This week’s Misfit Entrepreneur is Aryeh Sheinbein. Aryeh is the founder of Results Driven Advisory, a firm that has 2 primary focuses. The first is to help business owners value their business, then improve the value of the business. Second, to help business owners grow their own wealth while focusing on the business. Aryeh has and still works with Alvarez & Marsal as a Managing Director. The company is one of the premier advisory companies to the world’s biggest hedge funds and private equity firms on business valuation.
He’s maintained this while building multiple successful companies such as Results Driven Advisory helping clients throughout the world.
And I wanted to have him on to discuss a few topics, of course how to make sure you get the full value out of your business and maximize your wealth, but also how to successfully build companies while still working in a professional you love under a company.
Aryeh went to college and got a degree in finance and wanted to be on Wall Street as an investment banker. After two years, he moved to a small private equity/VC firm that was more of a family office. They invested in early stage companies and small businesses that they grew and sold or took public. He did that for 4 years and it helped to shape his path. He was the only junior person on the team and worked with private companies. He then went back to Wall Street and spent time in hedge funds and equity firms, then ended up where he is today helping those firms in valuing businesses. He always had the drive to do other things on his own and built his own businesses or invested in them along the way.
What should business owners know about how to truly value their business? What do they get wrong?
- For most business owners, the majority of their net worth is tied up in the business, the asset. And most don’t think about maximizing that for themselves.
- The starting point is the value today and the ending point is what you take home when selling. You have run the business to get to the destination in the right way.
- Business value differently. Manufacturing is different than SAAS, etc.
- Buyers are interested in the future cash flow. What does the business throw off in the form of cash?
- If you are not generating free cash flow, you have to show how the growth with get there and how it will pay off. If you are, you need to maximize the cash flow as much as possible. Essentially, EBITA.
- Recurring revenue in addition to good EBITA is important for value. It is valued higher than one off revenues.
- If possible, you should work to have a recurring component to your revenues to help your with your value.
What should an entrepreneur do to start increasing their value? And how does recurring revenue affect the multiple on a business?
- You need to layer in a recurring or subscription stream of revenue and automate it as much as possible.
- Look for complimentary products or services to your core product to add a recurring component with.
- Increase net revenues (EBITA) by either strategically lowering the cost to deliver your solution or look at ways to increase your pricing – do both if possible.
- Look for economies of scale in where you can add more clients without adding cost.
How do you achieve a liquidity event without selling it?
- You can do this with debt as a cheap cost of capital.
- It must be debt as vehicle that the business can handle.
- In a similar way you can do a “cash out refinance” on a home, you can do the same with a business loan.
- At the 20 min mark, Aryeh goes through an example of this.
Thoughts on exiting a business?
- There are many different factors, but the first to understand is that there are two types of buyers: Financial and Strategic.
- A Financial buyer is buying with the intent of a future financial gain or return on the invest in buying the business. They will pay a fair market value in the middle range.
- A Strategic buyer is a competitor or a complimentary business and views your business as a good “add on” to their business and plug it into to their offerings.
- Strategics get more economies of scale and thus typically pay a premium value for a business as the sole purpose is not just a financial return, but there are other businesses or capabilities that the target brings.
- Think of Dollar Shave club being bought because they created a niche and it was easier for Unilever to buy them and the niche than to compete.
- Most business owners work on and in their business but have little time to focus on their own wealth. How can an entrepreneur maximize their personal wealth while short on time?
- Increasing the net worth of the business increases their net worth, so maximizing that is a start.
- If the business is generating good cash for the business owner, most business owners hire a financial planner or advisor. This industry is driven by limitations in that they sell financial products and/or are paid a percentage of assets, but these fees really eat away at the growth potential of your capital.
- Additionally, you are not able to see all the investment vehicles available to you.
- The #1 thing, if you want to be educated, is that whoever you are going to deal, you have to know, like, and trust, and they need to show they have a broad knowledge base.
- Look for true investors that are Fiduciaries if you are going to work with an advisor.
Thoughts on 401ks and other investment vehicles?
- If you are an employee, take full advantage of 401ks and the match.
- There are limitations in that you cannot invest in things like real estate, etc. in a 401k.
- 401ks stick mostly to mutual funds and ETF’s which over 90% do not beat the S&P 500 over time.
- Fees are also important to track and make sure you are on top of as it is surprising at how impactful they are to the growth of your 401k in a negative way. Keep fees as low as possible and limit them in every way you can.
How do you manage it all and do what you do?
- You need to have systems for things.
- Things need to be able to scale.
- Standard operating procedures that are documented and can be followed by team members is critical.
- Your goal is not to be needed in the day to day but be needed strategically.
- What is the trade of time? You have to see what it takes and is capable of doing before you can know if it is something you want to continue.
- You must personally develop and get to know your true strengths to find complementary strengths in others and fill your weaknesses.
- Staying healthy is very important as well.
Best Quote: For most business owners, the majority of their net worth is tied up in the business, the asset. And most don’t think about maximizing that for themselves.
Aryeh's Misfit 3:
- People are super important in business and life, and it is a 2-way street. Your development in people skills and communication is critical to success.
- Focus on things you enjoy doing and to do this, you need systems to help you do so.
- Use systems to help manage and do the things you don’t enjoy. Always be learning. It really compounds your growth over time.
BKA Content (1 FREE Month!)
5 Minute Journal: