For pre-revenue businesses, it often feels difficult to identify and thus add to your startup’s valuation– but there are far more aspects than financials that contribute to a business’s worth. We spoke with Patrick Donohue, author of Breakout Valuation to discuss what business valuation really is and how to increase it.
“Breakout valuation is all about getting value today based on what the business can do in the future.”
Understanding what things are valuable is the first step to understanding how to add value to your business, Patrick says, and it’s worth considering long before you’re exiting the business. Building value starts at the beginning– early value appears as ideas and plans, strong teams, and promising futures. For example, a business may not be profitable yet, but having a loyal, involved following can correlate to strong sales down the line. Take Instagram and Youtube, bought by tech giants that saw potential and had the resources to bring it to life.
When considering exiting or selling a business, finances don’t always give you the upper hand. Be methodical in articulating your vision and what non-quantifiable value can achieve for the acquirer. Patrick noted that in negotiations, the seller knows the value of the business and the buyer knows the value of what they can do; problems often arise from ambiguity between parties. Only you know the value of your business and what it’ll accomplish!
Catch the full session above for more!
Serial Entrepreneur: Secrets Revealed! – EP84: Increase your Startup’s Valuation
We are having an exciting session today, learning about breaking out valuation in your company. Now, startup clubs almost hit a million members. We’re about 98,000 short of a million members, and we wanna really try to get to a million members within six months. Uh, we are the largest club on Clubhouse, and we’re proud to say that, and you can see about 10 to 25 shows a week on a clubhouse, on Startup Club.
Um, but if you’re listening to this in podcast, you may not know this, but this is actually a live show, and you can come to the live show, even come on stage and ask our experts questions, and we’ll do our best to help you with your startup. Um, every Friday, two o’clock Eastern, we run this show. And if you are listening to this recording and you [00:01:00] don’t know, we already, we also have a podcast.
In that podcast, you can check out over 83 episodes called The Serial Entrepreneur Secrets Revealed. Well, this whole concept of breakout valuation. What do you think Michele and Jeff, uh, about the topic today and the author that’s coming on? And I’m gonna share the room by the way as well, just at the very bottom there in the left hand corner.
Second icon click on Shared Clubhouse. If you do that in the audience, if you think somebody else could value, um, this topic or get some, get some learnings from it, please share the room. And, uh, but what do you think about the topic today, Michele? Yeah, I’m super excited about it. Um, talking to our guests, um, what he’s gonna do is help us kind of deconstruct how do you get a value for your company that is beyond the financial.
[00:02:00] Statements. So in other words, you know, people might say your business is worth three x ebida Patrick, who is on the stage with us now, Patrick Donahue, he’s going to tell us methods and techniques and how we prepare our company to be acquired. And I, I would say it’s a strategic acquisition, but Patrick, uh, we wanna hear what you have to say.
And before we kick it over to Patrick, who’s on the stage with us now, um, please, if you wanna get on stage, please raise your hand. Uh, you know, this is informal. Okay. And we have an expert here, so we need to take advantage of that and ask him questions and ask each other questions. So, Patrick Donahue, it’s a pleasure to have you.
Um, we’d love to hear a little bit about your topic in your book. Thank you.
Todd. [00:03:00] Excellent. Michele. Thank you. It’s, I really enjoy the opportunity to be here because I, I love your introduction, your opening comments cuz uh, I love talking about building what matters for entrepreneurs and that’s creating value and so it’s, uh, it’s great to be here. You know, my, my background has been in finance, uh, for over 20 years and I think probably like a lot of people here today.
Um, I literally started with a, uh, lemonade stand. It’s, uh, actually I put out my LinkedIn profile a couple years ago cuz it, it just really hit me one day that it’s actually where it all started and, uh, and have the picture to prove it. But, you know, what’s interesting about value is cuz I, you know, writing this book, um, I just started to realize all the inflection points in my life and why, understanding why things are valuable and why things are priced the way they are.
Um, I reflected back as that, as that, uh, as [00:04:00] that six year old kid, you know, selling lemonade. You know, why was I selling lemonade at 10 cents? And another kid down the street was selling lemonade at 25 cents. And why things are valued the way they are and why people get certain prices for things is fascinating.
So appreciate the opportunity to chat with you today.
And Patrick, um, when you talk about breaking out value, is this something that we do? Just, just, we’re getting a little bit of feedback. Patrick, uh, from your side, I know you’re new to Club X as well, um, we’re gonna put you on mute. There we go. We’re gonna put you on mute just so, uh, we won’t get as much feedback there.
And when you talk, just simply click the un unmute button in the right hand corner. So when you talk about breakout value, are you talking about, you know, just before we sell the company a month before, Are there some things we can do from, from day one, from the day we [00:05:00] start the business? Yeah, thanks Colin.
And let me know, are you getting feedback when I’m talking cuz I’m using a B’S headset? No, it’s very, it’s loud. Uh, but it’s pretty good. Okay, great. We hear you. Perfect. Oh, perfect. Okay. Well that, thank you Colin for the feedback. So, breakout valuation is all about getting value today based on what the business can do in the future.
And so to your question, Colin, breakout valuation is really, is really a mindset. And that mindset starts today, right? There’s no reason to wait up until when one thinks about an exit or what that day is gonna look like. Building value. Starts immediately. And a lot of valuation experts or people talk about m and a and exit planning and so forth will talk a lot about that, where one has to kind of set things in motion if they do wanna sell the business.
But in the book, and a lot of things I like to point out is creating a valuable business is not even to sell a [00:06:00] business. Having a valuable business is extremely important because it helps with so many other things for that entrepreneur in their journey. So specifically today and at all times, but today, like we’ve got a challenge with employees and talent, right?
And so who wants to work for a a company that’s not valuable, nobody. And so recruiting and retaining top talent, it’s important to have a valuable business and to have that mindset of a valuable business vendor relationships. Attracting customers, getting customers to pay on favorable terms. They do that with valuable companies.
And so that mindset is important to start immediately. And that’s what I really like to highlight. It’s, it’s not just something last minute as somebody actually thinks about selling the business. So I, I’m curious, so, um, looking at your book, this is [00:07:00] something you know, that you’re doing. Obviously it has to be in concert with the financial, you know, your financials.
But like, can you give an example? Like how do you do that? Like for example, um, I run a company that has an extremely large engaged social media community, and it’s not obvious at all when you look at the financials, but we believe. We know I should say that there is value there. Like, you know, like how does a person manage that?
Yeah, great point and great question, Michele. It’s exactly spot on. And you know, in the startup world we see that quite a bit where companies will get purchased even pre-revenue because they’ve created something really big and a lot of times they have, uh, a really strong following out of the gates and there is value there because value is all about what can be created in the.
Okay. And so [00:08:00] truly value is in the eye of the beholder. And so when one thinks about creating a community, like you’ve done a wonderful job at, what can the value of that community, uh, become over time? Now, one can talk about like products or services or different things where you can monetize those relationships.
And, and all of that is, is very valid. So it’s all about having the mindset of what that can achieve long term. And in the book I talk about, I love the phrase, uh, magnetic vision, cuz it’s one thing to have a vivid vision or just even a vision. But for entrepreneurs in particular, and to create value, it has to be a magnetic vision.
And what I mean by that is that it has to be articulated. So we have to talk about the vision, but then it has to be compelling so it draws people to it. And so a magnetic vision, the idea that attracts people to that vision. And when [00:09:00] that happens, like if one has a community in a robust user base and so forth, that may not have a lot of monetary value today as not showing up on traditional p and l, but as that entrepreneur can, can have that magnetic vision of what that community or user base can be over time and how it fits in the world, that’s where breakout breakout valuation truly happens.
Excellent. Well, looks like we already have two people on the stage, Patrick, that want to ask a question. So let’s, let’s go to Renee. Renee, uh, we always love having you come to the stage. What is your question or comment or even your experience, because I know you have a vast background. Yeah, no, I, uh, I struggle with this topic all the time.
Almost daily because it’s pre-revenue. Like one of the companies, um, lot of ip, lot of patents filed, and you can’t go with [00:10:00] the standard metrics because it’s a licensing play. It’s a solid company for it’s IP value to companies that can do more with the IP than you can. And if I look at metrics, um, the metrics I’ve looked at is you look at the companies that have sold, um, even if take bankrupt companies, Kodak, Motorola, Northern Telecom, they end up when they go bankrupt selling for 500,000 to million and a half per patent on an average of portfolio of 1000 to 3000 patents.
For example, if you look at ongoing businesses on patents, the company has a certain value before the, when the patent’s filed, it may be, uh, have a multiple of four. When the patent issues, it may have multiple of 10. When it goes to licensing litigation, it could be a hundred depending on the, the how core a patent it is as a pioneer patent, what field it’s in.
And so I find myself, I was looking for [00:11:00] either venture funding where people value IP or um, having to, having to play on, as you pointed out, the beholder. The value is based on what the purchaser is can do with the ip. And so everything’s gonna land on the reason they’re buying you or licensing, um, and what they can do.
The more they can, the further they can take your ip, the higher value you can negotiate, then you’re into a situation of should you negotiate or is this someone someone negotiate for you? Um, cuz I just think I used to be a better negotiator than I am now cuz I haven’t done it for many years. In terms of valuations.
And so I think there’s a lot of people out there that can really negotiate well and can, can maximize value. So it’s a function of who’s negotiating and who the buyer is. If it’s not a hockey stick projection based on revenues,[00:12:00]
Yeah, Renee, I, I, I love your point and your question, and, and IP is, is always a, is a fascinating subject. Um, actually, um, I’m not a big fan of, of, of intellectual property as we know it today. I like to think about, just know how. Um, cuz a lot of times it might, you know, come back to like the secret sauce or just processes and so forth versus what we traditionally know as a patent.
And the reason I bring that up is because I think intellectual property, um, it exists in a lot of areas and that know how exists in a lot of areas that don’t necessarily need to be a patent. Um, and then also, you know, assets, um, like patents or even a, a building or anything. Um, the value can actually be.
And that’s what’s kind of interesting, and that’s why I think it’s really important of the beholder of that process and that know-how, kind of think through where and how it’s valuable to the next person if [00:13:00] they’re looking to sell in particular, but why and how it’s valuable. And the reason why things can be negative.
So like a building can be negative if there’s like a chemical spill on it, right? Where uh, a new buyer would have to like clean something up or, or a patent can be a negative value because the cost of defending and litigating a patent is extremely onerous these days. And so one has to kind of think through the, the balance of that.
But tying this all together in my experience, you know, being able to articulate how the process and the know. Um, those trade secrets, what they can accomplish for that business or in the hands of other people long term. That’s where the magic happens. That’s where it gets really interesting. And so to come back to your point about negotiations, um, you know, I, I, I agree.
Some days I think I’m okay at negotiations sometimes. I, I feel horrible at it. I’m, I’m a big fan of, like Chris Vos and his book Never Split the [00:14:00] Difference. And so those things intrigue me. But the one thing I have gotten comfortable with, and I’ve seen it work many times, is with negotiations. It’s making sure that there’s, you know, several other parties at the other side of the table.
And then being able to articulate that magnetic vision of what that knowhow can achieve, and especially through the lens that they have as a buyer. That’s where it. That’s where it gets awesome, right? Like there is a reason, we all know the reason now why Google bought YouTube for a billion dollars and Facebook bought Instagram for a billion dollars.
Like it’s, it’s obvious today, it was not obvious, um, when, when those transactions happened, but those founders knew how to articulate, in my opinion, the, the vision of what those assets could be in the hands of somebody like the big tech companies. And I think that’s where it can get really magical for the holder of, of patents and know-how, if they do wanna transact that with other [00:15:00] parties.
What I really think you’re saying is on the negotiation level, the party doing the acquisition definitely knows the value of the ip, whether it’s trade secret or patent or whatever it may be. So the party acquiring it knows the value of what they can do. And what you’re really saying is to maximize value.
being able to show that you appreciate what they can do with it. So you can articulate the value in relationship to the buyer is everything for the negotiation. Cause if you don’t articulate that, you understand what they can do. They’re basically winning the negotiation. That’s the way I think of it.
Yeah. And I also love what you said, Patrick, about having others with you at the table. Um, at the top of the screen here is Colin, Jeffrey and myself. We actually just recently did a exit and we sold a domain [00:16:00] registry.club to GoDaddy. And I can tell you, I, I don’t, you know, for me personally, I feel like my performance and my effectiveness goes up exponentially when I have, so to speak, a wing person or, you know, when we can like kind of.
You know, strategize and really drive home the points together. It’s really hard, as you say, to be setting up the table, you know, oh, lonely Michele, or, oh, lonely Patrick. Just trying to persuade everybody because a lot of this, as you say, is, is obviously talking, but it’s your talking points and how you articulate it.
Just talking, talking oftentimes is, can really not be good. But I wanna move on to our next guest. We have Joe on the stage. Joe, what is your story? Any insights or questions that you have for, um, Patrick? Yeah, I find so my [00:17:00] story, I’m a engineer, founder, uh, I supply electronics into industrial manufacturing facilities.
One of my questions would come from when doing market cap evaluation or breakout valuation. Uh, It seems like there’s a hole in the way that I’m doing math, that the company’s value is not fixed on the value of what the company owns or the intellectual property, but it’s also an aggregate of the talent that the company currently has.
And so in a way, the, the market cap is a very subjective amount, and it’s more about when, when people wanna invest in or when someone’s being paid out of the company accounts, what is that in proportion to each other? And that’s what dictates the market price of the, the cap more than actual real valuation of the company.
And I’m open to any feedback on that.[00:18:00]
Joe, you, you’re spot on. And you know, I’m, I’m an, I’m an entrepreneur and my whole background has been in finance and. I’ll never forget when I was, um, on the floor of, uh, of an entrepreneur’s business. Um, she owns a business where she makes custom tiles and so very hands on, very labor intensive, but absolutely beautiful work.
And her final product is minimum five, if not 10 or a hundred times more expensive than tile. You just, you know, buy off the shelf at Home Depot. And when I walked around that, um, manufacturing floor that day and seeing the art, the artisans doing what they know and love so well, it just really hit me that day.
And it was a big, it was really the catalyst to my work and to this book is I realized what had not set so well with me as a student of finance over the years. [00:19:00] You know, cuz as a student of finance, I would see transactions happen like we all have. It’s like, why did somebody get such a big valuation and somebody else seems like it’s a similar business and they didn’t.
And at that moment in time when I looked around Mercedes facility, it just really realized that. It, it’s not a multiple, it’s not, it’s not a multiple of sales or multiple of, of EBITDA or any other math equation. Those are just math equations. It’s really the people in the processes that are creating value and, and the numbers are a result of that, right?
Like that’s the, the numbers that come from the people in the processes and what the business do. Like, that’s the, the, the, that’s the outcome. But the real drivers of value is the founder and the team that drive the magnetic vision. You know, the, the people, the communications, the cash management, financial forecasting, you know, the design of the business model.
You know, those are, those are the things that are really [00:20:00] driving value. So for. For you, Joe, with your business that is, it sounds like, is in industrial manufacturing. Yo, you’ve got a traditional business that is very asset intensive or has historically been very asset intensive, right? Like you own a building and a machinery and so forth.
And so to a lot of practitioners, to accountants and others, they wanna peg a value based on what the value of those assets are. Well, that’s fine if one were to like sell those individual assets, but that’s not actually what the business is doing, nor is what it’s doing to achieve long term. And that’s where it gets really fascinating to really to have an entrepreneur to say, okay, I’ve got this set of assets, but more importantly I’ve got the people in the process that know how to utilize these assets efficiently and this is what we’re looking to achieve long term.
And that’s where you decouple the keyword, decouple from. The view [00:21:00] of what are the value of the assets or your balance sheet to what the value of the equity to the business is and what it can achieve long term. And that’s why it’s important for that entrepreneur to really have that strong financial forecast or really a strong view of magnetic vision of what the business can achieve long term.
So the entrepreneur can get value today for what the business can achieve, and they’re not just pigeonholed into simply what the value of the assets are in that particular business. Does that help Joe? It definitely does. One other little nuance to it. It’s almost like if you lose talent, That it’s very possible you could create a down round just because the talent’s lost depending on what the business is.
I, I, I, I, I agree. You know, there’s a lot of nuance to, to that point, but definitely for a lot of businesses, the talent, you know, that’s the idea of a key person or key [00:22:00] person risk. A lot of businesses have a lot of key person risk, you know, and, and, and if there are certain people that need to be on board, um, that could be a challenge if, if people lose them and they’re trying to assign a value to a business.
Yeah. We actually acquired a company in about 2001 just for the talent. Um, at the time I was actually, my brother was pushing it. He was the technology side, and I was like, why are we giving up 5% of our company? Why are we doing all this, paying all this money and we’re not getting any revenue? We’re basically, we bought a security firm and, uh, the, the key, those people in that company, they became the key people.
Eventually that the gentleman who we did hire, one of the gentlemen, became CTO of the company as well, and then a president, uh, on other companies down the road. So there is value in that. But what I like what we’re doing here is we’re making a mental shift, a change in thought process, right? We’re not saying our company.
So if we just look at our company alone as a simple company [00:23:00] that generates, let’s just say it generates a hundred thousand dollars a year in profit, and it’s a widget producing company, whatever it is, and we think of that as being, okay, well, you know, we’re worth eight times or six times earnings, we’re worth $600,000.
We’re making a mental shift from that point to, okay, what would a strategic buyer value us at? Because we can make an impact on them. Whether that’s talent, whether that’s the ability to take your product or your widgets and distribute ’em through their distribution networks. And I was fortunate enough to have sold, I don’t know, fortunate or unfortunate on this one, Patrick
Uh, I had sold, um, or we had sold a, a company in 2006 to a Fortune 500 company. And I had the opportunity to work for three years at a Fortune 500 company. And in that time I acquired [00:24:00] probably about 10 different companies and I had a whole team of business development. It was insane how, how many people we had on our side.
And what I learned from that was they actually create economic models based on a post acquisition scenario. Now, I’m not saying that you’ll get full value for the company, you know, based on the, uh, value accretion for the acquiring company, cuz they’re gonna want some form of arbitrage, right? But you might get somewhere in the midpoint between.
What you might be worth on your own versus what you would be worth in the hands of a strategic buyer. And I think that was the case with.club and GoDaddy is selling to a strategic buyer. They just simply had a lot more, um, distribution than us, and they can take it a lot further, which gave us a phenomenal valuation.
Am I on the right track, Patrick, with this? Exactly right, Colin. I mean, every, well, every sophisticated buyer of a business definitely [00:25:00] has, you know, what that business looks like for them. And that value, you know, some of that value can accrue to the seller and in that, and that’s all fair game. And that’s why it’s extremely valuable for an entrepreneur to be thinking about like, where and why is this business valuable in the hands of, of this buyer?
Because it’s fair game to get paid for some of that. Now, of course they can’t. They need their own upside, you know, so it’s not like you can just magically get some completely bonkers number, but you definitely can get paid for what that business can be valued for that company long term. Yeah. And I, I, our public company, like I can talk about valuation, um, that we sold in 2006 was valued at 17 times ebitda.
So just think about it on its own, it would take 17 years now. It was growth, it was still in growth mode, so maybe less than 17 years, but it would take a, a, a, a number of years [00:26:00] to really pay off that acquisition or if you were to buy it as a standalone entity. But instead what they did is they took their two, 3 million business customers and they sold them the technology products that we had developed to those customers.
So they got a nice lift by doing that. Um, and it’s interesting that you know, different buyers that are always knocking on our doors, and more often than not, their cash flow buyers are private. But I think they’re the worst companies to do a deal with. Patrick, and I’m, and I don’t know if you’re on the same page with this one, but I think that, you know, you got these cash flow buyers, private equity buyers, they’re gonna look at you as your standalone value.
How much can they get, um, this company for based on earnings, multiple. And by the way, they, they tend to like to leverage as well. So they’re looking at the interest rate and saying, okay, if I, if I borrowed 75% of this for the acquisition, I’m paying X amount of interest, da, da, da. The second is [00:27:00] competitive buyers, in which case they can come in and they can eliminate a number of costs within the organization, or duplicate of costs.
Maybe you don’t need two CFOs between the companies, right? So they can eliminate one of them. And in that case, you’re gonna actually get somewhere between the midpoint, between what you’re worth as a standalone and what you’d be worth in a consolidated basis with the new company. Um, and then the third is those strategic buyers.
And I know, I love the fact that we’re making the mental shift to think about. The strategic buyers are we am again, are we on the same page on that one, Patrick? I, I agree, Colin. Um, but I would also encourage people to, um, be careful to, to stereotype anything because, you know, I could make a case in any of the three buckets you pointed out how they can both, they can both, you know, a private equity firm, while very much a financial buyer could also be very much a strategic buyer as well, because they may have an asset where, you know, they’re, they’re, they’re adding on to a platform business and they may be very willing to, you know, pay a [00:28:00] huge premium to be able to do that.
Um, and the reason I just say, say all of that is because I talk a lot about this when, when people are asking me about raising money, um, when they’re looking at talking to investors, um, I know a lot of people love to like put. You know, people in the buckets, you know, oh, they’re a seed investor, series a investor.
And the point I always like to make to entrepreneurs is, um, being assumptive like that only goes against you. You know, just get out there and have the conversations and cuz that first and foremost, that’s what’s most important. Um, And then also with, with private equity. I mean, private equity has gotten to be such a large asset class, and private equity is anything and everything that has to do with capital that’s being transacted privately.
And most of us, what we call private equity, is traditionally been what they call leverage buyout, where it’s a professionally managed fund where they’re using debt financing and, and other people’s money, um, to acquire [00:29:00] businesses. Um, and yes, they’re very much like the stereotypical like, you know, MBA graduate that’s, you know, pounding on a spreadsheet and has very little operational experience.
But all that being said, the industry is absolutely huge. And there’s a lot of private equity firms of, of people that are now like former operators who sold their business and are putting their own personal capital at work as well. So they’re very different than maybe where the industry was, um, largely concentrated just 20 years ago.
Um, and so, yeah, I, it’s, it’s, it’s fascinating to think through, but for entrepreneurs, I always like to encourage them to not get too caught up into, um, being assumptive of who people are and what their motivations are, because at the end of the day, it’s most important that they get out there and have conversations and start to, you know, put together the pieces of the puzzle for themselves, especially when it ties back to the idea of a magnetic vision and being able to understand and articulate where and how their business can be valuable in the hands of somebody [00:30:00] else.
Okay, so we’re talking about the magnetic vision. I, I think that might be hard for a lot of us to just sit at our desk and figure out, like, I’m curious the steps that you would encourage people to do. I mean, I obviously have an opinion about this, like what would you encourage people, Patrick and Colin, I like your thoughts on this too, cuz you’ve had a lot of companies that you’ve sold very successfully.
Like, how the heck do I come up with this vision without sounding like a crazy lunatic? Right? Like, of course everybody wants to make a money and, and, and thinks their idea is the best. Like, how do I really build that succinct vision that I can articulate and that my team can live and articulate? Because I’m a believer of Yeah, you’re thinking about selling you, [00:31:00] you, you don’t like, let the whole business shift to that.
You gotta actually be that. Patrick first, and then let’s go to. Yeah, it’s a great point, Michele, and I look forward to hearing everybody’s, uh, thoughts on this, including yours, Michele. Um, the, you know, as you were mentioning this, I, I, I drew a little, uh, inverted triangle here, um, as I was kind of thinking about the point I wanna make here, but, uh, What I encourage people to do and where I’ve seen be success successful is when entrepreneurs go out there and even if it’s a, a loony idea, but they start talking to people and they share it.
So in my community, I run a group called 1 million Cups Every Wednesday Meet that entrepreneurs can come and share their story, and it can be a complete idea that they, you know, hatched, you know, a few days ago. And it’s all fair game. And the idea is that let’s encourage entrepreneurs to get out there and start talking about their vision in a safe place.
And so at the bottom of the pyramid, the inverted pyramid is, I would encourage entrepreneurs to think about like, [00:32:00] first and foremost, like, don’t, like hold onto your vision too much. Like you don’t need to make it perfect. Start talking about it in safe places, you know, like with with Startup Club, um, and with with others, where they can get some good feedback and then they can start going into, you know, a broader.
You know, um, public dissemination of, of their vision. But to just basically fail forward, go out there, share it, get feedback, refine it. But it’s a completely iterative process and it never, ever, ever stops. And if you look at the greats, all of them have done it. I mean, you know, you can point to the obvious ones like Steve Jobs, but you can also look at the entrepreneurs in our own communities, right?
Like they have started with like loony ideas or things that seemed off the wall, and as they talked about and they refined it and they learned and failed and succeeded, you know, then it dials in. And then at some point in time people look back and be like, oh my gosh, I completely get what they were talking about the whole time.[00:33:00]
Like, we can all now do with amazon.com. You know, like Jeff Bezos, in the early days, everybody thought he was a lunatic, right? So it’s, it’s, it’s being able to be comfortable in their skin to fail forward and to be able to go share their vision and to refine that and make it, it of over time is how I think about it.
Michele. Yeah, well, let, let’s go back to the, that, that, that job that I took, the three year job working for a Fortune 500 company and acquiring 10 other smaller companies. Uh, you know, one thing I discovered, I guess you may or may not know this, but we founders, we tend to be a little kooky, uh, a little off the wall.
And more often than not, you would acquire a company and within 12 months, at least 50% of the time, the founder was gone. And so, in some ways, if the, if it’s too reliant on the founder, the success, when you present it to a buyer, it could [00:34:00] actually, you know, a sophisticated buyer could see that as being okay, if we lose the founder, the business will flounder.
And I don’t know, is that a, a thought? I, I understand where you’re going with, with this magnetic and creating vision and, you know, you wanna, you wanna, you definitely wanna show. A potential buyer that this is something way more than what they’re looking at from a financial statement perspective. Um, I am, I’m totally on board with you there, but I also wonder is there, uh, you know, is there an issue sometimes when it’s too reliant?
You, you do too good of a job being as, as Steve Jobs and, and in which case they, they’d think, oh, if we lose Steve Jobs, we lose our.
I, I completely agree, Colin. I think there’s, there’s a balance and there’s a nuance to all of this, right? It’s, it’s one thing to have that magnetic vision, but you keep bringing it back to, you know, the value being within the eyes of an m and a transaction. And so once somebody does get to the point where they’re [00:35:00] dialing it in to go to potential buyers, you know, that that does have to be to a point where it’s very polished and thought through, right?
And, and that has to, um, be aligned with what they’re looking to do. And with that, what that founder wants to accomplish, because you’re exactly right, co I’ve, I’ve seen way too many entrepreneurs who all of a sudden sold themselves into a really crappy. and all of a sudden they wake up one day and like, what the heck did I just do?
Because now I hate life cuz I have to go show up to a bureaucratic job every day, even though I’ve got a ton of dough. But I, I still, you know, make promises and probably have financial contingencies tied to me showing up every day for the next three years. And so there is a balance of like how to think through and what to articulate and to ask for in a serious negotiation if one is actually looking to sell the business in the meantime.
I think like Apple Computers a great example cuz, you know, they were, while they were public, but you know, like Apple was [00:36:00] never trying to like, You know, they were creating value in the eyes of their customers, creating value in the eyes of their vendors, uh, creating eyes in the, the value of their, of the, the current shareholders.
And so they weren’t trying to like necessarily frame the company in such a way where they were gonna get acquired. You know, and that’s where, you know, the management team could go out there and to share a vision of, of what they thought, you know, their product and what their technology could do over time.
Um, so there’s a couple different ways to kind of, kind of think through where and how somebody wants to, you know, develop and articulate their magnetic vision. Yeah, I’ve sold myself off twice in my life and both times I hated it. I remember showing up at six o’clock in the morning at the airport, cuz you always seemed to have to fly to meetings the day of or whatever.
And I’d meet a friend who sold his company and there he was schlepping it out to make his, uh, to make his meetings as well. We’d bump into each other a lot at the [00:37:00] airport. It was pretty funny, but, uh, but yeah, absolutely. Um, yeah, unfortunately Colin, I agree. I mean, I know more entrepreneurs who have been, you know, they’ve had what one would think is a successful exit, but they were not as anywhere as happy as one would dream they would be from an outsider perspective.
Um, and then there’s a lot of reasons there, but that’s why in the book I do talk about, I, I think mindset is just, it’s extremely important across the board. Um, and it’s super important if one is looking to sell, like, okay, what is the next thing? What is one really looking to accomplish here? Yeah. And then you, you take this magnetic, um, mindset theory.
Some people have taken it a little too far, like Elizabeth Holmes. You know, I wonder if Elon Musk, when he talked about self-driving cars by 2020, if he may have taken it a little too far, um, because sometimes it can border on fraud. So how do we make certain we’re not going down that.
I completely agree. [00:38:00] You know, I think that’s where, you know, from a, you know, there’s, there’s, there’s definitely a moral compass that has to come into play here. And so, you know, I’m a, I’m a big believer in, um, you know, I, I’m a member of Rotary, you know, and, and in Rotary we talk about is it the truth? Is it fair to all concerned?
Well build goodwill and better friendships, right? And those are kind of guideposts for me in how I think about things. And I think that’s really important for people, you know, like, you know, is it truly fair to all concerned and is it the truth? You know? And so while one can have a really strong vision of what an asset or what a business can achieve over time, there does have to be a fully thought through, you know, what could be the impacts of this?
Because if one were to. You know, be trumping something up for the purposes of raising money or for, for short term self enrichment. You know, that’s just not ethical, you know, it’s just not aligned with the, with the true north, you know, compass. And so there’s, there’s definitely considerations to be had there to make sure all [00:39:00] stakeholders are treated fairly.
Yeah. Great. Well, uh, Renee, Joe, or Michele, you either, anyone here on the panel has a question, just feel free to, you know, popcorn style. Just jump in and, and ask the question. Hey, so I, Michele, I just want to mention to our members that are here on this session, Patrick has a book, his book is Breakout Valuation, and we are going to give out three of the books, some maybe e or hard copy to those who just send an email, the first three people that send an email to firstname.lastname@example.org.
Can win his book. I, I’ve actually ordered it myself, Patrick, after you met, after we met you. And I, you know, I’m gonna say, I really am gonna read this because it’s something that’s resonating with me personally right now trying to articulate that breakout valuation. [00:40:00] And, and I am taking away a lot from this, so I really do appreciate it.
But I wanna go over, um, back to Joe or Renee. Um, you know, is this, is this resonating with you? Like, are you, do you think that you can go back? Like what would you do to try to like, figure out your magnetic vision, Joe or Renee?
Well, I’m starting to break down that, uh, It’s almost like the valuation of the company. EBITDA is only a a portion of it, so EBITDA, assets and talent. But if you try and make it from a flow of how it creates ebitda, you have earnings in before interest, taxes and ization. You also have, your earnings is based on sales, which is almost your sales people, plus the deal flow that’s available to your sales people.
And deal flow breaks down more into your customer [00:41:00] demand, plus the supply that you can meet with them and your customer in demand breaks down even further to saying that there’s a market opportunity and your customer owns a share of that market opportunity. So I’m kind of curious, what other pillars might you find extremely valuable in the overall uh, valuations?
Boy, Joe, that, that’s absolutely beautiful. I, I, I really liked how you articulated that because, um, you know, the, the big reason I started, um, writing this book, you know, it was probably about five years ago, I was at an entrepreneurial event and it was a beautiful fall day and we were standing outside and a, a gentleman will call you.
Uh, came up to me and started asking about, um, he’d gotten an offer. Um, and he had gotten an offer for like five times ebitda. And as I kind of started to unpack [00:42:00] what that looked like and so forth, you know, I kind of realized like he had a lot of other things that were really driving value and a lot of other things that he cared about long term versus what he was gonna get for that business and that it wasn’t gonna really move the needle for him.
And I just, I thought about that, that story with Jan when, um, when you were talking about all the things that go into it. Because what was interesting for me and, and, and what had really. Had not set well with me as I was actually a research analyst on Wall Street when the concept of EBITDA was developed, and no entrepreneur should know or have to even state what EBITDA is.
It’s a completely made up concept, and the vast majority of financial practitioners don’t even truly know how to calculate e. . Um, it was, it was a way for the technology companies in the nineties to be able to better articulate cash and it served a very specific purpose and somewhere [00:43:00] somehow it caught onto mainstream.
And it’s really helped a lot of practitioners, um, that control and own the money to, I think, um, buy businesses way cheaper than they would otherwise be buying them because they’ve got entrepreneurs overly focused on ebitda because multiples are correlation. They’re not causation. And the things you just described, like yes, it is about the financials.
A business needs to make money. It has to, you know, some way at some point in time it has to have cash flow, which a lot of us now call ebitda, but it has to generate cash. That’s what’s, that’s what’s important. And so your your point of like, what else goes into this? There are a lot of things that go into it.
In the book we talk about the nine components of a breakout valuation, but the one thing that really stood out, um, in hearing you articulate masterfully how to, you know, what leads into actually creating profitability is I would talk about capital and access to [00:44:00] capital, or capital strategy. All businesses need external capital partners.
You even look at like Microsoft, apple, Berkshire Hathaway is one of my favorite examples. Warren Buffet literally has over a hundred billion dollars of liquid assets. Even Berkshire Hathaway is issuing bonds. Why would Berkshire hath the way with hundreds of billions of dollars of of liquidity sell bonds?
Why are they raising capital? Well, buffet is a genius. He knows how important it is to absolutely have a fortress. He knows how important it is to have those external capital relationships and how to utilize. Massage those relationships even in the good times because it’s not bad times and tough times will happen for all businesses and to make sure that the cap, the company has access to capital, um, and [00:45:00] to be able to, you know, get through whatever happens.
And also, I mentioned in the book, you know, the reason Apple is successful today is none of the sexy reasons we all like to talk about. It’s not because of the iPhone, it’s not because of the, the, the app store or any of that type of stuff. The unsexy reason Apple is successful today is for the really boring reason that it’s survived.
Now, if Bill, if, if Bill Gates didn’t take that call from Steve Jobs and they weren’t able to have that type of relationship when and when Apple needed outside capital and to be able to keep Apple alive back in its dark days. Apple wouldn’t be around the way we know it today. And so I think one of those, that survival mechanism is, is really, really important in a big part of the equation for survival.
Making sure a business is going to be around is true access to [00:46:00] capital. And to be able to tie, tie, tie into, uh, capital providers, um, where and when needed at all times. So, uh, hopefully that helps Joe, but that’s, that’s one piece I would definitely add into your narrative. You know, I, I’m just gonna add one thing here.
I, I love this conversation and thinking about the different metrics, even though I’m not a finance expert like yourself. But, you know, I can tell you for the recent exit that we did, Colin, who is actually, uh, great at this economic studies, et cetera, is we invented our own metric. Okay. Just because of that very reason, Patrick, like, you know, we had internal people, I’m gonna say that were finance professionals or legal, but we knew as business people that, as you say, EBITDA for example, [00:47:00] was not indicative of the valuation.
So I really do strongly encourage people, you know, to think about what is valuable. You know, you know, ebitda. So what metric, Michele, are you able to say what metric? Or is it under nda? Oh, no, I, I don’t think it is. You say I, I can’t remember. I can’t remember what you’re talking about. You do . You talking about usage maybe, or?
No, no, no. We, we took ebitda, but we, we, we, um, changed some of the formula. Remember? I don’t remember. I’m sorry. Can you explain it better? I looked at pricing power. That was one thing, right? Like there’s just, I’m just saying like, , you know, we can’t talk too much about it, but you know, just pick up, even if your basic economics book or you know, someone maybe you know, who’s into economics or finance, they, they’ll be very stringent quite oftentimes, but not always about what metrics you follow, but [00:48:00] you have to really think about what applies to your business.
If you know you’re a new entrant and you’re trying to get customers, therefore maybe you’re price lower than maybe you do a study on what is the potential of pricing power Once there’s a certain amount of awareness, you know, there’s, there’s so many different ways to frame it and think about it. That’s why I think I was saying, you know, like just don’t try to like go in a room and think about like, what is the answer and I’m right, you know, kind of situation.
Yeah. Right. If you looked at our historical numbers, they, they, they weren’t, they didn’t justify the valuation that we received, but if you looked at the go forward numbers with the pricing power, the combination of those two showed a very different story. And we were able to show them that and prove to them that we had pricing power and that we could raise prices without causing any churn.
Because we did that the year prior. And we did [00:49:00] that during, I think, the negotiation too. We raised prices twice and then we began to say, well, you know, you could raise prices, um, a dollar a year forever. Pretty much right now, we probably have said enough, but the fact of the matter is we didn’t just settle for that standard ebitda.
And that’s what you’re talking about, Patrick. Right? Just don’t just settle. Try to articulate a story, but be a story. If you can put KPIs behind it, like what Michele’s saying. , and maybe we settle ourselves short. I don’t know Patrick, but we were focused on go forward EBITDA with increase in, um, pricing that they could implement.
And then of course they have more distribution cuz they’re a GoDaddy registry and, and whatnot. Whatnot. Thoughts Patrick? Yeah, I, I agree. And actually, the thing I was thinking about, Michele, when you were, when you were chatting was the book, uh, called Play Bigger and the idea of category design. But I absolutely love it, you know, and what you said, Colin, like, [00:50:00] don’t settle.
You know, it’s, it’s really up to the founder, to the entrepreneur to identify and track metrics that are important to them. Ebitda cash flow is just a result of all the things that truly cause value. So we have an experienced entrepreneur, Dan, who just joined the stage. Dan, I know you just came in, but you know, we’d love to hear any thoughts that you have or any questions for, um, any of the folks up here on the stage.
Another Canadian a yay. Well, thank you for the invite. Um, I was just listening, but I only stopped in a few minutes ago. So, uh, it sounds like you’re talking about evaluations and multiples and different reasons that the multiples would be different, um, in different scenarios. Is that where you’re at? Yeah, but it’s more identifying the causation, but yes.
Yeah. And so the causation you can [00:51:00] be intentional about is what I’m hearing you guys say in other. Think about ways that you can potentially create a higher valuation than a standard, um, would happen in whatever industry you’re in. And, and part of that, from what I hear you guys saying is you just, you looked at your scenario in a different way and by doing that made adjustments and then you had proof for people that there was a higher value than a normal multiple might have been.
Exactly. Well, that’s, um, the name of the game in, in, it’s really interesting because most. , most of us begin as on accidental entrepreneurs. Um, and I don’t know how many sit down and look, you know, basically look at what it begin with. The end in mind at some point sit down and say, okay, what does this look like?
Um, when it’s done, I, I, and done could mean it’s [00:52:00] operating as a cash flowing business. Or it could mean that there was an exit or a liquidity event of some sort. Um, and part of that process is looking at how you, you know, painting a picture of a result that might be different than normal. And then reverse engineer by asking the questions, what would make, um, a scenario better, stronger, higher, multiple, or even, you know, number that’s not attached to a multiple, uh, based on some strategic advantage that’s created intentionally and reverse engineered to that moment where you spend time painting a picture of the future.
Yeah. I, I love the word intentional and that’s, it’s, for me, that’s spot on. It’s, it’s all about intentionality.
And so you, are you again, I’m go, I’m going back to the very first question I think I asked you, [00:53:00] Patrick was like, from day one, what can we be doing today with that intentionality? So should we begin to think about the metrics or KPIs? I’m just trying to see if you have any tips for new startups and, and, and what they should be thinking about because it’s easier to sort of begin to think about it at the beginning and then you sort of engineer things a certain way versus you come to the end and you’re saying, oh, we gotta go back and change this because now we’re in a longer strategic, or we’re, no, we’re not a standard.
We don’t plug into whatever it is. Right. Yeah, it’s a, it’s a great, great point, Colin. And day one is really about mindset. And this book became so much more impactful and so much different than what I originally envisioned, uh, because a few years ago I just wanted to, you know, frame up finance, um, and numbers better for, for entrepreneurs.[00:54:00]
But unpacking all of that and making that available, um, to entrepreneurs and sharing my decades of experience around valuing businesses and doing deals and so on and so forth, I really kept asking Why, why, why? And really kind of backed into some really root causes, and that’s what we started the book out with.
And so it doesn’t sound like stuff that should be in a, in a finance book. Um, but we start out with confidence and vision. And curiosity and people and communications. And then, and only then do we get into the more wonky stuff. You know, the, the stuff around cash management and the financial forecast and the capital, capital strategy, business design.
But I, I’ve come to realize, cuz I’m, I’m an investor. I, I invest in private businesses. Um, and, you know, at the end of the day, it’s about the people. Um, and, and I’m not just, I’m not just saying that [00:55:00] it’s, it’s, it’s so much more important than the business design. So keeping this on track to the, to your question about day one.
Entrepreneurs really need to start with confidence, and they really need that mindset because if they don’t have, if they don’t come from a place of confidence, all the rest of the stuff I, I could blabber about doesn’t matter. It just doesn’t. And then they need to have the vision and then they need to be curious.
And curiosity means a lot of things. But for me it’s all about being able to ask questions of essence and go out to meetings and networking and join, you know, the startup club and being part of this clubhouse with serial entrepreneurs and being able to think and talk out loud about, you know, the things that matter to them.
But it takes that core curiosity, you know, connecting with people, which we’re doing here on this, on, on, on Clubhouse today. Right? And so those are some of the core things that have absolutely nothing to do with the numbers. But they have everything [00:56:00] to do with the numbers because if they don’t have the confidence to come here and be part of this event and to ask questions to connect with people, uh, none of the other stuff, it doesn’t matter what multiples are, it doesn’t matter what any of the other stuff, cuz they’re not even gonna get a chance to see that if they can’t start with the base of what really matters into start their journey.
So day one, I would highly encourage mindset. That’s interesting. And uh, it just reminded me of a story, um, back when we did sell in 2006 that I, that public company to a Fortune 500 company, and we were sitting in a boardroom, the boardroom’s probably about 20 people in the boardroom. It, it was, uh, with the executive team of the, the company and the CEO is sitting directly across from Lee Ram and, uh, from, from Deluxe.
And we were presenting, I was presenting a PowerPoint presentation and in my PowerPoint presentation of the company, I said, and oh, by the way, we also have. A two day strategic [00:57:00] planning per quarter. We have weekly huddles, we have daily sales huddles, we have goal setting, we have company goal setting, individual goal setting.
And then he raises his hand, his finger, and he points it off. Everybody in the, this is a Fortune 500 company here. Okay. You think they would have their act together, by the way? You really would, but you’d be surprised what you see in these companies, I’m telling you. And he points at everybody in the room and says, you know, this is the kind of culture we wanna bring to our company.
And just having good professional systems, just learning how to operate a company professionally gives the buyer so much more confidence and can also increase your valuation. So I really love this topic, Patrick, because we talked about things that help us break out of the traditional EBITDA numbers.
And I think, you know, I, I feel like we’ve only scratched the surface. But do you have any final thoughts before we close out and make a big [00:58:00] announcement? We’re gonna be making a very big announcement in two minutes from now, so I just want everybody to stick around for the announcement. But Patrick, any any closing thoughts?
We were able to share a lot, but I completely agree. There’s a lot more to unpack here. I’ll just say again, I, I love this conversation and I hope everybody here today took away, um, some valuable insights. And if there’s anything I can do for people, um, I try to be an open networker as much as humanly possible.
Um, and so people can reach me at, uh, patrick breakout valuation.com. I’m happy to, to connect and be helpful wherever I can. Um, and there are resources on our website that are, that are free. So if people do need financial model templates and all that type of stuff, they can go to breakout valuation.com.
And again, just, just looking to spread the word and to help entrepreneurs create what matters, and that is a valuable business. So thanks for the opportunity to have the conversation today. I really appreciate the whole team, Colin, Michele, Mimi, [00:59:00] and, and, uh, Michele and Renee, Joe, Dan, everybody for asking questions.
I just very appreciative. That’s great. We, we really enjoy it When Renee and Dan, we are, um, the announcement. Uh, we, if you’re listening to this in podcast or in replay, uh, you know, next week’s show, you’ll be able to catch. But if you’re listening to it in replay or you’re listening to it live now, uh, we’re just gonna let you know that we have Joe Foster, the founder of Reebok, coming on next Friday at two o’clock Eastern, and you’ll be able to get on stage and ask questions and talk to this gentleman.
He is a legend, 87 years old. He’s flying into Fort Lauderdale to do the interview at our offices. It’s, uh, just a phenomenal opportunity to hear an icon on Clubhouse, on Startup Club, and, uh, you’ve been listening to the Serial Entrepreneur Secrets Revealed Show. We do this every [01:00:00] Friday, two o’clock Eastern, and again, if you’re in podcasts, you can come on stage, you can come and listen.
In person live and come and communicate with us. We just love having people on stage like Renee, Dan and Joe. We really do enjoy it and I’ll tell you there, there usually is not, if you come on stage, we’ll follow you like we wanna follow you and we wanna continue to connect with you on through Clubhouse as well.
So we are looking forward to seeing Joe Foster founder Reebok next Friday, two o’clock Eastern on Serial Entrepreneurs’ Secrets revealed. Michele, any final thoughts or are we when you ? No, no, this has been a great session. You know, Patrick, I think you should come back. Um, and you know, we’re gonna delve into this topic even further and if you wanna get more insight, I actually, I’m gonna go check out those templates on your website.
You’re talking my language, you’re my kind of finance person, so I’m very excited to meet you here and um, if you would like to get a free copy of [01:01:00] Patrick’s book. , you know, just send an email to Hello startup.club and the first, uh, three people that do so will get ’em either a hard copy version or an e-copy version.
So thank you so much again, Patrick. We really appreciate it. Uh, the members here are grateful for, you know, your, your insight and your wisdom. So I hope everyone has a wonderful weekend, and thank you again for joining Serial Entrepreneur. Thank you so much.