WEBVTT 00:00:00.000 --> 00:00:03.000 Announcer: [music] 00:00:03.000 --> 00:00:11.513 Announcer: Welcome to Death and Dirt, a podcast from the Real Property, Probate, and Trust Law section of the Pennsylvania Bar Association. 00:00:11.513 --> 00:00:17.565 Announcer: Join us as we delve into real estate, estate planning, and trust and estate administration. 00:00:17.565 --> 00:00:29.537 Announcer: This podcast offers in-depth analysis and education for legal practitioners, real estate professionals, financial advisors, or anyone interested in real estate, trusts, or estates. 00:00:29.537 --> 00:00:31.000 Announcer: And now, our co-hosts. 00:00:31.000 --> 00:00:31.853 Jay: Hello, everyone. 00:00:31.853 --> 00:00:33.987 Jay: Welcome to season two of Death and Dirt. 00:00:33.987 --> 00:00:35.107 Jay: This is Jay Hagerman. 00:00:35.107 --> 00:00:39.373 Jay: I'm joined today with my friends and lovely co-host, Jen Galloway and Fred Long. 00:00:39.373 --> 00:00:41.773 Jay: Today we have with us one of my dear friends. 00:00:41.773 --> 00:00:43.533 Jay: I've known him for quite a while. 00:00:43.533 --> 00:00:44.867 Jay: His name is Owen Carhart. 00:00:44.867 --> 00:00:47.747 Jay: He's an accomplished entrepreneur and business leader. 00:00:47.747 --> 00:00:51.213 Jay: He was born in Pittsburgh, not too far away from where I grew up. 00:00:51.213 --> 00:00:59.000 Jay: He currently is lucky and resides in Miami, which weather patterns are a little bit more favorable than they are, at least where I'm at right now. 00:00:59.000 --> 00:01:02.176 Jay: He is the principal and founder of Business Optimization Group. 00:01:02.176 --> 00:01:15.185 Jay: It's a consulting practice that partners with leadership teams to improve financial performance, strengthen operations of different companies, support strategic growth, business planning, financial management, execution support, all good things for business. 00:01:15.185 --> 00:01:20.277 Jay: How I met my dear friend is we both graduated, and of course he did as well, from Gettysburg College. 00:01:20.277 --> 00:01:22.697 Jay: We're Bullets, still in the Commonwealth, right? 00:01:22.697 --> 00:01:29.000 Jay: He served on the endowment committee and was a fellow at the Center for Study of the Presidency and the Eisenhower Institute. 00:01:29.000 --> 00:01:33.029 Jay: So we're going to manifest Dwight's image back here and bring some along. 00:01:33.029 --> 00:01:48.205 Jay: He brings a lot of broad business development and financial expertise across multiple industries, including finance, legal issues, which we'll talk about today, manufacturing, healthcare, retail, commercial, residential real estate, even political consulting and fundraising. 00:01:48.205 --> 00:01:50.799 Jay: Owen's never shy about asking people for money. 00:01:50.799 --> 00:01:52.344 Jay: There's no doubt about that. 00:01:52.344 --> 00:01:54.000 Jay: I can promise you that's true. 00:01:54.000 --> 00:02:02.016 Jay: Anyway, he's also served as a trusted advisor for launching new products, structuring and negotiating complex deals, and improving business and operational skills. 00:02:02.016 --> 00:02:03.934 Jay: I think I've checked all the boxes off. 00:02:03.934 --> 00:02:05.459 Jay: Owen, thank you for being here. 00:02:05.459 --> 00:02:06.787 Jay: We're so happy to have you. 00:02:06.787 --> 00:02:07.623 Owen: Pleasure is mine. 00:02:07.623 --> 00:02:09.000 Owen: Thank you all for having me. 00:02:09.000 --> 00:02:09.600 Jay: Excellent. 00:02:09.600 --> 00:02:15.489 Jay: And our listeners today, so typically we talk about a substantive area of law, whether it be on the death side or the dirt side. 00:02:15.489 --> 00:02:22.354 Jay: And we're trying to learn as much as we can for our end user, which of course would be our clients or even maybe advocating in front of the court. 00:02:22.354 --> 00:02:24.000 Jay: But this is a little bit different. 00:02:24.000 --> 00:02:32.353 Jay: This is a direct impact on our listeners because we're going to talk about how to value and optimize your law firm, that business. 00:02:32.353 --> 00:02:34.024 Jay: So you're a lawyer, right? 00:02:34.024 --> 00:02:40.000 Jay: And if you have any equity stake as an owner, whether you like it or not, you're in business. 00:02:40.000 --> 00:02:41.694 Jay: You're just in the business of law. 00:02:41.694 --> 00:02:43.145 Jay: So you have to recognize that. 00:02:43.145 --> 00:02:45.661 Jay: And there are good things and bad things about that. 00:02:45.661 --> 00:02:52.387 Jay: And at some point, I mean, unless death is the only option, you are probably going to want to sell your business or have a succession plan. 00:02:52.387 --> 00:02:54.806 Jay: And maybe you're a young lawyer listening to this. 00:02:54.806 --> 00:03:01.823 Jay: And at some point you want to buy into an equity stake or maybe buy out a lawyer who is getting up in the tooth and wants to sell their practice. 00:03:01.823 --> 00:03:04.000 Jay: This podcast is directed specifically to you. 00:03:04.000 --> 00:03:09.723 Jay: because we're going to talk about how to value the business, the pitfalls, the potholes, the loopholes, all the good things. 00:03:09.723 --> 00:03:12.031 Jay: Owen, thank you so much once again for joining us. 00:03:12.031 --> 00:03:13.000 Jay: Let's just get to it. 00:03:13.000 --> 00:03:13.668 Owen: My pleasure. 00:03:13.668 --> 00:03:17.898 Owen: Again, thank you guys for having me and thank you for the warm introduction. 00:03:17.898 --> 00:03:22.573 Owen: I'm here to answer whatever questions you all have for me, I guess, getting started. 00:03:22.573 --> 00:03:31.868 Owen: I think it's very important as we go through this conversation to define a few key terms because there's nothing more annoying than acronyms that you don't understand. 00:03:31.868 --> 00:03:38.436 Owen: So throughout this discussion tonight, we're going to be talking about three acronyms that everyone should understand. 00:03:38.436 --> 00:03:41.831 Owen: The first one is SDE, which is Seller Discretionary Earnings. 00:03:41.831 --> 00:03:43.000 Owen: The second is EBITDA. 00:03:43.000 --> 00:03:50.597 Owen: a very interesting topic that accounting people love to discuss, which means earnings before interest taxes, depreciation, and amortization. 00:03:50.597 --> 00:04:01.341 Owen: And the other one is KPIs, which are key performance indicators, which people typically associate with marketing, but there are KPIs for all sorts of different operational functions in the business. 00:04:01.341 --> 00:04:05.736 Owen: So when you hear me talking about those, I hope you all understand what they are. 00:04:05.736 --> 00:04:11.000 Owen: And of course, if my hosts here have any questions about the specifics, I'm happy to answer them. 00:04:11.000 --> 00:04:14.167 Owen: I'll turn it over to you all to frame up the meeting. 00:04:14.167 --> 00:04:15.123 Jen: Thank you, Owen. 00:04:15.123 --> 00:04:20.679 Jen: And you know, I appreciate the acronym, the alphabet soup interpretation that you provide us. 00:04:20.679 --> 00:04:24.802 Jen: Although I will say Jay has made very clear that his favorite is OB3. 00:04:24.802 --> 00:04:30.000 Jen: And I don't think that any of these, even EBITDA is in the running to compete with OB3. 00:04:30.000 --> 00:04:34.267 Jen: You'll have to listen to episode one of season two to know what we're referring to. 00:04:34.267 --> 00:04:35.296 Jen: But thank you, Owen. 00:04:35.296 --> 00:04:36.427 Jen: Thanks for joining us. 00:04:36.427 --> 00:04:50.000 Jen: And I want to just kind of frame this up a little bit for our listeners and ask you to explain for us what a business valuation actually means for a law firm as opposed to, you know, your mom and pop pizza shop or other businesses that might be familiar to people. 00:04:50.000 --> 00:04:57.170 Owen: So very generally, people think that, oh, I don't need or want a valuation because I'm not selling my business. 00:04:57.170 --> 00:05:06.278 Owen: Valuation for any type of business generally is something that you want to partake in because it helps you to understand your own operations. 00:05:06.278 --> 00:05:17.000 Owen: It helps you to understand what you're doing really well and what you're not doing well and look through a sober lens of, hey, here's what's going on in the business. 00:05:17.000 --> 00:05:21.268 Owen: Here's what this business is worth, and here's why it's worth this. 00:05:21.268 --> 00:05:27.000 Owen: And specifically with law firms, it's incredibly important because law firms tend to be... 00:05:27.000 --> 00:05:30.258 Owen: especially small and medium-sized owner-dependent. 00:05:30.258 --> 00:05:37.817 Owen: And so whenever you're valuing a law firm, the dependency of the revenue from the owner is really, really important. 00:05:37.817 --> 00:05:47.917 Owen: And then taking steps to move away from dependency of revenue on the owner, the rainmaker, if you will, is the goal so that you can maximize the valuation. 00:05:47.917 --> 00:05:53.000 Owen: Because if you, Jen, or you, Jay, or you, Fred, leave your law firms tomorrow, 00:05:53.000 --> 00:05:57.833 Owen: and half of the revenue walks out the door, then you have a problem with the valuation. 00:05:57.833 --> 00:06:08.889 Owen: And so providing or doing the exercise of getting a valuation for your business, for your firm, is going to help you to understand operationally what you're doing well and what you're not doing well. 00:06:08.889 --> 00:06:10.444 Owen: It's not an emotional thing. 00:06:10.444 --> 00:06:15.000 Owen: It's literally just, here's what the numbers say, and here's what we do to make... 00:06:15.000 --> 00:06:16.179 Owen: the valuation maximized. 00:06:16.179 --> 00:06:20.749 Jen: I think there's a common misconception around business valuations, especially with law firms. 00:06:20.749 --> 00:06:30.430 Jen: People might think, and I think, you know, I probably [unclear word] guilty of this as well, that my firm is a book of business, meaning, you know, that's what it's worth, the business that I have. 00:06:30.430 --> 00:06:32.445 Jen: Can you explain that a little bit for us? 00:06:32.445 --> 00:06:33.084 Jen: Is that true? 00:06:33.084 --> 00:06:33.821 Jen: Is that a myth? 00:06:33.821 --> 00:06:35.000 Jen: Is that a misconception? 00:06:35.000 --> 00:06:41.019 Owen: Yeah, I'd say that's the major misconception because the value of the firm is not the clientele. 00:06:41.019 --> 00:06:42.774 Owen: It's not just the clientele. 00:06:42.774 --> 00:06:55.000 Owen: Of course, the clientele is important, but really the value of the firm is the operational process that the firm has in place so that their practice and the services they offer can be repeatable. 00:06:55.000 --> 00:07:13.952 Owen: For example, if it is just the book of business, then the value of the firm is very, very low because that firm is dependent, going back to dependency on the owner, it's dependent on one single person to bring in revenue rather than a repeatable marketing process, a repeatable sales process. 00:07:13.952 --> 00:07:22.000 Owen: These processes and the know-how and the expertise and the quality assurance and quality control are what matter to a buyer. 00:07:22.000 --> 00:07:25.158 Owen: They don't care if you have a $100 million book of business. 00:07:25.158 --> 00:07:29.737 Owen: It doesn't matter if the minute that you leave, that $100 million also leaves with you. 00:07:29.737 --> 00:07:35.684 Owen: Or maybe we use a million dollars as the example, because it's a little more digestible probably for most people. 00:07:35.684 --> 00:07:37.526 Owen: But you understand what I'm saying. 00:07:37.526 --> 00:07:41.000 Owen: If you leave and the money leaves, your business is worth nothing. 00:07:41.000 --> 00:07:43.667 Jen: You gave a couple of acronyms in the beginning. 00:07:43.667 --> 00:07:45.993 Jen: Can you, I guess, start where you'd like? 00:07:45.993 --> 00:07:56.716 Jen: I'd like to know some of the basics of a business valuation, but if you want to, in answering that question, specifically tailor it to law firms, that makes sense for our listeners as well. 00:07:56.716 --> 00:08:02.957 Jen: Why don't you break down for us the SDE and the EBITDA abbreviations and the differentiations between the two? 00:08:02.957 --> 00:08:05.000 Owen: So law firms typically are valued... 00:08:05.000 --> 00:08:15.000 Owen: Most law firms, not large law firms, but most medium to small to medium sized law firms are going to be SDE valued because there is ownership dependency. 00:08:15.000 --> 00:08:16.350 Owen: That's not a bad thing. 00:08:16.350 --> 00:08:18.581 Owen: It's just the way that they're valued. 00:08:18.581 --> 00:08:21.047 Owen: SDE, again, seller discretionary earnings. 00:08:21.047 --> 00:08:32.729 Owen: So whenever somebody is buying a business based on seller discretionary earnings, what the buyer is asking is how much money am I reasonably going to be able to take home if I purchase this business? 00:08:32.729 --> 00:08:37.484 Owen: So we're going to calculate what the business has made over the past three years. 00:08:37.484 --> 00:08:39.773 Owen: Perhaps we go back the past five years. 00:08:39.773 --> 00:08:44.000 Owen: We're going to look at what attrition might occur when the owner leaves. 00:08:44.000 --> 00:08:52.512 Owen: Probably going to assign a lower multiple on this type of business because of ownership dependency or the semblance of it. 00:08:52.512 --> 00:08:56.907 Owen: And we're also going to start discluding certain things, right? 00:08:56.907 --> 00:09:05.000 Owen: So whenever a smaller firm is owned by an individual, one individual or two individuals, typically inside the books. 00:09:05.000 --> 00:09:09.477 Owen: There are expenses that are what are considered discretionary earnings. 00:09:09.477 --> 00:09:19.378 Owen: Those get added back to the value of the company because if you're a quote unquote professional manager, maybe you're not going to have as many client meals. 00:09:19.378 --> 00:09:29.279 Owen: Maybe, you know, you can operationally determine like based on looking at the books, like, well, I would never spend that much on meals entertainment, right? 00:09:29.279 --> 00:09:33.000 Owen: You're looking at the P&L, you're saying this expense here. 00:09:33.000 --> 00:09:40.731 Owen: probably should be added back to the value of the business because I wouldn't have made that expensive if I were operating the company. 00:09:40.731 --> 00:09:42.449 Owen: This is how you work with SDE. 00:09:42.449 --> 00:09:47.432 Owen: Because you're not just purchasing a business, you're in a way you're purchasing a job. 00:09:47.432 --> 00:09:53.159 Owen: You're going to fill the shoes of the exiting owner and then you're going to therefore run the firm. 00:09:53.159 --> 00:09:55.106 Owen: And that's what you're looking at. 00:09:55.106 --> 00:09:59.000 Owen: If I run this firm, how much money am I going to be able to extract? 00:09:59.000 --> 00:09:59.769 Owen: from the firm. 00:09:59.769 --> 00:10:02.404 Owen: People don't buy businesses, they buy cash flow. 00:10:02.404 --> 00:10:05.149 Owen: And that's really, really important to understand. 00:10:05.149 --> 00:10:11.627 Owen: It doesn't matter if you make a million dollars a year, your revenue is a million dollars a year or $5 million a year. 00:10:11.627 --> 00:10:13.000 Owen: It doesn't really matter. 00:10:13.000 --> 00:10:17.231 Owen: if the owner is not able to extract money from that million dollars a year. 00:10:17.231 --> 00:10:20.897 Owen: And so that's very, very important to understand on the SDE side. 00:10:20.897 --> 00:10:23.944 Owen: And this is typically for small to medium-sized firms. 00:10:23.944 --> 00:10:29.528 Owen: Now, medium-sized to large firms are likely going to use EBITDA when they're doing their valuation. 00:10:29.528 --> 00:10:35.000 Owen: And we're going to move forward in a minute on three different types of valuations, but EBITDA... 00:10:35.000 --> 00:10:40.618 Owen: is typically used for law firms or businesses in general that have management. 00:10:40.618 --> 00:10:43.499 Owen: So the owner is not necessarily the CEO. 00:10:43.499 --> 00:10:45.659 Owen: The owner is not the CFO, CMO. 00:10:45.659 --> 00:10:47.892 Owen: There are layers of management. 00:10:47.892 --> 00:10:49.476 Owen: There are departments. 00:10:49.476 --> 00:10:51.709 Owen: There are repeatable processes. 00:10:51.709 --> 00:10:53.798 Owen: It's literally a corporation. 00:10:53.798 --> 00:10:57.975 Owen: So think of the Edgar Snyder's, for example, of the world. 00:10:57.975 --> 00:11:01.000 Owen: That type of firm would likely use EBITDA. 00:11:01.000 --> 00:11:06.000 Owen: rather than SDE because they have management, they have departments. 00:11:06.000 --> 00:11:08.920 Owen: They operate like a business rather than a smaller firm. 00:11:08.920 --> 00:11:13.978 Owen: Those are the two acronyms regarding valuation that we really need to be focused on this evening. 00:11:13.978 --> 00:11:20.391 Jay: Okay, Owen, so just to back up a little bit, you mentioned a couple things within that realm of describing SDEs and EBITDA. 00:11:20.391 --> 00:11:25.762 Jay: I like to go the kind of Socratic method a little bit of, let's try to teach by analogy and by example. 00:11:25.762 --> 00:11:31.810 Jay: So let's say that we have a guy or a gal who owns a solo shop and they do a million dollars of gross revenue a year. 00:11:31.810 --> 00:11:34.000 Jay: They're bringing in a million in the door. 00:11:34.000 --> 00:11:37.535 Jay: They're getting to be at the age where they don't want to work anymore. 00:11:37.535 --> 00:11:43.160 Jay: And maybe they have a young lawyer or maybe they're trying to sell to another outfit or something else like that. 00:11:43.160 --> 00:11:45.400 Jay: You had mentioned something called attrition. 00:11:45.400 --> 00:11:46.545 Jay: You also mentioned P&L. 00:11:46.545 --> 00:11:50.628 Jay: Whenever we go through this, let's pretend that we don't know anything about this. 00:11:50.628 --> 00:11:54.660 Jay: So what I'm assuming is, and correct me if I'm wrong, let's start with attrition. 00:11:54.660 --> 00:11:57.000 Jay: What is an attrition rate or what is attrition? 00:11:57.000 --> 00:12:09.103 Owen: So attrition is essentially whenever you sell the business and you are no longer involved with the business, how much of the business is going to remain under the new buyers, the new owners leadership. 00:12:09.103 --> 00:12:21.387 Owen: So typically, let's say you do a million and then based on looking at matters, looking at the history of the business, you can say, okay, of that million, 750,000 is going to remain under this leadership. 00:12:21.387 --> 00:12:25.000 Owen: That of course affects the valuation in a tremendous manner. 00:12:25.000 --> 00:12:28.195 Jay: So in that example, you would have an attrition rate of 25%. 00:12:28.195 --> 00:12:28.795 Owen: 25%, yeah. 00:12:28.795 --> 00:12:31.391 Jay: Because only 750, which is 75%, would stay around. 00:12:31.391 --> 00:12:31.991 Owen: Correct. 00:12:31.991 --> 00:12:32.417 Jay: Okay. 00:12:32.417 --> 00:12:34.213 Jay: So then going also, you mentioned a P&L. 00:12:34.213 --> 00:12:37.355 Jay: Now I'm assuming you mean profit and loss statement, right? 00:12:37.355 --> 00:12:37.955 Owen: Yes. 00:12:37.955 --> 00:12:42.627 Jay: That's a financial tool that a bookkeeper tracks and maybe uses QuickBooks and stuff like that. 00:12:42.627 --> 00:12:52.000 Jay: So that also begs the question that these law firm owners that are listening potentially that don't generate P&Ls or that are running their law firms with an Excel spreadsheet. 00:12:52.000 --> 00:12:54.839 Jay: probably to the dismay of their accountant, there's an issue there. 00:12:54.839 --> 00:12:57.000 Jay: So talk a little bit about the importance of a P&L. 00:12:57.000 --> 00:13:02.000 Owen: I mean, having accurate financials is, of course, incredibly important for your valuation. 00:13:02.000 --> 00:13:05.556 Owen: I would sort of push back a little bit on the Excel spreadsheet. 00:13:05.556 --> 00:13:08.222 Owen: It depends on how good they are at Excel, right? 00:13:08.222 --> 00:13:13.111 Owen: You can absolutely run your books on an Excel spreadsheet if you're good at using Excel. 00:13:13.111 --> 00:13:15.111 Jay: I guess I can barely open the thing. 00:13:15.111 --> 00:13:17.833 Jay: I just know it's the green one, not the blue one. 00:13:17.833 --> 00:13:25.000 Owen: Probably a lot of law firm owners are and should be focused on running their practice and practicing law rather than doing books. 00:13:25.000 --> 00:13:27.372 Owen: So another mistake is doing your own books. 00:13:27.372 --> 00:13:32.448 Owen: You should let a bookkeeper do the books while you practice law, while you bring in revenue. 00:13:32.448 --> 00:13:33.048 Owen: I promise. 00:13:33.048 --> 00:13:36.487 Owen: that your hourly rate is probably larger than the bookkeepers. 00:13:36.487 --> 00:13:39.637 Owen: And so, yeah, doing the books yourself is a big mistake. 00:13:39.637 --> 00:13:42.956 Owen: Not having accurate financial statements is a huge mistake. 00:13:42.956 --> 00:13:45.037 Owen: You have to have your books in order. 00:13:45.037 --> 00:13:51.844 Owen: You have to be able to show, here's what my revenue is, and here's how I got there, and here's how much is going to stay. 00:13:51.844 --> 00:13:54.881 Owen: These are the important aspects of looking at the P&L. 00:13:54.881 --> 00:14:00.000 Owen: So I'm glad you brought up books, actually, because the books is where the sausage is made. 00:14:00.000 --> 00:14:04.000 Owen: That's where the real information is on how this business runs. 00:14:04.000 --> 00:14:05.778 Owen: What's being expensed where? 00:14:05.778 --> 00:14:13.270 Owen: Looking at different registers is something that everybody is going to do when they're looking to purchase a business. 00:14:13.270 --> 00:14:15.810 Owen: Like, oh, I spent $100,000 on marketing. 00:14:15.810 --> 00:14:18.159 Owen: Okay, let's go look in the marketing. 00:14:18.159 --> 00:14:20.000 Owen: And it's all expenses that... 00:14:20.000 --> 00:14:24.664 Owen: you know, Dave and Buster's, that's going to affect the valuation. 00:14:24.664 --> 00:14:28.198 Owen: So having really, really clean books is important. 00:14:28.198 --> 00:14:32.721 Jay: That'd be quite an interesting clientele base, I suppose, right? 00:14:32.721 --> 00:14:36.820 Owen: I mean, I wouldn't have brought it up if I hadn't seen it. 00:14:36.820 --> 00:14:38.728 Jay: That's scary enough, right? 00:14:38.728 --> 00:14:39.328 Owen: Yeah. 00:14:39.328 --> 00:14:39.681 Jen: Okay. 00:14:39.681 --> 00:14:40.035 Jen: So Owen. 00:14:40.035 --> 00:14:51.428 Jen: Jay gave us the example of a solo attorney wanting to sell to another firm or perhaps a young attorney is coming in interested in acquiring that practice. 00:14:51.428 --> 00:14:53.580 Jen: How do you look at valuation? 00:14:53.580 --> 00:14:56.770 Jen: What are the methods for valuing that firm? 00:14:56.770 --> 00:15:01.000 Owen: So generally speaking, there are three methods generally. 00:15:01.000 --> 00:15:02.676 Owen: of how to value any business. 00:15:02.676 --> 00:15:07.240 Owen: The first is the income approach, which is mostly what law firms are valued by. 00:15:07.240 --> 00:15:09.089 Owen: The second is a market approach. 00:15:09.089 --> 00:15:11.458 Owen: And the third is an asset-based approach. 00:15:11.458 --> 00:15:21.338 Owen: Asset-based approach is most of the time the least valuable way of evaluating a business because law firms don't tend to have tremendous amounts of assets outside of cash. 00:15:21.338 --> 00:15:27.000 Owen: Construction companies, you might use an asset-based approach because they have tons of equipment. 00:15:27.000 --> 00:15:31.324 Owen: For the most part, for listeners here, we can throw the asset-based approach away. 00:15:31.324 --> 00:15:42.080 Owen: Income is going to be the normal way that law firm assets are evaluated because what, again, going back to what I had mentioned earlier, whenever you're purchasing a law firm, you're purchasing cash flow. 00:15:42.080 --> 00:15:43.345 Owen: And what does that mean? 00:15:43.345 --> 00:15:46.878 Owen: You're purchasing cash you can extract from the business over time. 00:15:46.878 --> 00:15:49.304 Owen: The market-based approach though is important. 00:15:49.304 --> 00:15:56.000 Owen: So if you are going to have your business, your law firm evaluated, what you want to do is you want to use the income approach. 00:15:56.000 --> 00:15:57.738 Owen: to do an initial valuation. 00:15:57.738 --> 00:16:05.011 Owen: And then you want to check your valuation against the market because in the market, there are buyers and sellers. 00:16:05.011 --> 00:16:10.933 Owen: And there's information out there of what buyers are paying for specific types of law firms. 00:16:10.933 --> 00:16:24.000 Owen: If your income approach comes up with a valuation, but the market approach doesn't support that valuation, then you have to adjust the valuation so that you get to somewhere where it's actually sellable. 00:16:24.000 --> 00:16:31.307 Owen: So using Jay's example, the gentleman or lady who is selling their firm has $1 million in revenue. 00:16:31.307 --> 00:16:41.000 Owen: We have a 25% attrition rate, and now we have a $750,000 annual revenue assumed to be coming into the firm after the owner leaves. 00:16:41.000 --> 00:16:51.909 Owen: we're going to one, make a valuation based on that $750,000 worth of income, but then two, make sure that that valuation is something that the market actually will buy. 00:16:51.909 --> 00:17:00.481 Owen: Because currently, the current way things are, there are more sellers in the market than buyers because we have an aging population. 00:17:00.481 --> 00:17:08.208 Owen: We haven't talked about the great resignation yet, but we have more people selling their firms than buying their firms. 00:17:08.208 --> 00:17:11.000 Owen: And when you have more sellers than buyers, 00:17:11.000 --> 00:17:12.277 Owen: is a buyer's market. 00:17:12.277 --> 00:17:16.426 Owen: And so the valuation has to match what people are willing to pay. 00:17:16.426 --> 00:17:18.660 Jay: Let's stick with that for a moment. 00:17:18.660 --> 00:17:20.957 Jay: You mentioned the great resignation. 00:17:20.957 --> 00:17:29.000 Jay: Let's talk about that because it's something that I think it's on the minds of a lot of practitioners who are looking to exit. 00:17:29.000 --> 00:17:35.911 Jay: And frankly, I think it should also be on the minds for younger attorneys who are looking to build a practice. 00:17:35.911 --> 00:17:48.791 Jay: And I don't necessarily want to overly emphasize that point, but I really do genuinely believe that there is more opportunity right now for young attorneys to build a practice than at least in my lifetime. 00:17:48.791 --> 00:17:53.000 Jay: So can you talk a little bit more about what the market looks like? 00:17:53.000 --> 00:17:53.609 Jay: right now. 00:17:53.609 --> 00:17:55.377 Owen: Firstly, you're 100% correct. 00:17:55.377 --> 00:18:03.055 Owen: For younger attorneys who are looking to acquire a book of business, this is the best time ever to acquire a book of business. 00:18:03.055 --> 00:18:05.188 Owen: You're going to get the best price. 00:18:05.188 --> 00:18:09.576 Owen: You're going to get the best book of business that you can possibly get. 00:18:09.576 --> 00:18:15.000 Owen: Because as I mentioned earlier, there are going to be more sellers than there are buyers. 00:18:15.000 --> 00:18:23.773 Owen: People looking to exit their business, looking to retire and annuitize, if you will, their business or get a cash payout for their business. 00:18:23.773 --> 00:18:32.859 Owen: It's a reality check right now, because if you've just been running your business the way you run your business, you don't have clean financials. 00:18:32.859 --> 00:18:39.000 Owen: You haven't taken the steps to get the valuation, the highest valuation to deliver the most value. 00:18:39.000 --> 00:18:43.191 Owen: to the person buying your book or that you want to sell your book to. 00:18:43.191 --> 00:18:50.236 Owen: They're not going to buy it from you because the guy who did do that is going to win the sale at the end of the day. 00:18:50.236 --> 00:18:53.698 Owen: And that's the reality of the market right now, for sure. 00:18:53.698 --> 00:18:55.824 Owen: There are more sellers than buyers. 00:18:55.824 --> 00:18:57.161 Owen: It's a buyer's market. 00:18:57.161 --> 00:19:03.477 Announcer: Do you feel like your firm has an operational system that's lagging, glitchy and running on 1990s logic? 00:19:03.477 --> 00:19:04.996 Announcer: You don't need a tune up. 00:19:04.996 --> 00:19:07.000 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that the cash buyout method, and correct me if I'm wrong, I'm kind of speaking out of pocket here for a moment. 00:19:53.834 --> 00:19:56.000 Jay: The cash buyout method is often... 00:19:56.000 --> 00:20:06.000 Jay: more of an option for larger firms, whereas an earn-out structure is often more appropriate for smaller firms. 00:20:06.000 --> 00:20:07.909 Jay: Do I have that right? 00:20:07.909 --> 00:20:09.091 Owen: Sort of a no. 00:20:09.091 --> 00:20:10.273 Jay: Sort of a no. 00:20:10.273 --> 00:20:12.364 Jay: That's why you're here. 00:20:12.364 --> 00:20:14.000 Owen: Here's the reason. 00:20:14.000 --> 00:20:15.328 Owen: It really depends. 00:20:15.328 --> 00:20:21.451 Owen: And this goes back to the SDE and EBITDA, the way we look at the financials, right? 00:20:21.451 --> 00:20:29.713 Owen: And let's go again back to Jay's analogy of the person who has a $1 million year revenue firm and 25% attrition. 00:20:29.713 --> 00:20:32.000 Owen: And that person says, you know, 00:20:32.000 --> 00:20:35.185 Owen: What I want for my firm is $600,000, right? 00:20:35.185 --> 00:20:41.778 Owen: Again, we're making up numbers, but just making up numbers, it's probably worth $600,000. 00:20:41.778 --> 00:20:52.000 Owen: And so paying the $600,000 in cash with a few small contingencies to make sure the business doesn't walk out the door, that's a good deal. 00:20:52.000 --> 00:20:52.600 Owen: right? 00:20:52.600 --> 00:20:59.733 Owen: That's a reasonable offer because you can reasonably assume that that $600,000 is going to be there next year. 00:20:59.733 --> 00:21:09.933 Owen: You're going to be able to, and I keep saying this, extract that cash, some of that cash after the operations from that firm, from that book of business. 00:21:09.933 --> 00:21:21.000 Owen: Now, if you have, again, using the same example, million dollar firm and 25% attrition after the seller leaves or the principal leaves, and that guy wants $2 million. 00:21:21.000 --> 00:21:27.593 Owen: Well, we're going to need to do an earn out because you're going to have to show me that your firm's worth $2 million. 00:21:27.593 --> 00:21:33.628 Owen: So you're going to work for the next three years and make sure that every single penny is transitioned over. 00:21:33.628 --> 00:21:37.539 Owen: Every single operational advantage that you have is transitioned over. 00:21:37.539 --> 00:21:42.345 Owen: It's much less about size than it is about operations and how your business functions. 00:21:42.345 --> 00:21:43.462 Jay: So would it be fair? 00:21:43.462 --> 00:21:49.721 Jay: I think a lot of times in the sale of a business, a lot of people are familiar with the concept of a multiplier. 00:21:49.721 --> 00:21:50.321 Owen: Sure. 00:21:50.321 --> 00:22:01.000 Jay: Correct me if I'm wrong, but is it fair to say with the analysis that you just went through that a cash out offer may be more likely if... 00:22:01.000 --> 00:22:07.916 Jay: we're using a low multiplier where an earn out may be more appropriate with a higher multiplier. 00:22:07.916 --> 00:22:09.429 Jay: Does that make sense? 00:22:09.429 --> 00:22:10.222 Owen: Yes and no. 00:22:10.222 --> 00:22:10.942 Owen: I'm sorry. 00:22:10.942 --> 00:22:11.542 Jay: 0 for 2. 00:22:11.542 --> 00:22:15.193 Owen: You know, it's like, and I'm not the lawyer, right? 00:22:15.193 --> 00:22:16.490 Owen: So I don't recall. 00:22:16.490 --> 00:22:21.245 Owen: But essentially what matters is the predictability of the revenue. 00:22:21.245 --> 00:22:22.974 Owen: And that's what matters. 00:22:22.974 --> 00:22:26.000 Owen: If I buy this, how much money, how much... 00:22:26.000 --> 00:22:28.255 Owen: profit am I going to get from it? 00:22:28.255 --> 00:22:30.510 Owen: It's not about size or structure. 00:22:30.510 --> 00:22:32.287 Owen: It's about predictability. 00:22:32.287 --> 00:22:36.319 Owen: It's about de-risking the asset, making it not a risky bet. 00:22:36.319 --> 00:22:45.681 Owen: So the more I can show the buyer, or if I'm the buyer, the more I can see that the risk is minimized, the more I'm willing to pay for it. 00:22:45.681 --> 00:22:50.465 Jay: So in our analogy, we have a million dollars gross revenue every year. 00:22:50.465 --> 00:22:54.360 Jay: And let's just say that our profit every year is 250,000. 00:22:54.360 --> 00:22:56.000 Jay: So that means our margin 00:22:56.000 --> 00:22:56.600 Jay: is 25%. 00:22:56.600 --> 00:23:00.445 Jay: And I have that for 10 years straight and it is super predictable. 00:23:00.445 --> 00:23:17.920 Jay: So I know that hopefully after 10 years, if I pay a number, let's say 750,000, I know that I need to basically for three years, the next three years, and I'm taking $250,000 out every year, that's going to take me three years at that predictable model to recoup my investment of 750,000. 00:23:17.920 --> 00:23:22.000 Jay: That's probably what you do and how you advise your clients, right? 00:23:22.000 --> 00:23:22.634 Owen: Absolutely. 00:23:22.634 --> 00:23:24.478 Owen: We advise on two different ways. 00:23:24.478 --> 00:23:28.512 Owen: So one is what you just mentioned, but the other is also yield, right? 00:23:28.512 --> 00:23:31.912 Owen: So when you buy a business, you're looking to extract cash. 00:23:31.912 --> 00:23:39.000 Owen: Just like whenever you buy a rental property, you're looking at how much cash am I going to extract net at the end of this? 00:23:39.000 --> 00:23:39.665 Owen: purchase. 00:23:39.665 --> 00:23:42.401 Owen: It's not just about the asset itself. 00:23:42.401 --> 00:23:44.988 Owen: It's also about what it's yielding. 00:23:44.988 --> 00:23:54.673 Owen: So let's say an opportunity cost, which we had mentioned earlier, or opportunity cost is I have this $750,000 to buy this business. 00:23:54.673 --> 00:23:58.000 Owen: If I put this $750,000 into the stock market, 00:23:58.000 --> 00:24:04.430 Owen: what percentage am I going to make year over year, depending on the asset allocation, right? 00:24:04.430 --> 00:24:09.113 Owen: If I put it all into really safe bonds, okay, I'm going to make 4%. 00:24:09.113 --> 00:24:18.898 Owen: Now, if I put $750,000 into this business and I make profit yield $250,000 in cash a year, it's much better than 4%, but the risk is higher. 00:24:18.898 --> 00:24:21.554 Owen: So that's the opportunity cost, right? 00:24:21.554 --> 00:24:24.000 Owen: Did that answer your question, Jay? 00:24:24.000 --> 00:24:24.706 Jay: Yeah, I get it. 00:24:24.706 --> 00:24:30.494 Jay: And that's one of the analysis that you probably have to conduct with your client, especially probably with sellers, right? 00:24:30.494 --> 00:24:33.929 Jay: Because once again, it's like if I get this cash on the table now, right? 00:24:33.929 --> 00:24:38.024 Jay: And then I do take that investment and throw it into my stock market for my retirement. 00:24:38.024 --> 00:24:41.365 Jay: Am I deleveraging my risk because I don't have to practice law anymore? 00:24:41.365 --> 00:24:44.000 Jay: And all the stress and malpractice and nonsense is gone. 00:24:44.000 --> 00:24:46.476 Owen: Well, and that's a great way to approach it. 00:24:46.476 --> 00:24:49.403 Owen: But also the problem with sellers is the ego, right? 00:24:49.403 --> 00:24:52.273 Owen: They think their business is worth more than it is. 00:24:52.273 --> 00:24:57.394 Owen: And they haven't done best practices, best financial practices, best operational practices. 00:24:57.394 --> 00:25:01.052 Owen: Instead, they are like, oh, I have a million dollars a year firm. 00:25:01.052 --> 00:25:02.290 Owen: It's worth $3 million. 00:25:02.290 --> 00:25:03.866 Owen: Well, why do you think that? 00:25:03.866 --> 00:25:10.000 Owen: You need to answer certain questions like how long, to your point, how long is it going to take me to recoup? 00:25:10.000 --> 00:25:13.231 Owen: my initial investment and break even on this thing? 00:25:13.231 --> 00:25:21.023 Owen: Or how much cash am I going to be able to take home from this to support my family, to invest in other opportunities, etc.? 00:25:21.023 --> 00:25:24.000 Owen: Those are the questions we're trying to answer. 00:25:24.000 --> 00:25:25.463 Jay: So you've touched on that. 00:25:25.463 --> 00:25:26.701 Jay: I want to go specific. 00:25:26.701 --> 00:25:32.160 Jay: So we talked a little bit about this theory of the different valuations, the different analogies. 00:25:32.160 --> 00:25:47.355 Jay: Can you tell us whenever you, and I know that you advise many law firms across multi-jurisdictions, specifically what value drivers, if I want to maximize the value of my business, what value drivers do you see whenever you're valuing and advising clients in a business? 00:25:47.355 --> 00:25:50.000 Owen: Number one, when you're valuating a business is 00:25:50.000 --> 00:25:53.179 Owen: We're going to look at the financials, obviously. 00:25:53.179 --> 00:26:02.846 Owen: So having strong financials, being able to report your financials on not just cash, but also an accrual level because cash-based accounting is great. 00:26:02.846 --> 00:26:05.635 Owen: Cash-based accounting doesn't reflect work. 00:26:05.635 --> 00:26:14.588 Owen: It reflects cash flow, which cash flow is very important, but you need to be able to also see how the business performs on a matter level. 00:26:14.588 --> 00:26:19.000 Owen: When it comes to law firms, being able to look at each type of case. 00:26:19.000 --> 00:26:22.391 Owen: and be able to say, this is repeatable. 00:26:22.391 --> 00:26:23.000 Owen: This... 00:26:23.000 --> 00:26:24.996 Owen: type of case has this much margin. 00:26:24.996 --> 00:26:27.286 Owen: This type of case has this much margin. 00:26:27.286 --> 00:26:38.147 Owen: And also being able to explain why you maybe loss lead with certain types of cases, why you take on lower margin cases and don't get rid of them, how these things connect to each other. 00:26:38.147 --> 00:26:40.554 Jay: So let's back up a little bit once again. 00:26:40.554 --> 00:26:42.961 Jay: So let's break this down to our audience. 00:26:42.961 --> 00:26:53.000 Jay: When you talk about mattering, what you're saying is if I'm an estate and trust attorney, I can say if I do estate and trust planning, the average will-based plan is this. 00:26:53.000 --> 00:26:54.160 Jay: revenue plus this margin. 00:26:54.160 --> 00:26:55.876 Jay: The average trust-based plan is this. 00:26:55.876 --> 00:26:57.454 Jay: If I do a probate case, it's this. 00:26:57.454 --> 00:26:59.077 Jay: If I do trust administration, this. 00:26:59.077 --> 00:27:00.747 Jay: If I do elder law crisis, it's this. 00:27:00.747 --> 00:27:08.216 Jay: That's what you're talking about, the granularity of breaking it down, even in the realm of estates and trusts, just per discipline, per actual thing that we do. 00:27:08.216 --> 00:27:10.814 Jay: That's what the granularity you're talking about, right? 00:27:10.814 --> 00:27:11.414 Owen: Yep. 00:27:11.414 --> 00:27:11.783 Owen: A hundred percent. 00:27:11.783 --> 00:27:15.522 Owen: You need to be able to, as a business owner, that's the business of what you're doing. 00:27:15.522 --> 00:27:16.122 Jay: Right. 00:27:16.122 --> 00:27:16.383 Jay: Got you. 00:27:16.383 --> 00:27:21.087 Jay: And you're also, once again, you as a professional do this and we do it all the time to our clients, loss leaders. 00:27:21.087 --> 00:27:22.261 Jay: What are you talking about? 00:27:22.261 --> 00:27:23.217 Jay: It doesn't make sense. 00:27:23.217 --> 00:27:23.817 Jay: I don't know. 00:27:23.817 --> 00:27:25.000 Jay: It doesn't sound good to me. 00:27:25.000 --> 00:27:25.600 Owen: Yeah. 00:27:25.600 --> 00:27:36.166 Owen: A loss leader is essentially a service that you provide where you don't necessarily make money or might even, that's what's called a loss leader, lose money, but you do it in order to get the people into the door. 00:27:36.166 --> 00:27:42.466 Jay: So in our profession, would that be, would a loss leader hypothetically say, it's like the Gillette model for simple wills. 00:27:42.466 --> 00:27:46.000 Jay: I write $100 simple will for well knowing that at some point in my... 00:27:46.000 --> 00:27:55.345 Jay: career, hopefully, I outlive the decedent and their executor comes to probate the estate with me, which then I can make money on the estate administration. 00:27:55.345 --> 00:27:56.792 Jay: Is that a fair analysis? 00:27:56.792 --> 00:27:57.392 Owen: 100%. 00:27:57.392 --> 00:28:11.202 Owen: And then to sort of further your analogy, if you were to purchase a book that was valuated at a certain price, we would take into account the clients that have wills and trust with that book, because those might come your way as well. 00:28:11.202 --> 00:28:15.000 Jen: You hit the nail on the head there, Owen, because for, I think, 00:28:15.000 --> 00:28:27.609 Jen: a decade and a half that I've been practicing law now, I've had mentors and attorneys that I've worked for that were really big on, I have a will file, that's my future business right now, that's my firm, that's the value. 00:28:27.609 --> 00:28:30.335 Jen: How would you even go about valuing a will file? 00:28:30.335 --> 00:28:43.000 Jen: You know, wills that we prepared for somebody, whether it's the simple will Gillette method that Jay mentioned, or whether it is a sophisticated plan, how do you look at those and project forward revenue to be given to you? 00:28:43.000 --> 00:28:44.343 Jen: are made from those? 00:28:44.343 --> 00:28:46.291 Owen: That's an excellent question. 00:28:46.291 --> 00:28:49.582 Owen: And one, frankly, I wasn't necessarily expecting. 00:28:49.582 --> 00:28:50.455 Owen: Quite simple. 00:28:50.455 --> 00:28:52.672 Owen: In some senses, it's very simple. 00:28:52.672 --> 00:28:57.507 Owen: The more complex that the estate plan is, the stickier it's going to be. 00:28:57.507 --> 00:28:58.107 Owen: Okay. 00:28:58.107 --> 00:29:08.455 Owen: So if I am Joe client and I've come to you for my simple $100 will, it's unlikely that I'm going to have tremendous amounts of assets later on in life, right? 00:29:08.455 --> 00:29:10.000 Owen: At least statistically. 00:29:10.000 --> 00:29:13.314 Owen: And remember, this isn't about emotions or ego. 00:29:13.314 --> 00:29:15.853 Owen: This is just statistics and numbers. 00:29:15.853 --> 00:29:25.583 Owen: So if you have $500, $100 wills, much less valuable than $500, $5,000 estate plans with a million or more or 10 million inside the estate. 00:29:25.583 --> 00:29:28.968 Owen: So you really have to be looking at those plans. 00:29:28.968 --> 00:29:32.000 Owen: What assets were brought forth during that? 00:29:32.000 --> 00:29:42.610 Owen: discussion when those documents were made, how often have those clients come back to update their documents would also be another important factor that you'd want to look at. 00:29:42.610 --> 00:29:46.207 Owen: And then you therefore would assign some attrition to that. 00:29:46.207 --> 00:29:47.000 Owen: There also is 00:29:47.000 --> 00:29:54.070 Owen: broad general data out there about how many, let's again, go back with our 500 wills or 100 wills. 00:29:54.070 --> 00:29:59.841 Owen: There's going to be general statistical data of how sticky those $100 wills are. 00:29:59.841 --> 00:30:09.291 Owen: So we would apply that data to those wills and say, okay, you can likely expect this many are going to return when a person passes. 00:30:09.291 --> 00:30:16.000 Owen: We just have to use data, available data, which is imperfect in order to attempt to determine 00:30:16.000 --> 00:30:16.957 Owen: what that's worth. 00:30:16.957 --> 00:30:27.000 Owen: But also with the understanding, and I think it sort of tracks, you guys can tell me, but the more sophisticated the estate, the more time that's been spent on building out the estate plan. 00:30:27.000 --> 00:30:33.543 Owen: clearly is going to be stickier because a tremendous amount of trust has been placed into the people that have made the plan. 00:30:33.543 --> 00:30:39.563 Jen: One thing you mentioned there, and I think it ties into best practices and things we can do operationally speaking. 00:30:39.563 --> 00:30:41.919 Jen: You spoke about operations several times now. 00:30:41.919 --> 00:30:53.069 Jen: As an estate planning attorney, reaching out to the client, encouraging them to maybe come back and update their documents and having that as a standard operating procedure, would that factor into your evaluation? 00:30:53.069 --> 00:30:53.669 Owen: 100%. 00:30:53.669 --> 00:30:56.000 Owen: And especially if it's documented that you do that. 00:30:56.000 --> 00:31:03.624 Owen: more that you can track that these people over the past 10 years or 20 years, these clients have come in four times and updated their documents. 00:31:03.624 --> 00:31:08.335 Owen: While they were updating those documents, by the way, we produced this amount of revenue. 00:31:08.335 --> 00:31:09.659 Owen: So that's stickier money. 00:31:09.659 --> 00:31:13.259 Owen: That's going to be incredibly, incredibly important in the analysis. 00:31:13.259 --> 00:31:19.506 Owen: What we need to understand and the takeaway for your audience regarding this conversation, it's not about the revenue. 00:31:19.506 --> 00:31:20.882 Owen: It's about the operations. 00:31:20.882 --> 00:31:23.000 Owen: It's about the repeatable processes that 00:31:23.000 --> 00:31:25.368 Owen: prove out your revenue and de-risk the asset. 00:31:25.368 --> 00:31:27.316 Owen: That's what's important to the buyer. 00:31:27.316 --> 00:31:29.000 Jay: You know, one thing that that... 00:31:29.000 --> 00:31:40.322 Jay: raises in my mind, and I don't mean to generalize, but I think there are a lot of small practices where those operations, as people get older, they're not thinking about improving their operations. 00:31:40.322 --> 00:31:43.713 Jay: They may be using outdated software, technology, processes. 00:31:43.713 --> 00:31:45.839 Jay: They're just not thinking about that. 00:31:45.839 --> 00:31:48.138 Jay: They're thinking about their retirement. 00:31:48.138 --> 00:31:56.184 Jay: And maybe at least in my mind, what I'm taking away from this conversation is that people probably should be thinking about those processes. 00:31:56.184 --> 00:31:59.000 Jay: And so is there anything, tips right off the bat, 00:31:59.000 --> 00:32:03.709 Jay: someone calls you and says, hey, Owen, I need to kind of get things in order. 00:32:03.709 --> 00:32:09.153 Jay: What are some low hanging fruit that people could take a look at and potentially improve? 00:32:09.153 --> 00:32:09.753 Owen: Okay. 00:32:09.753 --> 00:32:14.046 Owen: So one of the biggest, again, depends on the firm, is client concentration. 00:32:14.046 --> 00:32:19.000 Owen: If your firm relies, if 50% of its revenue is from three clients, it's a problem. 00:32:19.000 --> 00:32:26.390 Owen: You need to branch out and bring in more clients so that you're not dependent on one specific client. 00:32:26.390 --> 00:32:43.000 Owen: Number two is especially if you're thinking about retiring, maybe start retiring now and building leadership within your firm and delegating roles and responsibilities and operations so that the business isn't dependent on you. 00:32:43.000 --> 00:32:45.340 Owen: That would be a huge low-hanging fruit. 00:32:45.340 --> 00:32:46.600 Owen: Start delegating now. 00:32:46.600 --> 00:32:54.340 Owen: And a lot of this is setting ego aside and saying, maybe we will do $100,000 less because I'm not going to be involved this much. 00:32:54.340 --> 00:32:57.160 Owen: But how much does that matter in the valuation? 00:32:57.160 --> 00:32:58.000 Owen: Not that much. 00:32:58.000 --> 00:33:02.620 Owen: Because at the end of the day, we're going to assign attrition anyway, right? 00:33:02.620 --> 00:33:04.120 Owen: And so set aside the ego. 00:33:04.120 --> 00:33:07.900 Owen: It's time to say, okay, let's delegate some of these tasks now. 00:33:07.900 --> 00:33:13.000 Owen: Bring on another attorney into your firm so that maybe that person becomes the buyer. 00:33:13.000 --> 00:33:17.015 Owen: If you're thinking about your retirement, mentor someone and teach them. 00:33:17.015 --> 00:33:23.428 Owen: And then you can get a good deal for 10, 20 years if you need it, depending on how you want to structure that deal. 00:33:23.428 --> 00:33:28.000 Owen: The other one that's, I think, pretty easy is treat your business like a business. 00:33:28.000 --> 00:33:36.839 Owen: Even if you are the CEO and the CFO and the CMO, Chief Marketing Officer, do treat each of those departments separately because they're different things. 00:33:36.839 --> 00:33:43.251 Owen: And you need to be able, again, operationally to say, well, from a marketing standpoint, this is how we market. 00:33:43.251 --> 00:33:44.811 Owen: This is how we get clients. 00:33:44.811 --> 00:33:49.548 Owen: If we want to talk about KPIs, this is how much it costs for us to get one client. 00:33:49.548 --> 00:33:55.325 Owen: If you're thinking, bring someone in, don't make the mistake of trying to do everything on your own. 00:33:55.325 --> 00:33:57.000 Owen: Bring someone in to help you. 00:33:57.000 --> 00:34:03.590 Owen: Because again, if you remember way back in the beginning of this conversation, I said that it doesn't matter if you're selling or not. 00:34:03.590 --> 00:34:09.344 Owen: What matters is that when you do a valuation, it's a reality check on how operationally your business is functioning. 00:34:09.344 --> 00:34:11.361 Owen: I think those three would be good starts. 00:34:11.361 --> 00:34:12.000 Owen: Delegate now. 00:34:12.000 --> 00:34:15.520 Owen: bring someone else in and just improve generally your operations. 00:34:15.520 --> 00:34:19.744 Owen: If you have bad financials, fix your financials, really important stuff to do. 00:34:19.744 --> 00:34:23.155 Jen: Oh, and obviously the sooner the better is probably the answer. 00:34:23.155 --> 00:34:31.061 Jen: But if I am looking to sell my million dollar business, my law firm business, when should I start contacting you to come in and do this valuation? 00:34:31.061 --> 00:34:33.769 Jen: What's optimal timing for you to value a law firm? 00:34:33.769 --> 00:34:40.105 Owen: Well, I mean, I'm brought in a lot of times like right when the person decides they want to sell, which is a mistake. 00:34:40.105 --> 00:34:42.000 Owen: It also depends on who I'm working. 00:34:42.000 --> 00:34:42.600 Owen: for, right? 00:34:42.600 --> 00:34:44.406 Owen: Because I do buy side and sell side. 00:34:44.406 --> 00:34:55.003 Owen: And so if I'm working for the buyer and then I go to a seller and then they give me their very bad financials and I will find every mistake in there and I will beat them up because I'm working for the buyer. 00:34:55.003 --> 00:34:57.000 Owen: So I'm going to find all the bad stuff. 00:34:57.000 --> 00:35:00.932 Owen: And I'm going to say, you think it's worth this, but it's worth this. 00:35:00.932 --> 00:35:04.692 Owen: Now, when I'm working for the seller, I do obviously the opposite. 00:35:04.692 --> 00:35:06.003 Owen: I defend the valuation. 00:35:06.003 --> 00:35:14.493 Owen: But it makes it a whole lot easier to defend the valuation if I've been there a year or two beforehand so that I can clean up the operational issues. 00:35:14.493 --> 00:35:17.000 Owen: My firm can clean up the operational issues. 00:35:17.000 --> 00:35:18.197 Owen: clean up the bad books. 00:35:18.197 --> 00:35:19.081 Owen: You'd be shocked. 00:35:19.081 --> 00:35:23.609 Owen: Maybe not because you're lawyers, but you'd be shocked how bad some people's books are. 00:35:23.609 --> 00:35:26.939 Owen: And they don't fix them because they're embarrassed to fix them. 00:35:26.939 --> 00:35:28.292 Owen: But I mean, just fix them. 00:35:28.292 --> 00:35:29.176 Owen: I've seen it all. 00:35:29.176 --> 00:35:30.686 Owen: Nothing surprises me anymore. 00:35:30.686 --> 00:35:32.559 Owen: Just like nothing surprises you all. 00:35:32.559 --> 00:35:37.762 Jay: So in the sell side, Owen, we call that, at least in my world, we call that kind of a runway, right? 00:35:37.762 --> 00:35:40.000 Jay: Because once again, you're talking about... 00:35:40.000 --> 00:35:44.382 Jay: recurring, predictable revenue with operations, all the good stuff in a good soup. 00:35:44.382 --> 00:35:48.176 Jay: Jen asked, when should someone bring you in if they're looking to sell? 00:35:48.176 --> 00:35:49.779 Jay: We call that kind of a runway. 00:35:49.779 --> 00:36:05.382 Jay: And I think that I heard you say around two to three years gives that runway some legs so that your company can do, or someone like you can do what you do, absolutely maximize that predictable model so that someone like you can defend the ultimate valuation when you strike that date of sale. 00:36:05.382 --> 00:36:05.982 Owen: 100%. 00:36:05.982 --> 00:36:08.000 Owen: Three years, really, I would say is optimal. 00:36:08.000 --> 00:36:12.078 Owen: If you were going to pick the perfect amount of time, it would be three years. 00:36:12.078 --> 00:36:16.000 Owen: We can fix a lot of stuff pretty quickly, but three years would be optimal. 00:36:16.000 --> 00:36:19.361 Owen: build the runway, make sure the business is optimized. 00:36:19.361 --> 00:36:26.828 Owen: You can then prove out repeatable processes, specifically on the management side, the marketing and sales pipeline side. 00:36:26.828 --> 00:36:29.691 Owen: Those are really going to increase your value. 00:36:29.691 --> 00:36:33.612 Owen: And then the other thing is not to look at it as a cost center. 00:36:33.612 --> 00:36:37.532 Owen: So people think like, oh, this is going to cost a lot of money. 00:36:37.532 --> 00:36:41.328 Owen: Well, it's going to cost money because nobody works for free. 00:36:41.328 --> 00:36:45.000 Owen: But two, if you spend $60,000 or $120,000 or even $250,000, 00:36:45.000 --> 00:36:52.043 Owen: thousand dollars [wording uncertain in supplied transcript] on optimizing your business and you increase your valuation by two million dollars, then not really a cost, is it? 00:36:52.043 --> 00:36:59.785 Jay: So, Owen, just in kind of closing, before we go [unclear word] key takeaways, can you give us some examples of some things that kill valuations? 00:36:59.785 --> 00:37:07.151 Jay: Obviously, we talked about bad books, non-predictable valuations, just anything else, either things that kill that or things you have to. 00:37:07.151 --> 00:37:08.011 Owen: Weak financials. 00:37:08.011 --> 00:37:09.032 Jay: Is that number one? 00:37:09.032 --> 00:37:10.000 Owen: A hundred percent. 00:37:10.000 --> 00:37:16.624 Owen: Yes, 100% weak financials is number one, because if you can't read the financials, then you can trust nothing. 00:37:16.624 --> 00:37:18.611 Owen: So number one is weak financials. 00:37:18.611 --> 00:37:20.658 Owen: So what does weak financials mean? 00:37:20.658 --> 00:37:23.127 Owen: It doesn't just mean you're a total mess. 00:37:23.127 --> 00:37:26.318 Owen: It means you have no accounts collections discipline. 00:37:26.318 --> 00:37:29.269 Owen: You don't really know when money is going to hit. 00:37:29.269 --> 00:37:31.497 Owen: You only track cash basis accounting. 00:37:31.497 --> 00:37:32.761 Owen: You don't do accrual. 00:37:32.761 --> 00:37:34.688 Owen: You should be doing both, right? 00:37:34.688 --> 00:37:36.495 Owen: Everyone should be doing both. 00:37:36.495 --> 00:37:38.000 Owen: No systems is number two. 00:37:38.000 --> 00:37:39.389 Owen: Like you have no systems. 00:37:39.389 --> 00:37:41.056 Owen: You don't actually know where. 00:37:41.056 --> 00:37:46.389 Owen: And again, this is why financials are number one, because you can see bad systems in financials. 00:37:46.389 --> 00:37:56.000 Owen: So for example, if your law firm every month does 500,000 a month, or I guess we're doing the million dollar example, but just for the sake of simplicity, let's call it 1.2. 00:37:56.000 --> 00:37:57.503 Owen: So you do $100,000 a month. 00:37:57.503 --> 00:38:01.511 Owen: Okay, that's great because now we can see you're doing $100,000 a month. 00:38:01.511 --> 00:38:02.735 Owen: Where's that $100,000? 00:38:02.735 --> 00:38:06.353 Owen: Well, we do this for marketing and that's how we get our clients. 00:38:06.353 --> 00:38:08.079 Owen: That's how we get our $100,000. 00:38:08.079 --> 00:38:09.025 Owen: That's excellent. 00:38:09.025 --> 00:38:11.418 Owen: So it's all logical and easy to understand. 00:38:11.418 --> 00:38:16.094 Owen: But what you'll see in financials when there are bad processes is peaks and valleys. 00:38:16.094 --> 00:38:19.545 Owen: You'll see revenue up, revenue down, revenue up, revenue down. 00:38:19.545 --> 00:38:22.217 Owen: And that's because everything's owner dependent. 00:38:22.217 --> 00:38:25.000 Owen: The owner was busy this month going out and making 00:38:25.000 --> 00:38:28.103 Owen: new clients up, but this month he had to do all the fulfillment. 00:38:28.103 --> 00:38:30.188 Owen: That's where you see the peaks and valleys. 00:38:30.188 --> 00:38:31.739 Owen: So that's the lack of processes. 00:38:31.739 --> 00:38:33.776 Owen: So that's number two is lack of processes. 00:38:33.776 --> 00:38:37.121 Owen: Number three is not having a bench and having no succession planning. 00:38:37.121 --> 00:38:39.400 Owen: So you have no other associates, which is okay. 00:38:39.400 --> 00:38:42.794 Owen: I mean, some people decide that's how they want to run their business. 00:38:42.794 --> 00:38:45.364 Owen: We want to make this amount of money and that's okay. 00:38:45.364 --> 00:38:46.915 Owen: There's nothing wrong with that. 00:38:46.915 --> 00:38:49.000 Owen: But if you want to increase your valuation. 00:38:49.000 --> 00:38:54.372 Owen: Having some associates is going to be very helpful because you can transfer that over to the new owner. 00:38:54.372 --> 00:38:59.745 Owen: That infrastructure, that fulfillment, if you will, infrastructure is critical in increasing valuation. 00:38:59.745 --> 00:39:01.622 Owen: I would say those are the top three. 00:39:01.622 --> 00:39:11.532 Jay: I think it's pretty clear that we could probably go on for another hour or two, which I'm sure that our listeners would love that as they drive to or from work or wherever they may be going. 00:39:11.532 --> 00:39:18.000 Jay: I also know, having known you for a while, that you and I could talk for ages about anything we probably could come up with. 00:39:18.443 --> 00:39:22.871 Jay: But I think that that is a great takeaway with learning a little bit about that. 00:39:22.871 --> 00:39:27.410 Jay: Thank you for telling us as instead of practicing law, we are now business owners. 00:39:27.410 --> 00:39:30.177 Jay: And thank you for telling us about how that works. 00:39:30.177 --> 00:39:33.332 Jay: I guess, once again, I'm going to put a plug in for Owen. 00:39:33.332 --> 00:39:39.144 Jay: Once again, he handles specifically law firms and other types of businesses, but he works with law firms. 00:39:39.144 --> 00:39:43.074 Jay: And I know law firms he works with in Pennsylvania, in Florida as well. 00:39:43.074 --> 00:39:44.402 Jay: I've met the principals. 00:39:44.402 --> 00:39:45.731 Jay: I've seen the good work. 00:39:45.731 --> 00:39:48.000 Jay: If you even are interested in contacting. 00:39:48.000 --> 00:39:53.718 Jay: Owen's Group, if you have any questions, I'm sure that they will field it. 00:39:53.718 --> 00:40:00.905 Jay: I'm shamelessly going to say that he is our second season sponsor, so I'm allowed to do this. 00:40:00.905 --> 00:40:03.455 Jay: The phone number is 786-922-0326. 00:40:03.455 --> 00:40:05.000 Jay: That's 786-922-0326. 00:40:05.000 --> 00:40:12.997 [speaker unclear]: Business Optimization Group with the brand new website, bizoptimizers, B-I-Z-O-P-T-I-M-I-Z-E-R-S, bizoptimizers.com. 00:40:12.997 --> 00:40:16.238 [speaker unclear]: Owen, thank you so much for being here tonight. 00:40:16.238 --> 00:40:17.203 Owen: Thank you all. 00:40:17.203 --> 00:40:19.202 Owen: Thank you for your questions. 00:40:19.202 --> 00:40:23.684 Owen: I hope it's been fruitful and educational for everyone listening. 00:40:23.684 --> 00:40:30.302 Jay: And folks, with that, as I always say, don't let them throw dirt in your face until you're dead. 00:40:30.302 --> 00:40:31.543 Jay: See you next time. 00:40:31.543 --> 00:40:41.333 Announcer: The opinions expressed are those of the host and the podcast guests and don't necessarily represent those of the Pennsylvania Bar Association.