← The Candy Valentino Show
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- [00:03]
Progressive Insurance
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- [00:39]
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- [01:16]
Candy Valentino
Welcome to the Candy Valentino show, the podcast for founders, investors and entrepreneurs where we have honest conversations about what it takes to grow your business business, build more wealth and create financial freedom.
- [01:42]
Hey guys, I am so excited for you to listen to this conversation. Chris, thanks so much for coming on the show.
- [01:49]
Chris
Thanks for having me, Candy. I appreciate it.
- [01:51]
Candy Valentino
I told you before we hit record that we've gotten pitched tons of times over the years of doing podcast interviews and I don't think we've ever accepted one. But when I saw your resume, I'm like, I want to interview this guy, Harvard Law grad. You've been doing mergers acquisitions and exits for over 25 years and I think there is so much wisdom that you have that I'd love to pick your brain if that's okay.
- [02:13]
Chris
Well, I'm going to tell my wife that somebody thought I had something useful to say, so that's pretty nice.
- [02:19]
Candy Valentino
I love it. So you've been doing this a long time. Can you give us a little bit about, you know, Harvard? I wouldn't obviously think Harvard Law. Some people obviously think of criminal defense work and prosecutors in the da, but here you use yours to go into business. Tell us a little bit about what kind of got you into this so that we can start to unpack what you've done in the last 25 years.
- [02:40]
Chris
Yeah, sure. No, I really enjoyed the law school experience at least the last two years. For first year of law school is miserable and stress packed but and you definitely learn different ways to think and how to analyze problems and, and then I actually worked for a federal appellate court judge for a year, which was fascinating. And I've always, in every position that I've ever taken, I've always tried to pick one where I was going to learn a lot and not necessarily to make money because you don't make much money working for the federal government. But um, but then I practiced for a couple years in Silicon Valley and I loved the client work. We were working with startups and emerging technology companies and doing public offerings for them and M and A for them. I really love that I, I did not like the actual work, you know, doing contracts, reading the same contract 14 times. I, I've got bad enough add as it is. Trying to, you know, read the same contract that many times was made me discon. And, but it was great background and great learning and experience. And then I left that I was going to start a search fund with another law school classmate of mine. And when we were out looking to raise capital, we met up with a group that said, well, we're not going to fund you guys, but we would love for you to come work for us and help us invest our capital. And so that's how I got to do all, you know, the initial M and A that I did is we started a communications company that was a consolidation or a roll up and in the value added reseller space for communications equipment and which, you know, I was way out over the tips of my skis, to use a Colorado analogy, in that job, because I was, I mean I did 27 acquisitions over a couple year period. And even the most experienced M and A person would make a lot of mistakes. And me not being that experienced, I made way more than my share in doing deals. But you, you know, you learn a lot doing that many deals in that short a period of time. But the one thing that was, that was common with the law practice was I was working with entrepreneurs. So all of these companies that we bought, I, I got to build this relationship with the entrepreneur prior to the purchase. And then after the purchase I ended up moving from being the deal guy to being the chief operating officer and ultimately the president of that business. And so you get to, I always joke when I was doing the deals that, you know, when, when a deal went bad, I would tell the operations team. I'm not sure what you guys did afterwards, but when I closed that deal, it was a great company, you know, but, and, and that's really, that was the foundation of, you know, what we started at Class 6 and what we're doing now, but it's. It's very gratifying and inspiring to work with entrepreneurs. And, you know, they're kind of the heartbeat of this country, and we're honored to be able to serve them in. In all kinds of different ways.
- [06:02]
Candy Valentino
I love it, and obviously, I have a huge heart for entrepreneurs being one more of my life than I've not. I started at 19 and understand what it's like, and I understand the grind to even get an opportunity to exit. You know, as a female, I learned pretty young that women owned businesses. Less than 2% ever break a million dollars in revenue, and less than 0.5 of that 2% will ever exit. So when I was young, I said, you know, challenge accepted. Let's do this. But I think that there are a lot of things that entrepreneurs miss when they're building and scaling the company that doesn't set them up to have a successful exit or ever be acquired. And so I would love if you could share with our audience some of those things that you think, whether you're in year one, five, or ten, and you think an exit is close or further down the line. What are some of the things that we can do now inside of our business to really set it up to be successfully acquired at some point?
- [06:59]
Chris
Well, first of all, congratulations and doing what you're doing. And we've had several women entrepreneurs who've successfully sold their businesses. And it's the. I should give you their names. You should talk to them because they have great, great stories and have been phenomenally successful. And one of the traits that I've identified during COVID when, When there weren't a lot of deals going on, I talked to probably 40 of our. Our clients, former clients, that had sold their companies and just interviewed them and trying to understand, hey, what were those common characteristics? And to. To your question on, hey, how do you set up your business? I think a lot of it is being pretty intentional about what is it you're trying to accomplish, the fact that you started out with that objective in mind. You know, the one thing that I've learned about entrepreneurs, in addition to them having unbelievable persistence and perseverance, you know, in. In the face of daunting odds and problem after problem, the. Their level of persistence is. That's probably one of the single common denominators that I see. But the other one is, is. Is being intentional. What is it that you're trying to accomplish with this? For some business owners, it might be, I'm trying to replace a job and I want to earn some money and make this a lifestyle business. And you know, obviously that's a whole different set of intentions than it is. I want to build this business to sell. In a lifestyle business, you don't necessarily need to think that much about, hey, what am I investing in today that's going to pay off in 2 years, 3 years, 5 years, 10 years? Whereas if you're building your business to sell, you've got to be much more thoughtful around where do I get my best return on investment for my time and my money? And what are those investments that I have to make? Well ahead of when you're going to see a return from those investments. My, you know, the favorite example is as, as companies get closer and closer to, you know, call it 10 million in revenue, the demands on the entrepreneur grow to such an extent that if they haven't been thoughtful around building a team, they're going to burn out and that business is going to spin out. I've watched this movie, I can't tell you how many times. So I would, I think best piece of advice I would give them is be thinking about what team you need for your business two and three years from now and start building that team today. Yes, it's going to cost you more. Your operating expenses are going to go up. If you get the right team, though, what may have taken you three years to get to that team can help you get there in a year and a half or maybe a year. And I've watched that movie a bunch of times with folks that have, you know, they've been willing to make big investments. And so that, that whole intention, hiring ahead of when you really need the people and being super thoughtful and intentional about your hiring practices. You know, obviously you've hired people, I've hired people. You're, you know, if you're 50% successful, that's doing pretty well, right?
- [10:14]
Candy Valentino
Yes.
- [10:15]
Chris
But being super intentional around. All right, what is it? What are the characteristics that I want to see in that team? In that person I was trained to interview by an ex Catholic priest. Name was David Ryan. I think any event, he, he said, you know, there's three things that you can interview a person for. There's talent, there's experience and there's chemistry. So talent is really just, hey, do they have the raw materials to be successful in the job? Do they have the raw capacity experiences? Hey, have they done this role and been successful with it? And then chemistry is how well do they fit the culture and the value system of your organization. Too many entrepreneurs hire for experience. And if, if either the talent's not there or the chemistry is not there, they're going to fail. And he always told me, he said, if you're going to miss one of those three, you can give up on experience. If you've got the right person with the right fit with your company and the right capabilities, you'll. You can train them and they'll, they will grow into that role and you'll have somebody that fits the organization. So probably two or three different pieces there for you can do more than you asked for.
- [11:28]
Candy Valentino
So much wisdom there. Because on. If nobody listened to any other part of this interview but that I think that the one part of I always say there's like seven real mechanisms or valves, if you will, in every business. And I feel the one that trips people up the most is people. But what I love about what you said is if you can decide what team you need in a few years, but start hiring them now, really what you're doing is you're not just investing in the team, but you're buying time. Like you're condensing time in your build, which is going to help you escalate revenue more quickly. It's going to help you scale more quickly. And if you do, if you don't have a lifestyle business, which I love how you separated the two and you do want to build a company to exit now, you're just getting there more quickly. And what entrepreneur doesn't love more speed and more growth in a condensed time? So I love how you broke that down. I think that in a world where we do think, what's the resume look like, we tend to ignore that chemistry part, which is so important.
- [12:22]
Chris
Oh, it's huge. It's huge. We do. Anybody that we hire, you can talk to them about the, you know, the interview process is long and, and involved, you know, the whole hire slowly fire quickly mantra. We try to live by as much as we can. But identifying, oh, go ahead, take us.
- [12:43]
Candy Valentino
Through that if you will. Because I know everyone's probably like, well, what do they do? Like, what does. We. We have heard, I've heard so many cool hiring processes on here where they interview the spouse and they, they do all of this stuff. So what, what does your hiring process look like if you're able to share?
- [12:57]
Chris
Sure, sure. The, the first part of it, we obviously, you know, you get your resumes or the applications. The first thing that we do in our business, attention to detail is really important. You know, in the Deal business. And so the first thing we do is we give. We'll send back any candidate that a set of pretty detailed instructions for how to apply for the position and the types of information that we want. And we. Zach Gibson, who works for us, calls it the Blue M and M test is, you know, I can't remember the rock band that it was, but they would test the detail orientation of venues by saying, I only want blue M M's in the bowl, in the green room, or, you know, wherever the. The room before the concert, Tesla hides.
- [13:43]
Candy Valentino
The Easter eggs or whatever.
- [13:45]
Chris
Right, yeah, exactly. But. And then we just. And if anybody misses one of those instructions, and we know that's not going to be a fit, so that's an immediate disqualifier. And then we always insist that the first interview is done on the phone and we've got a set of prescribed questions that we ask. And the reason why we do it on the phone is people that are really good at interviewing, they're going to watch your body language. And so on the phone, they can't watch your body language. Right. So we, we typically don't do these on Zoom. We just do them over the telephone. And we've trained our folks to really resist the urge to talk. All you want to do is ask the question and just listen. And usually the first answer that someone gives you is probably the most accurate answer. They likely, with some awkward silence, will follow that with some other answers that kind of get less and less accurate or true as they go along. And so you, you just write all that down and you're trying to listen for just clues for. All right, hey, based on that question, how are they going to fit with us? One of our favorite questions, and I probably shouldn't be giving away our trade secrets here in case any candidates are listening. But, you know, one of the favorite questions is, hey, you know, you're, you're working on this project and you've got this task that's due on Friday and it's Monday, and it's looking really, really likely that you're not going to be able to get it done. What do you do? Most people's answer is, well, I would call my boss or, you know, whoever's leading the project and let them know. And that's not the answer we're looking for. The answer we're looking for is the entrepreneur's answer, which is, well, I've just figured out how to get it done. You know, if that means I got to work late, that's what I'm going to do. And so we're looking for those traits. Ours is a big service culture. We're here to be in service of entrepreneurs. And so, and we want people who not just are good at that, but that love, that they love taking care of somebody they love, you know, so we look for examples of that in their background. And then when they come in, we'll run them through a, you know, kind of more traditional interview process. We typically from the phone interviews will identify, hey, here are the three or four areas we really want to test. So if they've got four or five interviews that they're going to do in our office, each person has one of those areas to really explore with them and look for examples of, of how they either have done what we're asking them to do or haven't. And then finally we do a test once they've passed through that, then we give them a fake company with messed up financials and we ask them to do a presentation to us. And you'd be surprised, interestingly, how many people bail at that stage of the process. Or they just say, I, I just don't have this in me. But we usually, you will give them 48 hours or 72 hours to put it together. And then they get to present and they're presenting to a big portion of our team. And so we get a chance to see how do they perform under pressure. And, and I'm a big believer, no matter what the job is, to be able to see them kind of in doing what you're going to ask them to do in a, in a relatively high stakes, high pressure situation, that's going to tell you a lot. And to the spouse comment, which I was happy to hear that any, any position, we always try to have dinner with them and their significant other. You can learn a lot about a person by who they've chosen as a significant other or spouse and, and how they treat them.
- [17:21]
Candy Valentino
So we watch in some regard you're working with that significant other too, because what does that home dynamic look like? And is that going to be coming in and affecting performance inside of the business? So the more stable that is, the more, the happier they are that they're getting this position. It tells you a lot. So that's interesting that you do that too.
- [17:39]
Chris
100. 100. And so it's, I think again, you're, you're hiring a person. It's not a robot. You know, they're going to have strengths and weaknesses. You're just trying to identify, hey, how is this person going to fit, are they going to be able to do what we're asking them to do? You know, in our culture, we're big collaborators, and we are really, really big on kind of the collegiality of our firm. And so, hey, if somebody's got a really strong ego or they're not a good listener or they're not a good collaborator, you know, we'll exit those people fairly quickly. You know, we're. We're not small anymore. We have almost 50 people. But we're very careful. Right. If. If we identify somebody that's not a fit to, hey, maybe there's a different organization that would be a better fit for them that will help them find.
- [18:36]
Candy Valentino
Yeah, right. And it just. It actually makes everyone happier when it's not a great fit. I think oftentimes people get so worried about firing because you feel like you're going to let that person down, giving them the opportunity to find something else that they can excel in, because there's obviously going to be an organization that they align and they fit with. So I love that we talked a little bit about some of the things that people can do, obviously being an intentional with the way they build. Let's flip it to the other side. What are some of the most common mistakes that you see that people are saying, hey, I'm at a point, I'm doing 10, 20, 50 million in revenue. I think it's time to exit. And you're like, whoa, whoa, whoa, we need to do all of these things first. What are some of the mistakes that maybe you see entrepreneurs make?
- [19:16]
Chris
Look, no business is perfect. We used several assessments in our business to help us get up to speed really quickly on a. On a company. One of them is, we call it the Business Health Assessment. We patented it, where it's basically, we're just trying to identify what are all the potential risks that this business has that an investor is not going to like. And the way we built that, we just went through the last couple hundred deals that we had worked on deal by deal. Hey, what surprised us in that deal? What got in the way of evaluation? What potentially got in the way of the deal happening. And let's identify what that issue was or what that risk was. And then let's come up with some questions that we could ask an entrepreneur so we could issue spot for that. And, you know, the ones that we've given this assessment to almost a thousand companies, the. The issues or the risks that rise to the top of that list is one of them. We've already talked about which is if that business is too dependent on the owner in some way that we're gonna have a hard time selling it. It's no matter how well intentioned an owner is. Hey, if Candy, if somebody writes you a big check for your business, your motivations are going to change. Not intentionally, but just by default, kind of after that versus before. And so, and smart investors know this. And so if most of the sales are done by the, the owner, or if most of the product development or innovation is done by that owner or he or she is in charge of operations, that's at least a yellow flag for investors. And this goes back to that. If you really want to maximize value for your business, build that team and get that business running to where you're not having to fulfill significant roles in the business, it'll do a couple of things for you. One is it will make your business more valuable, but it will also, it'll improve your life because you'll get time back and get to focus on those things that you enjoy doing. The. It's amazing to me as an entrepreneur, it happens to me as well. So it's not, I, I don't want to cast aspersions, but how many business owners are doing things in their business that they don't like or that maybe they're not that good at? And so that's, you know, one of the things for business owners, hey, really identify those things that you're doing that you enjoy and that are adding value to your business and that you're really good at. And it's the 8020 rule. Hey, get 80% of your effort into those areas and you're going to, you're going to help your business. Those areas where you may not be as good at or you don't like, hey, let's find, let's find ways to delegate those and get somebody else that probably does like them and will do a lot better job. And in my world, it's compliance. We have two regulated businesses. And so as my business partner would tell you, that's the, I just hate compliance calls. You know, going through that. The other issues that we typically in a lot of businesses, hey, you've got too much of your revenue tied up in a, in one or a few customers. Big, big risk. And I think the final piece is this goes back to being intentional. If you're going to build a business that's saleable, you want to be really, really thoughtful about your business model and how revenue comes in the door. Too many businesses, you know, I call it the run faster, jump higher type business where I basically have got to run faster than my competitors every single day in order to win versus I'm building a business that, hey, 80% of my revenue for 2024 is already, it's already contracted. I've already, you know, those are your typical examples, right? A software business, a subscription business, businesses where we've got recurring revenue, those are, you know, those are really valuable businesses. The general contracting business where it's all people and it's all project based and you're basically as valuable as your backlog. Those businesses are not very valuable unfortunately. And so as an entrepreneur, really digging into the business model to find those business models that are going to be most attractive to investors is that, that's a, that's a good exercise regardless because that'll help you sleep better.
- [23:42]
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- [25:10]
Candy Valentino
Now this is Taxes.
- [25:12]
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- [25:26]
Candy Valentino
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- [26:07]
Yeah. And you know, it's interesting for anyone that's listening now that you're like, oh my gosh, that's what I'm in. You know, I'm a roofer or I'm a H Vac contractor. I think what's important is to then use your business as a vehicle to be able to make it more profitable. Take money out of the business and invest it in either other businesses, different business models, real estate, you know, portfolio, whatever it may be. Because I, I think not all businesses are attractive to be acquired. Like, let's be real, there are some. But maybe it gives you joy in the moment and you can go pick up your kid from soccer and the, the thought of having 50 or 100 employees would drive you crazy. So that's what I think so great about, about being an entrepreneur. It's great. It's a blessing, but it's also a curse because there's so much opportunity. I see people get paralyzed in what do they really want to do. And so they don't do anything. They don't take the step forward. And I think it's important to be intentional. But you also got to kind of test things out. Would you agree? I mean, it's kind of part of the whole process for me.
- [27:03]
Chris
At least 100%. Right. We entrepreneurs are successful to the extent that they're solving problems that the market hasn't solved, or they're solving it in a more efficient way or a less costly way. And that all requires experimentation. Right. You have to go out and test things and see, hey, what's going to work and what isn't going to work. On the flip side, as an entrepreneur, one of the things that we see is a lot of entrepreneurs are focused on 14 different things. There's a lot going on in their business, and I'm a big believer. And it. Sometimes it's. And I'm guilty of this, sometimes it's not as fun just to do those things that are really working well and continue to do those. And just, you know, as I, as I like to tell clients, you want to double and triple and quadruple down on those things that are working the best for you, and you want to continue to do that until you feel like, hey, it's not working as well, or we're starting to hit the point of diminishing returns on that, in which case, okay, now you got to pivot and look at something different. Unfortunately, a lot of entrepreneurs there, I mean, I would say for a lot of the companies that we work with, a big part of our job is just helping them narrow the focus a little bit and say, hey, you've got these 14 things going on. Let's focus on these three that you're really good at and you know how to make it work and they're profitable and they're going to drive value. It's not as exciting sometimes, right? It's not as fun as coming up with the new idea. And I, I also think back to the, I'm gonna come back to this team concept. For most entrepreneurs you need somebody who is the, I call it the brakes of the organization. Somebody who is very focused on execution and delivery. Because a lot of us as entrepreneurs, we're very good at coming up with the ideas. And I get this feedback from my team all the time. So you, you come up with a lot of great ideas, but if you don't have somebody who's very disciplined about execution, they're just going to be ideas and they're likely not to be that successful.
- [29:11]
Candy Valentino
Oh my gosh. One of my quotes from my books is like, ideas will not build your million dollar business. It's the execution and implementation of the idea that will. And so I love that you said that and you touched on something else about kind of finding like that, that one thing like you didn't using Prado's principle also with your products, your services or your client base. I'd love to hear your take on this. I always say, whether it's clients or the services that you provide, if you have those 14 different things, what 20% of that you're doing is giving you 80% of that result and then just cutting. I, I always use, you know, I don't have a fancy degree. I always say, I wish I did, I wish I went to Harvard. But you know, I always use Walmart as my example. Like when Walmart has stuff sitting on their shelf, if it doesn't sell, they're not going to put it back on the shelf. They're going to get more of what actually sells. So it's like the very simple concept of that that we can apply in our business. Is there something else that maybe you can elaborate on that people can also do to take a look at maybe those products, their clients and or maybe even encourage them on, on what happens to the business when they make those tough decisions to narrow their focus.
- [30:19]
Chris
Oh, I huge believer in the Pareto principle and the 80, 20 and whether you're talking about where the entrepreneur is spending their time in terms of, hey, what's the 20% of their time that is delivering most of the results. All right, how do we turn that into 40? Or we do a lot of work with consumer products companies and the whole SKU rationalization. Right? Hey, you've got 400 SKUs. You'd be much better off if you were focused on these 80. It's almost like a religion for some of them where it's impossible. A good friend of mine and we sold his company a long time ago, hey, if a product was making money and making margin, we should keep it and trying to help them understand, hey, actually if you put the marketing, you know, wood behind the 20% that, that are really driving your margins and really driving brand recognition, that's going to be way better for you. So I, I 100 agree with the, you know, the concept of sometimes less is more. And that's tough for entrepreneurs because they fought so hard to either get that product developed or get that product into market or whatever the, you know, whatever it is that they, they had to do. So at some level I think they forget the concept of sunk costs that, hey, this is, you know, I'm much better off getting a lot more focused than trying to come up with something brand new at this point.
- [31:51]
Candy Valentino
And every one of those ideas that is going to distract you, I think the quote is like distraction gives you diluted results. Like distracted focus gives you diluted results. Because it's like every one of those people don't see the opportunity cost involved, that every one of those products services new locations. Like all the things that you're doing is really just wearing you thin. And especially the entrepreneur, the CEO, if they're the founder in the beginning, you have so many different ideas. And to have your team try and execute on all of them, if you don't have a really well develop team with layers, it's going to burn them out too because they feel like they're always trying to pick up the baton. Do you see this perpetuating thing happen with entrepreneurs by the time they're trying to exit that they've kind of lasered into a few things? Or are you cleaning that up before you actually go to the investors?
- [32:42]
Chris
If, if a business comes to us, you know, two or three years before they're going to go to market, we will definitely help get them kind of more focused. It's not to say, I mean, we have a lot of clients that show up and just want to go to market, but I think almost all entrepreneurs, unless they have been really disciplined and really well coached, they're going to have some element of that distraction. And it's. It's rare, right, that you have an entrepreneur who's both excellent at ideation and product development and thinking about the market and excellent at operations and efficiency and delivery. And so that's that if finding that counterbalance to, you know, a typical entrepreneur and somebody who can be a great chief operating officer, a great president of that business and can go execute, and somebody who's not afraid to tell the emperor they've got no clothes, that, hey, you know, I know this is where you want to go, but it's not going to work the way you think it will. And in a too often in my prior life, the business that, all the acquisitions, you know, we had probably 4,500 employees. And one of the things that really was frustrating was very few people in the organization were willing to tell me that's a really dumb idea.
- [34:09]
Candy Valentino
Yeah.
- [34:10]
Chris
And when I found those people, I tried to surround myself with them, Right. I was like, look, I want you to tell me if this is really stupid, because you're likely a lot closer to the customer, you're likely a lot closer to our delivery, you're likely a lot closer to our systems and processes. And, you know, smiling at me and telling me everything's going to be fine is that's not going to be good for the business. And so, you know, I always try. One of the things that I try to interview for is just, hey, the. The willingness not to not respect authority, but basically to, hey, to challenge. Because that's the only way we're going to get better as an organization is if somebody's willing to tell you, hey, that's really stupid.
- [34:55]
Candy Valentino
Oh. Oh, my gosh. I'm so glad you mentioned that, because I was just. I was having a conversation with someone not that long ago, and, you know, because of doing, like, the podcast and some events, I feel like I'm in this online world, you know, far more than I ever was in any of my other businesses that I built. And I see this. This quote in this, like, semantics almost, like, shared all the time, that says, like, if you're not my greatest cheerleader, you don't have a seat at my table. Now I'm paraphrasing it. And, you know, or if you're not cheering for me, you know, I don't. I don't have time for you. And I'm like, oh, my gosh. Like, how we learn is by somebody challenging and having composition. Like, that's where you have actual growth. I don't want a bunch of people around me saying that's the greatest idea if they don't think it actually is. Like, that's where we actually are able to grow and scale, not even just in our business, but as humans, by having that opposition.
- [35:48]
Chris
For sure. For sure. It's as a woman who works in our firm that I just love having her on the team because she will always tell me that's not going to work. Or, hey, if you thought about X, Y and Z, or we're going to run into a problem here because we're. Again, we don't see the same things that the rest of the organization sees. And you need that perspective and you need that visibility to be able to fix things. When I was at Exponents, I got so frustrated. There's probably six or seven layers in the organization, from folks that were serving our customers to. When it got to me. And at every layer, it felt like the message got further and further diluted. So by the time that I heard it, everything was fine. And so I finally, I set up this President's Council or whatever it was, and I, you know, I. I picked 40 people that I gotten to know a little bit, and. But they were all at the field level. And I said, hey, you're here because I want to hear exactly what's going on at the field level. I want to hear exactly the problems that we're having with customers or our systems or our products. And that way you can, you know, hopefully get, you know, you could distill the truth in a much more effective way. It's, again, unfortunately, I think in too many organizations, to your point, you've got CEOs who want to be told everything's great and that they're great. And I've always. I've tried really hard with our team is you're not here to serve me. Right? I'm actually here to serve you. You're here to serve the organization and our customers and our clients. And the only way that you can be effective at your job is if we continually improve that. And that means, you know, look, there are a lot of things that we're doing today that we should be doing better. And that only happens if we're willing to. To, hey, call BS on it.
- [37:45]
Candy Valentino
Yeah, I love it. I love it. I think that honesty is what's really, it's a, it's refreshing in companies when they have that. And I think that makes them grow and excel more quickly. You had talked a little bit about companies that are too diverse, right. On how we can narrow their focus and really get better returns. And I also know that there are companies that struggle with the opposite. They have maybe a few key customers and they can't seem to diversify or a few products or services that work really well and their customers buy and they get tripped up of what they need to have a better bandwidth and diversify for their customers and have additional offerings. Is there something maybe you look at when you're evaluating businesses of how you can intentionally decide what other products or ancillary revenue streams that an entrepreneur should create?
- [38:32]
Chris
Yeah, it's a great question. And if you think about, hey, what, what drives value for a business, I, you know, I'm not that smart. So I try to make things really simple for myself. And one is you're going to, you're asking an investor to evaluate the future cash flows of that business. So it's really, how much is that business going to grow over time and how much cash is it going to generate? So that's one piece is how credible is that growth plan? The second piece is how risky is that growth? And so, hey, if that business has this growth plan, but they've got too much revenue concentration with certain customers or they've got too much revenue concentration with, you know, their hero product, which is starting to flag a little bit, hey, that makes that future growth plan a lot less credible and a lot more risky. And so I've always encouraged entrepreneurs, we use, we call it a growth quadrant, which is you want to think about the different areas where revenue is going to come from in the future. And you have existing customers and existing products, and then you've got future rev. Future new customers and new products, right? So there's that quadrant. Imagine a quadrant. And for most businesses, the most credible growth plan is when most of the growth is coming from existing customers or customers that are like their existing customers. Hey, they've, they've been successful at selling to them and their existing products. Hey, we're not having to prove to the market that we're rolling out a new product. Right. And we're going to be successful with that. So if you think about it from an investor standpoint, what I really need is, is to help them get comfortable that the future revenues in this business are. There's no high jumps involved. Right. I'm not asking the investor to make any leaps of logic in understanding where growth in my business is going to come from. So if, for example, growth by acquisition is going to be a core tenant of your growth strategy that you're going to tell an investor about if you haven't done any acquisitions, that growth story is not going to be credible at all. No one's going to believe you. And, and particularly folks that have done acquisitions, I mean, they're very difficult, lots of mistakes, lose a lot of money pretty quickly. Likewise, if most of their growth is coming from brand new customers that they've never sold to or brand new products that they've never developed, also going to be not very credible. So if your growth plan depends on some of that, what I would encourage an entrepreneur to do is, hey, go prove that you can be successful with the new product and with those new customers. So that the leap of logic that you're asking that investor to make is not nearly as significant where you're. It's just a lot more believable if the entrepreneur's already done it. Too many growth plans that I see entrepreneurs show up with when they walk into our office, you know, it's. It's those areas where they just haven't. There's been no demonstrated success doing what they're trying to convince an investor that they're going to do in the future. And I always ask them, I say, hey, so if you were buying a company and you know, the seller was telling you about all these great plans, what would be your reaction? Well, I'd be asking them why they hadn't done it, of course. Right. And you're not going to believe them.
- [41:54]
Candy Valentino
Especially if you're the founder, you know.
- [41:56]
Chris
Right.
- [41:56]
Candy Valentino
Like no investor wants to buy a company that then they have to go work on or they would just start it in themselves.
- [42:02]
Chris
Exactly. Yeah, exactly.
- [42:04]
Candy Valentino
Oh my gosh. I could literally talk to you forever and I don't know what final questions I want to ask. Okay, so one selfish question. What do you think are the business models that are still getting the highest return on EBITDA right now?
- [42:18]
Chris
So the best we've been. Yeah, we've been at market with a number of businesses this year. Obviously with all the conversation around, you know, I call it the most talked about recession we've never had.
- [42:34]
Candy Valentino
I love that.
- [42:35]
Chris
Yeah. Businesses that do well during recessions. We have a couple businesses at market right now that are. The demand for their product is all driven by regulatory requirements. So it's not, you know, businesses don't have a choice in terms of using their services. They have to use their services. And those businesses where that revenue is very predictable are, they're definitely trading at a premium today. You know, you mentioned SaaS or subscription businesses where the revenue is also very predictable. Obviously you want to look into churn rates and cancellation rates and all that. But again, businesses that do well during a recession where their demand is much more predictable and revenue streams are much more predictable, those are going to be lot more valuable today. We see this, you know, we saw it right after Covid. Hey, what businesses kind of sustained during COVID they ended up getting a premium. We saw this after the financial crisis. We saw it after the dot com burst. Hey, this is, I think the, the investor community, unfortunately sometimes short memories. So they, they tend to be very reactive. And so right now, at least, you know, folks are very focused on businesses that are going to do well in a pretty uncertain economic environment.
- [43:49]
Candy Valentino
You said churn rate, which was the other question I was going to ask you. Which are, you know, I've worked with a lot of earlier stage like under 3 million in revenue entrepreneurs and then mid cap, like anywhere from 3 to 10. And it's surprising to me how many entrepreneurs have great businesses like they've been able to sustain through Covid and make shifts and figure everything out. And I'm always so impressed by them, but I'm always shocked how they're doing it with no business metrics or measuring specific KPIs. And I'm like, if you did all of this without the data, imagine what you can do with the data. Oh my gosh. So are there a few just that you're like, hey, if you're not doing anything, maybe other than looking at your customer acquisition costs, like what are a few KPIs that all entrepreneurs should be like? Just start with these few. If you don't do anything else.
- [44:39]
Chris
Oh, I, you've picked up on the one that I would be very, very focused on, obviously. How much is a customer worth to you, you know, over the lifetime? And then do you know what it costs for you to get that, that customer on board? And then understanding the levers that drive each one of those metrics. Right. Hey, how do we derive more value out of a, out of a customer over the lifetime of their experience with us? Or how do we drive down our acquisition costs? I do think those are, those can be very focusing for an entrepreneur in understanding where do we place time, where do we place money, where do we place energy of the organization. And it also, I think it to that point, I'm a huge believer in KPIs and a huge believer in sharing financials with the organization so they can understand here's what drives the success of this business. And I think for most people, they, they want to be big contributors, right? They want to help the business and they want to be, you know, important in the, in the success of the company. And so you sometimes you just have to help them kind of put what they're doing in the context of this, you know, this bigger picture. And KPIs, to your point, are a fantastic way to do that.
- [45:53]
Candy Valentino
Yeah, I love it. I always say, look, if you can at least know where you're getting your customers from, how much they cost, how you can drive, because that's the only way, you know, if you can drive that down, and that's the only way you can develop a customer acquisition strategy to go get more of them. And then what's your retention or your churn rate and what's that lifetime value? Because really, without like a few of those, you can't even be predictable if you're going to sustain any type of sick list in the market or any pullbacks or anything. So I think they're so important for all entrepreneurs and the sooner they learn the data, the better the decisions that they can make.
- [46:24]
Chris
Oh, for sure. 100%.
- [46:26]
Candy Valentino
100% you, obviously. It's funny because you said, I'm not that smart yet. I don't think Harvard just lets anyone graduate.
- [46:32]
Chris
Like I said, Harvard makes mistakes too, Candy.
- [46:36]
Candy Valentino
So I want to ask you this last final question. And it's knowing all of the things that you know. You've obviously had an incredible education and you've had almost three decades of dealing with M and A and Exit. And you're an entrepreneur, too. It's not like you're a lawyer that does this. You're a lawyer, but an entrepreneur also, which I think is just such a uniqueness. And I just often wonder if you woke up tomorrow. So for some reason you woke up tomorrow. Your company, your 50 employees, everybody that knows you, all the things that you've done. You don't have a LinkedIn profile anymore. Nobody knows your name. It's all gone. The only thing you get to keep is what the information and knowledge you've retained for your entire life. But yet your money was gone, your bank account was gone, and you were starting from nothing. What are some of the first few things that you would do tomorrow morning?
- [47:28]
Chris
What an interesting Question I would probably start with conversation. I would reach out to the smartest people I knew and start to ask them the questions that are probably, probably would be rattling around my head in terms of, hey, where should you start? And I get a lot out of talking to really smart people. So that's probably the first thing that I would do. And then I think the other thing, and I think every entrepreneur ought to do this, is you do need to answer the question, what's most important to you? I think, you know, a lot of entrepreneurs, you know, for whatever reason, they get so committed to whatever venture they're working on that sometimes they forget, hey, what are the priorities in your life? You know, and for me, obviously, you know, my wife and my kids and health and all that are big priorities. And so I think I would start to architect something that, hey, how do I manage all of that together? And. And then again, talk to the smartest people I knew. I probably call you.
- [48:35]
Candy Valentino
Well, I'd be calling you. So I love that. And I think there is so much wisdom in that last statement that you shared, because I see so often people build a business that they hate because, yeah, that you can build. You can build a business doing anything. So why not architect, you know, design it, if you will, be the architect of your life and build a business that you enjoy. You know, like, oh, my gosh, I remember so many times I dreaded going into my own building, my own company, and I'm, I'm like, wait a minute, I'm the one that has the power to change this. Nobody forced me to be here for sure. Happens to all of us at some point. So no matter where someone is in their journey, I think there's a lot of wisdom to build what you enjoy.
- [49:16]
Chris
Yeah. I believe if you're going to put the money, time, energy, stress into building a business, it ought to serve you. And if it's not, then, hey, that's a problem and you ought to work to fix that. And the great thing about entrepreneurs is they tend to be incredibly flexible in terms of just being able to adapt. And sometimes all it takes is some hard questions for them to answer.
- [49:45]
Candy Valentino
Yeah. So, so good. Can you share with everyone if someone's in a position where they're maybe looking to exit or they're, they're maybe have a buyer right now that they're kind of going through talks and they want some support, how can they find you? How can they learn more about you? Where are you online?
- [49:59]
Chris
Yeah, sure. Well, www.class6classvi partners.com will get to us. Or Chris @class6partners is my email address. And, and I look, we do a lot of what I call pro bono work for entrepreneurs and so we're always happy to help entrepreneurs no matter if we're engaged or not. So certainly if somebody's dealing with something, we're happy to give them a hand.
- [50:22]
Candy Valentino
Oh, well, thank you. We're going to link all of that up in the show notes for everyone so that they can find you. Thank you so much for spending the time with me and just.
- [50:29]
Chris
Oh, you betting?
- [50:30]
Candy Valentino
I just. I love this conversation. I know it's going to provide a lot of value for people.
- [50:37]
Range Rover
Hey guys, thanks for tuning in to.
- [50:39]
Candy Valentino
This episode and if there was something that you loved or you had a specific takeaway, share it and tag me at Candy Valentino.
- [50:47]
Range Rover
And if you haven't already, grab a copy of my latest book, the 9%.
- [50:52]
Candy Valentino
Edge, Life Changing Secrets to create more.
- [50:55]
Range Rover
Revenue for your business and more freedom for yourself.
- [50:57]
Candy Valentino
You can pick it up anywhere books.
- [50:59]
Range Rover
Are sold, Amazon, Barnes and Noble, or.
- [51:01]
Candy Valentino
Your local independent store. And once you do, head over over.
- [51:05]
Range Rover
To 9 percentage.com and claim $1,500 in preorder bonuses, including a chance to join me on this very show. Thanks so much for tuning in and spending this time with me today, guys.
- [51:18]
Candy Valentino
We'll see you next time.