Resilience Talk

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.