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Finance Expert: Don’t Be the Bet: When Good Businesses Go Broke with Andrew Marianski · Budget Your Business

0:01
Scott: Hi, scott, host of Budget your Business, here, and I have a quick favor to ask.
0:06
Scott: After about a year of recording episodes of Budget your Business, I would really love your feedback.
0:12
Scott: So please take about maybe not even five minutes to answer eight quick questions in the link in the show notes.
0:21
Scott: That's it Just check out the link in the show notes and answer a couple of quick questions.
0:24
Scott: Thank you, and now on to the show notes.
0:25
Scott: That's it Just check out the link in the show notes and answer a couple of quick questions.
0:27
Scott: Thank you, and now on to the show.
0:28
Andrew: There's a difference between being the gambler and being the bet, and in this scenario, the venture capital firm is the gambler and they've got hands and hands and hands playing lots of different hands of poker.
0:38
Andrew: As a business owner, you're the bet, you're this one hand, so you've got a very different outlook and it's just in the nature of that particular relationship.
0:47
Andrew: But it's worth being really really aware of and careful about, and who you take on as a partner is so, so important.
0:54
Scott: Hello and welcome to Budget your Business, the podcast for small business owners who want to learn how to financially plan for every aspect of their business.
1:03
Scott: I'm your host, scott Geller.
1:05
Scott: Today I'm joined by Andrew Mariansky.
1:09
Scott: Welcome, andrew.
1:09
Scott: Thanks for having me, scott.
1:11
Scott: Well, andrew, this is actually the second time you joined us on our third episode technically the first guest on Budget your Business.
1:21
Scott: And still, I will add, one of the most listened to podcasts.
1:25
Scott: So not only that, but you're a first repeat guest on Budget, your Business.
1:30
Scott: So I guess the first question is how does it feel to be a celebrity here?
1:36
Andrew: Oh, it feels great and I'd expect nothing less from you, Scott.
1:38
Andrew: I'm sure you're going to be making celebrities left and right here, but no, it's fun Because is cause we actually went well, just to let your listeners know.
1:47
Andrew: When we were prepping here a little bit, I was like let's go play jazz, Cause it's, you know, it's a little bit of, we've got a little bit of a script but it's mostly off the cuff and it's kind of fun and see little bit about what they do.
2:06
Scott: And I like your perspective a lot because you've got a CFO background.
2:13
Scott: You're a partner in a business, you're a professor at University of Maine.
2:17
Scott: I know you have some rental properties that you run, so am I missing anything there?
2:26
Andrew: you, ron.
2:26
Andrew: So am I missing anything there?
2:26
Andrew: No, that's about it.
2:27
Andrew: I got a lot of plate spinning is the metaphor I like to use and then I got a couple of kids as well, which, between all those things, definitely keeps my calendar full.
2:33
Andrew: But yeah that's it.
2:34
Andrew: And yeah, finance background, and then now I'm just doing a series of different things, like you said, from professor and the rest of it, I kind of think, is bits of entrepreneurship and again, whether that's CFO, fractional consulting or managing real estate or helping small businesses raise money, all those kinds of things.
2:49
Andrew: So, yeah, a little bit of everything.
2:52
Scott: Good, and today's episode is going to take a little bit of I don't know if darker is the right word but a little bit of a pessimistic approach, as we're going to talk about ways, a couple of ways that businesses can fail, but also talk about what maybe you know.
3:09
Scott: What can they do to address some of these situations as well.
3:13
Scott: So how about we jump right into it, andrew?
3:16
Andrew: Yeah, that sounds great.
3:17
Andrew: And one of my favorite classes actually that I teach at the University of Maine is issues with small business, and it's great because a lot of these students are.
3:24
Andrew: They're actually like planning on starting businesses.
3:26
Andrew: So it's great to talk about failure before they've even started.
3:29
Andrew: It's a bit, you know, shakes their rattles, their cages a little bit, but it's good to do it before you're diving in and already in the middle of you know, neck deep in a problem.
3:36
Andrew: But yeah, one quote that I do like I can't remember exactly where I came across it, but it was failure is caused by failure to plan for failure, which there's a lot there if you unpack it.
3:48
Andrew: But essentially, if you think about how you can fail, you can avoid a lot of them.
3:53
Andrew: So those are the kinds of things I want to talk about.
3:54
Andrew: So, yeah, as you said, we've got a few topics.
3:57
Andrew: We'll just kind of jump in and see where we go here, but the first one and I know you've talked about it and you've had guests talk about it, but I'd be remiss.
4:05
Andrew: Not to mention is just not managing cashflow appropriately, that whole thing.
4:10
Andrew: That revenue is not the same as cashflow, and you can have tons of revenue and not have any cash because you're not collecting right or your payables are out of whack or you don't have any.
4:18
Andrew: You've overextended on inventory and your sales look great, but you're buying so much inventory to support upcoming future orders that you don't have to have money for payroll.
4:28
Andrew: Whoops.
4:29
Andrew: You know that's a big problem, but it happens all the time.
4:31
Andrew: So and I'm sure you've run into that one too but again, that's the.
4:34
Andrew: I think that's the number one cause.
4:36
Andrew: But again, I know it's been talked about a few times, but I don't know if you have any other experiences or thoughts on that too yourself.
4:43
Scott: Yeah, and I would say, Andrew, I think a lot of people feel like if they're growing, then things are great, right?
4:51
Andrew: Right.
4:52
Scott: And maybe you could kind of compare, contrast a little bit of.
4:55
Scott: You can be in a tough cash position when a company is on the decline, or maybe they're flat revenue or falling revenue.
5:07
Scott: Just as easily, and sometimes it's even more of a cash crunch when you're growing the business.
5:13
Andrew: Absolutely yeah.
5:15
Andrew: And that's the funny thing when you think about it.
5:18
Andrew: If you've got a long sale cycle meaning a long time between when you make the sale and when you, or, sorry, collection cycle, when you make the sale and when you collect the cash, it can be a huge problem because yeah, you've got all these sales and you've got, like I said before, you've got to buy the inventory and get it out the door.
5:31
Andrew: And if it takes people 90 days, or sometimes if you're dealing with like Medicare or something you can take 180 days before you get paid, like again you're people you still have to, or every two weeks or whatever it is.
5:43
Andrew: And then, ironically, to your point around, when business is flat or down, sometimes because of that same situation or same dynamic, when businesses run into a flat spell or they start their sales, actually their revenues decline a little bit.
5:58
Andrew: They end up with a whole bunch of cash because they're not having to buy all the inventory and then all the past sales, the cash starts rolling in.
6:06
Andrew: Because they're not having to buy all the inventory and then all the past sales, the cash starts rolling in.
6:10
Andrew: So in a funny way, like you know, you've had clients that are like, yeah, revenue is kind of tough, the order book's not that great, but I got tons of cash and I don't understand that and it's like, well, that's why.
6:20
Andrew: Because you're not throwing all your cash back out the inventory.
6:22
Andrew: So yeah, it's just a funny thing and it's sometimes really counterintuitive.
6:24
Andrew: The boy is it worth understanding really well as a business owner?
6:26
Andrew: All those, um, you know those dynamics, um, and it's very, you know it's a business.
6:31
Scott: It's very in a business specific, but you should know all those dynamics about your cash flows like the back of your hand yeah, and, and the other side is I, you're knowing, knowing what's in your cash, the bank today doesn't necessarily mean that's the same amount that's going to be in tomorrow.
6:49
Scott: And just because you feel like you have enough cash, let's say you want to make a hire and you're like you know what.
6:58
Scott: This hire is only going to add $3,000 a month to my payroll.
7:03
Scott: I can handle it, right, I've got plenty of cash in the bank today.
7:06
Scott: What's the folly around that thinking?
7:10
Andrew: Well, and that kind of goes to.
7:12
Andrew: Let me grab another one of my topics around not looking for scenarios that could bankrupt you, bankrupt you.
7:19
Andrew: That's another.
7:20
Andrew: It's related to that planning.
7:22
Andrew: But I always encourage businesses I work with that were students, um, to be looking for like what could really go badly for my business.
7:31
Andrew: And I don't, you know, you don't want to dwell on it, but you just want to know what could happen.
7:34
Andrew: And sometimes that's like, um, if you've only got three customers and one of them goes out of business, and to your point about the hiring, it's like you've got, you've got, everything looks good, and you're like, oh, I can afford lots more people, so you hire two or three more people and then one of your three streams of revenue completely vanishes because that customer went out of business or goes to a competitor.
7:53
Andrew: All of a sudden you're like, oh crap, I'm toast.
7:55
Andrew: You know what I mean.
8:01
Andrew: I can't, I can't.
8:02
Andrew: This doesn't.
8:03
Andrew: And like, just really, look like what could absolutely take me out.
8:05
Andrew: Like doing stress tests, looking at legal and regulatory things, like, if you that's another big one like, do you have any environmental exposure with the stuff you're doing?
8:13
Andrew: Like, is it, could the EPA get involved?
8:15
Andrew: Cause man that can.
8:16
Andrew: They can just come in and say you can't do, you can't run your business anymore and you just have to stop Like you can't do anything.
8:22
Andrew: You know what I mean?
8:22
Andrew: Things like that.
8:24
Andrew: Yeah, I mentioned the diversifying revenue streams and also just not being aware of sort of strategic threats and the big one now would be AI.
8:32
Andrew: Like if you're not looking at how is this going to change my business or my competitor's business or my suppliers or my customers, all that kind of stuff, if you're not looking at that and seeing, like, how could this really disrupt things in a good way or a bad way?
8:46
Andrew: Or, even more importantly, if you're not thinking about that because that all that thinking should be part of your financial planning and financial forecasting and cash forecasting before you make that higher to your point, like, if one of these happens, can I, am I still okay, am I, am I going to survive?
9:00
Andrew: And if you can answer yes, then maybe it's fine to make that higher, but if not, then I don't know.
9:05
Andrew: I'd probably wait off and see how long you can squeeze by without making an extra higher.
9:09
Andrew: And there was a I think it was Andy Grove from one of the Intel founders used to.
9:14
Andrew: I remember two things he said, both of which were kind of depressing for me, but one was, he said, only the paranoid survive.
9:20
Andrew: I think that might've been the name of his book, and the second one was um, if you worry, you don't have to worry.
9:26
Andrew: I was like what kind of weird paradox is that the point was.
9:29
Andrew: If you're constantly worrying about things that can go wrong, you don't have to worry.
9:32
Andrew: You're doing the right thing.
9:33
Andrew: Like you won't be, you won't be blindsided, but if you're just skating along with rose, rose, tinted glasses and like everything's gonna be fine, he said you're toast, yes, but anyway, that was a bit of a long-winded answer to your hiring, but that's another one of the things that I see.
9:48
Andrew: Take people out is I'm not doing the death scenario planning or business death scenario planning Like what can?
9:54
Andrew: Really take me out.
9:55
Scott: Yeah, that's, I think, an important thing to do.
9:59
Scott: Maybe what are a couple of metrics that people should have their, you know, keep in front of them or their fingers on when it comes to looking at their cash and their cash flow?
10:09
Andrew: Yeah, that's great we bounce around on.
10:11
Andrew: The collection cycle is always.
10:12
Andrew: Huge is how quickly can you turn a sale into cash?
10:17
Scott: I would say just to add on to that, andrew, is what you typically hear is days sales outstanding or days to collect cash right, and that's kind of to be thinking about, because if that number of days let's say it's on average is 32 days, and you start seeing that creeping up to 32, 33, 35, and you start seeing that trending, that's when you really need to start worrying about it.
10:40
Andrew: Absolutely, yeah, totally.
10:42
Andrew: Another one I'd say is your ratio of fixed to variable expenses.
10:47
Scott: Yes, that's good.
10:48
Andrew: Being that, and I'm sure all your listeners know.
10:51
Andrew: But just variable expenses are ones that you can ratchet up or ratchet down with sales and the fixed ones are fixed.
10:55
Andrew: You can't change them, like rent as an example.
10:59
Andrew: And if you've got a really high fixed expense rate you can't weather sales volatility very well.
11:05
Andrew: And you know, some businesses are like that and that's just the nature of the business.
11:08
Andrew: But that's something I always pay attention to because it's a risk exposure point.
11:16
Andrew: If you know 90% of your expenses are fixed, like you've got to bring in the sales every month or you're in trouble, whereas if it's flip side, if only 10% are fixed, um, you can take a big decrease in in sales and still be okay.
11:27
Andrew: And that's why people do you know if you've it's, it's a decision point like do you put someone on the payroll or do you hire a contractor and outsource it Cause an outsourcing one?
11:35
Andrew: If you're outsourcing a contractor like a 1099 person, you can throttle them back a lot easier than you can an employee.
11:41
Andrew: So just KPI that popped into my mind.
11:49
Andrew: That has eluded me now.
11:51
Andrew: Anyway, they'll come back, I'm sure.
11:53
Scott: We can come back to that.
11:53
Scott: So I feel like we've kind of hit the cash pretty hard.
11:56
Scott: And again to your point, it's always a conversation I want to move to one that I bet a lot of people don't really think about.
12:04
Scott: But I'm with you.
12:06
Scott: It can be a big driver and that is the inattention to the work-life balance and that family's, marriage, partner, relationship with the business.
12:18
Andrew: Yeah, yeah, I think that's a really important one and one that's often overlooked.
12:22
Andrew: And I think there's a couple of ways to think about that.
12:25
Andrew: There's one on the just very selfishly focused in on you as an individual and forget about family and kids and wife and any of that spouse, husband, whatever.
12:36
Andrew: If you're burning the candle at both ends and you're just like working and working and working, and you're not paying attention to your health or your you know, your diet or your exercise or your sleep, I think is sleep is a huge one.
12:47
Andrew: It's not sustainable in long-term.
12:49
Andrew: You're going to be making poor or you could end up getting really sick or in the hospital.
12:53
Andrew: And I mean it's a slippery slope because it's like that one day of like, oh I'm just going to just eat junk food today because I don't have time.
13:02
Andrew: That one decision isn't going to make or break you, but it's the cumulative effect of doing that time and time again.
13:07
Andrew: Or I'm just going to push through on five hours of sleep tonight and I'll be fine, and again one night.
13:13
Andrew: That's okay, you can catch up the next day.
13:14
Andrew: But if you do it day after day after day I mean, if you do the research on sleep deprivation, it is staggering how bad it is for your health.
13:21
Andrew: I mean, it's incredible.
13:23
Andrew: And not to mention this thing always makes me smile.
13:25
Andrew: I remember reading about a study on sleep deprivation.
13:27
Andrew: But the so if you've got study on sleep deprivation, but the so if you got, you know they had three groups of people.
13:32
Andrew: They had people that got like eight hours of sleep, people that got like six hours of sleep and people that got like three hours of sleep.
13:38
Andrew: And the ones that got eight hours of sleep did well on the test and they thought they did well on the test, like the cognitive test.
13:44
Andrew: The ones that got like five or six hours of sleep, they took the test and they didn't do on the test and they didn't think they did well on the test.
13:56
Andrew: So the ones that got like three and four hours of sleep, they took the test, did poorly on it but thought they did okay.
13:59
Andrew: So if you're really low asleep, not only are you doing poorly, you think you're doing okay you think you're doing great, but yeah, yeah it's so bad.
14:05
Andrew: So anyway.
14:06
Andrew: So that was the first one.
14:07
Andrew: So just, uh, focus on you Now, moving kind of the circle out a little bit further to your family.
14:13
Andrew: You know, if you're neglecting your family relationships, then you've got poor relationships with your spouse.
14:21
Andrew: That's terrible.
14:22
Andrew: Not to mention, I remember reading about a.
14:24
Andrew: This was a I think he's a investment banker like bigwig hedge fund guy or something, but he said the best investment he ever made was about $300 a week for a therapist because it saved him about $100 million that he would have to pay out in a divorce, you know, because his marriage was tanking.
14:41
Andrew: But I mean, I know that it's a bit it's supposed to be a bit of a joke, but to put it there, he was able to put a value on losing essentially half of his estate, but not to mention all those psychological damage like just having to go through a divorce and it's terrible on if you've got children and all that kind of thing and the other.
14:55
Andrew: I've run into several people or talking to people that are professional coaches and they've told me about like horror stories with clients and like this one guy's really successful financially and he had a complete breakdown because he was flying in from somewhere and he said, oh, you know it's his son's birthday.
15:13
Andrew: And he said, oh, what do you want to do?
15:15
Andrew: You want to go here, you want to do this, and the son's like, I just want you to be around, dad, and it's like crap and it like rocked him to the core.
15:22
Andrew: So, and you know, we could talk about lots of different stories of that, but it's just one of these things that every, as I mentioned before, the big takeaway is it's not one decision that's going to make or break you, but it's the cumulative effect of every day.
15:33
Andrew: Am I giving a little bit of attention to my spouse and my family and myself?
15:37
Andrew: Am I taking, you know, because it's just not sustainable and you can get wrapped up and it's exciting starting a new business, if that's what you're doing and you can justify like I'm doing it for my family, but you're not really you know you're doing it because you selfishly are interested are interested.
15:54
Scott: That's been my experience.
15:54
Scott: I agree, andrew, and one way I like to frame it as well is you are not there for the business.
15:57
Scott: You started this business to be there for you.
16:00
Andrew: That's a good point yeah.
16:02
Scott: I mean, I think it's hard to think about that, right.
16:05
Scott: I think a lot of you're in it day to day and you feel like I'm the only one that can get it out of whatever problem you're in.
16:12
Scott: Or you know I need to delay paying myself, or you know all these excuses you can come up with that you need to prioritize the business.
16:22
Andrew: Yeah.
16:23
Scott: But that business, you didn't start that business for you, just to work for the business.
16:28
Andrew: Yeah, To become an indentured servant right.
16:29
Andrew: Exactly yes.
16:32
Scott: That business is really there for you and I tell people all the time that that's the way you need to think about it.
16:39
Scott: You need to try to remember that because, at the end of the day, the business isn't going to go out of its way for you, Right right, it can't right, it's a business.
16:49
Scott: But it absolutely will drag you down any health relationship hole if you're not careful.
16:59
Andrew: Yeah, absolutely, and that's for me, one of my big KPIs.
17:02
Andrew: Well, there's a couple of different buckets of like.
17:07
Andrew: When I'm doing my own work, I look at it like am I trading my time for money?
17:10
Andrew: Am I making an investment, or am I doing something Because I think it's, it's, it's enriching to me personally, like you know, whether it's just, it's, it's beyond, like I'm not doing it for the money, kind of thing.
17:22
Andrew: Like when I teach, like that's I'm not doing that for the money.
17:24
Andrew: I get so much satisfaction and joy out of teaching and connecting with students.
17:27
Andrew: But weighing that how much you know you're essentially how many, how many dollars per hour am I getting for this work is huge, cause you know, if you've got your own business and it's all of a sudden you lose control of it, you can, you can be making less than minimum wage because you're working 80 hours a week and, yeah, you're taking home a good pay.
17:43
Andrew: But like you're putting all your time and effort into it and as opposed to sticking that step back and like, is there a way I could like reconfigure this business so that I get some of my life back and I can earn a lot more money per hour?
17:54
Andrew: And it may mean you ratchet back on sales growth a little bit, but that's a conversation worth having with yourself and your spouse and your kids and everything.
18:02
Andrew: But yeah, I absolutely agree.
18:04
Scott: Agreed.
18:04
Scott: Wrapping this up, I like to think of it as if you have a spouse or somebody that's a life partner with you.
18:11
Scott: They are also a partner with you in the business, regardless of what type of business it is.
18:16
Scott: I consider my wife.
18:19
Scott: She is a partner in the business.
18:21
Scott: She is not a fractional CFO, she has nothing in the finance area, but she's still, and her name might not be on any government records or documentation, but she's still a partner in the business.
18:33
Scott: Right, yeah, and I'm going to use that to roll into our next topic here, and that's speaking of partners.
18:42
Scott: How can having a bad partner or partnership like an actual business partner tank the business or kind of help or cause a business to fail you?
18:54
Andrew: Yeah, I guess I'll start on that topic of partnerships Without any details.
19:01
Andrew: In general, give advice again to students or people starting business.
19:05
Andrew: If you can do the business without a partner, that's generally the best path.
19:09
Andrew: I'm not saying it's always right and sometimes you need expertise, but it tends to make things less complicated and you have less possible pitfalls.
19:17
Andrew: Now there are situations where you know you do need a partner or you want a partnership and you've got really good complimentary skills or experiences and things like that and that's absolutely fine.
19:26
Andrew: I think a lot of times, well, let me start with the end and when it's poorly.
19:30
Andrew: If you've got partners that aren't, if you've got a partnership that isn't working out well, performance of the business suffers.
19:36
Andrew: You can end up with lawsuits.
19:38
Andrew: You can end up with, you know, broken friendships and relationships.
19:41
Andrew: All kinds of bad things can happen and most of the I would say most of those things are avoidable if you do upfront a lot of planning and, again, scenario testing and like, first and foremost which is probably goes without saying but you obviously want to trust the person because it doesn't matter how good your legal documents and partnership documents are.
19:58
Andrew: You're not going to think of everything and they're not going to all be captured in the.
20:01
Andrew: So if you don't actually trust the person and have similar values, just don't do it.
20:04
Andrew: And the other thing is, if you along those lines, if you are thinking about going to business with somebody that's got anything other than a pristine sort of moral compass, I would also say stay away.
20:14
Andrew: It's just, it's not good.
20:17
Andrew: So, basically, if you have any question about it, trust your gut Is that yeah, yeah, I mean a little test I've given myself in the past is if I died, would I trust this person to take my assets and take care of my family?
20:32
Andrew: If the answer is yes, then okay, I feel like that's a good sort of stage gate to be like.
20:40
Scott: That's a great you know kind of stake in the ground, right?
20:42
Scott: If you're not willing, I like that, andrew.
20:46
Scott: If you're not willing to, you know, if you pass away of having your this partner run the business, with your spouse possibly have to help take care of the family, cause that's that's where your income's coming from, right?
20:59
Andrew: Yeah, right, exactly yeah.
21:00
Andrew: So that's kind of the first one.
21:02
Andrew: And the second one then is even if you've got someone that you really trust and thinks great person and everything, you want to hash everything out ahead of time as much as possible.
21:10
Andrew: And again, it doesn't have to be in legal writing like a contract, but just talk about all these different scenarios Like how much money is everyone going to put in?
21:18
Andrew: What are your goals for the business?
21:20
Andrew: Are they aligned?
21:21
Andrew: Because one person might be like I want to grow this thing to a billion dollars.
21:23
Andrew: And then I was like no, I just, I just want to get $10,000 a month so I can kick back and relax, back and relax, and that's a big difference.
21:31
Andrew: You know, I mean things are going to.
21:32
Andrew: You're going to have run into issues if you don't align on that or solve something.
21:34
Andrew: And similarly, you know like what's the work ethic and the work contribution and meaning?
21:39
Andrew: Are you both going to put in 40 hours a week?
21:40
Andrew: Sometimes it's, it can be a, you know, a partnership with people at different stages of their life and one's going to be more of a consultative approach and it's like five to 10 hours a week and the other one's doing 60 and all that's okay, but you just need to talk about it clearly, upfront, and the more specificity you can get the better.
21:56
Andrew: Um, let's look here at my notes here.
21:58
Scott: Yeah.
21:58
Andrew: Just good communication and clearly defined roles upfront.
22:02
Andrew: You're not going to catch everything, but the better.
22:04
Andrew: You can talk through scenarios, including the bad ones, like you know those what was it called?
22:09
Andrew: The scenarios that could bankrupt you.
22:10
Andrew: Like, if this happens, what do we do?
22:11
Andrew: What are we going to do?
22:12
Andrew: What are we agreeing to?
22:13
Andrew: Like when do we pull the plug?
22:14
Andrew: How much more money are we going to put into this?
22:16
Andrew: If things go south?
22:17
Andrew: All those kinds of things just have?
22:19
Andrew: Just do a whole bunch of scenario planning.
22:21
Andrew: Be completely honest and by the honesty thing, it's like, don't say what you think your partner's going to want to hear.
22:27
Scott: Like oh yeah, I'm all in, I'm going to do 100 hours a week.
22:31
Scott: Be honest with yourself and the other person, right.
22:33
Andrew: Yeah, exactly, it's like no, I'm just.
22:35
Andrew: You know, I'm personally I'm a little bit lazy, you know.
22:38
Andrew: I mean I'll work when I want to, but I also enjoy my free time.
22:41
Andrew: It's like I'm not going to sign up for anything that I would never opportunity.
22:44
Andrew: It's not fair to myself or the partner.
22:45
Andrew: Yeah, I'm all in, I'm going to work 80 hours a week, so I'm not.
22:54
Andrew: So just those types of things, I think.
22:56
Andrew: But yeah, getting up front talking about the scenarios and being brutally honest, I think, and talking about the good and the bad.
23:03
Scott: I think the other piece there, andrew, is talk about the exit what happens if we have to exit this and I know that's a tough conversation.
23:13
Scott: At the same time, life happens.
23:14
Scott: I was just talking to a former client the other day and he's looking to invest in a business because one of the partners had a health scare and he's at the age where he wants to go spend more time with his family he doesn't want to spend all the time and the other partner is a little bit younger.
23:31
Scott: So obviously they have different priorities, a little bit different priorities based on where they are in life and what's happening to them.
23:38
Scott: But you don't know what's going to happen.
23:41
Scott: So if you don't think about and talk about how are you going to exit this, and then it just comes up out of the blue, it's a lot harder conversation to have.
23:52
Andrew: Yeah, because everybody's then emotionally charged, because there's like real health, real money on the table, whereas if you do it up front, everyone can be a bit more dispassionate and logical and rational.
24:02
Andrew: And it doesn't mean you have to stick with what you talked about up front, but you can then harken back and say, hey, remember, when we talked about at the beginning of this relationship, we agreed to this and it was like, yeah, yeah, that's right, and you tend to cooler heads tend to prevail again, as opposed to like doing it right in the middle of the firestorm, you know.
24:18
Scott: Or when you're having a health scare and maybe you're in the hospital going through testing.
24:21
Andrew: Yeah, and you can't talk about it.
24:22
Scott: And you can't talk about it, right?
24:23
Scott: Yeah, yeah.
24:24
Andrew: Totally Okay, that's a great point.
24:26
Scott: So so we hit up cash flow and kind of pulled in scenario planning that could bankrupt you.
24:33
Scott: Then we talked about the work-life balance, having a bad business partner and I want to touch on.
24:39
Scott: I know we're kind of coming up on time.
24:40
Scott: I want to talk about one more that was on our list because this one is really key as well, and again one that I don't think everybody thinks about really key as well, and again one that I don't think everybody thinks about.
24:53
Scott: That is taking it.
24:54
Scott: I'm going to say investor money, but I'd like to broaden that a little bit, because it could be money more than just from investors, but take an investor money from the wrong types of investors.
25:03
Scott: So what does that mean?
25:05
Andrew: Yeah, so it's not dissimilar from the partnership conversation that we just had.
25:10
Andrew: So if you've got a business and you're taking money and it can be from a bank, it could be from a venture capital fund, it could be from a relative, it could be from any other sort of capital source angel investors or whatever private equity.
25:20
Andrew: It's so important to understand everyone's incentives and their expectations.
25:26
Andrew: I'll give you an example.
25:27
Andrew: This is my favorite example, actually, because you run into it all the time.
25:30
Andrew: But, as an entrepreneur, if you take on venture capital money, I'm going to be a little bit unkind and unfair to venture capitalists at the moment, but just to make the point, because I have seen this happen.
25:41
Andrew: So if you're a small business owner and you're growing well, you've got a good business, but you need some additional money to grow, like we talked about, because you've got cashflow issues and you need to make some hires but the revenue isn't going to come in right away.
25:53
Andrew: Fine, as the entrepreneur, most of the time your goal is to grow this business and make sure it succeeds right.
26:02
Scott: Right.
26:02
Andrew: And then ultimately, you often want to have an exit.
26:05
Andrew: Sometimes you want to have exits, sometimes that's not really a consideration as a venture capital firm.
26:10
Andrew: They also want you to grow right, but their risk profile is different and the reason is, if they are investing in, say, let's say, they've got 20 companies in their portfolio, they know or they expect a whole bunch of those to fail, a few of them to be okay, and then they want one or two unicorns that just pay for all the other ones that didn't do so well, Like they have a massive, you know thousands of percents return.
26:38
Andrew: So their incentive is they want to try and make sure, increase the odds of every one of the portfolio companies to become that unicorn, because that pays for everything.
26:45
Andrew: That can mean taking huge risks that could potentially destroy the business, which is fine if you've got 20 businesses, because that's the nature of the game.
26:53
Andrew: It's fine for the venture capitalist, right?
26:54
Andrew: It's fine for the venture capitalist.
26:55
Andrew: If it's fine for the venture capitalist, If you're the business owner, that's a terrible deal.
26:59
Andrew: I don't want that deal.
27:00
Andrew: I know you're pushing me to try and make this thing a unicorn, but then in the process I've only got a 20% chance of succeeding, but you've only got one bet as the business owner.
27:12
Andrew: They've got 20.
27:13
Andrew: That's right.
27:17
Andrew: So and I heard it I heard this notion captured succinctly in a wonderful quote, which is there's a difference between being the gambler and being the bet.
27:24
Andrew: And in this scenario, the venture capital firm is the gambler and they're you know, they got hands and hands and hands playing lots of different hands of poker.
27:31
Andrew: As a business owner, you're the bet, you're this one hand.
27:34
Andrew: So you've got a very different outlook and it's just in the nature of that particular relationship.
27:40
Andrew: But it's worth being really, really aware of and careful about, and who you take on as a partner is so, so important.
27:47
Andrew: So that's like one example, and that's just incentive misalignment, just the structural yeah, it is.
27:54
Andrew: Another one is if you take money from someone that doesn't understand your industry, that can be really bad too.
27:59
Andrew: And I've actually got a somewhat personal example of this and it was with my dad when he sold his business years ago, decades ago, and it was in the construction underground construction like subways and tunnels and things like that and it's a profitable business, but it's really lumpy in terms of revenues and cashflow and that kind of stuff.
28:18
Andrew: So in the long run it looks great.
28:19
Andrew: And they sold it to and there was a huge private equity company that was doing a roll up of all these businesses like that and that was fine, except for the fact that they levered up and they took on all this debt.
28:31
Andrew: So then to finance all the acquisitions, so then they own all these businesses that are very profitable, but they've got very lumpy business.
28:38
Andrew: The bank that they've borrowed their money from to lever up the deals wants to be paid every month.
28:44
Scott: So then, all of a sudden you've got.
28:46
Andrew: Because they didn't, they ended up having to sell and they took a bath a little bit somewhat, but it got restructured.
28:52
Andrew: But anyway, there was not understanding the industry well enough to say like this probably doesn't make sense to do a leveraged buyout because the cash flows are too lumpy or we can't put as much debt as normally, that kind of things.
29:04
Andrew: And that's just a financing example.
29:07
Andrew: If you get an investor that doesn't know your industry, he's like why can't you just grow it 50% a year?
29:12
Andrew: And it's like because it doesn't work that way in the industry.
29:14
Scott: It doesn't work, right yeah.
29:15
Andrew: Then you've got problems and they're getting in your stuff, which is actually another little note I had about.
29:20
Andrew: You can have toxic investors that start micromanaging your business and then, all of a sudden, instead of running your business to create economic value, all your time spent managing investors, which sucks.
29:29
Scott: Like you don't want to do that, no, and it can be a second job.
29:32
Scott: Right, it can turn into a second job or having somebody, and I would also say that you know, be aware or be cognizant that you may no longer be making all the calls.
29:46
Andrew: Yeah.
29:47
Scott: And not everybody can handle that.
29:49
Andrew: Yeah, yeah it is.
29:50
Andrew: It's a.
29:50
Andrew: It's called a Faustian bargain or bet or whatever that is.
29:53
Andrew: It can be.
29:53
Andrew: Giving up control is it can be a big problem.
29:57
Andrew: In one of my past lives I was investment banking for middle market.
30:02
Andrew: We did a lot of M&A deals and, just to hearken on that point, this wasn't when they'd taken investors.
30:09
Andrew: This was when they were trying to sell their business.
30:12
Andrew: But there were so many examples where the business was up for sale and the owner entrepreneur got so wrapped up in the deal and managing the potential investors that the business results started taking, the whole deal fell apart.
30:24
Andrew: The deal fell apart absolutely it's like, your job as an entrepreneur is to generate economic value out of your business, not to manage investors, not to do that.
30:32
Andrew: So you know, if you're going down that path with investors, be very cognizant of that.
30:36
Andrew: And you know also the misaligned incentives and everything.
30:39
Andrew: And you may, you know, depending on the size of the business, you may want to hire an investor relations person just to manage that for you.
30:45
Scott: So you don't take your life off the ball, it doesn't have to be someone fancy it just needs to be someone with a good head on their shoulders, something that's experienced in it and can handle that for you, yeah.
30:54
Andrew: Yeah, so um yeah, so yeah, it's a.
30:55
Andrew: It's a big pitfall that can cause problems, especially if you give up more than 50% of the business.
31:01
Andrew: Then, all of a sudden, the investors absolutely can take control and boot you like Steve Jobs.
31:06
Scott: Yes, yeah, exactly yeah.
31:08
Scott: And Andrew, I don't want to go down another rabbit hole with this, but I will say it's not only investors right, it's on the debt side too.
31:16
Andrew: Totally yeah.
31:24
Scott: If you want to be careful who you're getting in bed with on debt, because while they may not, they can take control of your business.
31:27
Scott: It's obviously a different funding source than investors, but you need to find the right partner there too.
31:32
Andrew: Yeah, and they're kind of in a funny way.
31:34
Andrew: They're like the exact opposite of the venture capital example, in terms of they don't care if your business succeeds, they just need to be repaid with interest.
31:42
Scott: Right, exactly, they don't care what happens to you.
31:44
Scott: They may not care what happens to the business.
31:45
Scott: Yeah, I shouldn't say that I'm being a bit unprincipled.
31:47
Scott: They may not care.
31:48
Andrew: They may not care.
31:49
Andrew: But yeah, you could say, oh my God, I've got this amazing opportunity that in two years I'm going to make a thousand percent return on the money.
31:54
Andrew: It's like, nah, I just need to get paid this month.
31:56
Andrew: Yeah, and they're not going to see that, or they may not see that.
32:00
Andrew: I should say, they may not see that, yeah, but yeah, it's all.
32:03
Andrew: Oh my God, as I get older and just deal with more and more companies and people, it's all about understanding people's incentives and perspectives and motivations as clearly as possible.
32:12
Andrew: Clearly as possible and not in a deceptive way, but just making sure everyone's aware of what people's motivations are.
32:17
Andrew: It just it solves so many problems before they become problems.
32:20
Scott: It does, it really does.
32:21
Scott: Yeah Well, andrew, I think we ran through our list.
32:24
Scott: We got them all in which, which is good.
32:27
Scott: I was a little worried we this is going to end up being an hour Glad we were able to take care of hit those up.
32:33
Scott: I like to wrap up our shows with one to three immediate takeaways that our listeners could put into action as they walk away and typically around planning or budgeting and I know you have a you can share hundreds of tips, but what are one to three that you may have for us?
32:50
Andrew: Yeah.
32:51
Andrew: So two of them are going to be a little bit of a repeat of what we talked about.
32:54
Andrew: The first one I just can't say it enough Just do your cash forecasting and become so smart about it Like you should know it better than anybody else how to predict your cash flows.
33:04
Andrew: Second one is be a bit paranoid and worry about bad stuff happening, don't, you know.
33:10
Andrew: Don't do it to the point where you got to go see a therapist but you know, I'm a huge fan of therapists, by the way but just worry about things that can go wrong.
33:21
Andrew: It'll actually make you sleep better instead of sleeping worse, as opposed to just, you know, sailing along with rose-tinted glasses.
33:24
Andrew: The third one, which is a little bit tricky for me I tend to be a pretty, let's say, we're methodical and analytical, and but don't be a slave to your budget either.
33:34
Andrew: So you know, you set a budget and you set targets, which is all great, and the planning is, I think, more valuable than actually the plan itself.
33:43
Andrew: But, as, as you go through the year, don't be afraid to deviate from the budget if opportunities arise and that kind of thing.
33:47
Andrew: So as much as I say you know, be a, you should do cashflow forecasting and planning and do a budget and all that kind of stuff.
33:52
Andrew: Don't be a slave to it and it's okay to deviate, just make a new plan.
33:55
Andrew: So that's something that at least for me, something I had to kind of grow up and overcome a bit because I was so rigid on like I want to stick to my plan even if the whole world's changed around me.
34:06
Scott: I embrace that one, andrew, and I've been like you, right?
34:09
Scott: I don't know, maybe it's our corporate background, but it's.
34:13
Scott: The world changes and you've got change with it, so let's feel free.
34:16
Scott: It's okay to change your plan and change your budget.
34:19
Scott: Yeah, yeah, yep.
34:20
Scott: Well, what about a good book or podcast?
34:23
Andrew: Yes, I knew you were going to ask about a book.
34:25
Andrew: So I recently got back from vacation and this is going to be a little bit different.
34:31
Andrew: But I dove into existentialist philosophy while I was on vacation and so I read a few books on that and I ended up stumbling, as a recommendation of one of those books, on a book written in 1955 called the man in the Gray Flannel Suit, and it's a novel.
34:46
Andrew: It's super easy to read, like enjoyable read.
34:49
Andrew: It's about a guy that is in World War II and then comes back after the war and is trying to live a life and raise a family.
34:56
Andrew: But it's really good.
35:01
Andrew: Uh, it's in that existentialist vein but it talks about, like, what is work, what should it be?
35:04
Andrew: Um, the whole work-life balance, the value of time, what's important it's.
35:07
Andrew: It's a great, uh, great, great book.
35:10
Andrew: Again, really easy to read, very personal.
35:11
Andrew: It's very popular.
35:12
Andrew: At the time I didn't, I hadn't actually heard of it, but it was a massive bestseller.
35:16
Andrew: The man in the Gray Flannel Suit is really good.
35:19
Andrew: There's actually a movie I haven't seen yet but I've got it on my YouTube queue.
35:23
Andrew: Gregory Peck, I guess, was the actor, but it made shortly thereafter.
35:26
Andrew: That's the one I would recommend.
35:27
Andrew: It's a goodie.
35:30
Scott: I knew you'd give us a good one, and I like that because it's not your typical.
35:33
Andrew: Yeah, always how to win friends and people or whatever.
35:36
Scott: But yes, exactly right well, andrew, this has been great.
35:39
Scott: Thanks for coming on a second time.
35:40
Scott: Where can people find out more about you?
35:44
Andrew: uh, actually, from your website.
35:46
Andrew: I'm on there a little bit and uh, yeah, I don't know, I just kind of like to stroll around the the world and the internet and I'm on linkedin and that kind of thing.
35:53
Andrew: So I'm always always curious and open to opportunities and whether that be on the fractional CFO side or the real estate side, or anything teaching speaking.
36:01
Andrew: I love it all.
36:03
Scott: Okay, Well, thanks for joining me.
36:05
Andrew: Andrew.
36:06
Andrew: My pleasure, scott, and I'll see you next time.
36:09
Scott: All right, folks.
36:10
Scott: That's it for today.
36:11
Scott: If you liked the show or found something useful, text a friend, text, another business owner, and share it with them.
36:17
Scott: I'm Scott Geller and I hope you join me next time for Budget your Business.