How to Give Up Equity and Maintain Control of Your Business Part 4

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Okay, so I want to talk a minute about cap table optimization, too. So remember, the cap table is the who owns what. And I just want you to get a little bit about. When you think about bringing in outside investors, a lot of people feel that they need to maintain control, and that's really not the case. So most people don't understand that you don't need to have 51% of the company to have control. And if you think about some of the founders, like Jeff Bezos, and his net worth is up and down at any given moment, obviously, but he only owns about 12% of Amazon. Warren Buffett only owns about 38% of. And again, these change all the time. This is the most recent information from last year that I could get. Warren Buffett owns 38% of Berkshire Hathaway. Bill Gates about 1.3% of Microsoft. Phil Knight at Nike about 19%. And they've got giant net worths. Right? Giant net worths with minority ownerships. Think about Bill gates and Microsoft, 1.3%. Bezos is clearly the guy at Amazon, but only 12%, unless I think that's after his divorce. And Warren Buffett, 38%. But you think of Warren Buffett as Berkshire Hathaway. None of these people actually has control in terms of the percentage owned, but they do have a control strategy. And that's really important for you guys to think about as you get your business bigger. And if you do it now, then you'll find that it's a lot easier as you grow the business to not have to take specific steps to change the control structure later. So for Bezos, he's got a proxy agreement with his ex that says that he's able to vote the shares. So a proxy is something that you can give to another person that says that they have the right to do the voting for your interest. Okay, so you can do it with proxies. You can do what Warren Buffett did. He created two different classes of stock. And I love the boldness of this. His class a shares have 200 times the voting rights of the other shares. So that's a heavy ability for him to control the board of the company. Now, Bill Gates just had straight common stock. He didn't have anything different. And so did Chip Wilson. Right? A lot. That's probably the most common structure is that there isn't anything. But I'm going to encourage you guys to think about putting a control structure in yours. Phil Knight did a similar thing. Instead of saying that he had 200 times the voting rights, he said he gets to elect 9 out of 12 of the board of directors members. That means that there's no chance that he won't control the board because he can appoint 75% of the board of directors at any given time. So he can always control 75% of the board, even if he only owns 0.1% of the stock. And Zuck had not quite as bold as Buffett. He has 10 times voting. Right. So these are all strategies that, that you can use to stay in control of the company. And keep in mind why this is important. Because Steve Jobs got thrown out of Apple and Dove Cherney out of American Apparel and George Zimmer out of Men's Wearhouse, and on and on and on and on. Right. There's so many people who didn't have a structure like that put in place. And the truth is, nobody cares. Nobody cares except the investment bankers. When you're going through a public offering and even then, all you have to do is say no. You just have to say no. Okay? So it's really important to me that you guys think about having the ability to stay in control of your companies. And then just a couple of minor things to wrap. I just want you to be aware of ebitda. EBITDA is a term that you will hear quite a bit as you go into the investment banking and accounting worlds. So EBITDA's earnings before interest, taxes and depreciation and amortization. And the reason that that is a big deal is that it basically is designed to give us an idea of what is the operating profit of the company. So interest is usually related to debt that was used to acquire either other companies or capital assets of the company. So it's not something that really tells us how profitable the company is from its actual operations. It's certainly important that it has to be deducted as an expense because we used it to acquire something hopefully of value. Right. But in terms of saying how profitable is the company actually operating out? It's not as important because we could have gone out and sold equity to get that as well, and we still could. Right. We could replace that debt with equity. So we're going to take that out. We're going to take taxes out because taxes are a direct impact and result of the profitability of the company. So, so we're not going to look at that to see what the operating profit of the company was. And then in accounting we have two things that are not real expenses. They're fictions that accounting created to give us an idea of how assets that we own are going down in value, that we're kind of using them up as we go along and operate the company. But it's not really an operating profit thing. Right. It's not an expense directly related to the generation of the profit of the company. So, so we take out interest, we take out taxes, we take out depreciation, we take out amortization and then we're left with the operating profit. That's why that number is so important. Okay, is the purpose of EBITDA to estimate operating cash flow or earnings? Yeah, it's not quite cash flow, but it's really earnings. That's the goal. Cash flow, separate statement, separate thing. Lots of things that go into cash flow that would not affect ebitda and particularly if you're on a cash versus accrual basis for accounting. Rob. So that's, that's going to enter into that. And, and just to kind of give you guys an idea, and we'll go into this in more detail at the end of this in week seven and eight. But, but what companies are selling for across the board right now goes up and down. You can see that they kind of peaked at 5.6. This is across all industries. But they peaked in Q3 and 4 of 2018 at a 5.6 multiple. Then they've kind of trended down. They went way down in Q2 of 2020 to 2, 3, 7 and then had a recovery and now they're back down around 3, 8. But this is just so when you're thinking about what's my company worth, if you want to just think very, very broadly with a very, very broad brush, you can multiply by about three between three and four to get an idea of what your company should be worth. But really remember, different industries are different things. There's another thing that is important for you to know too from an accounting standpoint, especially if you are an owner operated business. So if you're an owner operated business, those businesses typically sell for multiples of SDE or seller discretionary earnings. And that is ebitda, the number that we've already talked about. But you're adding back the owner's compensation and any benefits that the owner has like the cable bill being paid or the retreat that they took their family to in Paris, the it didn't really have to happen for the company. Right. So from an SDE standpoint, the multiple across all industries is right now about a 2.5. So that's for owner operated businesses, SDE, EBITDA for professionally managed businesses. Okay. So just kind of keep those in mind. And then across the board, and this is something we talk about in a whole lot more detail in our EPIC program. But across the board, those owner operated businesses, typically under 10 million in sales and under 2 million in profit, those are selling around 2.5. The businesses that are professionally managed are selling for a multiple of EBITDA, not SDE. They're still under 10 million in sales and under 2 million in EBITDA or profit. They've gone up about 19% year over year from last year. The blue box ones the owner operated have stayed about the same for the past several years. So we're at about a 3.8 for professionally managed businesses. Private equity currently across all industries is paying a 15.2 multiple. So these are typically companies with more than 10 million in sales and more than 2 million in EBITDA. And then on the public markets, NASDAQ, the last time I looked a few weeks back, it was at about a 27.1 average. And so those are also larger companies. So we're looking generally we're probably ideally thinking about planning to sell to private equity or a family office or a SPAC or a public company or another corporation or a high net worth individual. Those are the five main categories of buyers that would be paying multiples in the red box zone. Okay. So when we're thinking about growing through acquisition, we like to acquire in the blue and green boxes and ideally less than 2.5 and 3.8. And then when we go to sell, we're really looking to sell to private equity or one of those other entities that's paying significantly more. And they're paying more because they're bigger deals. And there's a lot of competition because there's a lot of family offices and private equity companies that are looking for those deals. And then their exits typically are to take the thing public or sell it to a public company. So just to give you kind of a lay of the land there in that world. And then this to me is to incentivize you to think about ultimately exiting the whole thing rather than hanging onto your company. So if you were to hang on to your company and let's say that it was going to increase in sales every year, it's EBITDA excuse me, increase its profitability every year by 7%. Then you can see that over a period of 16 years, the first year we'd get 7% growth on 500,000. So that would be 535, I'm assuming a multiple of seven for the sale. But we're holding on to it here. This is just the value. So each year we're making 500, 535, 572, 612, etc. And the value of our company is increasing. And at the end of 16 years, we could sell it for 9 million, 6, 56. And we would have received the EBITDA every year during that as well. On the other hand, if we were to hang on and sell, hang on to the company for just a few years and sell. If we could sell it four times during that 16 year period, let's say we held it for three years and sold well, these numbers stay the same. But then we get a $4 million shot in the arm in year three and we reinvest that in another company same year. That's very easy to do. Right? And I'm not even, I'm just saying we're doing it cash, not, not even with leverage. So we have that $4 million shot in the arm in year three. Now we buy another company, hold onto that for four years and sell it. That's five, six. We're still selling at a seven multiple. That's just. We're not holding it. Then we do the same thing another four years, another four years and we end up receiving $26.6 million for it, plus all the cash instead of $9.6 million. So 276% more. So that's our challenge, right? The epic challenge. We talk about how can we buy and sell businesses. That's why this is so magic. Because would you rather have 9.6 million or would you rather have 27 million? Right, right. That's the big question. And the only way you're really going to make these jumps is by selling your business. And as long as you have things that you want to do that are beyond the business that you've got, exiting your business can be awesome. Okay? So I want you to think about that just in terms of motivationally and aspirationally. Does it make sense for me to think about selling my business? Because a lot of people, when I first talking to them, they're, no, I'm never going to sell my business. No, no. Give it to my kids and everything. It's the worst thing you can do. Your Kids don't want your business. They don't know how to run it. They're not inspired by it in most cases. Right. 98% of the businesses that pass from multi generations don't make it a few generations down the road because the kids want something else. The best thing you could do is sell the business, put the money in a trust and have it available for them there. So that's this section of the impact. I know there were some more complex issues in this one, probably the most complicated that we'll get. But I think it's really important to think about these things and they're things that a lot of people don't think about. The structure is going to create more value for you than almost anything else that you can do, assuming you have a successful business. Because we can look at all kinds of ways to increase sales and profits and all that type of stuff. But if I could save you 50% on your, on the taxes, if I can help you get 50% more for the company or five times more for the company because of how it's structured, that's really the place for us to start. Okay, so structure ultimately ties into value and profitability and, and it was hard to pick exactly where to put it, but I think it's important enough that it stands on its own and that's why I took all the time to go over this. Thanks everybody.

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