Breakout Valuation: How to Finance Your Future Today

By Patrick E. Donohue

WARNING: Investors and lenders do not want you to read this book!

With trillions of dollars at stake, those who own and control investment capital profit handsomely by severely undervaluing privately held businesses.

Lenders lure you with teaser rates. Investment partnerships dazzle you with fancy marketing materials. These are the tools of their trade, helping them earn excess returns on your hard work.

Breakout Valuation provides entrepreneurs with the insider knowledge they need to build what matters—a valuable business.

Written by an author who shares your entrepreneurial journey and has spent three decades investing, analyzing, and advising billions of dollars of transactions, Breakout Valuation tells you everything you need to know to finance your future today.

You can finance growth and stick to your moral compass while avoiding the tricks of the hucksters who want to take outsized returns on your hard work and innovation. You hold in your hands the knowledge to achieve a Breakout Valuation!

• Language: English
• Publisher: BookBaby
• Release date: Sep 20, 2022
• ISBN: 9781544529530

Book preview

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copyright

© 2022

patrick e. donohue

All rights reserved.

breakout valuation

How to Finance Your Future Today

isbn

978-1-5445-2955-4 Hardcover

978-1-5445-3768-9 Paperback

978-1-5445-2953-0 Ebook

Contents

Introduction

1. Valuation Matters to You!

2. Confidence: You are the Answer

3. Curiosity to Ask the Right Questions

4. People and Intentional Community

5. Communications: Don’t be a Ghost!

6. Trifecta of Cash Management

7. Entrepreneurial Numbers

8. Cash Forecasting & Analysis

9. Capital Ecosystem

10. Accessing Capital

11. Capital Strategies

12. Business Design

13. Tying It All Together: Breakout Valuation

Conclusion: Securing Entrepreneurial Legacy

Resources for Further Reading

Acknowledgments

To my fellow entrepreneurs, thank you for the inspiration! A special recognition of Chris, who laid aside fear and self-doubt and won.

Introduction

We sell things of great value for things of very little, and vice versa.

—Diogenes Laërtius

You started your business to earn a living, but you are building your business to create value.

Your business is likely to be the most valuable asset you control. It is also the vehicle for your Entrepreneurial Legacy, which is the reputation you build through your entrepreneurial actions.

Few people think about legacy in the heat of Aha! moments and the frenzied startup phase. But let me guess. You used words like burn the bridge, sink the ships, and set sail to describe your leap from a safety net to being 100 percent responsible for your own income. Dreams of independence fueled your excitement. They guided your early moves and helped you weather some startup storms. You would show the world what you are capable of.

Now you own your own business, and its impact on your life is growing. Let’s take a moment to celebrate. YOU DID IT! You really did. You did the hardest part! You have accomplished what very few people—substantially below 1 percent of the population (estimated to be three out of every thousand people!)—ever have or will. You built a business with your own sheer grit, talent, and determination. I know you have the war stories that go with it.

Chart shows the percentage of adults who are entrepreneurs in the US. This data shows the rate of new entrepreneurial activity per 100,000 adults in the US from 2000 to 2019. In 2019, the rate of new entrepreneurs in the US was 0.31 percent, or 310 of every 100,000 adults.

This book was created to help you take your business from scrappy bootstrapper to financially independent to a secure Entrepreneurial Legacy. This is for you, with deep respect and full acknowledgment that your journey has not been easy. This book does not attempt to make anything easier for you; rather, it is all about illuminating blind spots and providing powerful insights and frameworks to achieve what really matters—owning a valuable business. The purpose of this book is to give you the resources necessary to obtain financial independence through a Breakout Valuation.

A Breakout Valuation is a way to get the value for your business based on its future potential and not just what it has done in the past.

Owning a valuable business gets you to the ultimate goal of every entrepreneur—freedom. The freedom to work the hours you choose, expand when you choose, and sell the business when you choose. A valuable business provides independence: your business does not need to rely on external capital, and if you choose to bring in outside money to fund growth, you get to pick your partners. Very few business owners actually achieve such freedom of choice. The goal of this book is to give you knowledge and tactics to obtain a Breakout Valuation and join that rarefied club by sharing our experiences as well as what other entrepreneurs have done to secure financial independence. You deserve financial independence as a reward for all your hard work and the risks you and your family have taken. You deserve to enjoy the fruits of your Entrepreneurial Legacy.

Your Journey. Your Legacy.

What comes to mind when you hear legacy? Legacy is all about you and your deep, personal motivations. Legacy is the thing that nags at you to succeed so you can enjoy certain experiences during your lifetime and leave this world known for something. Legacy is created out of building lasting value. That value may be tangible, like money, or intangible, like reputation. At the end of the day, at your funeral and beyond, it is what you want people to remember you for—what you would like them to say about you when you’re gone. Maybe it is simple: nice or easy going. Or maybe it is audacious: really changed how everyone in her industry did XYZ! or he was a trailblazer in this innovation!

Entrepreneurial Legacy is determined by your impact as an entrepreneur through your entrepreneurial creating, building, and risk taking.

For many entrepreneurs, their company creates their legacy day to day through current social impact. For some, the only legacy their company will build is the cash it generates.

You have already had an impact on your industry, community, and employees and their families. You will continue to make an impact into the future. Your legacy already exists, but you picked up this book and started reading because you are still gunning for the big win—ringing the bell—homerun in an effort to secure your Entrepreneurial Legacy by building substantial value.

Why Your Journey Matters

What you have been gunning for all these years is really about optimizing your legacy. Optimized legacy is often very obvious. The bell has been rung. Someone achieves a big exit or owns their business and can enjoy working remotely and truly being an owner and not an employee. They have achieved a freedom to intentionally optimize their legacy by choosing what they leave behind and crafting the story that they want to be known by. Keep in mind, it is not about material wealth. The vast majority of people feel they need money for this, but for some, such as spiritual leaders, little to no money is required.

Who comes to mind when you think of someone who has secured their legacy?

You might think legacy optimization requires a harrowing journey that comes with a big payday or fame. You may think of Steve Jobs, Winston Churchill, James J. Hill, John D. Rockefeller, Mother Teresa, or Nelson Mandela. But there are people in local communities throughout the world who optimize their legacies without accruing national fame or great fortune. These people work to make the world a better place through their time, treasure, or talent. Think of the local machinist who hands their business over to their kids, the financial advisor who writes a book full of their business wisdom for the next generation, the community dentist who donates money and has their name on the local school, or the artist who inspires community art projects that will last for many generations. Through their work, they seek and achieve a legacy. Their work inspires others, allows future generations to build on it and creates wealth that betters their communities and the world. Everyone has the potential in them to do this.

Who are the people in your industry or community who have optimized their legacy?

Let me guess. Your Entrepreneurial Legacy does not feel complete. You have more you want to get done. Most of us are somewhere on the journey to optimizing our legacy. We are focused on making sure the train stays on the tracks and continually praying the light at the end of the tunnel is not a freight train heading our way.

The goal is to increase the odds of successfully optimizing your legacy while lowering the risk of failure. A big piece of that equation is making your business as valuable as possible. You may wonder, Why do some entrepreneurs get breathtaking valuations for their businesses, while the majority of entrepreneurs struggle to get any value beyond what they might have had if they simply had a ‘real’ job.

The focus in the pages ahead is to help you build a valuable business and secure your Entrepreneurial Legacy. To accomplish a Breakout Valuation, it is best to start with the end in mind. And at the end, all that will be left is your legacy—what you will be remembered for and the freedoms you created to live out your final days.

Remain Confident and Diligent in Your Journey

Many people want to grab your business on the cheap and crown themselves successful entrepreneurs!

Most of these people are using other people’s money—borrowing money from a bank or managing money from a group of investors. This is important because you are unique in that you have built your own business—you have done the unthinkable—and 99.9 percent of the people around you have never done that—including most advisors and most potential investors/buyers of your business! It is important for you to realize and remember this, as this book is going to challenge you to build on your current success.

According to Global Entrepreneurship Monitor’s 2018/2019 United States Report on entrepreneur statistics from 2019, 63 percent of US adults believe starting one’s own business is a good career move. An astonishing 45.5 percent of respondents think it is easy to start a business, and 56 percent believe they have what it takes to do it. You know the people who think entrepreneurship is easy are naïve! For more information visit https://www.babson.edu/media/babson/assets/blank-center/GEM_USA_2018-2019.pdf.

Meet Chris

You should have three months of expenses in a high-yield savings account to survive a drop in profits or take advantage of an opportunity, said Joe Smith.

In the past, I would often run very lean on cash until I learned the importance of having three months of cash in an emergency account. It took time and a lot of hard work to get my processes and discipline where they needed to be to achieve this. It was hard watching that money sit idle in a savings account; however, it recently paid off when I needed money to survive a 50 percent drop in sales during the start of a recession. Without that available cash, I would either be completely out of business and have nothing to show for the past fifteen years of building my business or I would be burdened with large debts that would have come with anxiety and sleepless nights, said Jane Smith.

Which feels better? Joe’s advice or Jane’s experience? Whose insight is more compelling to you? Both of them are trying to convey the same message—Joe and Jane are encouraging you to have a capital safety net to survive tough times and have money available when opportunities present themselves.

Humans do not want to be told what to do. They want to hear stories, anecdotes, parables, and inspiring quotes to help them frame their own decisions. People do not want to be should on.

In the spirit of experience sharing, throughout this book, we distill the stories from our many years of working with established entrepreneurs into a fictional character named Chris. Chris is an amalgamation of several entrepreneurs we have worked with spanning nearly thirty years.

Chris is a very successful entrepreneur who got her business going through her own hard work and grit. She was unsure and reluctant and doubted her capacity to create Entrepreneurial Legacy at critical junctures. She worked long, hard hours and made many great personal sacrifices to build her dream. Several times, her dream turned into a nightmare, and she wanted to throw in the towel and take the advice of friends and family to get a real job. But in the end, she achieved a Breakout Valuation and secured her Entrepreneurial Legacy.

The mistakes we have witnessed entrepreneurs making when building their businesses largely come from misinformation, not incompetence. As such, our most poignant stories are about the missteps—the trials and tribulations. Chris has wasted time and been scammed out of money, deceived by overpromising employees, and gouged by lenders and investors, but she learned along the way and, in the end, won.

Meet the Author

I was inspired to create this book to share the decades of experience my co-author and I have enjoyed advising and financing small businesses. I have started four businesses from scratch and created new businesses within larger organizations. Like you, I have scars from lessons learned in my own entrepreneurial endeavors.

I remember my own trials and tribulations when I left a real job in 2009 to plunge into entrepreneurship. Friends reacted strangely, and their questions dug deep into my psyche. As the years progressed, their questions, initially asked in the form of implied advice, just became blatant recommendations, such as Why don’t you work for 3M or United Health? They pay very well, and you can get benefits for life! As fabulous as I think these large companies in my hometown are, it was not the path I envisioned to create my Entrepreneurial Legacy.

The calling of entrepreneurship runs deep for me, but I did not realize why the calling was so strong until my mid-thirties. I grew up in a family of entrepreneurs and never appreciated it as a young person. I cannot even recall anyone ever using the term entrepreneur when I was a kid. My grandfather struck out on his own mid-career and took big risks, including buying a movie theater, operating lake cabins, starting a drive-in theater from scratch, and many other things that some people like to call side hustles. My mother owned a women’s clothing retail business. My father got his law degree after serving in World War II and grew his own legal practice as a sole practitioner. Throughout this book, I share the realizations I made along my own entrepreneurial journey.

My colleague and co-author, Nick Ehret, and I run Hill Capital Corporation, an investment fund dedicated to investing in privately owned small businesses. Nick is a Certified Public Accountant and has public accounting and small business consulting experience; I hold the Chartered Financial Analyst designation and have investment and financial forecasting experience. We are capital entrepreneurs working to bring innovation to financing private companies. This book is an example of our work and dedication to improve the capital ecosystem for entrepreneurs. Please note that all personal anecdotes in the book are from my (Patrick Donohue’s) perspective.

Our Journey to a Breakout Valuation Begins Now

Let’s get to work proving all your naysayers wrong and making sure you get the value you deserve from your business!

People who scale the highest mountains all have one thing in common—one strategy shared among them all—the first step. There are many aspects of running a successful business that get overly complicated. I know it firsthand. I have come to realize a secret to success is simply getting into tiny habits of doing the things you do not want to do. Everyone has their weaknesses and things they do not want to do that are essential to growth.

This book provides small steps you can use to tip flywheels into motion. We start with the foundation—the simple items easily within your grasp that make a big difference—and move onto the more operationally strategic topics in later chapters. We simplify the complex, allowing you to understand and act on our insights no matter your skill or comfort level with money topics. We provide design sparks to help you use what you have, identify what is missing, and develop habits and processes to get you to your desired outcome—Breakout Valuation and a secure Entrepreneurial Legacy.

You will be building your know-how throughout this book, and it looks like this:

The nine components of a Breakout Valuation are confidence, vision, curiosity, people, communications, cash management, financial forecast, capital strategy, and business design. Throughout this book, you will learn what goes into these nine components and how to improve your performance in each to raise your score and position yourself to capture a Breakout Valuation. We have also highlighted value drivers throughout the book. Value drivers are specific things, each associated with one of the nine components, which are the root causes of why some businesses get a Breakout Valuation. No business can, or should, master all of the value drivers. It is all about identifying which value drivers work well for you and your business and intentionally working on those.

The final chapter has a series of questions to help you assess your status. Keep in mind you do not need to be a master of any of the components or drivers; this journey is about increasing your odds of success.

This book is designed to start with the easy things within your control today and foundational to achieving more complex value drivers. The content within will help you simplify complex topics, with frameworks and Questions of Essence to distill what matters to you as the business owner.

Questions of Essence are important questions that enhance decision-making. Sometimes, the question itself is more of a guiding light than any answer. Throughout this book, we will be highlighting Questions of Essence to get you started. This topic is covered in more detail in the Chapter 3.

This book intentionally starts with some simple-enough concepts, like community building. Just as it may be obvious you need tires on a bicycle for it to function properly, it may seem obvious that you need some basic wheels, like community, to make your entrepreneurial journey more efficient. I have found in my experience as an entrepreneur and in working with other entrepreneurs that working on foundational skills yields the most traction and accelerates the acquisition of more complex skills.

So hang in there with us for anything that may appear obvious, as it is there to lay the foundation for value drivers that can transform your approach to building a valuable business. The goal is to inspire new perspectives, but the journey and destination are completely up to you.

Great things are done by a series of small things brought together.

—Vincent Van Gogh

The destination you seek is a mirage on the horizon. Your destination is a place of freedom, bountiful options, contentment, satisfaction—maybe even nirvana.

You don’t have control over the final outcome of your destination. But you do have control over your steps along the journey. The first step is real, as well as the next.

Throw out your conceited opinions, for it is impossible for a person to begin to learn what he thinks he already knows.

—Epictetus

Today, we will do what sounds simple enough—we take the first step and then another. Each step by itself is easy and, unfortunately, easy to ignore or take for granted.

To increase your odds of the mirage becoming real, please take to heart the first steps shared in this book. They are here to lay a solid foundation to what you ultimately care about—a Breakout Valuation and a secure Entrepreneurial Legacy.

Let’s begin!

1

Valuation Matters to You!

Just because Goldman says this is the right valuation, you shouldn’t assume it’s correct just because Goldman said it. My brother works at Goldman, and he’s an idiot!

—Andrew Ross Sorkin

For Chris to get what she thinks her business is worth, she came to realize she needed to understand how investors value businesses and glean insights into why some businesses are perceived as very valuable. She noticed that many of these highly valuable businesses have one thing in common—a leader regularly communicating a magnetic vision of the future to anyone who will listen. She realized she has kept her vision for her business to herself. She mentioned this to her peers at their monthly meeting, and they encouraged her to outline her vision to them. She anxiously shared her vision, and her peers were awestruck. We never knew you had robust goals for your business to achieve such levels of success!

Chris recognized she had important work to do. It was still fuzzy to her at the time, but she knew she needed a way to better communicate her vision to her team and stakeholders. It then dawned on her that her vision needed to be shared publicly as well and used as a tool to attract investors and lenders to help grow the business.

I have seen Chris, many times, realize her business is being viewed by outsiders as materially less valuable than what she feels is fair. But what really agitates Chris, and rightfully so, is that her smaller competitors—some of them brand-new startups—seem to attract large valuations, capital, and excitement. Her agitation is fuel for her burning desire to understand what outsiders see in other companies but not in hers. Most of her Aha! moments will concern how investors and business buyers view valuation.

What Is Valuation?

How do you value your company?

Is your answer a mathematical equation?

Is your answer addressing any items that create value?

If you answered the question How do you value your company? with something like a multiple of EBITDA, revenue, or customers, we created this book especially for you.

Academics and finance professionals attempt to make valuation objective, but the reality (in the real world that you know so well) is that valuation is subjective. Valuation is highly influenced by the personal views of the participants in a transaction. Knowing why and how experts and professionals use objective