How to Build a Sellable Accounting Firm | Ocean Gross

Sitting with me right now, I've got my friend Ocean Gross, who is an investment banker, deals with business transactions of all kinds. And what he's going to be walking us through is his framework for getting your business ready to sell and getting the maximum valuation for the business. So there's, there's five buckets of risk that he's going to be walking us through today. How to know if our business struggles with that particular risk and what playbooks we can implement to actually mitigate that risk, to make sure that we're getting the highest value offer, we're, we're getting the best terms, we're getting the deal that we're actually looking for when we go to sell our business. What makes a business sellable?

That's a great question. There is a lot that goes into it. It's just as much an art as it is a science. There's a lot of numbers that go into it, but there's also a lot of things that are subjective. And, you know, when it comes down to sellable, something that's valuable to one person may not be valuable to another. An example of that is, let's say you're selling your house. It's the easiest thing to understand. If you list your house for a million dollars and someone's only willing to pay $500,000 for it, then does that mean the value is a million dollars, or does it mean that you're willing to sell it for $500,000? Well, the value is what you're willing to sell it for and what someone else is willing to buy for. And so that is the value of a business. Now, what goes into that value will depend on the buyer and the seller and the things that are valuable to them. So a good example of this is one seller may value the price that they get, but not know so much the terms that they get on the sale price. So, hey, I want to be able to brag and say that I sold my business for 100x EBITDA. Okay, well, does that mean that you have very little EBITDA and you have a ton of revenue, You're a very big business, but you don't necessarily have a ton of profit. So you can command a high pricing multiple. Or would you rather say, hey, I sold for a cash amount, so maybe the actual EBITDA multiple was relatively low. But, but in that sale process, you manage to sell for a large cash amount. So think about having 15 million in free cash flow. So just how much money the business spits off every single year and then being able to sell it for, let's just say 2x and so you're selling it for 30 million. You can say I have a cash exit of X amount. So just depends on what the seller wants and then the buyer as well, what are the things that are valuable to them. And the more that you can understand what a buyer is looking for when they're looking to purchase a business, the better you can position yourself if you want to sell or even if you want to buy. Because it's important to know how other buyers view things so that you can understand the competitive landscape. Because especially in like business acquisitions, especially in the small cap, the person who does the least amount of due diligence often ends up buying the business because they offer the highest price most of the time because they don't understand the risks involved in what they're buying. So an example of that is if I buy a house that I didn't do any sort of due diligence or I didn't do any, I didn't pay for the person who got there and a home inspector to look at it and I found out all the floorboards are rotted away. Then I may have purchased this at one price thinking that everything was good, but ends up I have to spend the entire value of the house to get it fixed up again and get it cash flowing. Or you could find out that you're out of code and you have to knock the whole building down. Well, those are all really unfortunate things that you should understand as a buyer. What is the risk of the thing that you're purchasing? A lot of people go into it blind because they've never done it before for, and they don't really understand what goes into what, what an investor is looking for in their business.

So we were just talking about this. You shared that there's kind of like five main types of risk that investors are looking out for that would either make your business more or less attractive to them to purchase. Right. So I think let's go through these risks. But there's some terms that I know are going to come up as we talk through this that I just want to make sure we're like super clear on and people understand like what you mean when you use these terms. So I want to walk through a couple of these and, and if you would just give your very like, brief, concise, like kind of bottom shelf definition as best as you can. Number one that constantly comes up in this discussion is ebitda. What is ebitda?

EBITDA is A fancy way of saying profit. It's not about how much you make, it's about how much you keep. Awesome.

CAC to ltv.

CAC is customer acquisition costs. So how much am I spending to get one customer? LTV is lifetime value. How much money does that customer spend over the lifetime of their tenure with us?

So this is a ratio between those two numbers.

In other words, a ratio.

Got it. What's an add back?

An add back is something, let's say it's more common in the smaller businesses, less so in the bigger businesses. Because as you get bigger, maybe you have multiple shareholders, you have multiple owners of the business. Generally that the tolerance for add backs goes down. As in if you're publicly traded, you like really can't do that. They're like, oh, you're using personal, you know, business expenses for like personal things. Can't do that. Right. Smaller cap. You're going to see a lot of people maybe putting their car on their business and then they're trying to take that expense out to reduce their tax liability. I'm not a, you know, not a tax guy. This is not tax advice. I'm just saying, like that's what I've, I've seen people do. Me personally, I wouldn't necessarily do that, especially if I wanted to sell within the next three years. That's, that's really an example of an add back.

So you're saying that kind of artificially reduces profit, which would reduce your valuation on the business. Let's do less.

So that, so you know, investors, okay, good investors aren't stupid. They make some mistakes. But by and large the people who buy businesses have some amount of width to them. Especially when you're talking about potentially giving someone millions of dollars, that's, that's a good chunk of change. So when they're doing that, they want to make a well informed decision. And the way that they make well informed decisions is by making sure they have as much data as possible to be able to make that well informed decision. So if you have bad data, you can make a bad decision. If you have good data, you can also make a bad decision, but you also have the ability to make a good decision. But what if you want to make the good decision on bad data? It's very difficult to do that. So therefore you want to know that the data that you have inside of the business. So for example, how much money the business is making, right. That's kind of a big, big important part of how much I'm willing to pay for a Business is how much revenue and how much profit it spits off. If I see that number as being inaccurate or I can't trust the numbers. That for me, from the buyer's perspective looks very risky. It looks like, wait a second, what's happening here? This is kind of fishy. And can I trust these numbers? So that's what I mean by I really wouldn't suggest it because then there it adds into it questions the credibility of your data, which you really don't want because then that adds ammo for the buyer to be able to beat you down on the price. Yeah.

Okay. What is a multiple?

A multiple is. This is common, not all the time. So I'll be very clear. A multiple of EBITDA is how businesses are valued. Oftentimes not all the time. So an example of antonym or opposite of this would be a pre revenue company that doesn't have any revenue may still receive a valuation. Then are they a multiple of ebitda? Well, yeah, not really. Right. That's. So it's a valuation, but a post profit. Post revenue, Post profit. Those are like kind of the two stages. You have post revenue of now we're actually have exchanged a customer from a dollar for value. And so it's post revenue. Post profit is we now are able to support ourselves without any outside help, any, any people putting in extra money into the business. It can sustain itself. So post profit and then the profit that you keep in the business, there's usually a multiple. So it'd be 1, 2, 3, 4, 5, 100, 130. You know, there's, there's some interesting exits out there. It's usually a multiple of that profit. So if you are bringing home a million dollars every single year, you may receive a 1x multiple. So that would be you have a $1 million business or you may receive 100x multiple. You may be able to sell it for $100 million. So it totally depends on the type of business, the stage of the business, what industry you're in, what people are in. The business varies on a lot of factors, but that's generally how businesses are valued.

Well, in general, that multiple is going to relate to these risks that we're going to talk about in a minute here and how many of those boxes you have checked off. Right. So if you have fewer of these risks, in other words, if it's a less risky investment, then you might get a higher multiple on profit. Right, got it. Okay, last one I want to go over here is enterprise value.

Enterprise value would be the Value we talked about a little bit earlier, the value of the business. Sometimes it's in relation to the EBITDA multiple. The multiple, but not all the time. So that would be enterprise value is how much is someone willing to pay or what is the value of the business. So if the business is a $6 million business, someone would be willing to pay $6 million for it.

By the way, guys, Ocean just did a workshop inside of our free school community for accountants. It's called scale your accounting fir. In this workshop, he actually whipped out his spreadsheet that he uses to value businesses and walked us through exactly how to use it to be able to calculate our own enterprise value on our firms. So if you want access to that template and the training on how to use it, first link in the description below, go ahead and join the community. It's totally free. You'll be able to find that template and that training inside the community there. And similar to what you were talking about earlier with the house example, if I'm saying if I own the business and I'm saying that it's worth a million and you're looking at as an investor saying it's worth 500,000. So it's, it's some intersection or combination of those two. It's, you know, what is somebody willing to pay for it and what is somebody willing to sell it for? And it's the intersection of those two.

Correct.

So the risks to solve for. I'm going to list them out here and you guys may have heard some of these before. I, I don't think I'd heard all of these before, but I heard some of them before talking with you. And so I want to just talk through, like define the risk. What, what is the problem we're up against if this is what we're facing? And maybe talk through a couple of playbooks or a couple strategies that particularly service based businesses would be able to employ to eliminate that risk in their business. So the first risk that we want to solve for then is something called keyman risk. Could you just quickly define what does that actually mean in your business? What would that look like? How would you know you're facing key man risk.

So there's two main categories that I see and one of them is delivery and the other one is marketing or sales. So you have demand generation and demand fulfillment. Right. You have those two things. If either one of those things is fully reliant on the person who's leaving the business post transaction, that is generally a risk for someone who's Buying. An example of that is if you are in all the ads that could de risk the business because. Or that could increase the risk of the business and devalue it because people would look at that and say, yeah, well as soon as I buy it and you're gone, who's going to run the ads or who's going to be in the ads? How do I know that new ads are going to convert? And so you have the ability to remove yourself from the ads, from the paid ads so that other people know that they're willing to go with you. An example of the ability to de risk is outbound sales. Outbound sales is kind of difficult to crack. But once you get it working usually works pretty well. If you can, if you can, you know what you're doing. Right? And so those are ways that human risks exists in the demand generation, in the demand fulfillment. You have things like operations. So in your case, if they're a bookkeeping firm and they are doing all the bookkeeping and the taxes, then that person is going to be reliant when they sell the business. Who's going to do this work? And so if it's you, then there is going to be discounts. People are wanting to play pay less for your business because they know that they're just going to lose you as soon as the business is bought. Now I know that there's an argument to be made with earnouts saying like, oh, but you're going to stick around for a little bit. Sure. But I as someone who like wants to buy and then like do hypergrowth generally don't want necessarily like an earn out. I don't necessarily want someone to stay around for a while because we just rip the band aid off and we just go for, you know, we are a growth organization so we focus on hypergrowth, not necessarily maintenance. That's just not our deal. It's not what we do. And so because of that there are changes that we may make that someone may not agree with and having to convince someone because it's not necessarily. This is a very interesting one. It's not necessarily who owns the business, it's who has the most influence over the people in the business. A great example of this is Sam Altman. When he was fired, he said, we don't want you. The board decided that you're not a good fit. We're going to have to remove you. What happened? Well, he didn't own the business. Maybe he may have someone. I don't think he has ownership. I think that's what he said in the.

Yeah, it's under dispute in court right now whether he actually has an equity stake in the business.

But he won't get into that conversation of deciding whether or not he does. But he was removed from it. He was a CEO and he had so much influence that a large majority of the staff said that we are going to leave if Sam Altman is not reinstated. And so that is an example of someone who doesn't own the business but has large influence over the business. And so a lot of decisions would then have to go through Sam Altman. Right?

Yeah.

So in this case, if we buy a business and we see that type of risk, then it's like, well, my job as a. I have a fiduciary responsibility to shareholders to make sure that, that their investment is protected. That is a risk that I not able to take as a fiduciary responsibility to shareholders. So.

So I'll tell, I'll tell you a couple places. We see this all the time in the accounting industry, right? It's often very owner heavy. And on the marketing and sales businesses are. Yeah, on the marketing and sales front, you might get a ton of referrals. And the referrals are because of, you know, Bob, the owner. Right. People are like, oh, you got to work with my accountant, Bob. And so as soon as Bob leaves, they're not going to send that referral anymore, necessarily. Or they may not send that referral anymore because Bob's no longer there. Right. On the delivery side, you often see it where the owner of the accounting firm is also the highest level member of the fulfillment team. They're the, like the, you know, advisor to the clients. They're the actual CFO on the team. And this often is just because they haven't grown to the point where they can afford like that level of talent, right. And so that person leaves and suddenly, you know, you might have admin, you might have like basic bookkeepers, you might have a tax preparer, but you don't have like the high level person who like really knows the work inside and out. So in those cases, what's typically like, let's say you've got, you're planning on an exit, you know, in the near future. Like what would be kind of the playbook to, you know, make sure you eliminate as much of that key man risk as humanly possible.

In order of priority, I like to go at it, say, what are the problems? What problem are we trying to solve? That's really the best place to start and hire from pain so if the pain is I'm currently doing all the fulfillment, I'm going to hire for the pain that I'm in. And the way that you figure out what is the highest priority is doing just a time audit. You write down all your what you're doing every single day, day in and day out for two weeks. And then you take that and you say, all right, who are the people that can complete these tasks instead of me? And then how much would it cost to hire for that role? An example of this is let's say that I do want to find someone who's an A level talent. This is another thing that, you know, key man risk. If you're solving for keyman risk, do you want to put the right person in the right seat or do you want to put the wrong person in the right seat? Or maybe even worse, the wrong person in the wrong seat? You know, that doesn't make any sense. So you want to put the right person in the right seat. And so in my opinion, we would like to find someone who's an A player, you know, acqui hire, if you will, to be able to obtain talent. An example of AC we hire is Meta just purchased a stake in Scale AI. And the large reason that they did that was so that they could get Andrew Wang went to high school with him. He's now worth $3 billion. A little bit. $3 billion, yeah. And even back then, by the way, he was like coding and programming in his bedroom, like just AI stuff. He built this like really cool AI turret that was using machine learning to detect humans. And then like it was an airsoft turret. So it was very cool. Wow. He was very passionate about it, right?

Yeah.

And because he was so passionate and he's and developed his skills over time, Meta was willing to pay $14 billion in this case to be able to buy a stake in his business and then bring him in as their chief AI officer. So leading, you know, scale from scale AI to now Meta AI. So that's an example of acquihire, you can hire talent. And so the way that you would make your business more valuable is you would find the people, the right people and put them in the right seats and those really good business owner, really good talent that other people would be willing to pay for. And so if you have an A level person, the way that I go figure out how much is this person paid, I'll usually go find a platform and say, this is the role that I'm hiring for. This is the stage of business. And type of business that I'm in. You can ask, you know, any large language model this and they'll be able to give you a relatively good answer. How much should I be paying this person per year? Now that only tells you one form of compensation, cash compensation. Usually it doesn't tell you the other four Cs of compensation, which we can talk about later. But that would be an example of how you remove keyman risk and solve the right problem in the right way. You solve, put the right person in the right seat and remove yourself from delivery. The pain that you're currently in and unable to solve the problems that you want to solve and not just solving the person who has solved the problems that you're looking for in the past. So let's say that you are currently a $3 million business and you would like to become a $6 million business. Well, instead of hiring someone who's been in that role or one role under, you would want to find someone in a similar size company. You'd want to find someone who has been in an organization that is larger than yours. So think, you know, 9 or 6 to $9 million. So they may be starting at 6, all the way up to 9 and they've been in that role during that growth. The reason that I say that is the problems that you face as an organization of that size are different depending on the size that you are. So an enterprise level organization is going to struggle with different problems than a startup organization. And so that's where you see a lot of bad crossover of people trying to hire enterprise or big name brand people of like, oh, you worked at Google, therefore you must be really good. Well, they solve those types of problems that Google has, but not necessarily the types of problems that maybe a smaller or startup business or a medium sized business has. So you want to make sure you find someone who's appropriate for the size of business and the type of business that you're at and then put that person in the role. Assuming they're, you know, good at what they do and if they're really talented, you can expect to pay quite a bit more than you would probably feel comfortable paying a role for. And the advantage of that, even if you're paying this person $250,000 a year plus bonus, if I see that in a business and I see these people are in it for the long run, they're willing to stay around, that is a very enticing opportunity for me because I can see we can hire talent, we can acquihire talent, we can Acquire the business and we can bring on that talent. And ideally, when we go buy the business, the level of talent in the business that we're acquiring elevates and raises the bar and the standards of people in our organization, not lowers it. If we think that this person is going to join and they're going to lower the standards of an organization, it's going to be an instant no go. It's just not worth it. It's. It's not worth it.

So I think in a lot of cases, what you're going to find is you actually have to grow a little bit to be able to reasonably afford this person too. Sometimes you might be able to find the margin in there, but oftentimes it's like the reason the owner is still doing all that fulfillment work, for example, is because they have a certain amount they want to take home out of the business. And, you know, there's not enough beyond that for them to also afford that level of person.

Well, not just growth for growth's sake, you know, that's. Growth for growth's sake is the business strategy of cancer. You know, they just, we want to grow as much as possible. That's what cancer does. So instead you want to focus on like, what is the right ways to grow. Right? You can solve growth in the right way. You can solve growth in the wrong way. It may not necessarily be growing your client the number of clients you have. It may just be growing the profit that you have. And maybe that's just a price raise, or maybe that's figuring out how to communicate your value in such a way that makes people more willing to pay and increases the value of what you're selling so you can increase profit margins and therefore receive a better multiple on your multiple on your company.

Okay, so that's key man risk. The second risk that we want to go through today is something called key client risk. So kind of describe like, how would I know that I'm facing key client risk in my business?

There's definitely different schools of thought in key client risk there. I've heard people say anywhere from 5 to 20%. For us, it's around 20%. So that would be 20% of the total revenue of the business is coming from one client. That would be key client risk. You could also be key client risk in the sense of industry. So if you only focus one industry and all of those. So if you just served newspaper firms well, you know, newspaper companies are traditionally a shrinking business. And so if you're selling to those people, that could be an example of key client risk. Even if not one of those businesses makes up more than 20% of your revenue, what that means is if like 80% of your revenue comes from newspaper companies and we think that that industry is not going to do so well, what does that mean for your business? So that's an example of key client risk.

Now how would you go about mitigating that? Because obviously like most people aren't going to go, oh, I'll just fire the giant client and remove that revenue. That sounds really scary to a lot of people. But I know like that is a potential solution to this, right?

Yeah, that's a potential solution, not necessarily the right solution. It depends on that's subjective to who, what, what business someone in and where they're at in their stage. The way that I look at it though is if I have someone who's quote, a whale, a large client, then I would want to go out and find more whales instead of killing it and saying, well, you know, I don't want this, but how did I get that client? Was it a referral? Was it someone I got from paid ads? Was it through cold email, Maybe outbound? Can I replicate that? Can I go do that over and over again for other companies? That's the way I would rather just go out and get bigger clients. As you move up market, generally your margins expand as well. One of the easiest, easiest ways to make more money is just to move up market. And so upmarket just means serving bigger or better businesses well.

And there's, there's, there's some firms that we work with that we see doing that where they just move the entire firm to. Now we're an upmarket firm. And so if you get, you know, you get one more client who's a big whale, you can suddenly, you know, fire like 10 or 20, like lower end clients who are, you know, lower margin revenue. And now the firm's at the same revenue, but you've suddenly got 19 fewer clients that you have to deal with less relationships. Right. The way some other people will go about it is they kind of set up like a second division. So it's like we've got a division of the company that does kind of the lower end work that's more like churn and burn. We've got a division of the company that's like, this is our whale division now. But either way you're kind of like diluting the risk, so to speak. Is that right?

Yeah, I would say that's a fair assessment.

So that's key. Client risk. The third one we wanted to go through was single channel risk. So how would I know if my business is, is facing single channel risk?

What does that mean for small businesses? It's more relevant than bigger businesses because bigger businesses usually just have a ton of different ways that they get customers. And that's also part of the reason that they are so large. So you know, there's like, for example, law firms don't have this type of risk. Sometimes they do, but. Right. The ones that I know of that are so massive, they have referral partners, they have billboards, there's like these buses that are always going around their face across it. We have a guy who's, who's a billionaire from being a law firm and he like had buys a bunch of ads, he buys Google Ads, he buys, you know, so he has a large different area, that surface area from where he gets clients. So not one area. So if for whatever reason Facebook was to go to business tomorrow, their business wouldn't tank overnight because they have different areas, different ways to get clients from. So ideally a small business has multiple sources to get business from. Now I will say when you're early, early on, it's very difficult to diversify because doing one platform extraordinarily well is already hard enough. And so imagine just having to manage, you know, more management. As you talked saying, less clients means less, less number of clients means less entropy, less confusion, less management, less people relationships. So the same thing is true for funnels. So if you're going to do cold email really well. Well the way that you would do cold email is you'd have someone who's managing all the inboxes, you'd have someone who's managing all the conversations, you would have someone who's manag managing the reply rates, making sure that all the tech is set up properly. So those are examples of how hard it could be to manage to master one platform. Even harder to do multiple platforms at the same time. So find one platform, master it as well as you can, and then move on to the next one.

Well, this is probably the difference between your scaling strategy versus your preparing for exit strategy. Right? Because if you're in hardcore scale mode, there's very, very few situations where it's going to make more sense to diversify into another channel. Unless you're just truly reaching. Like for example, if you're on Facebook ads, it's like unless you're just truly reaching the total addressable market you have on Facebook, which is highly unlikely, which is highly unlikely, then it probably makes sense to just get better and spend more on Facebook ads than to try to start off cold email or even even move over to YouTube ads. Right. But if you're preparing for an exit, then it's probably worth the extra resources to spin up those additional channels because whatever, you know, whatever increase in resources you have to put in now, that's also going to increase your multiple and decrease the risk for the buyer at the end of the day when you do go to sell.

Yes.

So that's single channel risk. Fourth one we wanted to talk about was market risk. And I think you kind of started to get into this a little bit with your newspaper example earlier. But what, what is market risk? And how would I know that? I'm, I'm looking at a market risk in my business.

So an example in the accounting firm space is, I even asked to talk to you about is, what do you think the future of AI is in this business? If we believe that AI is going to replace this thing next year and all accountants are going to be out of a business or out of a job next year, then that would be an example of market risk. Another example of market risk is, let's say that you serve a specific region, demographic. Let's say you are in Los Angeles and it's shrinking every single year. Well, if that market is shrinking, then I'm probably going to be largely concerned with the fact that my market is going to dry up and it's no longer going to exist. And therefore, if I have no customers willing to pay for my thing, then that's generally a risk. As someone who wants to buy a business, another thing would be AI replacement. Am I concerned about that? Is there maybe not even AI, but is there a technology replacement? Is this going to be fully replaced with technology? Well, if the answer is yes, then I may not want to go into that industry. There's a lot of industries you could go into an example of like oil and gas. Right. Is oil and gas going anywhere? Well, probably not anytime soon. Are there risks of like, market risks of, well, what if all of a sudden, you know, Venezuela. What if we acquihire Venezuelan oil reserves? Right. Well, then, you know, imagine being the investment banker pitching that deal to Trump of like, we have a great deal for you. You know, we think this is going to be an excellent opportunity to acquire this, this nice area. There's tons of assets on the balance sheet. That's.

I'm sure that's exactly what the conversation was like too.

And so, well, now we have all this supply and we may have the same demand, which therefore will reduce the pricing power that the seller has of that asset or commodity, in this case for oil and gas. So tons of oil, not enough people buying it, your price is going to go down by nature. So that would be an example of market risk. That's why oil and gas is really interesting to invest in because there's just a ton of massive risks in it that you can't control. By the way, like, there's like a lot of things outside of your control.

No, that's, I mean, that's kind of the nature of market risk. It's like you can't change the fact that there's market risk there. I imagine the playbook to just kind of like protect against that in your business though would be just what are you doing based on that market risk that's out there? Is that right?

Yes. So you can, you can do two things with market risks. You can say, we're going to lean into it and say, yes, AI is going to replace all accountants and here's why that's to our advantage. We're actually utilizing AI in this way. And therefore we are the best, we are the best people to be able to take advantage of this massive opportunity. That's one example. The opposite example would be, yes, AI is going to replace it, but here's why that's wrong and here's why we're not worried about that because that's not going to affect us. So those are the two different places that you can play, the positions that you can play to.

Makes sense. Yeah. I mean, that's a big one in the accounting industry that people are, we're talking with people about this all the time and it's, I feel like I have kind of a very moderate perspective on it. We were talking about this the other day, but like, people are asking themselves, oh, are accounting jobs even going to exist in five or 10 years? And I think they will. Because what you always see with technological advances like this is the technology reaches the actual capability to do the thing well before the market is ready to trust the technology to do the thing. Right. Like there are still industries where they're heavily using fax machines. It's like technologically, email has been able to handle that type of work for like 30 plus years at this point. Right. But for whatever reason, these industries are still using fax. There's no reason for, there's no, there's no rhyme or reason for it that I can comprehend. But that's just what they trust and what they know. And I think it goes the same in the accounting world. Like, it's very, very, you know, very high trust kind of relationship. The relationship you have with your accountant, like this person's managing your finances. You want to just relegate that to chat GPT? I don't know, man. You want to just relegate that to Google's AI? Like, I've seen the answers Google's AI gives on a, like a Google search. Sometimes it's, it's out of this world. So I guess market risk is kind of the scariest one though, because what's happening in the market is totally out of your control. Right?

So, and then also people bet on one thing and then their job may no longer be relevant. And so maybe they spent years or decades doing this one thing and then all of a sudden they can go out of business because of things that are out of their control. And so that's why oftentimes investors allocate. It's called portfolio modern portfolio theory, which is just a fancy way of saying, you know, how do I reduce my risk and how do I reduce the chances that everything I put money into my investment account is going to go to zero? You can have different portfolio allocations. This is a very simple example of this is I'm going to dedicate a certain percentage, 50% of my portfolio to equities. So that would be stocks, bonds, maybe ownership in your own company. And then 50% of my net worth is going to be in bonds. So that's going to be things that are relatively considered more stable and less risky. But risk, return, risk reward, right? If you, if you have less risk, you're probably going to have less reward. So with bonds, you may have less risk, but the amount of growth potential that you could have with that money is also generally reduced.

So at the end of the day, it sounds like what, what I'm, what I'm hearing, I'm going to repeat this back to you and make sure I'm understanding you right. It sounds like with market risk, it's almost more about the story you're telling about how your business is operating. With this, market risk is more important than the actual market risk. And what's happening externally.

Yeah, storytelling is a really, really important part of any business. And if you can tell a really good story form of marketing, right, if you can tell a really good story, you're going to be able to get people to buy into your way of thinking and potentially be able to sell for more money.

So that's market Risk. The fifth risk here, and this is the one I think I hadn't heard of before talking with you about these recently. The fifth one is data risk. So what is data risk? How would I know that I have a data risk in my business?

You would know if you had a data risk in your business because you wouldn't be able to have solid numbers to be able to make decisions from. What I mean by that is if you are making constantly decisions on a gut feeling, I think this is the right answer and not the data says that our show rate is low. Therefore we are going to take actions to be able to improve our show up rate for sales calls. Okay, great database decision. You're probably solving the right problem in the right way, assuming that is actually your constraint. And I don't hear this talked about too often. There's a book called the Goal by Eli Golderat and in this book he talks about the theory of constraints. The theory of constraints which he came up with. I think it was like 50 years ago. It was a really long time ago. He used to work in manufacturing and so the theory of constraints was a very big deal back then to find ways to improve your factory's output which wouldn't go straight to your bottom line, you know, profit. So because of that he in there, he he. That is where, that is where that modern. That is where theory of constraints originally came from. Was. It was from that. Now obviously you know, you could say like some guy back in Egypt who probably came up with a theory of constraints and you know, he like was really the, you know, it's on some papyrus reed from thousands of years ago. Okay, all right, yeah, fair enough, I get it. But there's a high likelihood that that was actually the case. But he's the one that largely in today's modern age is probably credited with that type of information. Is that really good book by the way.

So what you're saying is the data then though tells you where your constraint lies and what's actually going on in the business?

Yes and no. So yes, in the case, yes it should tell you where the constraint is. But no in the sense of what if it's not a constraint focused approach and instead it is just knowing what I'm getting for this asset. So what I mean by that is what if none of your revenue or profit numbers on the business that I'm buying are accurate? Well, how do I know what I'm buying? That's really risky. It's like saying, yes, I'd like to sell you this car, does it run well, you're gonna have to buy it to find out if it runs or not, right? Okay, well great, you know, I'll buy it. So instead of being concerned of, you know, if the car's running, like, okay, let's start the engine, let's do an oil check, like how many miles does it have on it? Those are all things that you'd probably want to ask. So the same thing is true when you're buying a business. Is, is the underlying data that the business is presenting to me. They're using the data to tell their story, right? The data tells, but the story sells. That's big. That's a big thing. And the data, you have to, in order to make a good story, you have to have the data to be able to back up what you're saying. Otherwise people are going to be able to pick apart your story because they know that your data, the underlying data is faulty. And so, you know, one of the best pieces of advice that I've ever gotten was about the data tells, but the story sells. So you really do need the data, but you also want a good story behind why you're selling your business. So data risk, two ways to mitigate data risk. Number one is having a really good, you know, there's demand generation and then there's demand fulfillment, right? So you have demand generation side, that would be a CRM customer management software. Think HubSpot GoLevel. I prefer more enterprise level options because there's a lot of strength that can be had in that. But like, that costs a lot of money. It's like, yeah, it does cost a lot of money. But you know, do you think that if it was any good that it would be cheap? Right. Okay, well then you can definitely get what you pay for. And platforms like those that are more expensive are able to invest more money into the growth and the development of their platform to provide a better experience and more accurate data. And there's also definitely, there's the network effect, right? So for example, Facebook, if you're on Facebook and all of your friends are on Facebook, that's a high value. But if it's just you on Facebook, well then it's not very valuable. That's like, that's an example of the network effect. And so platforms like HubSpot that attract a lot of businesses, they have a ton of apps on there, so they've developed a network. It's an example of a, of a good moat. That's why they are very expensive. You know, they're a very, very large business because they have a very good network effect and the good thing. So an example of this is QuickBooks as well. You are able to integrate with a lot of different softwares and increase the data visibility in your business so that you can have good data to be able to make good decisions in your business and ideally scale faster. Right. We're working in high growth organizations. We always want to focus on do we have the data to be able to make the decisions in the business? If the answer is no, then how do we be able to get the data and who can help us put together that data in the business to be able to make good decisions on that? So things like HubSpot can tell you how many leads am I getting? How many leads are converting, what is the sales velocity, which means how fast do they buy? Is it one week, is it one month, six months, a year? How long does it take them to go from I clicked on one of your ads to I am now paying you money as a customer. So that would be good CRM data. And a very, very good CRM will generally do a good job at that. An example of really good backend data and backend metrics would be having a platform like a software like Asana to be able to measure how many tasks your employees are getting done. What is the utilization of those employees? Making sure that your financials are audited. Now, if you're in the bookkeeping space, ideally it's a lot of them. If not, then maybe you got to work on a little bit.

But the cobbler's shoes, what's the phrase? The cobbler's children wear no shoes.

Yes.

And that's often the case in the accounting industry.

Sadly, yes. So you want to make sure that your finances are up to spec so that if a buyer does come in and looks at it, they say, yep, I trust these, I trust the data and I know what I'm buying. And even if it's a few cents off, that can, that can have heavy scrutiny in your valuation. Because they say, well, if this is a few cents off, how do we know that anything that you say is true? And so that's, it's very highly scrutinized, probably more so than almost anything else is really the financials. Because, you know, money doesn't lie. It's in numbers on money is all just numbers on a screen. So you really have to make sure that that is dialed in.

Well, that's the case anywhere within your numbers. If one number is off, then that casts doubt on everything else.

Right, Exactly. Yep. And so those are examples of ways that you can reduce your data risk. You can have visibility on the problems that you're solving on both the demand as well as fulfillment side.

Okay, so that was data risk. And so the idea here is basically if you're able to eliminate all or most of these risks, then you're going to get a higher valuation on your business, a more attractive sale price or sale terms, whatever you're looking for. When you do go to sell to.

An investor, to a buyer, complete elimination is unlikely, but reduction is more common and more realistic. So yeah, so I would say if you can eliminate data, perfect. Or you can reduce data risk. Or reduce the risk, eliminate all your data, just delete it. Yeah. If you can reduce risks, you're going to get generally a better price for the sale of your business.

Ocean, where can people go to find out more if they want to know more about what you've been talking about here?

YouTube@oceangross x I like posting on X a lot and then Instagram.

I will say you have an excellent YouTube channel. So I would high of those three places, I would highly recommend checking out the YouTube.