Episode Transcript
[00:00:00] Speaker A: Welcome to the Independence by Design podcast where we discuss what it means to be a business owner and ways to get unstuck from the day to day so we can design a business that gives us a life of independence.
Tom Shipley is a serial entrepreneur and investor and he's on the podcast today to talk about acquisitions and how acquisitions can help you compound your valuation in a way that gets you out of the value despair that he calls the 1 million to $2 million in normalized EBITDA. Tom has a ton of experience in M and A because he took a company that was floundering around and barely had any cash to acquiring one of the largest firms in their sector and then scaling that up for 18 years and crazy success of Direct to Consumer ends up raising a hundred million dollars for an Amazon aggregator and has a ton of experience in how acquisitions can get you out of that value despair into the point where your valuation is meaningful and all the effort. As Tom and I round out the end of the podcast, we start talking about how true integration actually provides the cash flow that represents and supports that normalized ebitda. Because there's a lot of games we play with normalized EBITDA where people gobble together a bunch of EBITDA and then sell it. And he calls it the Frankenstein versus actually recognizing those synergies and generating cash because oxygen is the cash flow. And Tom's got a very unique way of approaching this new venture that he's involved in where there's a lot of synergies. First they merge them all together and then they package them up and sell them. And I think he's onto something really special because the integration is the hard work that I have not seen a lot of people do effectively over the last five to six years. And I'm very intrigued to see how Tom pulls this off. Regardless, I think you're going to really enjoy this conversation and get to hear and think about the name of the game of capitalism and valuation and deal structures from someone who's been there, done that over the last couple decades. So without further ado, here's my interview with Tom.
Well, Tom, such a pleasure to have you here. I, I think, you know, in the 30 minute pre call a couple, like it was a month ago or something like that and probably could have kept going for hours. And so I'm very, very excited and we were just talking about, as we're rounding at the end of the year, music, what do we stop doing?
And I think this ties into the conversation I want to have Is where do you determine where you want to spend your time and how value is created and how to align your potential and the value that's potentially able to be created. And like how do you think about value and time?
[00:02:37] Speaker B: Ryan, Great question. So I'll start with this is I'm a fundamentally, I'm an entrepreneur, which means I'm an optimist, which means that unless I think about it, I have unlimited time, unlimited resources and I can accomplish everything.
And I see so many opportunities that are out there, really problems that someone needs to solve and why not me?
The reality is the opposite is true. Regardless of the hubris we have as entrepreneurs is we have a finite amount of time and the finite resources and therefore it's never a question of resources, question of resourcefulness. And therefore we have to pick our priorities.
And so as I, you know, this is just a magnificent time of year. It's winding down the year and we get to think about the year ahead.
So I like to take a breath and think about what is really important to me. And it always starts with family. And again, it's so easy because we're so excited with so much to do just to jump in and say what we're going to accomplish in our current business, what future opportunities are there, what big, big things we're doing. But really starts with it is I'd say what, how do I want to show up for my family and what can I do to basically what are the special memories that I want to create with them? So I carve out that time and make trying to be very intentional about it.
But then the next thing is, the next thing is that I think about from a priority perspective. And what I love to do is to think about five years from now. And this is the thing I love to do all the time. And I do this almost daily basis, whether it's one year from now or five years from now. Looking back and again, since I'm looking at the year in 2026, what am I going to look back and say? The biggest thing that I accomplished, what is the biggest impact I had on my family, my future, on my community, my environment and on this world.
And therefore let me take a step back and breathe and identifying those things that are priorities and that quickly helps me eliminate and I look at all the opportunities in front of me and I like to rank stack them based on different criteria.
But ultimately what is it exactly is going to have the biggest impact into my goals in life. And for me, that's about, I think we talked about this, Ryan, on the last call is for me, my two drivers in life are impact and adventure. And impact is divided into those people around me, family and close friends. But then also and my community. But that also means that who do I want to focus my attention and resources and have that impact on them? And then a life of adventure, which means excitement and everything that makes me energy.
[00:05:20] Speaker A: So what I, what I love about what you're saying, and it's very interesting, Tom, because I think we talked about a little bit of this and not shocking that we think a lot the same from that conversation is contextualizing the real resources we have. Because what I heard you say, and it's similar to what I do, is admitting the top, you know, the whole rocks, pebbles, sand, water thing and you know, in the bottle, and I don't know if you ever heard that. And a lot of people probably have. And so you say, okay, well, I've got to spend time with my personal, I got to get my, you know, my own stuff together, you know, with my health wise. Then I got my family. So then you say, okay, well, roughly, if we got 40 hours a week, what am I going to do with that? So what I heard you say is you contextualize the real resources that are there and how you're going to spend that time with the adventure and the impact and then how does business fit into there? So then you're actually able to then stack, stack, rank your priorities in business. And what I find interesting, Tom, and then one of the topics I want to pack with you is how you're determining, you know, with your entrepreneurial background of growing and selling a couple brands and then, you know, raising money and like also now with your PE venture, of how you're doing that differently than other ways that you could structure capital. It's really kind of identifying like, okay, what is the spectrum of options on how to deploy time and resources and how you think about that. And I think it's really helpful for us to understand how limited that time is because then it makes us choose where to spend the time. So I say all that because I think it's gonna be interesting to hear how you think about where you're spending time in business and how you think about where you could spend your time because you started off doing one venture, right? Like you started off in a business. So maybe kind of give us that story arc of how you've thought differently and how you're, how you spend your 40 to 50 hours a week differently now that you know what you know.
[00:07:10] Speaker B: So let me start with the core philosophy that I have in life and that is that I have a, I have a belief that we all have this responsibility. And what's responsibility is we all are writing our own novel. It's our epic novel. It's not to be judged by other people. It's our epic novel. And every chapter we've responsibility to make epic as we define that should be. And to me, my chapters are five year periods of time, plus minus.
And I like to every five years take a step back and to say is this what I want to spend the next five years doing? What is the biggest impact that I can have? That gives me energy that makes life worthwhile. Especially looking back in my life many years from now and saying where did I spend my chapters and what is this next chapter looking at?
So if we go through my end, sometimes my chapters can go like they did when we were, when myself, my partner, we were building beauty brands.
That chapter lasted for 18 years. Why is I loved it and it kept, we kept on and we're living New Jersey and life was great. So we kept on reading up on that.
[00:08:18] Speaker A: Was it like a section and then there was a couple chapters in that section, I'm assuming.
[00:08:22] Speaker B: Yeah. So yeah, yeah, yeah, yeah, yeah, yeah. I mean, oh my God, yes. I mean I'm basically is you, you know, quick story is you start off with zero, with a big ambition, you promise your wife you'll never go all in again. A year later you're financially tap, you don't know how you're going to feed your two young daughters. The business hits 3 to 31,000 in revenue. But if the metrics are good, the business looks good. But you can't borrow, you can't get investors, you're done.
And I think I share with you is what do you do when you run out of money. I learned this in my first business is you buy a business.
So we bought and I found a business. We found, we basically bought a $15 million business in Hoboken, New Jersey doing a million and a half in profit a year. But it had everything that business needed from tech stack, great Internet marketers, designer develop everything. We put our little brand on top of this and within three years our little $331,000 brand on top of this $15 million business. With three years, we did a hundred million dollars and a billion dollars in that first skincare brand.
[00:09:24] Speaker A: Let's double click on that real quick because I thought it was a fascinating story like how you bought a business so it's kind of the whole minnow eating the, the whale. And how did you structure that and like how did you land on that? Because I know that's going to be, you know, one of your core premises here as we unpack the theme.
[00:09:40] Speaker B: So I, you know, I.
There are so many ways to, to buy businesses.
A quick stat for everyone, just change your paradigm is there are a thousand business owners that will retire every day.
75% of those businesses will be attempted to sell and will never find a buyer. And they will just close down.
And that is the opportunity. So forget about what you think your business is worth and what you sell your business for. You have to understand what the seller is. Now you can go do creative deal structures. And if you're buying businesses that are growing, that are very profitable, you could typically always, not always, but typically always raise money for it. So in this case, two good business guys with good business background, myself and my partner, when we went and found this growing business in Hobo Boca, New Jersey, it was five years old, it was growing every year. It was very profitable. So we were able to go out and find lenders and specialty credit was mesme lenders and they lend us the money to buy 85% of that business. We negotiated a really good deal on that and then ultimately they rolled over and kept equity in the 15% and two years later we bought out their 15% for the same price we paid them for the 85% because the business scaled really nicely and it was worth. And basically that's what you're looking for as a home run situation. For us it was great for them, it was great exit, but that's the way we did it. But it's all about as I keep on going back to resourcefulness, you have to really identify what the seller wants to do, what you want to do. You want to have a lot of conversations with a lot of sellers. And you should be always having conversations with entrepreneurs. We love to talk about our future. So every time you meet someone who is a business owner, you know, tell me about yourself. What are your goals? What really gets you excited? What are your goals for the future of the business? And they'll tell you. So when they talk about their next chapter in the next business, well, that's the opportunity for you.
[00:11:35] Speaker A: Well, I was gonna say so that you're in this, you're in this chapters, you know when you got this 18 year chapter, because I know that's where I, I'll keep us on track and keep the thread going. Tom But I think it's so fascinating is so you've got this first 18 year chapter and now because like as we progress and as you have now figured out how to deploy capital and time and resources without having to be the operator and be the doer, that first 18 year chapter or section, whatever you want to call it, is you figuring out a lot of these core principles that you're now deploying in unique structures and unique ways. So anything else you're like how, how did, like what, what are some of the core principles you Learned in that 18 year journey?
[00:12:16] Speaker B: I'm going to take you back to a prior chapter. If I say what are my chapters? At my first, you know, I'm going to say what's my first chapter? You know, out of high school and forget about a little bit of time at Florida State. It was going through special forces where I was given some core philosophies about people, people what and, and what real quality of character is and exceptional teams can do together. That's at the foundation. It taught me about tenacity and special forces. It tells me about is I, I never quit ever. And so there's, you know, these certain things you, you learn how to assess and reap and pivot but you just don't quit. So there's certain things I learned resourcefulness over resources. You, you know, as you're going out in a mass casualty event, you never have enough resources. So you're about, it's about resourcefulness. Okay, so all these, so that was a chapter of incredible. I thought I was doing about impact because I was giving during those, those years. But really the gift is always the other way around. What it gave to me.
Next chapter. Let's skip over degrees in my first test businesses but my first real business was in 1999. It was an online store. We mailed out but I believed in omnichannel market. Again, it's your core philosophy. What I learned in that business is a couple things.
First of all is you can build a brand that no one ever heard of through direct response marketing and become a really well known national brand, which is what we did with that first business. It was an idea in my head and we mailed up means the catalogs. We had a dozen pages in the Skymom magazine. And because the pure online offline different platforms, people constantly saw it. We built this brand.
And so I learned that I learned on how to actually again it's the first time I built a large scale team and how to what our responsibilities as leaders Are a responsive leader is to transfer our vision. And we're ultimately an inverted pyramid as leaders.
And we're there to give energy and support and the infrastructure for the team to succeed. Ultimately, we are responsible. If something's going wrong in our business, it's our fault. It's ultimate accountability is us. So if you're asking. There are so many things I took from Special Forces add into my first business, the team, the passion. Ignore the big resumes because that isn't necessarily the skill set you need. Those are great for consultants, but not necessarily employees and how to. And I got through a volume play, you know, learning, building your gut.
Right. I, you know, someone told me, you know, many, many years ago that you gotta go through a lot of challenging experiences to develop a good gut. But your gut was you have to listen to it.
[00:15:02] Speaker A: I had this Tom, I have a really good buddy.
[00:15:04] Speaker B: He.
[00:15:04] Speaker A: I love his saying. He said experience is what we get when we don't get what we want.
Isn't that just because that's. That's how we learn to the get. That's that gut. But I think that actually ties into.
As a leader you've learned these things, whether it's the special Forces and then you're running a business and then you're ex. You're transferring that experience to others through communication. Where Tom was there was there a unique situation or two where you're like, oh my gosh, people in business. And this mobilization of people and teams in the business is just like the special Forces. And how did you think about that?
[00:15:46] Speaker B: That's what I learned in my business. And especially is this passionate team that is all in. You can do almost anything regardless of. And let's be very clear is there's very few businesses where you don't not only hit massive walls, you have a concrete wall fall on the business, shaking everyone's confidence and even the.
It's an existential threat to the business where. I mean, I've been. How many times have I been where my board of directors said, you're done. Fold it off and just move on. My senior team said, there's nothing we can do. We're done as a business. We might as well just liquidate. I can't tell you how many times that I've been in this situation. And what you find in those situation is. Is as you have a level of certainty and clarity, clarity and honesty with your team.
You can rally people to a level of greatness that they never experienced before and their value and appreciation and they're Those people that you learn that can't live through that challenges and they shouldn't be in your company, and that's fine.
And so it's those experiences that taught me what is basically reinforce what an incredible team. But it's about a team with passion and heart. And that's why I talk about, it's our job as CEOs and leaders and founders to have this clear vision, but transfer that vision to clarity, to our teams that translate that into energy and clear direction.
[00:17:11] Speaker A: I love it. And so one thing that I'm really fascinated about how you're describing this is so as a leader with having that clear vision, rallying the troops, because I had a similar experience, Tom, like it was our business when we had, you know, no money for payroll. And it's amazing what people will rally around as long as the culture, the leadership, the team, all that kind of stuff. But what I struggled with 15 years ago, one of the missions that I have, and I think you and I both are in a similar boat, is I didn't understand how the game of ownership and capitalism worked from valuations. So I had a fundamental misunderstanding 15 years ago of like, what was the ultimate judgment? It wasn't revenue, it wasn't gross profit, wasn't that income? It's like what creates value.
And I see that as leaders, you know, we, and we could potentially rally people around something that's not a viable mission. So back to like your special forces or back to being, you know, like, when do you quit? When do you not quit? And I think the only way is like, how do we understand value and what creates value? So how does your understanding of the game of value and valuation and business tie into this?
[00:18:19] Speaker B: Yeah, let's, let's, let's be crystal clear on here. And it depends on what stage of the business. We have a startup, we have an early stage company, how many of the most successful. Let's just talk about tech right now, but you can talk about almost any business succeeded with the original vision or direction that they took, that they actually started the very beginning. Even look at PayPal, if we go back many years and say that basically it was a feature of their massive stack of features that ended up being what PayPal was. But if you look at most business, there was a pivot and a shift and things they learned in test along the way, that, that really dictated that. So yes, the vi, the original vision and what the original plan, original product might not work. But look at your core, what you have from a team perspective, what resources and you scan the marketplace and you identify other opportunities. And sometimes you have to double down and white knuckle. And sometimes you pivot. You can't be pivoting every day or you don't have a business and your team is have whiplash. But there are times you, you test, you learn, and then you pivot accordingly. Now with larger businesses, it's a little more different, is you have a great business, it's successful. You should always be spending 10 to 20% of your resource testing new products, new initiatives, and looking for what's next. And many times, as you know, that we built everything organically at Orlando Coast Brands. We again passed the first acquisition and five years ago or six years ago, I doubled down on acquisitions that I cited.
Building brands from scratch is kind of like being dragged through asphalt and glass with very little certainty. Okay. Versus when you acquire a business, you have a good foundation, it's already been off the ground. You have great. I rather spend the same amount of resources scaling it from, let's say 4 or 5 million to 100 million than all these resources and riskiness of never getting a business off the ground. Same thing with scaling.
[00:20:23] Speaker A: I can also resonate with that because the turnaround with the family business that was doing 20 million to the turnaround to sale was easier than the couple of startups I've had over the last 10 years. I'd rather shoot myself in the face than do another startup. I mean, and like, and I didn't know that until after the sale and then like, you know, I.
So Tom. But like I'm tracking you and I. And I love it.
The understanding of valuations is like, for me, Tom, it was like taking this red pill and like in the Matrix or the allegory, the cave. Like, I was like, I was like, oh my God, there's a base layer of this game that I was unaware of. And then I realized as a leader, I wasn't able to explain to my team what was worth it or not. And, and it like it. What happened was that it changed the ability to view the pivot, the double down or the, you know, the buy the company, like how to spot value. And so like, how did that education change your perspective? And when did that happen?
[00:21:30] Speaker B: Okay, so first of all, it happened.
I thought I had the metric in the playbook for that when I started my first business. But it's when I bought my first business and you're on the other side. When we got in trouble, I started really understanding valuation and discount factors and things like due diligence and what you learn in a challenging in a process when you do your acquisition. Then we did our second one, obviously then I was really plugged into multiples and what business value is.
But then it also informed me on what we should be building. One of the greatest advice I got very early with starting as an entrepreneur and it's the opposite of what you may think a lot of times people optimize very quickly for their exit value.
And what someone told me early in my career, they said, Tom, if you build a great business with great fundamentals, you'll have a lot of buyers.
And what I mean by that is I'm going to sell my business so I'm going to hit the throttle and maximize revenue.
I can't tell you how many businesses we're going to hit $100 million in revenue. Do you know how many businesses I've seen pursue that girl and blow up along the way?
And I will say and you appreciate this is I use, maybe it's an extreme but I like to make sure I'm landing. This is I tell my team is I don't give a about revenue. I care about ebitda, I care about cash flow.
If we're optimizing for long term strategy and optimizing our cash and our EBITDA and keeping our eye on that, it'll keep the business in check. And if you have strong EBITDA in your business and strong margins, there'll be a lot of buyers for that. And it's fundamentals. When I buy it. Let me flip it the other way right now. Ryan and I had this discussion this morning.
Someone said, tom, what do you look at in due diligence? What are you looking at? How do you value a business?
And I said let's start with this. The thing I'm looking for, I'm looking for based on the multiple, which is how many years of cash flow I'm paying in advance for this business.
I'm guaranteeing to whoever I'm buying it from. I'm looking at what is the probability that that'll sustain for at least that period of time or longer. For example, let's say it's a million dollar business and they're valued at, let me be a little bit aggressive. They're good, they're going, they're having nice growth rate, nothing incredible. And basically their market value would be five times, okay, between four to five times multiple depending on the industry. But let's say five. I'm not talking about a SaaS business.
So five times EBIT on this business. It means that when I'm buying this business, I'm guaranteeing the owner five years of that, what he would be getting today, what he would earn over five years. Essentially that's the deal. So I need to confidence that is, so what is it from a valuation we're looking for? I know what the industry multiples are, the, the number that you multiply against the ebitda. But also I'm looking at factors such as what can, what can be an existential threat? Well, all their, their one customer represents 80% of the business. There's no guarantee that they're going to stay around long term or they have a lot of churn in customers. Again, I look at their, their customer base, I look at do they have a moat around this business? Is there some technology that's coming along that could blow this business out of the water? Do I have good feelings that their people are going to stick? Is there too much reliance? Is the CEO doing all the business development and leading also delivery? So if the founder leaves, the business is in jeopardy. So again, everything is about that confidence. So everything is important. Valuation, not flip the other way. When I want to sell my business, I want to signal to a buyer that this is a great business with great fundamentals and it's sticky. So therefore the EBITDA is consistent, growing nicely the customers, the way we're getting new customers in and the lifetime value customers are great and there's not too much concentration of customers that we have a wall that we have great sops that our team is strong. There's something happens to me, the company will still, still do well. So get all these things is I want to give confidence to a buyer. But when I think about valuation, I not only think about multiples, I also think about what would a buyer be looking at my business and I'm looking at building a strong business. I'm not just flooring it to one specific metric which could blow up the business, which I've seen a lot of sellers do.
[00:25:53] Speaker A: Well, what a couple that take. I love it and completely double or you know, highlight and you know, underline all that stuff.
What I heard, which I thought was fascinating, is be you learned this game through your first acquisition and how many people have you and I both met that they learned that game when they're trying to sell for the first time and it's like you might as well F it up on an acquisition because you learn the same fundamentals or you have to go to your conference or my training or Something like that. Because if we don't understand the game, how do we know what we're supposed to be working on today? And that's like the whole like, you know that back to like if you're in the Special Forces, you're like, you have a mission and it's very clear what the game and the rules are. And like the only way you can understand whether to pivot or to double down is if you understand the context of your current situation versus what the mission is. And I love everything that you said. And that's where as within that context, I have a specific question for you on normalized EBITDA versus cash flow. I know like a lot of times people interchange those things, but you and I both know they're not the same because normalized EBITDA is not cash. So even though normalized EBITDA and the multiple are a thousand times better to look at for the judgment of the game versus revenue.
And I'll give you some context, Tom, because I got a client that I've been beating this into his head. Normalize ebitda. If you're doing a roll up to sell can be fricking awesome, right? You, you buy. He's been buying a bunch of million dollar companies and he's bolting things on. He's got the little private equity playbook.
There's no freaking cash.
So if he doesn't sell that freaking business, he like if he keeps going at the rate he's going. So I said to him, you have to, you're in a decision tree right now because if you want ownership distributions after working capital debt and taxes and actual cash, which is a plan B where you can actually keep this business, you can have 3 million in normalized EBITDA and no cash. So how do you, how do you think about that?
[00:27:58] Speaker B: Yeah, I mean, let me start this way is with our first business. If you think about growing a business to from basically 0 to 100 million and you're doing it fast over, like we did over three years, you're, and especially in a product business, you're eating cash like nothing else.
[00:28:17] Speaker A: How were you doing? Were you doing inventory? So like did you, were you like, did you have customer deposits? How was that cash coming in and out?
[00:28:23] Speaker B: Oh, we had. By the way, we. Let's talk about it. We added by not only inventory media and we also had a model that we'd actually. This is pretty. People will find this. Well, they won't find it unusual anymore. Imagine like before, after. Now you have after pay, right? That people basically pay even for whatever skin care and they do it on installments. But you have third party financing companies from afterpay. When I was in the business they didn't have those companies out there. So we did our own financing. Oh good lord.
[00:28:52] Speaker A: You were the.
[00:28:53] Speaker B: We were the afterpay. So we sell $150 worth of product and finance it over three months which meant but our life. But basically our customer acquisition cost was again it was, it was you know us 90, 80, 80% of our business was all subscription.
So again we had to get to month to 90 days to break even. And then the rest of it was pure cash.
[00:29:15] Speaker A: That's that white knuckling get the monster.
[00:29:17] Speaker B: But we were, but basically is is so we are spending money, we're scaling and the cash isn't catching up. So we're eating cash. But because we were profitable then the goal is okay, where do you get the money from? If you bring in equity is extremely expensive and you're giving away at that point. Buster Co.
The other way of doing this is by bringing in debt which is what we did. We found a great debt partners and basically between cash flowing our receivable line is our senior and then we had our mezzanine lender who gave us the growth capital and then it was a great combination on what we used. And again the ROI on that is you know yes it was maybe expensive but basically think about the ROI I got off of every dollar I borrowed because basically I was able to recycle those dollars every 90 days and I was able to make for every, you know every dollar that I borrowed I was able to make a buck. So again and recycling that four times. So was it really expensive? No, it wasn't. So again but this is the framing.
[00:30:18] Speaker A: Sorry to interrupt town but like that's the framing that like is so important if we're going to be capital allocators. Because the goal is to get the return on the equity. And that's where like if we shift our mindset and it's like, like you know, you got people arguing over you know, a percent on a 10 year loan. I'm like it's cheap debt, fixed rate. Even if it's 9%, lock it in, go grow your company. And it's just a whole mindset shift back to the whole fundamentals of the game that we're playing.
[00:30:48] Speaker B: And that's what it is is I always looked at what was return on capital and especially we're growing business and I know we could flatline the business or slow down the growth drastically at any point whatsoever. And when that happens, then you're suddenly, you're paying down the loans, cash is coming in because you're generating, you know, remember, over time there's a little business, that $331,000 business that lost a little bit of money over time. We had consistent six to seven million dollars of EBIT a year, growing to nine and a half at the very end when we sold private equity. But again, that's just the power of that model. And when you slow down the growth, that's what happens. But yes, you have to really know your numbers. Let me also share with this on another philosophy I have on, on the cost of capital. Okay, If I told you that I'm recommending for you to go get a loan for 20, between 25 to 30% interest to buy a company, what would you say to me?
[00:31:52] Speaker A: What's the return that I'm trying to get?
[00:31:53] Speaker B: What's the goal? Yeah, what's it. So let me, let me, let me just put this in context.
We bought two businesses where we negotiated this, the cash price that closed between 5 to 10% of the enterprise value. The rest of it was seller notes that we financed at 6, 5 to 6% interest.
So we had it so what was certain to go out and basically generate the cash. So I was able to go, and this is just revenue events. Lenders are extremely expensive. There's some good ones, there's some really ones that are egregious, but there's some good ones out there. It's expensive capital, but it's capital with certainty. You can borrow one to two times on the monthly revenue of a business. You can close within a week.
So we're able to get acquisition capital and then refinance it after that. But we can close within a week. We can pay the 5% cash that closed and now we have a business that. But you look at the average cost. So we pay 25% for 5% of the business and for 95% we're averaging at a 6% interest rate. That's a pretty good cost of capital.
[00:32:56] Speaker A: It is. And it's so fascinating because in my training I have, I break down the discounted cash flow valuation versus the weighted average cost of capital and how that is the inverse of the multiple. And like you just, you start messing around with the debt to equity ratios and stuff like that. But here's what's fascinating is I, I mean, even in your space over the last seven years, I mean, I had a little bit of exposure time to like the, the FBA space of the Amazon. And like how many of these people don't understand or even like honestly the private equity space over the last seven years, cheap debt people went in and bought a bunch of companies because they're again doing the normalized ebitda, the debt, the multiple and like. And it's kind of like when my dad bought a house on a one check stub on a FICO score in 2007.
That's kind of what I've been watching in the PE space because the cheap debt, it's awesome if you understand the game and the rules like what you're talking about. And then you have a plan to service the debt and you understand the risk and the viability of those future cash flows. And that's the kind of going back to the normalized debt and you back.
[00:34:05] Speaker B: You bake that into your agreement and your agreements such as seller notes, the when I buy a business and a sun seller notes. I said, well, you love your employees, you love your clients. We want to make sure that if there's a downturn, you don't want to put your employees and your customer. So let's just develop. So I'm guaranteeing the money, but let's put some backstops in. So if the revenue and EBITDA drops for whatever reason to a certain level, then we're going to extend out the payment so we're not killing the business.
So there's ways to structure deals to protect you and protect the business that everyone has an interest in. So, so go back. Oh, go ahead.
[00:34:46] Speaker A: Sorry. Oh God.
[00:34:48] Speaker B: I was going back to your original question.
[00:34:50] Speaker A: So, okay, that was where I was going about the normalized EBITDA versus cash flow and like how that how you think about those two versus in like how the end game that you're marching towards.
[00:35:00] Speaker B: So the end game is I'm what I'm really optimizing and a lot of businesses that I do is I'm optimizing to sell at some point, period. Okay. So what I do is or it's going to be generating a lot of cash flow after all, after the debt is paid off period of that business. Most businesses I'm, I'm basically focusing on a, on a sale perspective. So I need to met. Your cash flow is your oxygen. You run out of oxygen, you're dead. Your business runs out of cash and you have no way of fulfilling it. Your business dies. So you need to preserve and keep and listen, I'm a medic. So you start with the windpipe. Is the windpipe open? You know, is the airway opens. That's where you start with. Okay, same thing. Business. You need to make sure you're preserving cash and you really your eye on the cash of the business and you're making sure you don't run out of cash in this game. But then your goal is to figure out a way to deploy capital and resources to maximize your, to maximize your, your ebitda. Now just talk about the night we talked about this. The ninth wonder of the world, multiple expansion. Okay I love it is and, and for, for people I'm sure some of you that are listening understand this but why it's the miracle of the world is that as a business EBITDA gets larger. As the net profit of business gets larger EBITDA the business what's happened is that there's less competition for less companies having larger EBITDA. There are a lot of companies out there with $250,000 a year EBITDA. There's less than a million, there's less than 10 million, there's less than 50 million.
There's a lot of money out in the marketplace and what a lot of what big money says is the larger of a company, larger the ebitda, the lower the risk so they will spend more and pay more and, and more as far as the valuing a multiple on that ebitda. So and so that's really why you're getting paid more for more reliable businesses that people can predict the future of like it and where the money is going to. Now let's pretend this is I'm buying one business at three times EBITDA for $500,000 and, and, and another business for. Let me make my math easy on right. So basically that business worth a million and a half dollars, I'm buying another business for $500,000 of EBITDA for three times multiple. So now that business is worth 1 1/2 million dollars. I put them both together. Now I have a business that has a million dollar EBITDA but it's not worth three times multiple. It has a million dollar ebitda. It's worth four times if it's a good business, everything else remains the same. So suddenly I put these two one and a half million dollar valued business together and they're worth $4 million. So out of thin air I created a million dollars of value. That's the beauty of acquisitions and growing EBITDA and stacking. Give it up now. I love to stack EBITDA with Organic growth and then also with, with, with, with, with acquisition growth. Ryan, we spoke about this. Let me share my most favorite data point. I want people to understand if you've been long enough and you have a stable business. Yeah. Your first years might have been massive growth, 30, 40, 50, 70, 100%. But at a certain point you reach a steady state of growth and let's say you're grinding it. Some years you hit 20%, some years you hit 5%. Some years you have black swan events which happens on a regular basis either to your specific business or Covid in the marketplace, things like that or 2008. So on average you look back in the last five years, you grew by 10%.
Congratulations. You just increased the value of your business by 50%.
Now it has to. You take the value of inflation and add it to it. So it's not really 50%, but congratulations. Now if you by the way is.
[00:38:35] Speaker A: The same as the cost of capital in the s and P500, right when you really start.
[00:38:38] Speaker B: Yes, yes, yes. So. Yeah, yeah, exactly. So now this. Imagine all the resources you put into sales, development, retention of your clients. You spend this in. You've also spent it on new products, new initiative, new channels. Now imagine if you spend 5% of your resources a year on buying a business and you simply follow a set methodology and you buy one business, one half your size every year for five years, one business half your size. And that happens by having a lot of seller conversations.
If you do that, you've increased the value of your business not by 50%, by 1200%.
The strategic options that you have on where you can grow your business are dramatically changed after their five years.
If you decide to sell your business, the value you're going to sell your business for and the amount that creates that diagnostic wealth or generation wealth you're looking for.
It's happening there. And again there are formulas to do this. I don't say do this irresponsible. There are processing system, I'm industrial engineer. You take complex and make a boring. And there's ways and methodologies to responsibly buy businesses. But that's why I'm very big to leaning into it. Because Atlantica's brands we grew like this. And then we maintain that 100 to 125 million. But a certain point we steady state between 175 and 100 million every year.
@ that point, rather than just going all in and constantly launching new products and new channels and really focused on going back to our original playbook of acquisitions.
And basically grew through acquisitions. And then once we had profit, you know, buying a profitable business and then scaling it through our methodology we were really good at again our. Everything would have been so much easier than the gale force wind we face along the.
[00:40:27] Speaker A: Way.
So I love it too. And it's. I've had Adam Coffey on the show a couple times and he talks about his 30% compound annual growth rate where a third of that comes from acquisitions. I don't know if you've met my. I've got another buddy, Nick Bradley who's in that space too. He talks a lot about this. And so one thing that I find fascinating, I'm just eyeing the time. I know we got like 15 minutes here is the practicality of truly building a good business with this. So I'm going to speak out of both sides of my mouth because I want to actually hear your reaction to.
[00:41:00] Speaker B: This. Please.
[00:41:01] Speaker A: Do. Because yeah, everything you just said I think is very valid and I think the only way we can see that lens of the game is if we understand valuations like we've already discussed. So like totally check like yep, like this is the game regardless of what people think because this is how companies are valued and like valuation is the ultimate judgment when and how you transition that that value or purchase value.
The, the challenge that I have seen over the last seven years is the complete dysfunction of watching what it's which is the actual game but be played where if you peek under the hood it's a total effing disaster.
The CRMs are not integrated, the ERP systems are not integrated. You have dysfunctional teams. Like if you like go back to your special forces and like by the way Tom, you're about to go on a mission and Ryan is now your new teammate. Ryan doesn't know who you are, what you're doing, where you're going. And now you're just going to pretend that this all works together. And I, and, and I know I'm kind of planting the seeds. I think you've helped solve part of this problem. But like the, I've watched In the Amazon FBA space, the e commerce space, the SaaS space, home services over the last seven years, people bolt on these, you know, these companies and you're like this is such a, a dumpster fire.
And like when the, and like the game of like whether it's like public company who has a 90 day earnings report that they need to go from 100 million in normalized to 110. I mean I had a client who they sold they were six and a half million in Normaliza. They sold to a PE firm that was 35. 35 plus six and a half is over than 40 now. Everybody's more wealthy. They still have an AS 400 and it's a shitty operating business. But so like the 41.5 million normalized EBITDA didn't, didn't solve the fact that now that they've. They're spending 90 grand a month with is it KPMG or EY with 25 year olds with PowerPoint. So I've got integration and they still have a freaking mainframe.
So like at some point that company's got to generate actual cash.
So like how do you balance the game versus building good.
[00:43:12] Speaker B: Businesses? Okay, okay, I'll start with this is. I believe you start.
If you don't play the game right. We'll start with this. If you don't have the right. Let's start with the strategy and a process for doing this. You end up with Frankenstein. The concept, the concept was great that he was doing.
[00:43:30] Speaker A: Right?
[00:43:32] Speaker B: Yeah. But what he ended up doing is he ended up being Frankenstein. And that's what you're going to get with your businesses.
So I start is what is the thesis of what I'm building?
What is complementary? I'm not gonna. If you are buying business purely for EBITDA and not being complimentary, you're an idiot.
You can quote me on that. Okay.
And I know that a lot of people are doing that well. If I just slap these three business together. Imagine they have $3 million EBITDA. Now suddenly we're at $9 million. Look at the way we're valued. But they're not looking at how they're group together, what they really are and who would be the buyer. Because remember, let's go back to our first one. The first thing we talked about is the value of a company is relative to what a buyer will pay for it. A buyer will pay for it. What is the confidence, the predictability of their cash flow of their customers and what it means to their business coming in. The lower the confidence, lower. So that's what we're trying to solve for. So as you know, what is a theme? What is the unique that I'm trying to build with, with my acquisitions? What problems am I solving for in my business?
And then it also is really understanding that what does cultural alignment mean?
Is you can't, you know, if I was to, you know, there's certain companies that have massive culture classes which creates challenges. Those companies that are maybe touchy feely, softer and it really works well for them but they merge with an atmosphere. A company that has sharp elbows that's very profitable with a sharp elbows. There's going to be some culture and I said start with people. So I start with the people and the culture the team And I will not buy business if I see if it doesn't feel right instinctively that it's the right culture, it's the right environment that goes well with my environment. So first of all it's strategically how does it fit to zip out solve a problem we're going to do what are the biggest challenges and then ultimately is what is the long term and the integration playbook on this. There are some times where you buy a business and you intentionally keep their it separate because that's not where the value comes from or is it from integration. I don't know. So again these are decisions you have to make along the way. When I do an acquisition I play the balance between do no harm and what's the right thing long term and what's the timeframe to do that.
But understanding that I'm remember Ryan, I'm a systems thinker. I was raised as an industrial engineer. I raised but my degree isn't it and what I learned a long time ago is that everything affects everything.
You need to think about things at a systems and everything is touching each other. So how do people processes systems how does it actually and profit how does that actually intertwine when you put these business together and really think it through and having buy off from the team and really clear direction how you're going to handle this. Using your due diligence process to inform the most important day of day one what happens after that and really having that tight plan there that's what you know due diligence is to either one find reasons to walk away from the deal Deep due diligence.
Due diligence next is basically informs how you're going to address the issues that you find. You'll always find issues you're going to solve it in the in the before the close in the operating group in the purchase agreement or after close and who's going to do that but most important it it's all to develop your 30, 60, 90 and 12 month plan and long term.
[00:46:52] Speaker A: Plan.
What I love about what you're saying like and I think if you and I have spent a lot more time together like it's the systems thinking and so Tom I my. My audience hears me talk a lot about this three Statement model. So I have. It'd be so fascinating to get your reactions to it. My old business partner created who is the smartest CFO I've ever met. And you take your income statement, your balance sheet and your cash flow statement, you mathematically tie them together, but then you mathematically forecast them out. So the first year, every column is all three statements tied together. So there's 12 columns for year one and then years two through five are a whole column with some growth rates and revenue, cost of goods, overhead. But what we're able to see, Tom, is that because I'm a systems thinker too, is at the end of year one cash position and then the end of year five cash position is like the mitochondria of our body. And like if you have a plane, you know, aeronautical engineering, like it.
[00:47:51] Speaker B: Either blows up or it doesn't.
[00:47:53] Speaker A: Right? Like it's a closed system. And cash. And this is where like it's fascinating to and why I asked you the EBITDA versus the cash position because. And then how we can see the capital and the cost of capital is because everything touches cash. Like everything is a derivative of cash. However, what we can do is then, if we know that normalized ebitda will be $5 million, but we can see then, and so that's in the income statement. But then we can go down and see the cash position, you know, our working capital, our debt, taxes, we can say, okay, we're still healthy here, but we can see the correlation between the two. And we're not isolating just one and optimizing for just one one. And so like the whole, it's a whole closed system. And like when you go think about then the acquisitions, the due diligence and everything you're talking about as a systems thinker, what I'm hearing, hearing you say is you're always balancing the variables against each other. And I've just watched just the pure destructive behavior time over the last five plus years because there people are picking one data point and even if it is normalized, Deita, you can go get into a problem because the thing's got to generate cash at some.
[00:48:58] Speaker B: Point. Yep, Yep, yep, you're 100% correct.
[00:49:00] Speaker A: There.
How are you doing it in your current firm? Because I thought it was very fascinating where in like you've got a different strategy of how you're getting owners and companies and portfolios to collaborate to solve this integration.
[00:49:15] Speaker B: Challenge.
So. Well, there's two things. One is context.
I'm. I have it the Foundry brands, which I Launched five years ago. I'm a passive investor there. So not active in that roll up.
We sold our last agency in our agency roll up. And my next platform that I think we discussed is going to be in Q2 of next.
[00:49:37] Speaker A: Year. Got. So you're in the process of.
[00:49:39] Speaker B: Working on it and I'm solving and I'm solving something that it hasn't been done or when I seen it's been done, it's been done wrong. And I'm looking to build my next roller platform. Reducing the risk, which means I'm reducing some of my upside. But I'm helping.
What I want to do is I want to partner with 100 founders a year and change their lives and change. Basically create that diagnostic wealth or the generational wealth for them.
So what is the building? And I always look at what is, what is it? I always look at the first, third, first, second and third order impact.
Now just for those that are listening is. Let's just think about Tom, what the hell are you talking about? First, second, third order impact? Okay, let's go back a few years. Model T, Henry Ford creates these production very efficiently. Millions of cars are coming off the production line. So what's the first order impact? Well, that's, well that's very, very clear. It's impacting life's consumers. And the first order impact is, as obvious is we need, we need gas stations across the country. So suddenly, you know, Standard Oil, everyone else started building gas stations that people can go. Therefore people are traveling further. And then what's the second or impact? Wow. They have nowhere to eat. So therefore you see restaurants popping up everywhere. Okay, they're going further. Now they're actually eating and they're staying out. Now they're even going even further and doing road works. Okay, again, so a lot of booms are happening, but then they, they're running out of places to stay, guest houses with the different blue books that route, things like that. So then, so what did they do is then there started to be the first motel and hotel chains created across the country. So the foundations of hotel and motels are from that period of time. So first, second, third or impact.
We are in, we are in this incredible revolution in the United States. As we talked about. A thousand business owners are retiring every day.
One, one thing, okay. But we also have the AI impact. That's happening basically as I don't know how many years It'll be before 30 or 40% of the current jobs are no longer there.
Companies are either they're AI relevant or they're not. But it's putting a lot of pressure and stress on business owners. Some more want to retire. But with every business you need to think about is what's a long term impact on this business and how do we keep it relevant now how do I take this and meet when I'm buying a business, I'm taking a 5 year to 10 year bet on a business.
So what I said and, but my goal is, is if I buy business, I'm only impacting a few partners that I bring in like I did in my first business where we brought 85% of business but they got double the value because they rolled over 50, 15%.
So how can I do this with impacting more? The model is very simple, is I start with, I think about the theme. What would be a great business in three years from now? Now let me find five to six business owners that are making between one to two million dollars of ebitda. What is one two million dollars we mentioned, we talked about it is, it is the valley of despair. Why is if Congratulations, you built a very profitable business. The challenge is this. You're making so much money, unless you put a lot of money away and you're ready for retirement, can walk away, you cannot get enough, make enough by the sale of the business, you're going to get max, you're going to net four to five times that on the business. 75% of owners never get their earn out. So again, what are you going to net out of the business but then is four or five times what your current cash for the business? Is that enough for you or you and your partner to keep it.
[00:53:01] Speaker A: Keep it or sell it? Hamster wheel that just like you can't, you can't get and I call it escape velocity, Tom. Like you can't get out of.
[00:53:06] Speaker B: That. Yeah, that, that's it. So what I want to do is I want to partner with those, I want to group together great entrepreneurs with great businesses that want to actually need to double to triple the value of their business. I'm going to get those business but it has to be a tight theme on the business. We're going to group those owners together and we're going to spend two over two years merging the businesses, integrating, building a backbone of the business, building a parent brand on the business. Now the decisions that we've made on what the parent brand is how we're going to sell, how they're going to work together, who is going to be in the different roles, that is decided by the business. Owners and very simply is, it's six, it's six months of dating before we marry. Six months. We have a virtual merger agreement at six months. We're formally merging. If someone wants to leave, then leave. We need to make sure we have the right entrepreneurs in the room that have the EQ and IQ to work great together to build something really special.
Let's face it, we just shared that if you're selling your business and you're doing, if you're doing 1 to $2 million EBITDA probably you successfully selling your business is 35%.
Most businesses will have failed processes. Okay. But once you have 9 to 10 million of EBITDA, the probability of selling is you have to really screw up not to sell. You will sell the business now, will it be for a higher value to current business? That's the gamble that I'm willing to take and my team willing to take to. We're gonna, we're gonna share a piece of the upside. And if we only help you sell your business, but not for the upside, we work for two to three years for free. So that's the value proposition. It's a merch exit platform. And my goal is to build originally four groups per year and eventually do 12 groups a year. And therefore we get to impact somewhere at 12. We're impacting 24 founders a year if they have a partner. And then, and looking at that. But then look at all the velocity. All the companies were impacting the wrong way over a billion dollars an asset under, under, under management.
But we're building the best flywheel that's out there that no one's ever done in order to change the life of businesses of these.
[00:55:13] Speaker A: Owners.
You're doing the hard work up front which like what I'm hearing you say is you're willing to. Because all the stuff that I said that people aren't doing, you're doing that up front. And then like once you pay for everything, it becomes like a no brainer. It's like a non event. I mean that's what I've noticed with like with the clients I've worked with over the years. Time is like once they're ready, once they understand this stuff and like it, it, it's like I had a, I had a client where we just worked on a internal bio for him and he looked at the piece of paper which is the plan, he's like, this is very simple. And I said a year and a half ago you didn't know what any of those words meant.
So like yes, it is simple. But if you don't understand. So you're doing the hard work betting on the fact that like if you do the hard work, you know that because you know that the game is play the way that we're talking about and what I heard you say is you're doing all the hard work that I think everybody's going to get caught with their pants down because they didn't do the hard work. Because the hard work is what yields the.
[00:56:07] Speaker B: Cash.
Yes. And let's talk about this. What can we do? Also, what really is fun is there always business out there with partnership problems. This, we can solve the partnership problems where they can't decide which way to go. This, this is structure. We can help solve that. Even potentially buy a partner who wants to get out now, buy them out. Look, the second one last for two years. We can also help them do, we can increase value by doing tuck in acquisitions into this platform, increasing the value of their specific business, whatever, whether they're an agency, whether a roofing company, different home service. We can increase the value by doing tuck in acquisitions. And again, everything is about, it's a fun game by employing everything that we've learned painfully over the last couple of decades. And basically why? Because as you said, if you've only, if you've never sold your business, you're basically taking all the risk when you do more and more than one acquisition. When you've been involved with multiple acquisition exits, you're playing, you're, you're basically leveraging a.
[00:57:02] Speaker A: Playbook. Yeah, I know you got to run. I want to plant a seed because there's probably an argument for us to have part two of this. I ran an entire fund business model based on what you're discussing. Because of my coaching business. I was just kind of playing around with GPT. I spent like almost an entire day with it. And, and how in esop, if you're, I don't know how familiar you are with employee stock ownership plans, you can pre engineer that valuation and that deal structure with, you know, the bank debt, the mezz financing, the warrants and all this shit, because it's all based on cash flow. So you're actually eliminating some of the third party risk of having like the economic climate. So I had an entire IRR business model Tom built out based on like rolling out five to seven companies, getting to that normalized ebitda, how much debt, how much equity, the warrants and all that stuff as an esop. And then all of a sudden now you got employee ownership and the impact is an order of magnitude higher than a third party sale. But we probably don't have enough.
[00:58:03] Speaker B: Time. What we're not going to talk about right now is I think over the next five years it could be as early as three years is we're going to see a. We're going to see Robinhood having other platforms like that. A marketplace for outside investors tokenizing into basically into. Into private companies. Tokenizing into private companies so they don't have to be listed on stock markets. It's a way for them to and actually create evaluation. So we have a new world that's opening up to it which will also create some liquidity events which interesting.
[00:58:32] Speaker A: Exit. So that's got to be part two. Man, this is so fun. Tom, where can people find.
[00:58:36] Speaker B: You?
Okay, two different places. One is T shipley.com and we're running our next. I love to work with entrepreneurs that have seven to nine figure businesses every six months. For the time being we're running every six months. We have Dealcon CEO M and a summit. We have 150 phenomenal seven to nine figure entrepreneurs that get together. This time it's in Miami from February 9th through the 11th. If you want information on that, go to dealconlive.com and you cannot help.
Once you see, you cannot see it. You can't help being transformed with the room of people that we put.
[00:59:12] Speaker A: Together.
Brian, put those links in. Thanks so much my.
[00:59:15] Speaker B: Friend. And maybe we can get you there. Okay, take care my friend. Okay.
