Welcome to the ideal investor show. This is the podcast where we help you challenge your mindset and discover where you are tired of stories about other people's success, we can help you change your life, determine your time freedom point, and join us on the journey to financial success. Let's go. Hello, and welcome to another episode of the ideal investor show where we bring your great guests and have great conversations about how can you generate cash flow? Or how can you take something that you have worked hard or created equity in or created value in and turn it into money and maybe use it then in retirement or some kind of form like that. And for that we have a special guest because, you know, there are many, many people and in our audience in in our community that have regular w two jobs, but then there's also a group of people who have businesses and Chris Young is with us from class six, and he will tell us a little bit what does that mean, if you say okay, I'm kind of done with this company, either. I want to do a different one. What I don't want to do company anymore. How does it go? So welcome to the show, Chris.
Well, thanks so much for having me actually appreciate it.
Yeah, absolutely. So before we really dive into how this journey looks like, what the stations are that you show on your website, and I'm mainly interested in, you know, always assuming somebody builds a business, and it's been going pretty well. And now they come to the point where they say, Okay, I want to hand it over to someone else. But before we do that, tell us a little bit how did Chris younger get into like a founder of classics and selling businesses and stuff like that?
Well, fairly circuitous. I will say, I and I always joked I don't hold this against me. But I started out as an attorney, practice out there's
a need, right? We need attorneys. Not everything. But we need him, you know.
And why practice for a couple years in Silicon Valley at a firm called Wilson Sonsini, which did a lot of work with private companies, whether that was private financing, or IPOs, or m&a. And I wasn't very good at that. So I was actually going to start a search fund to go out and acquire a business with a law school classmate of mine. And then we got approached by a group that had actually had a bunch of capital and hired us as young as we were to help them do their investing and put deals together. And so that's when we started, I helped found through that communications company that was a roll up. And I was the deal guy to start with. So I did all the transactions for them, we acquired 27 companies over the course of a couple of years, and built that business, we got it to a billion 2,000,000,003 and revenues. And then the gentleman who was the CEO asked me to be the CEO, and then ultimately, the president of that business. So all the deals that I thought were great deals, when I closed them, I now had to integrate and fix when they were busted, and everything else so that you end up learning quite a bit about what makes for a good deal or a bad deal. And it was a great experience, both the guy that I worked for Jim Walker, still a great friend and mentor to me. I learned a lot about acquisitions. I learned a lot about integration, I learned a lot about, again, what makes for a good deal or a bad deal. And then we sold that company to Avaya, which is a big communications company in the US.
Orange pizza thingies, right? Yeah, yeah.
And then we sold the business and I actually tried to retire, as I think I was too young to retire. At least that's that's what my wife said. Yeah, I think it was, it was the day that I was reorganizing your spice to her when she said you need I won't use the exact language that she used. She said, You need to go find a hobby. And so David Tolson and my business partner, and I started our investment bank class six partners, it was mostly going to be a hobby, we were going to do a deal or two a year. And we loved working with entrepreneurs. And then we got busier and busier. And today, we've got about 50 folks that work with us. And we've got three pieces to our business, we've got the investment bank, which manages all the transactions. We have a group we call Pathfinder, which works with companies that might be a year to five years away from an exit, just helping them optimize what they're going to get. Just, you know, we've seen the end of the movie, you know, a couple 100 times so we're just trying to help business owners, you know, optimize what that looks like. And then we have a registered investment advisor that manages about a billion dollars for 90 families that were clients of the investment bank or our clients at the investment bank. So it's been a as I said, a little circuitous a little career add, but it's been a lot of fun. Yeah,
absolutely. Sounds like it and you know, for all the things you just described, but people that only see us are here Listen to us on Apple or Spotify, I can say Chris looks good for everything you've been through. So congrats on that. Now, you mentioned a year or two away from that point of exit. And I think that might be actually a good starting point for us. Because you know, we hear so much about entrepreneurship and applying yourself and I'm in my business where I help people basically build a passive income portfolio. We also frame it from a protection and legal perspective, to put this into an LLC or a series LLC structure, not so much because there's any intention to ever sell it or something like that, but to have the legal protection, but this mindset of okay, even though I might be working for a company, I have my business in our case, mainly to hold my investments in it and have my operations for rental income and stuff like that. But for more typical business, and I'm always secretly hopeful that we have business owners in our audience. What do you mean, when you say they are a year or two away from that exit point? What are some of the examples that people either realize, or you help them realize that that's coming?
That's a great question. Because I think for a lot of entrepreneurs, sometimes you don't recognize that you're ready to sell until you're ready to sell, right. And what we've learned just haven't done this a bunch of times is, the more that you can develop your plan ahead of time and really be intentional around that exit, the better you're going to do, the more money you're going to generate, the easier the process is going to be. The less headache it's going to be. Yet. There's a lot of folks, right that just it maybe it's a health issue. Or maybe there's a some realization that they come to that says he, this is the time to go meet in our investment bank, probably more than half of that business are owners just like that, okay, they're ready to exit, or they've been approached by a buyer and for some reason have concluded this is the right time. I think it's tricky, right? Because so much of our identities get wrapped up in our business. So much of our self worth gets wrapped up into the business that often it's a hard decision for entrepreneurs to come to grips with, and then ultimately execute. I think for a lot of business owners, I always explain to them, Hey, if your goal is to retire in five years, and you're a business owner, you probably want to sell your business in three years, so that you can transition with that business and ensure that the business is well cared for that transition goes well, you know, you maximize your payout, et cetera. I think it's it's really an individual discussion and decision between the business owner and their family and their significant other to decide, what is the right time for me? Right?
Yeah, that makes a lot of sense. Now, one term that you kept using over and over and over again, and that has become about 567 years ago are quite important to me, is the word business. And it might sound like what what are you talking about actual businesses business, and Chris is an expert in people selling their business. But what I found is when asking that question, what really is a business? And am I actually owning or running a business. And what I came to realize for myself, is that what I have is much more a practice than a business. And just for the audience to describe that for business. In my definition, I would love praise, if you can critique or feedback if I see this, at least reasonably correctly. For me, a business is something where you either provide a product or a service, and you for one have one intention to scale it, but even the intention to scale it, it also means to systematize right to ultimately get two departments to turn over responsibilities for different parts of the business and ultimately, also their financial responsibility. And be, I would say more like in the role of like a chairperson and founder or whatever kind of terms. And when I contrast that, and why am I saying that I'm basically running a practice is when the attempt to systematize is kind of like curtailed by the fact that those who want the service in our case, they associate the service directly with the person. And to make this a little more practical. I mean, when I initially thought we wanted to grow our company to a larger scale, it meant obviously, there's only 768 hours a week that you have and everybody else listening to us has. So the only way to really make that to a larger scale would be to have more people. And what ended up happening is I compare this to like the medical field, right where somebody says, Okay, I go to this search and or to this particular doctor to this particular dentist, and that's where the trusting relationship is. And when that dentist says, Well, I can't be there for whatever reason here to my colleague, he's better than me, that doesn't matter, that he's supposedly better because they rather say, Okay, I suffered the pain for a few extra days, if it's a dentist, then going to somebody I don't know, right. And so that, for me is kind of the distinction if you fail. And for me, I don't know if it's really the failure in as negative sense as it might sound, but you fail to really be able to systematize it because everybody says, but that relationship is not just skill based. It's also personality and otherwise, based in therefore, we want you and not others, and it's a practice and not a business. Would you agree with that? 100%
agree with that, where a business is dependent on you as an individual, whether that's for sales, or for delivery, or for product development, whatever it is, in particular, as you identified practices, like legal profession, or accounting, or, you know, being a doctor, where all of the service is being delivered by a person. Those are not businesses, those are practices, and they're not saleable. In the traditional sense.
Yeah, exactly. And I always feel like especially when we have an expert like you on the show, it's important to make that distinction. Now, I mean, there are obviously ways I have thought about, for example, should we put a lot of what we're actually doing in our mentoring and investing advising into like online courses, right, and then hopefully convince people as soon as was to take the online courses and pull myself out more and more and more. But the real thing that makes a difference compared to other competitors in the marketplace is the personal touch what I call the personal hand holding. And, you know, some people really wanted and needed and appreciated and I love doing it. So I think I've just contend with calling it a practice and be okay with it. But what it also means is, let's look at those that you probably more often work with who have actually successfully developed the business and they get to this exit point, I'm kind of curious how often or how likely it is that the owner of a business or the group of owners is getting close to the valuation, when they actually said that they had expected versus what you ultimately can find for them that is reasonable in the marketplace.
Yeah, in the absence of data or information, most business owners are likely to think that their business is worth more than what they might be able to get in the market. And you could certainly attribute that to pride in their creation and all the investment that they've made in their company. But I actually think it's because they have a fundamentally different perspective on two facets of their business than an outside investor would. One is the level of risk in their business. Because they've been managing the risks in that business for years, they're very comfortable and feel very competent, managing and mitigating those risks. Someone on the outside looking in on that business, if they haven't had that experience, they're not going to feel nearly as comfortable. And as a result, they're going to discount the value of that business. Likewise, an entrepreneur typically is going to feel very confident in the growth plan of their business, meaning they have a good intuition and a good sense for how that business is going to grow and generate more cash, whereas an outsider is going to be much more skeptical. And so when you think about what drives the value of a business, kind of the perceived level of risk, and then how credible is the growth plan of that business? If both of those factors, you know, for a business owner are more persuasive, and certainly easier to understand, they're definitely going to see their businesses more valuable, you know, than an outsider, in addition, for most business owners, their business is going to be the very best investment they'll ever have made in their lives. And as a result, you know, for them, it's going to take a lot of money to persuade them to do something different, because they're never going to get that type of return on investment, as they've gotten in their own company. That's why I think most business owners view their business as more valuable than the market. Yeah,
absolutely. I would agree with that. I mean, part of what I've taught, the few business owners that we've are working with, is that I always find it striking and I had to actually learn this myself to attach a value for my time, which is a huge, huge game changer, right? Like when I asked somebody, oftentimes in the early strategic calls before deciding if they actually want our advice for building this passive income portfolio, I asked them if they're business owners, if they were to have to charge for an hour of their time, what would it be worth, and it's very rare that somebody really has ever significantly spent time on it. And when I say when even if you don't have a fixed number of hours down to the penny, but what do you think right and most people answer somewhere in there close to 100 plus or minus a little bit dollars in our range, and I always say so if you just in your mind for a moment. Go back and think how much time you spend to the point that your ad right now then it's suddenly holy. You know, oh man that you know, so because when it's perceived as basically free time, or time spent for no cost, that makes obviously a huge difference. Now, I also know at least from those business owners that I know that and have been in touch with for many, many years, I haven't found anybody who says, I'm aware this is the formula. So if I ever wanted to know what the value of my business is here, it's just the numbers to plug in. I'm not sure that there really is a formula, but are there some kind of rules that are maybe based on profit or revenue or anything like that? Where somebody could say, Okay, anything beyond that is just crazy numbers or something?
Yeah, there's really, I mean, when we do evaluation of a business, there's really two or three ways that we look at it. One is, we're going to look at other transactions in their industry, and get a sense for what that range of valuation was, and typically as a multiple of earnings, and sometimes it's a multiple of revenues. But that's going to give us at least a range for how companies are getting valued in a particular industry. Now, if the range is, you know, six to 10 times EBIT, da, well, what's the difference, then between a business selling at six times EBIT, da and the business selling at 10 times EBIT? Da, which is a big difference, right. And that really comes down to back to those two factors that I was talking about. All right, well, how risky is the business? And how credible is the growth plan? And how aggressive is it? And so that's one way to do it. Second way is to look at public companies and do appropriate discounts to their valuations. Obviously, they're bigger and more scaled, and probably less risky than a smaller business. And then, the third way, which is what a lot of investors do is they're going to do some type of discounted cash flow analysis, where they look at what is the expected cash that this business is going to generate over the time that I'm going to own it as a new owner? What do I think I can sell it for? In there? What's the discount rate? Right? How risky? Or how predictable is that cash flow? And through that you can develop a sense for where that business could get valued. And so yes, there are multiples out there for particular industries, but absent really spending time on the individual business, those multiples are going to be pretty dangerous, and likely a pretty wide range. And obviously, most business owners are going to think that their business is going to sell for the top end of that range. Right?
Yeah, absolutely. You know, I mean, one of the things that I've oftentimes been thinking about when people ask me, okay, what makes your business different special? What's the USP or anything like that, compared to somebody else who gives investing in buyers advice in real estate? And the most credible and true answer that I can really point to is, the biggest difference is the personal relationships that I have grown, as the founder of the business over the last 15 years that I can then for each and every person that becomes a client of ours make available to them, and thereby provide, on the one hand, a huge time savings in building trust, but also something and I am curious if there's actually for somebody as experienced as you if there's actually even a way to give a value to that. And that is, for me, this has a little bit to do with psychology, if we look at individual clients, and myself and I were to buy an investment property with one provider that I have a relationship with. And then I go to the next the next the next and I were to teach clients how to do that. And then they find their own providers or real estate agents or whatever. And go and buy one here, one here, when you when you write versus when you have relationships with organizations who have not just one thing to sell, like, let's say like a Coldwell Banker or some turnkey organization or stuff, where we buy as the community or I call it the tribe over and over and over and over again. And the point that I'm getting at is so now when something isn't perfect, right, when somebody in our community bought a property, and it's kind of a limit, for whatever reason, yeah, the value in being able to say to the representatives on the other end of that phone call or Zoom call to say, okay, you know, as you've worked with us, you have the relationship with us. What can you do to fix this? Versus this is my one and only, it's not working out? How is something like that, if at all is valued in the context of the value of a business? A
look, ultimately, it's going to be based on that? How much cash can you expect to generate from that unique expertise or knowledge or set of relationships? And that's tricky, right? Because it sounds like a lot of it does depend on your community. And so it really just be a question of, hey, what kind of cash flow would that level of expertise generate over a longer period of time and how much capital would be required to do that? Right,
but I mean, that would, for example, be things like the flow is obviously much easier when you are known entity to let's say, for example, a turnkey provider that we have bought 20 properties from in the last two years, and they have something coming or even a bundle coming with the offer to and what would they basically be willing to negotiate on pricing? Right versus somebody off the street, so to speak? So I'm bringing up that question, because those are some of the things that have always gone, you know, I Yes, I think anybody can credibly understand that that is a benefit when they work with us, but I'm not so sure there really is a measurable benefit to the value of the business itself. Yeah,
it sounds like it's highly dependent on a few individuals and their relationships, which is hard to replicate. Again, it can have some value, but probably not a lot, right? Because it's, you know, a question you'd have to ask is, How easily could somebody replicate it? Yeah,
well, either replicated or just step in by to say, Okay, I'm the new person, the new representative of this organization. But I'm also taking care of all the people that are part of that organization, and so forth. Yeah. Now, I want to get without going too long to this one question that I might have had and feel very grateful that you are with us is to answer it in some way. And that is, if we take a regular business, not a practice like ours, and somebody comes to this decision, they work with you. And let's say they're lucky and get pretty close to what they were expecting the valuation of their business to be in the sale. If that is, let's say, a few million dollars or something like that. How does that look like is business owner who said their business than just having like, two or $3 million in their checking account? Or how does that actually look like?
So the, hey, if a business sells for a particular price, you're gonna have some expenses associated with that sale, you may be paying a lawyer, you may be paying some accountants, you may be paying folks like us to manage the transaction, right, you know, call that maybe 5% of the deal proceeds or 10%, then yeah, right, right. Okay, and then there's taxes, and your taxes are gonna depend on a couple factors. One is how the transaction gets taxed, meaning is it taxed as an asset sale or a stock sale? And if it is taxed as an asset sale? Do you have a lot of depreciable assets that you sold, that you're going to recapture that depreciation and therefore have ordinary income? Or is most of the game going to be capital gains? Obviously, in the US today, the difference between capital gains tax rate and an ordinary income tax rate is significant and 1617 points. In addition, it'll depend on what state Chris
before you go into. In addition, what that potentially means somebody would be in this ramp up, say, a smart to maybe convert into like a C Corp or something. No,
C Corp actually makes a sale even more challenging because a C Corp gets taxed at two levels, it gets taxed at the corporate level, and then it gets taxed as distributions go out to the shareholders. So in a C Corp, if you did sell assets, I
mean, any kind of corporate structure that is more favorable, like when you said stock, or she has a staff member units or whatever.
Yeah, ideally, it'd be an LLC. Okay, that'll be the easiest entity to sell an S corp, obviously, selling an S corp, if it's an institution buying well below the S corp election, which will create additional tax issues. So you end up doing what they call an F reorg. To convert into an LLC before a deal closes. Yeah, I
mean, I scope I can't quite really see why you would do that, because it's basically pass through.
So yeah, an LLC is passed through as well. Right. So both taxes a partnership or taxes, an S corp. So that's the at one level, you want to determine whether this deal is going to get taxed at ordinary income or capital gains rates. And then on the flip side, it depends on what state you're in. In the United States, some states have zero tax income tax. Other states like California and New York are pretty punitive. You know, they're very high tax rates. So
so when you meet Okay.
Well, we've had a few clients that have sold very, very large businesses, you know, 100 200 $300 million, where that's been part of the conversation, Hey, should we, if we're three or four years away from selling, should we end up move and change our domicile? Part of the challenge becomes if the operations of that business are still in New York are still in California, those states are going to be very aggressive about trying to tax those transactions, even though you as an owner may be domiciled somewhere else. Yeah,
although I mean, okay, I hear you what we have done and also suggest to our boxes that your personal location or let's call it residents, and where your business is, does not have to be the same Yes, you might have to make a foreign entity they situation or something like that. But, you know, I have no bid even though we for the longest time I've been living in California, but never had the business in California, any of the business. So, okay, I'm weighing only these questions, because I'm wondering when you said, Okay, I'm thinking, you know, put myself in the shoes of a business owner, I'm thinking, okay, sometime in the not too distant future, I want to probably sell for whatever reason. And you said, like, you know, you might want to start 123 years beforehand, those kinds of things, obviously, to get yourself into a capital gains tax position would be advisable, I guess, for
sure, yeah, it's worth spending time with a tax advisor to think about how you optimize because at one level, you don't really care how much the business sells for you care how much you get to keep? Yeah, exactly.
That was my question. So I mean, that would probably also make the question I have a few friends who have actually gone through this, who then made deals where they were sounded to me. And the way they explained it to me, and you tell me if this is even realistic, or just basically a simplification was to say I saw it the business, but not all at once in one step, it's basically being sold in trenches. And I'm, for the next two years actually still going to be there as something like an advisor or Mr. redoes, something like that, to make that credible, so it sounded like, you know, sometimes when the number is juicy enough, there are some ways to avoid that all of it happens all in one year. Yeah,
a lot of transactions, if there are notes associated with it, or earnouts, or some kind of escrow. Those generally are step transactions where you won't get taxed on the full transaction in year one, you would get taxed as you receive those proceeds. And so that's very common.
Okay, cool. So one other thing I wanted to bring up, because that has been one of the big things and for me, a significant change. With all this stuff coming out of the during the pandemic, is this whole idea of work from home, start your own kind of side gig, stuff like that? Would you consider those more practices? Or are they businesses where maybe they can sell the intellectual property or the customer base or anything like that, out of any of these kinda during the pandemic? I started this in my basement kind of businesses. Yeah,
a lot would depend on whether as an investor, you could expect those cash flows to continue, without the owner be prior owner being involved. If those cash flows can continue, then maybe those assets have some value. You know, but if it's just a single individual managing that, you know, look, there's intellectual property associated with it, where there's value independent value outside of the owner, then maybe there's some value there, but it's going to be, you know, obviously, it has to be pretty scaled to be of interest to outside investors.
Okay, so that kind of brings me to a few little bit more rapid fire kind of things. What, how old would you say, is kind of like the average age of a business, where he would say, okay, that makes sense, this is probably mature enough to come up with
all over the map, we've sold businesses that are eight or nine years old, we've sold businesses that are 100 years old, it really, time is probably not the most significant element. It's more about the condition of the business at the market, that would determine timing. Okay, cool.
And then are there any other factors that somebody who is or has started a business, who would say, okay, to improve the scalability and the value from the eyes or somebody from the outside? What are some of the things that people would be well advised to consider doing or putting in place?
Really, it's back to those two elements, which is, hey, how do I get an objective view of the risks in my business and address those? And how do I build a growth plan that is based in reality, and that I could convince an investor of those are the two things that I would spend time on? And that's, that's exactly what we do with companies is, hey, how do you? How do you identify those risks? And how do you look at that growth plan and make sure that it's going to be believable?
And are there any particular industries or any particular areas of the industry landscape where you would say that's where you see the future and where there would be a good area to apply oneself to maybe in the future then be able to sell it? Yeah,
we really like software, SAS businesses, software as a service businesses, we like consumer products. We love manufacturing. But you know, one of the things we've learned haven't done 100 Plus transactions, is there a lot of ways to go make money and a lot of really unique businesses out there. Yeah,
I've been doing this podcast now for a long time. And anybody who is a frequent listener will probably say, Well, I never thought that could be a thing right? Like I knew somebody who who is investing in real estate I said what kind of real estate he said car wash. The next guy is trailer parks the next guy storage units. So yes, I mean, when somebody says it, yeah, I can see it kinda right. But sometimes it's just like, whoa, you know, like, yeah, with that. So yeah, that's very cool. All right, very good. So before we get to the end, and you tell everybody how when they ready to sell their business, how they can get in touch with Chris, I have two questions. I asked everybody, the first one being, if you could meet anybody who would it be in by it?
I would love to meet Charlie Munger. He's Warren Buffett's partner. Yeah, I've read a bunch of books about him read his the the poor Charlie's almanac which I would recommend to anyone. He's 99 years old now. I've made it. Yeah. Made 100. Yeah, he is just an incredibly thoughtful, insightful, smart, no holds barred. He's very candid, which I really appreciate.
Yeah, I think that's a really good one. I think you're the first ones surprisingly, who use Charlie Munger as the person he wouldn't want to meet? I appreciate him so much for his kinda like, regular person. Easy way of responding, describing reacting to stuff. Oh, yeah. I'm not so sure about the See's Candy stuff. But But no, I love listening to him too. And one thing I find fascinating is when people when you really no, you have to listen pretty much to every sentence, because almost everything they say is profound. And Charlie Munger is definitely one of those. Okay, cool. Yeah, great choice. Thank you, Chris, for bringing that up. And, you know, I'm surprised that nobody else have said that. The other one is, if you had a time machine, you could go forward backward anyway, you know what, you know, but you're not allowed to change the time space continuum? Where would you go in mind?
That's an interesting question. I guess I would go forward. I'm not sure what year I would pick. But we have so much innovation going on right now. Whether it's in healthcare and information technology, I would just be fascinated to see how How's all this gonna shake out?
Yeah. Would you go and see if it works, and then get yourself and your link?
Maybe, maybe.
I mean, I've been saying, you know, this is kind of such a fascinating technology. I just wouldn't want to be the first one or maybe the the 1000s one, but when that is becoming the thing like we currently everybody has a smartphone. Right? Like I remember friends of mine, when they came out. They said I only need a phone to make phone calls. What's all this other stuff? Right? And nowadays, what did they call it? Recently? I heard somebody say it's like an amputee syndrome if you forget your phone.
Yeah, for sure. For sure. Yeah. Especially Orisha probably okay.
But like one or two generations younger, they're completely lost.
Yeah, for sure. For sure. All right. Well, wonderful. So
like I said, Chris, tell the audience, how can they get in touch with you if they want to discuss or maybe prepare them says if they're considering either having a business they want to say but I would also say probably is interesting to get in touch with you. If somebody's saying well, instead of starting from scratch, maybe I can buy something?
Sure. Yeah. Just reach out to me. You can reach me at Chris CHR is at class six partners Class V i Roman Numeral six partners.com. Okay,
wonderful. Well, thank you for being on the show. And I hope we can do it again sometime.
