Podcast: How to Uncover and Fix Your Value Gap, an Interview with Brandon Wood
In this podcast, you will learn what the value gap is and how to adjust your retirement plan to secure the lifestyle you enjoy.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.
About the Guest
Brandon Wood leads the operations and project management teams for GEXP Collaborative™. His management experience spans two decades, where he has directed multidisciplinary teams in treasury operations, risk management, compliance oversight and financial modeling. He helps bridge the elite strategies of our GEXP design team with the personal financial dynamics of each client. Brandon is also a partner at the family office firm Solidity Financial.
If you listen, you will learn:
- Brandon’s early career in finances.
- How risk drives the need for understanding your numbers.
- Observations Brandon has made about risk.
- What is value gap?
- How to cope with a large value gap.
- The factors you need to consider when calculating your business’s value.
- The process Brandon and his team take clients through for value calculation.
- The variables that will affect a business’s value.
- What are outsized returns?
- What outsized returns mean for a value gap.
- The problems that come up with a surprise offer.
- How to optimize your exit options.
Announcer: Welcome to Life After Business, the podcast where your host, Ryan Tansom, brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: Welcome back to the Life After Business podcast. This is episode 109. The big question is, do you know your number? Do you know how much money you need to sell your business for? Do you know how much money you need for life? Is there a gap between if you were to sell your company now liquidate? Could you maintain your lifestyle? I think that's a question that all of us entrepreneurs are constantly thinking about, whether it's on the top of her mind or if it's a huge stomach ache or a sense of anxiety knowing that we don't necessarily know what those numbers are or what our exit options are and how all of our decisions are impacting that. And finding the answer to these questions is why I'm super excited to have a long-term, really good friend of mine for the last eight years on the show who's also a partner at GEXP Collaborative. He's been a ridiculous mentor that I've looked up to because of all the different things that he does in his life, how he makes decisions and how he compliments a lot of the different things that we do as a team is financial background, is amazing. He owns a company called Solidity Financial, but decided to become a partner at GEXP with myself and Jim because his knowledge on the financial structure of how much your company's worth, how much you need, how much you need for life is so important, and his value that he brings is so important and he is on the show to finally lay it all out. What do you need from your business? What are the numbers that you need to hit for lifetime cash flow, for the net proceeds of your business and where do those variables bring you into the future of all your options and how you make decisions. I hope this podcast sheds a little bit of relief onto your understanding of what you need to look at, what numbers matter, so you can start doing some digging so you can actually get some clarity on what's important and why. So without further ado, here's my podcast episode with Brandon.
Announcer: This episode of life after business is sponsored by GEXP Collaborative. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your time frame to the buyer of your choice at the price you want.
Ryan Tansom: What's up, Brandon? How you doing?
Brandon Wood: I'm doing well, Ryan.
Ryan Tansom: So a long time coming that we finally got you on the show. You've been watching all of this for many years and so you and I have known each other for eight some years now. And um, for the listeners that don't know all of our background or who you are, what you do and where you came from, why don't you just go back, uh, to the day that you jumped into finance and got your, uh, your drinking through the fire hose experience.
Brandon Wood: Sure, sure. So I'll try to keep it as short as possible, but basically you know even in high school I knew that I was a numbers guy. Solving problems with numbers was a passion that I had, so really took that to heart with my studies, got a degree in financial management from St. Thomas in town here and my first job out of college was with Cargill treasury operations and so clearly a much bigger scale than most people are used to as you know, still the largest privately held company in the world I believe. But this is back in the late nineties and 2000 when the market was going up and people really couldn't do any wrong by investing in really risk was just kind of a figment of everybody's imagination really at that point because nobody's really encountering it. Well, when I started with Cargill had a catastrophe. It was a foreign currency catastrophe. It costs the company a significant amount of money. It was in the many millions of dollars. And that that was the start of a wave, especially for Cargill specifically of trying to get your head around risk and risk management. And so my experience in the financial management industry was revolving around helping this incredibly large company get a grip on the risk and exposure that their individual traders we're taking on on a daily basis.
Ryan Tansom: So you... I think from the stories that you've told me, it was literally managed on a spreadsheet and these people were so exposed in this specific currencies or specific things. So they just thought immediately that their returns were going to happen. So they didn't even have any kind of concern that they weren't gonna get their money back.
Brandon Wood: Well, they're... So what Cargill was doing was they were just letting people really wildcat. So they had all kinds of different traders who are trading in everything from currencies to commodities. They had people who were working with distressed real estate and really everything was to the upside. Everybody was making money and it was the running joke was, was who was, you know, who is really blowing the cover off the ball that day. And so it was, there was never a real serious conversation around what's our exposure here. And so when this huge loss took place, they had to start cutting staff and the trading floor started to shrink and there were, you know, the spreadsheet really was developed as this panic was happening and that is let's get this thing on paper here and find out what we're really looking at. And so, you know, I don't know what Cargill's compliance department looks like today, but my understanding is that it's that it's enormous. And really I was at the front end of it. I was the only person at Cargill's entire company who was trying to govern these traders and they really didn't appreciate my efforts.
Ryan Tansom: Lots of "F U"s and phone hangups.
Brandon Wood: There was, there was. And it was uh it was really setting up just guard rails and saying, okay, this is where you've been operating at, you've been successful with, with this level of exposure. Here are some parameters that we're just going to keep our eye out for. So if you blow over it, if y'all, if all of a sudden you're double, triple, quadruple your past exposure, which we're arbitrarily comfortable with, let somebody know. And so that was, that was the first step that they had taken towards, towards controlling risk. So basically what happened then is I really had a passion for, you know, for finances and being in the, on the investment side and because of that catastrophe, the career path for people jumping onto the trading floor and becoming one of those guys that I was, that I was kind of watching over was much more extended than I wanted it to be. So I made a strategic decision to take everything that I had learned there in a couple years and bring it out to the world of the individual investor, the business owners and say, how can I apply what I've learned from a risk mitigation standpoint and how can I apply that to the individual finance world?
Ryan Tansom: Well, and what I have found and when you and I crossed paths, it was when my dad and I were going through are the preliminary due diligence and kind of going through like, what the heck is going on with our business? What's it worth? What do we need? All that stuff. And we were in the morning crew at the gym and you were the sole confident that I had because I wasn't able to talk about it with my friends, with my family, with my coworkers, with anybody, and maybe give you know, your observations because as we kind of intersected, we smashed a bunch of different worlds together on what is it the business, what are your observations with business owners, with the, the wealth that they create with the business and what it's worth and what the situation that you saw that we were dealing with along with all the other customers that you'd worked with and how that correlates to risk?
Brandon Wood: Well, it's a great question because you have the small- to mid-size business owners... Typically the lion share of their, of their net worth is wrapped up into the business. And to them their perception of risk is that in general, and some people, you know as they see industry risk and they're... maybe they're a little bit more sensitive. But in general people, you know, entrepreneurs are pretty confident in their ability to, to keep the ship on the right path. And so they might have a, a kind of a reduced sense of what that risk is and you know, it was just kind of going to piggy back on our conversation that we're going to be having here is that along with them not fully appreciating how much risk they have, there are so many moving parts on determining what their risk adjusted return is, what they're pulling out of their business, all the different benefits that they're getting from a cash flow perspective to to cash flow their current lifestyle and then how does that apply to what their, what their exit strategy is or how are they going to get out of this, of this monster that they've developed that is providing a certain standard of living? I see that as being one of the primary issues is, is people not being able to reconcile what it means to not all of a sudden have that machine and then really going back out into the retirement world where you're just like anybody else who basically retired with a 401K at that point you have a chunk of money and now what?
Ryan Tansom: Well, and I think it's so interesting too because you and I've had many conversations along with a lot of the entrepreneurs and the friends that I have where, you know, it is risk, but like, and I think what was so interesting, it's manageable risk in, in my perception of what we dealt with in a lot of these entrepreneurs because it's your networks, you know, customers and vendors and situations that you have perceived control over. And what happens is, so yeah, you've got this whole world that you know and what it does is it kicks off a shitload of cash and so you've got your salary, then you've got your write offs, then you've got distributions and what happens is you start rewarding yourself for the things that you've done. But there's not a, there's this big gaping black hole which, you know, my dad and I realized and a lot of our clients realize that what the hell is this thing worth if I were to sell it because you know, we weren't saving money at all. We were using it for, for loans and for a rainy day when we actually needed payroll. And I think there's this whole big gaping black hole of, okay, what do I got here and what is it actually like? How do I get out of it if I have to? So what is your experience like how you know, what are some of the variables? I don't know if you've got some examples on some of the things that people need to start to really start to dive into and peel apart.
Brandon Wood: Sure, sure. Just kind of put a bow on the prior point there is that you have this, you have this business risk that you're facing and because business is risky and because ownership is risky the reward for being in that business and operating the business and continuing to maintain that risk is significant. And so what you're doing is, is you're trying to shift from this from this high-return environment which has all the benefits that you described, right? To a much more stable environment where we de-risk from the single small company interest to probably out to more larger companies and market interests and other types of investing that's going to mitigate risk, but also is going to provide a much lower return on investment or spinoff of whatever capital that you had invested there. So, um.
Ryan Tansom: Well, and even before we go, I go onto the example is I was actually having. I've had multiple conversations because there's a lot of chatter right now going, "we've been in the longest bull run, never when's the economy's going to crash?" And a lot of these entrepreneurs that are baby boomers like do you want to go through another recession, which is kinda scary. And, but. So there's the recession thing, but then there's all these industry things where I was talking to a guy today, um, were they, they did training... He was actually on the podcast. I'm Scott was talking about how this training institute that he ended up selling that eventually got sold to ITT tech. And Obama signed the legislation that literally shut down off multiple hundred million dollar company in one signature. So he, these privately held - this privately held business that had been, you know, I mean that is the ultimate risk, but do you mean you wouldn't say you wouldn't see that coming or even like the, what's the new legislation that got passive? There is no longer going to be plastic straws. What about the straw manufacturers? I mean, sure there's lots of privately held businesses that are, that are riding in that coattail right now.
Brandon Wood: You have disruption that's happening all across the board, right? There can be regulatory disruption, there could be all kinds of different technologies that are putting companies out of business. And so there's, there, there is a lot of risk. But like we were saying, the reward is there. So yeah. So let's, let's just jump into a quick example and kind of just take a look at how you begin to take kind of a basic reconciliation of what we refer to at our company as a value gap. Right? And I don't know, do you want her to define value gap, Ryan, or would you like me to do it?
Ryan Tansom: Well, I'll give my two cents and then you can expand on it with your, your background. So the value gap is what I've realized that a lot of entrepreneurs or even we experienced when you say, okay, so if I'm making x amount of money per year, right? So like let's say yeah, my lifestyle or the let's, let's say let's say someone's making 250 grand a year through salaries and real estate or distributions or whatever and you paid a bunch of stuff and that's what, how much you needed 20 grand a month to live. Well you know you need, if you were to liquidate everything, what does your balance sheet sheet need to look like today to passively keep that not so you're not having to exert your sweat equity into something. So if there's a gap between liquidation of everything and you maintaining your income, that's what I consider you got yourself a gap between you and your target and I know you've probably got a couple of examples, but maybe a little bit more technical way to describe it.
Brandon Wood: Yeah. So we'll just kind of run it through a very typical example that we like to use, right? So let's just say that we have a company that has $10,000,000 in revenue, right? And we've got a couple -- two partners, 50 percent owners in the business, and each one of them has saved up a half a million dollars in their, whatever their company retirement plan might be, each making $150,000 a year and then maybe with some benefits and some fringe benefits and distributions, maybe they're living a $350,000 a year lifestyle. So really the business is... you know, to replace that overnight, we're looking at getting them a $350,000 income so that they're not needing to make major expense adjustments when they pull the trigger on whatever type of deal structure for an exit or succession that we're talking about. Company's got $10,000,000 in revenue, let's just say hypothetically they could get or that they have EBITDA of 10 percent. Right. How do you feel about that figure?
Ryan Tansom: I know for the listeners I know, I know we talked about EBITDA a lot, but just call it net operating profits or some of the free cash flow. I think 10 percent. I mean typical like let's just say on an average up and down the street business is 10 percent after all that.
Brandon Wood: And then maybe assume like a four X valuation on something like this. Just for our example.
Ryan Tansom: Yeah. I think, you know, like in a, you know, this is, we've had multiple other podcasts about this, but I think you know, how you value a company and whether it's a three times return because again, an investor wants a certain rate of return or a certain amount of years that they pay back. Three on the lower end is because they have a lot of crappy operating procedures or they've done a lot of things and then you get up into the higher valuations if they're locked tight. But um, let's say, let's say they're run like a normal lifestyle business four times.
Brandon Wood: Yup. Yup. Fair enough. So, so we have $10,000,000 in gross. We were kicking off $1,000,000 in EBITDA and we hit a four x valuation, we're looking at a sale price of a $4,000,000. $4,000,000, fantastic. Seems like a big number. And then we start to drill down a little bit further. Well, we have to pay taxes. We might have debt, outstanding debt, and then of course we get two partners. We got to split that up. So to walk away with a all of a sudden done, especially if it's not planned out. Right? I mean you can really take a hit on those numbers. So let's just say that you'll walk away with 750 maybe, you know, maybe up to a million dollars a piece.
Ryan Tansom: I think for the listener, because we've paid the tax man and my teacher asked me, you see my dad's face or any of these owners that we've worked with, the asset sale that a business owner you typically does in the main street because if you're working on top level 2 million in EBITDA and above, you might be able to do a stock sale at capital gains, but asset sales, their ordinary income if you get the lump sum. I mean you hit the highest tax bracket immediately with no tax planning and then you paid on debt. I mean it's easily, you can get to that 7-800 to a million dollars with I mean it's half.
Brandon Wood: It is, and it's so common, isn't it? So. Okay, so let's just use that. Let's just use a million for round figures out because it's gonna it's not gonna make a huge difference whether we got 800 or a thousand walking away because we really only have $500,000 a piece saved beyond that. So just for real round fingers, let's just say we have a million-and-a-half. We're walking away with a million-and-a-half to show for what we've been doing for as long as we've been in business as an owner. Right. So say we're 60 years old, not looking to necessarily start something back up. We're well when we pulled the trigger here on whatever the plan is and again, how all these numbers shake out are going to help us define what options we have. Sometimes we run this analysis and there is no option other than to continue to operate the business because the value gap is so high that we need to stay in that business and grow it in order for us to come to a place where the owner's in a position to be able to do this.
Brandon Wood: So. So we had a couple of owners who were living $350,000 a year lifestyle. And for the sake of, you know, real simplicity, let's just assume that they don't have any other sources of income. They haven't diversified into any type of real estate holdings, which you know, which is something that you do see. And you know, obviously social security is a source of income, but that's, that doesn't move the needle on a $350,000 lifestyle, right? So we're walking away with $1.5 million and if we're just using a real shoot-from-the-hip of spinoff from cash flow, we could say, you know, we can pretty conservatively give somebody a five percent distribution off of that. That's sustainable. So you're looking at $75,000 a year in income, just kind of on our, you know, on a real top level basis here, a $75,000 a year. And so the real awakening is when you start to run through the personal financials there are, is, is that these business owners, they really have no idea what that number means and how they're going to bridge that gap. They just know that they're kind of stuck in a business at that point.
Ryan Tansom: Yeah. And it's paralyzing. And I, and I think what's even probably more paralyzing for most is they don't even know those baseline foundation numbers. And can you dive into, you know, can you dive in a little bit more into like this cash flow piece because I think there's a lot of people that probably don't know the, the underlying assumptions behind there. So because I think people go, Oh yeah, you know, because I, you know, I hear it all the time and honestly we used to do it is so we make, you know, okay, we'll go 1.5 million dollars. You literally just take 1.5 divided by 350 and then you look at your expense, you all figure it out for five years or something. We're like where's the, where's the five percent coming from? And what are the assumptions that you're making with those two different, the one point five and the five percent.
Brandon Wood: Absolutely. So there's, we have, we have a number of different variables that we're solving for, right? So as I alluded to earlier, whatever the big picture is for the resources that an individual has saved up for themselves, some of them have passive income, they have, you know, various real estate. All of these different things are going to come into play. As soon as we boil it down, we find out exactly where the potential for ongoing income is for the client. We now start solving backwards and we say, okay, we need $350,000 a year. This is an extreme example here. So we need $350,000 to finance our current lifestyle. One hundred-- 1.5 million. How, what type of risk do we need to take with a 1.5 million dollar base to produce the most income? So ideally when a client comes to us, we have a, you know, the value gap was smaller or nonexistence and then what our philosophy tends to be in, and again it comes down to the individuals and their appetite for risk, but we generally solve backwards and we say what's the least amount of risk that we can take on for this individual in order to achieve the cash flow needs that they have?
Ryan Tansom: To go to your question specifically on the five percent, you know, we start from what is the risk free rate of return and what's, how much can we get risk free for an individual. Right now on a risk free basis, you know, we're looking closer to, you know, maybe two percent, call it two percent. We're talking about $30,000 a year income for this individual or on a risk free base. It's not going to happen. Uh, so generally everyone uses kind of a different rule of thumb. But the more, the further we get up from two percent is just purely a measurement of the risk that we're going to take. And you know, the market does a long-term average or you know, on an inflation-adjusted basis of right around seven percent and that's fully invested in the stock market. And what really makes me nervous is when I see people modeling, you know, a 10 percent distribution rates off of their money when the market doesn't produce 10 percent all-in, right?
Brandon Wood: And so all we're really looking for to, to come to that number is, is if we diversify a portfolio and we're managing for risk, for any given level of risk, what is our comfortable distribution rate off of that nest egg in order to provide a sustainable income for the individual? So we'd like to benchmark just kind of right around four to five percent and it's just really a starting point. But if we, if the client needs a lot more income than the situation is going to provide for us, then we need to sign up the scale a little bit and that can go...
Ryan Tansom: And I think your point of this is like this person in this example can't sell their company. That's the reality of it, right? And so, um, because I think we can talk, I think this will be kind of fun is we can talk about all the different ways to bridge that gap. But for the listeners on rough guesstimates, what would this person need in actual proceeds other than that million bucks, what would they actually need? So the right now they got one point five, what would they need in order to pass the kick out that 350?
Brandon Wood: Yeah. Unfortunately, where I would like to see if this individual, I would like to see this individual walkway with $9 million dollars to produce that, to produce that $350,000. And...
Ryan Tansom: Well let's, let's take this even like it's a reverse backup for the listeners because here's where, here's where this gets really crazy because okay. So if we, if, if they need to walk away with 9 million bucks. So you're saying they need ten-and-a-half million bucks for the 350?
Brandon Wood: They need... They need to have, they need to have $9,000,000 after tax.
Ryan Tansom: I'm sorry. Yeah, yeah, yeah. So you're nine-and-a-half million bucks. Yep. So, so essentially now think about if you paid 40 percent in taxes and your debt. So you gross that backup, think about how much the company needs to be worth. It's ridiculous.
Brandon Wood: It is, it is. So there's a serious reconciliation that needs to happen.
Ryan Tansom: So then let's say Brandon, that like, okay, you know, let's say I'm the owner, I'm looking, okay, that's, there's no way. Yeah, there's some things that I could do, maybe I can get it up to six, $7,000,000 or something like that. I, you know, I've got a little bit of energy left. I've got some kind of strive to do this, but there's just no reality to that. Let's, let's maybe talk about it then we can get into the deal structures and the exit options. But even before we get into the deal structures and the exit options, let's talk about like, you know, how different variables in people's lives can mitigate or diminish how much they need. Like, okay, so let's say you're bringing in cash flow from your building from real estate or other things, you know. Kind of give us some random examples of how you could, you understand what I'm saying? Where do I get to kind of win, win, dwindling down, how much you actually need from the actual business versus you know, other, other different areas.
Brandon Wood: Yeah. I was just talking with a client here this week and we manage, he, he sold businesses in the past. He's, he's building another one but sold business in the past and he's of the mindset that he's going to build a business and he doesn't know exactly where it's going to go with that value. It's very much cloudy like, like it is for a lot of entrepreneurs, a lot of business owners, but he's actively looking for diversifying out of his business along the way. And so to take those steps to be able to take those steps early as huge. So he's in his mid-forties and he's looking to work another 10 years or so, but on the way here, he's making some investments in real estate and other the things that might spin off, you know, some, some private equity-type investments that might spin off of cash in the meantime that can, that can be part of that pie. And that formula when we start to solve for, uh, for what the exit options are, right? So it's how do we start to structure in income options. And there's a lot of different things that go into play and...
Ryan Tansom: I think a perfect example of that is like, so sort for some basic numbers for everybody is okay, so if you're making five grand a month off of net, off of rent or something like that from the building that you're, that you purchased or something like that. First of all, you get it a lot of tax advantages with the building, but you know, five grand a month is 60 grand. If you reverse that back up, that's what $1.2 million that you would need, that's less off of that 9 million bucks, right?
Brandon Wood: Yep, for sure. And then you know, so any source of income obviously is going to help. But as I'm kind of thinking about this example here out loud, is that the biggest key is, is that you have this $350,000 a year that you're spinning off. The sooner you get ahead of this snowball and you can start to start to plan for that income stream. We assume here that they only had $500,000 saved up, right? If we can get a headstart on that, we can actually start putting money away. That can be a big, that can be a huge part of the, of the, uh, of formula here. But...
Ryan Tansom: Can you maybe describe, you know, when we talk about knowing your numbers and how that impacts your timing, your exit options then deal structure, you know, like, so what are the things to consider when you're looking at your exit and your timing and like how and when you get your money, how does it, how does this all, how do these variables all the impact that?
Brandon Wood: I'm not exactly sure what you're asking there, but what I think you're asking is, is what, what are the variables that are going to allow us to have the most amount of flexibility?
Ryan Tansom: Right, the most amount of options, I guess is what I'm saying.
Brandon Wood: Yeah. So really it is propping up this, this big picture and that is, is controlling the expenses. Uh, you know, whatever, whatever we can do from the personal financial perspective to allow us to shrink that value gap down. Because as you're well aware, the less we need to demand out of that upfront cash and what we take and what we pull out of that business kind of in that, in that initial transaction and the more, you know and this can be debated, right. But I have a little bit more of an appetite for, you know, to kind of maintain some of the risk in the succession plan. So I like the idea personally of keeping a little bit of the skin in the game and that can take a whole bunch of different forms and you can speak to that as well. But in order to, you know, take some, take money over time, leave a little bit, leave a little bit on the table, leave a little bit of exposure there so that we can get out-sized returns on whatever type of, of, uh, of terms we're looking at in the succession plan.
Ryan Tansom: Yeah. I think to circle back and make a little bit more clear, I think it's like in you said it is trying to minimize how much money you need upfront when that transaction happens will unbelievably open up options and doors for you because what a lot of people try to do is they have a lack of time, energy or some sort of need to get that lump sum or they try and punch out right away, which is going to be the least amount of options and the most financially critical situation they can have. But you know, let's, let's say, you know, I think to kind of kind of open up a couple of conversations here is like, okay, so if we have saved up or we've got some sort of, let's say it's $250,000 to for easy numbers is if we know that we've got some real estate that's bringing us five grand a month, we've got some money that saved up and then we know that we only potentially need a couple million dollars up front and then let's say we've got a $4,000,000 business. We know that we can have. We don't have to sell it outright. We can sell maybe to our managers. We could sell part to our employees through an ESOP. We can maybe do a private equity recap because we're essentially closing that gap, but then allowing for out-sized returns because of whatever exit option. I think there's just a lot of people that get backed into a corner because I don't know these numbers and so maybe kind of explain what you mean by outsize returns and how that lump sum impacts the cash flow and some of those decisions.
Brandon Wood: Sure. I think that just kind of as you know from a 30,000 foot view, it's, it's trying to bring clarity to what formula you're solving for. So we have all these different variables we've discussed and the biggest risk that somebody is going to run here is that they are all of a sudden surprised by a sale or an offer or whether they're forced into a situation to where they need to sell before they've had any opportunity to make an adjustment to these variables. And the out-sized returns really goes back to the point I made earlier in that as long as we have exposure to these small- or mid-sized businesses, generally speaking we're going to be compensated for having that exposure. And there's a time aspect of that, so as long as we're exposed, we're going to get returns that are in- when I say out-size, I mean returns that are greater than what we can expect out of the market.
Brandon Wood: So if we have a transition period to where the owner wants to, you know, pull the parachute here and let's just say we have five years of a runway. Instead of saying we're gonna, we're gonna completely de-risk and we're going to walk away with a with a smaller amount of money because if, if somebody is coming up with all cash up front, the multiple is going to be lower. You're going to have a smaller pool of assets to start from and then we're going 100 percent out of that, out of that environment where we could maybe get that 20 percent return from having that exposure. We're going right back down into a diversified portfolio, which is fantastic. I love diversified portfolios. I'm all for it. That's something that I live and breathe, but the reality of, of that exposure is, is, is we're maybe looking at a rate of returns in the market and the 7-8 percent. So if we can double that by keeping in the business by having some secured notes, impossibly leaving a little bit on the table there and we can do that for five or 10 years. That makes a significant impact into what we're going to be demanding out of the less risky assets later on in retirement.
Ryan Tansom: Well, yeah, and I think, you know, to give a couple examples of rolling that equity, or a couple of different scenarios. So you know, in this situation where you get the lump sum, like someone in this size of business going back to our formula, I mean they have to list listed with a broker. It goes on a website just like a real estate agent and these brokers broker it and there's not all, you know, some people care about the tax planning, some people care about some of the things, but I mean it's just like, you know, you're a real estate agent when you're selling a house. They don't really care how much you owe the house and then what your financial situation is and whether you're going to buy another house or rent. I mean they don't really... Their goal is to sell the company and I think what allows the clarity is, okay, let's say I know I make enough money, I've got a couple of sources of income through real estate, through secure notes with you could, you could sell or finance some of it. You could roll some equity and I think what that happens is that allows people or buyers that that opens the bigger door for more buyers because the buyers have to find their own source of financing. They either have the cash or they are looking for creative structures that allow them to take it over. And I think that's where, you know, your management team comes into play or success or you know, your family successes or any my, it just really impacts it. I mean, you and I have worked with a customer where if they don't need the money, then they can have really creative ways to transition it to the management and the kits. I mean, I just, there's so much that hinges upon knowing your numbers and opening up the door then that you and I've talked a lot about private equity read cabs where you know, you don't need the 30 percent if you make enough money down, then that oversize return. What? I don't remember what it was like. I mean, they're averaging where sometimes they doubled their money on the second bite of the apple.
Brandon Wood: Oh absolutely. You know, and the reality is, is that if you're not doing, running this analysis well in advance, what options do you have if all of a sudden something happens and there is a triggering event that's forcing you into sale? Yeah, it's the more flexible you can be on the terms, of course, you're going to bring more buyers to the table, which is going to drive the price up. You're going to potentially have more opportunities to maintain some exposure while you're doing whatever type of transition away from your activity in the business, but worst case scenario is is that you're forced into a transaction and we see this where they're... a sale needs to happen, the sale needs to happen. The market defines what you get to walk away with and the only adjustment that you get to make at that point is to your expenses and that's again, worst, absolute worst case scenario and that's what you and I kind of live and breathe every single day at is trying to give people the flexibility so that the final adjustment doesn't need to necessarily be made in a dramatic fashion, which is to your lifestyle and your expense level.
Ryan Tansom: Well, let's take an example where you know someone doesn't know these numbers and they get this random out-of-the-blue offer that seems like a big. Like again, oh, hey, we're going to buy you for $4,000,000. It seems great, but explain how like when people go through the process, how all of a sudden that they don't know these numbers, how it impacts negotiation and how like when they get to the altar, how things can be so dramatically different?
Brandon Wood: Yeah, so the one thing that we know that it's a major risk is a surprise offer. It's the surprise situation where the snowball starts, right? The expectations are set. The business owner, all of a sudden he's. He's eyeing up. He sees that big number. He hasn't done his homework. He sees that gross figure before terms and in all kinds of things and taxes and everything had been applied. He sees that number, maybe some maybe employees find out about it and it's a train that's very, very difficult to stop and most of the time the people who are driving that train are on the brokerage side of things and it's just like a realtor selling your house were they really aren't incentivized to squeeze the extra margin for you because it doesn't really move the needle on their compensation. They're, they're looking for volume. They want to get your transaction. They want to get your transaction close so that they can get paid, but it's this, it's the surprise that starts, that triggers the momentum that's very, very, very, very difficult to slow down or to stop or to get out of.
Ryan Tansom: And then finding out that afterwards, when you're at the altar that you're not going to have enough money and you know, our, uh, how many stories you hear like, and again, I did it and I know a lot of these owners do. You sign a noncompete. So your normal knowledge and your industry experience that made you all this money. You sign this noncompete, you walk away, you don't have enough money and all the ways that you can make money, you, you've signed, you've, you've literally eradicated yourself from that industry. So you can't, you can't go back in and make the same amount of money, even though you don't have enough and that whole train drug you through the, through the goal line.
Brandon Wood: Yup, Yup. It's so true. You know, just going back to the many, many podcasts that you've done and you've had guests who've talked about all the things that you can do obviously and planning is is always a theme, right? And so there's all kinds of things that we can do and that we know that we should be doing as business owners to provide a lot of that flexibility, but I think that the one thing and it's kind of the point of today's conversation is that we can even be doing these things that are value drivers for the business. We can be doing things intelligently, setting ourself up to have the options and the opportunities for, for multiple different types of options and terms, but you really have to boil it down to what is your number? And if you don't have that number, it is paralyzing. It is. The business can be all roses. Everything can look absolutely fantastic. There might not be a surprise offer every year doing everything right, but there is no goal. There's no end in mind because even when everything is being done right from a business standpoint and running it and straight, everything is streamlined growth as doing great. You're evaluating how buyers are going to be looking at you to get the highest multiple. There still is this paralysis of, okay, when do I get off the train? Like what's my number? How do I know, as grey as everything is here, how do I know what the net is and how do I know what's a reasonable risk adjusted return to expect out of all of these different resources that I've accumulated, whether it's the business or whether you've diversified social security, obviously again a small component, but your your after tax savings, your retirement savings, everything factored in and how and when to pull the trigger on these various income options. All of these variables need to go into the computation.
Ryan Tansom: Well and what's your number? What? It's the. What's your numbers I would almost argue because what's your lifetime cash flow? How much money do you have and how much money do you need and how does that whole Jigsaw fall together? Because it's going to impact everything because you might need it all up front and you just knowing when and how you need those liquidation events to drive into that lifetime cash flow. Because you know, going back to your story about the brokers, I mean like knowing this stuff before you hire a broker is extremely important because I mean like there's lots of times where you could lose. If you have all your numbers and you have your whole structure set up, it's more advantageous for you to sell to your management team or to your family or to all these things which you don't need a broker because why would you hire an diner realty rep when you're going to do a reduced price contract for deed to your kid? It makes no sense and you wouldn't do that if you needed the capital upfront.
Brandon Wood: I totally agree. And the other thing is, is that, you know, depending on the terms that you're going to have with an internal sale, you may be forced in that direction based on the fact that even if you were to get all the cash upfront that got even a, even a nice multiple, right, a nice multiple paid upfront, you have a fantastic buyer, they're going to come in, they're going to pay a premium. So often the value gap is so dramatic that even under the best case scenarios for the, for the, for the, for the deal itself, there still is a better solution in the terms of, of doing something internally because again, you can maintain some, uh, some exposure to that business. You can take it over more time to get those, to get those returns that are going to fund you through different milestones that might be gaps to additional sources of cash flow in the future.
Ryan Tansom: Well and I think even going back to when you had mentioned terms that triggered a thought were like, okay, so great. You know, when you talk about risk in terms and having that note that going back into your old world and your lingo is so there's, you know, you might be able to seller finance on a, on a loan or a high interest loan seller's note to your management or to someone, but the reason that you're getting an out-size return is because there's risk in that person making sure that that thing continues to kick off cash as you step away. I mean, I don't know how many times I've heard were like, oh yeah, I sold to my key manager, I went down to Florida. And they went in, the whole thing went to shit and a year-and-a-half later when I was totally unplugged, I had to go take it back because technically that $4,000,000 note is not paying anymore. It's like a junk bond.
Brandon Wood: For sure. For sure. And that comes back to, you know, conversations that we have ongoing with, with our clients and that is, is what's our evaluation of the risk of, of being in this business. If you know, ultimately positioning yourself so that you can be completely out is the best place to be. Right? So if you, if, if all the stars align and you can completely de-risk and we see that there is a heightened level of risk in whatever industry it might be and we can, and we can talk about all kinds of industries that have been blown up and disrupted over the last 20 years. The idea is to have that flexibility there, but you know, it's getting a grip on the risk and there are there industries that are doing fantastic and we have people who are, who are really looking forward to taking that second bite of the apple and uh, you know, doubling down, maybe taken a little bit off the table but doubling down, pulling away from the business a little bit because there may be not the individual to drive growth because you know, their, their, uh, their energy is, is lower or, or whatever's happened to get them to want to step away. So.
Ryan Tansom: Well and let's, let's actually I want to, I just really made me think about a lot of the people that I am really good friends with and, or even myself and you know, these people that talk about, you know, owning companies that kickoff cash and you've got them so well run that it's a, it's a, it's a punch card. You just, you know, you're, you're clipping the clipping the coupons and you're making money. What are the, what would you say to the entrepreneurs that have such a well-run business that they are quote unquote the chairman or chairwoman or whatever it might be that is just collecting the distributions. How do you reconcile all of this with those people and what would be your advice for them?
Brandon Wood: Well, and you and I have talked about this a lot. There seems to be a kind of this consensus, maybe it's just from my experience, but it seems like consensus, but you know, business owners, when they're, when they're ready, they seem to be ready to be done. And they, they, they tend to want to get out where if there is an opportunity to structure in, you know, like and it doesn't just have to be from the sale and maintaining exposure from terms, but if you can actually participate at that board level or from some type of a, you know, a step back level or, or whatever it might be that solves your problems on a real healthy business. I mean that really is being able to maintain that interest. That's my personal goal, I know you liked the idea too of, of having businesses where you don't necessarily need to be a no seriously involved in, um, but through what you've built, you've developed the, the flexibility to, to kind of maintain some income stream from it on an ongoing basis. And that's difficult with a third party sale and oftentimes times a little bit more feasible with a, with an internal transition. But, but those are the exact things that we're working through with everybody
Ryan Tansom: You layer on estate planning with that in my thoughts for people that are in that mindset is you're still going to end up kicking over. I mean like you're still going have to drag you out of the corner office regardless. So you know, setting it up so that way it transfers through estate planning to your kids or the management team or to the right, I mean it's still an asset that's going to go away that you can take with you. So I mean you're still going to have to, even though you can, you know, make the 350 maybe until you drop dead, you know, there's still other ways to mitigate that so that way you don't leave everybody else an just an absolute shit storm.
Brandon Wood: Right? And it's the planning and it's in, it's having, it's having a design in place to design whatever it's going to take to finance the lifestyle you're looking for. And if there's some, if there's an extended transition that we can take advantage of there, it doesn't have to be forever until death. But that can get us through some of those years where the expenses are going to be higher for some reason. Maybe we have a house that's not paid for. We've got a big mortgage, a $5,000 a month mortgage. That's a significant part of our expenses. Maybe maybe there's a transition that gets us through one of these milestones that that kicks off and turns off a serious expense. So everything is solving for designing for the clarity in that, in the numbers that it's going to take to really not have the client take a serious hit to their lifestyle.
Ryan Tansom: So you might've just even kind of wrapped it up there, but with all the different things that we've talked about, what, what's one thing that you want to like highlight, make sure that they are the listeners are left with or if there's something that we haven't covered, you know, how would you, how would you wrap it all up and what would you leave them with?
Brandon Wood: I would definitely say that the integration that we do with the individual's interest, the indent, the owners themselves, right. That planning at the owner, the personal level for the owner that's separated from the business, but tied to it and really taking the time to dial in on what the owner's personal financials look like and what's the reality of where they're at, how old they are, the likelihood of future income, getting all of these things balanced out so that along with these fantastic decisions they're making for business growth and operations and their business, they have this side conversation that's happening that's. That really is more integrated than a lot of people give it a way to. So I would just encourage people to drill down, throw everything into the hat, find out what we need to be working on it, on a personal financial level alongside the business to give you the flexibility to just hyper optimize whatever exit options that we're working on it.
Ryan Tansom: Right. And I think, you know, to, to wrap a bow on that too is you know, a lot of us, I think about what my dad did and how we. All the risks that we took as we were juggling payroll and all those loans and all that stuff is like you do all that because you want to be rewarded for it and you want the control and you're dealing with the risks, but in order to have the control and what you realize when you get to the altar is you have zero control over this. If you don't know your numbers. I mean it's just... It's, it's a shame.
Brandon Wood: Yeah, and it's. And it's difficult because you know the owner is in a sprint right there. They're putting out fires, they're trying to grow, they're doing all these things and a lot of times the last thing, and we see it in retirement accounts, the retirement accounts are typically not as well funded as somebody who is working for a publicly traded company and that they know 401K is their only thing. So they're just trying to drive the value of their baby because they look at that as money being socked away. But there's really no end in mind. And that's really what I would encourage everybody to focus on.
Ryan Tansom: So if our listeners want to get in touch with you, what's the best way?
Brandon Wood: Yeah, I think just check out the website, the GEXP website and check the team out and get in touch with anyone of us.
Ryan Tansom: Thanks so much. It was a long time coming.
Brandon Wood: It was a pleasure.
Ryan Tansom: Well, I hope you enjoyed that episode. I don't know if you walked away with that with a little bit more relief and a less anxiety because you have a better understanding of what's important, what you should start measuring or if you had an oh shit moment that said, oh my gosh, I have a lot of work to do, but I think either way the biggest takeaway that I have is understanding your numbers is one of the most important things that you can do because in order for you to get what you want out of the exit and out of your business transition, the best thing to know is your numbers because then you will understand all of the options that you might have. My Dad and I would have maybe done a lot of different things. If we would have known we could have done certain things with the building, with the different structures, I could have potentially bought it... knowing what's important, what you want, and then layering your numbers and your lifetime cash flow need and how, when your business is valued and when and how you'll get that money, then you can make all the decisions that you want. You will actually have control over the future of your business and your transition or your exit. There's not much else that I need to say on that or if you have any more questions, go on our website GEXP Collaborative. There's tons of white papers on that. We have more ultimate guides that are going out that will explain this value gap and how to run the numbers. Go on to Itunes, give me a rating, share this episode with your friends. Otherwise I will see you next week.