The Nick Bare Podcast - Archive - Raising Capital, Funding Your Business, Preparing To Sell With Josh Holley

Episode Date: November 3, 2021

In today’s episode, Nick sits down with friend and Bryker and Co founder, Josh Holley to discuss raising capital and selling your business. The episode begins with Nick and Josh discussing how they met. They were training for a marathon together and Nick says that he learned a lot from training with Josh. A big part of Josh’s training was about learning restraint in his workouts and that was a big takeaway for Nick. When they started training together, Nick says Josh taught him a lot about business as well. Josh began his role in finance in the beginning of the recession in a restructuring firm. He thought he’d only be in the role for a couple years before transitioning back to a traditional finance role, however he stayed for seven years. He credits this time with accelerating learning and leading him to his current work of building finance and accounting into businesses. Even before you get into raising money Josh says you need to understand the cash needs of your business. Nick agrees, citing a personal story of his own business needs as an example. More than fifty percent of the time, even in well established businesses, leaders are looking at the bank account as the measure of health and success when financial statements tell a different story. Josh stresses the importance of accrual accounting, whether you’re trying to better understand the business, raise capital, or sell the business. Nick and Josh both agree that there are a lot of parallels between marathon running and business building because both require pacing and endurance. In the early days of growing your business, you may have small bank loans, but a large part of your revenue will come from friends and family. For these types of investments, Josh recommends a Safe Agreement. This will allow those close to you to invest in your business now and not discuss valuation until you get more traditional investors. Later, when you feel like your back is against the wall, this isn’t the time to raise equity, Josh says you should be looking to get creative and work with vendors and others to save money. Nick agrees, and adds that this is why relationship building is important to him and his business. For business owners, Nick and Josh recommend an accountant as one of your first hires. This will allow you to move to building the business not being stuck in the business. As you prepare to sell your business, there are a few things that will help you seem more desirable to buyers. This will be things like practicing accrual accounting, tracking sales tax and one time expenses, as well as implementing a board. If you don’t have these things in place there may be doubt in investors or buyers minds. Having all this in place can help you avoid earn out at closing. These things are an expense, certainly, but Nick and Josh say you’ll earn it back with investment or buy out. As the episode ends, Josh reminds listeners that when selling your business you have to keep the buyer in mind, and Nick stresses the importance of looking to the future rather than getting bogged down in the present. Timestamps: 0:00- Nick introduces the episode and today’s guest, Josh Holley. 3:14 - How Nick and Josh met. 8:11- Josh shares how he came to investment banking. 13:47 - Common business problems Josh sees in his work. 22:08 - Josh discusses how to better understand your business. 36:56 - Safe Agreement 48:34 - The importance of accounting 1:03:14 - How to get ready to sell your business. Links: Follow Josh Holley. Learn more about Nick Bare on his

Hello, everyone. In today's episode of the podcast, I sit down with my good friend Josh Holly, who started Breaker & Co, which is a boutique advisory firm here in Austin, Texas, focused on providing high-touch services, including corporate finance, investment banking, and special situations. I actually met Josh about a year ago when I started running downtown Austin with Jeff Cunningham's team in preparation for the Sub 3-hour Marathon. And Josh became a good friend and we built a relationship. And I started to learn more about what he's done and what he does with his business in the finance world. And I wanted to bring Josh on the podcast because I wish a lot of these topics that we dive into would have been uncovered when I first started my company. It would have helped out.

out tremendously, just being informed. Today we talk about raising capital for your business, funding your business, bringing it on investors, and then selling and closing acquisitions, all of which Josh does with his business. But this is great information for people who are thinking about starting a business in the future, who have recently started a business, own a startup, have an established business, and are even thinking about selling. and looking for someone to purchase that business. It dives deep into a lot of things, like I said, I wish I would have known years and years and years ago,

like over a decade ago. So without further ado, let's jump right into today's episode. You are listening to the Bear Performance Podcast, where we discuss topics on fitness, nutrition, business, and leadership to help you perform at your highest level and go on more. I'm your host, Nick Baer, founder of Bear Performance Nutrition and Prior U.S. Army Infantry Officer. We've scaled our brand through our core pillars of transparency, service, and integrity. And now I want to share with you through our experience and our guests, how you can optimize your life.

Welcome to the show. Ladies and gentlemen, welcome back to another episode of the podcast. Today we are doing a re-record of an episode we did a few. weeks ago because we had some audio issues. This one is with the legend himself, the fastest man in Austin, Texas. Josh, Holly. Josh, welcome, dude. Good to see you. I'm glad I get a redo. It must have been that bad because... No, dude. Last time it was epic conversation. Today we're going to be talking about raising capital, funding your business, preparing to sell your business, Josh coming from the investment banking industry.

And I do want to give some context on how we met, how we met each other. So I started training with Jeff Cunningham as my marathon coach, honestly, about a year ago at this point. And I started working with Jeff because I wanted to run the sub three hour marathon. And he said, hey, I got a guy that also wanted to do that. The previous year, and he's here. His name's Josh Holly. And I started training with you, running with you. It was you, me, and the girls on Wednesday mornings.

We weren't fast enough for like the guys running four minute paces yet. Even most of the girls are faster than us, too, if we're being honest. They are. Yeah. That's crazy. I mean, that's the definition of like finding a group of people that is, for me, it was better than me, faster than me. and just by surrounding yourself with those people, you get better.

You get faster. My group was fit. But the thing about Josh is that he was the guy that pulled my reins, where we'd go into a track workout, we'd go into a threshold workout, and for me it was send it every single track session, every single threshold session. And you were, hey, pull back, man. This is a long day. This is a long workout.

I learned a lot training with you. It led me to that sub three. Yeah. I mean, restraint's big. And on those track workouts, you can't hide, right? Because if someone's faster than you, they're going to come by you eventually. And it's very easy to measure, like, how much faster they are than you in that moment. So it's like your competitive juices start flowing.

And so it's really, it took me forever to learn to just hold back. And it's a long, especially a marathon training. That's particularly, you know, necessary. Well, I think anyone that knows that has run with another person is, you know, you start the run. If there's no structure to it, it's like, hey, we're going to go off for this 10 mile run today. we'll hold like 845 paces. That first mile is maybe 8.30. And then one person takes one step ahead, 815, 8.

Before you know it, you're running like 645 splits by the end of it. You're racing. Restraint, I think it's the best way to put it. That was a one word that kept resonating with me when I was training with you. Even on race day, when you go to those marathons, I mean, you've got to get the mile 20, 21. Like, that is the halfway point, 20 miles. So if you're ahead of pace before 20, you're going to be in trouble. So like training yourself to be restrained in those training sessions and holding back mentally when you get to race day, that's just, you know, you're already kind of in that mindset and you can kind of hold back mentally until you, until it's time to go.

Are you in a block right now? Yeah, I'm training for the Houston half currently. I'll apply for Boston 22 in April. So I might hit that Houston half in January and then propel that into Boston hopefully. That's the idea. I'm ready to go back into a marathon build. I'm this ultra build right now. I'm ready for some fast stuff.

Exactly. You're going to crave like track and pace. And yeah. I used to love those Wednesday morning workouts. I know. Especially when it gets cooler like this, the track in the morning when it's cool out is it's good. Well, the way we kind of led into this,

talking about this stuff, the financial aspect of a business, is obviously when we started training together, I was in an Iron Man prep. and we were documented in the series. I had Tyler and Yoli with me for every workout. And me, Tyler and Yoli, were the guys that showed up with the cameras in the truck

and we filmed the sessions. And obviously throughout that process and being around BPN gained some exposure and BPN was talked about. And then you and I connected. And I didn't know you were in the business of helping fund and raise capital and sell and the acquisition

and mergers of businesses. And we sat down one day and talked and you even opened my eyes up more to what I was missing from an entrepreneur as an early entrepreneur. You know, I've been a business owner for almost 10 years now. And it's taken me nine years

to learn some of the things I wish I would have knew 10 years ago. And that's what I really want to use this episode for is I want to help people who are looking to start a business, who have just started a business, who are looking to scale their business, or they're looking to sell their business, right? Any type of lifecycle of their business, this is valuable information that you're probably going to need at some point. And what better way than just to give them a path and let people know their options?

Because I think you don't know what you don't know. And if you know your options, that's powerful. So I would love to dive into, you know, what first got you into the financial sector, investment banking, and what led you kind of out of that? Like, what was that experience like that was that first hook? I've always been interested in business and finance, as long as I can remember, didn't really know what that meant or what I wanted to do. But once I got to UT here in Austin Business School and kind of learned the different

alternatives in finance, I immediately sort of gravitated towards investment banking. That's kind of the sexy place that everybody wants to go in finance in the McComb School of Business. So I was on track to head down that route. And then I graduated December of 08. And if you don't remember, summer of 08 is when the bottom fell out of the finance industry. So interviewing in the fall of 08 was just a complete disaster for those positions. And so that event sort of set me on a different path. So I've come back around to something that I find very interesting and wanted to do eventually. It just, the path was very convoluted to get there. So what ended up happening after I graduated is I got hired by a restructuring firm. I mean, at the time, honestly, didn't know what restructuring

was. I was like 21, 22 right out of school. They said there's a ton of travel involved. You get paid well. It's like, okay, that's, you know, travel sexy when you're younger, right? Where's on you over time? I don't even want to travel at all anymore. Man, I hate the airport. That's a different, yeah, a whole different conversation, especially after COVID, but this is well before COVID. So, you know, I thought to myself, I'll go do this for a year or two, and then I'll try to get back into a more traditional finance role. That was the plan at the time. And what a good lesson and sort of being opportunistic and taking what life throws at you and making the most of it, because I ended up doing that for seven years. And honestly, I think it was the best spot I could

have landed for like my skill set, my interest. Like it just restructuring is a very difficult, very challenging space to learn in. But I don't think I could have gotten a better, more well-rounded education in a seven-year period than I got there. And so what I was doing there, and this is relevant for what I'm doing now, is we were going into very distressed situations. And these companies were quite large. I mean, 200, 300 million in revenue. And they couldn't make payroll next week. It was that, you know, effed up, right? And there's no. real clear-cut playbook. All these situations are different and you just got to figure it out. And so it forced me to get really good at understanding really how to finance a business,

really understand liquidity, really forecast liquidity because if you're wrong in those situations, the consequences are you can't make payroll. Like there's dire consequences. So iron sharpens iron, you know, you just like force this really like, you're in a pressure cooker for 12 to 18 months in the situation. You've got to navigate through it. And at the end of these projects oftentimes you had to get really creative and transact your way out of it. So you got like a 12-month very hands-on liquidity finance ops, you know, experience. And then at the end of it, a really interesting complex transaction. So that gave me this really kind of broad skill set, right? And anything corporate finance made me very dangerous. So I still had that entrepreneurial

it. So I wanted to kind of leave that space and kind of start my own thing. And so in 2016, I co-founded the advisory firm I'm running now. And it took us a little while to hone our message or find our lane, if you will. But ultimately where we sit is if you think about the six to nine months before a transaction, the transaction itself and the six to nine months after, we can sit anywhere on that timeline and play a really interesting role. And again, all things corporate finance. So in-room CFO stuff, investment banking transactional, and half the business that we do, I'll get a call from like a private equity firm and they'll say, hey, we're about to acquire this business. It's doing 25 million in revenue, but it's, you know, with all due respect, mom and pop accounting and finance.

Like, it just needs to graduate on accounting and finance. They just say, you know what we need and what we're looking for. Just go, go put all that in place. So I go in literally day one after a material transaction and just start building the finance and accounting function. So that perspective gives me, you know, makes me dangerous on the front end because companies will come to me and say, you know what these guys are looking for because hell, you're putting it in place for them. Like, why don't we do that in advance of going to raise money? Because we want to get the benefit in our value of being proactive and putting this stuff in place. So the other half of the business is sell side readiness and running a fundraising process and the transactional component

as well. I think it's so important because to put it in terms of the way I got started, it's sloppy. And in a lot of cases, businesses that are bootstrapped from startups started by people who don't have a background in business necessarily, but maybe have this burning passion for what they're doing or their mission. And when you're so focused on that mission and the purpose and building, the back end doesn't always build at the same rate with the same systems. It builds sloppy.

And that's kind of the way I built my business over the first couple of years is I didn't know. I didn't know what I didn't know. I didn't know my options. I didn't know the systems and infrastructure I was supposed to be putting into place. And what happens is it gets built sloppy. And it works in most cases. But when you go to find an investor or get a line of credit or give up some equity or go to sell and people come in and you open up your books and they see what's really going on under the hood.

They're saying, holy shit, you've got a mess here. You got to clean that up. What are some of the big problems you have identified with businesses that you're going to help? Is that typically that where it's built sloppy? Or is that they don't have systems in place, like monitoring their cash conversion cycle to manage payroll? Yeah.

I think systems is a big one and just understanding how much cash conversion cycle. the capital the business really needs is definitely probably the most fundamental mistake or, you know, shortfall that a lot of businesses make. And so where that can bite you is if you're out raising money and you go to an investor and say, I think I need a million dollars to get through the next 24 months and they dig in and realize you need two or three million dollars. You've lost all credibility at that point. There's no pulling that back, right? So there's the, there's sort of the internal operational tools that you need if you're going to sell. but even before you get into trying to raise money or pinpointing how much you need, you've got to really understand the cash needs of the business.

And I know we talked about this last time, but in a lot of what we're going to talk about is related to consumer product companies, right? If you're not in a CPG business, it might be a little bit of a different answer. But where a lot of these businesses get bit is not understanding the cash conversion cycle of their inventory in particular. So let's assume a business owner. is sophisticated enough to forecast EBITDA for the next 12 months, right? EBDA is earnings before interest, taxes, and depreciation.

In short, it's a proxy for cash flow from operations. Even if you're at that point where you can look at the next 12 months and say, hey, we're going to be EBDA positive, therefore we're good on cash. What that misses is all of the cash and working capital that's going to get tied up in your inventory and in your purchasing. And so the cash conversion cycle, if you don't have the right systems in place and you don't understand it correctly, can sneak up on you. And so the way to start this sort of exercise is if you follow one purchase order from beginning to end, right? And I know it's not this simple in reality because you're consistently placing purchase orders. It's always sort of rolling

and it's all messy. But if you were able to track one purchase order from beginning to end and think about that from the first dollar that goes out the door for the deposit, when a company's less established earlier on, you're probably putting 50% down to even start the purchase order. And then 30 days later, it's completed and it's ready to ship, most likely from overseas, and you've got to put the last 50% down. So you're 100% committed, cash is out the door,

and the product hasn't even left Asia. It can take four to six weeks to get here. and then another six to 12 weeks to sell through that inventory. And if you're a CPG company doing, let's say, 50% online, 50% with wholesale, your wholesale buyers have terms. They get to pay you 30, 60 days later. So from the last dollar that comes in from your wholesale customer who gets terms, from the moment you put cash out the door for that 50% deposit,

it can be six to seven or eight months. Okay. And that gap or that trough in your cash that gets created during that window is what catches 90% of companies off guard. And this is kind of hard to understand if you're not really, if you don't have a good fundamental understanding of finance and accounting. But if you have a really stretched cash conversion cycle, it won't necessarily show up in EBITA. So going back to my earlier point, even if you can forecast profit fairly accurately, it can lead you to make mistakes in determining how much money, you need, you know, and when. And the system side of that is, especially an inventory for consumer product companies, if you don't have a good inventory management system in place, you don't really

know how much inventory you have on hand or how much is in transit. I mean, a lot of that, you'd be shocked at large businesses that track that in Excel, like manually. If you don't have a good handle on that and you don't understand this cash conversion cycle, you have no idea how much money the business needs, zero, right? And that's one of the biggest fundamental issues that these businesses run into. Well, it's tough, too, is as you scale, as you make more money, these problems are exposed even more. Exactly.

So I have some, like a practical example of this, 2017. 2017 was the first year we did seven figures. And to me, it was like, we made it. You know, we're finally a million dollar business. But it was the most stressful year of my life because our cash conversion cycle. So what was happening is we saw this massive growth in 2017. And at the time, we were working with a manufacturer, and we weren't really established business. So we didn't have any terms with our manufacturers then.

Now we have terms of our manufacturers where we'll place a production order. We put zero down and we pay it all off net 30. So we have great terms now. But in 2017, we didn't have that. where when we would place a production order, we'd put 50% down. And then we'd have 12-week lead times. Before it shipped, we'd pay off the remaining 50%.

So all of our inventory was paid off before it was shipped to us. It would ship. We would get it in. And then because we could only afford so much, we could only purchase what we could afford with liquid cash. We would sell out in a matter of days. I remember when we first launched our product end of the last. pump. We would get it. We would sell out in a matter of days. We called this, we call this problem,

we call this product liquid gold because of how fast it was selling. And we would have to try to stack production orders. So we knew we had 12 week lead times, say week one, I place a PO, week three, I place a PO, week five I place a PO. And each time I place a production order, it's 50% of that production paid. So what happens is, all your cash on hand, your liquid money that you have, is being paid to these manufacturers and you can't make money off this money.

So 2017 was a stressful year because we were finally growing. We finally hit seven figures in revenue, but I couldn't get out of this hole of cash flow. And it was just a frustrating year. I learned so much through this year or that year. I thought I was going to lose my mind. I thought I was going to lose my business.

sleep. I was stressed beyond belief. And I wish I knew the stuff that we're talking about in this episode back then. And that's why I think it's so powerful because business owners, consumer based product business owners, they need to know this stuff. For me, and we talked about it before, I thought the health of my business was based off the money that was in my bank account. I didn't know how much money I needed. I didn't know how long that money would last me. I was trying to bank as much money in that account as possible for my rainy day. And then trying to just guess. I knew at the time it wasn't the right thing. But I was trying to guess how much money I needed in there based off our growth and our production orders and the volume. And I wish,

I wish I would have been educated on this stuff that. And that's super common. I'd say certainly more than 50% of the time. And most of the businesses we're dealing with are, you know, I'd say 10 to 15 million of revenue up to 100 million. These are decent, you know, these are well-established businesses that still, you know, when we go in there sometimes, are looking at the bank account as sort of a measure of, you know, the health of the business.

And there's all this stuff that goes on outside of the bank account on your financial statements that would suggest you got problems on the horizon. And if you understand the, the financials you can you can see it a lot earlier so if you're in that situation right now just take a deep breath like it's very common you know it's this stuff is is very technical and hard to learn on the fly but if you can you know one of the things that if you want to graduate your business a little bit is to start working towards accrual accounting and if you find a good controller and you find a good accounting team they'll understand exactly what that means

And accrual accounting gives you the ability. It's a very boring technical side of accounting. And there's no reason to go any deeper on it than just saying accrual accounting. But it can give you the visibility to understand your business far beyond the cash and the bank account. The alternative to accrual accounting is cash accounting where you're just looking at your bank account. If a dollar comes in, that's revenue.

And if a dollar goes out, that's expenses, you know, and you're just looking at the bank account, like you said. And I would say less than half the business is. that we advise that are going to sell are still on cash accounting, even at this relatively mature level of 25, 30 million of revenue. And when they go to exit or raise money, you definitely get dinged on your value because sophisticated investors, they can't read into your business enough using cash accounting. So they have to go through all kinds of exercises. There's a thing called the quality of earnings that they'll do a Q of E before investing in your business to adjust

your historical financials that are in cash accounting to accrual because that's what they use to really understand a business. So there's one thing that you want to go start implementing. And if you want to mature your business, take the step of getting into accrual accounting. You will get the benefit of that effort when you go to raise money or sell your business. I can assure you of that. It's just a signal of like a level of sophistication. It's a signal that you kind of you get it and you care enough about that side of the business to invest in it. I mentioned this to you last time. I know accounting and finance and systems,

and this is self-serving for me to say this, but I know it can be a bit of an afterthought, but the people that care about that are the ones that are going to write you a $5 to $10 million check. They really care about that. They care about the boring, non-sexy systems, accrual accounting. Like, that's what they're going to really hone in on

when they determine a value for the business. One of the most proud and successful days in my life as a business owner was a day that I hired a CFO. Yeah. Because up until that point, I was one that was thinking about the accounting. I was one that was trying to plan for this cash conversion cycle. I was one that was looking at the bank account. And when I hired a CFO and a controller and a bookkeeper, I remember our CFO pulled me aside.

I was like, this is like a super, super healthy business. He said, the reason you guys are in such a good spot is because, you didn't know what you didn't know and you were so conservative. I was holding back for years. So the way we kind of grew BPN is I started with a traditional $20,000 loan and I dumped a lot of my own personal money in over the years, lots. Where was that loan from the 20? What was the how'd you get it? So I was a junior in college and at the time I was about to go into the army and the military associated bank USAA was offering this thing called a pre-commissioning loan. So they knew you were about to commission the army.

You were going to be making, you know, we probably started like $60,000 a year. So they were offering up to $25,000. And most people were getting engagement rings, new cars, going on on vacations. You didn't make your first payment for 18 months. And it was like the lowest interest rate possible. All my buddies were getting this money, buying new vehicles, doing all this stuff. And I thought, this is my golden ticket to start a business. I had to get it approved by my battalion commander who approved it.

I got awarded $20,000. Didn't get the whole $25. Got the money. And at this point in my life, I've never seen $20,000 in my bank account. I was like, holy shit, I'm rich. So I placed this production order for supplements. It was flight and intra-flight with a manufacturer that was based on in California then. And that's how I started with that $20,000.

And it went fast. It went really fast. After that, I was relying on money coming in from sales. To keep the business afloat, I would put my own paycheck from the Army back into the business. I liquidated my Roth IRA, all this stuff, just to keep it going. And when we finally got to a point. where I needed more money than that, you know, I was creating social media content for years up until this point and I started doing brand deals and generating revenue through YouTube

videos and ads. So I was generating revenue through additional streams outside of BPN that allowed me to fund the growth of BPN, you know, when we really needed it. So I didn't have to give up equity. I didn't have to take any loans out. No investors. We were approached multiple times. And I remember we were approached as probably 2018. And someone offered us for the way they valued our business then. I think $100,000 for 10% of the business. Looking back, I'm like, thank God, I did not do that. Oh my gosh, that would have been a mistake. But we got approached. by possible investors and obviously they wanted equity in the brand. But I just kept trying to make money through additional revenue streams to fund BPN's growth.

And I tell that story to share the way that I did it. You know, an initial loan and then just self-funded the rest of it. But a lot of people don't have that option, right? So I think it'd be ignorant to tell people, hey, start a business, take a small loan out, and then go make money elsewhere to fund. it. Yeah, but you know, I honestly, I thought that was the most interesting thing that we, that sort of came out of our conversation a few weeks ago, because when you're trying to figure out how to fund a business, the two standards are debt and equity. And you think that's all there is to finance a business.

There are so many other ways to be creative about financing a business. That's a perfect example of you didn't probably even realize what you're doing at the time necessarily, but you were finding an alternative financing source for the business, right? I mean, it sounds just, genius in retrospect, but I can tell you right now, I didn't know what I was doing then. You know what? And if you had all the knowledge you had today and you went back, you would have talked yourself out of growing BP into where. I think being with all due respect, naive in some of these areas was probably a huge benefit for you at the time. And if anybody brought you a business plan today for a supplement company, you could find a hundred reasons

to talk them out of it. So I think there's sort of a blessing in the, you know, early stages and sort of being ignorant and not knowing better right. Because I can talk people out of a lot of things at an early stage. But I think that's a good example of just, you know, you got to get outside the box a little bit, you know, when you're trying to finance. The term financing of business is, it seems intimidating. It seems very rigid, but it's not. It's whatever it takes to pump money in, to keep the business to grow, whether you're

finding an alternative source of revenue through, you know, brand deals or whatever. There's a lot of other ways to do it. So I hope people kind of listen and on that. specific point because I thought it was an incredibly interesting point last time. Yeah, I've talked about before that I do want to write another book at some point in my life and probably years and years and years down the road, but it's all about the startup community. I love the startup space. I love startup businesses. I love the consumable product business. I always want to stay in that business. For me, it's just, it's super fulfilling.

And I love it. And I love the creativity, the freedoms, the passion, like the burning passion, the belief in startups, as opposed to large corporate positions. But I would love to kind of shape this episode in a way where, you know, we're guiding people through this process of one, raising, capital to start the business, raising capital or giving up equity to scale the business, and then preparing to sell the business. I think a lot of entrepreneurs, a lot of business owners, they go into starting their first business. They fall in love with the process.

They fall in love with the business. I think more times than none, someone that starts, scales and sells business does that same thing multiple times. I've met so many business owners that they have. have this burning passion. They start it, they scale it, they sell it. They start it, they scale it, they sell it because they absolutely just love it. That's like the startup space. And that's the beauty of being in Austin. Yeah, you, it's a very extended version of like a Leadville 100. Like you want to feel those really low moments and those really challenging moments like you feel.

I mean, it's like it does it create, it puts you in a situation that forces you to be better. it forces you to think certain thoughts that maybe you wouldn't if you weren't being pushed. So like that whole journey of starting building, selling the business and all the ups and downs in between you, you crave that sort of feeling that it gives you no different than you would. Like, you know, why do we run marathons? You know, the last three, four miles is fucking terrible, you know, but you just, there's something about it that brings you back, you know, this is no different. I think there's got to be a correlation between entrepreneurs and endurance sports.

Or at least fitness. Yeah, exactly. You see it all the time. And I think it's because of that journey. It's we crave, like, I talk about 2017 being the most stressful year of my life in terms of business. I would go back and live that year over again, over and over and over. I tell my brother, because me and him both went through it together and Joe Pivitts, it was like waking up on Christmas morning when you're 10 years old every single day.

and the highs and lows that went through that year, I mean, they don't compare. And it was stressful. It was. It was tough. It was hard. But if I could relive that year next year, I'll do it. I'll go back and do it right now.

Yeah, and I think there's a ton of parallels because, like, you know, marathon training, you know this. 80, 90% is like boring 7, 8, 9, 10 mile runs at a much slower pace than you know you can run, where you get done with the run. and you're like, I'm not sure that really did anything, if I'm being honest. Like, I like the track workouts because I'm breathing hard and I know I just got better, right? But the 80 to 90 percent that no one sees, it's sort of boring, and you're building that foundation and laying the bricks like we talk about.

In a business, it's no different. There's so much stuff that is mundane and no one sees, and you're not sure at a lot of point in time, whether you're making progress. And a lot of times you might feel like you're moving backwards, but just staying in the game, continuing to train or continue to stick with it. It's hard to see it when you're in it every day, right? But you step back if you're, if you own a business, you know, that you've been in for two, three years now. If you're listening to this, think about where you were a year ago or even six months ago. I bet it feels very

different. And so if you're in a rudder, you feel like you're not making progress today, just remember that it, you know, it just takes time. You just kind of keep showing up and it'll eventually start to start to build. I don't think you'll ever meet an inconsistent, successful business owner. Every successful business owner I know is consistent. It's just one of the skills, one of the traits you need to have. But I think what makes even a better business owner is being informed and being educated on the things that we'll dive into.

So I think just to kick it off right from the start, raising capital to get started and breaking down the difference between debt, equity, and hybrid securities. Yeah, this is a long topic. So the earlier stages are very messy. There's no silver bullet. Like, you just kind of have to figure it out a little bit, just like you did. You had a very unique access to a loan product that a lot of people probably don't have access to. But most startup financing is a small bank loan, friends and family loan, or, you know, a lot of folks in the CPG space.

are using like kick starters and pre-sells to basically they pre-sell their first, you know, run of inventory or purchase order, and they take that money, they place the purchase order, they sell through the product, and they kind of repeat. And that's a really conservative way to do it where you're, you know, you're making a small bet, you're selling through that inventory, and then you regroup and place more and grow slowly. And there's this concept in tech. We mentioned this last time. I just want to hit on it while we're at this early stage.

Again, it's more applicable to technology, or if you're building an, app but I think it works here which is this this idea of minimum viable product there's a whole book on this MVP I'm actually reading some Seth Gilden stuff right now yeah and he's talking about that yeah so the the whole point is like let's say you want to launch a website and it's going to do something for the consumer and you dump 250 300,000 dollars in the website and you want it to be perfect and you launch it only to realize like no one really needs it needs what you're offering you probably could have built a $5,000 or $10,000 website just to sort of test and make sure people actually want the problem you're trying to solve. And so if you can get to the answer with $10,000 versus $250,000 and you can build a minimum viable product to get to the answer, that's the path you want to go, you know, stating the obvious.

Now, consumer product, it's not exactly that black and white, but that concept is still very relevant, right? If you can place one purchase order for $10,000, I know it's a lot of money, and make sure you can sell through that before you invest a whole bunch of money. and branding and website and packaging and all it just make sure you can sell through it first like just take it slow on the front end otherwise like I said it's friends and family you know small bank loans it's scrappy you know finding alternative ways to finance the business I'll give one specific security you can use early on because so often it's friends and family is the safe security S A-F-E it's an acronym for simple agreement for future equity this is becoming the most frequently used security for friends and family because it's a very simple document. You can download it online.

Don't pay an attorney heat to put this together. It's like a fill in the blank. And all you're saying, because stating the obvious, you don't want to sell too much equity early, right? And so that's what the safe agreement is meant to help with. It's also meant to help you avoid the conversation of value with friends and family or whomever at the early stage. And the agreement basically just says, say, give me, you know, $100,000 today. And when the business is more mature, and I'm able to raise money from outside, you know, institutional capital, as we call it, let those folks determine value at that time. And you, the safe investor, you can convert to equity based on the value they determine. You come in at a discount, right? You get the benefit of coming in earlier. But let's

postpone that conversation. So the safe agreement is a very way, like, if you don't want, if you want something more than just a handshake with a brother or a friend or something like that, but you don't want to spend a bunch of legal dollars, that's a great way to finance the very early stages. Then as you start to mature the business, this is where the landscape starts to open up. And I'll provide some context to these hybrid securities that you mentioned. But in the finance world, we have a term called a waterfall. And it's basically just means if the business were to sell or liquidate, who gets paid first, who gets paid second, who gets paid third. And et cetera. And the more complicated your cap structure is, the more relevant the waterfall exercise

becomes. But the point of that is at the top of the waterfall is senior secured bank debt. So as your business is growing and maturing, you're going to be able to access more traditional bank financing. Now, they will collateralize your business or encumber your business as the fancy term, which is risky. And oftentimes you may have to personally guarantee that. But that's from a business owner's standpoint, one of the more risky capital that you can take in because if things go sideways, the bank owns the business. That's the very top of the waterfall. At the very bottom is common equity. So that's the least risky for an entrepreneur, but it's the most dilutive to you when you hit the big home run and exit, right? So it can feel comfortable

because you're avoiding any secure debt or personal guarantees, but you're diluting for those investors. And so a lot of investors don't want to pick one of the others. They try to find these sort of hybrid securities in between. And like I said, when your business is doing, when you're getting into like five, 10, 15 million of revenue, this universe of these hybrid security starts to open up. I brought a list just I'm going to rattle through some of these and then we'll hone into a couple just because I want people to know these exist. We don't have to go too deep on them. But if you want to go research these and these are in order of that waterfall. And again, depending on who your audience is, who your investor is, depending on your

appetite for risk, depending on the stage of the business, it will kind of tell you where to fall in this waterfall is the way to think about it. Like I said, at the top is senior bank debt. Then you have mezzanine financing, mes debt, if you want to look that up, M-E-Z-Z, convertible note, preferred equity, safe and common equity. So in that order. So the closer you are to the top of that spectrum, the more it looks and feels like debt, the closer you are to the bottom of that spectrum looks and feels like common equity. So the two in the middle that I get asked about the most is the convertible note and preferred equity, right? The convertible note is very similar to the safe agreement, but more sophisticated investors will require something more robust than a safe.

And it's basically a loan. So it sits on your balance sheet as debt until it converts to equity. same concept. You can't agree on value necessarily today. You as an entrepreneur don't want to dilute today. So you say to this investor, hey, I'm going to take in your money today. And if in the next two years, it's typically 24 months, if I sell equity, a material amount of equity to a sophisticated investor and they establish a value at that time, you convert to equity and you get a discount on that value. So that convertible note bridges you from today where you think you might be selling your equity a little early and allows you to sort of sell it, you know, later in the future. It's less dilutive. The two things on convertible notes, I'll just say very quickly. I know we don't want to go too deep on this, but they typically have two conversion mechanisms. One is a discount rate and one is a valuation cap.

Entrepreneurs will hone in on the valuation cap and that becomes a real sticking point. Forget the valuation cap. If you can get away with just a discount rate, keep it simple. and try to ignore the valuation cap conversation. The next one I get asked about the most is preferred equity. This is the one that I think is the most interesting. Investors care about downside protection. Okay, entrepreneurs care about valuation. They wear it on their sleeve.

It's this, like, you know, it's this very sensitive thing that as soon as you start talking valuation investors or entrepreneurs get very defensive, rightfully so, because they put so much time and energy into it. So the way that preferred equity works, and the reason for it is if you as an entrepreneur want to maintain as much of the common equity and the sale proceeds at exit, like if you're like, hey, all I care about is when I sell for $100 million that I own as much of the common equity as possible, I'm willing to give up downside protection for that. That's what the preferred equity is for.

And so what you say to an investor, imagine I came to you, Nick, and I said, I'll give you a million dollars for 10%. and you're like, I think the business is worth a lot more. And you counter and you say, what about, I'll give you a preferred equity piece where if something goes sideways, you get the first million dollars out of the business before I get anything. And then after that, you can have 5% of common equity. But since I'm giving you the downside protection and putting you in front of me, the first million out, you get less common equity. And a lot of investors will trade downside protection for common equity because they're

more concerned about, you know, in case something goes sideways, they at least want their money back. You as an entrepreneur, if you're worried about the downside, that's going to be a self-fulfilling prophecy, right? You're going to walk yourself into a, you know, a bad outcome if you're too focused on that. So, you know, I know that's a lot, but again, I want people to know these things exist so they can go research them and see if it's a good fit for their business. I guess one of the questions that I could assume people are thinking right now is, okay, I'm starting this new business, I need money, I need cash to invest into this business. Do you go to look for debt first or do you look to give up equity first? And what determines what you

go after or is it a combination of two? I think that's why those hybrids are so interesting. I think it is a combination and some of it is it's just what do you have access to? Like, I think it's worth, like, let's say you need to raise $250,000. First of all, make sure you understand why you're raising that money. If you're trying to fund working capital and inventory or behind unpayables or you feel like, you know, your backs against the wall a little bit, that's not a great time to raise equity. That's the time to figure out where you can be creative either with accessing some debt financing or we talked about. this last time, you can go to your key vendors and ask them for extended terms. Don't be afraid to do that. That is a, I mentioned kind of creative ways to finance a business. That's one that you can use.

It gets used all the time. I'm in a situation right now, very healthy business, growing business, but the fourth quarter, this business has 50% of its revenue and, you know, a 45-day period at the end of the year. So it's just building inventory in advance of the holiday rush. And so we went to our vendor and said, hey, we need an extra 30 days just to get through this period. No problem. Gave it to us. Now, this is a more established business, so that's a little easier. But we did that in lieu of going and borrowing really high, high interest rate debt or, you know, panicking or doing something like selling equity or, you know, taking on more debt. So there, there are those alternatives to. If, on the other hand, you see a very clear path, like if you can

take in the money, equity dollars, and, you can take in the money, equity dollars, and, you know, you can, and you are fairly convinced it's going to allow you to level up, like it's going to change the business in some material way, that's a good indicator that, okay, this could be a good time to sell a little common equity, to keep the momentum of the business going, to level up, because you made it through the gauntlet and still own 100% of the common equity, very rare, very hard to do.

If you're too stubborn in that stance, not to suggest you were, but if people... I was pretty stubborn. Yeah. And there may have been moments in time. We'll never know where had you taken in a little equity and given up, you know, and diluted a little bit, maybe the business grows a little more the next year. Like let's say in 2017, that really tough year, you took in some capital. Maybe it's not the $100,000 for 10%, but something more reasonable. And that allowed you to pull forward inventory into 2018 that would have fallen out and just kept building in the momentum. In theory, 90% of your business today, if you had taken in that money, could be worth more than 100% today because you didn't take in the money. So there is a balancing act to if you can sell equity and like I said, it continues momentum. And there's a very clear reason or clear correlation between that equity raise and some fundamental change in the business.

In other words, you think the value is going to go up significantly. those are the moments where it's like, all right, and again, you don't have to sell common equity. You can use some of these securities we talked about, but those are good indicators as to whether debtor equity is appropriate. But sometimes beggars can't be choosers. I mean, you've got to kind of exhaust all options. Go to a couple different banks. I mean, we hit on a few of the, you know, like the PayPal's and Shopify's of the world, have these really expensive. You know, they'll, lend you money and take a percentage of your receipts. It's incredibly expensive. But if you're, desperate and that's a temporary solution. You can always do that as well. But I think you just have to,

you know, like I said, understand why you're raising money, make sure you know how much you need. And then that'll help dictate, you know, whether debt or equity or something in between might make a little more sense. This is why I always focus on building relationships. So what I keep thinking about when you're talking about that is I've come across many business centers that just want to burn bridges. They don't care about building relationships. So imagine, I've seen we have such good relationships with our manufacturers or vendors, the people we work with. If we would ever need anything, we would go to them and politely ask and approach it in a relationship standpoint. But I see some of the people that work with my manufacturer and they approach to them with, give me this, give me that.

No relationship building. it's just it's bad business and what do you think your manufacturer is going to ask you when you go ask for 30 more days of net terms no

so for one building and maintaining relationships with vendors manufacturers suppliers but then it also makes me think about building relationships with possible investors because if I ever took one

an investor, it wouldn't just be for a cash equity standpoint. It would be some sort of strategic partnership. Right. And that comes with trust, like trusting people because it's not black and white. It's, all right, I'll give you X amount of the business for X amount of money. But with the intent that we understand, you're going to bring a strategic perspective to the table, getting us into these wholesale accounts, helping us grow the business from a standpoint. point that we can't. So that's kind of where I'm at right now, if I would ever look for an

investor. It would be more strategic. Because not all equity investors are equal. I mean, if they, like I said before, if you're raising equity and like you're saying, if it's somebody that can help you level up the business, then it makes that decision a little bit easier for sure to dilute. And we did bring up like the PayPal working capital, the Shopify working capital. Those are options for businesses too, but you have to have some sort of a business and transaction history to be able to do that. So for example, if your Shopify store is doing 200,000 in revenue a month, say for example, which for most people isn't year one, it's after building some established years,

you can get some sort of working capital where, like you mentioned, say maybe you get $50,000 of working capital. and that is paid back based off your transactions coming into your store. So maybe 5 to 10% of your transactions coming into your store each day are going to start paying that working capital back. But then there's also a fee on top, which maybe the working capital is for $50,000, but the fee is for $15,000.

So you're paying $65,000 back and you can get cheaper money elsewhere. But if you're ever in a crunch and you're an established, business and that might be something you need to do. One of my questions I have for you, I guess, moving now into businesses that are already started, but one who raised additional capital, I know some people and I know some businesses that have gotten to the point where they've given up so much equity in order to build that brand in that company where it might be valued hundreds of millions of dollars, but they only have a single digit ownership, single

digit equity percentage in that company anymore. Is that more common than not? Or do you see that? And if you are there, or how do you avoid that? I do see that. I think it's more common that I see a situation where an owner is just sold to a private equity group. And at the time of the sale, he still owned like he or she 50, 60 percent of the business. So still had a significant chunk of the business. But then they'll look back and, you know, just a year earlier, they had sold like 20 percent for, or something significantly less than what it just traded for. The situations where a founder can get crammed down, which is the term we use,

crammed down single digits, is when they're raising equity to solve working capital and liquidity issues. This is why I was making the point earlier. If you're tied on cash or you're kind of on your heels a little bit, that's where equity can get very dilutive because investors are going to, they're going to punish you for that. They're going to want to hedge their bets.

They're going to, you know, your valuation is going to be impacted in a very material way if they feel like you're not, the business is underfunded. And so if you're on your heels and your last resort is to raise a big chunk of equity, that's when you get crammed down.

So like, again, even if it's expensive debt and you can get comfortable, it's temporary, you know, that would be a time to try to lean into the expensive debt rather than fire sell your equity. So keeping context for, again, why you're raising the money, I think is very important. The other thing I'll just mention while we're on it is this gets back to the very first thing we were talking about, which is, you know, how much money do you need? I think one of the biggest mistakes businesses make is, let's say you're in a comfortable

position, you want to raise equity and you think you need $250,000 for the next 24 months. You do that deal. Six months later, you're out of cash. that's where people can get really caught because you're probably going back to that first investor and saying I need more and that's going to open the door for them to make it very punitive, you know, on you. So you just make sure you understand what you're raising the money for, make sure it's enough. And again, the way people get crammed down is raising or selling equity as a mode of desperation or a mode to fund, you know, liquidity and working capital. Yeah, I kind of want to paint this picture for people who money. not be, because I think a lot of people might be thinking that aren't business owners who

haven't started a business. Maybe they're just getting started. They're thinking, okay, well, if I buy a widget for $2, it costs me $2 to make this widget, and I can sell it for $10. That's an $8 profit. If I can do that for 10,000 units, well, I'm making bank. I never have to worry about cash flow. or your cash conversion cycle.

But where people don't really think about things is there's overhead. So you're paying for maybe the additional cost of goods for packaging and shipping, shipping coming to you and then shipping out to the final consumer. You have utilities for your warehouse, your lease, your payroll, your insurance policies, advertising, marketing, customer acquisition. And then on top of that, now you're paying on terms. So you're putting 50% down on production orders and then 50% when it ships. Or you get net 30, net 60, net 90 terms.

And it very quickly gets messy and overloaded where you're not making $8 profit margins anymore. I think I told the story to you before where someone reached out to me years ago and said, I'd love to support you, but I'm not paying $25 for. a t-shirt. And my response is very deliberate and very respectful saying, I understand, like, where you're coming from. Yeah. Like, maybe it costs me $13, $14 to make this t-shirt.

But I also have to pay people to ship that. And we're paying a team for the warehouse management and order fulfillment and the lights to be turned on. There's a lot of expenses that are incurred in just bringing something to life. And the more you scale that brand, the more expenses you incur. And it becomes this beast that is building over time. But that's why it's even more important to understand your cash conversion cycle. Because now we have, like the way we have our system set up now with our CFO, our controller, our bookkeeper, is we know each month.

With small variations, what's going to change to our overhead? Okay, we have our warehouse lease costs this much, our insurance policy, our payroll doesn't change very much unless we do add more employees on or we give pay raises. And we know we're probably going to make this much this month based off of history of sales and people come to the site and our conversion rate. and then it's okay how do we look at reducing expenses now are there agencies we're using that we're overpaying for

can we outsource this to someone else so it's refining those systems but you have to build those systems first and I'm such a firm believer in this because it took me years to figure this out and if I would have known this stuff I'm telling you it would have changed my life early on so with all new

business owners, I'm shoving it down people's throats, like, learn this, understand this. It's sound, I mean, for new business owners, it's like drinking from a water hose. The one hire, if you can make one critical finance and accounting hire, like if you're hearing this conversation, like, man, I want to do better at the side of the business is a really good controller. People are way too early to go out and try to find a CFO. And I sit in a lot of CFO seats. So I'm just kind of shooting myself in the foot here. But you don't need. a CFO, okay? You need a really good controller because a CFO is oftentimes going to be more of a finance individual and less likely to get down in the weeds and really like maintain the books.

So if you're doing five to even up to 25 million in revenue, I don't think you need a CFO. The sooner you can find a really good controller who is young and hungry and has a little bit of an entrepreneurial interest. In other words, they're going to maintain the books in the proper way and they can help you implement accrual accounting like we talked about earlier, but they also have an interest in sort of learning, finance and helping with the forecasting and they want that exposure,

that is a really good hire. It seems like on the surface not that exciting. You'd much rather hire a creative, you know, from Adidas or whatever, right? That's way more fun. But if you want to make one key hire in this space early on, find a really good controller and hang on to them because that's a very valuable hire.

Yeah, it would change your life. Yeah. Change my life. I told the story before where the day that I learned and realized I had to build down our finance team in-house. On our website, we use multiple different payment portals and platforms. We use Stripe for our subscriptions. We have a PayPal option, Amazon pay option, and then just like our merchant credit card processor on the site. they all end up getting deposited to our business bank account.

One day I was in our Stripe account, just going over some things because I was a person that was before we brought on our CFO, our control, or bookkeeper, I was managing all these things coming in and coming out. That was a nightmare. It really was. That was the one thing I would lay in bed at night before closed my eyes thinking, I don't have a grasp on this and I really need to. I remember, like, and now I fall asleep right away,

I've never slept better in my life. But I was in the Stripe account one day, and I look at the number that's in there, and it said $250,000. So I hopped on chat with Stripe. It said, hey, I just want to double check. It says there's $250,000 in my account, but there's no way that's right. You know, we didn't have any big payments coming in recently. It's just recurring stuff. They said, no, it's in there.

Your account's been put on hold. We tried to reach down to you multiple times. It's still accepting payments, but they're not dispersing to your business account because the accounts won't hold. So I said, can you lift that hold? They said, yeah, we'll send it over right now. So imagine one, realizing you were missing a quarter million dollars. Yeah. Which made me think I need to build on a team in house.

This is above my head at this point. But two, it was like getting a little. loan for $250,000 injected into your business because I was operating without this money for months. So I was being even more conservative because I was building the business based off of our business account, the money that was in there, not a cash conversion cycle, no forecasting, no, no, no looking into the future. And then all of a sudden you get this cash injection into your business, which that was another. That never happens. It's usually, usually a quarter million dollar surprise like I didn't know I owed 250 to exactly exactly like

taxes coming up yeah yeah exactly but that was the moment for me that I realized I need help and I reached out to Dimitri that night saying it was like a Friday night at midnight I was like I need I need help and I don't know what to do so we built out on that team and it changed my life and now I can actually focus on building the business. I can I can focus on on building the business not being stuck in the business. You know, I think that happens a lot of business owners, especially when they try handling all the finances. There's a time and place where you have to, right? There's time and place in the beginning where you have to be heavily involved, but you have to be educated on this stuff because if you're stuck in the business, you can't build

the business. You're just stuck doing daily. operation stuff. Yeah. And at some point, I mean, and look, a lot of business owners can, like you said, they can do it themselves, but it's a bandwidth issue, right? And it's like, where is your time better spend? I can assure you it's not best spent on accounting and, you know, down on the weeds of the fine, you know, Excel. So even though you can do it, there's still a long list of things your time is probably better spent on. Let's talk, uh, getting ready for an acquisition or, a merger, you know, because I think a lot of people build their business. They build their

business with passion and purpose, and they love it. And you never really start a business thinking, or at least most people, you never really start a business thinking I'm going to sell this in a few years. It's like, I'm just going to build this thing up. And I think for most people, they get to a point in their life where it's, okay, well, I can actually sell this thing for some significant money. And they're like, all right, let's post it on Craigslist. and let's sell this thing for $100 million. And someone comes in and says, you selling this for $100 million?

Yep. All right. I'll write you a check right now and you can hand it over. But I know it's much bigger and deeper than that. How do you prepare for an acquisition? How many years out should you start preparing for an acquisition? You know, you would want to give yourself probably, depending on where you are and how sophisticated the business is,

you know, nine to 12 months before you launch a process. And let's talk about a process for a sec, because if you go hire a sophisticated investment bank, it's going to take them at least 90 days to get ready and at least 120 days to like run a process, identify a buyer and kind of work through all the documents, then it could be another 30, 60 days to close. Like the entire process itself can take nine to 12 months. And it sounds crazy. From the day you call an investment bank or sign them up to the day you close could be 12 months. then in advance of that process, you want to give yourself a good runway to get your ducks in a row. And some of this stuff is hard to implement too close to a process.

But, you know, I was just jotting down a couple because I saw where you were going at this. But we hit on accrual accounting. That's a big one. If you can start putting that in place well in advance of a sale process, that's great. For consumer product companies, tracking your inventory at cost, like landed cost. house. If you have that, these seem sort of insignificant, but again, the people that are going to write you a $100 million check or even a $5 million check, this is the stuff if they see you've taken care of, what it costs you to put these things in place, you will get back in spades

on your valuation. Okay. So tracking your inventory at cost and having a system to do that, Excel is not a inventory tracking system. Sales tax, making sure you have a third party like Avalera or tax jar managing sales tax, that's going to be a big signal to an investor that, you know, you have the business sort of well organized. I get stories for sales tax, man. I remember when we started, because each state has a threshold for sales tax. So when you start doing a certain amount of revenue in each state, that's what kind of signifies the threshold to start paying sales tax to that state.

In the beginning, I was going to each state's website each month and paying it. And I remember in my head been, I might as well just be the accountant. I might as well just hire a CFO or a CEO. And I'll just be the CFO because I was controlling the books. I was paying the POs. I was paying the sales tax. And then we ended up implementing Avalera with our accounting team. But I figured I had to tell that story because that is one thing a lot of people skip out on, I think, is the sales tax.

And that's a big piece. Yeah, and that's a good example of your real life. Let's say you're not tracking it really well right now. And let's say your real liabilities like $100,000 of past two sales tax. I'm just making up a number. As soon as an investor gets a sense that you're not quite sure and it's hard to pinpoint the real liability, they're going to overshoot. They're going to assume it's 200 or 250.

If you think it's 100, but you don't really know and you're not organized, they're going to immediately be like, it's probably 200, 250. and that's going to lead them to either reduce the purchase price or hold back a portion of the purchase price in escrow until that's figured out. Like, that's a real practical issue that can arise, that can surface in a transaction and cause a real direct impact on the cash you get it closed as a founder. So sales tax is a really good one. This is kind of a pro tip, but you want to start tracking any and all non-recurring expenses,

one-time expenses is what we call them. The most important stat in a business, this isn't the only stat, but is the EBITA that you produced in the most recent 12-month period. L-TM, last 12 months is what we call it. EBDA we talked about before, and then you can adjust EBITA for non-recurring one-time. So let's say you had some legal issue pop up and paid an attorney, 50 grand for some trademark dispute, never going to have that again. You can add that back to your EBITA, increase your EBDA. So at the end of the day, you have LTM adjusted EBIDA. That's the stat that you want to like hone in on as a, as a founder, owner. And it's really hard in retrospect. If you try to go back and remember these non-recurring expenses, you'll catch maybe 80, 90% of them. But if you start

tracking in real time, and the way to do that is you create a GL account. If you're an accountant listening, you'll know how to do this and put those into that, that bucket. So when the time comes, you've already got a running total of your non-recurring expenses. And investors will give you the benefit of that. So if your business is going to trade on 10 times LTM EBDA, and you can add back that $50,000 legal bill times 10 to significant move in your valuation. So I would track those non-recurring expenses.

And then some other little things that can just optically help your business look more sophisticated is put in a board, a board of advisors or a board of directors. People have different terms for it. And ideally, there's a couple of people that are really knowledgeable in your industry that are on that board. They can kind of guide you through the sales process, but it also just sort of signals to investors that you kind of get it and you are a little bit more sophisticated. And then make sure your legal docs are sophisticated. Like most people pull something off the internet to start the business and they forget about it.

If you've invested some money in those operating company agreements, investors will give you sort of the benefit of that as well. So if you can do some of these or all of them in advance of kicking off that process, that's ideal. And again, what happens is if you don't have these things in place, it's not necessarily guaranteed that it's going to sell for less. It's likely. But what will happen is it's going to create doubt in investors or buyers' minds. And so what they're going to end up doing is if they say, okay, I'll pay you $20 million for your business. But because you don't have any of this in place, I'm a little nervous. I'm not quite sure how clean this business is.

I'm going to give you $15 million today. And I'm going to hold back five and make sure the business performs, like you say it's going to perform. And if it doesn't, you may get some or none of that $5 million. If you have all of this in place, that holdback or that earn out,

people have different terms for it at closing. You're much more likely to recoup all that cash at closing because you can call bullshit and say, no, the business is clean. We're getting audited. We have accrual financials. Like, there's no holdback necessary here.

Just pay me the cash. because we know what it's worth, right? I think the consensus behind all of this is, in the beginning, you don't know what you don't know. I said it before, I'm going to say it a million times. There's things right now, a lot of things that I don't know, but I don't know that I don't know them. I'm going to find out about it in the future.

It's okay to start that way. It really is. Like most people start ignorant to the risk they're taking. Like you said in the beginning, I think the reason I'm here is because I was truly ignorant to the risks that I was taking. I really didn't know what I was getting into. I've learned a lot in the past decade. But you have to get to a point where, all right, it's time to clean this up.

You bring on a legal team. We recently brought on a legal team who's cleaning up all of our operating agreements, all of our structuring and the multiple businesses that we have. because a lot of the a lot of the things we do are categorized in different businesses whether it's like my personal stuff BPN stuff

property holdings and imagine in your mind up until that point you're just like it's all one like what's the purpose of I was like hey let's just flow it all through BPN it makes it easier for taxes and that's what my mind was but you hire

and it costs money it's an investment like to bring on a good legal team to redo all your operating agreements and restructure everything, you're going to spend tens of thousands of dollars. But when you go to sell one day or you bring on an investor, you're going to recoup that, right? I think we've kind of touched on this, but to really paint the picture,

like what happens when you have your shit together in terms of financing, legal, cash conversion cycle, inventory management, forecasting, and then what could happen if you don't have your shit together? In terms of the feature of your business, the type of investor you can bring in, or the sale. What is the success and the failure look like? Yeah, success is you can sign up of a very sophisticated sort of blue chip investment bank. It's not me. I'm saying like you could attract, you know, like Stevens or Jeffries or someone like that to run your cell process. And they too are going to feel a lot more comfortable about marketing your business

if they see all of that in place. So there's sort of a process before the process where, you know, especially right now these investment banks are very busy. They're very picky. Their fees are only going up because there's just so much M&A activity. And so one, it's going to allow you to attract, you know, a blue chip advisor like that. They're going to be. to run a process and they're going to get a lot of interest because they're going to tell these investors like, hey, this is the real deal. These guys are built to scale because the part we haven't mentioned is if you have all that in place and this investor is coming in and they can bring strategic value like you talked about early, like they can open you up to, let's say you're 100% DTC and

they want to take you wholesale and that's how they're going to move the needle. If you have that foundation in place, they can scale it quickly, right? And so that becomes, that creates interest an intrigue of investors like, okay, I don't have to deal with any of that crap. They've already done it. So I can scale this quickly. We can hit the ground running, right? Foundation is there. And you're going to go through that process with an investment bank. They're going to narrow it down to three or four interested buyers that are sort of qualified. You're going to do management presentations. It is a lot of work to run a process. That is a word of caution that you better have your house in order when you run that process because you as a founder, like if it's unique,

very, very distracting. It will become all that you're doing. If you're running this sort of blue-trip, you know, process, even if you have your shit together, the process will consume you. So you got to make sure the business is ready for that and that, you know, things aren't falling through the cracks during that period.

So it's not easy, but if you do sell through that more sophisticated process, you know, you're going to get competitive bids. And that's where the values really get pushed. You just need two. You need two, like, real buyers competing and the price can get pushed 10, 20, 30%, just because of a little bit of competition. If you don't do all that stuff, you're not going to attract a more sophisticated investment

bank, therefore you're not going to get reach and you're not going to get near as many investors to even know about you. The investors that you do attract are probably going to be less sophisticated, you know, they're not as deep of pockets. And more importantly, they're going to have real reservations about what the business is really worth. It's not as simple as a multiple of revenue in EBITA, LTM, LTM EBDA, if you don't have these things in place because they will, it's like putting a big asterisk over anything you tell them, right? And they're just going to immediately, they'll never define, they're never going to say to you,

hey, I would have paid you $20 million had you had your shit together, but I'm going to pay you $20 million. had you had your shit together, but I'm going to pay you 15. Like, you'll never know how it impacted your value. It's just sort of inherently under the surface when you're selling equity in a business that's not well organized and it creates doubt. And so they're going to, they're not going to be as comfortable writing a bigger check. They're going to put more of the purchase price into an earn out like we talked about. Or you're not going to attract equity at all. And you're going to have to find other ways to, you know, continue to grow the business or clean it up. Or, I mean, that, you know, failure is you can't track money period and then what you know then you're left running the business you got to find other

ways to finance it i mean it can be and you've just gone through this process that was you know if you're running it on your own or with a smaller investment bank is still difficult and distracting and you know it can it can really be not an ideal ending in that scenario i think too if you have any respect for the business you've built you get to a point where you realize all right i i had to do this a little sloppy things need to be cleaned up if you have any respect for the business you've built you get to a point where you for your business that you've built, you do the due diligence before handing it over someone else to really make it clean.

And now that we've talked about it and we've pointed it out this way, yeah, it's great to get a higher valuation and get more money for the business you're about to sell. But at the end of the day, it's like it's the right thing to do. You hand over a business to someone that's, hey, we did the dirty work, we did the right thing. And it's things you don't really find out right when you file your LLC and get a trademark for your name and launch your first product and build your site. But as a business owner, as an entrepreneur, I think you have a responsibility to be educating yourself on these things.

It took me 10 years. It took me 10 years. It's a lot. And I know this isn't for a lot of people, maybe the most exciting conversation. But again, the things that are like if you as a founder, at least at certain points in time, I'm not as concerned about that right now. Like, I'd rather invest in something else. I just can't stress enough.

Think about what the people that can write a five to $10 or $15 million check care about. That's your audience, right? It's no different than selling a product to a consumer. You're like, okay, who's our audience? You build a customer profile, et cetera. Well, who are you going to go raise equity from? It's finance and accounting nerds like myself. They care about these boring things.

So if you feel this inclination to push these things off or that they're not important to you as a founder and you'd rather focus on new products and things. Like, just remember, that's going to come back to haunt you if you push those things off because the audience that you're selling to really cares about the boring stuff. I think you learn in business as a whole,

whether it's planning for future inventory, planning for future investments or growth. You can't be looking at the present. If you're looking at the present, what you're doing right now, you're already behind. You're already missing. to be looking into the future. And looking into the future also comes with, okay, if we need to raise capital, let's be prepared

too so our backs aren't up against the wall. Let's be prepared for sale if the right buyer comes. Let's be prepared to purchase the inventory we're going to need for this next growth phase. If you just focus on looking into the future being proactive rather than reactive, I think it applies to almost everything to an entrepreneur. Yeah, yeah, no doubt, no doubt. And that's, you know, you kind of made the point earlier about, like, if you're too bogged down as a founder in the day-to-day, you're going to go weeks without ever thinking about the next product. Because, you know, you develop, especially the way you guys do to develop a new product can take months, years.

And so, again, if you're getting too bogged down on the day-to-day, you're going to miss that bigger picture, for sure. Yeah. Well, is there anything else you want to wrap up with before we? I feel like I've bored people enough, man. I love this stuff, but it's like, I'm sure, you know, for a lot of people, it's probably not the most exciting stuff, but I love it. Now, I feel like we hit on a lot of good stuff, honestly. Well, for me, it's, I'm so interested in it and passionate about it because I've realized what I didn't know in the beginning. And I know for a fact that 90% of other business owners that are coming from a situation like mine,

who have this passion, have this love for something. something and they're only thinking about the product and the site and the branding in the moment. But this is the stuff that is going to get you to where you want to be. And if you don't implement and learn these things, it doesn't matter how much branding you do. It doesn't matter how much product you sell. You're going to run out of money or your cash conversion cycle is going to be all over

the place. You're not going to know how much money you actually need on hand to keep scaling and hiring people and building teams and in, focusing on the right thing. So I'm passionate about it just because I realized, man, this is stuff I needed to know 10 years ago. That's all I know how to talk about. This and running, if you catch me in a cocktail party and you want to talk about anything else, I'll be staying there quiet. Running, finance, I'll talk all day. Oh, dude. You're talking straight to me right now. Yeah, exactly. All right, Josh. Well, hey, I appreciate it, man. Thank you so much.

Thanks for having me back, too. I'm glad we got to redo it. All right. Thanks for tuning in to another episode of the Bear Performance Podcast. If you enjoyed it, please feel free to leave a review on iTunes or share it with a friend. It helps us to grow and reach more people in hopes of changing lives with the Go One More mindset. Head on over to BPNSups.com for all your health, performance, and nutrition needs. We offer a wide range of products to help you feel and perform at your highest level, built on quality and proven by results without, compromise.