How to Boost Your Financial IQ feat. Steve Coughran

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. Today's guest is Steve Cofrin of Cultivar and Boosting Your Financial IQ. Steve is a very, very smart guy and really excited to have him on this podcast. He is really a strategic CFO, has been with many venture-backed companies helping them scale and grow, and now runs a consulting practice for entrepreneurs and business owners looking to maximize the value of their businesses and to continue to scale with kind of the financial edge that he has. So he kind of takes this mindset and approach that he uses for entrepreneurs and business owners, but also applies that to individuals and how do we, you know, maximize our personal financial wealth, our situations, and really free cash flow, understanding the reasons why cash flow is so important. And so He has a great platform called Boosting Your Financial IQ. I was just on his podcast a few weeks ago and had a great conversation. So there's a lot of nuggets you'll want to pull out of this. I think you're really going to enjoy it. So tune in and enjoy the episode. Thanks.

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Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. I am your host today, Ben Frazier. and we've got a really exciting guest, Steve Coffrin. He's the founder of Cultivar, which is a consulting firm that helps empower companies to drive successful financial, operational, and strategic transformations. He was a strategic CFO for several companies for many years and now runs several media companies, really helping investors, individuals, as well as businesses to just boost their financial IQ, which is actually the name of one of your media companies. So Steve, Thanks so much for coming on the show.

Yeah, absolutely, Ben. It's great to do this conversation now on your podcast. Ben did an amazing job on the Boosting Your Financial IQ podcast where he was talking about real estate and private equity and investing in all different types of things, which he did an amazing job on. So I'm glad to be here with you.

Yeah, thanks. I appreciate that. And we had such a great conversation during the podcast and afterward that I wanted to have you on our show and just talking about some of these things that I think are really important for investors, just individuals to understand, just coming from your background as a CFO, you know, knowing the numbers and using that knowledge to really boost your financial IQ. As you're looking at investment opportunities, you're looking at portfolio allocation, as you're looking at all these things to kind of go back to the basics. And so I thought it'd be great to bring you on and just kind of hear, hear some of those things that you've really studied and have built out an amazing a repertoire of knowledge on. So before we get into that, you know, share a little bit of your background, some of the context for who you are and some of the media companies you have and what you're doing really to help kind of further this message.

Yeah, absolutely. I mean, when most people think of a CFO and somebody where I'm at today, my path is definitely not linear. So I started my first company when I was 16 as a landscape design build firm. It was by total mistake. It was just supposed to be a summer job. But then it grew into this multimillion-dollar business. I did that for 13 years. I gained a lot of experience just with like design and networking skills. A lot of my clients were CEOs and executives and entrepreneurs who had successful exits in their businesses, and therefore that's when they were hiring me to spend, you know, several hundred thousands of dollars on their landscaping. So as a young lad, I learned a lot about business and learned a lot about just working with people and building relationships. Then I moved forward and I, I worked for Ernst Young in public accounting as a CPA, and that gave me great exposure to a different scale of businesses. And one of my clients was a financial services firm and they had $22 billion of debt and they were paying about $2 billion in interest a year. And what I realized in that time is that their leadership, they were creating these strategies and the financial teams were building these elaborate forecasts and financial models and budgets, and the two things weren't connecting. And that's when a light bulb went on in my head and I was like, okay, there's this massive disconnect between strategy and finance and how those two things come together to drive value. So that's when I left. I started my consulting firm called Cultivar, and I spent the next decade turning around and growing companies. And, you know, I worked with several companies in different industries and I also during that time became a CFO of some of the portfolio companies or clients that I was working with. So I worked as a CFO for a renewable energy company where we're building massive solar farms out in the desert, utility-scale solar farms. And then I was also CFO of a fintech company where we raised about $100 million and grew our enterprise value to nearly $1 billion within a couple of years. So that, that was a really exciting experience. So I've raised capital, I've been part of that process. I've done many acquisitions, been involved in the private equity world. And now, like Ben mentioned, you know, I have— I still do turnarounds and help organizations grow, but I'm also building out a financial media platform called Boosting Your Financial IQ.

Very cool, man. That's a really, really cool background. So you've seen everything from, you said, lawn landscape and design, you know, million-dollar businesses to $1 billion of interest payments, you know, per year, which is, you know, a pretty big, you know, range of a size of companies. But I would imagine there's a lot of, you know, similar just concepts and things that you can apply at any level. Right. And so just distill for us some of the things that you saw was happening to these big companies. They weren't really paying attention to— obviously the impact there is a lot greater, but you know, how do you kind of translate that to, you know, the more personal side of things? So you have your brand Boost Your Financial IQ and your podcast, Boost Your Financial IQ, and really kind of focus more on individuals. What are some of the concepts that you find most people kind of have a challenge with or struggle with or really understanding?

Yeah, no, that's a great question. But when I, when I think about financial literacy and financial illiteracy, which is a major problem out there in the world, you know, there's the personal side, but then there's also the business side. So I believe that business is an amazing vehicle to transform lives and communities and families and so on and so forth. Like, if business is good, life is good. If business sucks and you're a business owner, an entrepreneur, like, life's going to suck. And what I found is that working with these companies, you have different functions of the business. So you have sales and business development, legal, the people side, marketing, FinOps. That's my department. And you have all these functions of a business and you have these functional leaders. But so many of these functional leaders, they don't have the financial literacy skills necessary to drive value in the business. So let me explain here. I don't think people need to be like green shade wearing nerds in the back office, like doing debits and credits, and everybody in the organization understands how accounting works and how financial statements come together and what the general ledger is and all that stuff. I don't believe that at all. However, I believe every single person in an organization, they impact the financial statements. You know, there's people that impact revenue. You have sales and marketing. You have people with cost of goods sold that impact labor and the efficiency of labor and material purchasing and procurement. Then overhead, there's overhead structural choices and how the business, you know, the cost structure that makes it the business, those types of decisions. Are made throughout, you know, every single level of the business. So I believe that people should have some level of financial intelligence when it comes to business so they know what the value drivers are, so they know how to maximize the value of the firm. Otherwise, you're just going out there and you're playing to play. And what's interesting, Ben, is that when I wrote my second book called Outsizing, I did this, this study and I, I took 363 contractors, landscape contractors, or construction contractors, rather. And I chose the construction industry because I had proprietary data where I was able to compute the economic profit of these companies. So not just like the profit, the accounting profit that just says, here's revenue minus cost, here's your profit. That's what most people look at. But I computed the economic profit, which accounts for working capital and capital expenditures which aren't on the income statement. Right. So I computed this for 363 companies and then I mapped it And these are companies with a few million dollars revenue to $1 billion revenue. And I charted it out and I got this curve, right, where it's like it's down here in the bottom left-hand corner, it's negative, and then it curves up to the right. What I found out of this is that, you know, 20% of the contractors, they were earning 83% of the profits, which follows the Pareto principle, right? It's like 20%, 80%, 20/80 rule. And then the top 10% of companies were capturing 63% of the profits. So everybody else in the middle, they're just playing to play. And I think that's so true with other industries because after the construction industry, I went through and did this to other industries and the same results apply. So, Ben, what I'm saying here is that so many companies out there and entrepreneurs, they're just playing to play. Yeah, they're grinding, they're working hard, they're looking at their income, say, okay, I made $100,000 this year in profit.

Yay.

But then it's like, oh, I got to reinvest that in, you know, equipment or, you know, other types of investments. And that cash goes out the door or it's tied up in working capital. And, and I think there's this massive disconnect in understanding there in the world of business. So I'll pause there and then I'll talk about how that relates to personal, the personal side.

Yeah, I think that's so interesting. And, you know, a lot of people that we work with, you know, as investors, they're a lot more business owners, right? One of the greatest ways to build your own net worth and financial kind of stability is being an entrepreneur. But a lot of times entrepreneurs, they want to just run. They want to do the business. They want to make the sales. They want to go and, you know, have the vision. And, you know, I don't worry about the accounting. That's just my CPA does that. I don't worry about the financial statements. And most of the time it's just they don't understand it. But even going back to my time, I used to be a commercial lender and a banker underwriter. And you find this all the time, right? Especially kind of the lower level, you know, you know, several million-dollar businesses versus the billions, you know, the smaller scale, small mid-market. There's definitely a lack of financial literacy and really understanding. To your point, if you just look at the bottom line on the net income, you know, on your income statement, that doesn't necessarily mean your business is super healthy. You have to kind of look at it as a holistic thing, understand, you know, the cash flows, which we're going to get into in a little bit. But before you kind of get into the personal side, what, what really drove the differences between those, you know, top 20% of the businesses in the top 10% versus the average, right? Just to break down the Pareto principle, like you mentioned it, and generally it can be applied in, you know, almost anywhere, but 20% of, you know, inputs produce 80% of outputs is kind of the simple way to think about it. So 20% of your sample size represented 80% of the cumulative profit of that group. So talk about what are some kind of like key things for those that are listeners that are entrepreneurs and run their businesses? What are the like you know, 1-2-3 punch that were the kind of separators from those averages to the top?

Yeah, great question. I think most people think, oh, the, the players with the scale, with the top line scale, are the ones that are capturing all the profits. So if you're doing $1 billion in revenue, of course you're going to be in the top decile. That's not true. Like a lot of the big companies earning $1 billion, they're competing in like decile 2, 3, 4, and they're just playing to play as well. It's really the differentiators are those that have a solid strategy. That's, that's the first thing. And I'm not talking about like that marketing gimmicky strategy where you're like, hey, let's get together and define our mission and vision and values and create a mission statement for the next 5 years. Like, that stuff's great. Like, no doubt you should have that as a foundation of your company, but that's not strategy. SWOT analysis. I'm sorry, that's not strategy either. You're just identifying your strengths, weaknesses, opportunities, and threats, putting it up on the wall and saying, okay, there's a strategy. The strategy is determining, okay, what's our shared vision with, you know, everybody, with our stakeholders, our customers, our employees? Where— what's our go-to-market strategy? Like, where are we going to compete and position ourselves geographically to capture, you know, competitive advantages? What are our activities? Are we using technology? Are we outsourcing? How are we streamlining, you know, all the activities of the business? And then what are the returns and resources that are required? Based on the strategy. So it's a real hard look at the business in making tradeoffs in order to drive true business value. So that's what I mean by strategy there. I'm not going to go into too much more detail, but a really good strategy was ingredient number one. Ingredient number two is the people. So high-performing teams. So you can have the best strategy in the world and a terrible team and you're not going to drive value right now. A high-performing team, you know, is built on having this clarity and this alignment at the top with strategy, number one. That's why I started with that. But then also it's empowering your team and it's building that trust and it's executing and achieving results. And that's what keeps high performers around. So high-performing team is really, really critical. And then I think the third thing is, is just an understanding of, you know, the financial drivers. You know, so many consultants— and I can say this because, you know, I've consulted tons of companies— tons of consultants destroy businesses. They do. They come in and they're like, hey, we're going to cut your overhead because that's the easiest thing to do. We're going to come in, 1-2-3 punch, cut the overhead by 20%. You just boosted profits. And then we get the fee and we're out the door. And then little do you know that you just, you know, laid off your, your most, your most valuable employees, right, that are driving all the value of the company. You just fired them because they have the highest salaries. And yeah, you saved $2 million in the short term, but now you don't have the ability to generate that revenue in the future. So I think understanding the value drivers and look, price premiums and lowering your cost, your, your cost of cost of goods sold, those are your two ways to maximize value. Those are the easiest ways. But most people go to cutting G&A overhead costs and growing without having that, that margin improvement, and then you just grow yourself out of business. So those are the 3 things that, that I've seen as characteristics of those who play at the top.

That's really interesting. And I think we're kind of, kind of segue here and I want to make a little comment because one of the things that I noticed as I was doing, you know, banking and, and kind of small middle market companies, you know, we all heard that, heard the stats of, you know, the number of You know, small businesses that go out of business every year, you know, it's difficult to, to last more than a couple of years, especially as a small, smaller business. And a lot of times you actually think just economies of scale, the bigger you are, the easier it is to survive. But one of the things that was so interesting is two-thirds of the businesses that go out of business every year don't go out of business because they don't have customers, they don't have revenue. It's actually because they don't understand cash flow. They don't actually have the ability. They're actually making money, but they don't have the ability to pay the bills when they need to pay them. And they're not managing their cash flow cycle. And some of these businesses, you know, landscaping is a great example where it's more of a seasonal business. You have to understand the ebbs and flows of cash throughout the year. And, you know, this will apply kind of the personal side as well. But talk a little bit about, about cash flow, why that's so important as a business and understanding what the drivers of that are, because it's, it's not just you know, on the income statement, you can't just look at the bottom line of revenue minus expenses equals, you know, net income. That's, that's one piece of the pie. Yep.

Yeah. Your comments are so smart, Ben. I mean, 70% of companies that go bankrupt are profitable when they close their doors.

Think about that.

Yeah. People are like, well, how do they go bankrupt if they're profitable? Because there's the working capital requirements. You know, you have your money caught up in between accounts receivable and accounts payable, and that number can be massive sometimes. And then you also have capital expenditures, property, plant, equipment that you're buying. That's not accounted for on the income statement. It's captured on the balance sheet and the statement of cash flows. But most people don't look at that. So cash flow is king and really cash flow drives intrinsic value, which we'll get into here later on in the episode. But that's why I'm like such a proponent of cash. Too many entrepreneurs, they build forecasts and budgets and it's just a P&L budget. So it just comes down to profit and they're like, cool, Hey, look, we have profit for the month, we're good. And then it's like, oh, you need to do a distribution to cover your taxes. You need to invest in this, this piece of equipment over here. It's $150 grand, or you have working capital and it's climbing because you change your accounts receivable policy, whatever it may be. Next thing you know, there's these cash shortages and, you know, it kills a business. I was working with a doctor years ago and, you know, he hired me in to help him out with his strategy and just some financial pieces of his business. And he said, Steve, I got this bill. I owe, you know, $1 million in taxes and I have no cash. Yeah. I mean, he had like $200,000 or $300,000 in the operating account, but he's like, how is this even possible? How do I— how do I owe this money when I don't have the cash? And when I looked at the books, it is like, okay, because you accelerated depreciation in the past and you have these other things, working capital. So you're showing on an accrual basis that you're earning profit. So you're paying taxable— you know, you have taxable income here, but you don't have the cash because you didn't manage your cash. He ended up covering it, but he had to pull on his line of credit. And it was a big wake-up call. But so many companies, they don't have access to capital like that and they could just be killed.

So yeah, that's so important. And just for those that maybe aren't as financially sophisticated, you know, working capital and just AR, AP, you know, basically it's the gap between, you know, when you're receiving funds from a customer versus when you have to pay your bills that you, that you owe. And like a great example is I worked with some businesses that were supplying, you know, Costco, right? So they were actually producing products that would go into Costco and that's great. And you can, you know, make all the sales to Costco and you can record those on your income statement as, you know, received or as, as earned, but you haven't received the cash and Costco doesn't pay for like 180 days. So from the time you can recognize the revenue, you have 6 months to cover that, that gap before you actually receive the payments in cash. And so just, you know, break down a little bit real quick with what that kind of looks like. And you have the capital expenditures alongside of that. And then let's, let's kind of tie into the personal side here.

Yeah. So absolutely. So, you know, another example, I was working with a company and, you know, they had $1 million in working capital requirement. So the money that customers owed them between the money they owed their vendors, $1 million. They grew by 5 times, 5x in 3 years. They quintupled their sales, right? Quintupled their sales. Their working capital also increased the same at the same time. So it went from $1 million in working capital to $5 million and almost bankrupt them. And so, yeah, it's just that it's the money. There's other things in it. It's current assets minus current liabilities. I love how you explain it, Ben, just very simply, but it's the money people owe you versus the money you owe people, there's a delta and you get to become the bank. So a lot of entrepreneurs are the bank, right? And they're loading this money. But if you're not, if you have the capital behind the scenes to cover that, it can really hurt you. From a personal standpoint, you know, I think this all relates. So we work with a lot of entrepreneurs and business owners as well. So you make all this money or you're cash-strapped. A lot of entrepreneurs are just cash-strapped until they have a liquidity event and then they have a bunch of—

if they're growing to your point, right? Because there's growth required Where's capital?

Yeah, so a lot of working— a lot of entrepreneurs are actually broke, you know. They have debt and lines of credit, and, uh, but then they have a liquidity event, and then all of a sudden they, you know, come across $10, $50, $100 million, and they're like, wow, what do I do with this? Or they have some success along the way, their salaries start to increase, and they're like, okay, I put in my 401, my IRA. They just put it in there, they trust a financial advisor, and they put it in other assets and, and but they don't really know what that looks like behind the scenes. For example, if you're paying fees, you know, a lot of people are paying fees for their 401 and their IRAs, the underlying assets, and they don't— they're not aware of it. So you could put your money in these, these funds, right, that, that are underlying your 401 and you could be giving away like 50 or 60% of your returns to a financial advisor. But you think, oh yeah, you know, what's 2%? It's no big deal. But compounded over time, it's a major deal. So that's, that's something really important to understand. Also, there's just a lot of talk from the personal, from a personal standpoint where it's like, okay, debt is bad, all debt's bad. That's, that's Dave Ramsey, which he has a lot of great advice out there about like, hey, debt is bad, avoid debt at all costs. But really there's good debt and there's bad debt. You can use debt to invest in assets that will produce cash flow, and that's good debt. You can use debt to go buy the Louis Vuitton purse and go on vacation and buy stuff that you can't afford. That's bad debt, right? You're buying liabilities. So if you're using debt to buy assets, that's good. If you're using debt to buy liabilities, that's bad. And then from the alternative investment standpoint, you know, I know a lot of people with money, people come to them all the time. They're pitching them and saying, hey, Ben, you know, I got this new business idea. Hey, you want in? You know, it's 500 grand to get in. You're going to make a ton of money. I'm going to make you so rich. And they don't really understand the fundamentals behind investments and cash flow and private equity. So then they tend to make some bad decisions and they can lose a lot of money in that process as well. So that's what I, you know, I loved our conversation when we were talking about alternative investments related to real estate because I think there's a lot of upside. But unfortunately, most people don't understand how that alternative investment world works. Right.

Talk a little bit about this alignment of interest because you've shared on your website, you know, Boost Your Financial IQ, that the financial advisors, the consultants, they don't always have your best interest in mind. Right. And so you saw that in the business standpoint where the consultants are coming in actually destroying businesses, but that also applies to the personal financial side, right? I see so many people, to your exact point, they make all this money. They haven't invested in the financial literacy. They've invested in the kind of 101, 102 level understanding of finances. And so they blindly trust an advisor assuming that, hey, this is too complicated for me to understand. This is, you know, I'm never going to be able to get to their level, so I'm just going to trust them. But there could be a misalignment of interest. There could be, you know, things that you're not aware of that are actually hurting you that would cost you a lot less to just invest into understanding some of the basics. Right?

Exactly. And look, I know a lot of financial advisors out there in the fintech. We worked with a lot of financial advisors. I think there's a tiny little fraction that are like malicious and that want to like rip people off. Okay. However, I think it's important to understand that there's a difference between a fiduciary and a non-fiduciary. So if you're an RIA, you know, a fiduciary, it means you have a legal obligation to act in the best interest of your client. So if I'm a registered fiduciary, which I'm not, but if I was, then as Ben, as my client, I would put him in investments that serve Ben in the most appropriate way. That's my fiduciary responsibility. However, if you're not registered as a fiduciary, you're basically a broker. and I could put Ben into whatever type of assets I want. So over here I got this fund that pays me a commission of, you know, 25 basis points. Oh, this other one charges me 35 basis points. I'm going to just put Ben in that, right? And I say, Ben, you know, you're diversified in this fund. You have no clue what's the underlying asset of that fund. I mean, it could be invested in China and Venezuela and these other types of assets. You know, geographically speaking, but then other asset classes and it's just junk, but you have no clue. But I don't care. You know, I earn my commission and you think your funds are diversified. And when the economy's going well, you know, it's fine. You get your statement every month, you see you're earning some type of return. When things go bad, they go really bad. And Ben says, hey, you know, like, what the heck, Steve? And I say, sorry, you know, like, did the best I could to diversify you. You know, and right in that, that's the conflict of interest. So I think it's like you could work with a fiduciary. You also have to be careful because I could be a fiduciary but duly registered as a broker too, so I can market myself as a fiduciary. Hey, I got your best interest, but I'm also, you know, the back end here. I could still be a broker selling you high-fee products and putting you in high-fee products. So.

Right.

That's just, that's the misalignment there that occurs out there in the personal finance space.

Yeah. Talk about financial freedom. Like, what does that mean to you? How do you know as an individual you're financially free? Right. I love you have a goal here of traveling to 50 countries by 50.

Yep.

You know, you have freedom of time, freedom of money and other things to be able to do that. How does someone know that they could be financially free, right? What are the kind of parameters that you have to kind of understand and be able to achieve?

Yeah, great question. I mean, when I was young, the idea of being like restrained was like terrible. I actually had a leash. My mom like put me on a leash. That's before like the leashes are cool. Yeah, it's like concealed as like a monkey backpack with a little thing. You're like, oh, how cute, a little leash backpack. No, I had like a straight up like dog harness on me because I was like wild running around the store. But I just— I don't like the idea of being restrained. And I'm a creative, so I want to be able to go out there if I have an idea to go execute on it. So financial freedom to me means I'm not a slave to something that I hate doing. And Steve Jobs, he gave a great talk, you know, through his commencement speech to Stanford, where he's saying essentially, like, if you're waking up every day and you're like, what am I doing? Like, you're not free. So financial freedom— I know a lot of people that make $1 million a year. And their costs are like $1 million a year. They're not free. You know, I had the CEO I was working with and he said to me a couple of years ago, he said, look, if I don't make $500 grand, at least $500 grand a year, like I can't cover my bills. So you could have $5 million and you spend $1 million a year, last 5 years, or you could have $5 million and you spend $200 grand a year, it could last you a long time. So financial freedom is having the ability to choose and pursue whatever you want to pursue in life. But it also— it's based on, you know, your income, but also your spend.

100%. I think it's— it's your point earlier, having the knowledge and the literacy to understand these kind of things, right? Because if you don't understand what your expenses are, you don't have a budget, you're not tracking things, then you don't know how long, you know, you could last. You know, if you had to pull the plug on if you're a doctor or high-paid professional or something. You know, I saw this with, you know, some family members of mine that, you know, they were in the medical profession and had to work till they were, you know, retirement age. And even then were terrified that they weren't going to have enough to live because they just— they didn't ever invest any time into understanding, you know, these kind of basic financial concepts and cash flow and, and all that. So it was, you know, there's so much I think the financial freedom plays into financial knowledge and but also the freedom of understanding that really opens up the whole, you know, equation. If you can understand some of these basic concepts, it allows you to be able to do a lot of different things if you understand it. So I love that. Let's shift to kind of the last kind of segment here. I thought was so interesting when we were talking before, just because of your background and working for some private equity-backed companies, you talk a little bit about private equity as an asset class. This is something that, you know, as I've studied some of the ultra-wealthy, it's generally a pretty big allocation of their investments is into private equity. And this is differentiated from venture capital or angel investing, you know, kind of the lottery pick of the next big tech company. But private equity is a tried and true model. Leveraged buyouts has been, you know, used for many, many, many decades with, with some great success. So talk about what that looks like and your experience in that and maybe how, how it kind of relates to just some basic financial principles here. Yeah.

And I mean, the idea of leveraged buyouts is relatively new, you know, a few decades old. I mean, it's been happening since the beginning of time, you know, in some form or fashion, but it really became popular and private equity really exploded, you know, just, just recently back in like the late '70s, '80s, '90s. That's really when it started taking out, taking off. But essentially when I talk about private equity, because private equity could be a general term for private money used for hedge funds and venture capital and real estate, things like you mentioned, Ben. But today I'll talk about it in regards to LBOs, leveraged buyouts. The idea is, is you have a general partner, okay? So you form an entity and you have a general partner, and that's the operator, the owner of this private equity firm. And they go out there and they raise capital from limited partners, LPs. So they go out to individuals or accredited investors and institutions, primarily like ultra-wealthy people right now. And they say, hey, you know, do you want to put in, you know, $50 million into my fund? And they collect all this money. Then once they collect all this money into their fund, let's say it's $1 billion, then they earn fees off that fund. So the, the person operating the private equity firm, the GPs, the general partners, they earn typically 0.5 to 3% on average, just like 2% management fees on that committed capital. Then they take the money and they deploy it and they go buy companies with cash flow. Typically it's companies with strong cash flow. Sometimes they'll buy distressed companies and do turnarounds, but most of them, they want to buy businesses with cash flow because they're going to pile on a bunch of debt. That's the leverage part, the L of the LBO. They're going to put on, you know, 90, 80 to 90% debt, and they're only going to put in like 10 to 20% of their own equity out of that fund, out of that billion dollars to buy these companies. And it's really similar to real estate. So it's kind of like you buy an asset and then you get a tenant and then the tenant pays you rent. You take that cash flow, use the cash flow to service the debt. Hopefully the property appreciates and you have some type of upside. Same type of thing with the business. With the business, a little bit different because the real estate— when you buy a real estate asset, it's like a fixed building and you have a tenant and hopefully they don't go rogue. But that's the business model with the business. You have like a bunch of wild kitty cats running the business and you have to like manage it and get in there and do strategy and make sure the products are good and you're satisfying the customers and the suppliers. And there's a lot more risk, but there's also a lot more upside. You know, there's some real estate properties where you could buy and you can, you could achieve substantial upside. But with private equity, you could buy a business for, you know, $2 billion like Vista Equity just did. They bought a business for $2 billion. They invested in it, optimize it, and now they're exiting for $4 billion. So the upside is amazing, but you have to go in there and you have to like nurture the business and keep all those pieces together. And then when you sell it, that's typically what private equity firms do. Within 3 to 7 years, they're selling it to somebody else or they're taking it public. Then they earn money on the profits, which is called carried interest. They'll earn usually around 20% of the profits. And that's how a private equity firm works overall.

Yeah, I love that. I think, you know, I've talked a little bit about private equity on the podcast here and, you know, back when I was a banker, did several kind of M&A transactions where you're helping people buy businesses. And what's so interesting about it is commercial real estate and private equity is, as we're referring to it, as, you know, the leveraged buyouts. Are generally priced on a multiple of cash flow. So it's very similar valuation methodology where you're looking at what's the annual cash flow and, you know, take out all the fluff and then you price based on that. And what's interesting is, you know, if you're looking at evaluation, you know, real estate, commercial real estate, you know, say for just a simple, simple math, it generally trades around, say, a 5% cap rate. You know, for a Class A property, it's multifamily or something that's probably pretty pretty average, especially in, you know, big metro areas. So that's a 5% cap rate equates to about a 20x multiple of annual cash flow. So $1 million, you know, of annual cash flow times 20 is $20 million. That's a 5% cap rate. In private equity, they generally aren't trading for that, that type of a multiple. Right. And, and for a lot of reasons, but to some of your points, one, there's not really an asset that's just there whether there's a tenant or not, right? If you have a building that, you know, real estate has generally been shown to appreciate over time as lack of availability and supply is limited. But in businesses, you don't always have an asset. A lot of times it's goodwill or just you're buying for the brand value. And so talk a little bit about just kind of valuations, like kind of what you've seen and And what I've also seen too, it's really interesting private equity strategy, kind of a roll-up strategy is probably the most— one of the most common is you go and you find, you know, a really good operated business and you kind of use that as your anchor business model. Then you go and acquire other smaller mom-and-pop businesses in the same industry. And as you can continue to grow and get scale, the multiples actually expand as you get bigger, right? So you can kind of buy a business for, say, a 3 or 4x multiple down at a million-dollar level. But if you can get to, you know, $10, $20, $50 million in annual EBITDA, all of a sudden the value of that business goes up a lot. Just, just in the same amount of cash flow, you can actually sell that at a higher multiple because of the bigger money that's trying to get in the space. If you can create, you know, scale, you can actually create value, which is really interesting in this kind of space. Talk a little about some of, some of those things.

Yeah. So when you're building like a valuation model, when you're doing like private equity and looking at different organizations to acquire, you're looking at their free cash flow and there's, there's a formula. So you could look at the free cash flow into perpetuity, or you could look at free cash flow as a multiple like you're alluding to, Ben. A lot of companies, for simplicity's sake, you could do a multiple of EBITDA and it varies by industry. Let's just say, you know, an industry with an average X multiple of 5, 5x on EBITDA. Well, if you're a smaller company, to your point, you know, you're doing $1 million in EBITDA. Well, your multiple, yeah, on average it's 5, but maybe somebody is only willing to pay you 3 because you're a smaller company. There's some key man risk, meaning that like if a key person leaves the business, you know, customers can leave with them or, you know, employees can leave with them or like the business falls apart because it's relying on one person. So there's some key, key man risk. And then there's like liquidity. You know, if you take that money and you go invest in Apple today, I could go put money in Apple and I know like I could sell it, like I could buy it, I could sell it like 10 seconds and I get my money back. Well, when you buy a company, there's all this due diligence. You're like locked in and it's harder to like turn around and sell it. So there's some lack of marketability. There's a discount on that as well. But to your point, you go in and somebody says, yeah, you're only doing $1 million EBITDA, I'll give you 3x on your EBITDA. They give you $3 million. I buy your firm and then there's another firm over here. I do the same thing. They do $1 million in EBITDA, buy for 3x. Well, now I have $2 million in EBITDA and that's more attractive. Now I got more systems, more scale, like the, you know, more reach. And now it may be worth 4x. And then I keep growing and one day I have a portfolio of companies with $100 million in EBITDA and that may be worth 6x. So just by combining them or rolling them up to your point, It's called multiple expansion. That's how I can make money. Another way to do it is I did this in the past is the strategy was to buy a bunch of media companies and we were buying media companies because, you know, the idea was to collect, you know, and combine all these companies in a roll-up strategy of financial media companies. But then if you take the data from these financial media companies and the behavioral analytics and all the other intrinsic value, that's behind the scenes. Well, now you're not just buying a financial media company, you're buying a data analytics and behavioral analytics company, which can be worth a lot more. So now you buy it at a, you know, 5x multiple. But an analytics company is more sexy, more attractive. There's more value with that, that the assets, the intellectual assets that you own the business. Now you're exiting at a 10x multiple just by changing the nature and the strategy of the business. So there's so many different ways to do it, or you could buy a business and they're distressed or cyclical, like it's a bad cycle. You buy it when the market's down. Like, think of like cruise ships back in 2020. You know, I invested in Carnival and other companies with COVID You know, their stock prices just tanked. And I'm like, hey, their stock is trading at a value less than their cruise ship value, you know, the value of their tangible assets. So, you know, you buy into a company like that when it's cyclical, things come back around, people start going on cruises more. The stock, you know, increases and then you can exit. And so there's strategies there as well as far as private equity goes. But I think ultimately it comes down to free cash flow, whether it's real estate or private equity, LBOs or cryptocurrency or whatever it is, you're putting money into an asset and then that machine that you're buying is going to spit cash back out to you in the future and hopefully it's more cash. But I think so many people, they just get caught up in this idea like, oh, I'm going to invest in this startup or this business over here and look at their top line. They went from $10 million to $100 million and like they're so successful, I want in. Well, that stuff's all great and fine, but if you're not getting your cash back, that's what I care about. And you're not watching the free cash flow. That's where you could run into some serious trouble.

Yeah. Steve, this has been awesome. I really, really love just kind of bringing a thought to some of these concepts. And this is something that definitely people understand more of, and just financial literacy. So what's the best way, say someone is an entrepreneur, they're in a business, they're a CEO, you know, they want some help on the consulting side, you know, how do they, how do they connect with you? And then also on the more just personal side of things, people want to up their financial IQ. Well, you have your two brands, you know, share with us how people get a hold of you to learn more.

Yes, I think the best way, if you just want to increase your financial intelligence, you could download our Boosting Your Financial IQ app. It's on the Apple App or Google Play Store. It's called Boosting Your Financial IQ. You get it on your phone because I think, you know, understanding the language of money should be as easy as checking your phone. So just, you could download the app. There's a ton of free resources in there and you can just get started right now. And then the second way, if you want to learn more about like, hey, help me with my business, you know, teach me more about like how can I transform things and grow it to the next level, if you go to cultivar.com, our website Cultivar, there's a free masterclass and you can check that out. And I explain this all in more detail and I show you mathematically what I'm talking about. Like I'll pull up an actual valuation model and show you, okay, you, you impact these drivers right here, these 3 things, and look at it. You could take your valuation from $2 million to $10 million. So it's, There's that free masterclass on the website. Those are great things that you could do. But I just think listening to podcasts like this, I love what you're doing, Ben, with your base. I love what Aspen Funds does with providing alternative investment ideas for, for people to get in early and to, you know, to do things far beyond just a 401, IRA type investment, which, which is fine, but you need more than that. And so I love and appreciate what you're, you're doing there, Ben.

Awesome. Well, this is, this is really fun. I can enjoy this conversation, nerding out a little bit on some of these things. Give us a little teaser. What are some of the classes or the resources in your Boost Your Financial IQ app that people could get if they download the app? This is a free resource, right? Or is it paid?

It's free resource. So I have masterclasses, 4 masterclasses on there right now. I'm constantly adding to them as far as like investing, like investing in different asset classes. Just changing your mindset around money. There's masterclasses there. I have community conversations where I have people from all walks of life that I do interviews with them. I have all the podcasts are essentially located there, but I also have tools, tools that you could download, like financial models. A personal budget is on there. And then I just started a growth challenge. So there's a 4-week growth challenge on there. You can take part in every single week. There's a little activity to push yourself. So it's just all these financial tools and resources that are available to help you on a personal side and on the business side. It's awesome.

Well, Steve, thanks so much for coming on and sharing your knowledge. Definitely enjoyed the conversation. I'm sure our listeners will get a lot out of it.

Yeah, I appreciate you having me, Ben. This has been great.