[00:00:00] Speaker A: Sam, Welcome to Power CEOs, the truth behind the business. I'm your fearless host, Jen Godet, investor, entrepreneur and business advisor. Why are we here? Because I believe that iron sharpens iron. And when we bring industry leaders, founders, investors, people who have been there and done that time after time again, to share what's working in business and even what's not, we are all able to learn and grow.
As a result, our businesses grow and the ripple effect impacts not only ourselves, our teams and their families, but also our communities and our world.
Today, we are going to dive deep into the uncomfortable gap between building a company and building an asset. My guest, Tom Powell sits at the rare intersection founder advocate, deal structure and investor advisor. He's seen what founders do that quietly destroys valuation and what actually unlocks it. Tom, welcome to the show.
[00:01:28] Speaker B: Jen, it is absolutely my pleasure. I love spending time with you and I'm pleased that we could actually get time to do this together. It has been such a wonderful venture getting to work with you.
[00:01:40] Speaker A: Likewise. And I'm really stoked about this because we're going to dive deep into that founder trap and the first real moves that take a business from founder led to investor ready. So Tom, what are the top signs that a founder is unknowingly blocking their valuation?
[00:02:00] Speaker B: Well, the unknowing sign to the founder is not necessarily the unknowing sign to the investors. Right. But that unknowing sign to both the founder and even the founder's team is somewhat that founder centric business. And so the founder, everything around them, every time a decision needs to be made, it goes right back to the founder's desk. And they seem to think that they're building some systems and structure and they believe that they're delegating to their team. But in reality, especially when it's not going smooth, the founder jumps in there. They're a hero. Once again, everybody loves the founder, they love their personality. They got to jump on the phone and that means they're not ready for those investor dollars.
[00:02:39] Speaker A: You're exactly right. We see it all the time. And it's really funny when they tell me and I tell it to me all the time, hey, I'm ready, I've got a team, I delegate everything.
But it's always the log jam is always the founder, because though they say that, it's not in practice. So thank you for sharing that. But let's back it up just a little bit before anybody talks about selling their business. What does exit ready really mean?
[00:03:06] Speaker B: Well, you know, can I talk about the sign of when it's not ready, which is generally the data room. So that's our, that's our clear, specific place that we first look. Is the data room set up clear and able to answer questions without some nomenclature from a person jumping in there and articulating what's supposed to be in the data room? They're not capital ready at that point. But the second part is generally they're not capital ready until they really define what problem it is that they solve. So you and I have been on a recent conversation and we listen to these people over and over and over again and the founders are glad to tell you what they do.
And in the United States, it's inherent in even how we are introduced. So what do you do, Jen? And instead of saying, what problem do you solve, Jen, which is like, how are you making the world better? And so inherently that is where they go off the rails and when we can bring them back around, that's really when they are capital ready in the first sign, is when they can really, truly articulate and attract the people that understand the problem they're solving.
[00:04:10] Speaker A: You know, and I would go a step further, Tom, and you and I have talked about this numerous times, and it has to be done very succinctly. If they can't do that and capture my interest as an investor in 30 to 60 seconds and I don't know exactly what problem they're solving, how they are the unique person to partner with in order to solve it. Like, I don't even keep listening.
So could you give me something that founders who are looking, who are like, I think I'm heading to an exit or I want to partner with capital, what is the one thing that they can take away right now and implement right now that can move them forward when it comes to shifting this, the definition of what we do, to defining the problem we solve, they have to.
[00:04:52] Speaker B: Go back in time to when they first identified that there was something that needed to be solved. It was a pain point, it was whatever, and put them in that and recognize that they're not necessarily the brilliant person that first recognized it, that there's actually others that are having the same pain. Otherwise there's no business if they're the only one having that pain, that's not a business. But then they start articulating or saying and telling the story about how they're solving it, how they're brilliant, how their teams come together with us. So the number one thing they can take away is articulate, spell out in the Most simple way. What's the problem you're solving? We're solving cancer. It kills people. And it makes me very sad. It makes you very sad. Because when they can get a me too out of that conversation and I even say in 30 seconds, that's good. 28 seconds is our timer. As you know, when we're sitting up there on our shark tanks, it's like you get 28 seconds to get through the whole introduction of what's the problem you solve, what it means if you actually solve it and who are you looking for in the next step. Right. So you really follow that, that hero's journey, which is the bad guy, the good guy and the happy ending. And so you know that it's really that scenario that they can take away.
[00:06:04] Speaker A: From this super simple. And I just want to repeat that for the people in the back. The takeaway is be able to articulate simply the problem you're solving. Get a me too from the person you're talking to in 28 seconds or less. What problem do you solve? What does it mean if you solve and who's looking for that next step? And so Tom, what role actually moves the needle first when we're looking at this business? And the founder is the bottleneck, as we discussed already, what role is the first one for them to sort of release? Is it operations, is it finance, is it sales? Is it chief of staff? Like what role do we need to clear them from first? That'll actually start that momentum and shift that momentum.
[00:06:47] Speaker B: In many cases it's the operational roles, but not the accounting or finance roles because we very rarely find a founder that is phenomenal at the finance side. They may think they are and so what ends up happening is they stay within the books far too long. They're actually the bottleneck in paying the bills and the cash flows and different things instead of setting up the structures. But really what we need is that operational decision making process and allow champions and actually the full person that can lead that and own it and make the mistakes and give them that piece. So one of the main things we look at when we're looking at the probability of success is the founder's passion, because that is important. That does not mean that they need to be bigger than life. It just means they're going to show up when things go absolutely wrong and they're going to keep the team together.
That's a key vision building skill. The second part is can they hire and retain good team members.
That's the part that they have to get out of their own realm, which is allowing others to carry that ball, Allowing others to be the quarterback and actually be. With the 12 seconds left, are you going to be able to score that touchdown? And it's not you coming in as the hero that's the hardest part. And you see it.
Sorry.
[00:08:08] Speaker A: Oh, I'm sorry. It really is. And you know what I hear, and I want you to sort of elaborate because the thing that I hear the most is founders say, no one can do that like me.
The real issue here, like what is the real issue here? When they think that way and they think that they're the only one who can get the ball to the touchdown line with 12 seconds on the clock.
[00:08:29] Speaker B: It's absolutely true. Generally, even up to companies that are up to a hundred million dollars in revenue, you can see it. But it really becomes highlighted at about the $10 million mark, at the $2 million mark. It is absolutely there because the founder is still showing up. It's the restaurant where the chef has to come out of the back room. And because the chef is also the owner, whereas the owner is there and having people come. And the chef is interchangeable with other chefs. Right, because they've built a brand that's absent of the chef. Now you gotta talk about restaurants. You've got Wolfgang Puck, but Wolfgang Puck is never in the kitchen generally when you go there, right. That's a business that transcended the person, even though it has their name to what the business is. And that's systems and structure built around the team. And it gets the founder out of there doing the day to day picking and poking and pushing. They need to be in vision.
[00:09:25] Speaker A: And so when they're struggling to make that leap, because there's a lot of founders I know who are watching this and they're like, yeah, you say that, but it's not that easy tomorrow.
It's hard to find that person. It's hard to trust that person. Like, what is it that they really mean? What is the real issue and how can they move forward?
[00:09:41] Speaker B: You know, the trust is an interesting one. And we like to talk a lot of times about the ham and egg breakfast. I love this analogy, is that the founder in a ham and egg breakfast is the pig. You know, they are committed. They're part of that breakfast every single day. And the hen is involved. They lay an egg and then it becomes part of that and all the rest of the to be the hen. And especially the advisors, the attorneys, the accountants, the outside advisors that come in to help them when they go hire someone like us or you to come in. You know, we're not really that committed because it's not our rear ends that are on the line. And so the committed founder also generally has a partner in that. That's like it's our net worth, it's our name that falls down when this thing doesn't work. And so they stay involved.
And you cannot scale to a valuable company by staying involved at that level. You can scale. There's a bunch of books out there, even one of them called scaling, which is growing your top line, maybe even growing your bottom line, but not necessarily growing your exit value. And that's because you can't get a great exit value as long as the founder is day to day involved in that business.
[00:10:54] Speaker A: You're absolutely right. I couldn't agree with you more. We do have to take a brief break, but this week everyone is watching. Identify that one decision if you're a founder that you're still making and it's a bottleneck, and design your way to remove yourself from it. Tom has given every reason for that. Now it's time to put the pedal to the metal and take action so that we can actually have forward momentum.
So let's design that way to remove ourselves for this. If this conversation is resonating with you, connect with me on LinkedIn and join the Power CEO's Facebook group where we go deeper on capital exits, leadership and building business. But exit readiness isn't just about selling, it's about removing the friction. And that brings us to capital next. Because money doesn't just accelerate growth, it also exposes weakness. Stay tuned as we dive deep into partnering with capital after these important messages.
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Let's get back to the conversation at hand.
Partner with capital Deals go bad. How to prevent it before the break, Tom and I were talking a lot about this and on the during the break we were talking about how capital can be a catalyst or it can be a chokehold. One of the things that Tom's really great at is he helps founders to raise that money to partner with capital without giving up control. And today we're going to unpack where deals quietly, or maybe not so quietly, go wrong.
Tom, what's it that smart investors want from founders besides growth?
[00:13:25] Speaker B: The number one benefit or the number one characteristic we enjoy about the founders that we invest in over and over again is transparency.
Founders think money only wants to hear the wins. And the reality is that when we only hear wins, we know we're missing a big, sometimes very dangerous part of the story. And we're there not just as money. We're actually there as people that have been there, done that, seen that can actually help and oftentimes help them get around those corners that they don't even know that there's going to be trouble. And so transparency helps us. So when we only get fluffy little notices, that makes us very, very nervous. And when we only get told fluffy little notices before we've made the investment, we generally back away very quickly.
[00:14:16] Speaker A: You're absolutely right, and I really love that you brought this up. What Tom is talking about is the blind spots. As founders, what are we great at? We're good at solving a problem, building a business, getting it to that level, but we're really great at getting to that next level, because if we, if we knew how to do it, we'd already be there. Let's just be real. And when we want to partner with capital, capital's pretty darn smart, and it keeps getting more intelligent.
And so the. The best use of capital. And I agree, I love being strategic capital, where I can be that resource or make that introduction or help them to see those blind spots just like you do.
So those blind spots, folks, that's where your growth is, and that's also where your pitfalls and your landmines are. So, Tom, you know, founders can do this on their own. They have to have somebody or a group of somebody's in their corner. Can you kind of share a little bit about why that is and how, how you are working with them to kind of get past some of those hidden landmines when they're looking at.
At partnering with capital?
[00:15:22] Speaker B: Yet growth inherently just means doing something that you haven't done before. And so to do something you haven't done before, you can learn it by doing it with your own painful experiences, and it will be painful. Or you can also learn it through ope, which is other people's experiences.
So in building businesses, you can use your money or you can use other people's money. Generally, you'll scale much faster if you're able to use other people's money along with your own. And it's the same way with that experience.
So you know, for myself, you know that I'm a pretty avid skier, yet I still have coaches often and frequently in my skiing to refine those little techniques. And you can see the best in the world doing that. I know how to do yoga, but I have an accountability coach that comes to my house three times a week to get me there. And in business I have, with almost four decades in business, I have business coaches for the areas that I need the strength or more so even for the my blind spots where I'm not seeing something, where I'm not maybe communicating the way I should, or maybe I'm being overly egotistical about some point or I'm not measuring what that risk really is going to do, that I can't count down the road because I'm into a new area. I've been growing for 40 years, I continually wish to grow. And the people we work with are also the ones that specifically need those next steps. And it's amazing you know this when you've been there and you see the next one coming up. We can't feel their pain, but we can help them avoid much of that pain.
[00:16:52] Speaker A: You're absolutely right. And you know, it's funny to me, how many times can we talk a little bit about how to find that right value add, strategic coach, mentor, or even strategic capital. Because sometimes when we hire the people and we don't know what to look for in that process of obtaining the consultant, the advisor, the strategic money, we make big mistakes. So what are your kind of go to high level questions to ask when you're looking for that next business coach or that next strategic capital?
[00:17:30] Speaker B: It's funny, we used to use, and I still do to a certain extent, the bigger pile theory. So remember when you used to get the call from the boiler room brokers that would be calling you up with a stock tip?
It doesn't really happen anymore. At least they don't get to me anymore. I don't know if it still happens or not, but one of the things I'd always say is like, you show me your pile, I'll show you my pile. If your pile is bigger than mine, I'll talk to you. And so it's kind of along that line in anything. So it's not trying to be egotistical. I don't care if they're wealthier than me or not wealthier than me. It's have they done it before or are they simply academic? And if they're simply academic, and I do have a doctorate, so I don't, you know, pound on the academics. It's that, do they have the research, but have they actually implemented the research before? And you need to have both in that field. I need to have somebody who's actually studied it, why it works.
That's the type of coach that I'm looking for. And that's the tria. That's the coach and the role we fill with the founders that we work with.
The other one is, what's the stake in the game for that coach or that person? Do they really actually have some skin in the game? And there's an awful lot of people that say, well, I don't want to give up any equity, but the best people you can have are the ones that are sharing your journey to help you get to the next stage. Otherwise, it's just friendly advice or it's just to pay for. And we've also had plenty of those where they're just paying for a small amount. You're going to get what you pay for.
[00:18:56] Speaker A: You're absolutely right. And you know, the best coaches and advisors, you and I have shared this as well before off the air are the ones that have skin in the game. Because if we've got echo, if we've got a piece of the upside, you know, we're going to bat for you in every way, shape or form because we have a tremendous upside above and beyond just the like, little bit of consulting fee that we collect along the way, which basically pays for our staff.
Let's be real, that's all it pays for.
[00:19:22] Speaker B: And a lot of times it doesn't even do that. A lot of times we have it where I'm paying for the staff to give free advice or less than, you know, what we compensated because we're betting on the outcome of the growth of that company.
[00:19:37] Speaker A: That's absolutely right. Same thing. So let me ask you the next question and let's go a little bit deeper into this.
We wanted to talk about capital and strategic money. When does strategic money become the most expensive money you can take? Because we've talked a lot about alignment. You talk about alignment all the time. And sometimes capital is. Is detrimental, like the wrong capital partner can be detrimental. So when does that happen? How does strategic money become the most expensive money you'll ever take?
[00:20:07] Speaker B: If I can back up for just a second and say the most expensive money is not oftentimes strategic money, it's it's dumb money, okay? So dumb money can be very expensive because when it doesn't work out, and they were just chasing yields, and we have lots of founders who are like, this is going to pay 200% in three years. And so the investor goes into that, and then when it doesn't work out, the investor lost sight of this was actually an investment, and they bring in counsel to sue. And then that becomes a very bad, negative scenario around there. Most people forget that. But on the strategic side, the strategic side, and it's actually why we created the founder's office, is there are strategic players out there that come in to get rid of the founder and take the idea and grow the company. So that's the second most dangerous segment. And then the third one that is just a heartbreak is when the founder founders always, 100% of the time, have an exit. It's either on their terms or it's on events terms, which means it could be the market, it could be their investors, it could be a divorce, a death, whatever. There's always 100% an exit. And strategic money that's not aligned with that founder on that is incredibly painful.
And so we have a lot of founders that their egos are so built into the company that as they're moving through the growth pattern to build that value, the founder themselves have built their personal value to understand that they're not part of that company, that the company is separate from them. And so when they go to sell, they're miserable because they've lost their identity. Oftentimes worse than a divorce and even a death of a family member because they've lost that. And that's when it's incredibly expensive. You see the founders that come out and they die within a short period of time after they've sold their company. They got all this money, but they're so miserable. And so that's the important part, is to get yourself ready as a founder for the next adventure. You get to take all that you have and move it forward into the next idea, whatever that is, wherever you want to go.
[00:22:05] Speaker A: You know, you speak absolute truth here, and it's something that we have talked about so many times. I've, I've listened to a lot of your, your LinkedIn lives as well. And this is a conversation that I have as well. And so if you're watching, folks, what Tom just said is so incredibly important, and we're going to dive really deep into this later on in the show. But the difference between having all of your identity and your self worth wrapped up in what you do and in your company versus separating that out and having it, having your self worth, your identity outside of your company.
It's the most challenging thing that we go through as advisors and consultants and coaches trying to work with founders through their exit and beyond. So if you heard nothing, listen to Tom here. Tom, we do have to take a brief break, but for those who are wanting to dive deeper into this, how can they reach out to you?
[00:23:04] Speaker B: Probably the easiest is to go to foundersoffice.com foundersoffice.com, we actually named the company after who we're actually serving. So the problems we solve is this founders isolation paradox, which is the founders that have all these advisors around them and they're still making the decisions usually at 2am in the morning by themselves. Even their spouse can't help them within those decision processes. And so it seems very isolated and it is very isolated. And so the founders office.com is where you can best reach me.
[00:23:36] Speaker A: Fantastic. Listen guys, if you're preparing to raise or restructure capital and want clarity before you do anything, please reach out to Tom to Founders Office. I have worked closely with them and you know, it really is critical that, that you do some of these things for yourself personally as well as professionally. And bad deals don't start with bad intentions. They start with bad structure. So coming up next, we're going to go deeper into what happens when growth means buying, building, and more after these important messages.
Foreign.
Welcome Back to power CEOs Truth behind the Business. I'm here Jenkote with Tom Powell, and we are going to dive into M and A. Buy and build. It's a hot topic.
Let's talk about all the good, the bad and the ugly. M and A doesn't fail because of math. It fails because founders don't know how to integrate reality. We have this great vision, we have this great thesis. We do all the things and then when it comes time to implement, integrate and execute, it falls flat. And sometimes this can sink our business.
So acquisitions can either accelerate our growth or it can completely destroy it. Let's talk about what investors really want to see before they fund a buy and build strategy. Because founders, we always think about our side. We don't think about the investors and what they're looking for when we go to raise capital. And then once we're partnered, we're always thinking about our side of things and that's a critical mistake. So Tom, let's start at the beginning. When should founders choose M and A over organic Growth or to supplement organic growth.
[00:25:43] Speaker B: You know, one of it has to do with what we call and other people have called a forward forecasting. So if you jump 3, 5, 10 years out and look backwards, so you say we want to be the second largest in our industry and today we're a baby, baby, baby in the industry. You can get there through organic growth or you can get there through acquisition.
And so if you can jump forward to that period of time, look backwards and say, what steps did we take? So now we're number two in the entire industry. And what we did was we had the strategic. And you start building it that way, you realize that what it is not, is it is not founder centric, it's system and structure centric. If you're being very realistic about it, even if you're the voice of the company and you're out there talking about it, you're the Colonel Sanders of chicken, right, or whatever you want to be, you still have to get the right systems and structure in there. Because the acquisitions are very much like technology. If you don't have good systems and structure, the acquisitions will speed up your bad processes and just create messes.
And technology does the same thing. If you can bring technology to something, you can bring this wonderful new thing of AI. But if you do not have good systems and structure, it's just going to speed up a bad outcome. And so that's the major part that we need to look at is look back and say, where am I? The founder, the bottleneck in this? And you have to be brutally honest, which most of us cannot do. Oh no, no. My personality is really big. I'm the one that can solve this problem or no, everybody loves me. I'm the one that brings in. I'm the best salesperson and I have these key relationships with people. That doesn't build value, that builds revenue, that builds lifestyle businesses. And most businesses are lifestyle businesses and they have million dollar incomes or more, which are great, but it does not build value, it does not give you freedom and it does not allow for an exit.
[00:27:33] Speaker A: Absolutely. And, and I think the key word there, Tom, is freedom, right? Because we are entrepreneurs because we crave freedom. We want to solve big problems. We are problem solvers. We want to, we want to impact, we want to have a maximized impact in whatever way that we see or envision. And we want freedom while we're doing that. And when we build a lifestyle business that's not scalable, all we've really done is built a job.
And so what you're talking about is the difference between having a job and not really having a saleable asset that grows our net worth versus building the systems and the operational excellence, which I call AI readiness these days. Because operational excellence and AI readiness are the same, are one in the same.
I love that you talked about tech is very similar to approaching the M and A aspect because it's so true.
And so, you know, it's really critical. If you're watching this and you want to have an essay or you want this to be realized in the future and maybe support your lifestyle or your retirement without you having to be involved. It's very important to listen to this show in its entirety, to reach out to tomorrow, learn more, and then to continue listening with us. So what has to be true for the investors before investors fund a buy and build?
Say we're talking to founders right here. What has to be true before investors are going to actually give you their capital?
[00:28:55] Speaker B: So if we come back up just for a second on there, there's such a wide range of investors and as we said, dumb money, and I'm not supposed to use that word, but you know, there really is dumb money out there. And dumb money does not mean that the people aren't smart.
It's that they're making the investment. And probably one of the most basic simple books is the richest man in Babylon. And it's been around forever, right? Or at least all of my life, plus a couple decades. And it talks about invest in stuff, you know. So what we find is a fair amount of the investors that help drive the founder led community are founders that have exited. And then what they see is they see themselves in the founder that they back, but they usually see the founder, that is the early stage them founder when they were making every single mistake out there. And they're like, if I just give them some capital, they'll be able to figure out because if I just would have had the capital and that's not what made them successful and have that exit type scenario, but we lose sight of that.
So exactly for the founder investor, the six keys of capital still apply, which really go through the clarity, the alignment, the structure, the stewardship, the velocity and the legacy. So if you've got those models and you're looking at that and you have a framework, whatever your framework is, that's what you want to be doing and that's what you want to be executing on and don't deviate from it.
[00:30:19] Speaker A: You're absolutely right. And I was dumb money at one point in time that's what causes us to lose our money.
[00:30:25] Speaker B: I have been several times. That's the fun part of it, right? Not really, but it is. The interesting part that gets makes us great coaches and leaders and partners in these ventures is not because we've been so fabulously successful. It's usually because we've stubbed our toe or actually had an amputation. It's like, let's not do that again.
[00:30:44] Speaker A: That's right. We learn so much more from our failures than we do from our successes. But I love learning from other people's failures because that's what a wise man does.
[00:30:53] Speaker B: Yes.
[00:30:53] Speaker A: So talk to me about the three biggest mistakes. I mean, you've been doing this for decades. The three biggest mistakes that founders typically make in the first 100 days post close when they're doing an acquisition.
[00:31:07] Speaker B: Boy, I tell you, the first, it's not the first hundred days, but in the first hundred days. So it's the mistakes leading all the way up to it that are really the many times the deadly ones. But we just recently talked about one of the most deadly mistakes is all of a sudden they look at the cash in the bank as that is ready to use cash for other things other than really understanding that the operating cash is going to be critical and that during that merger and acquisition time and that new company coming in and you're blending everything together, the expenses are going to rise through the roof.
The savings that you think you're going to get do not happen in that first period of time, especially if you get rid of people, because if people have left during that time, you're going to have a drop in revenue or you're going to have a rise in expenses, or you're just going to have complexity.
And so watching that cash and understanding that cash, lack of cash is what leads to a company going bankrupt. And you see, Jen, so many times that a company goes bankrupt not because they weren't profitable, but because they don't have cash. That's what happened. Right. And they don't have any borrowing capability at that point.
And where this really shows up in the most visible way for any of us is when a successful restaurant decides to open a second restaurant or more so combine with another restaurant. The reason that that happens is because the restaurateur had the skill of being a great single restaurant operator. They didn't have the management, leadership and hiring and structure and system skills to run two restaurants. And the complexity that that takes. You can't just double yourself. And that happens in the businesses all the time.
[00:32:49] Speaker A: You're absolutely right. And so let's, let's now shift to the founder side of things because you are a founder advocate more than anything.
You know, cash confidence is essential.
Avoiding the pitfalls and the mistakes is essential. And that's why you hire advisors and you hire people who have been there and done that. But let's talk about thinking about earnouts, rollovers, staying on in the structure of an exit. Because this is where I see a lot of fails happen. A lot of people don't maybe have an employment attorney, for example, when they're doing an earn out. And so they get really raked over the coals when they stay on and end up finding themselves without a job later on. So how should founders be thinking about, you know, the earn outs, the rollover staying on because they're not doing diligence on the capital. In my experience, they don't know to due diligence on their capital partner because you're now, especially if you're rolling over equity, you're now an investor with that, with that capital partner.
And so there's risk and they don't even, it doesn't even occur to most first time exit founders to do this. Can you share what they can be asking themselves or thinking about or maybe the due diligence questions to ask of the capital if they're considering staying on or rolling over some of their equity.
[00:34:09] Speaker B: I recently had a friend on our show, which is the lunch and learn on Wednesdays, right, Which you've been a guest on, which we love.
And he had done an exit. He was in the aerospace industry and his exit, they wanted them to stay on for six months.
They had believed and Ivan had said, look, you don't need me to stay on. They're like, no, no, no, we really want you to stay on. We just want to be able to get. And that's not an unusual part because they're totally sure of what may not be fully disclosed or transparent. And so in this case though, Ivan's like, I'll stay on, you'll pay me a check, but I don't need to be here. And he said after about two weeks they came to him and they said, you were right, we really don't need you to be there.
That is so unusual. Now here's the, here's how it usually goes though. New acquirer comes in, you've been acquired and after about two weeks they're doing things and they're messing up the company. As you see it, they may be doing it right or doing it wrong. But and so you're inserting yourselves. And pretty quickly the new acquirer, the new boss, realized they don't want you there.
And so in the earnout, depending upon how the covenants were written in there, you can be carved out. Because really the earnout was not earnings of value. It was earnings for your effort, future effort.
And so really, I'm not saying you shouldn't have earnouts, but you really do want to have a structure that specifically takes you out of it. And it's really not a business if you have to stay on for a long time.
It is a small proprietorship. Even if it's $100 million, if you're the secret sauce to that, then that's they're not buying the business, they're buying you. And they just wrote you a big check and you're a professional athlete that needs to go out there and still score the basket, still score the touchdowns, whatever it is, you're still going to need to do it and you probably won out.
[00:36:02] Speaker A: Yeah. Thank you for that. We are out of time for this segment, but folks, if you want to acquire in 12 months, start by making your taking advantage of what Tom has said. Make sure that you have your systems and structures in place. If, if you are going to be doing this, consider all of the things including your cash confidence or cash flow. And if this conversation resonates, connect with me on LinkedIn. Join the Power CEO's Facebook group where we go deeper on capital exits, leadership and building businesses that actually scale M and A is leverage, but only if the foundation can handle the weight. Which brings us to the final evolution. Coming up next after these important messages.
Welcome Back to power CEOs Truth behind the Business. Want more of what you're watching? Stay connected to power CEOs and every now media TV favorite live or on demand, anytime, anywhere by downloading the free Now Media TV app on Roku or iOS unlock non stop bilingual programming in English and Spanish on the move. You can always check our podcast
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We're going to dive right back in because this has been just an epic conversation with Tom. We started with what do we what does it look like to partner with money or capital partners? What does it look like if we're going to grow from from a foundation that's sound, using M and A as leverage and so much more. But we want to wrap that up in A with a bow because a lot of founders say they want freedom but they keep building businesses that need them to breathe.
So we need to shift.
There's a shift that has to happen when we prepare for becoming capital instead of the labor. Tom has watched this. He's watched founders do this well. He's watched founders fail. He has done this well. He has failed. I have done this well. I have failed. So, Tom, what is the hardest mindset shift that occurs or has to occur when moving from founder to funder?
[00:38:41] Speaker B: Most likely for most of the founders that we see is that as we said earlier, they see any founder sees themselves in the new founder that they wish to back. They see their integrity. They see their capabilities. They see them as their older self, not as their younger self.
So they only see the best of their younger self in there. But they forget about all the frailties that we had and the lessons we hadn't learned yet along the line. And so they come in with that, and they understand that they don't really understand necessarily what they're investing in. And so they start giving them money, and then they're willing to give them time. And then all of a sudden, what many founders that they've done is they've created a job for themselves, jumping into somebody else's business that they're building, and they're throwing good money after bad. They don't even understand the idea of sunk cost. And worse, they're throwing time in and the time you can't get back, you can earn money again. There's lots of ways to earn the money, and it's better that you don't lose that. But it's when you're tied up, all of a sudden you become in there. And we see board after board after board of where these people have just put their whole life back into some other founder's dream.
[00:39:53] Speaker A: Yep, I've done that. Guilty as charged. In the past. Learned from that mistake. Always learning.
So how should founders define an investment thesis moving forward? Because it really is about that. It's about understanding what it means to be an investor. But, you know, just like when we do an M and a thesis as a founder, as we're looking at organic growth before an exit, we now need to have an investment thesis based off of what we know and the keys that you discussed earlier. So how should people watching define that thesis for themselves? Are there some steps, what can you discuss that can give them some immediate tips?
[00:40:35] Speaker B: Well, the one tip is be wary of the financial advisor who only deals in stocks and bonds and calls alternatives offshore investing still in stocks and bonds that are publicly traded.
There is a place for that financial advisor. And of the capital that you're going to deploy into private enterprises, you need to be very realistic that the reason the public markets work is because they're liquid.
And so that gives them. So when it drops the, you know, it's a greater fool theory, they pull their money back out and then they go back in as it goes back up type scenario. Private markets do not have that. So you have to have advisors that understand the private market. You also need to set up, really, one of the keys is how much money you're going to play with and how much money you truly can lose, even if it comes back to you. But it's gone as soon as you make the investment until it comes back to you. Right. So you cannot think that that's going to be a liquid investment.
Another part on there is how much control or lack of control are you going to have and how much will that lack of control cause the value of the money you've actually put in to actually devalue? So as we're, you know, as we're looking at companies, a lot of times we'll be looking at the private investors and we'll say, you know, they think that this company's worth $10 million and they own 1% of the company.
They don't really own that value because they don't control the company. Their investment is actually worth less. And so on the opposite side, you want to be very truthful about it.
So the first place to start is just like everywhere else, we say, get a coach who does it, knows it, understands it. It's not just a financial planner that went through and got their mba, which I have no problem with that. There's a portion of your money that should be with that very safe, very secure, very much part of the liquidity investment side. But if you're going to be investing in alternatives that are the private side, you need to have the right financial advisors around you and people you can ask questions. And it goes back to. Number one rule for us on the six keys is clarity. Number two is alignment, and number three is structure. And so if founders just go with their guts, none of those three are there.
None. And so you're going to end up having bad outcomes at some point.
[00:42:52] Speaker A: Going with your gut and investing without knowing or having clarity. Alignment or structure is kind of similar to hope as a strategy. It really is not one.
So most founders, most entrepreneurs who are listening here understand that we don't have a business plan or business strategy that is based on hope and prayer and, and I don't know what's going to get me there. We reverse engineer it. We want to do the same thing as investors. It's a different skill set. Folks, listen, I've lost at that game in the past. It's.
Every time I've lost, it's made me more savvy. Every time Tom has lost has made him more savvy. Learn from our mistakes, don't go create your own. Because I can tell you you're gutted when you lose a big chunk of of your exits because you went with regret.
[00:43:37] Speaker B: How many times have you come across somebody that had to actually go back and build another business or worse, get a job, or worse, live on much less than they thought they were going to because of a bad investment?
[00:43:50] Speaker A: Many.
Many, Tom, Many.
[00:43:53] Speaker B: We've had so many people that have said, even in co investments, in investments we've done, it's like, well, I put everything in. Why did you do that? You shouldn't do that.
But it's paying 12%. No, that's not the reason to do that.
[00:44:06] Speaker A: Yeah. And you said something, and I want to highlight it because it is so incredibly valuable. What Tom said, folks, he said, if you're gonna do this alternative investing, you're gonna invest in private market.
Don't invest money that you're not willing to lose. You have to look at that money as if you've lost it because you have no access to it for quite some time. Sometimes 10 years, sometimes 12, sometimes it's a lot faster. But you have to be okay. And sometimes it doesn't come back at all. If you're like me and you like to play 10% in, in the venture capital world, like, that's a lot of losses, but the wins can be really big. But you have to be okay with writing.
And so we don't gamble with money we need to live. We don't gamble with money we're planning on retiring for. And let's be realistic about how much money we need before we go locking it up for long term.
[00:44:58] Speaker B: If I can just say on that. So one of the things we work with as we're working with founders looking to exit, we figure out what their annual expenses are that they need to live the life that they want to live. And we use a 4% benchmark of the capital that they actually need to have that can earn that. And then the rest of it is play money. They can do what they want with that. But that first point at 4%, which everybody will be like well, I can get 7 or 8%. No, don't run your life like that. Run it at 4%, then it's a relatively conservative number and that's your basis. And if you do that and then you've got your other pile and you don't bet all of it on black, then you know, you should have a great, great outcome.
[00:45:39] Speaker A: It's absolutely right. And so we are getting towards the end of our session and I know you have an event coming up. Lift pitch. Talk to me about what that is, how that came about and, and, and why.
Let's know why. The problem you're solving. Like, dude, give me the, give me the problem you're solving in the pitch that we were talking about earlier.
[00:45:57] Speaker B: Well, imagine that you grow up in the mountains and you never get an opportunity because your family didn't either have the economic or the actual experience of getting out in those mountains. Whether you're slid on snow, on a ski or a snowboard, or riding a bike or whatever it is, you didn't get that opportunity.
I have the good fortune of over 50 years ago being brought to a mountain where I learned how to ski. And skiing has been a big part of my life.
I now serve as the president of a nonprofit in the Sierra Nevadas up at Lake Tahoe, where we help kids and adults learn how to ski, snowboard, ride bikes. And we also have an adaptive program as part of that where we not only teach the young athletes that have some type of a disability, we teach their family how to get out on the snow.
So we were able to take through a good friend of mine, Kevin Peterson, who you've met on one of our shark tanks. We all served as sharks on that. He said, why don't we do this on a chairlift? So we have a chairlift that we've dedicated on March 1st in Lake Tahoe that in the afternoons we're going to have VCs, capital raisers and founders that have exited with money. And we're looking still for a few more spots in that area. Jen doesn't like the snow, but she's probably still going to come out and sit on a stationary chair lift for me and she's going to listen to eight minute pitches. So before they get on the lift, they get the 28 seconds to be able to tell their story briefly and then they get eight minutes to actually do the presentation while they're writing. It'll be filmed. We think there's going to be a number of different series that'll come out of this and at the end, it raises money for our adaptive ski program at Sky Tavern.
So you can check out skytavern.com to check to learn more about the mountain or you can check out liftpitchtahoe.com liftpitchtahoe.Com learn more about what we're doing. We're looking for a handful more founders, we're looking for a handful more private capital that's looking to be investing in early stage startups. And there's some pretty serious businesses that aren't just early stage that are coming out to do their pitches out there as well. So it's going to be a blast of an afternoon. Yes, Jen, it's going to be cold. I know that's not your favorite, but I did promise you that I would get you the, you know, the nice. We can get you a Russian hat, big coat, big gloves and have you stay inside and just look fashionable.
[00:48:13] Speaker A: Absolutely, I will. We'll talk about that offline. But folks, unfortunately, all good things to come to an end, including this show. If you're thinking about raising capital, preparing for exit or shifting into investor mode, connect with Tom Powell. He's truly an expert in this space.
You can connect with me on LinkedIn or on Facebook and I can connect you with Tom, if you didn't catch that earlier.
But if you want to be ready to exit, the first uncomfortable decision you need to make is to stop being the hero. I think that's the biggest takeaway from today.
Good news is we'll be here same time, same station next week. So until then, win today, win this week and we'll see you next time.
[00:48:52] Speaker B: Thanks, Jen.
