the best possible condition. such companies intend to go from good to gone. Gone is not a failure, gone is the design. I'm going to be blunt about this and I'm going to be humane about it at the same time because I've been on both sides of it. It's not your baby. You didn't found it, or maybe if you did, it didn't even matter. In most cases, you arrived on day one to a company someone else built and somebody else bought with a mandate and a clock. The operators who make peace with that early make dramatically more money than the ones who make peace with it in the data room. And the ones who make peace with it in the data room usually make peace with it. About four days after the first offer comes in too low, which is exactly forward days too late to fix anything. But I don't want to be glib about the cost because the analytical version of this advice is cheap and the real version isn't. Here's what actually happens to a lot of CEOs at the end of the hold and almost Nobody says it out loud. The hardest part of an exit is not the money. The money is usually fine. The hardest part's losing the role. You spent a thousand days being the person who decides. Your calendar has been full for three years with things that were important. Two hundred people knew your name and a few dozen of them shaped their careers around what you thought of them. And then there's a closing dinner in a transition period where you're increasingly ceremonial. and then on a Tuesday in month four where nobody needs anything from you at all. That's real. I've watched good people go quietly wrecked by it while their bank statement looks terrific. So here's what I tell you, and it's practical, it's not therapeutic. The identity problem and the value problem have the same solution, which is that the bench. You have to build a company that runs without you. Two things happen at once. The multiple goes up, and you get to go practice not being needed while you still have somewhere to be every day. The CEOs I've watched come through an exit intact are the ones who spent phase three deliberately making themselves less necessary, and then spent phase four figuring out what to do the next thousand days or for. Start that conversation with you around day 800, not day 1010. Here's the plan. It's three moves. First one takes about 90 minutes, and you can do it alone. Move number one: score yourself against the multiple checklist honestly and find the biggest discount you carry. Seven items: customer concentration, owner and CEO dependency, forecast accuracy, management team durability, post-sale, quality of earnings, and add back. Revenue, predictability, and contract structure, data room readiness. Score each one of these one to five. Five means a buyer looks at it and moves on. One means the first thing they'll circle. Do it alone first on paper. Then, and this is the part with teeth, hand the blank sheet back to your CFO and one board member and have them score it independently and compare. The gap between your score and theirs are more informative than either score. In my experience, the CEO is generously self-graded on exactly one item and it's item two every single time. Then take your lowest number and say it out loud. This is the discount I'm currently carrying. One item, not a list, because you have somewhere between nine and 12 months of usable runway left in this hold, and this one item is where it fits. Move number two. Start the working capital review this month. It's free money. I put this second, not third, because it's the fastest cash in the building and requires nobody's permission. two lists this month every SKU that turns less than twice a year, sorted by inventory dollars, every receivable over 60 days sorted by dollars, with the name of your person, not the customer's name, your person next to each line. Then one meeting, 45 minutes on the calendar with three weeks. Both lists on the screen are. Two decisions per line, what happens to it and who owns it and when. That's it. No project, no work stream, no steering committee. Set a target that says the customer, days of working capital, down by X by the end of the quarter. And here's the tail for what's whether it's working. The cash shows up before the meeting series ends. Working capital is the one place in the business where the results arrive faster than the program. It's amazing. You should try it. You'll love the cash coming in. Move three. Write the day one thousand story, then work backwards and put the first milestone on the calendar. This is the one people skip and it's the one that organizes the other two. Sit down and write in about a page the story you want to be able to tell on day one thousand. Not to the buyer, to yourself. What is true about this business that wasn't true on day one? Use numbers. Eva Dai went from twenty four to thirty nine. Top quartile revenue went from fifty one percent to Of the book to 68. Inventory turns went from 2.1 to 3.4. No customer is over 18%. Four of my six direct reports have a named successor in development. The forecast has landed inside three percent for seven straight quarters. These are big numbers. These are the ones you want to be singing about. Write the real one with your numbers. Then work backwards. If that's true on day one thousand, what has to be true on day nine hundred, day eight hundred? What's the first milestone? What date does it go on the calendar? And then do the one thing I ask you to do in episode one because it still works. Tell somebody, your CFO, your spouse, your sponsor, an undated intention is a whoosh, and I've never once seen a whoosh on an income statement. What it looks like when it's working and when it's theater. When it's working, phase four is quiet and slightly boring, which is by now how you'll recognize the pattern of the entire season. The cadence from episode nine just keeps running. The management team presents their own numbers to the board and you say very little. The diligence request list gets answered out of the report that already existed. Nobody builds anything special for the process because the process is asking for things you already had. When its theater phase four is loud, there's a project, it has a code name, and there's a war room with a countdown and a consultant who arrives in about a month 32. Three new executives get hired in the last two quarters. And the org chart and the deck has people on it who haven't done a full year. The management presentation is beautiful, and the underlying report can't produce half of it. Buyers can tell they can all they always can. A business that has been built boring, repetitive evidence going back years. A business that's been tied it up has a beautiful deck and 11 months of history. You've seen them, you know the difference. Boring compounds. It compounds in phase one and it compounds all the way through the check. Okay, the number three things worth keeping from this one. One, enterprise value is EBITDA times the multiple, and you're responsible for both terms. Four levers, revenue quality, margin, capital efficiency, the multiple. Pulled in order, they multiply rather than they add, and lever full multiplies the value of the entire thing, all other three, which is why the owner trap is the single most expensive problem in a middle market company. Two, margin and cash move first. The multiple re-rates as the business de-risks. You cannot sprint the multiple in the last 90 days because everything that de-risks a business is in the form of a track record. And a track record takes two years and you spend on the team and the cadence. Buyers can tell the difference between a business that was built and one that was tidied up. Three, capital efficiency is the cheapest money you will find. And it requires no one's permission. It's two lists, slow inventory and old receivables. Start this month. Let me put the thousand days back together because this is the one that ends the season. Day one to one hundred, you took command, one goal, one strategy, named the owners, and the organization knows a new era started. episodes one through two, day one hundred to three sixty-five, the rest of that year. You found out where the profit actually lives, and you and whether you earned the right to grow, the quads, the ratio, two lines off your own PL and a verdict. Episodes three and four. Then you did the hard part. You retired the complexity. You price the value instead of the cost. You rebuilt the budget from zero instead of from last year plus five. Episodes five, six and seven, days three hundred sixty six to seven hundred thirty. You built the team that could run it without you and the cadence that runs it, whether or not you're feeling energetic that week. Episodes nine, eight and nine, days seven thirty one to one thousand. You turned all of that into a premium because a business that's simple, predictable, and honestly earned is not dependent on one person. Is worth more per dollar in earnings than one that isn't. Four jobs, one clock, and underneath it all of it, the same line to open the season with. Luck is a residual of design. You're going to get lucky in this hold. A competitor stumbles, a strategic shows up with a reason to overpay, a market turns your way for reasons that has nothing to do with you. That's coming. and the only question that even mattered was whether on the day it arrived, the business was in condition to catch it. A thousand a day ago, this was a theory. If you did the work, it isn't anymore. It's a design proven and the residual bang. So that's season one. Ten episodes, one clock, and every framework I know for turning a thousand days into a number worth defending. If you're starting the season now, start at episode one and run it in that order. It's built as a sequence, the same way the phases are. Next season we're bringing the operators one guest at a time. One play at a time, not a career retrospective, a single move they made on a specific day with the numbers that proved it work. Every one of them maps back to an episode you've heard. So you'll know exactly what you're listening to. If you want the day 1000 score for card from today, then go to the 80/20 Institute. You can always sign up for the classes there. There's all this cool stuff going on there. You should go check it out. I think you're gonna like it. I'm Bill Kennedy. Go run your number.