Submit your song requests in the chat and don't forget to follow AED on social media. And stick around, because after this, Brian Heinrichs from Burris Equipment is doing karaoke! Christina from AED is here! Christina is the newest AED employee, responsible for bringing new distributors into the association's membership. Do you know of a distributor that should be a member of this association? Let us know in the chat! Mr. Vazquez from Miami, welcome to the Small Dealer Conference! Michael I am great, thank you for asking. I hope you guys are doing well, and crushing it in Miami! Dallas McMahon, how are you? Welcome to the conference. Kelly Monroe, Doug Jurgensen, welcome. If you have a song you'd like to hear, let us know in the chat. Michael Dexter will be lip-syncing Bohemian Rhapsody later. Michael Dexter will be lip-syncing Bohemian Rhapsody later. You Thank you all for joining us. We'll get started shortly. Barbara, thanks for sticking around. Thank you. I'm high on believing, that you're in love with me. All the good love, when we're all alone, keep it up girl, yeah you turn me on. I'm hooked on a feeling, I'm high on believing, that you're in love with me. I'm hooked on a feeling, and I'm high on believing, that you're in love with me. I said I'm hooked on a feeling, and I'm high on believing. All right, welcome back everyone. Thank you for joining us. It's Thursday, which means we are about ready to kick off the weekend. You know, here at we just joke that means 2 more working days until Monday. So, get ready for our next poll bring out your cell phones. Please. We're looking for a lot of participation on this 1 because I'm very curious to know how you are all going to complete this sentence when I'm not working. I love to what text in your answer to the number 2, 2, 3, 3, 3, or go to pole. E. V. dot com backslash event for for for. Again, complete the sentence. When I'm not working, I love to what I know we've got a big golf community here in the membership. I personally like to be on the lake somewhere personally with friends. Co workers are fine too. Of course, fish. We have some fishermen. I'll tell you what come out to the lake and the Ozarks. We'll take you fishing. We'll go fishing for some bass. All right, hunts. We got some hunters. Awesome. All right. Well, apparently, everybody just loves to work. So we are going to get right into it. I'm very eager to announce our next speaker. We have Sean with us today. And let me tell you a little bit about Sean. So Sean has over 30 years in business experience. The most valuable lessons that Sean Hutchinson has learned have been from business owners who have generously shared their stories of success and struggle. They have allowed him to offer insights and guidance based on firsthand experiences. As one of the founders of RFN Advisory Group, Sean's primary focus is strategy and growth. He helps owners and their leadership teams to imagine what being a company of the future looks like for them, and then helps them achieve it. Sean sees his work as transformational, not just transactional, and it all comes down to getting you ready for next. Sean, it's great to see you again. Just curious, what do you like to do in your time off? I actually like to travel, which is trying to cut down a little bit right now, but international travel is what I do. All right, well, hey, I'm gonna turn it over to you and we'll get started. Great, thank you, Phil. Just gonna share my screen here. And hopefully what you're seeing is the presentation. Just make sure that we are getting it up on slideshow. There we go. Okay. Good, so I changed the title just a little bit so you don't think you're in the wrong session. We were originally 18 value drivers, and that is very much at the core of this presentation. But I think really what we're getting at here is why are some businesses worth more than others, and the value drivers that really matter the most in determining that. Now, one thing that Phil didn't tell you is that I've been doing transition readiness and value acceleration work for a long time, and I'm a certified exit planning advisor through the Exit Planning Institute. But I'm also a third-generation heir to my family's 65-year-old manufacturing business back in Oklahoma City, where I grew up. So right now my dad is mid-70s, and let's see, mid, actually, 76. And we're going through a transition discussion and building value on our own business. And ironically, I think he's my toughest client, actually. So I kind of live family business and the idea of getting a business ready for transition, the idea of building value for a lot of different reasons. And I want to use that as a backdrop today to share what we have to share. Now, let me tell you just a little bit about our company. RFN Global is the parent company, and I'm a partner in that as well as our three subsidiaries. We have an online education academy for both owners and advisors. It's a nice educational community there, and I encourage you to go and register for it as kind of a call to action after this session, readyfornextacademy.com. We also have the advisory group, which Phil mentioned. That's our consulting group, and we focus on advising owners on building value in their business and transition readiness. Even if you're not thinking about a transition for another 5, 10, 20 years even, getting your business transition ready actually adds value to it. Now, RFN Cities, we do the value acceleration transition work at the community level, and we actually scale it up to do it hundreds of owners at a time in a city or a community, so they're moving through this program together, protecting community wealth and continuity as they go. So you can find us in US and Canada here in the United States. We're headquartered in Miami. We also have outposts in Chicago, in Phoenix, in Denver, where I'm located, in Bozeman, Montana, and then our Canadian office is located right in the center in the fifth coldest place on earth. No kidding, Manitoba in Winnipeg. It is actually colder than Siberia, so there you go. We actually asked you guys to complete a survey, and thanks very much to the folks who did. We got some interesting data out of it, and I'm gonna go through that first because I think it gives us some backdrop, some context for what we're gonna be talking about today. So who answered? On the number of employees, low one, high 130. Revenue, less than 1 million, up to 100 million. Two thirds of that cohort that answered that question were actually at 20 million or above in revenue. EBITDA, earnings before interest, tax, depreciation, amortization, our low end was 100,000, high end was 21 million. The EBITDA percentage based on that on the low end, 1.86%, on the high end, 37.5. I'm guessing that we didn't actually all answer the same question there. There may have been a misunderstanding about it, but we did have, even taking the top end outlier out of the picture, we had quite a range of EBITDA percentage, net earnings percentage before tax. Revenue per employee is a productivity metric I really like. And on the low end, if I took the smallest business out of the mix, because that's a little different, we had 388,000 per employee, all the way up to 923,000 per employee. That's employee to revenue metric, a nice productivity metric if you think about it. There could be material differences between those two businesses right away, but it is quite a range. And I think there are probably some best practices in there that are worth talking about. And then the EBITDA per employee, 10,500 on the low end, 323,000 on the high end. And you can probably guess that the 923,000 and the 323,000 rounded were the same company. So scale is actually mattering there, I would say. So our primary objective here, we got kind of a mix. We got create sustainable growth, but the big one was strengthen my operations and then renovate and repair. We just had one response there. So a bit of a bell curve. Do you have a history of consistent growth greater than your competitors? And that's a key part of the sentence. And then coupled with projected revenue growth above the market's rate. And we're gonna talk about why those comparisons are really important to think about. So we didn't have anybody whose business was on fire. We did have quite a few that were growing at a good clip at some that were holding steady. And we have one that says things aren't so good right now, but looks pretty positive overall in terms of the total pie chart. The market, does it support significant growth? Also, it's a design constraint in a sense. It's a growth constraint or growth tailwind. So no enormous markets, but some very large markets, pretty big most of the time. Smaller markets, significant percentage at 21 and a half. Does your business own the highest percentage of that available market relative to the competitors? And this was a classic bell curve. Yet most of you felt that you were right in the middle, somewhere near the top, somewhere definitely market leaders in terms of market share. And then you had a fall off down to, we're practically invisible. So quite a mix in the group here, a nice distribution that's worth thinking about. So future revenue, in terms of recurring revenue or stabilized revenue from contractually committed customers, some small percentage had a good assurance of future revenue, probably due to maintenance contracts or some other arrangements, certainly. Most had pretty decent confidence in the future revenue curve, which is good. We don't see that in all business sectors. And then most of you fell into the only a few contracts or other reasons why we're not so confident in future revenue. And then a couple who were absolutely not confident. And then gross margins, where are you relative to the industry norm? The majority felt like you were solid. Some were better than most. None were printing money. It's unfortunate. We hope we can get there one day. And then some making money, but less than most, nobody's struggling to make any money at all. So these are at least profitable businesses, maybe not comparable to other businesses in the market. And then what's going on with your customer base? We asked this question because we wanna know whether you're concentrated in customers and a few large customers, whether you have a nice customer diversity and what kind of risk you have in that portfolio. So most of you said, well, actually losing a few customers and still being fine or losing a few customers and not being so fine, we're tied at 42.86%. And then a couple of you said it would be really tough if you lost even one customer. And then how are you doing on financial controls and financial matters? Most of you felt like you'd be just fine even if you were audited, which is great. We like that. Pretty on top of the finances. So most of the group felt really good of where you are. Some not so great, we're okay. And a couple that could do a better job of it. Again, best practices kind of throughout all of this. I'm sure you've thought about sharing information with one another and then producing revenue in a systematic way, which really goes to the strength of sales and marketing teams and sales and marketing processes. So a big belt curve here too, but less confidence in this area actually than some of the others. So an opportunity for improvement. And this is a really important area when you're talking about value drivers. Now, finally, how do you do on tracking customer satisfaction and expectations? A little weaker here, I would say. Again, a spread, but it was definitely toward the middle. And it was kind of in the, I would put it in the category of guessing a little bit more than we would like to be. And maybe there isn't really a really structured way or disciplined way of going out and getting that information. It can be difficult to get, by the way. It's not a slam dunk just because you asked for it. So, and then do you have a leadership team? An individual in place that can recognize that business's vision and mission while helping the owner achieve their objectives. And sometimes it's the same person, but there's some risk in that. So really nice spread here. I would say that it tilted towards, we're pretty solid most of the time, but we could be better. There were several companies in here that just don't have a management team because either they're too small and they don't have employees, which is interesting. We didn't really see that in the revenue responses. One of the companies that said they didn't have any employees was actually an $11 million company. And that's a little bit difficult to understand because they did actually list that they had employees. So we were getting a little mismatch there, pretty common in surveys. So let's talk about some of the theories behind value acceleration, creating value in your business. So we call this the value, the five stages of value maturity. Starts at the top with the red box, identifying value drivers and value killers. Now that's what we're gonna spend time on today for the most part. The second piece, moving to the right, obviously is defending your value drivers, reducing the value killers. So in other words, let's figure out how to put a ring fence around or a moat around our value drivers and make sure that we mitigate as much risk out of the company as we can. Once we get that done, once we feel like we've defended well enough, then we can go ahead and enhance our value. But our position is it got a lot of risk in the company. It's really hard to enhance value because you're gonna spend a lot of resources managing risk and not enough, you may just run out of resources enhancing value. Once you've enhanced the value, you can manage it and you can manage it for as long as you need to manage it, as long as you have a value discipline behind it. And then ultimately, whenever this might be, the owner is gonna wanna harvest some of that value or all of that value out of the business. And some of that may have to do with your personal financial planning, your life after business goals, but there's also a question of if you're a family business, how are you gonna pass that value from one generation to the other? And there are lots of strategies for that. Now, owners typically want clarity before they do any of this work, which is great. I think we all like clarity in a process as complex as this, but at some point you have to make a decision about where are we gonna go with the ownership transition in the business. If it's an inside transfer, family generational transfers, you got a lot of options that you may not have in other cases, and they're worth considering. You don't always have to sell your business in order to transition it at a high value, but there are other considerations to take into account. There are really three ways to increase enterprise value in your company, and we all focus on number one a lot, and that's increase the profit of the business. And you hear talk about multiples of four or five or six or nine, whatever it might be in the industry, and that multiple is going to be calculation off of the net earnings or the EBITDA, right? So you might say, you might hear or say, hey, businesses are selling for four or five times EBITDA. We're gonna get into a little bit of the danger of valuing a business solely off of profit. There are problems with it. You can reduce the risk. Risk management is a huge value driver if you're effective and you're disciplined about it. And if I were to say of these three areas, where would I wanna focus most of my attention? It would be in the middle category. It would be in the risk category because it's probably driving more value even than increasing profit. And then being best in class, communicating to the marketplace, positioning your business as absolutely the best in our market, the best in our class. We have the right systems. We have the right leadership team. Whatever happens, we're poised to handle it. And we do planning well. So keep those three ways in mind as we go through this. All right, so we're gonna have some fun here and we're gonna run a couple of polls as we go through this. But this is a tale of two companies. What I've done is I've set up a couple of dummy companies and we're gonna compare them as we go. Now, I'd like you to step back and think of this through the eyes of an investor. This is really a good, I think, perspective for a lot of owners to take on their own business. Think about, would I buy my own business? Would I invest in my own business? What kind of sort of objective look can I take from will it generate investment returns that I can be happy with? Because in fact, if you are an owner of a business, you invest in your business every day. You could take money out of the business. You're choosing to put it back in and take that financial risk. So think of it as though it's an investment, just like any other investment asset that you have. So let's start with this. Company one on the left, company two on the right. We've got two fairly similar companies. They're one's a little bigger than the other. It's 40 million versus 30 million. They've got pretty healthy gross profit, 9 million on the left, 5.5 million on the right. And the net earnings of 4 million and 2 million. Now, I'm gonna launch a poll. I'm gonna ask you, oh, wait a minute, I gotta go up. Oh, it's over here. I'm gonna ask you, which company is worth more? So I'll launch the polling. We'll leave it up for 10 or 15 seconds here. Think about, in your opinion, which company is worth more. Still got some answers coming in here. I just want to give everybody time to. Good. It looks like we've got everybody. I'll show you where we are. Great majority of the group picked business number one. Based on net earnings and a multiple, you may be right. That's one way to value a business. Now, we're going to take another look at the businesses. I'm going to add a little bit more information to them, and I want you to think about which company would you buy. Why are we not advancing here? Hold on. Okay, so company number one, same information. All right. So company number one, we've added an annual growth rate compounded of 2%. It's got three customers that represent 60% of its revenue. It has a statewide footprint, and it doesn't have any recurring revenue at all. So no assurance of future revenue. Company two, same financial characteristics, but it's got a growth rate of 3%. It has a diverse customer portfolio. It has a regional footprint, and it does have recurring annual revenue in the form of maintenance contracts. So my question to you now is, which company would you buy? I'm going to launch that poll. Hold on here just a second. Here's the results. I think we have a unanimous vote here, which is really interesting to me because when we've gone through this before, we've gotten pretty mixed results because some folks default back to, well, wait a minute, if I buy the company at the right price and I got four million in EBITDA and I've got a multiple on it, that company is worth more, but I feel like that EBITDA is going to return my investment if I can get it priced right. But you guys, I think, made the right decision. It's exactly what I would do and the issues really are in that risk profile. We always say, if you value a company or if you make a decision about how to value a company based on just the financial numbers, a lot of people do it, then you're actually just looking at the car and not getting under the hood. I could put two companies up here that had exactly the same financial information on those first three bullet points, and if I added the last four, they would look incredibly different in terms of value and price, as you guys agreed. So great, we have focused on value drivers and value killers already. So let's go forward just a little bit here. Oh, I actually had some extra bullet points there. Strong reliance on an owner on the left, management succession in place. I'm imagining that will not change your answer. So let's look at some of the things that we talked about, and let's organize them into value drivers and value killers here. So here's the first company with the entire profile. The value drivers here could be size of the company, generally speaking, bigger companies have less risk in them, and they're more financeable. So they can finance growth at a lower cost of capital. Smaller companies generally struggle with that for whatever reason. They may not have enough assets to collateralize the financing. They may be more volatile. They may not have the team that they need to actually guide the company through growth in the future. There are all sorts of things that really are correlated to size that inject risk and therefore less value into the company. So 40 million, maybe size, but it's a pretty good size, and I think we can make an assumption that it's fairly stable. Gross margin looks to be healthy. I would say we're not running a thin margin at the gross level, and I think it's pretty consistent probably with what your industry runs in terms of a gross margin before you add overhead. But there could be a question mark around that, because if the gross margin actually is lower than the industry average, that might actually be a value killer. So we're always looking at how does it compare to other companies? How does it compare to the benchmarks in the industry as a reference point? It's important. EBITDA looks okay. Actually, on the higher end, if you consider the responses to our survey. However, again, could be a question mark because maybe it isn't favorably benchmarked against the industry itself. Then market share. So it's a statewide footprint. It's a bigger company than the other one, which was a regional footprint. So depending on where they are and the dynamics of the market, their market share might be very high. But it depends on what state they're in. If they're in California, I doubt that they're a major player. However, if they're in Iowa, might indeed be a major player. So again, that's geography and special characteristics. Now we're getting under the hood. Looked okay, but if we get under the hood and run the benchmarks, may not be. Value killers compared to the other company, clearly weaker growth. 2%, 3% might not sound like a lot, but if you compound it over a long period of time, annually, it can end up being a whole lot. The revenue model and the potential volatility there because it had no recurring revenue whatsoever. It's the volatility, not necessarily the revenue model, but the volatility that will get in the way of a higher value. Now you may be unable to create a recurring revenue model in your industry. However, if there's any chance of doing it, recurring revenue is a huge driver of value in any industry. So it might be worth looking at the revenue model and pursuing opportunities in the recurring revenue space. Customer concentration, major value killer. I know that if you've invested in a business, you're thinking about investing in a business, anybody who comes with three customers that represent 60% of their total revenue, that's a huge risk. And that's gonna go back to that survey question of what happens if you lose one customer? Well, if you lose a customer that's worth 20% of your revenue or greater, obviously it's gonna hurt a lot and it's gonna affect your operations and your position in the marketplace. If you had good market share, you might very well lose it. In this particular case, they might lose seven or eight or $9 million worth of revenue possibly more depending on the customer. It would be totally destabilizing to the company in a lot of different ways. Owner reliance, another big value killer. Anytime, right? The entrepreneur, the founder, let's assume that that owner is the founder. Look, they've built up the knowledge base over 20, 30, 40 years perhaps, but not sharing it, not systematizing it, not putting in documentation and processes and really key, holding key sales relationships in the owner's domain is really dangerous. And most people will not invest, if I'm a private equity investor and I see that kind of owner reliance and the team is around them is non-existent or very, very weak, I'm gonna walk away from the deal because it's just not investable, it's not transferable. Weak management team usually linked to owner reliance, usually, although the owner might be transitioning out of that reliance position and developing a management team. So there could be some positive news there. And if that's the case and they're investing real money in developing a management team and the systems and processes, they might, that might be in a transitional space between value driver and value killer. It can be both headwind and tailwind to some extent, it's in that kind of purgatory. So it's important to know where you are on that spectrum of value driver, value killer. And then the reason that I put sales team and process there is due to the owner reliance, they may not have a sales team, may not have a good sales team because that information about key clients is really vested in the owner's brain. So you guys recognize all of that really instinctively when you looked at company one versus company two. Let's look at company two then, same information on the left. Value drivers, maybe the size, right? It's big enough to believe that if it's growing and it has the infrastructure to grow at 30 million, it's probably a reasonably stable middle market company. Got to look under the hood there though. Gross margin, again, comparable to the industry, lower, higher, could be a value killer if it's lower. Stronger growth than the other company, a diverse customer portfolio. So they're going to be in the category of we could lose a customer, it's always painful, but it's not going to destabilize our business. And that's smart. It probably means that they have a really good sales strategy, sales process and sales team because they're not whale hunting. A lot of businesses, and this is kind of, counterintuitive for some folks, but if you send your sales team out with the mandate to kill whales, you're going to end up in a concentrated customer situation. They've done exactly what you asked them to do. And they're excited about it because they killed a whale, it's worth a lot of revenue. Now, why does it kill value? One, the customer concentration. Two, and this is really important, they may have discounted the deal in order to get the whale. So now they've impacted gross margin, which could be significantly. Now we're in a situation where we've done two things that hurt us. We've got margin management working against us. We've also got customer concentration. We may have had to agree to unusually, unusually strict payment terms, right, on their side. Maybe we've said to them, well, you can pay us a little slower than other people pay us if you have an account receivable with us. So we got the whale and we lowered the value of the company. That, for some people think, well, wait a minute, I did what you told me. The sales team did what the strategy required. From the owner's point of view, not managing that ended up creating a less valuable company. Recurring revenue, big driver, succession planning, in this particular case, is a huge driver of value because again, company's stable. And if there is a succession plan, if you've gone to that degree, that effort, then you've probably begun to transfer knowledge as well because setting up a good succession plan requires it. And then the footprint. We had one statewide, the bigger company, and then we have a regional footprint in this case. Concentrations can be customers, geographies, and industries. So you can kind of look at it, I wouldn't say necessarily a triad, but you kind of keep your eye on all of those because you can't really get into a situation, as you probably know, where geography and the kind of funding that's available within that geography or even government support can affect a business. So having a more diverse area, a bigger area to operate in can be helpful. Then value killers. This one has lower EBITDA than the other one. So why are we dealing with an efficient company on the overhead side? They might be running a little bit fat because the other company was actually generating a higher net margin. And then depending on the number of employees that they have, if they're running a little fat, the chances are good that their revenue per employee and possibly their EBITDA per employee is below where it could be, although relative to the industry, it might be fine. But these are areas to look into. I agree with you. I would buy company number two before I would buy company number one for all of the reasons that we talked about, even though my cash return on company one might in fact be higher over some period of time. But that's gonna be balanced out most likely by growth. And as the smaller company grows, it probably can scale on the operating side. Hi, Sean. Do you have a quick question or a quick second for a question? Yep, sure. All right. So Steve Aliot from Maine would like to know, does free cashflow factor into your value drivers? Yeah, sure it does. Absolutely. Cashflow and the liquidity that comes along with it is a really important issue. So there are a lot of different ways to look at the value of a business, right? And you need to make a distinction also between the value of a business and price. Value and price are two different things. If you're looking at it through the eyes of an investor, you probably care more about price and how you structure the deal, how you use equity, how you use debt over what period of time. That in and of itself is going to affect free cashflow. You may be looking at a business with a certain cashflow profile. If you buy it, you're going to have to put debt on it, most likely you should, because it's gonna juice your returns. But that means you're paying off a loan that wasn't in the business when you bought it. So those things have to be balanced. Discounted cashflow, I think, as a methodology for valuing a business, and more importantly, pricing a business, is right at the heart of it because you can take cashflow, you can assign risk, you can come up with a internal rate of return and ROI profile as an owner, and kind of keep your eye on how are we actually gonna take money out of the business. I think the major mistake maybe that people make in terms of even investing in their own business is that they defer cashflow distributions for so long that they're really depending on selling the business, transferring the business to someone in the future to get their return back. And I've had, honestly, I've had business owners tell me that they've taken no substantial returns over 10, 12, 15 year periods. And that's a problem, that you're not getting enough out of the business if that's the case. If you have heavy reinvestment requirements, look to debt. It's much, much cheaper, it's much more flexible in some ways than reinvesting your own cashflow back into the business. So good question, free cashflow, big driver of value. That's why in some cases we prefer light asset businesses over heavy asset businesses because the cashflow has to be plowed in some cases back into heavy asset businesses. But I think in your case, for the dealers, I'm presuming that you have asset-backed financing that you can lean on. I hope you do, it should be helpful. Is that our only question, Phil, are we good? That's our only question so far, thanks. So we're gonna look at some market drivers of value and also some operating drivers of value. So market drivers and operational drivers, and we just kind of divided them into those two categories. You can think of market drivers as kind of the outside world, you're facing the market and the market is facing you. So you've got kind of that outgoing incoming interaction with the marketplace, interaction with your customers is what it comes down to in most cases. And the operational drivers are really the things on the inside of your business. So let's start with market. We've talked about growth. Growth is always in my mind, a benchmarked attribute of value driving, right? It's benchmarked, growth is good, but if you're growing less than the industry average, you're not really in the place that you wanna be in. So think about those benchmarks. AED, as a matter of fact, I think one of the great things about AED is you get a lot of benchmarks out of AED and that's fantastic. Not every association provides those. And if the data isn't there, it takes a lot of legwork to get it, but you get as close as you can. So growth in and of itself, unbenchmarked, unmoored from the industry average is not gonna tell you a whole lot. Large potential market. Let's talk about the sort of tensions between dominant market share and a large potential market. So if you were the dominant player in your market, there may not be a whole lot more that you can grow into without innovating, right? Without introducing something new into the market that would be maybe a new line of business, a new service, a new sort of category of equipment in your cases. And so you gotta kind of create space if you're the dominant player. So your market oddly gets smaller as you become more dominant. If you wanna expand into other markets, you gotta do it with discipline because growth costs a lot of money in most cases. You gotta buy infrastructure or create it, gotta buy customers or go after them. Making a market is an expensive proposition. So you have to have a balance sheet to do that. So you've kind of got a little tension between those two, but a dominant market player also has pricing power, right? You have real competitive advantages and barriers to entry that smaller non-dominant players just don't possess. So there are a lot of reasons to be dominant, as long as you have a long-term growth plan that takes that into account. If you plateau out at some point, I actually think you're vulnerable because at that point, even if you have barriers to entry, you're going, there are other people that are gonna have strategies that you may not want to compete on, right? So they may come in lower pricing. They may come in with a higher level of service. You've seen a lot of dominant market players get a little bit lazy about defending that position. So you always have to have your eye on it. Market drivers continued, recurring revenue. God, if you can get at that, it's so valuable, and I'm sure you'd like to. Again, some industries, it's just not a revenue model that's available, but if the sales team or if your strategy team can really hammer away at that and be innovative and creative about it, I can tell you that it's gonna drive almost more value than anything else in your business. It really is the top value driver in any industry. Again, market dominance creates barriers to entry. I think another barrier to entry for you guys is you carry a lot of big assets in most cases, and that in and of itself is a barrier to entry because you have to have a big balance sheet, potentially, to actually get into the industry. You can also create additional barriers to entry if you are dominant. You can pick off less dominant players, make those acquisitions, and continue. We kind of call it the jaws of life. You insert yourself into the market at some point, you guys started, maybe you were small, and then you just kind of begin to pry it open and continue to grow and dominate in that space. My position is there's really no way, there's really no reason to get into a new market unless you're gonna dominate it. There's no reason to do it unless you think you can be number one. So keep that in mind. It also produces a higher return on investment if done with the right kind of financing. Customer diversification, absolutely key. You cannot, I'm just gonna say this now, you cannot end up in a customer-concentrated situation. It will decrease value, and it may make your business non-transferable. Even if you have asset, even if you have cash flow that people could potentially buy into, it can get to the point where nobody will buy the business even though you can make an argument that it has value. It's just too much risk. Product differentiation. This may or may not be an issue for equipment dealers. I don't know. I know that some of you may be single line, some of you may be multi-line. I think probably the opportunity here probably in differentiation is in customer service, customer maintenance, you know, whether you, you know, do you make it easier for your customers? Are you in the field? I think there are a lot of ways that you can put a twist on that product depending on what you're selling as product. And unless you're making it, unless you're an OEM, you know, you may not have a whole lot of control over that. Your brand, your brand equity. Do people know about you? Do you end up in the press? Do you position your company as absolutely the top competitor in the space? People need to be talking about you. You need to have a social media presence. You need to be promoting the brand over and over and over again in order to build that equity. And that is an intangible asset for an outside investor. They do value it, absolutely. And then margin advantage. We've talked about that. I think this is a big one and we don't focus as much in our work on net earnings. We think they're important, but they can kind of be manipulated as you know, right? So you can, maybe you pay some people a little bit more to reduce taxes, they distribute their strategies for getting to a lower tax threshold. However, the real number is in your gross margin. That's what tells us whether the company's operating really efficiently at the highest level. And we've seen, you can see a big effect moving, you know, gross margin from 10 to nine. Losing one point of gross margin, depending on the size of the business can really have an impact. Let's talk about operational drivers. So those metrics that we were talking about, so, you know, revenue per employee or gross profit per employee, whatever those productivity metrics might be and there are tons of them. You can go, I think it's called kpi.com for key performance indicators. If you have a scoreboard that you're operating off of, and we always think it's a good idea to identify the top key performance indicators in your business, not, you know, a list of 100, but get it down to maybe six, eight, 10, the things that matter the most and track those regularly and over time as a piece of your growth strategy, as a piece of your planning. Productivity KPIs are phenomenal predictors of the future success of the business. And in fact, whether it's building value. Productivity also tells you how much scalability do you have in the business. So as you grow, are your margins actually getting higher than your growth rate, right? So you're seeing real effects on the scalability of the business. Those come through systems, processes, knowledge management, goes back to that owner reliance. Are we pulling out of people's heads? Are we pulling out of our experiences, knowledge that can help us as an organization get smarter and smarter and smarter and continue our competitive advantage? Financial systems. There was a little bit of a concern there in the survey responses. You guys came back and you said, yeah, a lot of you were comfortable at the audit level, which is a very high bar. I would encourage you, if you're thinking about transferring your business at any point in the future, start getting audits. That's a big deal for outside buyers. So it's worth the investment, quite frankly, to have a third party look at your financials and determine where that financial risk might be. Those best practices from an independent view are important. So there's also the aspect of just financial controls. Do you have best practices in place for handling incoming and outgoing money? Do you have good ways to track the cash and convert it into three financial statements? Not just one, not just the income statement, but balance sheet, income statement, and cash flow. And is it clear that those are absolutely accurate over any period of time? Capital efficiency. We checked, we mentioned this earlier, but how are you using, how are you allocating your capital? And are you allocating it to the highest margin, highest ROI lines of business, activities, whatever it might be, customers? Are you using the kind of capital that you have efficiently, but also are you going out and getting less expensive capital to use in valuable investment situations? So we always look on the return, the return on invested capital, ROIC, is an important metric. And then I know that AD has metrics on return on assets, which is an important metric for some businesses less so, but I think in your case, because you are asset heavy, it's an important metric. So there are all kinds of capital efficiency metrics out there. And I would, again, direct you to kpi.com to kind of get a sense of whether you need to put something like that on the scoreboard. If you are an owner, you care about this deeply because profit doesn't tell the whole story for you. What tells the story for you is, are you getting money back in your pocket quickly? Is there a current yield on your investments? Or are you having to wait a long time to realize your capital investment? By the way, you invest capital in your business every day. It's not like, these are not situations where you're talking about recapitalizing the business. We're talking about devoting capital every day to funding activities when some activities, if they are not meeting return threshold, you ought to stop doing that and either reinvest in another place or put that money in your pocket. Customer satisfaction, little concern on the survey as well. Really important, I think it goes without saying, to know how your customers are doing. Are they really using the products in the way that you think they are? Are they getting the level of customer service that they should be? And furthermore, how do you stack up against your competition? Because frankly, we know, and I'm sure you do too, it's not always the quality of the product, it's usually the quality of the service. If you are commodified against other equipment dealers in your market, because you're selling the same kind of equipment, then it's gonna be service that you trade on. And I think potentially that points at a recurring revenue model. Not an expert in your industry, but anytime we see service, we think recurring, if you can get it. Sales team, do you have one? Do you have one that you can really trust is producing the same kind of results over and over and over again? Do you have those sales systems in place? I'll tell you, we have run into a lot of situations over the years where there's a disconnect between strategy, sales, and operations. So the sales team will go out and do exactly what they're asked to do, sell. The operations team, when the sales team comes in with a big contract or whatever it might be, says, whoa, I don't know how we're gonna be able to produce that given what we have on our plate right now. So having that connection is really important. And then tying it all to strategy is probably even more critical. And then the leadership team, bench and strength, right? So their talent, their experience, but also how deep does the bench go? If you lost your CFO, for instance, if you have one, what kind of impact would that have in your organization? And do you have a succession plan for all key positions? Not just for the owner, not just for the CEO, all key positions where it would have a negative impact. Risk management, we talked about that. Having a good process for risk management, but also managing across five categories of risk. So let me tell you what those are. Strategic risk, financial risk, operational risk, legal or compliance risk, and reputational risk. Often that fifth one gets missed, but I think owners spend a lot of time managing it because you need to know that people are viewing your company in the way that you intend. You need to know that your reputation as an individual and your legacy reputation are protected. So just wanted to point out, there's a whole ecosystem of risks there and they're not just financial or operational, they go beyond that. Innovation, what new ideas are coming into your company at any given time? How do you produce those new ideas? I just was talking to another family business owner the other day, they're in their sixth generation transition on this business. They founded it in 1900, so they're 120 years in. And their rule with every generational transition was the next generation, the new generation has to come up with one new idea. I thought that was really fascinating. They built it in to their transition process. And then where's your information technology? This is so important today, much more important than it was probably five years ago or 10 years ago. And the pace of technology is speeding up so much, keeping up with it and being best in class on information technology can be a big, a high hurdle and it can be expensive, but it adds a tremendous amount of value to a company. And again, if I'm an investor and I'm coming in and I'm looking at your company, if I see dusty information technology, out-of-date software, out-of-date equipment, no disaster recovery, cybersecurity is messy, I'm backing off in a hurry because those are things that you should be able to do, you should be investing in. And I don't think there's any question today that it either kills value or drives it depending on your situation. And then being an employer of choice, what does that mean? It means that everybody in your community that's in your space wants to work for you because for whatever reason, you're well-managed, got great compensation packages, your benefits, benefits are attractive more so than your competitors, all those things, your culture is probably gonna drive as much of that as anything. And then how do you get new people? Usually if the people who are working for you already are doing your recruiting, that's how you're gonna become the employer of choice. Related talent management and development, in other words, training, how can people grow in their jobs once they get the job? Everybody wants to climb that ladder, they also wanna get smarter, they want new experiences. And we know from surveys over the years for human resources, the thing that matters most to employees is not compensation, it's training, it's getting new knowledge. And then succession, we talked a little bit about that, all key positions, no risk in succession planning, please, it's gonna be a problem for you. So let's go to another poll and we wanna know what are your top three drivers here, value drivers in your opinion. We've got 10 on the list, so pick three and this one will probably take us just a little bit longer. We'll allow maybe 30 or 40 seconds for this. We're getting there. A lot of people still have to vote, so keep going. Okay, I'm going to shut it down in about 10 seconds, 15 seconds here, just so you know, so keep going. We've got about half the group has voted so far. Okay. Getting there. Okay, I'm going to go ahead and end the polling, we'll see what we got here. Sharing the results. Okay, looks like our winners are recurring revenue and customer diversification. We had, by the way, we had an 18 out of 33 vote. So we got a decent spread here, lots of different value drivers, that's interesting. I would just point to a couple of things here. And the one, the one thing I want to point out is this one margin advantage. So only three of 17 pointed to that as one of their top value drivers. So that's usually an indication of we've got a ways to go on pricing potentially, which may have to do with competition in the market. Or it could be as I mentioned earlier, a lot of discounting in order to get a lot of what might be called contra revenue, right? So we're discounting or we're doing rebates or whatever that might be. Now sometimes it's just conventional in the market to do that. But if you can build margin, if you can build margin advantage over your competitors within your business, and growth should contribute to that, if you're growing and you're seeing your margin go down, as a result of the growth, that spread, if it's getting wider, there's a problem, need to watch that. I'm glad to see that half of you said recurring revenue is a big advantage for you. I'm glad to see pretty good growth. And I'm glad to see that you've got great, that six out of the 17 feel like you've got a good management team. But you can see here, there's some work to do, I think, and some opportunity on all the value drivers across the board. So I see best practices opportunities within AED, which is great. Look, there's always opportunity in value building. So I'm going to share with you a few value drivers, because we're talking about, we've been talking mostly about things that can build value. We've touched on a few of the major value killers. We're going to do a poll soon here. Oops, seems like I'm missing a slide. What happened there? Maybe I just went past it. We are missing a slide. Sorry about that. So top value killers, let me just kind of list them for you. And we've referenced this, one, customer concentration, two, owner reliance, three, sales team, lack of sales team strength, right? And generally speaking, that is going to be tied to, I kind of put them in the same category, a lack of succession planning, and a lack of training, a lack of hiring, all those kinds of things are kind of indicative. Sales team weakness can be indicative of a lot of other value killers that are present in the business at any given time. So if you're going to focus your energies on reducing risk and removing the value killers, get rid of the customer concentration, work on owner reliance as fast as you can, get those systems, knowledge management, get those processes in place, train people up, work on your succession planning, and work on your sales team. Those are the things, if they are present in any kind of investor evaluation, are going to cause the most concern. So let's do another poll. Let's talk about your top three value killers. So let me launch that. I can find it here. There we go. Launch the polling now. Let's see what the top three value killers are for you guys. We'll leave it open for about a minute. John, while questions or while those answers are trickling in, we do have another question from one of our attendees. Yeah, sure. I'd like to answer that. So David Kennedy would like to know, as I'm pretty sure he meant as it relates to, would this be a possible business value driver? He wants to know, how about how well you are purchasing your equipment? Yeah. So that goes back to a couple of different things, right? So it's going to be capital efficiency. So what kind of capital are you using to actually purchase that equipment? How much capital are you tying up on your balance sheet at any given time? It's kind of like any time we see excess inventory or really expensive idle inventory in a business, that's a sign that capital is not being deployed in a way that's as efficient maybe as it should be. And you're going to look at that return on assets as well. Pricing well is always, procurement is always an advantage, especially if you're doing it better than your competitors. So I definitely think it's a value driver. If you're unable to get your inventory at a good price, I think you probably just need to look at the procurement process in one way or another. So I'm glad you brought that up, but I always point it back to how are you using your capital? How are you using your working capital? I'm also a big fan of debt, believe it or not. I think that is a very powerful instrument. And I always say, especially in growing businesses, say to the owners and the management team, your commercial banker as you grow is probably your best friend, but you have to tell them the story of your growth. They need to know your strategy, your planning, so that they can get behind you. If you talk to your banker infrequently and your request is essentially, hey, I need a higher line of credit, you're under leveraging that important relationship. And I would go back and reconsider what you might be able to do with it. Thanks for taking that final question. Yeah. You bet. Okay. Let's see where I'm going to end the polling here, sharing the results. So our biggest value killer, lack of succession planning and key positions. It's like everything else is reasonably well managed. We've got a pretty big concentration here, too much reliance on the owner. So those two things often tie together, right? Reliance on the owner and lack of succession planning. We had some sales team challenges here, and let's see. Then we've got operating margin, gross margin that's lower. Those were kind of the top and out of date information technology. None of these things is something that can't be overcome. They're all addressable. They're all fixable. So if you feel like you've got those problems, it's really time to go to work intentionally on them. Now, this is about the management team kind of lifting their head a little bit, the owner lifting your head a little bit and thinking about a strategic horizon out there. A lot of times transition, potential transition is one of the things that drives that lift your head and work on the business rather than in the business every day. So let's go back to the presentation here. Let's just go back to the five stages of value maturity. So your next step beyond identify, if you've done some identification today, is to start defending those value drivers, see if you can ring fence them off. If you feel like that you've got strong succession planning, make sure it stays strong, right? If you've got good margin, make sure it stays good because you're going to need those tailwinds as you move in to the next stage of value maturity. Now, just real quickly, most business owners on their journey to transition and value acceleration this tied together are in three categories, explorers, you're exploring today, you're getting insights, you're getting information. So that's good. You're investing in that. Pivoters are the folks who have been kind of sitting on their hands for a while. And they say, all right, it's time. I got to do this. I'm going to pivot to action around value acceleration and transition planning. And triggerers are often, and that can take three, four, five years, maybe even longer, depending on where you start and where you want to end up. And then triggering owners are the shorter time period owners who maybe because of a life situation, like an adverse health diagnosis or a family situation say, I have to transition and I have a limited period of time. And we provide in our practice, this is what we call decision support, which is pretty simple. We're helping you make the best decision that you can under the circumstances. So here's our mantra. Transition ready businesses are more valuable. It's that simple. Getting transition ready and all of the aspects that we've talked about today with drivers and killers focusing intentionally on that process, really working on the stuff that matters will make your business more valuable. It's that simple. So don't shy away from transition thinking and transition readiness because you think it's way down the line. Start now. And that way, if a good opportunity comes up or something pushes you in that direction, you're ready. Your posture is best in market. You're reduced the risk. You focused on profit. You put this whole picture together and you have a great deal of confidence that if the opportunity came, you would be able to handle a transition. Now we've got a couple of to do's for you and I would really encourage you to do this. The first one is go to this website, owner.readyfornextacademy.com slash pages slash AED. We've set up a special page for you where you can access what we call the owner transition readiness scorecard. It's 10 questions. You rank yourself one to 10, perfect score 100. And you'll get a report out of that, a response from us saying, hey, if you scored yourself in this range, this is what it means. Here's some of the background on that and some things that you could work on. And then as I mentioned earlier, go to owner.readyfornextacademy.com. That'll give you access to some education that may be helpful to you in the future. So any questions beyond what we've got so far? I think we're just about on time. We ran a minute over. It doesn't appear there are any more questions, Sean. Well, great. I just wanted to thank you very much, AED, the team at AED for having us today. I hope you guys have benefited from the presentation. It's kind of weird, I have to say, not to be able to see the crowd. That's always strange to not be able to see the reaction. But I've been looking at the camera and I hope it's been effective for you. Here's some contact information. Feel free to reach out at any time, connect with me on LinkedIn. I always like to post content and help you out. So even if you don't need advisory services, we're happy to be there for you just as a sounding board. Thank you, Phil. Thank you, Sean. And those were some excellent considerations we just heard. And we're really looking forward to you all joining us at the AED Power Break. It's going to start as soon as I open up the Zoom link. So head on over there. The link is always in the chat. It's a 45-minute interactive session if you weren't there yesterday. We're featuring discussion topics and special guests where we can really discuss this morning's sessions and we're going to ask you to participate because I'm really curious to see how y'all are doing out there. So we're hoping to also discuss today veteran hiring opportunities in the AED Foundation's Technician of the Year Award Program, among other business conditions in your markets. We'll see you over there.

video transcript

host

distributors

association membership

value drivers

business experience

market dominance

risk management

transition readiness

business value

AED Power Break