– The Private Equity Profits podcast with Seth Greene Episode 003
Beatrice Mitchell The guest is Beatrice Mitchell of Sperry Mitchell and company founded back in 1986. Today one of the oldest and most active independent m&a advisory firms in the United States. Beatrice is a Co-Founder and Managing Director of Sperry, Mitchell & Company, an investment banking boutique which specializes in arranging the sale or merger of private mid-market companies. She also co-owns Percival Scientific, a leading Iowa-based manufacturer of biological incubators and plant growth chambers.
Listen to this informative Private Equity Profits episode with Beatrice Mitchell about Selling Your Business Post-Covid.
• What differentiates Sperry Mitchell as an independent m&a advisory firm.
• What an ideal company to help negotiate a sell off exit looks like.
• The biggest difference between an entrepreneur and non entrepreneur.
• How COVID has impacted buying and selling strategies
• Lessons learned from challenges faced
• The book, The Complete Guide to Selling your Business
• How the current interest rate environment affects sellers coming to market.
The Private Equity Profits podcast with Cliff Locks Episode 002 Sasha Grutman The guest is Sasha Grutman founder and Partner of Middle March Partners. Sasha co-leads the firm’s merchant banking and investing efforts. He has spent his entire career investing and advising high-growth financial services and business services companies that leverage technology to create sustainable advantages.
At Middlemarch, Mr. Grutman advises clients on business and capital strategy issues, has sourced over $730M of capital for clients, and serves as a board member for a number of Middlemarch clients and portfolio companies. He has deep domain expertise in specialty finance and transaction processing, sectors where he has been exceptionally active both as a merchant banker and as a private equity investor since 2002. Active with both private and public companies, he has participated in over $3.2B of transactions over the course of his career as a merchant banker and private equity investor.
Prior to founding Middlemarch Partners, Mr. Grutman served as a Partner at TH Lee Putnam Ventures, a $1B growth equity fund, where he co-led the firm’s financial services investments in specialty finance, insurance services, and electronic capital markets investments. Previously, he was a Managing Director at Citigroup where he oversaw the firm’s on balance sheet financial services private equity holdings as well as managed the bank’s $6 billion private equity fund-of-funds business. He has also held private equity investment roles at Goldman Sachs and Frontline Capital.
He began his career at The Boston Consulting Group in its Financial Services and e-Commerce Practices. Mr. Grutman received an MBA from the Wharton School where he majored in Finance. He was a Fulbright Scholar in Italy where he pursued independent research on Dante. He graduated from Yale University magna cum laude with a BA in Humanities. He holds Series 7, 63, 79, and 24 FINRA registrations.
Listen to this informative Private Equity Profits episode with Sasha Grutman about Identifying Ideal LBO Candidates
Here are some of the beneficial topics covered on this week’s show:
• What makes a good private equity dealmaker, fundraiser, researcher, associate
• important personality traits in finding value where there doesn’t appear to be any.
• The worst investment mistake he ever made, and what he learned from it.
• The most rewarding part of doing what Sasha does.
• Leaving a personal legacy
Connect with Sasha Email: firstname.lastname@example.org
Connect with Cliff Locks: https://www.investmentcapitalgrowth.com/
The Private Equity Profits podcast with Cliff Locks Episode 001 Michael Livian The guest is Michael Livian, founder and CEO of LivianCo. an Investment and Wealth Management Company. Michael has over 20 years of experience in the financial services industry. He was the Chairman of the Executive Committee and Head of Asset Management at Safdie Investment Services Corp. (subsidiary of the Swiss private bank, Banque Safdie). Prior to this position he was a Managing Director at Speed Ventures, a primary pan-European private equity/VC firm. He also worked as an Associate Director for Bear Stearns & Co. in New York and in Italy with a special focus on fixed income and credit derivatives. He holds a summa cum-laude MSc degree in Economics from the University of Milan. Michael published several academic articles and books on quantitative finance, fixed income and equity valuation. He is a CFA charter holder, a member of the New York Society of Security Analysts (NYSSA) and the co-chairperson of the Private Wealth Management Committee at NYSSA. He lives in New York with his wife and three children.
Listen to this informative Private Equity Profits episode with Michael Livian about the growth of the alternative investments industry.
Here are some of the beneficial topics covered on this week’s show:
• How he helps clients achieve combining investing with purpose and fulfillment.
• The best percentage for time split between portfolio company analysis/operations and evaluation of new investment opportunities.
• Attributes that make a business a good candidate for a leveraged buyout.
• The typical capital structure prevalent in LBO transactions.
• Red flags you would look out for when assessing a potential investment opportunity.
Michael is the founder and CEO of Livian & Co. He has over 20 years of experience in the financial services industry. He was the Chairman of the Executive Committee and Head of Asset Management at Safdie Investment Services Corp. (subsidiary of the Swiss private bank, Banque Safdie). Prior to this position he was a Managing Director at Speed Ventures, a primary pan-European private equity/VC firm. He also worked as an Associate Director for Bear Stearns & Co. in New York and in Italy with a special focus on fixed income and credit derivatives. He holds a summa cum-laude MSc degree in Economics from the University of Milan. HeI published several academic articles and books on quantitative finance, fixed income and equity valuation.He is a CFA : charterholder, a member of the New York Society of Security Analysts (NYSSA) and the co-chairperson of the Private Wealth Management Committee at NYSSA.
Cliff Locks 1:05 Welcome to the private equity profit podcast. I’m Cliff Locks your host and with me today is Michael Livian, the founder and CEO of a lending company, an investment in wealth management company. Michael, tell us a bit about your background and how you got started.
Michael Livian 1:20 Hi Cliff, thank you for having me on your show. Very excited to be here today started, actually in a different country. I was born in the US but raised in Europe. That’s where I started my career. And I moved to the US about 20 years ago, I started working for a big Wall Street firm, and I was more of an academic. I published a book with Italian Publishing Company of Bloomberg. And I was working with universities, I was very involved in the fixed income space. And then I transitioned more to the venture capital and private equity space. And in 2004, I was hired to run the asset management of a Swiss private bank here in the United States. And after several years of being involved with wealth individuals in the asset management industry, I decided to start my own firm with some partners, but large caliber large family offices. And that’s how I got started. The idea was to create an innovative business that caters to the needs or modern needs of wealthy families and business owners. And since then it’s been a phenomenal journey journey.
Cliff Locks 2:34 Fantastic. I’m glad you’re helping a lot of family offices to be able to help their high net worth individuals that are part of their team. So I’m assuming you’re also doing multifamily offices, and then single family offices.
Michael Livian 2:48 Among others. Yes, so multifamily offices, single family offices, that large wealth individuals, that that’s my basic client,
Cliff Locks 2:59 How do you help your clients achieve combining investing with purpose and fulfillment?
Michael Livian 3:05 It’s I think, understanding what wealth is for for a wealthy individual or for wealthy family is it’s a multi pronged exercise. It’s it’s not only about the money and your returns, think the wealthier people get, and the more complex needs become. And the larger the families, the discourse is elevated more to what the values are, what the purpose of that family or that individual is in life, what the legacy that they want to leave behind them is. So we work through several assessments, and help our clients, not every client is a good candidate, but many clients, they really want to address those type of issues. And more and more what we are seeing is there is an alignment between the value values and purpose in life and also the way they want to invest their funds. And the So in other words, ESG is playing a role now.
Yeah, yes, g i think ESG is, it’s definitely I think it’s an acronym that has a big appeal on people, I think that it’s aligning the value. So ESG, it may be everything and nothing. It depends what you include and how you define history. But it’s really determining defining what the purpose is, you know, for that family or that individual and investing in a way that is consistent with that. So it’s different families have different views and different interests. And it’s a transition not everybody is like that some people are still really looking just at at rates of return. They’re not making an impact. But I think that the way I will look at this when we’ve been doing a lot of work and Following the research of fidelity and Beynon company, and having been discussing this for many years with a lot of professionals, what we see changing is it’s for those people that actually started the business in school. And if you think of the Mazda three, turn, you know that there’s a pyramid and the base of the pyramid are really basic needs, you know, shelter food, as you get more comfortable, and you fulfill and meet those needs, your your needs evolve, and there are different things that you’re looking for in life. And the same applies to wealth. And I think that the as we change what we do, as generations changing, what we’ve seen is that that if you survey, a baby boomer, or for those participants, so that the podcast that did not know that those individuals that were born right after World War Two, their needs are very different their views their values than the Gen Xers and Gen Y, or millennials, you know, or generations that were born after 1960, they, they have a different view of the world, they are more or less worried about their their basic needs.
They’re specially among wealthy people, that our clients, they’re more interested about finding purpose, having more balance in their life and worker and retiring and having plans in place and, and doing things that are meaningful in their life. So I think, as we evolve, you know, as a society, as an affluent society, these topics are going to become more and more relevant.
Cliff Locks 6:50 That’s very interesting. In other words, when you look at the, we have parents, they’ve been successful at this point, they have the next generations, which is their children. So if you look at the time and the quality that can be put together, where they’re spinning knowledge and education together between the parents and the children at this point, to understand their responsibilities, and the wealth that’s within the family that will continue as a legacy to go forward to be able to do good, and also to support, you know, the next generations at this point. So us actually spend time with the other generations, I mean, the children have that wealthy family at this point to help them carve a plan together and be part of the fabric of what makes the family. Yes,
Michael Livian 7:36 yes, yes, yes. Yes, a lot of the research that that that we have been reading is that that there is a positive correlation between happiness of individuals and the next generation, and having a sense of the history of the family and the heritage and the legacy and creating that bridge. It’s also a way to make everybody happier, you know, it’s like,
Cliff Locks 8:03 so the family dynamics, when they work together with one of your team members is actually addressed at that point, it actually becomes a healthier and happier ecosystem, let’s say within the family at that point. Quick question, what are some of the biggest challenges your clients are facing now?
Michael Livian 8:20 I mean, I think that at this specific point in time, obviously COVID as the gigantic challenge, I would say, for some people financially, I think even very wealthy individuals that are heavily exposed to certain areas of the real estate market, I think they are a little challenge. But for most people, I think it’s not even financial, it’s really the level of anxiety and fear, fear of the future and the, you know, questioning, you know, their their lifestyles, and where they’re gonna live, if they want to stay. I mean, we’ve seen a lot of people move around in the last year or so it’s like, people that were very deeply rooted in in a location, and they just overnight are uprooted. And they move to different states or, and so there is a lot of anxiety yet not. And, and I think that that’s probably today that the biggest issue, but I do anticipate that with the rollout of the vaccines, these will actually pass and I think we’ll hopefully we’re closer to the end than the beginning of this problem. And so that is kind of one of the main issue specific to the current circumstances. And then you have general issues, I think, our clientele there prime, they’re mostly professional business owners and entrepreneurs. And I think that the speed of the change that technology is bringing About his displacing a lot of people, a lot of it’s, it’s it has become increasingly more challenging whatever industry you’re in, to deal with the disruption that technology is bringing about. So that is also a big area of concern for our clients, the lifecycle of products, the life cycle of their specific industry is changing. And, and they need to adapt. And it’s, I don’t think that previous generations were faced with this issue. And then that’s another area where we actually converse with the, with our clients, very smart people, business owners, but that they’d like to hear from us what what we see in the marketplace, you know, we were deeply involved with the companies of all kinds and all sides, and we listen to their management calls and participate, you know, to a lot of conferences and get to know really what is happening in a lot of like, the most successful firms and we share some of the findings with our business and our owner clients
Cliff Locks 11:08 are very good. I sit on the board of directors of five companies on finding the same type of disruption that takes place at this point. Most of the companies are more entrepreneurial in their understanding is we have to disrupt ourselves at this point, before you get disrupted. What we’re finding some of the technology that’s out there in hydrogen, some medical appliances, like some of its, you know, many decades old, the technology, it’s had incremental increases, but not exponential type of increase in renewing what that engineering looks like inside those products. And we’re finding it’s the entrepreneurs that are disrupting these these organizations. But you brought up something very, very important, the conferences, maybe the zoom calls that are out there at this point in time is a way to get educated. And I think, to be proactive at this point.
Michael Livian 12:00 Yeah, I’m very optimistic about the future, I think, I do think that whatever is going on today, in the world, and with technology and digitization of almost every process offers an opportunity for people to improve and not to be displaced by technology, because I think that that, as humans, we’re always going to be superior and, and
Cliff Locks 12:29 so it’s just about educating ourselves and upgrading our knowledge and our skills. I think you’re brilliant, I think you laid that out very, very nicely the idea of the individual, and those that own the companies need to take the initiative to understand we’re going to need to re educate the workforce. Some of the manufacturing may have something called a kobach, meaning there’s a robot but the individuals working next to it, the robots doing a lot of the menial, repeatable tasks, but they can coexist together and someone’s going to have to program and keep an eye on in run those robots at that point, it’s probably a technician at that point, which will get paid more than somebody, you know, running on the line. So let me ask you, what does the growth of the alternative investment industry look like from your perspective?
Michael Livian 13:20 It’s a very, very, very good, an interesting question. First of all, I think that it is important to define the alternative investment space. I think that that. Again, I think it’s easy to put like a label on something. But what is an alternative? Is it real estate, venture capital, private equity, hedge funds, commodities? cryptocurrency, what what is it? That is included in in the definition? And I think that each subcategory of what you may define alternative investments, they have, certainly different paths in their evolution. I think that first of all, the fact that you’re in an environment where structurally interest rates are low, despite the short term gyrations that you may have had recently with the 10 year Treasury, you are still in a low interest rate environment and you are in an environment where valuations in the public markets are pretty high. So there is a very large demand for alternative assets in general. And I think that’s going to continue and I think it is going to evolve Having said that, I do believe that within the asset, alternative asset space, there are a lot of players that don’t really deserve to be there. In the end there are there’s going to be a pretty stronger so say Natural selection and evolution. And I think that that, specifically, let’s say, any person can start a hedge fund, you know, it’s like, but there’s not that many great hedge fund managers. I mean, it’s really very few are very large. So I do think that that the the compensation structure in some of the hedge funds is going to change. Okay, it has started to change, I think there’s gonna be more consolidation. And, and I think that there’s always going to be a big appeal. But I think it’s gonna look very hedge fund industry is gonna look very different in the future. I do think in the private capital markets, both private equity and private credit, you still have tremendous opportunities, in a way becoming also more liquid. You know, there are marketplaces where you can exchange physicians and loans and you have a lot of participants. And you may get higher rates still very highly of sub sectors of the alternative space. And then I can go on, but I think probably these are the broadest categories are solid ation in the hedge fund world. Still expansion in private equity, VC, private credit, as long as credit remains cheap and available, you’re not gonna have a lot of hiccups there. But again, private markets are heavily dependent on credit. And we are, I would say, in the expansionary phase for credit, but this is not going to last forever. So I think it’s important to be very wise, as an investor, where you’re when you’re approached the space,
Cliff Locks 16:36 recognizing there’s a pressure to put money to work in the five year private equity cycle, what industries or strategies do you think make the most sense right now,
Michael Livian 16:46 clearly, I think what we have seen in the last year is a strong demonstration healthcare, biotech and Life Sciences space. There are phenomenal opportunities, it’s, it’s an industry that still offers a lot of opportunities for extra returns or additional returns, because it’s a little bit behind the other industries, when it comes to de innovation other than the pharmaceutical sector in particular, or the life science or the biotech, but the healthcare sector as a whole, because it is heavily regulated. So it has not evolved as fast as a lot of other areas. So the technology there can really create a lot of incremental returns. And there’s a lot of opportunities there. I think that’s certainly a very important area. So if you think of the two areas that you have a lot of regulation that kind of slows down the evolution of an industry, there’s these two giant areas of healthcare and the financial sector. So I think they both are probably in the early cycles of a massive evolution. And in that offers, obviously opportunities for returns for investors. So it’s, it’s, I would say probably a little bit more between the VC and the private equity, not your classic private equity, leveraged buyout, I do think also, when it comes to the private equity, space, logistic and infrastructure space offers incredible opportunities. I think, again, in the US, the percentage of ecommerce in retail sales is still pretty small, compared to the entire pool of retail sales that are happening. And in I do think that the backbone of e commerce is really the logistic that’s so you know, storage facilities, and transportation. So those are kind of assets generally offer good cash flows, and they’re pretty stable, and they have potential good growth rates. And I think those are private equity investors, the ideal candidates, you know, you can level them up and increase your rates of return. So those are the main things that come to mind. But there’s obviously a lot of other areas of interest. I think it depends also on the on the style and appetite of the private equity operator.
Cliff Locks 19:09 Tell me a little bit, what credit ratios do you look at when assessing the financial health of a borrower.
Michael Livian 19:17 This plays an area of great interest for us, we look combination of purely quantitative metrics that we can pull from the balance sheets. And I think we have a very close relationship with the NYU professor or former professor at Altman, that is a dear personal friend of mine and developed the z score model. So we use his model with many other evolutions. There’s another academic by the name of Campbell, that has developed other tools. So they they give us a little bit a more holistic sense of the health of firm then obviously alongside those, those are, I think they give you a much better probability of default. But alongside those, what we use are more traditional metrics. So we use will be data ratios, that to EBIT ratios, debt to assets, debts to capital, obviously we normalize the cash flows, we look at the kind of averages over time we look at peers. So there’s a number of things that go into that. And most recently, we have not employed utilize this tools, yet, but we are working closely with some FinTech companies, they are doing a lot of interesting work, I think that they are providing their accounting solutions to companies. And they pull the data almost instantaneously from their accounting systems and from their bank accounts. And they can actually, in real time, look at the evolution and credit worthiness of the borrower. And they even lend to borrowers based on those metrics. And so there’s a lot of old school classic stuff that goes into the analysis of the credit analysis for a borrower or issuer. But there’s more and more exciting stuff that is also coming online now.
Cliff Locks 21:23 Very, very positive. And I’ve seen one of my companies is utilizing those lines of credit. In other words, we’re on walmart.com, they’re doing hundreds of 1000s of dollars a week in that line of credit was very, very important to be able to allow the continual growth in that particular market. So when Yes, they have access to our bank accounts, and they understand the cash flow that’s coming from Walmart into our accounts, and they lend against it. So it maps up very, very nicely. Michael, what are some of the red flags you would look out for when assessing a potential investment opportunity?
Michael Livian 21:56 red flags, I think that, first of all, what, what we have learned in after many years of dealing with borrowers companies and management and investments, is that probably the most important aspect that you want to look at when you evaluate a business or an opportunity is actually the industry and the industry dynamics. It’s not focusing on the specific product, or the management of the company. But the first thing that we would do to identify if there are red flags, we’re just going to look at the industry dynamic. How does this industry look like? in which direction? Is it going? Is it growing? I mean, how many participants are here? Is it prone to changes and disruptions are the companies that we’re looking at the re on top of their game, or they’re behind? So it’s not really a red flag, but that’s contextual, I mean, if an industry is going in the wrong direction, we’re not going to put money behind it. Now red flags is, first you start with the management. I mean, you want to have credible management that is honest, transparent, has the right incentives, communicates with investors, you know, sets proper goals and shows a track record of achievement when they fail to do that, or they’re not transparent, that is already too. And then you have a number of accounting metrics. You know, if you have big discrepancies between earnings and cash flows, that is typically a red flag for you. So I think it’s a, it’s not that difficult, but that, you know, there are tools that we have available at our disposal, when we look at the accounts, to see if things are off, you know, revenue recognition, discrepancy between cash flow and earnings ending on the specific industry, the working capital cycle starts to look off menu, you can start to pinpoint, but I think that that, before you look at the financials, you want to look at the business and the management. The financials are a consequence of what the management is in the business. It’s if you have poor management, low quality management. For us, it’s an awful red flag
Cliff Locks 24:10 for a very good, well seasoned team is very, very important to have consistent results and maybe serial exits, maybe they’ve built and sold a few companies. Let’s look at some of the value your fine team brings forth. In other words, we’ve got a high net worth individual, they probably have a business that they’re running at this point, you know, they are starting to get into their 50s 60s you know, they need to look at succession planning. You know, do I continue to prepare, you know, the company to be able to be sold? Am I going to turn the business over to maybe one of my children? Am I going to bring somebody from the outside to run the company. Tell me more about your process to be able to help these high net worth individuals make the strategic decisions they need to make.
Michael Livian 24:55 Look, I think this is a topic again that I have very close to my heart. Cause approached by some strategic buyers. And you know, we are in the business that generates a nice steady cash flow. And we go and ask the same questions to myself. I said, you know, what? Where do I stand? I mean, do I want to build this business for my children? Do I want to pass it on to them? I mean, what’s the endgame and it’s a in I got involved institute that is known as the exit planning Institute. And I found out there is a science behind exit planning, building value for a firm for business owners, me it is medium sized, small sized business owners. And and I came to the realization a very, very large chunk of the businesses in the United States are owned by by private individuals, and that they are in their early 60s, almost, I would say, 75 80%, I don’t remember exactly the statistics, they expressed an interest to retire within the next 10 years. But if you ask them, if they do have a plan, or a written plan, again, 80% of them, they don’t have a plan, they just have an idea and the goal. And also, what were the statistics show is, most of those businesses, they end up not consuming a real transition, you know, they actually have problems before either there’s a disability, there’s some Distress, there’s an issue with the family, they, so they never, the transition does not come to fruition, we really prepared ourselves to work with clients using the science behind the transition planning, and that the numbers and the methodology to make this successful, and to also make it an enjoyable experience for the business owner, because also i’m quoting, Price Waterhouse, they did a survey of business owners that sold their business within 12 months of the sale. And a very large number of those business owners, they say they profoundly regret selling that regret selling the business, transitioning out of the business, whether it’s an external transition, it’s a sale or pass it on passing the business on to a partner or to the children, it requires three things requires emotional preparation, right? I think people do not realize that you know, what, you spend a lifetime building a business, and you’re been running every day, and you know, getting excited dealing with problems, clients making money, and all of a sudden you sell this I mean, your purpose is gone. You are your business if you’re a business owner. So there is some preparation that goes into that, you know, the financial component. I think that that many business owners are not aware of the structure of the transactions, how much they may get out of the transaction, the tax implications, the state implications. So all of these things need to be handled and prepared before you transition not while you’re transitioning. And lastly, I think the majority of business owners don’t really know what that they have an idea of what the value of their businesses, right, but they do not know really how much they can increase the value of their business and how much they can get in a transaction. So these three prongs are the foundations of a plan.
Cliff Locks 28:23 I think that’s very, very important. I mean, I’ve had the privilege of building three companies with successful exits, and it was a plan and there were advisors involved, find folks like yourself that helped guide me through that process. And it was a privilege to work with them. It was emotional. My last transaction, I sold the company to KKR, which is a large venture company company and became part of a fortune 500 Company, which was something new to me versus being entrepreneurial. And then we had the ability to add additional assets. And when we sold the company, again for 1.2 billion in cash. So when you look at things, it’s a process for the entrepreneur, and then the opportunity to do you want to stay with the acquiring company for a period of time. In my case, I stayed for 18 months contractually, and then go on and do something different the tax implications. Those were very, very large checks that had to get written and they need to get planned for.
Michael Livian 29:10 Absolutely, you’re absolutely right. 100%. Right. I think that what typically happens is that when you come to the deal table, the seller just feels very frustrated and pulls out because they just didn’t realize that most transactions, you have an urn out, you have sellers financing, you have taxes, you have commissions, if you do acid sale, you may be penalized and they get very frustrated and they boys up to the point that they may go to the table when they need to sign and you just decide to take a walk and live the negotiation in the deal. So
Cliff Locks 29:46 very interesting. Yeah, I’m on the nother one. Now I’m working with young people and we’re doing the acquiring side and we’re finding ability to stay very friendly with the seller and understand what their needs are. You bring up Something very, very important. See this on your website, know your gaps, you know, the three numbers you should know and manage to achieve your goal that lays out a very positive scenario. And I’d like to go into depth with a little bit from yourself, where this conversation really needs to happen with the seller at this point, because you don’t want buyer, you know, remorse, let’s say, and the seller remorse you don’t want having these conversations where the funds are going to go and understanding the period of time for the transition between the seller and the buyer. And maybe the seller becomes one of the board members, maybe they leave some equity in the company, understanding each other’s needs, I think can allow that transaction to flourish. So tell me more about that. No, you get
Michael Livian 30:43 I think, as a very successful business person yourself, you know, how the mind of, of a business owner works, I think that you need to always simplify things have clear numbers, clear things in your mind, that’s really how we need to have, we cannot deal with that with uncertainty and confusion, our mind always wants to have certainty, even if it’s the wrong certainty, facilitate the process of a business owner transitioning, I think there are three fundamental gaps that they should really have straight in front of their eyes all the time than they can be numerically calculated. They’re extremely important. The first one is what we call the wealth gap. So the wealth gap is essentially what financial planners use all the time is, how much money do I need to live my life the way I want to live it pretty easy to calculate with some trial simulations.
The second component of that calculation is how much do I have today that is liquid and investable, that can get me there, the vast majority of the times there’s a giant gap between the two specially for business owners element that was going to fill in that gap is the value of the business. So essentially, if you want to get to a point where you’re comfortable, and you know that you can really go on with your life and do whatever you want in peace, you need to make sure that that gap is filled by the value of your business after tax after transaction costs, if you do an exit, and that’s really what you are working towards. Now, this leads to the second part, which is what is the value of the business? Is it sufficient? Can they grow it enough to act as a plug to kind of close that wealth gap? So there’s two components that you want to evaluate? One is a profit gap. And then if you have a value gap, so what are these gaps? Today?
Luckily, we have a lot of tools and technology in databases, also in the private markets, as opposed to the public markets, where you can benchmark your business. So the income gap, essentially, is a measure of the difference between if you take the best in class company in your specific sector, and yourself, what is your EBITDA margin, or adjusted or recast the beta, you want to make sure that in the private business world that you need to make some adjustments is not like in the public markets. So you need to add back certain numbers remove them, so you need to fix calculation for your EBITDA. But what you’re looking at is, what is my EBITDA margin on the revenues that they have? And what is the EBITDA margin of the best in class company. And then I think part of the exercise is to see what levers Do I have to increase the profitability of my business, that’s kind of part of the exercise of accelerating buildup in value in your business. But it’s, it’s a number that you should know as, as I think that that when you have numbers in front of you, it gives you a different motivation. It’s not an idea, it’s not a concept, you can compare. So you know what my EBITDA margin is, like 15% the best in class companies, their EBITDA is 25%, maybe I can increase my profitability by 5% By doing this, this this this And lastly, is your your value gap is essentially the value of the best in class company in the same sector. Same type of business, if you apply a multiple to their EBITDA. And if you apply a multiple to your EBITDA, you can calculate the difference using the same level of sales. So if you have best in class margins, and best in class multiples, and you have your multiple and your margins, that gives you an idea of how much value creation you could aspire to achieve. get to that point, ultimately, if there’s sufficient money to close your wealth gap.
So this these three elements together, they work as a foundation to make to build a plan. They give you the right motivation, but also the Right tools, then to go deeper into some assessment and analysis at the business level as a personal finance level, and see, you know how you can adjust, I think it’s very important to start with simple, clean, good numbers. I think when business owners see these things, they’re Wow. Alright, now, I know what I need to do. And let’s work on this. And let’s work and there’s a whole process behind this, build all the different plans to close those value gaps and those income gaps and those wealth gaps.
Cliff Locks 35:32 Very, very comprehensive. I mean, you bring forth a lot of wealth of knowledge for that high net worth individual to really understand a vision of what success looks like, you know, as they continue to age and they got to make some decisions with their business, it would be very, very positive for our listeners to partner with you, Michael, what do you love about what you do? And what do you find most rewarding? personally?
Michael Livian 35:54 It’s a very good question. There’s two things that they’re always loved. And they think that’s why I went into this profession, I have a deeper intellectual curiosity. I like numbers, I like concepts, ideas, businesses, I like studying and researching. If I if my, my family makes fun of me, they say should be an academic, you know, it’s I should be teaching stuff. Because I really love learning. And I think being in the finance sector, it allows me to learn everyday more. I mean, there’s so much we can learn on the quantitative side, on the analytical side, and the research side, on the tax side, there’s so much you continuously learn and learn and learn. And I really enjoyed and I can share it obviously, with with my clients. So this is one thing that I like, really makes me happy that because of person I am, I really get enormous satisfaction when I can help people and I do something meaningful for them that and we have all sorts of people, all sorts of clients, we do get the often people will make a big change in their life very happy. And they’re very grateful. The reward that they get from that is priceless. It’s not a monetary reward. It’s like, you know, I feel like I really did accomplish something, you know, somebody that had some issues, and they need to fix things. And they had that. And they’re just grateful, you know, that I help them out, or we help them out as a team. I’m
Cliff Locks 37:12 not alone. I see you and your team cares about their investor. Now with COVID-19. Some of the economic disruptions tell our listeners about the program that provides an objective second opinion, from your trusted and professional team are hurt. There’s no fees, no stress, no obligations,
Michael Livian 37:28 things now are a little bit better. And obviously, I’m very happy that got out of the stressful times that we experienced at the beginning of COVID. For many people, this was just the catastrophic event that came out of nowhere, I think it was the economy was doing perfectly fine. Everything was doing perfectly fine. All of a sudden, you are faced with issues and problems that seem insurmountable. You cannot walk out of your house, you cannot walk out of your apartment, you think you’re extremely wealthy, because you you own a nice office building downtown, and all of a sudden you don’t have tenants. You have a hotel, and you know, they forced you to shut it down. A lot of people, their life changed overnight. We offered early days, our services for free to not all our services, but at least an initial review and assessment and financial situation of some of our clients. We offer them a free consultation to see where they stood, how they were invested if they had the proper investment plans, who are benefiting from all of the things that our government has been extending to people. So we just wanted to assist people.
Cliff Locks 38:40 I truly appreciate you spending this quality educational time with our listeners today. Michael, it is my pleasure, Cliff. Michael, can I share your contact information with our listeners, please? Yeah, absolutely. You can reach Michael Levin. His email is at m Levin at Levin co.com Lubin co comm is spelled Li ve i a n co.co m that’s Li ve i a n co.com and you can also reach Michael at 212-319-8900. Again, Michael’s phone number is 212-319-8900 Thank you to our listeners. I look forward to being back with you shortly for another episode of the private equity profits podcast. The show has been produced by market domination LLC. I’ll see you next time. This is Cliff Fox