Welcome to Resilience Talk hosted by Paul Spencer of Second Nature Solutions.
Let's dive in.
Brandon Giella: Hello and welcome back to the Resilience Talk podcast I
have with me as always Paul Spencer.
And we are introducing a new format for the show, which is much shorter,
simpler episodes, more frequently.
So stay tuned for more newsletters, more, uh, episode listens that you'll find on
YouTube and other podcast platforms coming out on a more regular basis more quickly.
So please, as always, go to Second Nature Solutions and you'll find
the newsletter signup there and get the latest, uh, notifications
when we release a new episode.
And today's episode, we are starting a new series on ownership.
So as a business owner, the things that you need to be thinking
through to get the most value out of your business in the ways that.
You can think through how to structure your business.
Think about the financial metrics, think about your, uh, leadership
components or the way that you structure the organization, all of
which drive value to the business.
So first up, Paul, tell us about the importance of the financial, uh, aspects
of the business as it relates to value.
Paul Spencer: Uh, yeah.
'cause as an owner, well I think it's, it's important to start.
Why we start a business, and normally it's because we have maybe a passion, a
deep passion, and, and we just, because we don't know any, any better, right?
We start a business, uh, maybe we have a deep expertise and we're really,
really, really good at something.
And so it just becomes natural because you get frustrated.
Because nobody else can do it the way I do.
And so you jump into it and now you have a business.
Um, and then sometimes it's just natural for you to just do something on your
own because you don't like having a boss or, um, you just wanna do it
yourself and you feel like not really the expert in it, but you feel like,
I do feel like I could do it better.
And so that's.
Typically why and how we start businesses.
The last one would be, I wanna make money, It's kind of the
Silicon Valley startup mode.
and so we go through that.
Whatever, whatever avenue you take, they all, they all end at,
I need a customer, I need revenue.
Um, and then I need to be able to deliver something.
Brandon Giella: Hmm.
Paul Spencer: And that's where we end up being.
Pretty good at, right?
If we have a successful business, if you can make it through there,
then you have revenue, you have customers and you know how to do it.
Um, the part that over time that we lack is really the understanding that.
business is an asset.
It's not any different than if, um, I have a financial planner or if
I'm my own investor and I buy stocks or mutual funds in my 401k or my
retirement accounts are just for fun.
You, you, you analyze all of that by buying an asset.
You're buying low selling high, right?
That's, that's your aim.
you have a nice filter.
We all have good filters on.
What are assets and what decisions are we intentionally making in
order to make good decisions?
And, but we lack that a lot of times in our business because we just
started it, we got going, and now our focus is delivery and customers.
Right?
so the importance of this topic when you're an owner is to understand the
financial performance of your business.
And there are, there are some.
Indicators that when you say you're gonna sell your business, let's say
we're gonna buy low, I start the business, I grow it, I have employees.
I'm good, I'm good, I'm good.
And now I wanna sell high.
Well, we're gonna have different valuations.
Just like a, an appraiser would come into your own home if you're gonna
sell, and they're, that's a third party.
They're gonna look and see, did you remodel?
Right.
Um, what are the thing, how's the.
Upkeep of it.
What are some things you've done recently to it?
Is it have a new roof?
Those kinds of things.
And that'll tell you the value of your home.
Same thing happens on a business.
If you're gonna sell your business, a third party will come in and
they will evaluate the business.
Right?
And typically you have a multiplier.
So, uh, more growth businesses have a, have a 10 times multiple.
Um, some of their smaller, like maybe a plumbing business, right?
It's more like one in 1.2,
1.5.
Maybe if you get it two times, that would be awesome.
but anyway, the buyer and the appraiser in that, in that, uh,
situation understands how to evaluate your business because it's an asset.
And so.
The important thing for us here today is that as an owner from the very beginning,
think of your business as an asset.
And so the first one is financial performance.
There's also growth potential dependencies, recurring revenue, right
to win, which means how competitive are you and how differentiated are
you in your business, in your market?
Corporate structure, key management, leadership, and
then ownership involvement.
That's, those are eight kind of general things that they typically look at.
The first one is financial performance, and a lot of times we don't even look
at our financials, and I know this, uh.
Not because me, I mean, Brandon, I am good with my financial
Brandon Giella: Of course you are Paul.
I have no doubt.
Paul Spencer: l and all these things, right?
So I'm talking about other people, not me.
Brandon Giella: Of course, of course.
Paul Spencer: so, uh, but I know working with all the family businesses, um,
that the accounting side of things are.
Uh, they're way over here and you really don't care about them.
Honestly.
You much rather focus on, uh, the sales side, the delivery of
things, uh, making happy customers.
Right.
Um, and, but it's really important that you, and this
is the, this is the key phrase.
I'm gonna read this.
What is the history?
Of producing revenue and profit timely and accurate financial record keeping.
That's one of the primary questions an evaluator is going to ask and
evaluate for the value of your business.
Because if I'm a buyer of your business, even, let's say it a
different way, even if you are not.
on selling your business and you're gonna keep it forever, uh,
you still want to build an asset.
You still have to have something valuable.
You don't wanna be running it for 20, 30 years and then
come at the end and just say.
It just floats away.
It goes away.
I don't think so.
You wouldn't do that to your home, do that to the other assets in your life, right?
So you spend a lot of time investing into this.
You wanna have it be valuable, right?
For your, for your kids, for friends, you could pass it on, right?
Nonprofit, anything like that can happen.
So anyway, that's why, um, it's important to be thinking about
this and, when we think about.
Timely and accurate financial record keeping.
Um, one of the best practices with this is to have a financial
review month your p and l.
it could be with your account, account or your bookkeeper,
or maybe just your partners.
and if you're, if you solo, own your business, uh, maybe an executive team.
Um, but there are lots of businesses that I work with.
know who you are, right?
Where it's October, and you don't even have your financials for August.
Brandon Giella: Hmm.
Paul Spencer: of you may not even have your, your, financials for
July yet, and so that's not timely.
They may be accurate, but they're not timely, and so the buyer
again, is going to be asking you a question what, what is your revenue?
What's your.
Profit history look like.
Um, you may be able to say, oh, it's good, it's great, but prove it to me.
Like, give me your last two years of financials and, uh, how accurate
are they and how timely are they?
And if you can't give me this month's financials, it's already,
uh, uh, I'm already gonna reduce the value of your business.
Because why would I incur the risk?
I mean, on just on face value, on a word that you give me when I
don't even know what the, what the true, uh, performance, financial
performance of your business might be.
Brandon Giella: Hmm.
So it sounds like there's a couple of things going on here.
One is you have the, uh, accounting side of the house where you have accurate
bookkeeping, and then you've got the tax.
Accounting that goes along with that.
Make sure you're tax efficient and all of that.
But then if I'm understanding, there's also like financial review,
which is like unit economics, forecasting, things like that.
Like do you give any other kind of, um, caveats to how you would
approach thinking about your finances?
Paul Spencer: Um, well, yeah, there's one other thing, which is, um, like
a proforma type, growth strategy.
Brandon Giella: Hmm.
Paul Spencer: forecast, um, into the next two years based on.
Something.
Right?
Brandon Giella: Hmm.
Paul Spencer: Uh, you may say, uh, our industry is shifting,
uh, for the worse we think
Brandon Giella: Hmm.
Mm-hmm.
Paul Spencer: so we wanna build a proforma of
Brandon Giella: Okay.
Paul Spencer: the next 24 months to see what effect that's gonna have based
on our theory that we're gonna lose.
This type of customer, this type of business or this type of
industry is going to, uh, reduce its profitability by X amount
Brandon Giella: Hmm.
Paul Spencer: that mean to our financials?
And then that gives you an an understanding of what to do.
And how to pivot.
Um, and it could also be a growth strategy, right?
Instead of minus it's a plus and saying, Hey, this, we have lots of
opportunity here and here and here.
And, um, if we could actually gain this type of revenue and this profit margin,
would that look to our financials?
And how do we grow with our structure and overhead in order to, to maintain that?
And what that, what would that be a pro forma look like?
Brandon Giella: Would you agree that Of course, that's helpful.
On the operational side while you're running the business, but the in,
in the event of a sale, a buyer, uh, would like to know that information.
They're gonna be doing their own proformas and you can actually have
negotiating leverage if you can understand growth mechanics better
than they can and make your argument.
Paul Spencer: yes, that's right.
Yeah.
And it's not, it's, it's not always, trying to prove it to them.
That's one aspect of it.
But when you, um, are organized this process is mature.
Meaning you, going back to that, that phrase, uh, you have timely and
accurate financial record keeping.
So that means you have a process
Brandon Giella: Hmm.
Paul Spencer: right?
And it's disciplined and it's mature, meaning that, uh, it's
well-formed and so I don't have to prove it to you necessarily.
Because I have all the evidence behind me, I've been able to show
that I've been able to do accurate for myself and my own business by
these three things that we did.
And I've got the financials to show that.
And that is, that's a multiplier.
plus, if
Brandon Giella: I agreed.
Paul Spencer: to buy my business, and again, when I'm building an
asset, that's what I'm looking for.
I'm wanting to create value.
Uh, value for myself, obviously as an owner for my employees, of course, um,
but also for, um, just, just again, if I'm not gonna sell the company, um, it's
still important to maintain my home.
To put on the new roof, to redo the bathrooms, right, to put
on a deck out the backyard.
And those are all the things that we do anyway.
Um, and this is the same thing, right?
And we're just looking at it one lens.
Financial performance is the same thing.
And if you're good at this and not so hot at the other
seven or eight, uh, valuations.
This comes a long way
Brandon Giella: Yep.
Paul Spencer: prove your financial prowess and because essentially
this is the value of your business.
Brandon Giella: Yep.
It is the most important one.
If you could say, there's a lot of things that go into valuation
evaluating a business, but this is the one you gotta get right.
Paul Spencer: Yeah,
Brandon Giella: So, okay, this is great.
Uh, we have many more evaluators to explore in the upcoming episode, so
stay tuned for the next few weeks and we will see you next time.
Thanks, Paul.
Paul Spencer: yeah.
Thank you.