Thinking about a liquidity event? Click here to book your FREE strategy call.

Oct. 20, 2020

Financial Economist Mike McDonald On How And Why You Should Seek Alpha For Your Business To Maximize Profits (#27)

Financial Economist Mike McDonald On How And Why You Should Seek Alpha For Your Business To Maximize Profits (#27)

"Taking chances on average over time, if you're smart about it pays off and pays a dividend." -  Mike McDonald

Dr. Michael McDonald is a professional financial economist with a PhD in finance, and a significant background working in finance including a decade on Wall Street and in various corporate finance roles. His consulting clients have included Fortune 500 firms, banks, hedge funds, asset managers, and government agencies. 

Michael prides himself on being adept at identifying areas of financial challenges or opportunity for firms and then capitalizing on them. Michael excels in explaining and applying sophisticated topics in corporate finance and business intelligence in a way that is comprehensive yet understandable to finance and non-finance professionals alike

He specializes in working on analysis and decisions related to big data, business intelligence, financial forecasting, pricing and operational effectiveness. 

Michael has authored extensive research studies on investments, corporate debt, rates of return to investors under various scenarios, and valuation of tangible and intangible assets. His work has appeared in the Journal of Corporate Finance, the Journal of Behavioral Finance, the Journal of Business and Behavioral Studies, the Journal of Fixed Income, Studies in Economics and Finance, and the Pacific Basin Journal of Finance among other professional journals. He has also authored numerous case studies on situations in corporate bankruptcies, spin-offs, restructurings, mergers, and other significant business events. 

Michael’s work has been cited by the Wall Street Journal, Marketwatch, Bloomberg, Reuters, and other news organizations.

SHOW NOTES

  • From the classroom to the board room, Mike's story
  • How Mike helps Dell, Microsoft, and Goldman Sachs grow
  • Lessons mid-market businesses can learn for large businesses
  • How to find a gold mind of opportunities by licensing products from universities
  • The industry-leading study Mike did on investment bankers and liquidity events
  • What business owners must know about the preparation process for a liquidity event
  • Two metrics business owners must ask about their businesses
  • The surprising answer to the question, "would you rather have a 1% increase in volume or price?"
  • Why seeking alpha isn't just for stocks
  • The 80/20 rule for growing your profits
  • Financial ratios you should be using in your business, but probably aren't
  • Why you can't expect investment bankers to prepare you for a liquidity event
  • How long-term planning and strategies are key to your financial success
  • The hidden opportunities as a result of the pandemic
  • Why every business owner must find and fix the business skeletons in the closet
  • The problems inaccurate numbers and forecasts create
  • Victor Niederhoffer's article and the powerful lesson business owners can leverage
  • How you can leverage the power of data analytics and big data
  • Mike's example of how data analytics stopped theft in his company
  • The importance of growing your wealth through capital appreciation
  • Why you need to take chance

This podcast is brought to you by Deep Wealth. Are you thinking about a liquidity event? You have one chance to get it right and you better make it count. Enterprise value is created from preparation, and not the event itself. Learn how the Deep Wealth Experience helps you maximize enterprise value. Master the same strategies our founders used to increase their company value 10X with a 9-figure exit. Click here to book your free exploratory call.

Enjoy the interview!

SELECTED LINKS FOR THIS EPISODE

Contact Mike's through Mikem[at]ashogi.com

Mike's company  MorninginvestmentsCT.com

Mike's study The Value of Middle Market Investment Bankers

Victor Niederhoffer's article

The Deep Wealth Experience

Book Your FREE Deep Wealth Exit Call

Deep Wealth LINKS FOR THIS EPISODE

The Deep Wealth Experience

FREE Deep Wealth eBook on Why You Suck At Selling Your Business And What You Can Do About It (Today)

Book Your FREE Deep Wealth Strategy Call

 

Did you enjoy this episode of The Sell My Business Podcast? 

Please leave a review. Reviews help me reach new listeners, grow the show, and continue to create content that you'll enjoy.

Please click here to leave a review on The Sell My Business Podcast.

 

This podcast is brought to you by Deep Wealth. 

Your liquidity event is the most important financial transaction of your life. You have one chance to get it right, and you better make it count. 

But unfortunately, up to 90% of liquidity events fail. Think about all that time, money and effort wasted. Of the "successful" liquidity events, most business owners leave 50% to over 100% of their deal value in the buyer's pocket and don't even know it.

Our founders said "no" to a 7-figure offer and "yes" to a 9-figure offer less than two years later. 

Don't become a statistic and make the fatal mistake of believing that the skills that built your business are the same ones for your liquidity event. 

After all, how can you master something you've never done before? 

Are you leaving millions on the table? 

Learn how the 90-day Deep Wealth Experience and our 9-step roadmap helps you capture the maximum value for your liquidity event.  

Click here to book your free exploratory strategy session.

Enjoy the interview!

Transcript

Steve Wells: [00:00:00] This is Steve Wells. 

Jeffrey Feldberg: [00:00:01] And I'm Jeffrey Feldberg. Welcome to The Sell My Business Podcast. 

Steve Wells: [00:00:06] This podcast is brought to you by Deep Wealth. Are you a business owner who is wondering how to either grow your business, sell it, or both?

Or maybe in today's environment, you're wondering how to make your business pandemic proof. Visit deepwealth.com to find out how you can master the strategies to grow and extract the deep wealth from your business. Visit www.deepwealth.com. 

Jeffrey Feldberg: [00:00:26] Welcome to episode 27 of the Sell My Business Podcast. Today's guest, dr. Michael McDonald, is a professional financial economist with a PhD in finance and a significant background working in finance, including a decade on wall street and in various corporate finance roles. His consulting clients have included fortune 500 firms, banks, hedge funds, asset managers, and government agencies.

Michael prides himself on being adept and identifying areas of financial challenges or opportunity for firms, and then capitalizing on them. Michael prides himself on being adept at identifying areas of financial challenges or opportunity for firms, and then capitalizing on them.

Michael excels in explaining and applying sophisticated topics in corporate finance and business intelligence in a way that is comprehensive yet understandable to finance and non-finance professionals alike. 

He specializes in working on analysis and decisions related to big data, business intelligence, financial forecasting pricing, and operational effectiveness. 

Michael has authored extensive research studies on investments, corporate debt, rates of return to investors under various scenarios, and valuation of tangible and intangible assets. His work has appeared in the Journal of Corporate Finance, the journal of Behavioral Finance, the Journal of Business and Behavioral Studies. the Journal of Fixed Income Studies in Economics and Finance, and the Pacific Basin Journal of Finance among other professional journals. He has also authored numerous case studies on situations in corporate bankruptcies, spin-offs, restructurings, mergers and other significant business events. Michael's work has been cited by the Wall Street Journal, MarketWatch, Bloomberg Reuters, and other news organizations. 

Mike, welcome to the Sell My Business Podcast. We are absolutely delighted to have you with us today. Let's start things off by having you tell us and our listeners, your background of how you got to where you are today.

Mike McDonald: [00:02:42] Thanks Jeffrey. So, I'm like McDonald. I'm a professor of finance at Fairfield University in Fairfield, Connecticut, or at least that's my day job, if you will. But more on that in just a second. Prior to going into academia, I actually started on Wall Street. I worked as a bond trader for Wachovia and then Wells Fargo in the municipal bond space, sales trading, that sort of thing. And then subsequently I worked for what today is the second largest hedge fund in the world, AQR in a quant role.  Subsequently I got very interested in the academic side.

So, I started doing my PhD and during the process of doing my PhD, I also worked for Seeking Alpha, helping them to develop them amongst other things, some of their data driven products. So, they take data and they sell it to the investment community based on their user base. So, my specialty is really all-around using data to help businesses, to make better decisions.

And after I finished my PhD, I started doing this more and more on a consulting basis. In a consulting role, I've done work for everybody from general electric and Dell to Microsoft, Cisco, and a variety of big banks, HSBC, Bank of America, Goldman Sachs, et cetera, as, well as for small all firms. And oftentimes what I'm doing is helping the firms to figure out how they can grow.

This is especially true for smaller firms. Not necessarily for somebody like GE or Goldman Sachs, but somebody that wants to be the next Microsoft or Dell or they dream of that anyway. In terms of growth this year, it means two things. Number one, trying to take your existing products and make more money from it.

Get to a wider user base, optimize profitability, et cetera. But number two, it also means trying to introduce new product lines, identify opportunities in your market or adjacent markets, and then capitalize on those opportunities. And so that's what I do with my firm Morning Investments and with our spinoff, from which we've launched recently, aShoGi .

Steve Wells: [00:04:49] Mike, can you tell our listeners a little bit more, how do you actually go about that? But how do I look at creating new market opportunities? What would you do if you came into this widget making company? 

Mike McDonald: [00:05:02] So, that's a great question. If we think about expanding your product line, what we might ask is, okay, what are the opportunities that are out there? And most of the time, the business owner doesn't know, they say, we make coffee cups or we make industrial equipment or whatever.

Maybe we're a manufacturer where reseller our we're a retailer, whatever. So, oftentimes like everybody else get focused on their day to day and they fail to take into account the opportunities in the broader spectrum. And so one of the things that we do is help the business owner to begin understanding what's the target addressable market and some of these different opportunities. What could you conceivably do? How big is that target addressable market? What are the margins look like? And are there opportunities to capitalize on that. For instance, what a lot of business owners don't realize is even if you're too small to have your own research and development department, you can actually go out and license technologies from government agencies, from universities, things like that. These are patented products. Let's say universities come up with, and they'd like a business owner to take that product to market.

Most of the time, the university is not very successful with doing that this, but we help businesses to think through what are some of those opportunities. What's the size, what's the cost going to look like for producing that? What's the profit margin, et cetera.

Oftentimes it doesn't cost the business, anything to launch this opportunity because you can actually get what are called SBIR, Small Business Innovation Research Grants from the US government. And these range from a couple hundred thousand up to over a million dollars that you can get because the government wants to see businesses grow.

So, we help firms think through that, apply for those grants. Look at what their opportunities are, things of that nature. 

Jeffrey Feldberg: [00:06:53] Mike from Wall Street to the classroom and everything else in between it really, he's an interesting background, but let's dial in on the financial aside for just a moment in your area of expertise.

Most business owners don't realize that when it comes to the eventual value for their business in a liquidity event, whatever that liquidity event means to them, whether it be a full exit or a partial exit where they're taking some chips off the table or outside investment, many business owners mistakenly think that the value that they'll get for their business comes from the process itself.

When it couldn't be further from the truth, it's actually the opposite. And this is where Deep Wealth, where we specialize in the, an operation that you do often years in advance of your liquidity event. The process is like a backwards looking mirror, the better your preparation, the likelihood of a higher enterprise value increases and it can increase significantly.

So, from Wall Street to being a consultant, to working across different industries and businesses, here's my question for you. As a business owner, where would be some of the blind spots that I should be looking to find, or as a minimum, thinking about when it comes to the preparation process for my business in an effort to maximize my enterprise value.

Mike McDonald: [00:08:15] Yes. I think that's a really good point, Jeffrey. And I've helped, bankers do studies on this, when you and I have talked previously about a study that I did with some investment bankers that basically found that one of the big challenges that business owners face is that they're not well prepared.

They haven't laid the proper foundation or groundwork when it comes time to sell their firm. But I absolutely agree with you that it's difficult to get that groundwork in place and business owners don't necessarily know what they need to do. In my view. I think that there's really two elements to this.

Number one is, do you really understand your business and your market? And every business owner of course says yes, but do you really understand the data behind it? For instance, do you understand what your customer acquisition cost is? Do you understand what your customer lifetime value is?

Those two numbers determine whether or not you've got a viable, long run business. If you don't know what those numbers are, it's really hard for somebody to make an offer on that business. So, getting in there and understanding and looking at the data can help you to get a better handle on what that business is worth, where it's growing and how you can capitalize on it.

If your lifetime value for a customer is significantly greater than your customer acquisition costs, this business has a lot of opportunity. If it's only a little bit greater, business in a little bit of trouble, potentially. And so, this is where business owners have to start thinking about these things in advance.

How do I make my customer acquisition cost as low as possible while at the same time, maximizing my lifetime customer value? It's a very fine balance between these things. Certainly, we all need to, when you're running a business, be very cognizant of costs and things like that. But at the same time, you don't want to undermine growth and what makes that business viable in the first place?

So, it's not an easy balance, but if you pay attention to those two metrics, I think that helps tremendously. 

 Steve Wells: [00:10:19] Many business owners we talk to, they don't know. What they're going to do with their company, as far as their liquidity event, are they going to sell or are they going to merge?

Are they going to pass it on? But one thing we always tell them is it really doesn't matter. The same thing you need to do to get ready to. Exit or handover or finance your business are those very same things you need to do to build a good business. So, some of the points you're making are really interesting because, you need to know the lifetime value.

You need to know your cost of acquisition. My question is this, a lot of business owners don't want to get into that detail, but it's so important that they do that. So, have you seen any examples of where you found ways to really create more of a blue ocean? You've seen ways that a business could grow our markets, that they could reach and it may not even be under their watch, but it's really for, potential suitors to see what the runway is. The more runway, the more reoccurring revenue, the more future they see, the higher that valuation is going to be. Have you ever experienced anything like that in some of your research? 

 Mike McDonald: [00:11:31] Oh, absolutely. Steven, that's a great point. And I even see this in some of my investments. So, I own some franchises that are hands off right. Where I'm not necessarily in there every day, but I'm instead of taking a back seat and managing this thing overall and, we own a number of different locations, but whenever I'm looking at new franchise locations to buy, that is an existing franchisee wants to sell them.

One of the things I'm thinking about is how big is that market that they're in right now? And then how can I expand my revenue in their market. Now, revenue, of course, as we all know is just price times, quantity of units sold. So, it's really interesting and everybody's mind always immediately goes to how do I sell more units. I have a thousand widgets that I'm selling each week. How do I get to 2000 widgets, 3000 widgets, et cetera? And that's great. And it's something you should pay attention to. And there's a lot that we can do around that with data. But the other side of the coin is are we charging the right amount of money?

Now price is pretty tough, but it's really a key element. It's a key variable. People have to think about. If you're renting out a house on Airbnb, how do you decide what price you should charge per night for that we can look around at kind of your comps, your peers and see what they're charging that doesn't necessarily tell you what you should be charging.

If each of the three of us, you Steven and Jeffrey and myself were all renting the same house on the same street. And we're all looking at one another's price. then it's really like the blind leading the blind. So, we got to get in and dig a little deeper to really understand what are the fundamental drivers economically behind the supply and demand here.

And can we raise our price more and have that kind of filter down so that we get greater profitability and hence make the business a little bit more valuable. One thought experiment I always like to do when I'm talking to people. And even seasoned executives, guys who are 20-year veterans at General Electric or NVidia, they'll get this question wrong.

Would you rather have a 1% increase in volume? That is the number of units sold or would you rather have a 1% increase in price. Again, holding everything else constant. And a lot of people say, Oh, it doesn't matter. But the reality is that if your product has any marginal cost at all, if it costs you anything to produce that product, even indirectly and customer service and stuff like that, you should always take the 1% in price.

Why? Because that price. Increase flows directly through to the bottom line where the volume increase generally doesn't. Now you can make up some exceptions to this rule, but in general, it's something that a lot of business owners don't understand and don't think about, but it's really critical to maximizing profitability.

Jeffrey Feldberg: [00:14:27] That's a great point and I'm going to call that the 1% price rule. And let's put that under a term that you used earlier. And we'll explain this for our listeners. On the investment side, you said one of the things that you would do is to seek alpha. So, for starters, why don't you share with our community who may not be familiar with that term.

What does seeking alpha mean? And then I'm going to circle back with a question on that of how a business owner with these principles can take advantage of that. So, what does that mean, Mike, to seek alpha from the investment side? 

Mike McDonald: [00:15:00] Sure. So, alpha's just the excess return that you generate in an investment above risk.

When we think about any kind of investment there’s some level of return that we expect on. Let's say you loan money to, so another business owner, maybe you're going to get a 5% rate of return on that. If you're investing with business a and business a is offering you a 5% rate of return and you're investing with business B and business B will offer you a 7% rate of return.

If the two businesses are equally risky then your alpha for business B is an additional 2%. It's however much you can earn on that investment that's over and above what you need to earn given the level of risk. So, we talk about seeking alpha. It really means trying to find the most profitable opportunities that are out there.

Given the level of risk that we're taking on. And this concept is traditionally thought about in stocks and bonds. But the reality is it's absolutely just as applicable for everyday business. 

Jeffrey Feldberg: [00:16:02] Terrific, and thank you for explaining that.

So, now let's bring that into our world here at Deep Wealth and the business owners that we help on the preparation side. Because when you think about it, when you prepare your business for any kind of liquidity event, in that preparation process, you need to be finding where it is. Is that alpha? How can I seek out that alpha in my preparation that ultimately is going to differentiate me from other offerings out there and increase my enterprise value? And the challenging thing about a blind spot. It's a blind spot because it's a blind spot. You just don't know that it's there. It's hiding in front of you in plain sight. So, speaking to business owners with your background, both now as an investor who has been on the other side of looking to invest in companies, and now as a business owner yourself, 

What would be a few areas as a business owner that I need to know of how and where I can seek additional alpha in my business to increase ultimately my profits, which goes on to increase my enterprise value.

Mike McDonald: [00:17:09] Yeah, that's a really great question. And so certainly one obvious opportunity as I talked about a few minutes ago is pricing. But setting that aside for a minute beyond that, you also need to be thinking about what's your cost associated with producing different products and then which products should you be investing in? Most businesses, whether they recognize it or not have multiple profit stream opportunities. You have multiple different products and you want putting your money behind the product that generate the best margin. We think about this as what we call contribution margin in a financial accounting sense. So, you want to be putting money behind those products that are going to help to bring in the most dollars for the business.

And sometimes these are products you don't even know you have. For instance, if you're a manufacturing firm for say industrial equipment, you might have a potential ancillary revenue source in servicing that industrial equipment or in training people how to use that industrial equipment. That is aftermarket sales and service, repairing machines, adding additional parts, selling them, that sort of thing, but also helping with the initial installation.

A lot of people would just say, we sell the product and then we ship it off to the customer and they do whatever they're going to. That's true. But what are the opportunities to go a little bit beyond that, develop training materials, perhaps. This could mean sending people out in person, or it could mean just developing prerecorded videos, manuals, things like that, to help people with using these sorts of things.

So, the question you really have to be asking as a business owner is how can I grow the firm, and in particular grow profits by focusing on my most profitable products? It's that old 80, 20 rule, but in reverse, in some sense, 80% of your profits are going to come from 20% of your products. Said differently, of course, the other 80% of your products are probably sucking up a lot of your time, but aren't necessarily producing a lot of profits. 

 Steve Wells: [00:19:18] Mike, that's a great point, one that, businesses need to look at. And particularly when we talk to many business owners, we say, you need to look at your company and look at it as if you're going to have to leverage it, are you going to have to get loans?

And they go, why is that? if you're going to do an exit, you don't know right now, what kind of buyer you're going to get, and many buyers are going to need to leverage your business, meaning they're going to have to go get debt on that business. And the question is how can a business owner look at their business from a financial point of view of someone who'd be loaning money into it?

What are these institutions going to be looking at? Because that's going to make your business more valuable and your potential buyer is going to pay more for that because they can leverage it into a higher degree. 

Mike McDonald: [00:20:08] Sure. Yeah. certainly, when it comes to evaluating any business, we usually turn to our tried and true financial ratios.

So, any buyer, any lender, anybody who's looking to put money into the business, either on the debt side or the equity side, they're going to look at the business's health through the lens of financial ratios. And banks and buyers are going to think about this in the same way, because they're really two sides of the same coin.

The banks own the debt in the business. And the buyer owns the equity of the business. So, in that sense, both of these guys have the same stake in the health of that business look like. So, the key financial ratios they'd be thinking about would be things like their liquidity ratios. Your debt to total asset ratio, your EV to EBITDA ratio.

They're also going to be looking at stuff like ROA, ROE, ROI, et cetera. You're operating return on assets, your cash conversion cycle, things like that. Now certainly there's a whole alphabet soup, many of which I've just gone through. But if you're going to get to the point where you've got a saleable asset, something that could be sold for large amounts of money to somebody else in the future, you've got to get to be conversant in these financial ratios.

That's number one. But number two, you've also got to be thinking in terms of not just what they've been historically, but what they're going to be on a forward-looking basis. That is forecasting where this business might go in the future. Now there's a lot of different techniques for forecasting out there.

In my experience, most of them are fairly simplistic. So, what I like to do when I help business owners is to turn to a more data driven approach. And this involves specialized types of what are called regression analysis. Basically, pull in the relevant data, run it through a computer program, could be something as simple as Excel, that'll do a regression analysis and then it spits out estimates for profits in the future sales in the future, costs in the future, spits out estimates for these different ratios, et cetera. So, all of that comes about as a result of having kind of a good financial model. So, when I think about this intuitively, I always start by asking at a foundation level, do you understand your financial ratios?

That's step one. Step two have you built a financial model. Around those financial ratios so that you understand, for instance, the sensitivity analysis. What happens if we raise or lower price, historical, current perspective of the business.

And then for the future, what's our financial forecast look like, how are we getting to that forecast? What's the sensitivity around that forecast, et cetera? 

Jeffrey Feldberg: [00:23:04] Thank you for the insights and the explanations Mike. Let's take quick step back for a moment. A few years ago, you had produced a study, the Value of Middle Market Investment Bankers.

And as you referenced earlier, that's how the two of us first connected when I had read that study, when it comes to the preparation side, which is primarily. Our sole focus here at Deep Wealth. What did you find when you spoke to business owners and you spoke to investment bankers and you looked at the preparation area, what were some of the key findings that came out of your study?

Mike McDonald: [00:23:39] One of the biggest findings was that business owners didn't necessarily understand all of the work and effort that was required to prepare that business for sale in the first place. They often thought that the investment banking process was really just around going out there and Hey, I'm ready to sell my business.

Here you go. It's like a realtor. Find a buyer for this. But the reality is that selling your house is very different than selling your business. Sure. When you're getting ready to sell your house, maybe you need to put on a new coat of paint, vacuum up a little bit and do some kind of touch up here and there.

But when you're selling a business, the preparation that's required is a lot deeper than that. And many business owners simply didn't understand that reality. But what we found in the study is that if you went through and actually, they took the time to do that preparation, you ended up with a much more successful sales process.

And after selling the business owners were much more cognizant of that. They understood the importance of getting that business ready to be sold in the first place. That was something that, going into the process they didn't really appreciate. And then once they were done, they graded, this is as being a much higher priority and being frankly, a lot more critical than they'd given it credit for initially 

Jeffrey Feldberg: [00:24:58] Mike a follow-up question to that because it's in your data, it's in your numbers, the statistics showed it. When you spoke to the business owners and investment bankers, it came out. One of the challenges as a business owner, when you speak to most business owners, not all, but most business owners.

And they share with you that one day, they're going to have a liquidity event, perhaps it's a year from now, perhaps it's five years from now, but when you ask, okay, what are you doing today to prepare for that? And the typical answer as well, nothing, when I'm ready to have that liquidity event, I will then begin my preparation.

So, to those business owners, what words of advice would you give of why they should be rethinking their answer and their efforts that they're putting into preparation?

Mike McDonald: [00:25:41] Sure. Many times, business owners, like everybody else, they get bogged down in the day-to-day. You think about what's the minutia. I get up every day and I have to do X, Y, and Z. And then I go home and I do the same thing the next day. They don't necessarily spend time thinking about what's the big picture. And I see this with all sorts of business owners out there, but the reality is that those business owners who are thinking longer term, they're thinking bigger picture about how they can grow that business. They end up with a much more successful exit in the medium term.

Again, 1 year, 5 years, 10 years, whatever timeframe that might be. You're going to be more effective at growing your business and ultimately more effective at monetizing the business, if you're thinking in advance about the strategies and setting, the groundwork for it. 

Steve Wells: [00:26:30] I know there are probably many business owners out there listening and they heard the alphabet soup a few minutes ago and they go, oh gosh, this seems very complicated.

 I don't think I have the time to do this. We talk a lot about building your exit team and there are people that help the business owner understand like you would do for them and help them do the analysis. And even like we've said, it could be five years from. Begin to put together your virtual data room began to compile that information.

And as we keep saying, this is going to help your business anyway, given the crazy financial times we live in, Jeffrey and I heard an interesting thing but they're putting a letter C after it. Now this is EBITDAC during Corona. 

What have you seen out there that might be interesting for our listeners to hear, to help them navigate through this time? 

Mike McDonald: [00:27:19] Sure. As tough as COVID-19, and there's no doubt that it's very challenging, especially in certain markets and certain verticals, this also creates opportunity.

I don't care what business you're in. There are opportunities that have been generated by the Corona virus or opportunities that come up any time. There's a seismic shift in the world, and certainly COVID-19 would qualify as a seismic shift. So, that could mean as an example, refocusing your business on certain products that are in greater demand.

I talked to a private equity exec the other day, and he was saying, we’ve sent all of our portfolio companies to focus on making products like hand sanitizer and face masks and, disinfectant and medical products and things like that. So, certainly that's one obvious opportunity, but a lot of people would say, I can't make them.

And that's fair enough. But you also have to ask yourself, what are the opportunities that this creates within your own industry? If your firm is feeling the effects of the Corona virus, what about your competitors? Is there an opportunity for instance, to, think about buying out a competitor, maybe they're in a weakened financial state, they need some sort of a cash injection or it's the right time for an exit for that particular person?

Is there an opportunity to do some consolidation, a little bit of a roll up within your industry? Is there an opportunity here to raise prices, maybe previously customers had been resistant to price increases, but now they have a greater need for your product, or they're not as price sensitive because they have additional funding coming in for instance, to cover certain emergency costs?

So, any business you talk about, if you're doing well doubled down on that, lean into that growth. If you're struggling, ask are you struggling, maybe just a little bit less than your current predators are. And can you capitalize on that and consolidate in your industry, then you buy out those competitors that you would have competed with in the future.

So, no matter where you are, there are opportunities that come in and the alphabet soup that we alluded to, a lot of people would just turn to their accountant and they'd say, you calculate all that. I don't want to have to deal with it. That's a mistake because if you understand where you are, then you understand where other businesses are when you get those same numbers and you say, hey, here's an opportunity.

I want to buy out this competitor. Might not make sense based on as you put it, Steven EBITDAC, but at some point, in three months, in six months, two years, whatever the world will start to look more normal. And if we can understand what those metrics, are, that the business we'll produce under normal circumstances then we can do a better job of valuing those competitors and maybe doing an opportunistic buy out here or there. So, no matter what the state of your industry is, there are certainly opportunities out there. 

Jeffrey Feldberg: [00:30:16] Mike, I like one of the terms that you referenced earlier, where you're encouraging business owners to play to your strengths, find out where you're strong in on the business side and do more of that.

When you look at success, isn't that what success is, you find out what your strengths are and you focus on that and you build upon that. Another strategy for success though, is if you look both to yourself and to others where failing, maybe taking place, and at least you're aware of that, now you can figure out maybe I should exit from that particular part of it altogether.

Or maybe I need to bring some people in who can help us with that to have that as a strong suit for us. let me ask you this. And I would like you to put your investors hat on. When a business sooner is deciding to have some kind of liquidity event as an investor who is looking to either invest in the company or buy the company outright. What would be in your experience, three of the most common deal killers that just have the future investor or buyer walk away because of what they're seeing or not seeing? 

Mike McDonald: [00:31:26] Oh, that's a great question. So, certainly there's no doubt that businesses can benefit from what's called high grading, their portfolio, right?

Taking out those weaker pieces, whether we think about in a real estate context or, a manufacturing context or whatever, finding those pieces that are not doing as well, and selling them to somebody that could perform better with that asset. So, what can kill the deal? I think that one area that's potentially problematic is anytime there's any sense on the buyer's part that the seller has been misleading or has been hiding issues, things like that. Everybody understands that there's good and bad aspects to every business, to every asset, but you've got to be upfront about that because otherwise, if you're not upfront about it, setting aside the morality or the ethical issues altogether, if I'm thinking about buying a piece of your business or buying your business outright.

And I find out there's a skeleton in the closet that you didn't disclose all of a sudden, I'm not going to trust anything else you've said. And so, then I either can't buy the business at all, or else I have to put a much lower valuation on it because I've got to say, hey, there's a lot riskier than I first appreciated.

Not necessarily the business risk itself, but risk around whether these numbers are accurate and honest, whether the projections that you've made, whether the discussion that we've had is accurate and honest. So, we've got to put in some kind of a discount based on the uncertainty around it. So, I would say any time the business owner is hiding something.

That's probably a mistake in the medium term. You want to be upfront and transparent with the other side. Now, of course, we all understand that you're going to put a good spin on the business, but you need to acknowledge the risks. And certainly, it's absolutely critical ethically, legally and financially that you're accurate with your numbers.

If your numbers are inaccurate that can lead to legal problems over and above actually just selling the business. So, that's one issue that I think causes people to walk away. A second big issue that causes people to walk away is saying, I just don't see a route forward for this business.

We see this all the time. When you look at bigger transactions that are contemplated by private equity buyers. If the Industry looks doomed. If you can't see the route forward for a business, then nobody's going to want to buy into that. So, as a business owner, you need to have, even if you're not going to be the one running it, you need to have a vision.

You need to have a plan that you can clearly articulate to the buyer that explains how do you go forward with this? How do you take this business and grow it? What's the opportunities in this industry? So, I think it's critically important that you believe in the business and be able to communicate that effectively.

And then third and finally, I think that it really comes down to just having all of your ducks in a row. A business that's disorganized. It seems like a mess where nobody kind of understands what's going on. That's an asset that's really hard to get your arms around. If I'm looking at buying your business and I don't really understand the numbers and you can't explain them to me, you don't have those numbers in the first place.

 At some point, I'm just going to be saying, this is perhaps more work than it's worth, they don't have their act together here. And the absence of that, I don't necessarily know that I trust the continuity plan for this business. Sure. Maybe they generated $10 million in profit last year.

But if I can't trust, I don't care about last year's profit. I care about next year's profit. If I'm the buyer, if I can't trust that we're going to have the groundwork in place to continue to see that profitability going forward, this isn't worth buying. So, I think those would be my three highlights.

Steve Wells: [00:35:23] Yeah, those are great. Those are really great. Mike. Can I circle back around one quick thing I was thinking about when you were talking about, buying businesses and, many business owners I don't think, think about that a lot. Because they built their business up, but I think it's very interesting if you've run a business and maybe you want some liquidity event for yourself and you want to exit or do something.

And, we've found many times this is a very emotional time for a business owner. This is who they are. Their identity has been wrapped up in building this business for many years. So, the thought that they could use those skills and perfect and hone some business skills and then apply that to a new business.

They can take some of the proceeds and maybe buy into, and like you're saying you've got some passive businesses that, don't necessarily take up a lot of your time. So, it really gives a lot of flexibility. So, some of the things that you're, encouraging the business owner to learn some of the alphabet soup could be useful in other things. So, I know it's not a question, but what I wanted to ask you was, we've been asking you a lot of questions.  Is there anything that we haven't asked you that you think that business owners really need to hear and you see some of the weaknesses that they're missing opportunities, it's something that you would tell them as we're coming closer to the end of the, interview.

Mike McDonald: [00:36:36] Sure., number one, there's always a lot of opportunity for roll ups among, widely dispersed industries. So, consolidation works very well in a number of industries and there's a great blog post that I read a long time ago, the guy wrote a long article about his name's Victor Niederhoffer, the title of the post or something like the best deal ever.

And it was basically all about how he bought some, small fragments of larger businesses, three of them in particular, combine them together. And he paid like a million dollars for these three fragments. And then he sold them for a hundred million dollars subsequently. And it was really all about combining these small fragments.

Opportunities from an M&A perspective you wouldn't necessarily think about it. That's number one. And that's been around for a long time. That's not a new concept, but it is something that's not easy to execute on. Number two, when the other thing, again, thinking about this past versus future opportunities.

The other thing that's gotten a lot of press lately is around data and data analytics with some of the new hot companies that are going public these days, like Snowflake or Palentir or Datadog. And we also read about big data. You can open up the Wall Street journal without reading about big data and data analytics.

A lot of business owners don't really understand this, but it is a really useful tool.  In one of my franchise, passive income businesses, it's a series of franchise hair salons. as you can tell, I know the listeners can't see me, but my hair cut is just, okay.

I'm not here actually cutting the hair or anything else. I just have a bunch of employees that do that sort of thing. But what we found early on, we first bought one of our new locations was that we had a theft problem. We had employees stealing from the business and the problem was you can ask all day long who's stealing.

And of course, nobody's raising their hand, but given my background and my familiarity with data analytics, we're able to run a pretty basic background of basic regression that clearly identified the people that were working when there were cash shortages, when there were thefts. We were specifically able to pinpoint this down to the one individual that was stealing out of 30 employees.

We have 30 different people working on mixed shifts. One person was stealing, say a hundred bucks a day. We were able to go through and identify that one person using data analytics. And it's a kind of a dumb Mickey mouse type example, but it illustrates that there really is a lot of opportunity with data analytics.

This is not an area that's easy or simple to use, and that's probably going to stay true for the foreseeable future, but it is something that as a business owner, you want to be paying attention to and starting to ask questions about what are the tools that are out there and how can I use them, whether it's optimizing my pricing.

Whether it's cost control or theft control, whether it's understanding valuation of what my competitors are doing. There's a lot of opportunity with data and people don't always know where to start or what to do with that, but that's probably a separate topic for a whole other day.

Jeffrey Feldberg: [00:39:47] Thank you for that example. And on the data example. Let's talk about data in a different context. And this is one of our wrap up questions that we ask every guest who comes on the podcast. And the question is this. Looking at what got you to where you are right now, if you could go back to the younger Mike and tell the younger Mike two or three things either do or not do because these things made a huge difference for you, what would that be?

Mike McDonald: [00:40:16] Oh, that's an interesting question. So, first off, I would say, working for other people is generally not a way to long-term financial success in general. You usually want to try to have some sort of an equity stake in your own future. Whether you're a partner in a business, whether you're an owner in a business, whether you're starting your own business, whether you are, even if you do work for somebody else, you have some sort of a profit-sharing arrangement.

So, certainly I think, being able to grow your wealth through capital appreciation in an enterprise over time is critically important. That's number one. Number two is, take chances. I have to tell you certainly like everybody else I've had successes and failures, but when you look back, I can't name any single failure where I say, oh boy, that was really a huge mistake and, that completely derailed future plans. Taking chances. Of course, you have to be smart about this, but taking chances on average over time, if you're smart about it pays off and pays a dividend. Taking risks, whether in your career or in your business make sense. No business, no person ever gets to be bigger more successful, et cetera, by standing still. So, that would be the second point that I would make.  Third and in general, I would say that you have to think a little bit differently than everybody else. If everybody else is doing one thing, and there's a tremendous amount of competition in that space, it often makes sense to differentiate yourself.

You don't have to do something completely crazy and wacky, but ask yourself is there an opportunity for me to play in this market or is there too much competition here already? And if there is a lot of competition, how do I differentiate myself? So, I would say those are the three factors I think about.

Jeffrey Feldberg: [00:42:12] Thank you. Really appreciate that. Terrific insights. Mike, if somebody would like to get a hold of you, what would be the best way to do this? 

 Mike McDonald: [00:42:20] My firm's website is morninginvestmentsCT.com as in Connecticut. You can contact me through the contact us section on the website, or you can send me an email. The other company that I operate is called aShoGi that's ASHOGI. So, my email there is MikeM[at]ashogi.com. And aShogi is really built around helping businesses grow, expand new product lines, things like that.

aShogi is a mashup for on top the shoulders of giants, Isaac Newton's last words. So, certainly we'd love to hear from any of the listeners out there, if they have individual questions or want to start a conversation, but, thank you all. 

Steve Wells: [00:43:02] Thanks Mike. It's been great. 

Jeffrey Feldberg: [00:43:03] Thank you.

Mike McDonald: [00:43:04] Appreciate it. Thanks guys.