WEBVTT NOTE This file was generated by Descript 00:00:00.870 --> 00:00:06.600 Welcome to Resilience Talk hosted by Paul Spencer of Second Nature Solutions. 00:00:07.020 --> 00:00:07.860 Let's dive in. 00:00:08.845 --> 00:00:12.685 Brandon Giella: Hello and welcome back to the Resilience Talk podcast I 00:00:12.685 --> 00:00:14.635 have with me as always Paul Spencer. 00:00:14.635 --> 00:00:19.795 And we are introducing a new format for the show, which is much shorter, 00:00:19.795 --> 00:00:21.625 simpler episodes, more frequently. 00:00:22.810 --> 00:00:28.750 So stay tuned for more newsletters, more, uh, episode listens that you'll find on 00:00:28.750 --> 00:00:33.460 YouTube and other podcast platforms coming out on a more regular basis more quickly. 00:00:33.790 --> 00:00:38.470 So please, as always, go to Second Nature Solutions and you'll find 00:00:38.470 --> 00:00:41.920 the newsletter signup there and get the latest, uh, notifications 00:00:41.920 --> 00:00:43.150 when we release a new episode. 00:00:43.990 --> 00:00:49.450 And today's episode, we are starting a new series on ownership. 00:00:49.870 --> 00:00:54.100 So as a business owner, the things that you need to be thinking 00:00:54.100 --> 00:00:57.910 through to get the most value out of your business in the ways that. 00:00:58.795 --> 00:01:01.405 You can think through how to structure your business. 00:01:01.645 --> 00:01:05.275 Think about the financial metrics, think about your, uh, leadership 00:01:05.275 --> 00:01:08.425 components or the way that you structure the organization, all of 00:01:08.425 --> 00:01:10.255 which drive value to the business. 00:01:10.585 --> 00:01:17.035 So first up, Paul, tell us about the importance of the financial, uh, aspects 00:01:17.035 --> 00:01:18.985 of the business as it relates to value. 00:01:19.765 --> 00:01:20.395 Paul Spencer: Uh, yeah. 00:01:20.425 --> 00:01:24.145 'cause as an owner, well I think it's, it's important to start. 00:01:24.745 --> 00:01:29.935 Why we start a business, and normally it's because we have maybe a passion, a 00:01:29.935 --> 00:01:34.885 deep passion, and, and we just, because we don't know any, any better, right? 00:01:34.885 --> 00:01:39.715 We start a business, uh, maybe we have a deep expertise and we're really, 00:01:39.715 --> 00:01:41.335 really, really good at something. 00:01:41.335 --> 00:01:44.635 And so it just becomes natural because you get frustrated. 00:01:45.010 --> 00:01:47.140 Because nobody else can do it the way I do. 00:01:47.140 --> 00:01:50.170 And so you jump into it and now you have a business. 00:01:50.260 --> 00:01:56.860 Um, and then sometimes it's just natural for you to just do something on your 00:01:56.860 --> 00:02:03.220 own because you don't like having a boss or, um, you just wanna do it 00:02:03.220 --> 00:02:07.420 yourself and you feel like not really the expert in it, but you feel like, 00:02:07.810 --> 00:02:09.370 I do feel like I could do it better. 00:02:10.300 --> 00:02:11.645 And so that's. 00:02:12.310 --> 00:02:14.920 Typically why and how we start businesses. 00:02:14.920 --> 00:02:19.180 The last one would be, I wanna make money, It's kind of the 00:02:19.180 --> 00:02:21.070 Silicon Valley startup mode. 00:02:22.510 --> 00:02:24.280 and so we go through that. 00:02:24.280 --> 00:02:29.200 Whatever, whatever avenue you take, they all, they all end at, 00:02:29.500 --> 00:02:31.420 I need a customer, I need revenue. 00:02:32.050 --> 00:02:34.390 Um, and then I need to be able to deliver something. 00:02:34.550 --> 00:02:34.770 Brandon Giella: Hmm. 00:02:34.810 --> 00:02:36.310 Paul Spencer: And that's where we end up being. 00:02:37.105 --> 00:02:38.185 Pretty good at, right? 00:02:38.185 --> 00:02:41.155 If we have a successful business, if you can make it through there, 00:02:42.205 --> 00:02:44.815 then you have revenue, you have customers and you know how to do it. 00:02:45.205 --> 00:02:50.605 Um, the part that over time that we lack is really the understanding that. 00:02:51.400 --> 00:02:52.540 business is an asset. 00:02:52.750 --> 00:02:57.340 It's not any different than if, um, I have a financial planner or if 00:02:57.340 --> 00:03:02.710 I'm my own investor and I buy stocks or mutual funds in my 401k or my 00:03:02.710 --> 00:03:04.480 retirement accounts are just for fun. 00:03:04.930 --> 00:03:08.830 You, you, you analyze all of that by buying an asset. 00:03:09.160 --> 00:03:11.140 You're buying low selling high, right? 00:03:11.140 --> 00:03:12.280 That's, that's your aim. 00:03:14.200 --> 00:03:15.220 you have a nice filter. 00:03:15.220 --> 00:03:16.900 We all have good filters on. 00:03:17.215 --> 00:03:21.625 What are assets and what decisions are we intentionally making in 00:03:21.625 --> 00:03:23.185 order to make good decisions? 00:03:23.665 --> 00:03:28.165 And, but we lack that a lot of times in our business because we just 00:03:28.165 --> 00:03:34.045 started it, we got going, and now our focus is delivery and customers. 00:03:34.255 --> 00:03:34.585 Right? 00:03:35.605 --> 00:03:40.855 so the importance of this topic when you're an owner is to understand the 00:03:40.855 --> 00:03:44.335 financial performance of your business. 00:03:44.335 --> 00:03:45.985 And there are, there are some. 00:03:46.645 --> 00:03:51.355 Indicators that when you say you're gonna sell your business, let's say 00:03:51.355 --> 00:03:55.435 we're gonna buy low, I start the business, I grow it, I have employees. 00:03:55.435 --> 00:03:56.665 I'm good, I'm good, I'm good. 00:03:56.785 --> 00:03:58.495 And now I wanna sell high. 00:03:58.855 --> 00:04:02.395 Well, we're gonna have different valuations. 00:04:02.665 --> 00:04:06.025 Just like a, an appraiser would come into your own home if you're gonna 00:04:06.025 --> 00:04:07.675 sell, and they're, that's a third party. 00:04:07.675 --> 00:04:10.105 They're gonna look and see, did you remodel? 00:04:10.345 --> 00:04:10.645 Right. 00:04:10.675 --> 00:04:11.905 Um, what are the thing, how's the. 00:04:12.330 --> 00:04:13.260 Upkeep of it. 00:04:13.560 --> 00:04:15.870 What are some things you've done recently to it? 00:04:15.870 --> 00:04:16.980 Is it have a new roof? 00:04:17.010 --> 00:04:18.030 Those kinds of things. 00:04:18.150 --> 00:04:21.660 And that'll tell you the value of your home. 00:04:21.990 --> 00:04:23.520 Same thing happens on a business. 00:04:23.520 --> 00:04:26.910 If you're gonna sell your business, a third party will come in and 00:04:26.910 --> 00:04:29.880 they will evaluate the business. 00:04:30.150 --> 00:04:30.480 Right? 00:04:30.510 --> 00:04:33.420 And typically you have a multiplier. 00:04:33.420 --> 00:04:37.590 So, uh, more growth businesses have a, have a 10 times multiple. 00:04:38.485 --> 00:04:42.265 Um, some of their smaller, like maybe a plumbing business, right? 00:04:42.265 --> 00:04:44.545 It's more like one in 1.2, 00:04:44.545 --> 00:04:45.535 1.5. 00:04:45.535 --> 00:04:48.535 Maybe if you get it two times, that would be awesome. 00:04:49.825 --> 00:04:54.505 but anyway, the buyer and the appraiser in that, in that, uh, 00:04:54.625 --> 00:04:59.605 situation understands how to evaluate your business because it's an asset. 00:04:59.755 --> 00:05:00.325 And so. 00:05:01.150 --> 00:05:07.150 The important thing for us here today is that as an owner from the very beginning, 00:05:07.210 --> 00:05:10.180 think of your business as an asset. 00:05:10.810 --> 00:05:14.050 And so the first one is financial performance. 00:05:14.050 --> 00:05:20.200 There's also growth potential dependencies, recurring revenue, right 00:05:20.200 --> 00:05:24.370 to win, which means how competitive are you and how differentiated are 00:05:24.370 --> 00:05:25.990 you in your business, in your market? 00:05:27.160 --> 00:05:30.310 Corporate structure, key management, leadership, and 00:05:30.310 --> 00:05:31.630 then ownership involvement. 00:05:31.870 --> 00:05:35.500 That's, those are eight kind of general things that they typically look at. 00:05:35.860 --> 00:05:41.680 The first one is financial performance, and a lot of times we don't even look 00:05:42.370 --> 00:05:45.160 at our financials, and I know this, uh. 00:05:45.535 --> 00:05:48.685 Not because me, I mean, Brandon, I am good with my financial 00:05:48.985 --> 00:05:50.065 Brandon Giella: Of course you are Paul. 00:05:50.065 --> 00:05:50.725 I have no doubt. 00:05:50.755 --> 00:05:52.645 Paul Spencer: l and all these things, right? 00:05:52.645 --> 00:05:54.775 So I'm talking about other people, not me. 00:05:55.015 --> 00:05:55.765 Brandon Giella: Of course, of course. 00:05:56.335 --> 00:06:00.685 Paul Spencer: so, uh, but I know working with all the family businesses, um, 00:06:00.745 --> 00:06:04.405 that the accounting side of things are. 00:06:04.825 --> 00:06:07.915 Uh, they're way over here and you really don't care about them. 00:06:07.915 --> 00:06:08.515 Honestly. 00:06:08.815 --> 00:06:13.345 You much rather focus on, uh, the sales side, the delivery of 00:06:13.345 --> 00:06:16.675 things, uh, making happy customers. 00:06:16.675 --> 00:06:17.035 Right. 00:06:17.485 --> 00:06:21.505 Um, and, but it's really important that you, and this 00:06:21.505 --> 00:06:22.825 is the, this is the key phrase. 00:06:22.825 --> 00:06:23.605 I'm gonna read this. 00:06:23.905 --> 00:06:24.870 What is the history? 00:06:25.540 --> 00:06:31.990 Of producing revenue and profit timely and accurate financial record keeping. 00:06:32.170 --> 00:06:37.360 That's one of the primary questions an evaluator is going to ask and 00:06:37.360 --> 00:06:39.940 evaluate for the value of your business. 00:06:40.240 --> 00:06:45.070 Because if I'm a buyer of your business, even, let's say it a 00:06:45.070 --> 00:06:48.550 different way, even if you are not. 00:06:49.780 --> 00:06:53.440 on selling your business and you're gonna keep it forever, uh, 00:06:53.470 --> 00:06:55.510 you still want to build an asset. 00:06:55.570 --> 00:06:57.700 You still have to have something valuable. 00:06:57.790 --> 00:07:01.360 You don't wanna be running it for 20, 30 years and then 00:07:01.360 --> 00:07:02.650 come at the end and just say. 00:07:03.490 --> 00:07:04.510 It just floats away. 00:07:04.510 --> 00:07:05.140 It goes away. 00:07:05.140 --> 00:07:05.740 I don't think so. 00:07:05.740 --> 00:07:10.210 You wouldn't do that to your home, do that to the other assets in your life, right? 00:07:10.390 --> 00:07:12.880 So you spend a lot of time investing into this. 00:07:13.000 --> 00:07:15.640 You wanna have it be valuable, right? 00:07:15.640 --> 00:07:19.420 For your, for your kids, for friends, you could pass it on, right? 00:07:19.690 --> 00:07:22.210 Nonprofit, anything like that can happen. 00:07:22.600 --> 00:07:26.500 So anyway, that's why, um, it's important to be thinking about 00:07:26.500 --> 00:07:30.910 this and, when we think about. 00:07:31.660 --> 00:07:34.300 Timely and accurate financial record keeping. 00:07:34.750 --> 00:07:37.990 Um, one of the best practices with this is to have a financial 00:07:37.990 --> 00:07:41.440 review month your p and l. 00:07:42.430 --> 00:07:46.720 it could be with your account, account or your bookkeeper, 00:07:46.900 --> 00:07:48.490 or maybe just your partners. 00:07:49.420 --> 00:07:54.460 and if you're, if you solo, own your business, uh, maybe an executive team. 00:07:55.120 --> 00:07:58.810 Um, but there are lots of businesses that I work with. 00:07:59.605 --> 00:08:00.985 know who you are, right? 00:08:01.195 --> 00:08:05.725 Where it's October, and you don't even have your financials for August. 00:08:06.285 --> 00:08:06.405 Brandon Giella: Hmm. 00:08:06.505 --> 00:08:10.045 Paul Spencer: of you may not even have your, your, financials for 00:08:10.045 --> 00:08:12.535 July yet, and so that's not timely. 00:08:12.805 --> 00:08:16.525 They may be accurate, but they're not timely, and so the buyer 00:08:16.525 --> 00:08:22.315 again, is going to be asking you a question what, what is your revenue? 00:08:22.855 --> 00:08:23.365 What's your. 00:08:23.740 --> 00:08:25.690 Profit history look like. 00:08:26.080 --> 00:08:29.680 Um, you may be able to say, oh, it's good, it's great, but prove it to me. 00:08:29.920 --> 00:08:35.170 Like, give me your last two years of financials and, uh, how accurate 00:08:35.170 --> 00:08:36.730 are they and how timely are they? 00:08:37.060 --> 00:08:40.690 And if you can't give me this month's financials, it's already, 00:08:40.720 --> 00:08:43.645 uh, uh, I'm already gonna reduce the value of your business. 00:08:45.070 --> 00:08:47.050 Because why would I incur the risk? 00:08:47.050 --> 00:08:50.980 I mean, on just on face value, on a word that you give me when I 00:08:50.980 --> 00:08:55.060 don't even know what the, what the true, uh, performance, financial 00:08:55.060 --> 00:08:56.680 performance of your business might be. 00:08:56.845 --> 00:08:57.175 Brandon Giella: Hmm. 00:08:57.835 --> 00:08:59.665 So it sounds like there's a couple of things going on here. 00:08:59.665 --> 00:09:04.735 One is you have the, uh, accounting side of the house where you have accurate 00:09:04.735 --> 00:09:06.985 bookkeeping, and then you've got the tax. 00:09:07.345 --> 00:09:08.905 Accounting that goes along with that. 00:09:08.905 --> 00:09:11.305 Make sure you're tax efficient and all of that. 00:09:11.665 --> 00:09:15.205 But then if I'm understanding, there's also like financial review, 00:09:15.205 --> 00:09:18.685 which is like unit economics, forecasting, things like that. 00:09:18.685 --> 00:09:23.365 Like do you give any other kind of, um, caveats to how you would 00:09:23.395 --> 00:09:25.135 approach thinking about your finances? 00:09:25.495 --> 00:09:28.225 Paul Spencer: Um, well, yeah, there's one other thing, which is, um, like 00:09:28.225 --> 00:09:31.795 a proforma type, growth strategy. 00:09:32.125 --> 00:09:32.515 Brandon Giella: Hmm. 00:09:32.575 --> 00:09:37.045 Paul Spencer: forecast, um, into the next two years based on. 00:09:37.900 --> 00:09:38.470 Something. 00:09:38.770 --> 00:09:39.070 Right? 00:09:39.275 --> 00:09:39.355 Brandon Giella: Hmm. 00:09:39.400 --> 00:09:42.640 Paul Spencer: Uh, you may say, uh, our industry is shifting, 00:09:43.450 --> 00:09:45.460 uh, for the worse we think 00:09:45.625 --> 00:09:45.705 Brandon Giella: Hmm. 00:09:46.125 --> 00:09:46.545 Mm-hmm. 00:09:46.990 --> 00:09:49.720 Paul Spencer: so we wanna build a proforma of 00:09:49.885 --> 00:09:49.915 Brandon Giella: Okay. 00:09:50.080 --> 00:09:54.010 Paul Spencer: the next 24 months to see what effect that's gonna have based 00:09:54.010 --> 00:09:56.800 on our theory that we're gonna lose. 00:09:57.175 --> 00:10:00.805 This type of customer, this type of business or this type of 00:10:00.805 --> 00:10:05.725 industry is going to, uh, reduce its profitability by X amount 00:10:06.055 --> 00:10:06.355 Brandon Giella: Hmm. 00:10:06.415 --> 00:10:08.095 Paul Spencer: that mean to our financials? 00:10:08.185 --> 00:10:11.410 And then that gives you an an understanding of what to do. 00:10:12.470 --> 00:10:13.340 And how to pivot. 00:10:13.730 --> 00:10:15.890 Um, and it could also be a growth strategy, right? 00:10:15.890 --> 00:10:20.420 Instead of minus it's a plus and saying, Hey, this, we have lots of 00:10:20.420 --> 00:10:22.160 opportunity here and here and here. 00:10:22.520 --> 00:10:27.530 And, um, if we could actually gain this type of revenue and this profit margin, 00:10:28.460 --> 00:10:30.050 would that look to our financials? 00:10:30.050 --> 00:10:35.480 And how do we grow with our structure and overhead in order to, to maintain that? 00:10:35.480 --> 00:10:37.640 And what that, what would that be a pro forma look like? 00:10:38.170 --> 00:10:39.705 Brandon Giella: Would you agree that Of course, that's helpful. 00:10:40.030 --> 00:10:42.280 On the operational side while you're running the business, but the in, 00:10:42.430 --> 00:10:46.690 in the event of a sale, a buyer, uh, would like to know that information. 00:10:46.690 --> 00:10:49.480 They're gonna be doing their own proformas and you can actually have 00:10:49.480 --> 00:10:53.140 negotiating leverage if you can understand growth mechanics better 00:10:53.140 --> 00:10:54.970 than they can and make your argument. 00:10:55.360 --> 00:10:56.140 Paul Spencer: yes, that's right. 00:10:56.140 --> 00:10:56.410 Yeah. 00:10:56.410 --> 00:11:02.410 And it's not, it's, it's not always, trying to prove it to them. 00:11:02.440 --> 00:11:03.880 That's one aspect of it. 00:11:04.180 --> 00:11:10.540 But when you, um, are organized this process is mature. 00:11:10.930 --> 00:11:15.940 Meaning you, going back to that, that phrase, uh, you have timely and 00:11:15.940 --> 00:11:17.920 accurate financial record keeping. 00:11:18.070 --> 00:11:19.930 So that means you have a process 00:11:20.650 --> 00:11:20.950 Brandon Giella: Hmm. 00:11:21.580 --> 00:11:21.850 Paul Spencer: right? 00:11:21.850 --> 00:11:27.640 And it's disciplined and it's mature, meaning that, uh, it's 00:11:27.640 --> 00:11:33.220 well-formed and so I don't have to prove it to you necessarily. 00:11:33.565 --> 00:11:38.695 Because I have all the evidence behind me, I've been able to show 00:11:38.695 --> 00:11:45.325 that I've been able to do accurate for myself and my own business by 00:11:45.595 --> 00:11:47.185 these three things that we did. 00:11:47.365 --> 00:11:49.285 And I've got the financials to show that. 00:11:49.675 --> 00:11:51.865 And that is, that's a multiplier. 00:11:53.455 --> 00:11:55.350 plus, if 00:11:55.555 --> 00:11:55.945 Brandon Giella: I agreed. 00:11:56.035 --> 00:11:58.525 Paul Spencer: to buy my business, and again, when I'm building an 00:11:58.525 --> 00:11:59.995 asset, that's what I'm looking for. 00:11:59.995 --> 00:12:01.255 I'm wanting to create value. 00:12:01.960 --> 00:12:07.810 Uh, value for myself, obviously as an owner for my employees, of course, um, 00:12:08.080 --> 00:12:15.700 but also for, um, just, just again, if I'm not gonna sell the company, um, it's 00:12:15.700 --> 00:12:17.590 still important to maintain my home. 00:12:19.210 --> 00:12:24.580 To put on the new roof, to redo the bathrooms, right, to put 00:12:24.580 --> 00:12:26.230 on a deck out the backyard. 00:12:26.230 --> 00:12:28.180 And those are all the things that we do anyway. 00:12:28.600 --> 00:12:30.820 Um, and this is the same thing, right? 00:12:30.820 --> 00:12:32.530 And we're just looking at it one lens. 00:12:32.860 --> 00:12:34.990 Financial performance is the same thing. 00:12:35.350 --> 00:12:40.510 And if you're good at this and not so hot at the other 00:12:40.870 --> 00:12:43.480 seven or eight, uh, valuations. 00:12:44.260 --> 00:12:45.460 This comes a long way 00:12:45.585 --> 00:12:45.805 Brandon Giella: Yep. 00:12:45.820 --> 00:12:49.660 Paul Spencer: prove your financial prowess and because essentially 00:12:49.660 --> 00:12:51.520 this is the value of your business. 00:12:51.790 --> 00:12:52.030 Brandon Giella: Yep. 00:12:52.900 --> 00:12:54.280 It is the most important one. 00:12:54.280 --> 00:12:56.380 If you could say, there's a lot of things that go into valuation 00:12:56.410 --> 00:12:59.530 evaluating a business, but this is the one you gotta get right. 00:13:00.045 --> 00:13:00.335 Paul Spencer: Yeah, 00:13:00.850 --> 00:13:02.500 Brandon Giella: So, okay, this is great. 00:13:02.560 --> 00:13:07.360 Uh, we have many more evaluators to explore in the upcoming episode, so 00:13:07.360 --> 00:13:11.140 stay tuned for the next few weeks and we will see you next time. 00:13:11.140 --> 00:13:11.585 Thanks, Paul. 00:13:11.835 --> 00:13:12.125 Paul Spencer: yeah. 00:13:12.125 --> 00:13:12.365 Thank you.