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Build a Business Worth Buying brings you candid conversations with industry leaders, M&A experts, and successful founders. Learn advanced strategies to scale, optimize, and prepare your business for an acquisition—because building a business worth buying starts with smart decisions today.
Aaron Alpeter [00:00:05]:
Welcome to Build a Business Worth Buying, the podcast where seasoned entrepreneurs, M and A experts and world class operators share behind the scenes stories of building, scaling and selling remarkable businesses. I'm your host Aaron Altier and every week I sit down with people shaping the world of acquisitions. Founders who cashed out buyers with both strategies and advisors who help make deals happen. This is not a podcast for beginners, it's for those who know the grind and want actual insights to make their next big move. Get ready to take notes, rethink your strategy, and hear untold stories of what it takes to build a business worth buying. Today's guest is Emily Reeves, who's currently the VP of Capital Solutions at Bridge. Emily brings a deep background in capital markets and private credit where she's advised investors and operators on how to use debt intelligently to grow, recapitalize and prepare for liquidity events. She spent her entire career at the intersection of lending and investing focusing on cpg.
Aaron Alpeter [00:00:53]:
Most recently she helped structure deals that help balance growth and risk management and I'm really looking forward to her perspective that I think is going to be really valuable for the founders that are listening to the podcast. How do you use debt as you approach your exit window? How do acquirers and investors underwrite businesses? And what signals does debt send about the sophistication and risk of a business? So Emily, thank you so much for being on Build a Business Worth Buying.
Emily Reeves [00:01:17]:
Aaron, thank you so much for having me. I'm excited to be here.
Aaron Alpeter [00:01:19]:
We were talking about this a little bit earlier about just how debt is a signal to a business and I'm curious about how you approach something. When you look at a balance sheet, if you see debt on the balance sheet, is that a good thing? If you see a lack of debt, is that a good thing or a bad thing? How should people think about this? What signals are they sending?
Emily Reeves [00:01:37]:
It's a really good question. Debt, I think to the consumer sounds like a really dirty four letter word and it's not. Debt is a great tool that can be used to help a business grow. Lack of debt or debt on the balance sheet isn't necessarily a good or a bad thing. A lack of debt could just be a personal business decision that an operator has decided to make. Sometimes though, it's at the cost of dilution. So they may have gone and they've fundraised and they've given up equity and that's certainly one approach to take. I think at the end of the day that's maybe a more costly approach.
Emily Reeves [00:02:12]:
What you are preserving in margin on your sales is ultimately given up in equity. So I think there's always a great use to utilize debt to meet the business needs. But what we're really looking at and to your point, when I'm looking at a company, the first document I open is the balance sheet. I want to see what debt the business has. So I want to see a is it responsible debt? And we can get into that a little bit more like what is responsible debt versus irresponsible debt and are they over leveraged? So have they given up more than they really have on the debt side of things? So it really ties to kind of irresponsible debt of as a business owner, I'm sure you're getting five to seven calls a day of people saying look, I'm going to give you $2 million. Do you want two? And the answer to that is who doesn't want $2 million? But what are you going to do with that $2 million? And do you understand how much that's truly going to cost you? The people who are picking up the phone and calling you, Some of them. Look, you're a business owner, you are on a list. There are lots of people who have your contact information.
Emily Reeves [00:03:13]:
Now really understanding the sources and uses. So very common term here to us lenders, sources and uses. So what are the sources for the debt and what are the uses of it going to be? But as a business owner you need to ask your Sometimes taking out debt for the sake of having cash and sits in a treasure chest is helpful, but is it high interest rate? So the people who are calling you giving $2 million, that can be 30, 40, sometimes 60% APR, it's going to be at a discount. So every dollar you take, you're going to be paying back $1.60. Do you need that? Can you turn that $60 that you're paying for this debt around to $5 then hey, that might be a good decision. But have you taken this cash out to make payroll? Have you taken this cash out to keep operations going? Do you have the funds coming in that's going to service that debt? So I want to see has it been responsible? Has it been deployed in a way that makes sense for the business in a way that's sustainable to the operator?
Aaron Alpeter [00:04:16]:
So this is interesting. I definitely want to get into the good debt versus bad debt discussion. When you talk about sources and uses, it almost sounds like sources is tied to the interest rate that you're paying. I imagine if you're pulling your credit Card debt, that's probably less preferable than if you've got a business line of credit or venture debtors, things like that. And then from a uses point of view, it's kind of after the fact. Right. And so sometimes it may be difficult to understand like well yeah, you took out half a million bucks, but what did you spend it on? I spent on this, this and this. I wonder if like not having a really clear story is the indication versus oh yeah, we bought a manufacturing line and this is why we did it.
Aaron Alpeter [00:04:57]:
Can you walk me through good debt versus bad debt and how you look at those sources and uses?
Emily Reeves [00:05:03]:
Yeah, absolutely. So the sources can be lots of things that can be an EBITDA multiplier. So your net income, you know, if that's 500,000, do we maybe want to get you a multiplier of 2 to 3 on that? Maybe get you a million, a million and a half. And the uses to your point, what are you going to do with that? Are you buying a manufacturing line that's going to increase outputs, it's going to increase sales? That's responsible. Are you going to, maybe your sources could be inventory that you have or equipment that you've already purchased that you own outright, that that cash is tied up. Let's bring a debt facility in place. It's going to free up liquidity. You have $3 million worth of granola bars that are sitting, waiting to be sold that is tied up.
Emily Reeves [00:05:52]:
Can we maybe free that up? You can use that cash, sell through it, deliver to your customers. That's really responsible debt. That's a good source to pull debt from accounts receivable. That's also a good source to pull debt from. You have, you know, $5 million worth of AR, that's going to be paid in the next 30, 60, 90 days. Let's free that cash up. Let's pull that for you. And then what are the uses? Are we going to maybe buy more equipment? Are we going to buy more raw materials to deliver on goods? Are we going to reinvest that to maybe hiring a key salesperson? You know, when, when you give your customers terms, you're ultimately giving them an interest free loan.
Emily Reeves [00:06:29]:
So when you tell Walmart, great, pay me in 90 days, that's not a problem. You know your Walmart doesn't have a check written, sitting on the sidelines with your cash in the bank waiting to give it to you. Walmart's reinvesting it in the business. They're paying their insurance, they're paying their payroll. Take that cash and reinvest it there to, again, hire a new salesperson that might add a new retailer for you, might be able to bring on a new customer.
Aaron Alpeter [00:06:52]:
Yeah, this is really interesting. I mean, you've talked a couple times. You know, if I buy a dollar of debt right now, I'm paying back $1.10, $1.60, something like that. You know, a lot of that in terms of deciding if it's a good deal or not, depends on what you're gonna be able to get from it. So how does a company think about, hey, if I do this, I actually think I can get $3 back? And so even if I had to pay $2, it's worth it. How do you go about kind of squaring that as a brand to figure out, is this debt expensive? Too expensive for what I want to do with it?
Emily Reeves [00:07:26]:
Knowing your numbers, that is so key. And that is something that a lot of founders and a lot of business owners don't want to deal with and get very overwhelmed with. As a founder, you are creative, you are a go getter. You have this idea, you want to bring it to market and you bring on maybe a bookkeeper, you bring on a CFO to just deal with the stuff you don't want to deal with. And that's very fair. No one wants to look at their credit card statement at the end of the month and think, oh, yikes, I spent $900 on Uber Eats this last month. I don't want it. My ignorance is bliss.
Emily Reeves [00:08:02]:
And I think that applies to businesses as well. When you see, oh, shoot, I've been working with this company and I'm not getting paid. They're only paying me 60% of what I'm actually selling to them. But knowing those numbers, it can be overwhelming. It cannot make us feel good. But we really need to know the functions of the business. The best CEOs, the best founders, the best operators I know can speak to their numbers and can speak to their financials, and they're making informed business decisions. And that starts with knowing your numbers.
Emily Reeves [00:08:36]:
That starts with knowing when you have $3 of ad spend that you're going to bring in 5 on that new customer. You know your customer acquisition costs, you know what's going out and what's coming in, and it allows you to pivot quickly. You can be proactive, not reactive. If you are just spraying and praying and you've decided that you're going to spend $10,000 on Facebook ads, you need to really understand what that return is. That you've spent $10,000. What did that look like as you kind of look at that? Daily, weekly, monthly, quarterly, what's coming back in? And there's so many things you can invest in and spend money in, and it's tough to matriculate what that actually comes to. I mean, trade shows, you can spend $20,000 on the low end and you say, okay, well, how do I tie that customer that I met at a trade show to the investment that I made on the front end? And having your numbers knowing what's happening allows you to kind of plan to the future of, okay, do I do that trade show again? Do I continue selling to this customer and really understanding what's going on as opposed to having a finance person say, you know, this is it. You can actually get your hands around it and you can question it.
Emily Reeves [00:09:50]:
I think you should question your financials. You should always question what's happening. And you should be the person who knows things best, not, you know, a third party that's kind of coming in and advising. And that can be overwhelming.
Aaron Alpeter [00:10:01]:
Yeah, I think that definitely resonates with me. I mean, the ability to understand your numbers is, is kind of a prerequisite to running a business, right? I guess. You know, we've talked about good debt and bad debt. What does smart debt look like? And I'm kind of thinking through, you know, if I, I can put anything in a spreadsheet and say, oh, yeah, this is going to be a 50x return on doing these sorts of things. But how do you actually step back? And what sort of muscle does a founder or business need to learn to say, actually, no? Like, this is a reasonable way to build the framework. This is a reasonable way to understand that you may want to have. Because you can build a manufacturing line thinking you're going to need it, but if you don't actually need that capacity for 10 years, even though it's a quote unquote good use of funds, it probably wasn't a smart use of funds because you're outpacing what you need.
Emily Reeves [00:10:53]:
That's exactly it. I mean, I think you hit the nail on the head there, is it? You know, you're looking at your forecast, you're looking to see what there is, you know, down the line. I'm working with a company right now. They've grown incredibly quickly, and they've had a great banking partner who supported them up to about $20 million worth of equipment. But that's only gotten them to about four production lines and they could take 10 tomorrow. And still have the, you know, still have the customer demand to continue to deliver. But the bank kind of turned that tap off and said, look, this, you know, this is what we feel comfortable with. And now the business has started to be reactive.
Emily Reeves [00:11:29]:
So they've had to go out and maybe take on some terms from, you know, lenders that aren't as favorable to meet up with this demand, or they're now scrambling to get to that full capacity that they know they can. And to your point, spreadsheets are just numbers. So it's a science and an art to kind of look and see, okay, this is where we are today, this is where we're going. How do we continue to kind of build that framework? And a lot of people think, great, I've gotten the investment, or, great, I've gotten the debt, I'm good, I'm covered. And sadly, that's just the starting point. Your financing needs are going to change. And no one wants to hear this, but every three to 12 months, as you grow, the financing you need is going to change. And so it's something to always be cognizant of.
Emily Reeves [00:12:17]:
It's something to always be thinking of. You know, to your point, I had a customer who they took on a really big retailer and they were really excited about it. And the retailer gave them this really aggressive forecast, and they bought all of these ingredients and all of this machinery to meet up with what that forecasted demand was. And the demand didn't hit. It came in at about 50% of what the anticipated sell through was going to be. So it's being prepared and being nimble and flexible to think, okay, if this happens, then what? Always kind of having this backup plan, always knowing, okay, if this doesn't materialize in the way I expected it to, which it never does. All founders know this. You can have a crystal ball that tells you everything that's going to happen, and you still have to be prepared for that.
Emily Reeves [00:13:04]:
But being able to pivot quickly and knowing, okay, I have X amount of materials that I've made for this customer, what are some additional channels that I can sell this through to? Can I maybe shorten my, you know, keeping certain X amount of inventory on hand or maybe go into more of a just in time model, what's going to make you the most nimble you can be?
Aaron Alpeter [00:13:24]:
And I think, you know, just building off of that example, it sounds like you can make a good decision and become unlucky. Right? In this particular case, they took out a loan because they believe that there was a Forecast or AR that was coming, they bought all the raw materials to service that, and then they get unlucky where that forecast just didn't matriculate. And so, you know, as, as a lender or as an investor, if you were to take a look at that, would that be a ding on that company? Because, hey, you've, you took out too much debt, you've got, you know, all this inventory you didn't service through. Or is it a, you know, what your thought process was, was good, it was accurate, but, you know, for whatever reason, it didn't pan out the way you expected.
Emily Reeves [00:14:11]:
I think it can go both ways. I think first and foremost you can see it as a ding, but you look to the founder to say, okay, well, what did you do to overcome this challenge? Because we're always going to be faced with challenges. And so as a lender, it's, well, what did you do? Did you take on a bunch of high interest debt to kind of pay this off? Did you put more cash into the business? Did you go and find more customers that you could sell this through? How did you overcome, in this case, the borrower did go and take on a lot of high interest debt and now they're underwater. And we're slowly trying to work out, you know, the sources of how we can get that debt paid off. So we're looking to, you know, they bought $3 million worth of equipment outright to sustain this demand. And so we're going through and we're trying to find a loan that's going to be based on the equipment that they bought that they can use to free up that cash to reinvest back into the business. They still have all these ingredients. What can we use these ingredients for now to maybe make a new product line that's attractive to this retailer because there's still a good relationship there.
Emily Reeves [00:15:16]:
You know, what, what else can you continue to sell? What can we do to kind of work through this?
Aaron Alpeter [00:15:20]:
Yeah, no, this is, this is fascinating because I think that, you know, it's interesting because with the founders I work with, there is this Dr. Jekyll and Mr. Hyde sort of relationship. When it comes to debt. There are some people that are totally comfortable with leverage. You know, they typically come from a finance background and they say, hey, yeah, let's go, let's do this. And then there are others that say, absolutely not. No, no way.
Aaron Alpeter [00:15:45]:
And I think that the truth is probably somewhere in the middle. And so I guess I'm, I'm curious to know what advice you would have for A founder who is thinking about a liquidity event or an exit over the next 24 months. Like how should they be thinking about the right approach? Because it certainly can be a tool. And if you have the decision making processes in place that you talked about, where I'm good at forecasting what the future could look like, I have a pretty good idea of if I do this thing, this is what happens. And I know that I've got assets in the form of equipment or inventory or receivables that I can borrow against. Like there's a certain level of sophistication that makes sense. But I guess what advice would you have for those, those aspiring founders who want to exit in the next couple of years?
Emily Reeves [00:16:30]:
I think that's a great vehicle for an exit because again, you know, the alternative is equity. So if you want to have the most impactful exit that you can be sure to preserve that cap table. You know, there are companies I specialize in funding CPG companies. It's really where my heart is. I've done this for the last 10 years. And a lot of these founders, this starts in your kitchen, this starts with your family or with a partner or a friend. And as you start to dilute and you take on these investors, you're not really working for your goals and your visions anymore. You're working for the people who have given you cash.
Emily Reeves [00:17:04]:
And yes, you have this exit coming, but is that exit as impactful as you wanted it to be? Is it going to be life changing money for you? Is it going to be life changing money for your investors? So there's a ton of responsible debt out there that allows you to preserve as much equity as you can in the business. I do think again, debt is this kind of this dirty four letter word and it shouldn't be. It's a great vehicle to use to reinvest in the business. You give up a little bit of margin but you preserve it in equity. Again, it just comes down to debt that was used responsibly or debt that was used in a way that's continued to grow the business. We have a customer right now and they did this really responsibly where they had a big box retailer come to them and they wanted 2,000 doors and they said right now we don't really have the capacity for that, but we can do 500 and we can slowly roll this out and we can see what the sell through was. And they're making a much more successful. They've set themselves up for a much more successful because it was a crawl, walk, run strategy.
Emily Reeves [00:18:07]:
Some founders decide to take the sprint and they take on the sales and they take on a ton of debt and things don't go as planned. But when you go slow, you're building the blocks to kind of build for, for success. I've seen much better exits come than people who just grew for the sake of growing. That's certainly a strategy that we've seen where they say yes to everything and no to nothing. And as you're looking to exit, taking into account having a really stable business where it's not, you're just building the airplane as it's going, you have something, you have a flight plan, you're in the air as you make that exit. That's going to be apparent to people in the end of, you know, is this really stable and sound and is this kind of running like a well oiled machine? Are there things that we can add to enhance this as we come in and buy, you know, what else, you know, can we take them to those 3,000 stores with this exit? Does that buyer see that path that they have a sustainability to get to as opposed to a business that's just kind of flying by the seat of their pants there?
Aaron Alpeter [00:19:09]:
I want to kind of take a look at the other way. So we've talked a bit about how like the uses of the debt and how that's an important piece to be thinking about. And you know, you don't want to just take out debt to keep funding basic operations and things like that. How do you think about how much debt a business should take on? And so kind of what I'm getting at is, you know, you're always borrowing against something. And so if there's equipment, there's a certain market value to the equipment. You can say, okay, I've got $2 million worth of machinery, I should be able to borrow one and a half off of that. But you probably have receivables, you have other things out there that people could borrow against. So I guess two part question.
Aaron Alpeter [00:19:50]:
First part would be what are those different levers that people should be thinking about in terms of borrowing against? And then the other part would be what ratio should they look to borrow against? Given my $2 million example with machinery.
Emily Reeves [00:20:07]:
No, absolutely. So there are lots of different levers you can pull and we've kind of touched on them. That's going to be that equipment, your commercial real estate, your ar, your inventory, a good ratio. So there's something called a debt service coverage ratio. And this is typically what banks are going to look at. So for every dollar of debt that you're taking on, based on your net income, are you able to pay that dollar plus some change back? So a debt service coverage ratio of 1.25 means for every dollar that you're borrowing, you can pay back $1.25 on it. So even just fundamentally as a business, knowing what's my net income and how is that going to pay down the debt, what am I actually able, you know, and there's debt service coverage calculators out there. So typically banks are looking at your tax returns and they'll look at some interim financials and they're going to say, okay, can I service the debt? If you're not profitable yet, which many, many, many businesses are not, that's where that type of revolving line doesn't make sense.
Emily Reeves [00:21:05]:
That's where you're pulling that lever of the I have 600,000 in AR. I can pull that through now. Something to look at as a business. And I see a lot of lenders doing this now where they're getting flexible. Lenders want to give you money. That's how they make money. And they over lend or they overextend on what a traditional market can do. So I see there's one lender in particular that does this.
Emily Reeves [00:21:30]:
Where you look at the balance sheet, you look at the inventory, you look at the ar, let's say they have a million dollars in assets and this lender has given them 1.5. You go back to the borrower and you say, how did they get to this 1.5? Where is kind of the shortfall in availability of 500,000? And they say, oh, well, they gave me a purchase order facility, so they paid my suppliers a little earlier and I took that cash and it never really materialized. It doesn't materialize into ar. And sometimes it's a timing issue. So that lender has given them an additional half a million dollars and they've yet to deliver those goods. But down the road there's going to be 2 million in NAR. They've been able to invoice for that. And so sometimes there's a timing issue, but sometimes that lender is a little underwater here and they're just kind of kicking the can until they can exit, until that lender can get out.
Emily Reeves [00:22:24]:
And we're seeing a lot more of that where it's to the benefit of, you know, again, no lender wants to say no. They want to be able to give as much cash as they can and they want to help the business grow. But how has that materialized? Now, Was that additional 500,000 used for POS? Those goods were delivered and they didn't sell. And so how does that business now back out? And that's key to an exit strategy of is there enough here to actually pay off my debt without me putting more cash in? And that's where it comes down to the founder knowing their numbers. So that additional 500,000 may have been a new SKU that was going to be on shelves, and they didn't have any data on this. This is something that the retailer asked for exclusively. It was maybe a new flavor. It was maybe new packaging.
Emily Reeves [00:23:10]:
Where they've gone from, you know, usually it's. It's a tub and there's a scoop, and it's, you know, you have 30 servings. Or another retailer said, look, we'd like to do single serve. And you have no data on that. You haven't sold that on a D2C market. You're already in 3,000 doors with this retailer. They want to add now single servings to their 3,000 stores. And you don't know how that's going to perform.
Emily Reeves [00:23:34]:
And that's always a conversation that you can have with your customers, with your buyers to say, look, can we maybe start smaller? You know, this is a new product for us. This is something we'd love to do with you, but we need more information before we can do that, because the alternative is you invest this debt that you've taken out. And the market didn't need single serve. The market said, look, no, we like our 30 servings. This is easier for us. I have this in my coffee every day. I don't need to take this on the road with me. And that's where you start to get underwater, and that's where you have to take out.
Emily Reeves [00:24:05]:
You have to either invest more cash in the business as a founder, or you have to dilute yourself to then fill in that hole.
Aaron Alpeter [00:24:11]:
Interesting. I mean, you've talked a little bit about this tension between lenders maybe want to give you as much as you can possibly bear, but then founders probably don't want to take as much as they possibly can. So what are some general principles that a founder whose listings can look at and say, okay, you know, they're saying that they'll give me 2 million bucks. Should I take on 2 million? Should I take half a million? Like, what do you. What should I be looking at?
Emily Reeves [00:24:33]:
What's the mental framework for the people who aren't watching this? You kind of made this gesture with your hands of what do I do? And I think that's when you go back to your numbers. You know, as a founder, you go back and say, how is this debt going to serve my business goals? What are my goals here? Are my goals to increase product options in the market? Are my goals to kind of keep things steady Eddie, and continue on like, am I willing to make this jump? And am I willing to make this jump with my own cash? And I think that's the question you need to ask yourself. If it's my money that I'm using, it changes the conversation a little bit. It changes the way that you think about it. It's much easier to take money when it's right in front of your face. But are you willing to personally back that I think really helps reframe because it really helps you decide, am I willing to personally back this or is my lender willing to personally back this? Who's more motivated here and who's more confident? And as a business owner, you really need to understand if this doesn't work out, I'm going to have to put my personal funds into it anyway. And asking yourself that question ahead of time as opposed to when you're forced to really helps reframe the way you're thinking about debt?
Aaron Alpeter [00:25:49]:
No, that's super helpful. In your experience, if there is a business that's working toward an exit, is it a good idea to be paying off debt in advance of that exit or is it seen as an opportunity to say, just leave it there, make your payments, because your acquirer is probably going to have a better interest rated relationship and they can refinance that.
Emily Reeves [00:26:09]:
Leave it there, make your payments, let someone with access to cheaper capital come in and do it. Stay current on your payments, make sure that you can service that debt. But that's best case scenario where when you're acquired, someone else comes on and takes that debt. But again, they're going to be looking at the financials, they're going to be looking to see what is supporting this debt. Am I taking on good or bad debt? Have they taken on more than I can pay off or more that I want to reinvest in because they've made bad choices.
Aaron Alpeter [00:26:37]:
Yeah, this, this tension between good and bad debt. It feels like debt that started out could be good and eventually become bad or vice versa. I guess. Outside of the things that we've talked about where maybe an expansion didn't pan out, is there ever an example of where good debt can become bad debt? Maybe the business Just shrinks in general or things like that. But I'm just trying to get a sense of, are there other areas of good debt that are more risky than others that people should just be aware of?
Emily Reeves [00:27:10]:
Absolutely. I think there were these Eidl loans, so emergency disaster relief loans. They are the greatest loans we will ever see in our generation. They were 30 year terms, 3.25. It was, we will never see this again. Not unlike people who bought a house at, you know, 1.99% like myself. I will never see that again. But was, was that capital invested properly? Did you go and buy a new fleet of vehicles for the business? Because you said, great, let's use this money.
Emily Reeves [00:27:39]:
And your old fleet was fine. It was continuing to work. Did you invest this into something that made sense for the business? And I think a lot of people kind of look to those Eidl funds to see everyone has those Eidl loans. Everyone took those out. What did we do with that? That's a really great loan because you can service that debt whether or not it was a bad deal or not. It's such a low monthly payment. But then business owners started to go back to the market for more financing. Opt and you know, we're in a high rate environment, but I think we're in a normalized rate environment.
Emily Reeves [00:28:15]:
I think paying, you know, prime right now is 7.25. I think sometimes the people who are paying, you know, 10%, 14%, that's still good. But we need to get used to look, these monthly payments are going to be a heck of a lot higher now than what we've been able to do for the past four or five years. So can good debt turn into bad debt? Yes. But can a good company go bad? Yes. And so that's typically what happens when there is a downturn. Are you able to service the good debt that you have taken on? And that has, that's completely separate of the debt. That's just an effect that you have now and another challenge that you're looking to face.
Emily Reeves [00:28:55]:
But there's, you know, you lost a key customer or the market changed, or there was competition, your competition started to do it a little bit better. It's just a side effect that you have to deal with as the business turns.
Aaron Alpeter [00:29:06]:
So what do you do in that case? I mean, if you, if you've got something and it looked good and then something economically changed, I mean, I just imagine Covid and that being such a huge impact for gyms, for example. So if you had debt on a gym because you bought a bunch of equipment and then the gym closed down. What are your options there other than saying, well, this was a good idea and now I'm going to do something different.
Emily Reeves [00:29:29]:
Nature of the biz, baby. It's going to happen. That is the founder risk that the market can change. But being quick and nimble and adapting and. And we saw so much of that during COVID of the businesses that then said, come and rent out. You know, look, do you need an elliptical in your living room? Like we have an elliptical. We will, you know, you can continue paying your monthly gym membership and we're going to charge you an additional 50 bucks a month and you can, if you can come pick it up and bring it back to us, then great. Or they adapted and they did virtual classes.
Emily Reeves [00:30:02]:
There were so many things that businesses did and that's where it going back to your numbers. Knowing what I think, quick thinking founders and people who are adapt and can overcome quickly is the key of any successful business.
Aaron Alpeter [00:30:15]:
Ultimately, I want to kind of fast forward to valuation multiples. So when it thinks about debt, that's there. When an acquirer is looking at a business and they see that there's debt there, even if debt has exceeded the. Has improved the EBITDA multiple, it's there. Do you find that people will look at this and say, oh, wow, yeah, they 3x their EBIT, but they're carrying x amount of debt. Let me just take that amount off of whatever value I'm going to give, or does it increase or decrease what they're willing to pay?
Emily Reeves [00:30:48]:
It can. It certainly depends. Again, is the person who's coming in and acquiring, are they going to be able to refi that out at a lower rate or is there still a shortfall of what's able to be paid off? So is there still kind of this airball? Typically, what you'll see in an acquisition is it does come off of that purchase price.
Aaron Alpeter [00:31:05]:
Got it. So it may be helpful where let's suppose I'm getting a 3 or 4x multiple and let's say it's 100 million bucks. But I've got 10 million bucks on that. Okay. Yeah, your multiple and Your EBIT is 100 million bucks, but the 10 million is coming off, so we're gonna give you 90. Okay.
Emily Reeves [00:31:20]:
Yep, that's exactly. And just something to think about and consider. Again, you know, it's. Did you preserve that in equity? So are you still getting more off the top? Because again, that debt needs to be paid off one way or another.
Aaron Alpeter [00:31:32]:
And I guess that there's an argument too that if you didn't take on the deb and it was good debt, then maybe your, your EBIT is a lot lower. Right. And so you're still getting that 3 to 4x multiple, but you're only, you're getting $50 million. And so, yeah, that's kind of how, how that leverage works.
Emily Reeves [00:31:49]:
Yep. It all comes out in the wash in the end. You just have to think as an operator, what's most important to me in an exit here and am I setting up the framework for a successful exit not only for my investors, but for myself as well?
Aaron Alpeter [00:32:02]:
Yeah. Does the calculus change a little bit from a lender perspective when you're looking at recurring revenue in cash flow heavy businesses, when it comes to acceptable leverage levers, because there may not be inventory, there may not be assets. Right. It may just be cash flow and some receivables. But how do you approach that as a lender?
Emily Reeves [00:32:23]:
That's a little bit trickier where, you know, D2C or direct to consumer is an incredible strategy that we're seeing a ton of businesses go towards here and it depends on the appetite for the investor. So you can see kind of this hockey stick trajectory. And I'm working with a business right now that did 4 million in sales in the last three months of 24, and they're looking to close 25 at 100 million, which is an incredible story. But a lot of lenders are going to look at how sustainable is that? What happened here? So what is the context? What was your strategy? How did you get to 100 million? How contingent is that upon X, Y and Z? Because strategies change. And when you're in D2C, you know, if you've been fully reliant on Facebook ads and Meta changes, one thing of their algorithm, how are you preparing for that? How are you omnichannel? So are you on TikTok shop? Are you Instagram heavy? How does that look and feel? And that's what a lot of people are going to be looking to is how sustainable is this annual recurring revenue? Was this just a flash in the panel or is this something that you have a really strong marketing background in and this company did so they had a very strong supply chain relationship with one founder and a very strong marketing background and the other founder and they came together and built something that was really strong and they're omnichannel with all of their advertising and that's going to be much more attractive to a lender than when you just say, yeah, Reddit ads have been very successful for me. And if Reddit makes one change, then the investor is going to think, okay, well if that one change happens, what are the backups here to continue to continue the same reoccurring revenue?
Aaron Alpeter [00:34:01]:
That's interesting. In many ways, lenders are kind of a buyer of a business as well. You're not owning the equity per se, but you're making a bet that when you underwrite this business that it's going to be around at least for the term of the relationship. How does your lens as a lender overlap with that of an acquirer and where is it different?
Emily Reeves [00:34:21]:
The lens of a lender is more so how am I going to get paid back in the event of a downturn? Have I given you what could change? What are red flags that I can see? And can the borrower answer those questions for me? So that's being informed. That's kind of knowing. Every debt facility is going to be looking for a nimble founder, someone who understands that there's going to be headwinds and are you going to be able to adapt and overcome as those headwinds come in? As an acquirer, it's how do we keep this business sustainable? The lender is really thinking, what do we do in the event of a downturn? The acquirer is thinking, how sustainable is this? Are the pieces in place that if I come in and I make nominal changes for improvement, will those actually improve the business? Or is this whole business contingent upon one guy? Like, is this, you know, the one salesperson, should he leave after I acquire this, the whole thing kind of topples over. And so that's what an acquirer is going to look at. The diligence is, is this really a sustainable business? Across the board, a lender is going to be looking at, do the operators know how to overcome challenges?
Aaron Alpeter [00:35:30]:
That's really interesting and I think there's no right or wrong there. I think you need to look at both of those. That's really interesting. As you look at the last couple of years, I know that we were in a zirca environment in the startup ecosystem for a long time. It was like equity was free, debt was basically free. It was awesome. But now that the cost of capital is much higher, do you see debt becoming a more common toolkit for founders? Do you seeing more acceptance of it in a more traditional sense?
Emily Reeves [00:36:05]:
Absolutely, absolutely. And it's brought some great options to the market. There's so much dry gunpowder sitting on the sidelines right now in the debt world. And the Private credit world that wants to be deployed ultimately, and they're going to come in and fill in that gap. I was just talking to a friend of mine, the VC world, and their approach was, it's gone for me, a quality, not quantity approach. So it used to be quantity. We are just going. We have all this cash we're going to deploy.
Emily Reeves [00:36:31]:
If some of it comes back, great. We're going to spray and pray. We're going to make lots of big investments everywhere and hope to hit on a couple of those. And they can't really take that approach anymore. They're really going for smaller portfolios of maybe 12 to 25 businesses, as opposed to 25 to 100, which they were doing. And that does let debt kind of come in and open the door to more opportunities that are going to be out there. And it's forcing lenders to get a little bit more flexible on things and really get into the mechanics of a business, which I think is a good thing, ultimately.
Aaron Alpeter [00:37:01]:
That's really interesting. Do you find that, because I've heard this too, that there's just a lot of dry powder that's out there. And I guess the question is, is it not being deployed because people can't find the opportunities and that it's more of them finding them and it's an access issue, or is it because the opportunities don't exist and it's more of a quality of. Of the founder or quality of the company issue?
Emily Reeves [00:37:26]:
I think it's a little column A, a little column B. So private capital is very difficult to navigate, and that's ultimately why bridge exists. We come in and help founders navigate the debt options that are in the market. We help them understand their financials and what their financials can and can't sustain when it comes to debt. And we get them paired up with the right lender. But I think it's also a bit of a quality issue as well on some of these businesses that are getting by. You know, there's a lot of zombie companies out there that are, you know, they're operating on 60 days worth of working capital. And no lender wants, you know, no lender wants to see that.
Emily Reeves [00:38:05]:
They don't want to think that, okay, if I give you this loan, great. We've now extended you to six months of Runway, whereas you had 30 lenders really want to see a lot of cash. And I think it's, you know, having a business is the American dream. It really is. And having this founder mentality of you truly can start and build anything but you really need to understand what you're building and how you're building it. And there's just so much information out there. And, you know, podcasts like yours, you can listen to six of your episodes and you have built a game plan for businesses to build on. And founders really need to take the time to understand how to sustainably grow and scale and build what they're building.
Emily Reeves [00:38:45]:
The idea is the easy part, the execution is the hard part. And knowing how much cash you need as a founder, you can't solely rely on debt. You solely can't rely on outside investments. You also need to bring your own dry powder to the table as well.
Aaron Alpeter [00:39:00]:
No, that's well said. I think when it comes to these qualities of companies, that certainly something I spent a lot of time thinking about, and we work with a lot of brands that way. The knock against the debt industry is that they want to give you a lot of money when you don't need it, and they don't want to give you money when you think you need it. I think that that's just the truth. I can't imagine that that's going to be any different in the future. And so when you think about advising companies that are just starting out or they've been around for a while, how do you help them think about the role of debt in making their business worth buying?
Emily Reeves [00:39:36]:
Know your numbers. Ultimately, the worst thing you can say on the phone is, oh, I don't know, I'll have to ask my accountant, or I don't know why they did it that way. I'm going to have to ask. It shows that you really don't know what's going on. And that scares a lender when they're working with a founder who doesn't have those answers. And sometimes you don't know what you don't know. But anytime you go into these conversations, it's worth talking to your accountants, worth talking to your CFO and asking questions about, you know, the annual reoccurring revenue, your profit margins, where the cash is going, what your expenses. Have been trying to tighten some of those up.
Emily Reeves [00:40:16]:
You know, we all work with M and A people all the time, and they'll say, you won't believe how much they were paying. X, Y and Z for A, B and C. And sometimes you have to. It forces a founder to be reactive, not proactive. And that's not to say that these people don't deserve what they're being paid. Or as a founder, you shouldn't be generous to the people who are helping you, but really understanding how the decisions that you make affect your bottom line.
Aaron Alpeter [00:40:39]:
I want to go a little bit deeper than that, because you've talked about knowing your numbers a couple of times now, and is it that I'm sure there's a continuum where, yes, you need to be looking at your financials on a monthly basis. You should know what they are. Is that kind of what you're talking about? Or is it like you should be able to recall what you spent three years ago in this line item and you're at that level, or is it something different completely where you just understand kind of the mechanics of the business and where the cash is going?
Emily Reeves [00:41:10]:
I think it's the mechanics of the business, knowing that, you know, you might have three large retailers that you're working with, and one lender might say, look, the way that we see this, you're only. You're losing money on this customer, and you've been losing money on this customer for the last six months. What is your strategy here? And are you making up for that in other areas? Are, you know, you're making 50% margin with one retailer and you're losing money on this. What's your strategy here? And the worst thing a founder can say is, oh, shoot, we're losing money to Costco, you know, that's where. Or it's like, you took a big swing on this and it didn't pan out, what happened here? And so that's kind of where the numbers add context and commentary. You can say, we did this big Christmas launch with Costco, and we weren't anticipating that. When we launch during the holiday season, they require that all of their retailers are in this print circular. And Costco charged us, you know, $500,000 to participate in this.
Emily Reeves [00:42:13]:
And we were only anticipating on making $750,000, and the goods didn't sell through the way that we thought they would. But being able to add context to numbers, to me, is knowing your numbers, knowing, you know, you can look at a spreadsheet and see negative 300,000, and you go, ouch. And that's it. Whereas what happened there? What caused this? You can even when we look at net income and say you were profitable for the last four years now, but you took a hit this year. And typically, everyone's response for the last four years has been Covid, like, that was the answer. And that's very understandable. And Covid kind of turned everything upside down on its head there. But knowing where you can add information is what I mean by that it.
Aaron Alpeter [00:42:57]:
Sounds like a lot of it is understanding the narrative of why things happen the way they were and your ability to project it forward and say, well, you know, Covid happened. We don't expect Covid to happen for another hundred years. And so here's why we shouldn't look at that as a baseline going forward. So I think that makes a lot of sense.
Emily Reeves [00:43:16]:
Exactly. And a lot of good came from COVID too. It forced retailers to get scrappy. It forced them to maybe go back to their customers and readjust their pricing. It was a great negotiating opportunity. It was an opportunity to maybe find a new co manufacturer when you were forced to maybe find someone domestically. And they're able to reduce their procurement cycle from 90 days. If they were getting things in from China to now.
Emily Reeves [00:43:42]:
They can produce goods in two weeks. And that's been, you know, it's less inventory intensive. They don't have to buy so much and hold it and keep it in, you know, in the warehouse. And they can turn things quickly. They can find a new 3PL that maybe has better economics for them and forced them to pull a couple different levers operationally that they were never forced to before and came out stronger forward in the end.
Aaron Alpeter [00:44:05]:
Makes a ton of sense. Well, Emily, this has been a fantastic conversation. Thank you so much for coming on. Build a business worth buying. We've got two questions that we always like to ask our guests. And the first one is, what is the best example of a moat you've seen a business build?
Emily Reeves [00:44:22]:
The best example of a moat I've seen a business build is probably keeping cash for a rainy day, ultimately. So having a cash reserve that, you know, internally you can deliver for. You know, I think individually we should all have a rainy day fund. I also think businesses should. Should adapt that a little bit more. Sometimes it's every dollar in. We spend every dollar. But having a rainy day fund as a business is just as important as an individual as well.
Aaron Alpeter [00:44:52]:
And if you had to start today, how would you go about building a business worth buying?
Emily Reeves [00:44:58]:
Oh, gosh, if I had to start today finding a business that would or building a business that would be worth buying. I ask myself every day when I'm grocery shopping, what kind of business would I like to build? And historically, I've always answered, I'm definitely not building a granola bar company because there are 900 granola bars and protein bars on shelves. But recently I just discovered Bare Bells. And my goodness, I'm glad that they came to market. A couple years ago, I would build A business that brings innovation and fills a need. So I am a Pilates enthusiast. Pilates socks are $25. They are very, very expensive.
Emily Reeves [00:45:34]:
I would love to bring something to the market that innovates and iterates given the current economics right now you see headlines all the time of the top 1% has 100% of the wealth and no one has anything else. And I think the consumer is being very conscious of where they spend their dollars. And I'd love to build a business that kind of caters to the people who are having to tighten up. I have this I would love to bring something that helps people enjoy what they currently have more. So I would build something that allows you to turn normal socks into Pilates socks and allows you, as opposed to going out and spending a hundred dollars on four days worth of socks that if you have a pair that you're wearing right now, some type of mechanism that allows you to use what you have now and continue for it to have more longevity.
Aaron Alpeter [00:46:20]:
I love that. I hope you get a chance to do that one day.
Emily Reeves [00:46:24]:
Thank you so much. When I find the time, it's on the list.
Aaron Alpeter [00:46:27]:
Thanks everybody and thank you, Emily and Bridge for being on the podcast. We'll talk to you next time on Build a Business Worth Buying. Thanks for joining me on Build a Business Worth Buying, brought to you by his book and the I hope today's conversation gave you real insights into scaling smarter, selling better, and thinking like a strategic operator. If you found value in this episode, make sure to subscribe, leave a review and share with someone who's building their own sellable business. Until next time, remember, the real win isn't just building a business, it's building one worth buying.