Adding Value to Your Firm with Silver Oak Wealth Planning

Welcome to Accountants LawPod, where accounting professionals and law firms converge. Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhart.

Welcome back to the podcast, everybody. And this, this week we're going to talk about adding value to your firm. And we have special guests. They've been with us before, Mark and Les, and I'm going to kick it over to Steve to do the intro because they are his colleagues that he's worked with for how many years now, Steve?

Well, we were just talking about that. Welcome, Marc and Les. I think Marc and I met each other about 5 years ago in a mastermind group and just kind of spun off from there. And we refer business to them, and every single client that we've referred just absolutely loves these two. They really have a good foundation that they present. They create safety with the clients. They, you know, they have very innovative ideas, and we're just thrilled to have you guys back. So welcome.

Thanks. Awesome. Welcome back.

So who wants to kick off? Who wants to start this off today? This is a big, deep subject. I love this.

Yeah, I just wanted to say thank you very much. We're honored to be a part of this group. And yeah, we certainly focus on very holistic financial planning.

And— That's the key word.

We have developed the firm. I've been in the business 21 years, the last 17, our third partner, Dave, 2012. And we've really developed a business that we wish we had joined long, long, long ago, but we've, we've used our combined experiences to really build what we want to build. And adding value to your business is an incredibly important concept in the financial realm. A lot of business owners, you know, if you look at the 4 individual silos of financial planning, which are investments, protection, tax mitigation, and estate planning. For so many business owners and law firm owners out there, the fifth silo, the business, is by far and away the most important. So Les McMullen, I'm honored to work with. He's our specialist in business and business succession planning, and I'd like to turn it over to Les. Thank you.

Thank you very much. It's good to be back and good to talk to all of you again. I guess what I would say is is that a lot of what we're going to talk about the next few minutes is around how to avoid mistakes in transitioning a business. And so the first thing that I would say when we're talking about this is you should always be aware of when you want to dissolve a business. You should be asking that question every 90 days, even if you're 30 years of age, even if you think you've got decades more, because I think what's key is to have a business that can be transitioned. Mm-hmm. Seamlessly, effectively, efficiently. And so what we do is we help businesses prepare to do that. So there's never an emergency. And what we've often found is people that really wanted to sell their business because they were exhausted, then have a business that's run well and it doesn't feel like they have the same life they used to, and they change their mind because what they really wanted was a business that was run well so they can go on vacation without having to check their email 10 times a day and they're making more money money with less work and they're happy and their, their staff is happy and their clients are happy. You get the idea.

Sometimes that's the answer. That's—

yeah.

And it's— what's important to us is that, that you're making good decisions. And at the end of the day, if you want to work till you're 75, that's up to you. If you want to work till you're 55, that's up to you. What we want you to do is to make strategic decisions so that your business is, one, selling for more, selling without drama, and that you have a happy personal life and a happy financial life after the sale. So we'll talk about the details, you know, over the next 45 minutes. But that's the gist of it.

So could you jump right into the steps to prepare for a sale? What does that look like? How does somebody reach that step? And they're like, okay, I want to do this. I'm the guy that wants to stop working at 50, let's say. And what do I do? Where do I go? Who's going to help me?

Right.

So this requires us to step back a little bit. So the first thing I want to talk about is how do we determine what a business is worth? Something that won't surprise you is that most business owners think that a business is worth more than the open market would say it's worth. And if you were to ask business owners, what describes the value of your business, they would say something along the lines of, we have X amount of revenue and we have X amount of profits and we have loyal customers. And all those things certainly matter. So if I were to ask them, how are you going to increase the value of the business, they would say what? More sales, more profit margin. More diverse client base, things like that. We care about that stuff. It's not where I'm going to spend most of our time because our clients are aware of those things anyway. We do talk about how to do that.

Mm-hmm.

But what I would suggest to you is that a huge portion of selling a business for as much as possible is taking the risk away from the buyer. So if I'm going to buy a business and I'm going to put a huge amount of my money and time and my life's focus I want to make sure that I'm buying something that is going to be relatively low risk, but also something that I can expand so it becomes a good opportunity for me. So how we do that, there's a lot of depth that goes into that. It can be very simple things like, do you have a good HR outlook? Is your accounting done effectively to standards? We like accrual. I know that everyone doesn't. We can talk about that if you'd like, but—

Yeah.

Do you have any ongoing lawsuits? Do you have a client base that is dependent on you because you have known these people since high school? Do you have a client base that is not diverse in terms of, you know, is your biggest client half of your business? There's those things and 20 others that we want to address. We also want to make sure that there's no single person that can be removed from the business where the business becomes ineffective.

Mm-hmm.

So many businesses are there because somebody worked incredibly hard and had quite a bit of ability and they built a thing. And it leaves them one relatively miserable because they can't go do anything. They can't go to Fiji, they can't go, you can't leave internet service. But it also means that if I'm buying your business, what am I really getting if you're gone? So that's the kind of stuff that we talk about. And there's a lot of structure that goes into over months and years to getting a business to the point that it will sell like a best-in-class business for its category.

So in preparation for it, then what you're thinking is somebody walks through the door and it's like, hey, I wanna sell. Yeah. Oh, you're way, you're years from this, my friend, because there's way too much dependent on you. You do not have systems and processes in place. There is dysfunction that needs to get realigned. Yes, you're a cash base, but maybe there's some accrual method. Some don't have the accrual method in it depending on— because it is a cash transactional base. But I think that what you're saying is, is like, if they always say lead with the exit in mind, it's really hard when you're young to understand what that means. So my conceptually thinking like every 90 days, ah, I don't know if I could do that. However, I think that Important key factors. What you're saying is if you're gonna go with this mindset in mind, which you should, you're advocating as you should, there are pillars and benchmarks and milestones that you need to be really looking at as a mature adult. So I feel like right now we live in an age where we've got maturity in some spaces and we've got just ignorant bliss of like, hey, I'm a business owner. Yeah, it doesn't work like that. You, you have taxes to pay, you have all these obligations. And it's fascinating to me what we were talking about pre-show is the people that put the sign up to sell, you were saying like 3/4 of them don't even sell.

Right.

They end up dissolving.

Right. Well, you asked a question at the very beginning of that, and, and I want to answer that question. You asked, if somebody comes to me and says, I want to sell, what would I do?

Mm-hmm.

So we think that there are two big decisions to make. The first thing is we have to determine what your business is worth today.

Okay.

And so we're going to ask for financials, of course, and we're going to benchmark the business in a bunch of different ways. I can show you one of those reports if you'd like.

Yeah.

It's really, really effective. We break it down into 6 subcategories and all the things you'd want because we want to, clients know what they, what their business would sell for today and what they can do to improve that value.

Mm-hmm.

The second thing we do is we create an action plan and it looks like project management software.

Oh.

In all the areas that we need to address to get you maximum value for your business.

That's cool.

Now that never ends, right? Because just like any, just like a good financial plan, just like any other plan, as soon as we've got it dialed in, something changes.

Yeah.

So when I say that every 90 days, I think a client, a business owner should ask if they're ready to sell. It may be a 15-second conversation and they go, I'm 32. Of course I'm not.

Okay.

Got it. But, but knowing what you're moving forward with is important because if you ever say, yes, I am, what we spend our time doing changes. I'm not gonna have 5-year strategic initiatives if I intend to sell the business in 18 months. Does that make sense?

Yeah, it does. And, you know, one of the things I teach when I, when I teach my classes at the Bar Association to new attorneys is I tell them every fall, sit down, whether it's with just yourself or with your partners, and relook at— first of all, build an exit strategy. Doesn't matter. You're not for sale now, but build an exit strategy. What happens if I break my leg and I can't work, or if I pass away or whatever? What are you going to do with this business? Number 2, what does our exit strategy look like? How would we get out of it? What would we do? And just have that plan in place because it creates dialogue and it helps prepare you for people like you and Marc, you know, when the time comes. And a lot of times it answers that question. I know I don't want to sell or, you know what, I'm sick of this. I do want to sell. What's the action plan?

One thing it really also does is it gets business owners out of tactics. Business owners are like, I've got all these things hitting me in the face today. I've got to address this and this and this. But, you know, and the timelines are usually quite short, right? If you are having a— and we do workshops, we do 90-day sprints and we meet every 2 weeks with the business owner and we have interim 30-day and 60-day deliverables. And what that does is it— I like that. —gets the business to think about strategy every once in a while.

Yeah.

So I'll give you an example. I was at a meeting day before yesterday, 3 ladies that own a title company, been around for 3 years, doing great. They're quite good at what they do. And one of the vulnerabilities of this business is that one of them is in charge of marketing. She handles all of the client relationships. She's very good at it. She's very authentic, tons of energy. When we were talking about them selling their business, they want a 5-year exit. We were talking about, well, how do we replace you? And I said, well, the answer is quickly because two things happen. One, your business becomes much safer to buy if the person who's in charge of this stuff is not leaving. Two, if we had two of you at your level of ability, we would double the business. So it's good short-term business. It also leads to a much safer sale for a buyer. Does that make sense? I agree.

It does. When we sold our business, the new owner tied us to that business for about a year and a half, and we were the face of the business still, and it just kept humming along even though we didn't own it anymore. It was nice to just take a paycheck and go home at 5 o'clock every day, you know?

Yeah. And the other thing is, if I'm buying a business and there's a goodwill period, that's what you're describing. But if I'm buying a business that is fairly de-risked, I'm much more likely to just write you a check or write you the majority of the purchase price upfront. If I'm worried about how this is going to go, I may have holdbacks where we agree on $5 million. I'm only giving you a million upfront and we have to meet certain goals over X amount of years before you get all your money. So now you're in a position where you don't have ultimate control, but you've only gotten 20% of what you were hoping to for your business. So the more we can de-risk, the more we can, I mean, the final iteration of something like this is buying a McDonald's, right? They do so much work. They do a demographic study. They know how to build up— Yeah. Right? Everything is done for you. And all they ask you to do is do it the way we've always done it. And 99.8% of these things succeed. We're not going to be McDonald's, but if you can create a business that is really, really bulletproof, then you are going to get a higher sale price and you're going to get more of that money upfront. And you are gonna have a shorter goodwill period so you can get onto the next phase of your life if that's a goal.

So we're really, which I, I'm loving this, and Lynda, I, I kind of want your opinion 'cause it's, we're really talking about strategy on this side of the fence where we've seen it sometimes on the other side where it's just like, well, it's a price. They, this magic price that they came up with, whatever that is, or The cash, how much cash revenue generation? I mean, Lynda, you, you from experience yourself too, having sold really a business, it's property, but it was in a business. I mean, there's a lot behind that that happened for you as well.

Yeah, well, you have to have clean books. They're going to ask for 3 months or 3 years worth of, you know, tax records. So you have to have good record keeping where you really need to have a good accountant or bookkeeper behind you for sure. There has to be a lot of thought put into it. I mean, you have to really, it's not something you're gonna flip a switch tomorrow. Although in our case with the property we sold, it was like the offer came in, we had talked about it and talked about exiting out of Rhode Island and the offer came in and my husband's like, oh, should we sell? I'm like, uh, with that number? Yes. I mean, the number was just something you wouldn't not say yes to.

Yeah.

So, but I've seen it happen with businesses over the 25 years I've been doing it, where a lot of times with the attorneys, we don't know about it until we kind of wonder if something's going on because all of a sudden it's like they have a bigger interest in their books and all of a sudden they're wanting to get things cleaned up and they're asking a lot of questions that they never asked before. And you're thinking, are they buying a house or are they selling something? You can figure it out. Mm-hmm. But a lot of times they don't seem to wanna keep us in the loop where we would like to be in the loop, know about it. Um, you, you know, those are the things that you, you really wanna strive for with your clients. But they should, if you have a good professional relationship and a good working relationship and good communication with your client, they should keep you in the loop. But sometimes it can, like you said, Steve, sometimes it can come out of their partner's not getting along. Worst case scenario, right? They wanna separate. And sometimes it seems like a lot of law firms shuffle and change partners and change names. And you know, it's part of the business and who's going over here and who's going over there and how is the staff being separated. And usually they, because they're attorneys, they work it out themselves.

Mm-hmm. Well, and it's building, I think you're touching on something I was asking earlier. It's like, who's that team that's gonna support you? Les has a great model, but you're right, Lynda, you, you need these other, you need to be prepared essentially.

Exactly. Tomorrow I'm selling and have never talked about it. If somebody came to me and Sarah with a big number, you know, and obviously we've talked because I'm older on how we're gonna, how's this gonna look down the road and we've prepared for that. But if you know, we're, we're trying to prepare for that as best we can. I mean, it's just like your, when you do your will, it's the thing you gotta keep looking at over and over again because things can change in anybody's life at a given moment, moment in time. But I think sometimes you You really have to, yeah, you have to prepare for it. That's the best case scenario. Because if it's a fire sale, you're gonna not make the money that you probably deserve. I mean, my husband's son's business, my husband gave it to his son and then he just walked from it. And we're still stunned by that today. He just closed the door and left.

And on a legacy business.

On a legacy business that had a big book of business of competitive clients. And we still to this day don't understand it. It's caused a rift in our family. It's, it's sad. So that can happen too. So there's lots of scenarios and ways that can go down and it all really, everything comes down to communication.

Right. Well, and, and that's the kind of exactly the thing we try to avoid.

Yeah.

Both by preparing for that handoff and then determining if an internal handoff would've been the best way to handle that. By the way, one of the thing, other things we should talk about, 'cause it's central to what you guys do is the difference between EBITDA and recasted EBITDA. And I don't know how much you guys get into that, but we spend a lot of time on the difference between what your experience owning a business would be versus what a buyer's experience would be. So the simple example is I lease my car through my business. So if I've got 3 owners, each one of them has a Tesla, they're leasing it through the business. It's a nice tax deduction. Off we go. If the owner then wants to buy the business, at the very least they don't need 3 cars, they need 1. And so that money gets put back into the value of the business. And it would not be reflected in your earnings statement because the money's going back.

Right.

And sometimes that's significant. We had an extreme example where their EBITDA was like $4,000. The recasted was $2.6 million. Wow. They're begging for it. I'm not saying that's something you should do.

Yeah.

But as you can imagine, the difference between those two numbers are significant.

Yeah.

And so we put a fair amount of effort into that. So our approach here is when we meet with a brand new prospective client, we get the financial data and then we do a 2 or 3-hour interview and we're talking about 150 separate topics. And we're answering a lot of questions because when you're valuing a business, there's two things that matter. The books, earnings, you know, is the simplest way of looking at that. And then the other thing you're looking at is that every industry has a range of multiples. It could be 3x recast EBITDA to 9x.

That's a lot.

It'd be a pretty normal range.

Mm-hmm.

So there's a point if you don't have enough of your business organized where there is just no buyer because it's too much risk and nobody— or the customers are too concentrated or the business owner is all the value and they're leaving and there's just no buyer.

Mm-hmm.

To get to the lowest multiple, the 3x, you kind of have to be an average-run business. So 0 to 50 gets you nothing. There is no buyer.

Okay.

To be best in class, you get that 9x number, you just have to have a ton of stuff organized and put to bed so that the buyer is willing to pay the top-end multiple. And in that case, it's usually a strategic buyer and private equity firms, firms like that. And they pay big money because they not only see that we have low risk, they also see that we can take this beautifully constructed platform and we can make it explode. And so that may not be right for a business, but it certainly is nice to have the opportunity to, to say, no, I don't want the highest multiple possible.

So there's something that just came to mind, two things that came to mind as you were talking. And I want to, I want you to showcase what you were, as the example that you were showing, we're discussing earlier, but I, my brain, I'm starting to liken this to you either get a house that's fully remodeled and done and it's just a turnkey and you know you're paying for that. You get the house that's in the partial, so you have the opportunity, just as what you were just saying, there's opportunity of things to grow, or you know that you're buying the long-term fixer-upper, but that's, that's a different price point. So to me it was like, okay, I can see this in my brain very visually.

Right.

And so the more that you are wanting, if you want what you're saying is that top line, You gotta make that 9x. You gotta make it like you're saying, best in class, best in show. You gotta put in the work to get there.

Well, and if I could, if I could continue your analogy, it's a good analogy.

Yeah.

The, the first situation would be a house that you would buy to bulldoze. Oh yeah. Yeah. So nobody's, nobody's gonna buy those or they're gonna buy it.

You're just gonna tear it down. Yeah. Yeah.

So effectively there's no seller.

Yeah.

The best in class is a floor plan so beautifully constructed that I'm not buying it just because I love the home. I'm buying it 'cause I'm gonna build 1,000 of 'em.

Them around the country.

Yeah. Okay.

And so that's what we're talking about. A company, a company so beautifully constructed that I can make the model explode.

I love it.

And, and so that has applications for law firms because especially if you're in a niche industry.

Yeah. It definitely does. You're hitting the nail on the head. Yeah. Yeah.

Where it, I think it has an even larger application is for some of the clients of your clients.

Yeah. Yeah.

Because these businesses are trying to get good advice from their law firms and they're getting good legal advice, no doubt. But are they getting comprehensive advice? And if you can be the conduit that helps a business owner double their value, they're going to tell everybody at the country club about you. It's really good business for that law firm. And you're going to have an incredibly happy client.

So there's this model. So then my other— this is the part 2 to my thought process here— is then you've got people that want just the goodwill asset of the client acquisition. There's just that. It's like they— like you're saying, they kind of— it's like the partial teardown, but the value of what you've built in the client. And what is— and that's tangible sometimes to the owner. So the more you remove yourself from those levels of engagement, not because any other reason, but hey, you know what, I've got more staff in place. Like, the more that you sort of delegate and kind of build framework, but I believe then your value— because there are people that just want that, that's all they're buying is your client list, or they're buying your client list and your employees.

Our colleague Sarah, that— yeah, Bridging the Gap, he looks for firms that are desktop centric. They're doing the work, they've got the client base, they may have tax as well. And he knows he can come in and workflow the heck out of it, switch everybody to QBO, get everything just in his manner. He's got a plan, he's got a way he does it.

Okay.

So he looks for that because he can get it as a lesser value. Maybe the— and he said sometimes he looks for maybe the owner is 50 or 60 and it's just done, especially tax industry. They get so just toast, they wanna be out of that business.

Yeah.

And does a plan and the owner usually stays on for a couple of years after he purchases it. Not always, but it was interesting to hear how he looks at a firm because he's not looking to pay top dollar.

Right.

He's got his methodology. So he's swallowing up and growing. He planned it out.

So to go back to Sarah's analogy, he's a fix and flipper is what he is.

Oh, yeah.

He knows how to add value. Yeah. But if I'm in the selling business, do I want to be the guy selling to the fix and flipper or do I want to be the guy selling to the private equity firm, the strategic buyer at literally twice the value.

Yeah.

And that is exactly what we're talking about is to figure out where you are. Also, the guys that have got the best-in-class businesses don't have to spend as much time at the office. They can go on real vacations. They can turn off their computer because everything is handled. They can get hit by a bus and their business continues effectively without them.

Which we don't want you all to get hit by a bus, but—

Which, yeah, but it's the goal, right? To not have to be— it should run without us.

Yeah. Yeah. It's a huge goal, right?

Yeah. Yeah. So can you show us your— if you have a demo, you're just Johnny Awesome.

Just remember this is a podcast. So anybody who is coming on to see this, you need to go to YouTube to see it.

Please. Yeah.

So as we talk about it, be very descriptive. Yeah.

I will do my best and I will try to go through this quickly because shockingly scrolling 53 pages just on audio isn't as exciting as it sounds. So we call this our Business Insight Report. And so a component of it is to give you at the end, the last slide will give you a value for what we think your business is worth today. But I think more importantly, we're going to tell you why your business is worth what it is today and what we can do about it. And we put that into 4 segments: low value, low cost; high value, low cost; high value, high cost; high cost, low value. And so we want to start at, surprisingly, low value, low cost because we get some wins. So this may be updating the HR. This may be cleaning up your books, not your clients, but generally.

Mm-hmm.

You guys would be shocked to know some business owners' books are not clean. It might, it's just things you can do that need to be done, but they're not going to rock the boat. It builds some trust. It lets the rank and file employees know that we're not trying to tear this thing down. We're trying to build it better.

Yeah.

And then we go around that until we've got to a pretty clean business. So I'm going to kind of scroll down here because again, there's no point in— Sure. Title pages. One, what are we going to use? We try to get 4 years of financials. That's not always possible, but at least 3. We are going to then have a questionnaire so that we can do some benchmarking. We use IBISWorld data and we're going to only benchmark against companies in the same industry at the same size.

Mm-hmm.

Because there are significant differences in terms of value for, for that. We're also going to do a non-financial questionnaire and interview because again, we need to not only make sure that this company is sellable at the right price, but that we're going to end up with owners that are happy after the sale. It's a big deal to us.

Mm-hmm.

So this is what you end up with. So we break it down into 6 subcategories. Pardon my overscroll. 6 subcategories and then a final score. And we'll break— we'll go into each one of these subcategories later. This was developed, by the way, in Australia, so it's exotic and cool. That's why we have Es instead of Fs. But for the purpose of our conversation, Es or Fs.

I love it though, the oversight scores above, right? At the top there, the business insight.

Yes, right.

And then it makes up of this grading system that we have here.

That's right.

It's fascinating. Okay.

So if we were to, if we're going to look at this overall score, as you can see, they've got some things and some areas that you guys deal with look pretty good. Yeah, yeah. And yet this is probably a company that would do no better than an asset sale.

Interesting. Fascinating.

So a business owner sees that and goes, oh my gosh, yeah, you better explain why or I'm not going to be in a good mood. So then we're going to, we're going to talk about why.

So for those of you that are just listening to the podcast, the pick, the business that we just looked at got a D+ rating.

And 3 of their subcategories were A's.

Which were the financial credit. Yeah, some of the big key stuff that we want to keep clean. Right. Their structure.

So, again, a client I'm working with now has 3 equal owners with A shares. They also have investors with B shares. So, we can deal with all of that kind of stuff. We can deal with S corps and LLCs and C corps and PCs and all kinds of fun stuff, which obviously is important for law firms.

Yeah.

Then we're going to go into financial analysis. So we're going to have our analysts look at all of the accrued financials. If they're using a different system than accrual, then we will convert to— with the help of you guys, we'll help— we'll convert to accrual. And then we're going to— this is how we get to recasted EBITDA. We're going to do all the add-backs. This is, as you can imagine, very thoughtful work and can be incredibly important depending on the firm. It can change.

That's a lot of work right there.

It is a lot of work.

Personal expenses paid for by the company, not business related.

Yeah. Look how much they added back right there.

I mean—

Yeah.

And those add backs go straight to the bottom line when you start to create a multiple and a sale price. And I guess it's technically possible to have a negative, to have an add away, but it's very, very rare. It's almost certainly the owner taking some benefit that the new buyer would not take.

Exactly. Yeah. Fascinating.

We normalize profit and loss. Again, we want to do this with our financial team, which would include the bookkeeper, of course. Balance sheet. Again, this is not super difficult stuff. Operational balance sheet. Again, we're just making sure we have it all handled and then we're going to do a trend analysis. One, sales, profit, all the things you'd expect. Sometimes this is really, really helpful. Sometimes it's not. The firm I'm working with is a title company. I don't know if you guys paid attention, but there were not a lot of real estate transactions last year. And so they— testament to how well they run their business, they almost broke even last year, which is phenomenal.

Wow.

They're going to make more gross revenue by the end of March than they made all of 2023.

I believe that.

So the trend analysis sometimes is very, very effective. Sometimes it's not, but we want to know. And then we're going to go into each of the subcategories. We're going to talk about exactly what's going on here. Where are you above trend line? Where are you below trend line for companies in your similar industry and size?

Mm-hmm. Mm-hmm.

Because that's what's going to really inform why we got the grade we did. So for instance, in this case, they have a longer inventory hold than their peer group. So that would be something we'd work on. Obviously they're doing some things really, really well. Another thing that we do is breakeven analysis. And breakeven analysis is really important because it's a way for us to back into what is your maximum non-leveraged growth.

Oh.

So let's put this in terms of law firms.

Yeah.

How much money are we making on every billable hour?

There we go.

And how many more billable hours can we have before we max out our, our employee base and have to hire someone new? If this were a different type of firm, it might be how much more product can we put in the warehouse before we need a bigger warehouse? It might be if it was a heart surgeon, how many surgeries can they do? At some point, you get to a place where you've grown as much as you can without leverage. And leverage might be that you need to get a loan from the bank because you have to hire someone new, but it means that your cash flow on hand will no longer sustain growth above a certain percentage.

Interesting.

Maybe you finally, you know, you buy your building.

Yeah, there's 9 different ways to run this scenario. In this case, they have a safety margin of 63%. Which means that there's a lot that can happen before they feel leveraged. If this number was 10%, we'd be worried.

I see. Okay.

What's your safety margin there? I mean, what is your comfort zone number?

Well, it depends on the industry. And this will be really instinctive for you. If I were to tell you I ran a grocery store, you would expect my safety margin to be much lower than if I ran a solar company. For instance, because the margin on grocery stores is a gazillion transactions. So, we win the race, but we barely win it. We just win it so many times that we do okay.

Yeah.

For a cooler company or for, you know, something like that, we need to have larger margins because there are so many external things that can impact us.

Yeah.

So, it's industry by industry, which is why we benchmark to each individual business. And then by the way, law firms, same thing. If we're a generalist, then our margins would be different than if we only did mineral rights work.

Mm-hmm.

Right? So you can get higher margins with narrower niches.

I can also see the impact of decisions that the three of us have talked about. Where are you doing flat fee, hybrid? How much is unbilled? All of those impact decision-making processes. What does it look like and getting really good about how to close that out properly so you can track it a little bit better. So yeah.

Okay. This is really helpful because we also then return all this information to the bookkeeper so that when the financial team is giving the business owner advice, we're all looking at the same data and we're generally going to come to the same common sense conclusions.

So I like, I like what I just saw here. If you can scroll back.

Sure.

Page 20 there. So this particular business, what do you make of the assets that increased so tremendously and what would you look at or would you during the sales process, during this investigation, you know, would you dig into that because that's almost double?

Sure. You know, it's very important to us. And by the way, one of the things that you see is that businesses that are closely held are paying themselves, paying the owners much more than a strategic buyer would pay the chief executive. So, sometimes, you have a business that's artificially leveraged. And Steve, you and I have talked about this. The law firm that has 3 partners and they distribute every penny on January 1st.

Exactly.

So, they made millions and January 1st, they can't pay the light bill.

Right.

Because there's no strategy for how you handle free cash flow.

What's that called? They get more engrossed in having that, reducing that tax liability at the end of the year than they do looking forward into the business.

Or some of them have 3 boats and they need the money. There's all varieties. But that's why sometimes big strategic buyers run more effective businesses because they deal with stuff like this well.

There's different processes too. And we have a term for that because a lot of the analogy comes to What's the term that you say, Lynda?

Oh, I don't know which term you mean, Sarah.

The coffers. You're clearing out the coffers. You're clearing—

Oh yeah, they clean up. They just completely strip the business of all operating capital and it's like—

Right.

And then they don't have enough money to pay their insurance.

I just wince every time I hear that in like October, November, we're going to be reaching out to you at the end of the year and we really want to pay off everything and, you know, disperse, you know, make all these distributions and—

And these were always under the disguise or the thought process of the— the expense of, of like what the business tax-wise is going to need without that long-term—

Yes, yes.

And if you're, if you're a firm that's recycling, like we've talked about this earlier off camera or off topic, the recording, you're a firm that's going to have partners build in and you're build— you have that equity partnership legacy style firm. That's one thing. If you're a solo firm, that's done really well, but you have no family members coming in and you want— you're going to have to search for that key A player to come in and want to be that partner, hopefully like what they see. But still, I still think— I don't know about you all, but I still think that no matter what, you still have to be strategic and make sure that cash flow is there, make sure that the thought process is there. You may not like the way this new partner— it might be a younger person— wants to do business. And you're a legacy person trying to move on out. I mean, there's a lot behind this, just free cash flow, cash flow in general, just the thought process.

This is amazing.

It's true. And also, by the way, very, very, very few small businesses— and by small business, I mean under $50 to $100 million— have a tax strategy. They have a tax tactic. They may have brilliant tax tactics, but tax strategy can make a business so much stronger. Then we talk about sustainable growth. And so this is what I was talking about before we get to leverage. So one of our 6 subcategories is credit. Like, if you needed money, would a bank give it to you? In this business's case, they got an A+ there. So yes, they would. How much growth would we need year over year before we had to have access to additional capital? And we can talk—

Oh, wow.

—to that number, but it's an important number because there are a number of businesses that go broke because they grew too fast.

Yeah.

And with law firms, what that often looks like is you're burning out lawyers, 70-hour billables, and what do those guys do? They leave or they have a heart attack or both, or you're having to hire people that aren't really qualified yet. And so you end up overgrowing and watering down your brand.

Les, we're also seeing a premium cost because the acquisition of a new attorney is hard right now. You know, it just, we're paying a premium for a firm that we're working with that recruited somebody very heavily or not an attorney, you know, an administrative staff person they paid heavily for, didn't turn out.

Sure. Well, I mean, a simpler example is dental offices. In Colorado, dental offices, almost always hygiene departments are losers now because hygienists are getting paid so much now in this state because there's a shortage. So, you see it in a lot of different industries.

Yeah, that's so true. Wow.

So, in this case, their credit risk is great. In some cases, it's not. So, we talk about how to clean that up.

Yeah.

And we then go through the benchmarking in a bunch of different areas. Businesses almost never do this. Small businesses almost never do this.

I was just going to say, how many small businesses have you ever heard of that that study whether they could get credit or not. They don't— they're like, oh, I don't want to— I don't want to go into debt.

Well, especially lawyers, because sometimes there's a little ego involved. Right?

Right.

So what this does is creates a third-party, unbiased expectation of what will happen. Right. But then we now can tell these— this firm, here's where you are compared nationally to peer firms. How are we doing? Are we running an effective business? And we can show that if we just got it to median, is there additional profit? Often there is. In this case, I think there's $230,000 in net profit that if we could just get to mean for all of these measurables would be, would make it all the way to the bottom line.

Mm-hmm.

We go through all of the the overhead per person, revenue per person, all the kind of things that I think law firms generally have a better understanding of than other types of businesses 'cause of the way they bill. But knowing what you can do about it matters a ton. And then we benchmark it again. Do your paralegals make as much as a sister firm in another city? Interesting. Then we do something called a profit gap analysis. There are a few gaps in a business. This one says if we ran things well, how much more money would make it to the bottom line? In this case, I thought it was $230,000. It's $203,000. So in this, this business run well has another $203,000 that makes it to the owners every year. Mm-hmm. Then we get to the stuff nobody's thinking about. Which is really de-risking a business so that strategic buyers are interested.

Wow.

And, and this stuff is a lot of it is really easy to clean up. But let me ask you, who, what business owner in a small business wakes up on a Tuesday and says, you know, I should really get into all this stuff? So having somebody to guide them through it, do workshops, set aside time and provide the experts to address all of these things is very, very important. And it's why there's 10 million Subway shops around the country and Jersey Mike's became a national brand because they cleaned this kind of stuff up, which gave them the opportunity to have dramatic expansion. The same—

Well, look at, look at WeWork right now. Look what happened to WeWork.

Right.

And then I just saw an article this morning about a company that is, in that market who is going out and buying warehouses now and doing warehouse sharing, office sharing spaces with a much lower cost, you know, because WeWork just exploded. To your point earlier, they just exploded. They went into the markets everywhere, bought everything on every corner, and then they overdid it.

Yeah, they overdid it. They got a little unlucky too. But overleveraging meant that the being unlucky because the office space market crashed right, it might be a fatal error. If they'd had a better growth strategy, they could have been unlucky and survived.

Look what's happening to Best Buy right now.

Sure. I mean, goodness. And if you have this stuff handled, you can pivot.

Yeah.

I think there's going to be a number of billionaires made by figuring out how to repurpose strip centers into some sort of residual business. Anyway, we look at ESG. This is very important in some industries. It's less important than others.

Mm-hmm.

And so oil and gas, obviously environmental is going to be huge. If you're a law firm, environmental probably isn't as huge, right? So we're going to give it the amount of weight it deserves, but because it impacts value in some industries so dramatically, we wanted to address it. And then we're going to have a scoreboard for their governance. Is this business run well? From the executive, executives on down. What could come out of the weeds to kill this thing? Is it a lawsuit? Is it a cyber attack?

Wow.

So when I say we go into 150 different issues, I mean it. We're pretty darn comprehensive.

Can I ask you a question? It just popped into mind here.

Yeah.

B Corps, don't they have some sort of like, that they do some of this kind of, I don't know how, I don't know what that looks like, but I just think of because of the sustainability is what I was thinking of the human resource aspect of it. There's some pieces in there that people were going for B Corp. It, it's like an interesting model to, it takes a bit of this, I feel like a little bit, not too much.

I think, I think that's the problem. I think that what you, you see is that business owners randomly delve into of this. Some delve into more than others, some, you know, but it's really random. It's I was playing golf and the guy in the cart next to me happened to be an HR specialist. And so, I really liked him. So, now, we're doing an HR manual. It's not I have a very thoughtful, comprehensive way to bulletproof my business and understand how it adds value to the business itself. Yeah. And by the way, it's also going to add significant EBITDA while you're running the business and you're going to be less miserable.

Yeah, exactly. Half the time they don't know what they don't know and they don't know what they need to know.

That's right, because they're worried about today's fulfillables. All right. I mean, that's what happens anyway. Then we have a scorecard that's going to determine where your risk lies.

Sure.

Zero is represented here. The more bars means more risk. And that then you take all of this, we can do weighted average cost of capital. This would represent the fact that we're generating, give or take, 4.5 times as much profit as they— as you would if you took the same amount of money and invested it in Treasuries.

Which leads us back to our earlier conversation.

So the higher the WACC, the more people are going to pay you.

Let's remember that phrase, you guys.

I love that. The higher the WACC.

The higher the WACC. I want to start using that.

And we put it on a nice simple page for you. It's an economic profit analysis.

I like it.

So the break-even point for this company is 22.69 because we've determined that they're 4.4 times as risky as treasuries. This company is actually generating 27% profit. So their WAC plus, to create a new term, is they've got an extra give or take 4.5% of profit over and above risk, which means all things being equal, this is a good risk. You know, $5 million here is going to long-term give me a better return on capital than if I were to invest in treasuries. Now, if I can show them I also have a strategy for growth, this all of a sudden becomes a best-in-class kind of business that we could really make hum and be a great investment. Yeah. Anyway, you do all of that and we can backdoor the algebra and end up with here's what we think your business is worth today.

Wow.

Which is a lovely way to think about it.

Yeah.

And then this, this is just a quick page that talks about how— what each share would be, because sometimes, you know, there's different people have different amounts of shares and we're doing tax analysis and financial planning with each of the individual partners so they know how much of their wealth gap is covered by the sale of the business. Are they going to be able to generate a lifestyle after the sale? And then we can talk about if we were to clean up some of this stuff, your business is worth $5.36 million today. If we got all this cleaned up, best in class would be worth $9.14 million.

If you— Do you give any sort of timeline to reach those goals?

The problem is— great question, Steve. And the reason I can't give you an answer is it depends on the motivation of the owner. Owner. So, if I've got a really motivated owner, I can get a ton done in 12 to 18 months. If I have an owner that's putting off meetings and not getting, you know, not—

Right.

Not a good partner in this, then sometimes it's going to take longer. What we're going to provide them, and that's what this last page is, we're going to provide them with project management. And then I'm going to provide them with the team. And I'm going to have, again, these 90-day sprints. So, and we're going to do it kind of in this general order. We're going to attack this and attack this and attack this, and we're going to have champions for a lot of these things. What we don't want is to have a situation where the business owner is responsible for their entire end because they're going to run out of time and patience.

Right. Yeah.

But we want to find people in their business that can be champions for some of these initiatives that I can work with. Then we present deliverables back to the business owner. They're seeing the business get more valuable. They're seeing their life get better because there are more proficiencies. They're saying that the money they spend on this work is actually leading to something.

Heck yeah, to do this even if you're not thinking about selling your business.

Well, I would 100% agree because what this does is put your business into a position where it can sell well.

It's that exit strategy again, whether you do it or not, you know.

Right. Whether you want to sell it is up to you. And in fact, once we've gotten a business that's pretty clean, that's when we get to that 90-day conversation. Every 90 days, do I want to sell? That may be 15 seconds of no, I don't. I love this business. Yeah. Great. Then what is the next strategic initiative to make this business better, better, bigger, cleaner, et cetera?

I think it's also peace of mind in knowing if you need to, because— Exactly. That's right. Something in your life pivotally changed without— and it happens more frequently than people think about. You have this peace of mind having this in your back pocket of knowing that you've fine-tuned so many aspects to it.

I mean, the worst-case scenario is you have a couple, and for this scenario, we'll say that the husband started the business.

Yeah.

Husband dies of a heart attack. If they've done this work, that business continues to operate.

Yeah.

There is no tragedy financially.

It doesn't have to always be about selling the business.

It could be, but it also may be that the wife is traumatized, just lost her husband. Right. Yeah. Bikes and she's going through a really terrible time.

Yeah.

How awful to have to go in and try to pick up the rubble because there are orders that have to be fulfilled the next day. So what this does is buy some time and maybe a strategic sale in 1, 2, 3, 5 years is right. Maybe the business is running so beautifully that she's in no hurry. The point is we don't end up with a financial strategy piled on top of a personal strategy.

Mm-hmm.

And could be true with a disability. Maybe he doesn't pass away, he has a stroke or a heart attack.

Yeah.

And so what we wanna do is separate the quality of this business from the quality of the owner as much as possible.

I think that's a huge, huge piece is that whole kind of mindset shift that people will have to evolve into is that separation. But wow. So this has been amazing. It's obviously like a masterclass in 40 minutes or plus. You just deep dove into this.

And I just have one question for Les. Do you sleep at night?

It's funny that it has nothing to do with this because we've also done some of this work. So my business is really well run. I have a significant number of people more competent at certain things than I am. I am over 50, so no, I don't sleep at night, but it has nothing to do with this. If you guys ever want to talk at 3:45, just message me. I'm probably up.

I hear you. Oh yes, interesting. Well, um, goodness. So we obviously, we're going to post how to find you. Um, I know, Mark, this was really Les' moment, but we got to find Mark in this too, because there's parts that you do that are of value to this whole thing, um, as well. And, and, uh, linking back to you all, how to start this. I love the fact that you do workshops or you host ways to, to do this, to start the conversation. And I still feel strongly that it really comes down to you. Sure, you started the business, you didn't have the navigation. 5 years in, your maturity hits you and you're like, hey, you got to start, just start somewhere. Just— this is such a great resource, a, a straight tool to And I think oftentimes people are looking for it in the standard ways of the Small Business Administration and all these other ways, or their colleague, like you're saying, your friend next to you. But we're giving you resources and tools of a more strategic way of doing this and what well-thought-out process with professionals that do this.

And one other shortcut that I see is that people will go to a business broker, and I think very early. To be clear, we don't do business brokerage. I, I don't sell businesses. Yeah, we are going to, with the owner's cooperation and hard work, provide a well-wrapped gift of a business to a business broker. We're going to be the best client they've ever had because this thing is humming. Yeah. And so what I see often is people hire a business broker, they do a valuation, but the valuation is only to create a price. It's not exactly where there are gaps to add value.

Yes.

We happen to have a price that we think it's worth currently. That is not the point. The point is now let's see what we can do to dramatically increase the price, increase your personal happiness so that you have a real decision about whether you want to sell this business because it's so much more valuable, but also so much easier than it used to be.

Well, I could say as a partner, just as a business partner, the conversation Lynda and I have The more honest conversations we have about where we see this, where we've like, we're, we realized we're going to have 5 years. I mean, that went like that.

It did.

Yeah. And a point I would like to just address.

Yeah.

This correlates very closely with the personal financial planning that we do.

Yes.

Because, you know, other individuals that are doing business succession planning, etc. You know, if we're working with a business that we think right now their business would sell at $4 or $5 million, well, we can run that in a financial plan and say you get $4 or $5 million minus tax out of the business.

There you go.

And here's what your income at, you know, at retirement looks like. Here's what you're able to leave for your kids.

Mm-hmm.

Bottom line, is that the life you want? And they say, no, what does 8 look like? And we say, 8 looks like this. And they're like, oh my gosh. We can create a dynasty trust for the grandkids. We can actually vacation, you know, so it's— if that makes sense, they play very closely together.

You're peeling the layers off the onion and you're involving them in the process and you're making them really think, you know, what do I want to do? I like that.

And we can often do really good tax planning on the 8 so they even get to keep a higher percentage of it. So, Mark's 100% right. Again, we think it's very important to work on all 3 legs of the stool at once. Your personal life plan, your personal financial plan, and your business plan. And so my process involves all 3 of those. The actual financial planning aspect, the personal financial planning is not what I do in our team because, as Steve rightly said, I'm pretty busy with the business side. But Dave handles that for us. He's brilliant. He doesn't miss anything. And we work carefully to make sure that all 3 legs of the stool are balanced.

That's wonderful. That's fantastic. My gosh, it's such a pleasure having you guys back to adding more wealth and value to all of this. It's really important and I really feel like it, it really confirms that you're owning a business, the care and nurturing that needs to happen in the business. Um, there's just so much mixed messages out there right now of just things that go on and, oh, just open a business, be an entrepreneur. It's not meant for everybody. But those of us—

You know, we're onboarding a new law firm right now. And they said to me the other day, in fact, they became a client of yours, but they initially said to me, well, we can just go down to Vanguard and set up our 401(k). 401(k). No, you can't.

Yeah.

You're starting a new business. You need to talk to Marc and to Les.

Yeah.

And you need to, you need to see all of the things that happen behind the scenes that make a difference. That, I mean, and to what you presented today, I mean, my head's just buzzing now. It's like, oh my God, there's, there's there's actually a roadmap out there for people. I love that. It's not just the storefront approach to investing.

Well, with that, I think we should say we're good for the hour. Thank you. Nice to see you again. I enjoyed this a lot. So, Tira, can you—

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Thank you, everyone.

Bye-bye.

Thank you. Bye. Have a good day.

Thank you.