The Forgotten Chapter - Operating a Business Like an Institution

Andres Sandate: 00:00:00

Foreign. Welcome, everybody, to another edition of ATL alts.

This is your host, Andres Sendate, and I am joined once again by Brad Gunter, the founder and chief executive officer of High Point Advisory Group. How are you today, Brad?

Brad Gunter: 00:00:18

Doing great. Ready to get back into another one?

Andres Sandate: 00:00:21

Yeah, let's do part two. We finished part one talking about acquisition as alpha and how as advisors and intermediaries to business owners, you know, we.

We could assist them in growing, if you will, their operating business or, you know, putting in place a framework to.

To acquire additional operating businesses and how owners and their advisors can think about buying the business and the different disciplines that go into that. So again, go back and check out episode one. Today in episode two, we want to talk about the, you know, the actual.

The business and the operator to the institution and what it looks like to actually operate and run the business at an institutional level. So I've got a lot of questions.

We, you know, went back and forth and sort of framing these up, but, you know, really today it's about the forgotten chapter.

I think so many times when we talk about M and A, we talk about acquiring and we talk about selling, we don't often talk about that middle road, that long road, sometimes a shorter road of operating a business. And so let's just jump right in. In episode one, we established that, you know, up to 75, 80% of an owner's net worth is tied up in their business.

Here's what strikes me. An RIA will be rebalancing a client's liquid portfolio, like monthly, quarterly, more often stressing it, reporting on it.

And meanwhile, that's only a small portion of the client's overall net worth when you think about their operating business, which is generating cash and probably growing if it's a successful business, and it typically remains untouched and it just sits there in the background. And for raas, what we're saying is we want you to get much more integrated, much more involved in understanding what's going on in that business.

So talk, Brad, about why the years between transactions, you know, the purchase and the sale, the years in between are the most critical and most often overlooked stretch in an owner's financial life.

Brad Gunter: 00:02:35

You know, great, great question. Great way to kind of start this thing.

I think, first of all, just, I mean, again, when we're talking to RIAs here, I don't think we're asking anybody to step in and actually work, run the client's business.

What we're asking is for you to kind of ask enough questions and be able to stay aware what it's doing when this goes dark, that's when it's kind of the most dangerous. You know, I'd say this is generally where 90% of the values created or destroyed during those years.

At the end of the day, you know, everybody focuses on kind of, as you mentioned, the acquisition or the exit. Those are just the pricing points. You've got to build the value in between those. And that's really where you create that multiple arbitrage.

That's where you create those large liquidity events. You keep going, going from there. And again, like I said, There's 90% or so of the values created in those years.

A lot of times nobody's managing this at all. So you've got an owner who's heads down. You know, it's kind of the one man band pulling all the strings.

And you don't have anybody stepping back saying, hey, what does adjusted EBITDA actually look like? And what kind of multiple can we get on these things? And under what circumstances can we expand ebitda?

We should be doing that on a monthly basis as we review financials. And under what circumstances can we get a higher multiple? It's a really simple equation when you come to sell your business.

So I mean, the big thing is I would say ask your clients, you know, what's your plan to grow even over the next couple years?

And if they just kind of look at you, well, I'm going to make sure there's cash in the bank account and I'm going to make sure we are avoiding a going concern. That's an issue. Right. You want to know which levers they're pulling.

You want to be able to have those intelligent conversations because the math is kind of brutal in both directions. Right. If it's flat, you're going to get a decent multiple. For if it's growing 15% year over year, it's a whole different ball game.

And especially if you can explain why and show that, hey, this is going to continue long after I'm gone, you can drastically improve your odds on the favorable exit.

Andres Sandate: 00:04:24

Yeah, and that's a good thing, not only for the owner who's worked his or her lifetime or in many cases, you know, grown a company amidst all the challenges. Right. We don't have to go into that, but it's also good for the advisor.

And if you're listening as an advisor, hopefully you're taking what we're discussing here and saying maybe this is an opportunity to go and sit with the clients and say, I want to be much More involved and integrated. Like Brad's saying, you're not running their business, you're not asking to, you know, step in and, you know, take over.

What you're asking for is more insight, it sounds like, and more perspective. Let's define when you talk about good operating infrastructure, Brad, what does that mean for a business?

Let's take a typical RIAS customer who's doing let's say 20, 30 million, up to 100 million of revenue. What does that look like when you say good operating infrastructure versus just running a profitable company now?

Brad Gunter: 00:05:19

Great question. And there are a couple distinct things we look for. It's a lot of gray, right?

So it's not necessarily black or white, but there are some black and white items, right? One that I think 80% of you will laugh at is make sure you're on accrual accounting for your financials.

We are looking at a couple new clients right now that are in the 60 million dollar ballpark that are still on cash accounting. And while I may be the best or worst CFO in the world, I don't care who's looking at numbers.

It's hard to make heads or tails of them, let alone somebody who's just been in operations their entire life. All those guys are doing is looking at the bank account and saying, hey, we have cash, let's keep rolling.

Not looking at this from an adjusted EBITDA standpoint, pushing it forward. Governance is another thing we always want to click into. Is there a board? Is there somebody that you're reporting to?

Are they meeting regularly to monitor KPIs and move forward?

You know, when it comes time to transact, if you can show, hey, here are the last three years board meetings with the notes and what we decided in each of them. And the same board is going to continue whether or not you would like to adjust it, or maybe you do want to adjust it, that's fine.

But that builds a lot of credibility, the systems and data.

You know, a business should be able to answer questions without having to go to controller and then having to go heads down for two or three weeks to get you an answer. Customer concentration, margins unit economics.

I mean, I can't tell you how many manufacturing companies that I work with that you walk in the door and they know ballpark gross figures on basically their entire operation, but they can't tell you on each product line for versus the ones that do. And you know, pretty quickly they're going to get a premium when it comes to the closing table. You want a management team, right?

You Want layers of management so that owner is replaceable. You know, at the end of the day, a buyer really wants to buy a bond. At the end of it, right.

You want to buy something you can either bolt on or something that's going to be consistent and slowly increasing in value over time and paying you cash. So you really need to think about it from that way.

Andres Sandate: 00:07:08

Yeah, I mean, I think what you're describing to me sounds like if I'm an RIA and at Gramercy, you know, we're trying to do more of this is we're sitting, you know, when we're doing let, let's say a quarterly update with a client and going through just the market and giving an economic update. You know, we're spending time in that hour, you know, getting a 20 minute update on the business. Right.

And, and maybe that's going to take earning a little bit more trust and maybe some confidence and positioning your RIA and your role as an advisor, a trusted advisor to that CEO or that C level executive as, hey, we're not, we're not trying to be nosy here.

What we're trying to do is hopefully put the raa, put the advisor in a position where they're looking at us and saying, this is an individual that's obviously invested clearly in growing the multiple, helping me grow the business and is asking much more operational questions than the, you know, the, the advisor down the street. Right. Who just wants to gather assets and just wants to invest my assets and move on to the next client.

Brad Gunter: 00:08:09

Well, really quickly, if, if you're kind of positioning yourself during that whole hold period as an interested party, you're a lot more sticky as an advisor than somebody that checks in quarterly or God forbid, annually to look at the numbers there.

As for the expertise, you know, I think most of us here are pretty competent financial professionals, but the operational piece like that's exactly where we're here to step in. Our bread and butter are two things.

It's really transaction advisory and helping manage those OPCOs in the lower middle market to really juice them, make them profitable and maximize that exit. That's exactly the gap we want to step into.

Andres Sandate: 00:08:43

Yeah. And that's one of the reasons why we partnered with High Point Advisory Group and why we are bringing them into the Endurance X, you know, platform.

It's not that you guys offer investment services and you're not an investment advisor, you're not a competitor, you're not doing the wealth management piece. What you guys are doing is a really critical, an important step in the role of serving our clients more holistically. Right.

You're, you're able to sit and have this discussion around diagnosing what's missing and then help the client, our mutual client, in, in many cases sit and identify what's missing and then put a roadmap together.

And that's what really episode two and we're going to talk about and then obviously in three is when we get through that piece is then preparing for Exit, which will be our third show. But let's talk about this diagnosis step. Because we sit down with a CEO, they're running a 50 million dollar revenue business.

They've got, you know, they've got all these different roles, right. Their coach, their player, their recruiter, they're the sales executive. You talked about that in episode one.

And yet there's some things that are falling short and you're walking into these businesses and we've seen that right. Before as well. But what is the pattern of what you see missing typically in these lower middle market businesses?

Brad Gunter: 00:10:08

Yeah, I would say it starts and ends with a cadence there. Right. I think a lot of business owners will say I run a $50 million business. Okay, 50 million. What are we talking cash revenue?

Are we talking accrual based? Are we talking profit? And they just kind of stop and, and back up for a second.

Well, hey, if you're running a half a percent net income margin business on $100 million, yes, you're making money. But you could really expand those margins and do a little bit better.

Andres Sandate: 00:10:35

Yeah.

Brad Gunter: 00:10:36

What we see pretty consistently is finance treated as an afterthought. There's cash in the bank, we don't have anything to worry about. We're going to be fine.

A more institutional way of looking at this is hey, everything is inline GAAP accounting. We are putting together a monthly financial report.

We're sitting down with a BE at high point, be it someone else, a fractional CFO or professional that knows this backwards and forwards and they're giving us advice to grow the company. Right. That you know, the companies where you see consistent 15, 20, 30% adjusted EBITDA increase year over year over year, that's not an accident.

They're pulling strategic levers month after month after month and realizing the vision of their leader. And that's what a key finance professional does. Other kind of pretty easy ones like in the owner dependency is pretty self explanatory.

A lot of times that's the issue is the owner is the only one looking at the financials and it's a Very different skill set. Most business owners aren't also chief financial officers, they're not controllers.

They may be bookkeepers, which means they just want to dive into the granular accounting details, which means they're just going to waste time, go heads down and say, yep, that looks accurate, not actually look at the bigger picture and work from there. A lot of times there's not a lot of separation between personal and business.

I know we've all got clients that run lifestyle businesses, love that while it's operational, but you're not really prepping for the exit, which is the single most important transaction you're ever going to have. And again, just that reliance on the bank account.

I can't tell you how many times we see that where folks say, got enough to go on a couple vacations this year and we're going to be fine, rather than building that institutional transferable asset.

Andres Sandate: 00:12:11

Yeah, I think the piece that really got me, you know, sort of thinking about where we can translate and transfer, if you will, a playbook to the RIAs that are listening. Again, our platform is much more than just investments and looking at private market strategies, etc.

What we're trying to do is give the advisors, hopefully the folks that are listening, toolkits, right, and, and resources and experts, you know, like yourself, who can sit with them to serve their clients. Right.

And in this specific area of, you know, Maybe you have 100 million 200, $300 million book of business, maybe you have a 50 million dollar client and you know, they've got a lot of liquid assets that they're giving you annually to deploy, but maybe they've got a really, really complicated set of assets that involve real estate, involve operating businesses, involve a whole bunch of other things. And I think that when you talk about things like IP and you talk about all this ownership and how it's arranged and the structure of it is something.

When we got to talking Brad, that I thought was fascinating about how you guys start to lay all that out.

And that was one of the reasons why Brian and I at GPWA were excited about building the relationship and why I'm like, this can translate to other RAAs. There's no reason other RAs should not have a Brad or Brad helping them. Right?

Because you're able to offer family office style services, family office style road mapping to clients that you can see have all these issues. And so walk us through, like, what does a clean structure look like?

You talk about things like Holdco and opco and real estate and IP and separating all of that to get the highest ROI for your owner clients. And I think, you know, we are spot on, like totally aligned around that, knowing what you own.

But when you, when you pull the org chart apart and you sit down with the client, like what is optimal when you, when you have all those different boxes and buckets.

Brad Gunter: 00:14:25

Yeah, no, great question. And I mean the favorite consulting answer is going to be it depends, right? It depends on your specific.

You're also going to want your tax advisor structuring this. You're also going to legal. But what, what I typically see is a lot of folks have an entity structure that they just happen to grow into.

Andres Sandate: 00:14:46

Right.

Brad Gunter: 00:14:46

The reason they have an operating company is because it was established years ago, then they bought some real estate and somebody told them to dump it into it. The IP is, wait, it's probably commingled with the operating company. There are, you know, it's kind of fewer, you need to think about it from 2%.

One is tax efficiency, which I know a lot of RAs on this call are going to be very well informed on. If not, there's some great tax professionals I know. Andres, you've got a number in your network as well.

There are essentially it's two questions, the tax efficiency and then it's limiting liability. Right. When one of these implodes, you don't want it to take out the whole ship. Right.

So even, you know, within our advisory group, for example, we're going to have multiple entities to make sure, you know, if something goes sideways on a transaction, then it's not taking out the recurring revenue. You want to separate all these. Right. So generic clean structure.

You've got a hole co at the top, you've got operating entities that are running by themselves. You may have a shared service client.

Andres Sandate: 00:15:43

Right.

Brad Gunter: 00:15:43

For instance, if you've got accounting or back office functions in one that are also going outside, great.

You probably want to ring fence that you want an IP company if there's some type of crown jewel, some patents, those types of assets that can stay off to on their self. That way you have some of the licensing rights and that type of thing set up. Again, it's going to depend specifically on that.

And honestly it's, it's pretty high ROI work. Yes. Nobody likes spending money on legal fees to get this done.

But what it prevents the kind of catastrophic meltdown if one of these hits everything. You want to isolate those risks in a circle separately.

So I would say definitely, and we're happy to give you our take on it, but you definitely want to talk to your Attorney on how to limit life liability with those.

Andres Sandate: 00:16:27

Yeah, I mean, one of the things that we talked about and I, I, I borrowed this term that, that Brad shared with, with Brian and I in one of our strategy meetings. Just flooding the zone. Right. Like you don't want to overwhelm the client with too much.

But I think it can be a thoughtful exercise around thinking sitting down with the client as an ria, as an intermediary, as somebody that's traditionally maybe looked at their investments and their taxes and retirement planning, maybe doing the 401k at their, at their, you know, for their firm or for the firm, stepping back and saying, have we looked at the ownership of the assets?

And you've got some really great consulting frameworks and things you've built and some of your ip, which, you know, we, you know, I think we would both agree, you know, sometimes just visually seeing stuff helps. And so for those listening, if those are of interest, you know, definitely reach out to me. Reach out. I can connect you with Brad.

Because I think as you sit down and you see how this, you know, really hits with a C level executive, with an owner, it just sometimes helps to have that fresh perspective.

And I think it gives the ria, you, the advisor, it gives you a really clean understanding about where are the different levers that you can make an impact. Let's talk about the framework and well, before we do that, let's talk about one thing you've brought up and that's the people. Right.

You know, because I imagine an owner can buy a software, you know, faster than they can replace themselves. It seems like with AI today everybody's talking about, okay, you know, what's the impact going to be?

How much of this is about systems that these owners and CEOs have and how much of the, I guess decision making is, is about, you know, the people.

Brad Gunter: 00:18:12

Yeah.

Andres Sandate: 00:18:12

In this new age we're in.

Brad Gunter: 00:18:14

Yeah. I mean, it's just daily. Right. But today what I would say is systems are probably 30%. Those are the easy parts.

Anybody can come in and say, hey, we're going to implement an ERP or you know, here's a new reporting package. Those are systems that we kind of breach. It's the, it's really the people operating those systems. Right.

I know a lot of folks think they are coming and everything else. Great. It's going to take, you know, all professional services at some point. It's going to do it.

No, what it's doing is making qualified professionals able to leverage their time more. Right. So what you're able to do. If you were to throw something in Claude or chat GPT or anything like that, it's gonna be 80. Correct.

But are you willing to chance that 20?

What we're able to do and where I see kind of the sweet spot is you've got a trusted advisor who's leveraging those tools to gut check it, to analyze the outputs, to make sure there aren't mistakes there. Regardless though, the individual that's pulling the strings on that is by far the hardest part. Right.

It's, it's, that's why we tell people, you know, there's three year exit prep. It's, it takes time to hand off your sales responsibilities to somebody else who's leveraging an AI tool for leads.

It takes time to manage operations. You could have the best systems in the world. You could be not, you could be changing zero systems. It's still going to take somebody time to step in.

And if I'm a buyer and oh, hey, here's the new guy, he started last week, you might as well have me insert somebody new. And essentially I'm taking a huge risk at that point. You want to have time in the seat for those individuals so people still remain the biggest item.

Andres Sandate: 00:19:43

Yeah, no doubt about it. Next piece I want to talk about is the framework and the build out. In this second episode, we're talking a.

Brad Gunter: 00:19:53

Lot about.

Andres Sandate: 00:19:55

How do we operationalize the company in a way and has an advisor as an ria like, how can we work with a high point advisory group, like somebody with your background to sort of create more value. In the third episode, we're going to talk about how do we maximize the value at the point of sale.

So this middle piece is where if an owner is say five years out from a potential exit, okay, we'll just use round numbers and wants to use this Runway. They have this five year Runway. Well, what does the build out sequence, you know, when you guys are sitting down with a prospective client?

I know it depends. There's a lot of gray and what you guys do. But what does that five year roadmap look like? Where do they start? You know, typically.

Brad Gunter: 00:20:40

Yeah, great question. And if you're prepping five years in advance, that's phenomenal.

The, the unfortunate reality is a lot of folks say, hey, I'm going to sell in five years, I'll start prepping in two or three. And then, you know, some unimaginable circumstance comes along. You have family, health issues, you have a downturn in your industry.

There are a number of things you Want to be positioned well ahead. So if something happens, you have to sell. A, you're not forced to, right? Yeah, you're, you're solely dependent.

You're not forced to because you're out of the seat. And then B, you have the option to continue on. C, it's a saleable asset at the time. Right.

So first and foremost, again, shocker from the finance and accounting guy on the call. Finance and accounting is going to come first because that's what's going to supply the data for every other decision. Right.

You want clean financials, you want monthly reporting that you can make confident decisions on.

Without more than an hour or so to compile these numbers, you should be pulling them from one system or they should be readily available where you need them to make decisions. Second, I'm going to say reduce concentration.

You're going to use that data to say, wow, all of my sales are coming in from one rep and he may be 65, 70 years old. Whether that's the owner or not, that's a huge key man risk. Let's try to separate some of that out.

Let's bring in a team so that, that way if he takes a vacation or if he retires or if she decides to take a sabbatical, sales don't fall off the cliff and it impairs your organization. Suppliers, same thing. If you're not, if you're a manufacturing business and you only got one supplier overseas.

I think we've seen what tariffs have done to folks because they weren't able to pivot fast enough. And it's devastating. Right outside of that, building a team is definitely going to take time.

Andres Sandate: 00:22:20

Right.

Brad Gunter: 00:22:20

So that's why the next step is rather than just, hey, we're going to diversify one person, it's building a team to help scale this. Right. Everybody looks at it as well. I've got to, you know, if I'm making a hundred thousand dollars a month to use easy numbers. Oh no.

If I have to hire a high powered executive that's right off the top. 20 Grand a month in payroll costs while you're also getting a high caliber employee if you do it right, which should be accretive in the long run.

It just takes time. You can't hire an executive team of eight or a management team with layers all at once.

It takes time to sequence these things, build it out and kind of get it put in. Right.

And then lastly, I would say that the last piece that very few companies or I'd say portfolios have from outside of Andres the part that you guys would touch is, is, is really that governance and capital allocation framework in a perfect setup. You've got the OPCOs distributing cash up to the whole CO and it's being reallocated systematically.

You're looking at, hey, if here are three companies, I'm putting a dollar into each of them, what am I expecting in return on each of those dollars? Start looking at these as an investment, right? Why are we continuing to dump money in the legacy business that's killing us?

There's these new profitable ventures we should be looking at. At that point the decision may be hey, let's sell that and reinvest into the new, new options we have.

At that point you want to start looking at this, I don't say like a dashboard because you are operating the businesses, but you want somebody to come in and look at that where you can reallocate systematically, where things aren't just being done on gut feel. That's what I see 99% of the time.

Andres Sandate: 00:23:50

Yeah, no, there's a, there's a graphic that you showed us that really hit home.

I, I imagine myself sitting with an executive and we're talking about markets and they always want to talk about investments and they want to talk about their portfolio etc, and then you say well could we shift the conversation and talk a little bit about, you know, the business and how your business is going and, and you guys have this four part framework which I love and you touched on it, but maybe you can and, and finish and, and round it out.

But this four phase roadmap, you know, phase, phase zero is like you talked about the OPCO stability and you said this in episode one, like if we don't have an operating company that's throwing off cash, we don't really have anything to talk about. There has to be something that's generating cash, right?

That's, that's number one that gives us investments to, you know, to, to, that gives us cash to make investments. That gives you know, you guys something to be looking at to optimize. Then you get portfolio visibility. And you talked about this also in episode one.

That gives us like a dashboard and analytics around what are the KPIs, what are the financials look like, et cetera.

Like imagine as an RIA knowing that, right, you don't have to go in and run the business, but bring in Brad, bring in High Point Advisories Group, build that out and now, okay, you know, once a month, once a quarter, like the RA is getting that dashboard, getting those analytics and saying wow, hey, Mr. Client, like awesome quarter. You guys are crushing it. Must have landed a couple new customers or whatever.

Then you have this whole thing about capital and decision controls, right? Imagine being able to sit there as an RIA and saying, Hey, I see that you're throwing off $3 million of additional cash like year over year.

Like where are you guys putting that cash? Oh, we're, you know, putting it into the business. Great. Have you thought about, you know, is that the best place to allocate it?

Do they even have a capital allocation framework? You know, and then lastly is just this optionality and scale, like how do you expand that 3 to 5?

I just thought that framework really hit home because it allowed us as advisors to step in and, and be able to have a much more strategic conversation than just talking about the economy and talking about tariffs and talking about the market. It's like we're talking about the crown jewel of this person's, you know, literally their net worth is their business. Anything you'd love to add or.

I don't know if this is a great time to sort of, you know, walk, walk people through, you know, this framework that we're pulling up.

Brad Gunter: 00:26:11

Yeah, absolutely. Apologies for the crude roadmap drawing. I promise our slide where it's getting a little bit better as we go on, but I think you nailed it.

I'm just going to reiterate. It starts with phase zero. There's no role for an ria there's no role for our group.

There's no role for anything without a cash flow positive company generating positive gains in order to redeploy either into itself to its employees or keep going. The phase most people are at is that phase zero, right? They don't have the visibility, so that's the first thing you come into.

If we can get them to two or three before sale, the exit's a lot smoother and we'll get into that in episode three. I would say really just being able to make those decisions.

You know, for instance, you, Mr. RA, you can come in and say, hey, you're spending off 3 million cash. Should you be reinvesting? Why don't we go acquire some competitors? You know, there are.

And if you need help with that, we can absolutely help with that as well. We help source, buy side deals and identify market mapping potential, potential acquisitions.

Anyone who's curious in the multiple arbitrage opportunities here. It is one of the great wealth generating secrets of this time in the world. I mean, it is truly an opportunity with the silver tsunami going on.

So Just being able to have those conversations and kind of plant the seed.

You may be, yes, you're delivering great returns from a liquid portfolio standpoint, but if you can drastically increase that exit value, that gives you a lot more capital to play with on the back end of this as well.

Andres Sandate: 00:27:41

Yeah. And I mean, as, as an RIA ourselves, like, we want to attract, you know, higher net worth clients that have more sophisticated needs.

And that's one of the things that we set out in building Endurance X was we wanted to have a platform that could offer a mix of different things. Right. Investments through the private markets offerings, the alternatives, which we felt like is a growth aspect of the wealth management business.

More and more clients are asking about diversifying strategies, diversifying solutions. But I also know as a, as an owner of that business, you know, and talking with Brian, like, that's not enough to attract people to the marketplace.

We have to offer other things. And when we met, it was like, evident immediately. You're talking a lot of the same language that we're talking as advisors.

You're just talking about it through a different lens. You're talking about building out a roadmap to create more value for your customer, your client.

We, you know, historically, as a, as a, I guess as an advisory community are the ones waiting for phase three, which is the scales happen, the optionality of what to do next. The liquidity event takes place and voila, you get a phone call and somebody wants to, you know, give you another $20 million.

What you guys do, and where we are increasingly partnering is stepping in and saying, Mr. CEO, Ms. CEO, can we sit down, introduce our firm, introduce our partners at high Point, and let's lay out, what does a roadmap look like for you as the executive effectively running this family office? You've got this operating business, you've got real estate, you've got ip.

And I think this graphic, which is something that we can make available, and I know Brad's team can share this, it just spelled it out real clear. And I think for an executive level discussion between an RIA and a client, I think it's pretty powerful. Yep.

Brad Gunter: 00:29:33

The other quick thing to jump in on, if you can get to phase two and three, what we're talking about at that point is what is the best return on your capital? Yeah, that's one thing we absolutely want the RIA involved in.

I think everyone on this podcast who's tuning into this would agree if, if you have an advisor that's going to make them more profitable on the exit.

But we're also looking at, wait a second, if you spend all this time and money and a headache integrating M and A or just continuing to invest in the business, what can we do with that money elsewhere? The other thing we always look at is how much cash is actually kept in the business from a liquidity standpoint.

I'm sure we've all got clients who feel really good about the money in the bank account. Looking at it, say, hey, best case scenario, it may be in a money market account inside the company.

Why don't we reduce some of that, give it to your RIA who's generating double digit returns year over year. That's the smartest thing for you with your money.

We will send that to you and let you handle that from your, you know, your area of expertise, if you will. So that's something. It's not just a one way referral source.

A lot of times we're coming in saying, hey, you've got 3 million bucks in a non interest bearing account. What? Why? Right. There are a lot of things we can do with that trapped capital to unlock it and obviously it would go straight through you guys.

Andres Sandate: 00:30:49

Let's talk a little bit about this family office readiness framework.

I know that that's a, you know, that that's an area that attracted, you know, us to want to dive in and do this series is I felt like it's one thing to talk about the, the buy and the sale, but I think this middle episode is super important. Hopefully people won't just skip straight to three, right? It's like, let's talk about the exit, let's talk about the liquidity event.

That'll be a big one, big discussion. We'll do that shortly. But let's talk about this readiness Checklist for the RIAs that are listening specifically.

I mean, again, this is all about empowering them with tools and resources.

If you're an RIA listening and you're saying to yourself, I want to be able to assess where my clients actually stand when it comes to operating and running like a family office.

Whether you offer family office services or not, as an ria, the ability to sit with a client, you know, some of your more sophisticated, you know, ultra high net worth clients in particular, which I'm sure many of our RA customers have a few or at least aspire to have more of them, you want to be having this strategic level discussion and see where their stands. What are the nine? Maybe walk us through those. And then which ones do you think in your experience? The owners that you've sat with.

Which ones do they care about?

Brad Gunter: 00:32:06

Yeah, great question. So to give a little bit of background on this, when we have clients come in, they're really in two buckets, right.

We always start with an assessment, every single one of them.

We're going to deeply analyze the financials, we're going to look at them, how they're operating from reporting standpoint, you know, soup to nuts accounting. We're going to handle the entire thing there. That's non negotiable. I don't care if I have to give it away.

We're doing that so we understand where we're starting. With more sophisticated clients benefit from this, right.

If you're already past phase zero, as this client was, they had a, the goal setting was, was top notch, you know, strong EOS client. They knew exactly where they wanted to be in one, three and five years. They knew exactly what they want do in the operating company. Right.

We looked at, we choose to look at the whole portfolio when we do this and we're like, great, what about the real estate? And they just kind of looked at us. They were speculatively. It was a home builder, not to be too specific on location, but custom home builder.

They're doing about 20 million in revenue on this one. And there were, there was no goal setting. They would buy a random rental here. Oh, my neighbor had a field. I bought that.

Oh, hey, we may develop these one day. That doesn't work. That's not the most way to effectively allocate capital and expand. So that's really what led to this is us going through.

Okay, let's, let's assess them if they really want to.

I mean this, this gentleman in particular said, hey, I want to work construction company, I want to buy a fencing company, I want to buy pest control. I want to keep expanding by competitors. I want to vertically and horizontally integrate a bit as we expand here.

And what it let us do is say, hey, you're not in a place to do that right now. Right. Like you're running a very profitable business, but you're not there yet. So we came up with these nine dimensions to really score people.

We've, we've gone back and forth now it's more of a numerical exercise. This was kind of a, you know, scale of one to five type thing here. It's a, you know, fully in place, partially in place or not in place. Right.

So going through those governance and control, it's really. Are you meeting as a board? Do you have a regular review cadence that we're handling with an outside party to hold management accountable.

Accountable whether or not the owner of the company is, is, you know, on this board, they should be answering questions. And I think we can all find value in being held accountable for what we should be doing or at least explaining ourselves.

On the legal and entity architecture standpoint, there was room to improve there.

I would say they, they kind of had a, I mean they had a reasonable structure, but there was a lot more they could have done from a tax and liability limiting standpoint. Financial infrastructure, that's what we spent the majority of the call talking about is, hey, what's the reporting look like?

How are we handling that? Capital allocation, investment discipline. They got a zero on this one.

And that's where we see folks saying, oh, my neighbor wants to sell this company, so I'm going to buy that one. That may be a great acquisition. But how would you know? You haven't gone out to market, you haven't tried to strategically source deals.

And this is what we see a lot of times doing it well.

Andres Sandate: 00:35:00

Or there was business was on sale, so we just bought it and tucked it in. But it doesn't maybe have the capital allocation exact decision framework applied to it, right?

And so, and imagine as you have more cash to deploy, more opportunities suddenly find their way to you, right? And all of a sudden you look up and you have a closet full of stuff. And is it, you know, is the, is there a framework that's being applied?

Is there a discipline that's being applied? I mean, anybody can walk in their garage and probably pull half the stuff out and say, I really, really use it anymore, right?

And I'm, I'm like that, right? Just got a lot of tools I don't need, right? So, so the same is with business, right?

I mean, you just end up with a lot of assets when you are wealthy and when you have a lot of capital to deploy, you just end up with stuff and doesn't fit.

Brad Gunter: 00:35:46

Yeah, exactly. I mean, most of these guys can't answer what is your weighted average cost of capital?

What return do you need to be for a break even on this investment, let alone, hey, I know if I, if I hand my money to Andres, I know he's going to get x percent.

Andres Sandate: 00:35:59

Yeah.

Brad Gunter: 00:36:00

Why would we think about doing anything if it's not substantially higher than that and we're going to take more risk on it? You need to adjust that risk reward. So that really wasn't in place to kind of round these out.

So risk management, asset protection, pretty self explanatory in that one human capital and shared services. Do you have shared services you can kind of deploy across? Is it set up properly?

What we see a lot is the main OPCO is employing everyone and the services are being robbed elsewhere. Well, if you ever want to transact with any of those other companies, it's going to be a major exercise.

You're gonna have to pay someone like me to come in and right size it. And it's ultimately not accretive so you might as well set it up to start with tech and data. So what systems and tools are in place?

That's a pretty self explanatory one.

And then the strategic optionality and exit readiness, that's where you want to say hey here, you know, here's the data room that we keep stocked quarterly. If someone wants to come make an offer, I think everyone, if they're approached should listen to the offer. Never say no until you know what it is.

But until you have the data ready to go and a sample data room to say, oh sure, we haven't updated it in six months, but here's what it was six months ago. We can update that by today's Friday. Wednesday, we can have that done for you if you're curious. Right.

That's a much more powerful place to be X name company than now. So hopefully that gives everybody a little bit of insight and kind of what we walk through. Area for improvement across all of these.

Andres Sandate: 00:37:13

One quick follow up I'd love to ask you about that's just come up more and more is cyber and cybersecurity and just how do you help customers when you see areas that are just there's exposure. Right. Because that's a real red flag.

And when you get into diligence on buying companies or advising on purchase price, I would imagine that this is an issue that's come up. Have you had a cyber incident? Is there strong controls in place? Maybe you could speak just to that for a few seconds.

Brad Gunter: 00:37:41

Yeah, absolutely.

I mean in this day and age, you know, you've got everybody in a family, office or organization that's got some type of cell phone, some type of laptop you've got. I mean many folks employ individuals overseas with no virtual desktops, that type of thing. So it's always something to look at.

I would tell you trust that to the experts. Right. I know that's not a particular area of our expertise, but we do have some strong partners.

And Andres, I'm sure across the platform you also have some to recommend here, but absolutely, that's a huge risk that we look at on every single acquisition.

Andres Sandate: 00:38:15

Yeah.

One of the areas I think we can both agree on, you spent some time on this in the framework was the institutional discipline around capital allocation.

I mean, I think as RIAs and wealth advisors and many of the people listening would probably say they take great pride in being able to, you know, be objective and help their clients think about a way to have a discipline, to be diversified, to have a structured approach that's nimble and flexible and can take advantage of market opportunities and inefficiencies, etc. I mean, that's something that I think a lot of financial professionals are attracted to the wealth management business around.

But capital allocation as an owner and capital allocation as a busy family office executive that's got an OPCO and has real estate and has IP and has all this stuff going on, I think sometimes can get sloppy. What I thought would be really good is if we just spent, you know, a second or two talking about what does that discipline look like?

You mentioned weighted average cost of capital. What are one or two things we can leave our RA audience with when it comes to how do we introduce this touchy subject?

Because we're not talking about, hey, let's go deploy more capital into, you know, the bond market or to the stock market. Let's talk about, you know, buying businesses and does it meet like an internal threshold of our cost of capital?

Can you speak to that just for a second or two?

Brad Gunter: 00:39:39

Yeah, absolutely. Once you're above the, hey, I have a single operating entity and that's what generates cash and that's what I do with it. At that point.

It's basically you've got a couple options to do with your money.

When you've got multiple options and, you know, you've got a president of each company, you've got your, your property manager saying, hey, the apartment complex you bought three years ago needs a new roof. And you know, the HR and your op codes, you know, hey, we need to hire 10 new people for X, Y and Z.

And oh, by the way, I haven't been investing like I'd like to. You have a windfall or, you know, you continue to generate cash, what do you do with it? So perfect world.

Free cash flow is always going to flow up to the whole go. And it goes into forming there. There are other options, but four doors, right?

So it's either acquire, reinvest in that Ottko, distribute to the family, which you're going to have to do. Some of you, you got to eat, you've got to pay the bills, we certainly understand that. Or do you want to pay down debt? Right.

Where do you want to go with that? Within reinvesting? I would say there are a lot of options there into different OPCOs.

There may be a point at which we say, okay, great, let's get a written framework.

Actually, that's probably the next step is get a written framework with return hurdles, approval thresholds, and part of that is give money to the ria right there. There should not be a scenario where, okay, it's the end of the year. Here's, you know, a check.

This should be a regular cadence where, hey, I know a portion of this is going to. Andres, I know a portion of this is going back into the business to fuel growth.

We've got some great opportunities and then we're going to look for a transaction or two, we're going to acquire a few things, we're going to move on from there. The cadence needs to be at least quarterly. I know, Andres, you'd probably say faster, say at least quarterly. Things change.

The market shifts with interest rates. I know we're seeing that across all asset classes.

But in buying companies, if that gets a little bit cheaper, probably time to make an acquisition before, if you can find some good deals. And I mean, the whole key is having the owner shift from just an operator.

Hey, what is the biggest problem in the business to taking a step back and saying, hey, you know what, Honestly, I'm fine if we're undermanned slightly over here because my return on that dollar is massive on this opportunity. So you're starting to look at it more again as an investor in your own portfolio than just an operator.

Andres Sandate: 00:41:51

Yeah, yeah, no, no question.

I mean, it's, it's really fun sitting here talking with you about this stuff because it allows you as an advisor to really take your, you know, if you're a CFP or you're a CFA or somebody that really just, you know, gets excited about diving into the markets and there's some big IPOs that are, you know, coming, you know, to the table with SpaceX and anthropic and others here in the coming weeks. So there's a lot of excitement and probably a lot of questions.

But there's also the day to day of your clients lives and 70, 80% or more of their net worth is likely tied up in that business, in those operating businesses.

And so I, I think what we're both trying to say is have a regular cadence, get much more integrated into that conversation and a great way to do that, like, for us has been just building the relationship with you guys because this is the language you guys speak, these are the services you offer. And we look like a superstar when we bring, you know, you guys to the table. And, you know, and, and, and, and it's just that simple, right?

We will ultimately have a client that's much more organized. We'll have a client that's got a, a business that we have more visibility around.

We'll have a client that's got a business that's growing in value, and we'll have a client where we have a much, much higher probability of when there's a transition or when there's a liquidity event of having more assets and not less assets, you know, to, to go and deploy. And I think that's something that most RAAs, you know, on the call, you know, would say they want, right? They want to grow their book of business.

Can you talk about why the operational, you know, setup and why getting it right?

Like, maybe there's an example you can give in terms of exit value, which we're going to, you know, we've, we've got a few more minutes, but teasing out what we're going to talk about in episode three, which is the exit. Can you give, like, in real dollars, like some of the. Maybe there's a bad story out there or unfortunate story out there.

When somebody said, man, I thought I had this all set up to go and get X and I was going to be able to, you know, go retire to the mountains or to the lake or the beach. And then you go through the process and it's like, sorry, you're going to get half or less than half of what you anticipated.

Is there an example you could share?

Brad Gunter: 00:44:04

Yeah. So we're in a unique spot on this one. It's a great question. Typically our clients are in a better spot because we preach this.

And frankly, we don't really keep clients, they don't like listening to us. I don't say lecture, but insist on, hey, you've got to instill the discipline. You've got to go forward from here.

If they're not interested in doing that, we're not the right fit for them as a financial advisor in any capacity. So I would say ours don't experience this a lot of times. That said, we do buy and sell sides, diligence reports, right?

We do quality of earnings, we do the whole nine yards. And I mean, I can't tell you how many times, both on the sell or buy side, we're getting in too late, that's zero operating prep.

We see companies where we come in and we run a proof of cash and we literally have no comments. And then we say, okay, we need to do more analysis just to provide value and earn our fee so the client feels acceptable.

But we know this, this business is airtight. There's no comment on that one, right? On the other side, I've seen them that just absolutely implode at the closing table.

You know, for instance, we're doing one. We've done one recently. It's about a $15 million transaction construction business.

And I'll give you two construction examples because they're notoriously bad because of all the accounting upkeep, schedules, job costing and the like. One had a $15 million offer with a $5 million seller note, 10 million cash. Close, we get down to the finish line, they've got no inventory system.

They've got nothing to tie to. There's no way to track cogs. We literally can't do anything to write us outside QE and save this thing.

That one's going to transact it a fraction of the cash value. Now, if it transacts at all, this guy's got a couple options.

One, it can either go back to the drawing board, say, hey, we're gonna hire you guys, we're gonna implement all these things, we're gonna run it for two years, and then we're gonna probably worth the money, in my opinion, for what he's gonna get in cash. Alternatively, he can close, but it's likely an earn out a seller note and a little bit of cash from a family office. Guys, everybody on this call.

If you hear one thing today, this seller note is not guaranteed on this. If the business doesn't perform, you're trusting the business to somebody else. Sometimes it's the only way to bridge the gap.

In these scenarios, you're not guaranteed that money. So the cash value at the table went down from guaranteed 10 to 3. And we'll likely never see that 15 unless a freaking miracle happens.

Running through this, another one I've seen recently was a one out of Miami. They actually did not work with us. It was about a 5 million EBITDA, 30 million revenue construction company. This is kind of a funny one.

They literally had nothing but handwritten invoices, orders, change orders, period. And they were very confused why. They'd been in and out of LOI with private equity four times in the first six months they'd been on the market.

Well, the guy wouldn't. It would have cost about $150,000 to go in and recreate the financials. So someone could actually pull the detail out of it.

They wouldn't even pay that. Yes, nobody likes paying for accounting and financial services in that aspect. But you're stepping over dollars just to save pennies at that.

They're never going to transact if they can't get something reasonable.

Andres Sandate: 00:47:18

Yeah, yeah. And we've all heard about those clients that we were going to close three times we were under loi and it didn't.

And now we're hearing the reasons why oftentimes. Wrapping up episode two, we've talked a lot about operations to finish up.

Let's talk about the advisor's role in this and you know, make sure that the advisors that are listening because again, we're doing this to hopefully empower RIAs. Yes. We want you to work with us at EnduranceX. We want you to look at the investment opportunities. We think we have some really great ones.

But more importantly, we want you to be empowered with more tools and more resources and more from our platform partners like Brad and High Point Advisory Group, to go out and win more business and to attract more clients and to serve your current clients in a deeper, more strategic way. So let's talk about the advisor's role. Here's the question.

I think every RIA listening is sitting there asking themselves, this is not wealth management. I'm a wealth manager. Like my job is a wealth manager. And what is my role during these operating years?

I know that I need to be there 612 months before the sale. Maybe during the sale with the M and A people, with the lawyers, with the tax people, understanding, guiding my clients, sitting next to my client.

But it sounds like you're asking me to be there like quarterly or having these conversations about their operating business. Quarterly. Where does this partnership come in? If I'm the RAA and I'm listening to this.

Brad Gunter: 00:48:48

Yeah, it's a great question. And listen, I think flooding the zone is a great way to say this. Right when I need somebody. Just.

I mean, we had one of these recently where they said, hey, I need somebody to evaluate alternatives, assets. I know, I know the guy. I've got it. There's.

Andres Sandate: 00:49:02

And we appreciated that intro.

Brad Gunter: 00:49:03

Yeah, it was right there. I'm like, awesome. That makes me look great. And I don't have to pretend to be something like that.

I'm not asking you to come in and do a 13 week cash flow forecast and start operationally managing receivables and payables to stretch working capital and figure out how these things work. What I'm asking you to ask the question because you're there for your client, you can quarterback the relationship.

We will come in and do an evaluation depending on what they're looking for. Typically it runs in the we charge as much as 30 grand for it. Right now we're offering free evaluations on all companies.

Now if you want the full back daddy family office thing, there's a little bit of cost there, just a couple of cases, but typically it's either free or a very low charge to analyze it and if they enter into a long term relationship, it's immediately credited back. We will come in, inspect the company. We will work through everything from an OPCO entity structure. We'll make recommendations.

Typically we issue a value creation plan and I think our smallest ROI is about 300% or so with the things we found. It is a very small cost and a very large gain and we can at least detail the roadmap to show you guys where you need to go.

Andres Sandate: 00:50:12

Wow, that's amazing. Okay, last one for this episode. Episode 3 will be coming out real soon. We're going to talk about exit, but I know you got to hop and I got to hop.

But for the RIA who's got a client, they're three years out from from an exit. They've said that to the RAA and the operating infrastructure is just not there. The RAA knows it and they're listening to this.

What's the first move they need to make this week? Who do they need to call?

Brad Gunter: 00:50:36

Yeah, hopefully we can get my information in the, in the show notes here. Reach out to me directly. I'm happy to jump on a call. I'm happy to walk through it again. We're here to help clients and provide value.

I'm a big believer in value first, so if you need somebody to have that conversation with you individually first or with your client, which at some point we'll get there, please just reach out directly to us online or via email.

Andres Sandate: 00:51:02

Awesome. Brad Gunter, Founder and CEO of High Point Advisory Group.

Thank you for joining me on ATL Alts for this second episode to talk about the operating of the business. Episode three will be coming out soon where we're going to talk about the exit plan. We'll leave it there for today.

Brad, enjoy the rest of your afternoon and we will talk soon.

Brad Gunter: 00:51:20

Awesome. Thanks.

Andres Sandate: 00:51:21

Thank you.