ValuationPodcast.com - A podcast about all things Business + Valuation.
ValuationPodcast.com - A podcast about all things Business + Valuation.
Value Creation at Every Stage of the Business Cycle
Hi, welcome to ValuationPodcast.com - A podcast and video series about all things related to business and valuation. My name is Melissa Gragg, and I’m a divorce financial mediator in St. Louis Missouri.
Today we are discussing Value Creation at Every Stage of the Business Cycle with Jordi Pujol a CFA or Chartered Financial Analyst, and MBA graduate from The Wharton School of Business.
Jordi is a financial modeling wizard and Valuation Specialist in Los Angeles. He works in the Middle Market, appraising businesses and Intellectual Property (IP) for financial reporting, tax reporting, and strategic decision-making. He works with a boutique investment bank in Southern California.
Hi, welcome to valuation podcast.com, a podcast and video series about all things related to business and valuation. My name is Melissa Greg , and I'm a divorce financial mediator in St. Louis, Missouri. But today we're gonna talk about value creation at every stage of the business cycle. And I think it's an important conversation to have, but it's important to maybe have it from a financial aspect as well. So we're gonna be talking to Jordy Pugel , who is a CFA and chartered financial analyst, an MBA graduate from the Wharton School. He is also a modeling wizard, financial modeling that is and valuation specialist in Los Angeles. He works in the middle market, appraising businesses and intellectual property for financial reporting, tax reporting, and strategic decision making . He also works in a boutique investment bank in Southern California. Welcome, Jordy . How are you?
Speaker 2:Hi, Melissa . Thank you. So you so much for having me. I'm a longtime listener and very, very excited to be talking to you today. Um, so I'm excited to get going.
Speaker 1:Yes. And we're going to be talking about a topic that kind of seems a little bit easy, but it's not, we're gonna get into some complex kind of concepts, but it's also trying to understand at the stages of a business, okay? So the, the topic is really about creating value at each of these stages. But when we're talking about the early stage , right? Are we really worried about getting a valuation ? Are we really worried about survival? You know, are we really worried about , um, hoping that we get a sale? Right? You know, like, talk to us a little bit about how we can either create value or look at value when we're just starting out. Like maybe I, maybe I got some rounds of funding, and maybe you can give us some examples of like, how would we look at that at the very beginning from your perspective?
Speaker 2:Absolutely. So unfortunately, if you, if you're an entrepreneur, you know, an entrepreneur, you know that they're doing all of everything you said , um, they're trying to create value. They're trying to join people together. They're thinking about their product, they're thinking about their customers, and trying to put a million things together into a single package that is their core product. So, in the early stages , um, yes, I think you're right. I think we shouldn't be worried about valuation, but the earlier you start thinking about value, the better you're gonna do at an exit. So what I like to think about is setting stakes in the ground, and the more you can think about what are the key milestones that launch you into a different tier of value, the more you'll be ready to battle those milestones.
Speaker 1:Well, and like at the beginning when we don't have much, what do we have? Like, you know, like we're asking people for cash, we're trying to figure out how to bootstrap things, you know, like what, what can we start to leverage?
Speaker 2:So the obvious key leverage point at this stage is gonna be people, right? As an entrepreneur, your key job is to take people from different areas of expertise and bring them all together under a single roof so that you guys can have an amazing company. And that's gonna mean thinking about marketing, thinking about product, thinking about your financial folks that can help you raise the money, thinking about an operating person that can help you operate the business. And as you're putting these people together, you are creating goodwill for the firm that eventually will end up in somebody else's balance sheet if they acquire you. But you are creating value just by putting these people together. Obviously, there has to be a product and it has to be something sellable. Uh , but your key action is to bring these people together. As you mentioned, they, you have no cash a lot of the time, right? Entrepreneurs, unfortunately are strapped for, for resources. And so your key value creation can come from your equity. And , uh, investors know this, right? Employees know this. The more equity that you can get at the beginning, the better you'll be at an exit. And as an entrepreneur, what I have to think about is how to distribute that equity so that in , I incentivize people in the right manner in the same way that when I'm thinking , uh, I want to take money from a venture capital firm, from a private equity firm, I wanna make sure that I'm, I'm focusing not on the value and not on the valuation that someone's gonna give me, but how much of that equity I'm giving up. Because that's the main resource that you have, and you wanna make sure that you allocate that correctly.
Speaker 1:Well, and I, and I think that when people are going through kind of the beginning stages of business, because I am sure you do this as well, but we will speak to like startup communities, right? And they will be like, okay, I have a startup . I have this great idea. Maybe I have some investors, like, what's it worth? Like, how much equity am I gonna give up? Or you have really owners that are very concerned about giving up equity. So can you tell , talk to us a little bit of a process of like, you know, how do we not only use valuations, but how do we transfer ownership? And how do, how do we get comfortable with giving up some of that equity too? 'cause that's not what everybody wants to hear.
Speaker 2:No. And you're, you're absolutely right. That's, that's the key thing to think about. But you shouldn't be afraid of sharing, right? I, I think they teach us that when we're little kids and, and sharing is caring. And the , and the same thing goes for your company, right? You are not gonna hold a hundred percent of your equity, you can't do this on your own. You, you have to think about that. And so as you're establishing that original team, again, you wanna make sure that you're allocating significant portions of equity to incentivize those people to stay with you, right? If somebody owns 0.1% of your company, it's not the same as owning 10%. Now, when you're thinking about giving up that value for venture capital, every round kind of has a relative percentage that is usually given up, right? Somewhere around 20%, maybe 30% in some cases. And, and that's kind of what determines your valuation. But again, if, if giving up that percentage is gonna give 10 x your value, then does it, does it really matter, right? You give a half, but gain 10 x, that probably means that you're still up in the grand scheme of things. And so if you can do that at every stage, sure, you'll give up a fifth of your company , um, but you're gonna 10 x it , then it makes a lot of sense, right? So I think that's the mentality that you should be in , um, that even if you're holding less equity, you're holding a smaller piece of a much, much bigger pie. And that's obviously what we always want,
Speaker 1:But I think that, you know, business owners also, they go into that first round of funding and they're like, okay, or, or investors like this could be anybody, it could be friends and family anytime where you're kind of seeking money from the outside that you might have to give up equity. They also have this perception of, well, if I give up 20 or 30% this round, and then I need another round and it's 20 or 30%, and then another round, like, I'm gonna quickly give up all of my ownership. And I think that, you know, again, that's kind of like being, you know, foolish in the short term for the behest of the long term . But there are ways that you can even value a company at that stage with like a 4 0 9 a or something like that. Like, there's ways that we can document it, but it's really first having the discussion of whether you're okay with giving up that type of equity. Like where do you see people or do you recommend that people stay and never give up past the 51%, or are there times when it really is allowing other people to be involved could get you exponentially to a different place?
Speaker 2:Yeah, absolutely. So I'll take , I'll say two things and then give you a little bit a , a small story of my personal life, but when, when you're, when you're giving up, but yes, it, it can be extremely difficult , um, but you sometimes don't have to give up control, right? So economic rights and voting rights can be different for your company. Um, there are tons of companies that have, you know, a 10 x voting power on the founder shares that maybe get you a couple more board seats with people that are friendly to your decision making . And so you can always control the company in a different way that you share your economics. Not that you have to do that, but that's an option. Yeah. Um, the , the second is, again, understanding that this is really all you have, right? So you want to share that, that piece with people that can help you grow. And so, no, you don't want to share , um, you know, 50% with the , with the venture capital that only is gonna get you two x return. That doesn't really make it a lot of sense. But if you're shooting for 10 x, then it really makes a lot of sense. And so when you're sharing with employees the same thing, right? You, you wanna make sure that you take those four nine a's that you're thinking about them , that you're thinking about the price that they're setting, that you're thinking about the stakes on the ground across your milestones, and that you're communicating that value to your employees. Because if they don't know that, you know, your 10 cents share can become a $10 share, they're not gonna really understand the value of what you're giving them. And something like this happened to me earlier in my career where I interviewed with a company, and I think they were offering me something like $35,000 equivalent in series B shares. And I thought, well, you know, series B, that's not that much. The comment's probably gonna be worth maybe a fifth of that, a third of that. Um, so I'm getting less than like $10,000 or something, like $10,000, so this isn't gonna really drive my decision. And the company kept growing, kept raising money, and the last time I checked, which was really hard for me to do , um, the last time I checked, it was worth four to $5 million just on that original stake. So the company had something like a hundred XD and I had completely missed out because nobody really communicated the power and the value of that equity in a very early stage of the company, especially at a series A, a, series B. Even so, you know, I I always regret that. And, and , and obviously now I, I make sure that people understand what they're getting. And even though there's gonna be a little bit of a tax bill, it might be a hundred percent worth it.
Speaker 1:But, and, and I totally agree. I, but I also, from an a reality standpoint, in talking to early stage founders, they're also have this issue that, you know, okay, you give equity to somebody and, and you show them, look, the value is gonna be amazing. Like this is, this is how we're giving you equity in lieu of salary, right? So you're getting equity, but you're not getting paid. How do you bridge the gap? Because a lot of times you can find good talent, or you could have amazing people, but you're gonna have to have some of that money , um, in order to compensate them, or else, or a shorter maybe runway, right? Maybe you have to shorten the runway so that you can get to cash quicker so that you can start paying people. But that is also a rub of if you're just giving them equity for payment, you know, you might have people that are still having to do other things for a salary, right?
Speaker 2:No, and , and you're absolutely right. I think, I think a founder has to create that balance and has to understand what the market rates are and how to compensate people for maybe paying a little bit of average market rates or maybe even below average market rates. It's not like you're gonna get this amazing person for $20,000 a year. Um, if they're getting $20,000 a year, they're probably want 50% of the equity, right? There's a balance of what people can get in cash and what they can get in shares. But if you, as a founder in the early stages, aren't good at creating a vision and selling and motivating people , um, you're already a , a little bit on the losing end. Uh , you, that's really your job as an entrepreneur. Showcase that vision, get people excited, work on your product. And so you have to convince these people, you have to convince great people to take slightly below average market rates in terms of cash, but really recognize the upside . And there's a , an interesting psychology concept that divides people into kind of intrinsically motivated and extrinsically motivated and extrinsic motivation can be just your cash, right? Your cash, your end of your bonus, and you're kind of motivated by these things. And as soon as they go away, right? Like somebody who's used to getting a 50% bonus, like an investment banking, and then it goes away, you're gonna be pretty, right? And , and you're likely to just quit that job and, and move on. Um, but if you're intrinsically motivated, right? And equity kind of tends to do that, where you're attached to this future long-term goal, then you're gonna be an amazing worker, an amazing teammate, and you're gonna think long-term, right? You're gonna take actions that aren't short-term, and that really motivates you for long-term growth and long-term value creation . So that's why I think this equity thing works, and that's why I spend so much time with entrepreneurs working on their four nine A's , and making sure they understand , uh, what they're giving to their employees, how they're giving it , and why pushing the value all the way down to the lowest possible supportive or value may not be the right answer, right? We, again, we wanna minimize their taxes, but we wanna also create an arc of value so that people can realize that they're getting value across time. And , and companies do create value across time. And so I , I'd like to match those , um, when, when, when talking to entrepreneurs,
Speaker 1:Well, and I think that in the beginning stages, you know, you, you get the right people. You have to have a vision, you have to have people buying into this vision, this dream, right? And so they're coming to you and they're like, yes, I wanna be involved. You can exchange equity. And that's kind of the beginning stages. Yes, there's a valuation that could be in play there to document it, because you have to tell the IRS you're giving, you know, equity in lieu of salary, but as a, as the entrepreneur, I then need to sit back very quickly once I have my team and start working. And so now we're gonna get into mid stage where, you know, what are your assets? What are your core strengths? Like, how are we building value in this space?
Speaker 2:Yeah, you're, you're absolutely right. We get through the first stage, we join the team, and now it's time to get down and really work. Um, that this second stage, and you probably were thinking about it since the beginning, but the second stage really focuses on investing in your core asset. Um, we call it intangible assets, just because, you know, I come from the financial reporting world and spend a lot of time there, but when somebody acquires you, they're gonna be thinking, what is the core intangible asset, right? The , the non-physical stuff that I'm acquiring, and how do I present this business case to the business, to the board , um, of this larger company, of this private equity firm. So intangible assets, you know, we know them as customer lists , technology. I think the most popular one, or the , the one that I, I find it easiest to relate with is brand. And so you have to make sure that you're understanding what you're selling, right? Are you selling a lifestyle, a brand , um, you know, a , a certain emotion? Or are you selling core technology, right? Are you just selling the best possible piece of technology that you can think of? Or are you really just a customer service oriented firm, right? What, what is your core strength and what is your core value? That's where you should be investing. And so , um, as you're thinking about that, you know, make sure that you decide, are we a brand company? Are we a technology company? Are we a mix of the two, but more focused on one, right? You always make sure that you're kind of pushing your key differentiator up at the top in your investing list.
Speaker 1:Well, and I think that it's interesting because brand right now is everything. Like we are getting canceled or you are getting, you know, the highest , um, accolades and it's based on your brand, it's based on your people. It's based on how your people portray your brand. Um, but what other, like, that is more, again, still intangible. So let's say we got that team, you now go into like potential technology, right? And everybody knows patentable and non patentable technology, but like, is that even as important now as, you know, if you have a brand that's unique and you are authentically putting yourself out there for that, you know, is it mattering at this point at whether you can patent it or not? Like, is that still a big value driver for companies? Or if it's unique, it's unique, right? There is no other thing out there. So it could be patented quite easily, but patents are not <laugh> as easy as they seem.
Speaker 2:<laugh>. Yeah, no, ab , absolutely. So this is kind of a , a funny thing to think about, but let's just say that you're a clothing brand and you're selling , uh, antis sweat , quick drying technology in your shirts. Um, maybe you can panic that , right? And, and if I'm a consumer, sure, I I'm gonna be drawn to that. Like, that's a little bit of a hook of saying, oh, okay, sure. Like, I'll smell less bad if I go to the gym, or I'll feel a little bit better because the clothes is softer and they have this crazy cool patentable fabric. But in reality, when I'm thinking about Nike, I'm thinking about the lifestyle of Nike. I'm thinking about the logo, I'm thinking about just do it thinking about sports and the great athletes. And so I'm, I'm looking for that performance in my own life when I'm going out for a run, when I'm playing a sport. And so it's still okay to focus on, okay, we have this patents and we have, you know, cool technology for our shirts. But you probably want to think about again, that that lifestyle and that feeling that people have when they buy your products. Uh , I was listening to , um, uh, a bit by Seth Godin, and his story is , well, Nike's one of the best brands in the world, not just because it's Nike, but because if Nike created other products, let's say a hotel, I can kind of picture what that hotel would be like, right? I can kind of think about , um, what the themes of the hotel would be, how many basketball courts it has, it probably should have a golf course. Um, you know, basketball courts , I, I, I get that image of sports and excitement when I think about that brand. Other brands, right? Marriott, for example, that one's harder to pinpoint, even though it's a gigantic brand. But I, I find it harder to think, well, if they made a shoe, what would that shoe look like? And so Marriott took an interesting strategy where they started acquiring different companies. And those brands are very defined, right? If you think about the W Hotel versus that St . Regis , it , it's very different. The colors are different, the music is different, the sounds when you're in there, the way that rooms look, and suddenly I get a feeling for a lifestyle. So a shoe by St . Regis, probably a really formal, traditional, very elegant shoe. A a shoe, but maybe the w cooler, more modern, colorful. And so again, that's, that's the power of focusing on the right thing, as opposed to thinking, well, I have this patent on quick drying technology and the perfect arc of the foot, and that's somehow gonna sell my products if, if I'll , I'll be a little bit long-winded on this one. But if, if we now take true patentable technology, right? Something like biotechnology, that's, that's , uh, an area where you wanna make sure you have these exclusive patents and these exclusive rights to sell. Because the amount of research that goes into building a right therapeutic is incredible, right? We're talking about billions of dollars. And so , um, you know, when Eli Lilly came up with Prozac, they wanna make sure they can corner that market for the longest possible time, and the government understands that. And so they give these patents. If I create a song and I'm a creative artist, you get that copyright. And so those are areas or industries really where it , it matters a lot, and those protections matter a lot. But when you take, for example, software as a service, yes, again, patentable technology starts mattering, but what I really care about is the ecosystems of what I'm building. So if I take Amazon Web Services, they, they're creating an ecosystem and a cloud, and that's how they became the top player, because people can upload their information, they know they have the right latencies, they have the right databases behind it, and so they're, they're creating something beyond just the patents of, of their technology, right? They're , they're creating something that's really hard to replicate. And once you're in that system, you probably don't wanna leave it, right? High barriers to, to, to leaving. Um, and that's just as important as the patents, right? I'm sure they have a ton of patents, but really it's not about the patents. Again, it's about that technology they created and that ecosystem of value for the user
Speaker 1:That I am speechless. I think that that was such a good way to kind of talk about some of that, you know, like how what Marriott speaker or what a Marriott sneaker would look like is very fascinating. Like as a brand, you know, do people understand what you embody, right? Because absolutely, if they created a hotel for Nike, we would all assume that we would all be working out a lot <laugh> , and it would be very active, you know, like every single thing would, would have that vibe. And as a brand, do you have , do, do people know that about you? I think that's a very interesting perspective to look at it. But again, if, if you really, now we're kind of coming back full circle in this middle cycle of saying, guess what's important. Again, the people, the knowhow, are they, are they enforcing that brand? Are , and you meet somebody out in the world and they're a representative of Nike, are, are they, you know, does that matter? And now who your people are, and this goodwill becomes even more important, right?
Speaker 2:Abs Absolutely. I mean, people are absolutely everything. Um, I I , I was talking to a friend recently and he mentioned that some of his salespeople, they have a base salary, then they have commissions, but they're capped on the commission. And to me, that's absolutely crazy. And this, this is a pretty major , um, MLS soccer team, and they still have that structure where they're not sharing some of that upside indefinitely. And , and to me, that's crazy, right? Um, I, I also , um, I I take a lot from , um, from Channing, who's, who's the creator of Objective and, and one of the founders, and he always said that, you know, the right people in the right places , um, and the no management management system where you are essentially getting people together that are accountable, that like what they're doing, that they're experts in their field, and that almost on their own, they can create something. And, and that's your job, again, as an entrepreneur, you put them together at the beginning, but then you have to create all these standard procedures for hiring all these standards, procedures for onboarding standard procedures on how to operate, because that's the only way you're going to scale. Um , in, in business school, I, I took this operations class and there's this really funny kind of subway example where we obsess about how long it takes to chop the tomatoes, and does somebody , uh, build the sandwich and also charge for you , uh, charge you at the end? Um, you know, do they work on different stations or do they separate into three different stations? And you have three people. I'm like, wow, this is the dumbest example ever. But , uh, I went to an ice cream shop the other day, and there were something like four or five people working there, and the line was crazy. And, and you've seen the lines at some of these ice cream places, but one person was making a milkshake and he took 15 minutes to make that milkshake, right? And in those 15 minutes, they, the other person served like four or five customers. And so, again, really simple example, but that tells you how important it is to think about these operating procedures and starting, standardizing the operating procedure, knowing where your bottlenecks are, understanding how to , uh, move people along a chain. And so if you're an operation, and so pretty much anything that, that has a service component, that know-how that operating procedure is extremely, extremely, IM important, right? And if you run through it, because one thing is putting out on paper and one thing , one thing is running it in real life, you'll see where those issues are, right? And so somebody needs to document that and let the person know, Hey, if there's a big line, you gotta cancel out milkshakes, right? Yes, they make $10 and the regular ice cream makes five. But in that same time, you're gonna serve five groups of people at a , you know, average $15 clip. That doesn't make sense, right? You're, you're essentially losing money that may lead to changes in your operations that may lead to changes in the way you hire people. How many people are at a station at any given time? Um, but, but that's another area where it's gonna be important when you're in early stage, it's gonna be important when you're in middle stage and extremely important when you're a mature company, because you've probably reached that arc of value, and now it's all about that operating performance. So you're right, this is, this is how we transition into investing in people, to your assets, back to people <laugh> .
Speaker 1:Well, and it's , it's fascinating because, you know, I do a lot of traveling and for sports, for family, for business, and every time we go somewhere, I'm like, I should be a secret shopper here. <laugh> . Like , I , I would tell 'em all of the things that like, are just not working well or, or, or could be better or more efficient and things like that. And I think that sometimes we get distracted by everything else. Like, for example, you know, people right now, they don't wanna work in an office, they wanna work from home. Like younger generations are expecting different things out of the workforce, and we still have old institutions that are not necessarily changing to that. You know? Do you think that just like capping out the commissions, like you're literally crippling your own workforce, <laugh> , you know, at at what point are we gonna start sharing more of the profits? Because from, you know, like you're a CFA, like shareholder value is of all the importance, now we're going to, is employee, is team value? Is, is their happiness more important than the shareholders?
Speaker 2:Or is it ever , uh, you're pretty on the spot? Yeah, you're pretty on the spot here. No , I'm sorry . Um , <laugh> shareholder value is extremely important. Let's not, let's not forget that, right? If you do the right things, share shareholder value is the result. It shouldn't be your goal. It's the result of doing the things correctly. And when, when I think about shareholder, I like to move it up a notch and say, stakeholder, right? Because your shareholder, sure , they're one piece of the puzzle, but so are your customers, so are your employees, so is your management team, you may have debt in the mix , and so there's a bank that cares about you, right? So it , it , it's no longer as easy as thinking shareholder value. And the bottom line is the ultimate thing. Like I said, again, it's the result of taking the right actions. But if the, if people care about the environment and that's not one of your core tenants, you're gonna suffer for it. If people care about the right press and you don't have the right press, and you're saying things that maybe you shouldn't be saying in a sensitive environment, you're gonna suffer for that, right? So all of these actions that you take result in shareholder value. And so, I , I still think it's probably the key tenant of any company to think about profitability, but Amazon is the best example of a company that sacrificed short-term profitability for the long-term benefit of the company, and ultimately the long-term benefit of their investors. And , and it's really funny to go back and, and watch those interviews where, where people are essentially making fun of Jeff Bezos, like, what are you doing? You , you continue to lose money. And , uh, is there an end insight to this? And now it's one of the absolute most valuable companies in the world because of this extremely long-term approach and extreme focus, not on only shareholders and investors, but their customers, their operations, and the people that work within Amazon.
Speaker 1:Well, and I mean, they identified a pain and they solved it, and they solved it for a ton of people, and they solved it when we went , you know, went into a pandemic and really needed stuff being delivered at that point. But I also think that, I like what you're saying is that if, if you put it into the beginning and the middle and the people that, that's gonna then exude out, right? If you're creating something out of passion and, and, and in getting your people involved in it, the result is they go out into the world being like, oh my gosh, Nike's amazing, or Marriotts or whoever's amazing, right? And they embody it. And then you have to say, okay, now what if we get all of those things right? Then can we just operate forever? Or do we have to start doing things different when maybe, you know, like if , if you're really successful and you take over the whole, the whole market, right? Like Amazon is the market <laugh>, like, who's gonna cook ? You know, like we're just trying to figure out how to be Amazon resellers or Amazon Supply, you know, like everybody's trying to get involved with them, but what are they going to do? Like, what do they need to do now? Like what if, you know , like, I don't know what their financials are doing, but for any company, you know, what if technologies change? What if the world changes? Like we're changing in three year cycles of this world, like, very quickly. So what are you seeing maybe that more mature companies can do if they are losing some market share, right?
Speaker 2:Yeah, absolutely. So, so the first thing, you're right, it's always thinking ahead, right? No, no matter what company you are, eventually you're gonna have to do a race , which is kind of like an exit. You're potentially gonna go through an an m and a event, which is also kind of like an exit, or you're gonna go through an IPO, which is the ultimate public exit, right? So always be thinking about that as you're creating value. Now, let's say you've gone through all of that right now, you're that public company, you're a mature company. Um, the motor end has a really funny lecture about companies needing to act their age. And, and I love, it's one of my favorite ones because he says, Hey, well, for an early stage company, it's okay that they act like a child or the aggressive growth companies, it's okay that they're a embracing teenager, but when you get into this mature company level, it's no longer, okay? Right? You need different CEOs, you need different executive, you need decent procedures, and you may have to completely change your strategy too and start acquiring other companies. Um, you may have a lot of cash stored, you may , uh, have investors that are pushing you to maybe grow beyond what you're able to grow on your own organically. And so m and a becomes the quick, quick way to gain additional value, gain additional revenue, and , uh, create value for your investors. Apologize on , on the cough . But , um, I, I tend to separate acquisitions into kind of three different tiers. The first one being add-ons, right? So if you're trying to expand, if you're trying to get , uh, new skills, if you're trying to get new people, maybe a new customer niche, those are easy add-ons to put, right? I'm a company that specializes in California and I wanna move to Arizona. I might just acquire another dentist practice if, let's say that's, that's what I do. And, and that's a quick way to add on a business that you can probably integrate, that you can put the accounting systems together that you can use the same HR for, and there's already synergies involved from that cost perspective. Sometimes you may able to even cross sell the, the businesses, right? Your customers that move from California to Arizona, now they can use the same dentist and they don't feel like they're leaving the system. Um, the second one is accelerators, okay? So now we're getting into something that's a little bit more interesting. Um, these are ways to get access to new technology , um, get a new brand under your portfolio, or maybe even pivot into a new market, right? So these are gonna be things that you maybe think about for a little bit longer before you acquire them, but they're great ways to enhance the value of your company by going into maybe an adjacent market, a side market, or buying up a technology that's may maybe getting , um, getting a lot of traction in the industry. And then lastly, there's what we call betts, right? So Betts are gonna be those big acquisitions or very early stage investments, which may take your company a completely different direction or future proof your business, right? So these are gonna be acquisitions that you're maybe not so sure of, but the world is maybe not so sure of either. But if you are a corporate venture fund, right? You probably wanna invest in the nascent technology that's happening in your industry so that you have kind of a right of first , uh, acquisition power and can integrate them back into your business. So they're gonna be harder. You don't want to be making betts on, on a company that's larger than yours, right? Which unfortunately it's happening a lot these days. It's not that you shouldn't do it, it's that it gets harder and harder to build that business case. And, and at the same time, sometimes that's just the only way to acquire the competing technology, right? Or, or a very synergistic technology. Sometimes it's, you know, you gotta bet the house <laugh> , and that's just the way it's,
Speaker 1:Well, a and I mean, quite frankly, all of these ways you could raise money, right? Or you can buy something, each of it, you're trying to utilize money, like you can go and get bank debt. I think it's just that people are averse to bank debt, right? It doesn't mean that it's not readily available and that somebody isn't willing to lend it to you. But I wanna talk a little bit about m and a right now, because I'll tell you what I'm seeing and I'm seeing, and then I wanna get kind of your perspective, but in m and a right now, especially probably in the lower middle market, okay, I am seeing successful companies of similar sizes, and they could still be like in that 25 to probably 30 million of revenue. I really think it's kind of in that space. And they, they wanna jump up to 50, and that's really is like a jump. You gotta, you gotta change some things to get to that point, and they're seeking to almost buy things that are similar, but very mutually beneficial, right? So it's not like I'm cap capturing the entire entity. I'm pulling these two in, and we have some synergies right here, but we're exponentially going to make it bigger. Do, and I see that these are deals being done by business owner to business owner, not necessarily, you know, superpower coming and buying the little guys. It's like these really good companies, like how can we grow this faster? And I think that leaves a lot of opportunity for business owners who are in that mindset of like, well, I've grown a great business for 35 years and I still have 10 more years left , right? Well, these might be your competitors locally that are also aging out of the market, right? These could be people that you've known in your groups and organizations, right? What are you seeing? Because I'm not seeing this big behemoth kind of, I'm seeing more like mergers and joint ventures and a lot of different opportunities available to business owners too.
Speaker 2:Yeah, you're, you're absolutely right. I mean, the, the opportunity to merge with a similar company of your size and create synergies that way is, is a great way to do it, right? At the same time, it's always difficult because different entrepreneurs have different perspectives on things. So the most important thing that I've seen in this space is to find someone that is like-minded in themselves and also in the way they treat people, right? What do I mean by that? So if you have , um, a business, let's say a staffing company that their core values , making sure that they place the right people in the right places, and that they don't compromise on the value they're providing to their clients, and you try to merge with someone that is really more interested in the short term gain in volume , um, and, and treats customers in a different way, that's not gonna be successful, right? I'm sure you can learn some things, things from that person, and they can learn from you, and maybe you meet in the middle, but the reality is that's gonna be a tough merger. Uh , not only because you guys are gonna butt heads, but because people below you are gonna butt heads, right? Culture is extremely important when you're putting people together and especially following a round of cuts, which tends to be common in a merger, right? So, so people are always gonna be sensitive to the first year of integration. So if you're going into that kind of merger of equals and you're seeing all these synergies, put them on paper, you know, work with your advisors to really sell out, what are the true synergies? What are the true cross sell opportunities? What are you gaining from that business that's beyond that one plus one? Um, if we , if we take the traditional bidding process for a firm, right? You're, you're likely gonna be overpaid, right? It's called winners curves , and obviously if you won, you paid the most for the company. So naturally, you've built in a premium for these companies, and you have to make sure you cover that premium and then some , um, you also have to make sure that you understand, how am I gonna share these synergies, right? Do they belong to me, the original company, or do they belong to the person that's coming in as my new partner? How are you gonna share these things? And as you're planning that, I'm, I'm a big proponent of roadmaps and blueprints and putting things on paper , um, these valuations really help because you can see, okay, this is what I'm worth now, this is what this company's worth now this is what they're worth together, this is what they're worth together. If I take this action, this is what they're worth together if I take this different action, right? And you can create these scenarios and these models , um, they don't have to be overly complex, but they have to be something where both parties agree to it, and they're both being mindful of where things can go wrong, too. Right there , there's a risk that comes with these things. So being overly optimistic is, is good, but you have to make sure that, you know, you're putting it on paper and cross cross checking yourself.
Speaker 1:Well, and, and I think that this goes towards at , at a certain point in the lifecycle of your business, you need to start having a consistent team, not a lawyer that you call when something goes wrong, right? You really need to start, like, I , I mean, I think you should start talking to a transactional attorney or a business attorney that has transaction experience, right? You know, start to understand that it's not the wild west, it's not something that's unattainable as a business owner. It really is a possibility of you buy , like, you're never too small to buy another company, right? It just depends on do you have the right team around you to help you understand the opportunities? So, and this isn't just attorneys or evaluators or accountants, right? Like, let's talk like even at, at a certain point in your business cycle, you should also be doing like once a year or once every six months a meeting of your, like I would say your preferred advisors, right? Bring your accountant, bring your lawyer, bring everybody together at your office and say, Hey, we have a big company to move and guide. And a lot of it's strategic planning, but specifically with the advisors that maybe don't get to talk as much, right? These advisors all come in and say, okay, where do you wanna be in one year, five years? What do we need to do legally? What do we need to do? Accounting? What do we need to do financially? What do we, all of these things, what do we wanna do at m and a? Right? There could be opportunities that are just sitting there with all of your advisors, clients that you don't even know about. I get clients that are like , uh, do you guys wanna meet? Like this might be a good fit? So, mm-hmm , <affirmative> , how do you start to build a team before you're even needing a team, right?
Speaker 2:So the, the key thing to do is find a quarterback, right? So that quarterback can be maybe your wealth manager , uh, maybe it is your attorney, maybe it is your CPA, it can be any of those people, as long as it's someone that you trust that has your best interest at heart, and then maybe you've worked with the longest, right? Uh , not necessarily, but again, something that kind of helps build that trust. Once you have that key person, they probably have teams that they like to work with, and they've been in the business of advising for way longer than you have, right? Uh , I recently tried to create a website for, for my wife, and it's so easy to do it now, but I'm sure if I hired a professional, I wouldn't have spent so many hours and it would've looked a million times better. The same thing with these professionals, right? Everybody has a specific niche, a specific industry, or a specific skill that they bring to the table. And the other advisors tend to know that , right? Sometimes even better than you, because I don't know how you're gonna find this, right ? You Google that , I guess. But once you have that key person, they can start building a team. And I like to think about them as alignment meetings. And it's painful because it's probably the most expensive hour of that year, the most expensive phone call you have that year. But if it can save you five hours from each of those advisors once you're taking an action, it was a hundred percent worth it, right? In the same way that we as a company have these alignment meetings and we spend one hour to align ourselves on goals and operational metrics, it's time saved in the future. So again, you're investing, but you're getting a return in the future if they're all in
Speaker 1:Agreement . Before you go any further than that, I wanna just say as business valuation experts, we see this happen all the time where there's a legal issue and there's an accounting issue and there's a financial issue, but all the people aren't in the , like, we, we can see all of them in the business valuation, right? But they're not connected. Like nobody knows that all of these exist . So if you get everybody on the call, something accounting says, might trigger legal to say, oh, wait, I didn't, oh, wait, let's protect this. You don't know what's gonna happen in this meeting. You're just to facilitate so that they can tell you, you know, what landmines to avoid, right? What kind of things to avoid?
Speaker 2:Absolutely . You , you , you wanna get people aligned. Um, I , I used to work for, for ENS and Young and, and something that sometimes happened was that, you know, teams working with the same client and working on the same project would only talk maybe at the beginning and maybe at the end kind of set , set the goals and hey, okay, fine, we're we'll bring it , um, together at the end. But something happened in the middle where we kind of went in slightly different directions. Obviously not nothing crazy, but you got to the end and couldn't really put it together in a very holistic working package. And if you had just added that extra hour, like I said, maybe every month, maybe every week, whatever the right cadence is, you would get a much better result. And that was the reality. As soon as I started doing that with teams and having the check-ins and, and the client off a little for these very expensive calls, you know, we, we turned way better product at the end, and the client was ultimately very, very happy, right? So those small costs mean nothing when, when you get the, the big problems taken care of.
Speaker 1:Well, and you know, we had a , a recent issue with a client that, you know, when you're moving through litigation, you move very quickly. And after we made some decisions in the litigation, they came back and they're like, you left me out. Like, what , what , what, what about this? Like, what about that? Like, I wanted to be part of it. And you can't ignore that if these team members, like your accountants, your lead , like all of these players are all in a different field, right? They could be playing a different sport <laugh> , right ? And, and they're, they know that sport really well, but you need to get all of them together so that they can use that knowledge for the betterment of your business. And because it, what will happen is you're like, oh, we made this decision with marketing and you go to legal and legal's, like you did what? Right? And now there's no recourse, right? As opposed to, and then they're like, why didn't you call me? Like that was a, that's a legal issue, right ? And you're like, I thought it was a marketing issue. Like you're, you'll get pushback from that person because they're there to provide advice, but you have to ask for the advice, right? You have to set the stage,
Speaker 2:Absolutely ask for the advice. And, and again, if that team knows each other outside of working with you, that's gonna be even better. Why? Because they're having dinner outside with other clients. They're catching up and saying, Hey, how's that going in that project? You know, they might be playing golf together. And so you, you wanna make sure those people know each other, they trust each other and they have your, your best interest at heart, but at the, at the end of the game, yeah, it's your business. So you wanna be involved and you wanna make sure that you're get the ball rolling on, on creating that team and, and getting these people together. Um , there , there's also, you said also something interesting, which was , uh, you probably don't want your divorce attorney handling your m and a <laugh> . And so yeah, maybe she'll charge you $20,000 instead of $50,000, but I would rather go with the $50,000 expert in the field than sometimes kind of going with the people. Um , you know, advisors know about a lot of things, right? I'm an expert in valuation, but I, you know, been around marketing enough . I have an MBA things that you learn along the way. Sure, I can give you a little bit of advice, but as soon as it starts going off my core strength, I'm also gonna bring someone else in, right? If it's a marketing issue, I can only guide so far, bring that person in. It's a legal issue. I don't even wanna venture into it. I'll give you what has happened before in the past and some things I've observed , but please, please, please hire an attorney and a tax attorney and an m and a attorney, whatever other worker comp attorney you need, because they're gonna be the , the true experts . So yeah, I like that. I like that, that idea of , um, you sometimes being your own quarterback and, and , and thinking about your business holistically and making sure that those people are chatting with each other
Speaker 1:Because these deals are getting done. Business owner to business owner, there's a lot of deals getting done in that manner, but I think that the business owner may get this false sense of security and thinking like, I know how to negotiate a deal. That's fine. That's a slice of it, a small slice of it. Then there's all of the other stuff, you know, even getting your accountant involved to understand what are you gonna get after the deal? Not they're gonna pay you $5 million. What are you going to get after you pay off the payables? What you pay off the debt and you pay off your other debt and then you do this, you know, like how, and then you pay taxes. Let's not forget right ? Taxes, right? You might be left with $2 million and be like, well, I don't want you to find that out at the end. All of these things can be done in a time fashion. And then you could say, okay, I know I need to make 10 million <laugh> to be happy. I can't go for a 5 million price. Now you're saying, how do I get to a $10 million value? And it's all of these things that we've kind of talked, if you haven't built some of it, you're gonna then go to sell. And people are gonna say, well, yeah , that's, this is a bunch of crap that has some rose spray on it, but it's not that good <laugh> . Um, but maybe you can tell us like any examples that you have or kind of what would somebody do next? You know, like if, let's say, I totally agree with what we've said today and I need to start talking about some of these things, I believe you'd need to talk to somebody who has done deals. Like, I don't care what stage or, or in your career if you haven't done any deals and seen them, the good and the bad, right? Had deals crash and deals be amazing, you, you don't know some of the things that can go wrong and you don't know how to prevent it, right? So talk to us a little bit about maybe even your company , um, what you do and how you help people. Um, but I think that people are at that part where they're like, I wanna grow, but is it the internet or is it m and a? Right?
Speaker 2:Absolutely. No, please , please, please talk to advisors. Um, most people, honestly, if they're good advisors, they might even talk to you for free for 30 minutes. And that can just spark ideas in your head. Um, if, if you don't have the cash, you don't have the cash and , and it's not good to put yourself in tremendous debt to try to get a deal done unless you see the value afterwards. But like I said, a lot of these advisors can, can help you even think through that, right? Maybe debt is the answer. You don't have to be scared of it. This is why. And they can guide you through the process. Hey, I have a friend at a bank. They offer 1% lower rates than everybody else in the industry. This is why they do it. They specialize in growth businesses, they specialize in your industry. They have a better understanding and a better portfolio so they can diversify risk, right? Tho those people , um, can guide you in different ways. And again, you , you've gotta understand that, that sometimes that 30 minute call is, is worth more than anything you can find on the internet. So at objective, we, we focus on two things. One, helping people exit. Um, those are gonna be middle market business owners, entrepreneurs, family-based companies that want to exit between 20 and a hundred million dollars. We're very competitive in the space . Our rates are great. Um, the people that we put in every deal are specialized specialists in that industry and have been doing this for a while . A lot of them come from big banks and big private equity firms, so they know what they're dealing with on the other side and, and they can be tremendous help as you think about how to get your accounting cleaner and they have the right person for that. How to clean up your legal before somebody goes digging up the skeletons in the closet, how to think about your ebit done cleaning up that those earnings. Um, they can set up those themes . They can help you coordinate, run the sales process, build beautiful marketing materials. They can really help you at an exit. Um, and then the second piece of our business focuses on valuation. So that's setting those stakes in the ground, making sure you're having a regular cadence of understanding your value and also taking care of your compliance needs, doing financial reporting, doing tax reporting , um, helping you make better strategic decisions before a raise or before a transaction. So we help people with those valuations, with those models and, and really help them make better decisions. That's always what we're intending to do, right? Even those compliance exercise, I'm having that extra conversation, putting in that extra time to make sure that you're understanding what, what we're showcasing through this valuation. And, you know, there's all kinds of products. If you're a board, you can come to us for a fairness opinion before a transaction. If you're an entrepreneur, you can come to us for a foreign na . And if you're a public company or even a private company that needs gap reporting, you can come to us for purchase price allocations and goodwill impairment. If you're a fund, you can do your investment valuations through us. And, and those are all, again, compliance exercises that if we just spend a little bit more time on and really guide you in your decision making and can help you uncover things that maybe you weren't, you weren't thinking about. So that's what we do. We're a small firm. Um, it started about 10 years ago with two partners, and now we're a 20 person firm doing great work in Southern California, Denver, and Dallas. Uh, and I'm part of the, the valuation team and I'm really happy to be there. So hopefully, hopefully you guys will, will contact us.
Speaker 1:Yeah, well I think this was a really amazing presentation. I also think that, you know, in, in general, if you're, if you're trying to plan ahead or you're looking at any type of m and a or merger, part of the issue is gonna be letting go of control and, and or sharing in some capacity. So the more you will also need to hit metrics and be more clear in communication and have more things written down between the partners. So all of that usually is not as easy to do, but you need somebody doing it. So that's another reason to kind of get a team or somebody that understands, you know, a lot of our deals we're putting together all the due diligence at the beginning, right? So we know what they're gonna ask for. Why don't we have it ready? You know, like these are simple things that I think can be done, but if you're working with a professional, you'll, you'll get the tricks. And if you're not, you know, I also think going to your current advisors is a good place. 'cause you don't wanna leave them out either. Like it's good to go to your accountant and say, Hey, do you know how to account for a transaction if it's an asset sale or a stock sale? And if at that conversation they don't know what you're talking about, <laugh> , then you can ask them, Hey, I wanna work with you still with my taxes, but I really need at a transaction accountant, right? Could you refer me to one? So you're keeping your main people, but you might need to find somebody that could be an add-on when it's when you're ready, right?
Speaker 2:A a hundred percent agree with you. And letting go is the first step to scaling. And it's the hardest <laugh> , but you gotta do it. Um, like we talked about in the beginning, sometimes you gotta let go a little bit of that equity, you've gotta let go a little bit of that ego. You gotta let go a little bit of that control . And, and, and you'll be thankful you did because there's great people out there and the people closest to you are probably some of the best people you have because they know you, they know your business. So start there and then use them to, to, to go further and find the right expertise.
Speaker 1:Yeah. No, I, I think that that is , uh, excellent. And I will tell you, 'cause probably no one's still paying attention to the podcast at this point, <laugh> , but um, interestingly enough, one of the things that you talked about , uh, we created a company with five people and it's the five people that are the four people that really make my world happen. And we all shared equity.
Speaker 2:Oh, fantastic. I well I'm glad to hear that. We'll , you the right choices. Yeah, we'll
Speaker 1:I know, we'll see. And I think that it has been amazing 'cause we all are like 8,000 more times motivated, right? Because it's sort of like equal joy of what happens. Um, and I think you have to step back from equal participation, right? You, you go back and let everybody be in their superpower and then it all works. So it , it's an interesting concept, but maybe we'll talk more about it soon, right?
Speaker 2:Absolutely. No, great , great insight, right? Pay people according to their strength and, and sometimes equality is what drives everyone. And sometimes it's equity, right ? So choose what what works best for your firm and as long as people are motivated, you'll great things.
Speaker 1:Yes . Amazing. Well, thank you so much Jordy . If , uh, people wanna reach out to you, we've given them the information and we'll probably have you back on here to talk about some more things. So we appreciate the information and we'll talk to you soon.
Speaker 2:Thank you so , so , so much Honored to be here and thank you for this great conversation .