Joe says business owners should understand their company will have more value if it is “transferable” rather than a “lifestyle business.” A lifestyle business is one where the business owner needs to be present for the company to function. If a company can run as its own entity without depending on the owner, it will be more attractive to potential buyers as it is considered transferable.
Furthermore, Joe recommends business owners to read Vivid Vision by Cameron Herold. This book helps owners and business leaders solidify their vision for their company, write it down, and therefore clarify their objectives to the rest of the team to produce a cohesive direction for the overall business. When it comes to more technical systems or processes, business owners should also document them clearly so the organization’s infrastructure will be what is driving the business’ growth- not the owner.
Chris also raises the issue of concentration risk, which is when a company obtains a large percentage of their revenue from a particular sector or client. Joe says this can carry too much risk, and owners should consider adding new markets and services so they can diversify the sources of their revenue.
Finally, Chris and Joe discuss how recent banking failures and crises have impacted businesses. Joe advises owners to keep risk management at the top of their priorities in this environment and to ensure they have a good relationship with their bankers. They should consider enrolling in Insured Cash Sweep (ICS), which allows large assets in their bank account to be split into smaller, FDIC-insured amounts at various banks. Joe also recommends listeners to set up lines of credit ahead of time with their bank and consider negotiating better terms with their vendors on payables.
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Hello, everybody, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by senior vice president and partner Joe Seetoo. Thanks for joining us.
Absolutely. It's great to be here with you.
You know, having you on because you've got a lot of experience in terms of working with business owners. You've got this whole offering designed to help business owners maximize the value of their company and the exit, it’s called the Strategist here at Morton. You also have a podcast called The Ripcord Moment that focuses on talking to business owners and their experiences as they kind of pull that cord and exit their business.
So that way you can help others get the most out of their businesses that they have. So thank you for joining us.
I'm excited, Chris. Thanks for having me on.
When you think of all of the conversations that you've had and the people you've talked to and network with, what are the top three or four things that come to mind that can help business owners maximize the value of their business?
Well, I think the first is really understanding that the business itself, as it grows. Is it a lifestyle business or is it one that is going to have transferable enterprise value? Right. And so typically those that are not centered on the on the business owner themselves and by the way, many businesses that ultimately go on for sale start off, you know, by definition as a lifestyle business where the owner is growing, they're making good money.
It's providing, by definition, a good lifestyle for them. But inevitably, the struggle with that is that they have to be there in order for it to work.
Yes, that's the that's the key, right? I mean, what people are looking for is if a business needs that owner to operate and run, it's probably not worth as much money as a business where the owner is like on a boat in Cabo. Yeah. And it's running just fine.
Sure. Because it comes down to the predictability, the certainty of the earnings that it's its own independent, you know, functioning entity as a business that, again, is not dependent on the owner being there day to day. And so if you're an outside buyer coming in to look to acquire that asset, if it's dependent on one key person, that key man risk, there's a tremendous amount of risk in it for the acquiring from the buyer's perspective.
Okay. So that's one aspect. I mean, you first have to understand. Is it a lifestyle business or is there actual value that's transferable? Correct. And then from there, like what are a few things that people should do, as they look under the hood of their business to say, hey, these are some things that I should focus on now that I know that I'm going from a lifestyle business to an enterprise business.
What are some things I should focus on to maximize that?
So I think the two biggest things in that transition you have to think about one is and it's one we've even employed here is the owner has to get their vision out of their head and get it documented and down so that the rest of the team there's buy in and that everyone understands where this company is headed.
And we call that the vivid vision. Right. And so it's a phenomenal book by the author I believe is Cameron Herold I've actually recommended this. I’ve bought this book and handed it to other CEOs. And when you actually go through the process of writing it down, they said it's been transformational. And so what that does is it really allows for everybody in the company to get that vision of where the company's going and really have a crystal clear, you know, point of view of what that Northstar is.
So I think that's mission critical and it's not an easy process to go through, but that's something that owners need to think about doing. The second thing is the process as you start to develop around what we call the tribal knowledge that the owner typically has in their head and maybe even some of the other key professionals, you’re getting that out and getting that documented into strategic processes that others can learn from.
That can be sort of the infrastructure, the skeleton of the business on which the sales and the marketing and other ancillary processes are built on and products are built on. So in many ways, by doing that, you're starting to take, allow the business not to be dependent so much on the owner, but that the business processes are what's driving, driving the delivery of the services and the growth.
Right driving success. So, you know, making sure that again, just to rephrase it or, you know, put it in a different order, making sure that the entire company knows what the vision is for the firm and where we're all trying to go.
Having the right processes and procedures in place that are documented. So that way, you know, new employees can come in and follow those and help drive the business forward. And then also, you know, just the business owner being honest with where they are in their stage of their business, whether it's a lifestyle business or enterprise, has actual enterprise value that can be sold.
Absolutely. You rephrased that well.
Another thing that comes up from time to time is concentration risk of your clients. Right. So how much revenue is coming from one particular company or sector? How do business owners go about diversifying that?
Yeah, that's obviously, you know, everyone loves to get the big client, the big revenue stream whale hunting, so to speak, the 800 lb gorilla. But what you ultimately find is that over time, that creates that can be very problematic for a number of reasons. If that client leaves, the business suffers. In fact, I was working with a business owner last year, and that was exactly the case.
It really upended their business model. So over time, obviously, the key is and again, if you're thinking about it from an outside buyers perspective, the certainty of the earnings that are hitting the bottom line, if you have too much concentration, you're putting all your eggs in one basket, which is exactly what we say you don't do here in wealth management.
We're doing financial planning. You've got to be cognizant of that risk. And there's really, you know, the only ways of getting around that are being thoughtful about how to acquire additional clients in that particular service, or if you're looking for perhaps, of going into new markets and adding additional services or additional markets, you're able to bring in revenue that way.
Yeah, Thanks, Joe. What do you like most about working with business owners?
I think so, when I think about it sort of philosophically, you know, to me it's the ultimate. They are the people who drive the economy. They naturally are the ones who are saying, I'm going to take ownership for my future, good, bad or indifferent. And they're willing to put themselves out there. And I think, you know, one of the things that I admire about that is that entrepreneurial aspect of like, I'm willing to put myself out there.
I'm going to be me and I'm going to take ownership for that. And it's just I think it's admirable.
I agree with you. I came across this Netflix show. I don't even remember the name of it, But, you know, my wife's a very organized person. Her favorite store is the Container Store. And I'm scrolling through Netflix and I come across this show. These two women that their sole job is to go into people's homes and, like, organize it, and they do a phenomenal job.
And I thought to myself, I know that that really is what drives America. It's these people that say, you know what, I'm passionate about this. I know how to do it better than anybody else. And I'm going to find people to pay me to come into their house. Sure. And to organize it for them. And it was just it was really cool.
So I agree with those words that when you think about the world that we're in today, we have some banking crisis that's going on. You got Silicon Valley Bank, Signature Bank, Credit Suisse is having some issues now and renegotiations with UBS. Businesses have had to reevaluate their banking relationships. Yeah. How should businesses protect something that they probably don't often think about what they need to protect, which is their cash in this environment?
Yeah, I mean, I think it's a great point and I'll take just a higher level step back and talk sort of about the businesses in general. I mean, I think risk management has got to be first and foremost on everyone's minds, not least of which is that we're continually having these sort of black swan events that are hitting us out of nowhere.
You know, COVID and now, you know, the banking crisis. And so, you know, I go back to I think it was my football coach that said complacency kills. And it's something that has stuck in my head. And I think if I could impart that sort of share that nugget of wisdom, to anyone who's a business owner that's listening, never resting on your laurels.
And I think it means looking at every aspect of your business, right? Because information is flowing quicker. It can upend any business any day of the week. And I think that's a different dynamic than we faced, you know, 20, 30 years ago, because the speed at which things move today is dramatically different. But to your specific question, one is making sure you have a really good relationship with your banker, especially if you're dealing with the smaller, more regional community banks, business banks oftentimes that are typically doing 70% of business loans in this country tend to be sort of the smaller regional banks.
So that personal relationship, I think is critical. You know, obviously there's the insured cash sweep feature, the ICS acronym that we're hearing about in the CDARS program. Those are various programs that are set up at banks that allow for businesses and individuals to participate in these programs where let's just say they have a million dollars well over the FDIC limit, that that cash is then being swept into other banks at amounts below the minimum so that you're making sure all of your cash is insured.
And what's nice about this is you're getting one statement it’s very transparent and allows you a great degree of certainty. The other thing that I would mention is that get those pieces, those extra safety nets in place ahead of time. So maybe have another banking relationship. You know, one of the things we're doing in Morton is we're using Schwab, Right.
Which is our custodian to do active cash management through T-bills. So that's another way to have access to cash that's earning something, maybe setting up your margin lines or lines of credit with the bank ahead of time so you’ve got access to cash. And then the last thing I would say is that as it relates to even just cash management, cash flow management is look at can you negotiate better terms with maybe with your vendors on your payables where if you're on a schedule where you're paying every 30 days, maybe you can extend that to 35 days, 40 days without damaging the relationship, but you're buying yourself just that little extra bit of wiggle room.
Yeah. Joe, thank you. I was talking with a partner of ours in a separate business from Morton about how he was navigating this, this banking relationships. And it was amazing, he said, because he has longstanding relationships and he spent a long time working for Wells Fargo. He was able to call one of his former colleagues and get a business account opened up within just a few days, which is normally unheard of.
Right. Right. And so it's important that they do have, that you do have good relationships with banks as your business and then paying attention to different margin lines, FDIC insurance or leveraging this ICS, insured cash sweep. So that way you can protect yourself well above a million. I think those are great points. Joe, thank you so much for joining us.
I look forward to tuning in to The Ripcord Moment and the Strategist offering and helping business owners maximize the value of their business. Thank you so much.
Thank you, Chris. Yeah.
Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.