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Can AI Solve the Silver Tsunami with Jonathan Cheung
00:29:03
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- [00:02]
A
An AI Solve the Silver Tsunami with today's amazing special guest Jonathan Chung, welcome to the Artificial Intelligence Podcast where we make AI simple, practical and accessible for small business owners and leaders. Forget the complicated tech talk or expensive consultants, this is where you'll learn how to implement AI strategies that are easy to understand and can make a big impact for your business. The Artificial Intelligence Podcast is brought to you by Fraction aio, the trusted partner for AI Digital Transformation. At Fraction aio, we help small and medium medium sized businesses boost revenue by eliminating time wasting non revenue generating tasks that frustrate your team. With our custom AI bots, tools and automations, we make it easy to shift your team's focus to the tasks that matter most, driving growth and results. We guide you through a smooth, seamless transition to AI, ensuring you avoid costly mistakes and invest in the tools that truly deliver value. Don't get left behind. Let fraction AIO help you stay ahead in today's AI driven world. Learn more and get started. Fraction aio.com Now Jonathan, I'm so excited to have you here because you first introduced me to this topic and it's something I'm very aware of. We have a lot of people who have family businesses and we don't want whatever we want to do. It's never what our parents did. And so there's a lot of these businesses that are pre Internet or pre technology and there's all these opportunities there but a lot of people just think nobody wants it, I'll just shut it down. And there's all of these businesses that are critical to American infrastructure we don't think about because tech companies are so exciting. It's exciting to talk about AI, but I spend a lot more time eating food and washing my clothes and doing these things that are part of regular life than I do using AI, which is more of at this point. It's exciting and it's fun, but it's not a necessity like food and shelter is. So what is happening right now with this wave of baby boomers and older generation who are in the final 10 to 20 years of running their business and not sure how to transition out. What is the opportunity there for these businesses to become more automated and to survive into the next generation?
- [02:09]
B
Absolutely. Jonathan. First of all, thanks for having me here. Super excited. Jonathan Chum from Transville Business Advisors, the world's largest business brokerage firm. We're in over 20 countries helping business owners exit their business looking for buyers that take care of their legacy, take care of their customers, their employees, the talk of Silver Tsunami definitely is a very interesting. Right. I think it's a historical moment, right. Where trillions of dollars are expected to transfer over the next two decades. It's really the largest wealth transfer in history. Anywhere from business assets to home equity as well too. So I think there's a few things here, right? So one is how do we help business owners get ready to make that transition, right? A lot of it is qualitative, some of it is quantitative, right? Including improving obviously their financials and whatnot. I think where AI can play a huge component of this is helping number one, I mean with reducing cost, right? Having cost reduction potential, having revenue generating potential as Wall Street. I think the other aspect is predictability of quote unquote labor, right. If we think about AI as a source of labor, right. We've in the US have outsourced to cheaper countries. From a labor perspective, right. I think some businesses are thinking about AI as an alternative source of labor that works for you 24 7, right. And able to have more predictable outcomes. You obviously can trade it to be smarter and whatnot too. So there's that piece. And then I think just even from an onboarding kind of wealth of being able to document the wealth of knowledge within these companies, right? Especially at the smaller SMB, small, medium sized business perspective, right. That has been more of an asset for larger things, right? Being able to invest in the documentation processes, right. Having laid out think redundancy in functions or not. I think AI enables now SMBs to have that storage of and just honestly it becomes an asset, right? Which makes the business more valuable.
- [04:28]
A
I think challenges of a business you've sold for so long is that you probably never written down your process, you've just always done it the way you do it. And having seen the difference between startup business and a franchise, the beauty of a franchise is that you have all the processes written down. It has an instruction made manual. Every business someone started themselves, there's no instruction manual. And that means there's hundreds of different ways they can have every process. And this is why a lot of these smaller businesses have trouble with their first hires because they haven't documented the process. They're like, figure it out. How do I use the cash register? How do you do this? What happens if someone asks for a refund? What happens if I close the cash register and I didn't count the money? Like all these small issues that you've solved and it's in here. I'm guilty of this too. As I've started growing my business and Hiring employees. I realized that having SOPs and recording every process is so important because it's really hard to explain it when you're not actually doing it because you might miss one little step. And it's very challenging because especially if you're a small business owner, you're very busy. I don't have time to write down on progress. I'm busy doing it so that AI can watch you and create that documentation and kind of fill in that gap where it can just watch you and see what you're doing. There's such a difference for me between watching a video of someone doing something and seeing the SOP they wrote. There's almost 99% of the time there's something in the video that the SOP doesn't cover. Like the step I get stuck on is not the step everyone else got stuck on. So I really think this is a powerful use case where you can now document your process without giving up your time. Like you're just can watch you and start to learn from the. I think a lot of people have no sense of what their business is worth. My experience is people either massively inflate or massively undervalue. They'll shut down a thriving business. Nobody wants it. My kids don't want it and I don't want to run it anymore. Or they'll think their business is worth 10, 50 or 100 times more than it is. Like, I'm always fascinated when people give evaluation and you say, where'd you get the valuation? They go, that's just what I feel like it's worth. And there's no math behind it. What is the process for deciding how much your company is worth or if it's worth, if people would be even interested in buying it? Like, how can someone who owns a business have a sense of that?
- [06:41]
B
Yeah, absolutely. And exactly where you mentioned, Jonathan, it's my kind of personal story, why I joined the business brokerage space is really because with him, right, we were small business owners in the little island Guam, very US Territory. And we had a few, not super large, but I think, you know, small businesses with grand recognition. And Guam, such a small island, there were brought 150,000 population when we closed, right? And even at a young age I was like, huh, There should be some value, right? There's. There's profitable, right? There's some brand recognition and that's definitely our why at transport, right? Helping business owners really be able to capture the value that they created, right? With that said, there's different valuation methods, right? I'll start with the more I guess like technical. What are the different ways? Right. And just for background, I actually started my career at KPMG doing business and intangible asset valuation. Right. So obviously working with boards generally called the larger businesses. But the methods does translate to smaller S and P as well. Jonathan. The main three approaches are the income approach, the market approach and the asset approach. Right. So in terms of the income approach, that's really generally speaking for kind of larger businesses or they're growing fast, right? Hey, let's look at their projections over the next 5, 10, 15 years depending on how fast they're growing leverage, different ways to calculate how risky those projections are. Right. To discount that back to the present moment. Facebook was one of my favorite clients at kpmg and at that point there were quite a roommate. So for high growth client like that, we did look out for 15 years after all make that projection makes sense for smaller business, right. Maybe it's pretty stable, but it has recently signed a contract for the next two, three years and expects a larger boost in revenue and profit. We'll also want to factor that into current approach. Right. So income approach, more of a cash flow kind of projection approach. The second is the market approach, right. Which is looking at essentially past transaction data. Right. The two sources of multiples was what we call it, right. So let's, we also look at publicly traded companies. So with that example, right. When we value Facebook we would look at hey, what is Google being valued at at a stage of a similar high growth. Right. And obviously other companies like Amazon and as well too, what is their price to their EBITDA ratio? Earnings before interest, tax, depreciation, amortization. For some industries it's we'll look at also enterprise value divided by revenue. Right. But for most businesses it's cash flow. Right. So what is that cash flow? The other source of transaction Data especially for SMBs is just past transactions, right. So what has closed for those similar industries, Right. And what are they trading? There are, it's interesting, right? There's a few dynamics that come in play for kind of the larger scale businesses, right. We see multiples that are very high, especially in tech. But for more traditional industries, where especially the industries we play in as a business to bridge firm, it's manufacturing, right. Service businesses, F and B. Right. Kind of more traditional industries, how much the banks are able to fund an SBA loan also honestly factors in the market pricing. Right. So there's a lot of I guess signs to it. Right. There's definitely Art but there's some signs in what multiple we end up applying to that business. So that's the market approach. The third approach is what we call the approach, Jonathan. And generally speaking, if a business is profitable, the income or the market approach will yield a higher valuation range, right? It's really, hey, you're a factory or you're heavy business, right? They're restaurant, you know, you're cash flow neutral or maybe you're in the red, right? But there's still value to it, right? Someone can buy that business, take the app, the equipment and be able to monetize, change the brand, right? Do your own thing so that that's more tangible assets, right? There's businesses with intangible assets, right? Patents, trademarks, customer lists, right? Different animal in terms of how to value intangible asset, but the fundamentals the same, right? So if I buy these assets, whether it's tangible or intangible, what is the projected cash flow I can earn from some of them. So that's one piece to it, that's the other cost or the other kind of way to think about asset approach is what is the cost to replace that. So if I were to buy a second hand CNC machine, right, how much could that cost on the market today to factor in that approach?
- [11:32]
A
So I live on a tropical island too and I remember a business was, they were going out of business and they said they wanted a seven figure valuation. We're on tropical island and it was a bar that's next to a gas station. It wasn't even on the beach. I was like, what? And I remember they said, you get our brand. And I was like, why do you think your brand is worth so much? You have a terrible location. And I said to my wife, I said, I bet they're going to be selling off the assets within a few months. And they were like selling off the chairs and all the pieces, right? Because they massively overvalued certain assets. And I think brand is one of the most common things. People overvalue. They think they have a brand when they don't, like Coca Cola, McDonald's, they have a brand. Everyone knows who they are. You have to be, I feel like much larger than people think to have a brand and have brand recognition. What are some of the other assets that people massively overvalue besides like their brand or their name that they think increases the valuation but actually doesn't?
- [12:26]
B
Yeah, that's a great patents, honestly is one key thing, right? It, it's the unfortunate truth where patents generally are a great way to protect your revenue. Or we've seen so many startups and some of them are not really a quote unquote startup, right? They've been in business for decades or smaller tech companies, right? Where they invest so significantly in protecting the patents that they have, right? But when it comes down to it, look, if your revenue and your cash flow, it is what it is, right? And that really factors in most of what would give you your market rate, right? And pans help defend it, right? So we may be able to apply a higher multiple, right? To get you a sign, a meaningful or some sort of higher valuation. But it's not going to be like hey, your fundamentals suggest that your business is more too low. But hey, I have pants. It doesn't make your business a 10. Maybe we can argue for 2.5, right? Some sort of slightly premium, right? So I think that's one thing. And for I'm in Southern California now, I spent most of my career in the Bay Area, right? So you definitely see a lot of startups use a lot of their funding or their initial revenue on reinvesting more patents, right? But the truth is look at a larger player and a question. Software, right? Software is so hard to prove that you're infringing on someone's patent, right? First of all, as the smaller company, right. Are you actually able to see, hey, what is an Adobe or a Cisco or an Apple is using their product, right? So you have to be the end user first. And enterprise software is even harder, right? There's so many kind of players out there, right? A salesforce is in so many different. So to be able to find that there could be some infringement is a thing. Proving it is another, right? How do you actually prove like this way is the only way to get this function to be done, right? And then the last piece is even if have a good case for it, are you actually going to win a legal battle? So that that's where I think hands are great. Especially if you're actually making decent size revenue, right. We could, we could have some play there in terms of arguing for higher valuation, looking for strategic buyers and whatnot to get you a pretty premium price. But if you're not that profitable, you know, having two or three pans of movement, very good. As Jonathan Honestly, if you're really getting to a larger addressable market, you need dozens of patents, you need a patent every potential way, right? To be able to defend that. Yeah.
- [15:04]
A
I've been watching this big lawsuit out of Japan now where Pokemon is Trying to sue another video game because they say, oh, you can't have animals that fight for you. We own that. And they just lost the lawsuit. In Japan, they lost the first patent thing because they weren't the first game that ever. They didn't invent that. It already existed before them. And then in America, they just said, hey, let's review all of Nintendo's and Pokemon's patents. So now they might actually, they might backfire to where they thought it was their defense. And now we might just take your patents away. And they're looking at all of their patents. And I think we forget lawsuits take a long time, cost a lot of money, and they're a big turnoff for investors. Like when someone says, oh, we're suing a bunch of people. Most people don't want to be part of a lawsuit. Like, it's not something that's exciting because all you have to do is have an unlucky jury or something can go wrong. And suddenly they're talking about piercing the veil and going after the investors. And it's. I don't want to, I don't like that talk. Like, I don't want to hear that. I think that's really good to bring up because I think people think a patent is like this magic card that means no one can touch me. But I've worked with people who've been through like decades of patent infringement lawsuits and it can take. And if you're lucky, you recover some of it after all of your fees and costs and the stress and there's. And you can't. It's very hard to run your business and be part of a major loss, especially if you're a smaller company. I think that's really interesting because a lot of companies. This other thing I see is where people don't have a really strong definition of who their customer base is. And so they'll say things like, if 10% of everyone in China buys my product, and it's, yeah, that. That's any product. Like, they think that the market valuation, when you're looking at addressable market, is everyone. And I see this happen in other areas. It's very common in social media where people use terms like reach. And I'm like, what does reach mean? Like, how many people could have seen your post? Like, what? But how many people did see it seems way more important. And I see this with a lot of startups where they're trying to make it seem like they have more users than they have. And they'll say, oh, we have users or certain companies do monthly active users instead of daily active users. And like I know, right? As soon as they say that you know they're doing something. Oh, you're counting a different number than everyone else or you're doing non standard accounting. When you're looking at a company in evaluation, what are some of the practices that make you want you go I don't want to be a part of this. Or this makes me nervous. If it's strange accounting or if it's how they count their users. What are some of the other things that you've seen companies do that make it much harder for them to sell?
- [17:40]
B
Yeah, absolutely. I'll definitely talk about selling kind of what we call red flags. Right. Or risk factors. Right. And when you think about evaluation of business, it's really the lower the risk, the higher the value. Right. So I would say these are what's called risk factors. Right. Solvable problems. And we actually have another practice called exit factor that helps business owners get ready to. Right. And we work with a lot of partners that for example one risk in the hedge on pretty much it's books that could be cleaner but especially for the smaller sized businesses. Right. Family ran. Some of it is cash income. Right. So how do we let a third party believe in the numbers that are present? So first time we do work with books and companies that specialize in cleaning up books for larger deals. It could be a quality of earning report. Right. For a third party to come in. Usually X big four CPAs start to come in and really have a third party stamp on what's pretend from the numbers perspective. But I do that. The other big thing is if the owner is the business. Right. I think a good test is hey business owner, can you go on vacation for three weeks and the business is not going to. It's still going to run. Right. I think that's a key test. Right. A lot of times surprisingly, even for more sizable business deals with meaningful amount of revenue and employees, the business the owner is still honestly too active. Right. So that's one of our suggestions from the exit plan side. Right. Hey, you need to have a little bit more redundancy. You need to offload. You need to have. Going back to the first topic, we talk about having documented processes. Right. So that other people can hover. Right. When you're on vacation, other aspects are high customer concentration. Right. If you have 20 clients but your top client is 90% of your revenue giving strength here. But that's a huge risk factor. Supplier risk. Right. Whatever suppliers want A business tomorrow, right. You can't be able to provide inventory. Right. Those are some of the kind of basic, I would say, where we come in as brokers and exit consultants is try to, number one, actually help the client take steps to mitigate those risks or really evaluate if it really is the risk. Right. We represent quite a few CNC merch team shops, right. And a lot of them meaningful revenue, right? Anywhere from, call it 2 to 20 million dollars revenue. But sometimes they only have a handful of clients, right? Because their client could be Boeing. Right. But hey, is it really that big of a risk that Boeing has bought from them for 20 years straight? So then we think about other ways to evaluate it, how really big the risk is. Right? So how many different products is going buying from this method? Right. Okay, they're buying 50 products, right? So within the 50 products, how many years have bought, Right? What's the volume, what's the change? Right. In the urgent patterns. Right. But yeah, all in all, I think the, and this is worth going back to AI, right? I think with some of these risks, right, AI can help a lot, right? Where what would the owner, right, having the AI be able to respond to their employees the way that's kind of the knowledge, documentation, inventory control, things like that. I feel like all of that just helps with mitigating some of the risk factors.
- [21:07]
A
My experience has been that a lot of people just look at the upside. So when they're thinking about what my business is worth, they just look at the possibility and it's always, oh, this is a client. Oh, have you talked like, and I've seen this before, I'm like, oh, have you talked to them? And they go, oh yeah, we're about to close the deal. And nowadays, because we record every phone call, I go great, let me see the transcript. And I look at the transcript, I'm like, this person's not interested. And it reminds me of like when I was in high school and how I would assess a conversation with a lady versus anyone else going, oh, she does not like him, it's going bad. I'm like, I think it went great. And no, it went really bad. You can't self assess because you have these rose colored glasses. And I love that you brought up risk. Because I often have to explain people that risk management is a huge part of how I run my business. That every time there's a project I look at am I going to get paid up front or long term? If it's something I'm getting paid on the back end, that's high risk because the other person could drop out or something could happen. So the more of that, I'm always managing that and. Or a slow money versus fast money. And I see this in real estate, where most people get destroyed in real estate, they didn't look at the downside and they go after a deal, they get emotionally invested and it's. If it goes bad, it's devastating. And like the people that succeed are the people who manage that. They look at the downside first and go, I don't care if this deal could change my life, it could also ruin it. I don't want to play like this dangerous game all in. Every time I do a deal. A lot of business owners, there's. They look at all the good things and they don't look at the risk and they don't think about one of the things that really interested me. And I talked to someone who helps to sell podcasts. I was like, how could you possibly sell my podcast? And he's. And they explained it to me. It was very fascinating because what you do is you bring in a co host slowly and then you start taking sick days and slowly transition out. It takes one to two years to change hosts. And my kids watch this show Blippi, and there's two blippies. There's the original guy and I think he got paid like $500 million. I'm like, he's not doing it anymore.
- [23:04]
B
Wow. You know what I mean?
- [23:05]
A
That's. I'm, that's. I'm doing something else. But the new guy is not the same height. And I can, I was, I was watching, I go, that's not the same guy. But my kids can't really tell. But I watched how they. But what they do is they don't. They mix old and new episodes. So there is a way to transition out, but you have to. If you don't start doing it before the sale, that's when you end up like, we have to stay for two years or three years as we transition you out. So if you don't have this plan and start thinking about how can I not become the center of my business? And it's very hard for people to sell because we get. When we start thinking about our business, we start spending the money before we've made it and it starts putting people in place. So I really like talking about risk because I think it's so important how much we talk. You talked about how like AI is labor provides a consistency. It's not going to go on strike. It's not going to get sick, it's not going to take days off. How much can a company increase their valuation if they are very automated? I've worked with clients that some of their technology is 1990s. Like their bookkeeping is basic spreadsheet. I know you've talked about people that do pen and paper. Like there's these little things that can make a huge difference to automation. How much of these things, how much can it affect the valuation? If you have two companies that are exactly the same, one is pen and paper and one is like cutting edge. Everything is automated, there's records of everything, there's perfect inventory management. How much of a difference does that make?
- [24:34]
B
Yeah, yeah, absolutely. I think if I had to give a rough estimate of what the premium is, I would say maybe between 10 to 20%. But with that said, I think the way we think about it is really still to the fundamentals. Right, so what is the cash flow? Right. So if presumably we could actually compare before the AI current implementation, right. What did cost to apply? Hopefully margins improved. Right. So I think we could have those comparisons. Right. Once we get the cash flow pretty much at quote unquote steady state. For the other hope is an AI enabled business may have higher growth rates than compared before. Right. So all that still factors in the kind of traditional valuation method I mentioned, income approach, market. So it's really what did it look like after? I think the other lever we can pull to defend the higher valuation is where, hey, with the AI enabled kind of business, there's less risk of turnover. Right. There's less risk of strike stuff we talked about. Right. And so can we defend a higher multiple? If we're using the market approach, can we defend a higher multiple? If we're using the income approach, can we defend a lower discount rate because it is less risk by itself. Those are the levers we goal to have a higher validation and obviously depending on the industry. Right. Like how? I guess like how much more value can we extract with an API enabled kind of process. Right. Also varies quite a bit based on industry.
- [26:21]
A
So for people who are thinking, oh my God, I don't know what my company's worth and how can I kind of valuation. I know that's a lot of what you help people do is to be objective because it's. It just looks so much easier for me to look at someone else's business, someone else's relationship, like it's so hard to look at my own because I'm on the inside of it. What is a little bit of your process and where can people find what you're doing and maybe reach out to you online and say hey we're not sure what our business is worth. Here's what we're doing.
- [26:47]
B
Yeah absolutely John for all your listeners. Right we're happy to provide a complimentary business valuation taking our what we see in the market today for a particular industry. They're living range right. We have over 650 buyers and our internal streams were database right so what we think the rain deal is that we figured very good buyer. It's very happy to offer that my my email is jchungworld.com J P H E U N G AT T world W o r l d.com my cell phone is 626864 grease pits 962-6864 reduced its time on WhatsApp as well too. So definitely happy to chat. And we handle honestly a huge variety of deal sizes as well too. Right. Anywhere from a small restaurant franchise resell. Right. All the way up to over $100 million in purchase price. Right. So we've already read wide range right. And industry agnostic. Right. I think the only deal my office personally passed on was a commercial bank commercial right. So we passed it to one of our financial service investment banking referral because they offer very generalizing. Definitely we have industry domain expertise across our thousands of brokers locally rates. Definitely happy to help.
- [28:13]
A
That's amazing. I'll make sure to put all that information in the show notes and below the video on LinkedIn. Thank you so much for being here today, Jonathan, for an amazing episode of the Artificial Intelligence Podcast.
- [28:24]
B
Awesome. Thank you, Jonathan. Thanks everyone.
- [28:28]
A
Thank you for listening to this week's episode of the Artificial Intelligence Podcast. Make sure to subscribe so you never miss another episode. We'll be back next Monday with more tips and strategies on how to leverage AI to grow your business and achieve better results. In the meantime, if you're curious about how AI can boost your business's revenue, head over to artificialintelligencepod.com Calculator Calculator Use our AI Revenue Calculator to discover the potential impact AI can have on your bottom line. It's quick, easy, and might just change the way you think about your business. While you're there, catch up on past episodes, leave a review and check out our socials.