This episode is a re-run from when we sat spoke with Scott Larson, a financial expert with over 15 years of experience in investment banking, private equity, and hedge funds. Scott founded OutFin Group in 2023, which helps founders of $2-$20 million revenue businesses prepare for profitable exits. With a background in investment banking at JPMorgan Chase and private equity experience at GCP Capital Partners, Scott shares valuable insights from his impressive career.
In this episode, Scott discusses his journey from New York City’s financial district to becoming an advisor for business owners. Learn about common pitfalls in the selling process and how to avoid them, the importance of financial infrastructure, and crucial steps to take 18-36 months before a sale. Scott also shares real-world examples of failed deals due to financial oversight and how strategic changes can lead to better outcomes.
Whether you’re an entrepreneur considering a sale, a CFO optimizing business value, or simply interested in finance, this episode offers actionable advice.
Key Topics Covered:
- Building a solid financial foundation
- Maximizing business value with financial infrastructure
- Common mistakes during the sale process
- Successful negotiation strategies
- Benefits of partnering with financial experts
Follow Scott Larson:
- Website: OutFin Group
- Twitter: @IAmScottLarson
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Wayback Wednesday | Getting The Best Price For Your Business: Expert Advice From Scott Larson
Introduction
We are coming to you with Scott Larson, who I met over Twitter. Why don’t you give us a little bit of your backstory and introduce yourself more formally?
I spent the last several years working in the financial industry in New York, doing everything from investment banking, and private equity, to hedge funds. I always wanted to do something entrepreneurial, and went out last year and tried to buy a business. In that process, I ran across hundreds of businesses, found a lot of good ones, and saw a common problem. The founder would have a great business and was looking to sell it, but they didn’t have any financial infrastructure, and they didn’t have any view of their numbers. A lot of them didn’t even know what their numbers were.
I saw an opening in the market where there were a lot of businesses out there that needed help with the finance function, and they also needed help selling their businesses. One of the things that we do at our group is we come into a business about 18 or 36 months before they want to sell. We dress up the business and make the changes that a private equity firm would make after they buy it. We do that before they sell, so when they sell their business, that value goes to the founder and not the private equity firm. That’s the opening of the market that we saw, and that’s the problem that we are trying to solve.
Why don’t you tell me about one of the assets you looked at and when you had that a-ha moment that this is an issue and a white space in the market?
I got to the 10-yard line with a pretty big business, and we were about a month away from closing. The updated PE came back. I had been talking to the founder regularly, and the updated PE came back, it turns out the margins fell off a cliff, making the deal untenable. I called the founder and said, “What happened here?” He had no idea what was going on. He was selling things for a lower price, and that’s why the margins fell by ten points.
I tried to renegotiate the deal, but ultimately it didn’t happen. I saw that which is a lot of the other founders out there. This poor founder cost himself a lot of money by not having a good handle on that. I thought there was an opening. There are a lot of founders and operators who just need some help with the numbers, and they are going to make more money when they end up selling their business down the line if they had someone in there to help them out with this problem.
State Of Lower Middle Market Buyouts
Can you take a step back and tell me about his finance organization and what the root cause of the failures was that got him to that point?
When you say financial infrastructure, he had none. He had a bookkeeper, and that was it. He had an accountant who sold his taxes at the end of the year, but he didn’t have a real-time look at what was going on with EBITDA and the gross margins. What product has a higher margin? Is this one higher margin or lower margin? He had no idea about any of that. He was doing it all by gut, all by feel, and by getting someone in there who could help him out with that, you can optimize the business. You can make better decisions. You can have a good sense of where the numbers are month-to-date and year-to-date. Where are you versus budget, versus forecast? You can make much better decisions as a founder. Not to mention, when you go to sell your company, if you have a good handle on that, you are going to get a higher price for your business.
Let’s take it in the other direction. When I have seen founder-led businesses bought, the first thing the founder does when the PE firm tries to do is add in this final report, financial reporting, structure, and processes. A lot of founders, if they have an earn-out, they are hanging around the business, and they have an allergic reaction to that. How do you prevent them from having the same allergic reaction in your services business and then coach them through the exit process?
It comes down to education, and it’s as simple as Do you want to make more money when you sell your business? If you do, then you should do this. If you don’t, you don’t care about the money or your retirement fund, then go ahead and sell it to the PE firm and let them do that and let them handle it. At the end of the day, you are going to make more money as a founder if you have a good handle on what’s going on in the numbers.
You will make more money as a founder if you have a good handle on your numbers. Share on XTeam Structure
What are you trying to take your firm to? What’s the team structure? How are you working with the founders? A lot of them on this lower middle market side are probably able to afford your floats. How are you managing that? and what team are you looking to build for?
Over time, we are looking to grow and build. Right now, there are a few of us, but we have different offers. One of the offers is a lower monthly cost, and we get a percentage of the incremental EBITDA that gets created in six-month increments. If you don’t want to lay out the capital upfront and you want to let us sit alongside you and become a true partner, we can do that. We can work with firms to do that.
Then there is a situation where you want to become the buyer, or because you’ve raised the value, it doesn’t make sense anymore.
Maybe down the line, but right now, I want to be a true partner and try to help them get the best outcome for themselves.
Founders’ Biggest Mistakes
What are the biggest mistakes founders make when they sell a business? We have been involved in a couple of processes right now. We had a very good experience with some founders. We have had a mediocre experience with other founders, as we are trying to shake something loose. Why don’t you walk us through? What are the top three mistakes founders make when they are selling? It’s their baby.
A lot of them start with a phone call from either a PE firm, maybe it’s a strategic in the industry or a lot of times it’s a broker or banker, and when you think about the incentives of all those people calling the business. The bankers are trying to, first off, get an engagement form signed, and so they are going to tell them a number. “We can sell your business for X.” Nine-five percent of the time, I have never seen the founder get X. It ends up being Y, and Y is a lot lower ao the bankers will tell them a number as they can start with the process. They start to slowly walk down that number or, ultimately, the founder sells. I have talked to several of them that this has happened to. They end up selling their business and they are a little upset about it. They didn’t feel like they got what they should. They didn’t get what they were told they were going to get and that’s a mistake.
Another one is selling to the highest bid and not doing your work on Who am I selling to? What are they going to do with my business? What are they doing with my employees? A lot of them have a lot of pride in what they built over the last twenty years, and they get jammed on term sheets, and, six months after they closed, they are fired. They didn’t get as much money as they thought they were going to, and again, they left very disgruntled.
Going into that process, someone holding your hand, knowing these people have a great reputation, they are going to treat you well. The term sheets are fair to you. You are going to walk away from this whole thing much happier and more fulfilled about what you built and what you hold. Who you ultimately sold it to is such a better outcome for a lot of these founders.
Seller Financing Insights
I have seen on Twitter and a little bit on LinkedIn these courses that say, “Why don’t you get 100% seller financing or this massive 50% to 60% earn out?” We are in a situation now where the founder’s been left at the altar twice, and we were putting in a binding bid on this business, and this guy is certainly more concerned about certainty in price. What is your commentary on the state of how founders are transacting now, like earn-outs? Are they in? Are they doing seller financing? They are not getting multiples. What are your thoughts? What do you see in it?
Right now where we are in the market, that’s the bridge. It’s the seller financing because interest rates shot up a few months ago. Evaluation expectations hadn’t moved. They are starting to move now, and the way to bridge that, from my buying standpoint, is using seller financing. You are trying to get the DSCR into a normal range, and you do that with seller financing.
My experience with seller financing is mixed. A lot of sellers don’t want their money. They want certainty, and a lot of them are reluctant to do it. They are going to wait to get their price, and in my opinion, it makes sense in a small amount to keep all the incentives aligned. I’m a big incentives person. It does help keep incentives aligned. I do think some are good, but some of these 30%, 40%, 50%, even higher percent seller financing deals. As a founder or someone advising a founder, I would say, “Why don’t we hold off and let’s get some more certainty?”
You said incentives. I love incentives. One of the things in this, we are about to put in is we are about the customers. The customer risks it and then leaves. Was he the business and the customers, or can we transition that? If you are giving me advice and we are going to buy this business, how would you think about my structuring to keep him involved enough that we have a bridge for the customer relationships?
Its earn-outs do make a lot of sense for a small amount. He’s got skin in the game and if a customer is looking to leave because he’s gone, he’s incentivized to give them a call and say, “Stick around. It’s a good idea. Here’s why.” You just want him to have some skin in the game for when that situation arises. That can be an earn-out, that can be you can do other, more specific things about customer churn, but earn-out is the easiest one. He’s incentivized to keep that revenue at a certain number for however long you think is necessary, and so if you need to make that call, he’s going to make that call.
On the other side of that, why would someone use an earn-out over him rolling equity versus seller financing?
It’s on the upside and if you show him a plan about, here’s what we think we can do, and it depends on how much you need him. Some founders have a great business underneath them. They could retire, and the business is totally fine. In that situation, from your point of view, you don’t need him to be around. You don’t need him to help grow it or do the next phase. There are situations. My deal last year was very dependent on the founder. We needed him to stick around and stick around for a good amount of time, and in that situation, we wanted him to roll some equity. He was very much incentivized for that next bite at the apple. Depends on the situation, depends on the business.
Lower middle-market buyouts You’ve got the HVAC industry, which is the benchmark of people rolling up and founders selling their businesses, but things have changed with interest rates now going up. Deals are down 40%. Middle-market private equity funds. What are your views on the state of lower middle-market buyouts? There continues to be a bit of a spread, and what has happened is founders have heard about buyouts in their industry and pretty crazy multiples over the last few years, and they have got the number in their heads.
They are selling out seven times. I can sell mine seven times. I have seen this before. We come in and look at the business and say, “You are not a seven times business. You are a three and a half times business, and there are things you can do to get you closer to seven, but right now, you are not a seven.” That spread is narrowing at the moment, but it’s still not there yet.
One of the things that we have been talking to founders about is they are very nervous about this capital gains tax hike. Have you seen that? What’s the response? It feels better for a buyer right now because of this thing, but that said, this idea has been floating around.
I have seen so many deals happen because of the fear of that capital gains tax, at prices that are not advantageous to the seller and I think you are never going to predict tax law. Don’t try to play it like timing the stock market you are never going to time it. Do what you need to do. Try to get the highest value possible for your business. Don’t worry about the tax block because you never know what’s going to happen.
You can never predict tax law. Do not try to play it. Just try to get the highest value possible for your business. Share on XYour whole value prop is turning a lower multiple business into a higher multiple business. How does that compete with tax incentives? We see a lot on Twitter. There’s how you minimize taxes. They’re like, minimize taxes, which is questionable advice sometimes. How do you think about balancing a potential, I don’t know, 20% hit on the purchase price with increased taxes, versus your value prop of increasing the valuation multiple of the business?
We are never going to time tax law. We partner with tax strategists to help with the tax situation for the founders. Our value prop is, let’s increase the value, and we do that through operational improvement and simple blocking, tackling things you can do in your business to help increase the value.
Experiences On The Ground
As you are working from the office of the CFO you are going to start an engagement. What do your first four weeks on the ground look like in the business, and how do you integrate with the team? These are lower middle-market businesses. What size businesses are you targeting to work with?
We are two in 2 to 29 million revenue, but we are meeting next time with a $40 million revenue commercial HVAC business. We go that high, and in this business, they don’t know what they’re about and so, that’s just from a financial perspective, unsophisticated. Great business, but they need some help on that side, and that’s the value prop that we bring.
You go in from working in banking, and you say someone doesn’t know their EBITDA. That’s almost undetectable for me. What do your first four weeks look like? How do you unpack that?
It starts with the numbers and building a model, getting the model together. Getting the budgets, forecasts, and figuring out what is your EBITDA? and then, that’s step one, and then, step two is, how do we maximize revenue? What can we do within the operations of the business to get that EBITDA higher? The most frequent thing we look at first is pricing, and I have run across this so much, where they haven’t raised pricing in years, and we are in an inflationary environment. You need to look at pricing every single year, and I haven’t done it in several years.
That’s a quick win that we look for. Sometimes, that’s not there, but a lot of times it is. Other times, it’s operational items, as you well know. Let’s look at procurement. Let’s look at spending. Let’s go down the line items on the P&L to see if there are ways that we can maximize. Maximizing EBITDA. That’s the name of the game here.
I heard a lot of improvements, but you come from a financial angle. The first four weeks are on the ground and you are getting the numbers together and they are running operational improvements. I’m trying to see the structure. I only think it’s slides now since I was a consultant, but so, what’s the structure? What does a Gantt chart look like to get started? The founders I have met have no interest in doing this because they built their businesses. They have no interest in doing it. I’d love to hear what your day one in the life of, and then your first couple of weeks in the life of.
Day one opens up with usually 90 minutes to 2 hours of due diligence type of meeting, where we download the QuickBooks and get the numbers in front of us at what they have, and we go through “What’s this? What’s that? What’s that? Who’s this customer? Where did this customer go?” Piecing together all the information with the founder and trying to put the puzzle pieces together, if you will. Then, we go out on our own from there and build out the model and put that together.
We also try to build out the KPIs. A lot of times these businesses, don’t know what their margins are in this product versus that product or any other interesting KPIs in the business that they are not tracking right now, and we try to build that out with the data that they give us. Then, we go back with the founder and we sit down and we have our Zoom, say “Here’s what we found. Here’s what your numbers look like. Here’s your KPIs. Here are the things you should be tracking, and here are the things that are going to help you make better decisions.” From there, we start the operational improvement. “Here’s the things we see that we think we can tackle and work on and let’s start that now.”
Working With Founders
What’s the most interesting reaction you’ve had from a founder as you’ve unpacked their business? I heard a story one time of a business that transacted my old run in private equity. This security guard business had been paying for like 250 pagers at like $8 or $10 a month for a decade, and he was like, “That I would have had an extra million dollars if we turned the pagers off.” Given that, what’s the most interesting thing you’ve seen?
That’s a good easy win right there. One of the most interesting ones I talked to was this manufacturing business up in northern Michigan. The founder was an older gentleman, 70 years old, who had a great business, and I asked him, “How much do you guys make? What’s your profit? Do you have any idea?” He’s like, “We are about $1 million a year.” It’s like, “Great.”
We got him and we dug into the numbers and he was making over $2 million and he had no idea. We got on the call with him and said, “You are making about 2.2 million. That was your EBITDA last year.” Good surprise. A lot of times, it’s the other way. This guy had no idea that he was making that much money. He didn’t know how profitable it was, and therefore he didn’t know how much his business was worth because he didn’t even know what the profits were. It was a nice surprise for him, but it was pretty interesting that he had no idea. What he was doing was pulling out $1 million a year from his account at the end of the year, and that’s what he thought the earnings were.
What is his plan for the upside then? Either way, he’s not minding the store. Is that a different plan than if somebody doesn’t know their EBITDA? He didn’t know his EBITDA, but it’s probably better than he thought, not worse than he thought.
Better than he thought, which is rare. A lot of times, it’s worse but in his mind, it’s like, “You are going to be able to sell your business for probably a little bit more than what you originally thought, and let’s get it in shape where we can make that happen.”
Is there, is there a difference between your action plan for that business versus one that they don’t know their EBITDA or they are making zero EBITDA?
Every company is different and every situation is different as you know. The action plan is sometimes their pricing is maybe even too high and their churn’s a little bit, a little high, but there are things on the PNL that we can take care of. I have run across some companies, two of them in particular, that are software companies, and they’re awesome businesses, very good businesses, but there’s no infrastructure. There are four founders, and they are doing everything.
If they were to sell their business, the founders would be gone, and there would be nothing left. My advice to that is, “Your earnings might need to go down, but you guys need to make some investments into the infrastructure of the business. At the end of the day, you are going to get more forward down the line when you do that.” That’s another set of advice versus a manufacturing business that doesn’t know its EBITDA.
How do you think about convincing the founders of where to add staff and resources? Most founders are comfortable working a lot and they don’t want to add big costs. They’d rather not know where the money’s going than add costs. How do you get them from A to B, about adding that infrastructure and reducing their earnings?
It starts with the goal, and their goal is to sell the business within 3 to 5 years, and then let’s work backward about what we need to do to sell it for the highest price possible. Trying to solidify them, they are going to get a nice number on their business. It’s a great business, growing very quickly, but if you guys want this number, here are the steps we need to take in the near term to do that. It’s near-term greedy or not in your-term greedy for, ultimately, a nice exit and they understand that and they are making the right investments.
What results are you expecting from the founders that you are working with? It’s like the banker story right now? Big number. We want to get this engagement letter signed exclusivity, so if you sell it, you are in trouble if you don’t get it done, but that said, what are you hypothesizing that you are going to help with the exit?
It depends on the business, but there are circumstances where founders can get double within 18 to 36 months. I put that back on you and I’m very curious. If you are looking at two businesses, the same industry, the same type of businesses, one of them has their numbers put together. They have a team, there’s infrastructure, and it’s very much de-risked. They are on top of it, and then you have company B that has no idea. It’s a little sloppy, not even sure where the cash is going. What’s the difference in multiples you are willing to pay?
Let’s say it’s 5 and 5 equal. If it’s five, multiple five, multiple equals whatever the earnings are. If you have to unpack it. I’m certainly going to pick the one with infrastructure because it’s going to require less external management. We are going to put one of our operating teams at every asset. Do I want them to spend the first six months doing your work or do I want to spend the first six months running my playbook? I’m going to pick that option. Particularly if there’s a lot of revenue leakage and the cost playbooks work. If it’s the software business, it’s usually not the same and that’s why I don’t invest in software, but that’s interesting because I don’t want to spend the first year of a whole period running your playbook. After all, it’s going to reduce the IRR of the business.
It comes down to risks too. Very much de-risk the transaction, if you have the infrastructure and you have the financial capabilities there, and because it’s less risky, you are going to pay a little bit more.
Getting The Most Out Of An Exit
Changing the asymmetric risk profile from buying the business and the thing. As founders are exiting businesses, what advice do you give them? You’ve told me a lot about where the business is going in the actual plan when they are about to transact and entertain parties and IOIs, what advice do you give them and how do you use that part to squeeze another half turnout of the business?
At that point, price is important, but it’s also finding the right buyer for the business, and these are legacy businesses for founders. Trying to have a talk with themselves about what they want. Do you want this to go to another platform and they are going to change the name and they are probably going to fire a lot of people there, but you are going to get the highest last half turn or do you want to sell it to another firm where they are going to keep your legacy around and you are going to be the platform? It depends on what they want.
A lot of founders want the right buyers. The advice I’d give is to do your due diligence on the buyer. They are going to give you three companies that they have bought before. I have done this before, and you call those three companies, they go, “They are the best. You’ve got to keep digging.” Do 10 of those calls, do 15. Call the company that didn’t work out with them, and ask, “What happened?” How did they act in that situation? Did they treat that founder correctly when things were going sideways? Doing your work on the buyer goes a long way and makes life easier for everybody.
When selling your business, do not forget to do your due diligence on the buyer. Share on XGiven this market. If you were advising founders, would it make more sense for them to sell to a lower middle market, a landfill PE fund, an independent sponsor, or a family office?
It depends on a lot of circumstances. I do like the family office side. A lot of times, those family offices are not in the game of flipping it again over the next 3 or 5 years, and there’s a higher chance that they are going to stick around and run that business for the next 10 to 20 years. You’ve got to find the right family office. You need to have a good relationship there, but all set and equal, let’s say everyone is on the same page. I would probably vote for a family office.
What’s different about the ownership structure of a family office that makes that attractive? We have been working with a lot of family offices on the diligence side, on the advisory business, and they operate a bit differently. If you unpack that a little bit for the team, even if it’s a founder reading who might want to sell a business, what could be advantageous?
It’s a different hold period, and most family offices are willing to buy a business that they find is an enduring asset and they are going to hold on to it for a very long time with no intention of selling ever. Some of them will look to sell, but that’s the mantra. I would say in my experience, the family office is probably going to have a little bit less of an operational role in the business and so it goes back to what you are looking for. If you go into a lower market private equity fund, a lot of them have ops teams that are going to come in and help optimize the business, so every circumstance is different, but that’s a key one the holding period.
Is there a structuring difference, an exit difference, or a multiple difference between those three options?
You are going to get less on the margin with the family office. When you think about Middle Market private equity, most of the time you are going to roll some equity in most circumstances. You are going to make money on the second sale and so on. That’s another consideration I’m going to sell to you for X. I’m going to keep 10%, 15%, 20%, or whatever it is. What’s the plan? What do you think you can do with it? Then they are going to sell it again, and that second bite of the apple, I have seen this before, sometimes can be more than the first one and so, depending on what that firm does with it. Getting behind that plan is important for founders too.
This is a little in the nitty-gritty. If you exit private equity, the founder, if they stick around and run as a president, whatever it is. They are going to get some management incentive packages. What’s your advice to them during the negotiation of that? How much should they roll?
It goes back to how everything changes. I would say get your head around what the plan is. Make sure your relationship with that firm is very good. If you are on solid footing with that firm and you think the plan that they have laid in front of you about what they want to do, once they close, you believe in it and you think there’s opportunity there, roll as much as you can because I have seen it so many times where that second bite of the apple can be worth more than the initial sale.
I spoke to the founder. He sold his business, a family-owned business. He sold it to a second generation, and I said, “How’d it go? You sold about four years ago. How’s it going?” He’s like, “We don’t know yet. We are going to find out at the second bite of the apple, and that’s how we are going to know if it went well or not.” It’s that second sale that sometimes determines if it’s a successful exit or not.
Let’s say a founder rolled 20%, but he’s looking at that plan from the PE firm. That plan is likely going to be at least 30% askew from what he did to make the business successful. The people from the firm come in, they make a list of 200 acquisitions. He’s never bought another business, so hold it in. What advice do you give to the founder to manage that? I would imagine that’s going to feel a little bit awkward compared to what they’ve been comfortable doing over the last several years.
That’s a scenario where I like that plan because a lot of these founders are technical founders. They have grown great businesses, but they don’t have the M&A experience. They don’t have the M&A chops, and the private equity firm does. Getting that help from the private equity firm to do that and to create that value, it’s a quick way to create a lot of value, and with their help, that’s a great scenario for a founder and it’s an interesting topic too. You and I were talking about this earlier. I talked to a lot of founders who are looking to sell their businesses over the next few years, and I told them, “Be the platform, not the tuck-in.”
What does that mean? Private equity firms, when they buy, go into an industry, they are going to buy a platform company, and that’s going to be like their main company in that industry. They are going to keep those standard operating procedures. A lot of times, they will keep that brand and that management team. They are going to pay a lot more for that platform.
The tuck-ins are the ones where they are getting folded into the bigger brand, the bigger company. They are going to pay a lot less for those companies. When I talk to founders, I say, “Be the platform, not the tuck-in, and let us help you do that. Let us help you create a platform-type company and not a tuck-in company.”
That said, we are doing this backward. What is the difference between a tuck-in and a platform? Not from the multiple perspective, but from the infrastructure that you can put in place. What are the top five things that a platform has that a tuck-in doesn’t?
Most of the time, size. Bigger companies are more likely to be a platform, but outside of that, it’s a lot of things like standard operating procedures. Everything you do from go-to-market to customer service is you have that down tight. It’s not like the “Fly by the hip” type of thing where you have it. You have a way to take that procedure and move it to other tuck-in acquisitions. The brand is great, with name recognition and management team infrastructure. Having a whole setup around your company. You are going to get a much higher multiple if you have that done versus just flying by the hip, no idea where the numbers are. We are trying to get by the next day. That’s more of a tuck-in type of company, and the multiple is going to reflect that.
Some of these lower middle-market PE firms have a whole sourcing department that the teams incentivized to look for platforms. When they get that call from a PE firm, how would you recommend they approach that conversation?
Setting valuation expectations very early is always helpful. I have seen that happen where they go down the line, and they get a number, and the number gets walked down. Being very clear and open about where we are in terms of evaluation and then being very clear and open about, what’s your plan here. Is it going to come in here and fire everyone and take my business and move it somewhere else or am I going to be the platform, and we are going to go buy the competitors? Inquiring about what their thesis is, what their thesis is on the industry, and what their plan is for the company, and then getting the evaluation and stuff. I won’t be clear and upfront right off the bat.
One of the things I have heard in deals, particularly lower middle-market, is they don’t even have a CFO. Honestly, sometimes, you need to control at that level, but they don’t even have CFO buckets you into a tuck-in versus a platform. At what point do you add that cost of having a professional CFO? We have heard a lot about fractional CFOs now. Does that help you in a sale? What do you think about these things, and how do you message them to founders?
Fractional is a great resource for these companies. You can get A-plus talent, and I don’t think you need them for 40 to 50 hours a week. You need them for 10, and you are getting them for 20% of the cost. It’s a good way for companies to build out that infrastructure without laying out the money that’s required. A-plus or A-CFOs are incredibly expensive, and they are only getting more expensive. I honestly think getting up to the $50 million, $60 million, or $70 million revenue, is the moment you might start thinking about it full-time but anything until then, you can get 80% or 90% with the fractional.
I agree with you on the value and the cost part. How do you see the optics work if they have a fractional CFO when a PE firm comes crawling around or even a family office comes sniffing around to try and transact it? Do you bring a CFO on full-time then whether doing it or what’s your recommendation?
Your value is going to be higher, depending on what the plan is. I still think fractional works for a lot of instances. The size of businesses that can still have a fractional is only going to increase as we get better with technology and get better with some of the procedures in businesses.
Impact Of Generative AI Language Models
How do you see generative AI language models contributing to these founder-led businesses? Is that overlap with your work, or was it a flash in the pan?
It is. We are not there yet with it, but it helps with the more menial or lower-level tasks. Bookkeeping is one of them where you formerly would have a full-time bookkeeper coming in the office every day and tacking transactions. 80% of that can get done with AI and someone on top of the 20% to make sure it all works. It makes everyone in the organization more efficient.
The more interesting things that I’m seeing now, and even in my business and other businesses, is this automation software, the Zappi age of the world, and those automation experts that are out there, that’ll come into your business. If you have anything in your business that’s an if-then statement. If a client books a meeting, then send them XYZ materials. That used to be done by humans and took some clicks, and that person worked 40 hours a week, that can be optimized and that’s happening right now, in real-time. It’s a real cost that you can take out of your business, and that’s the biggest lever I’m seeing at the moment in terms of software and somewhat AI.
When you come into these businesses, you are going from no department to a department, building it apart. They are not automating anything away. You are getting operating leverage and not having to put people in place. How do you articulate cost savings to that in the investment if you put in, I’m making this up, a $100,000 software package a year? It’s like a chicken or an egg. You sound like you are making a reduction. You’re reducing EBITDA. Not adding it.
Yes and no. The software, you can buy it. It’s very monthly. You can buy a per seed. I don’t think you need to sign up for $100,000 upfront. You can wade your way into it, and that’s the beauty of SaaS software. It’s not as much of a commitment anymore, and it’s a lot cheaper than it was many years ago. You can make those investments, whereas several years ago, you weren’t able to do that because it was such a large upfront investment.
Advice For Founders
Let’s end the technical discussion with this. What’s the final piece of advice you’d give to founders, and how do they pull you into the business where it makes the most sense and when do they pull you into the business?
We talk to a lot of founders every week, and a lot of them say, “I’m not looking to sell for three years,” and I say, “That’s perfect timing because this takes a long time. This isn’t a month. Its eighteen months minimum is where we are going to be able to add the most value.” If you are thinking about selling your business at some point in the next five years, we could be helpful.
I speak to founders who say, “I’m not looking to sell,” but having your business ready to sell is a good idea. First off, it makes your business better, and more efficient. Also, you never know, and I have seen situations where there’s a business in Denver where they built a great business, and personal things happened to the founder. He luckily had everything together, and he was able to sell the business for a good price within eight weeks of when he needed to sell.
Having your business ready to sell is a good idea. It helps ensure your business is better and more efficient. Share on XA lot of times, it’s a little bit of an insurance policy. We don’t know what happens in life, and sometimes you are going to need to hit the exit button. If you are ready for that, it makes life so much easier. If everything’s a mess, you are not going to get the number you want, or sometimes you want to be able to sell the business. I always say, “Get everything to sell,’ and it’s going to be more efficient anyway. It’s going to be easier to run, and then when you do want to sell, you are going to be in a much better place.
Getting On Social Media
You and I met on Twitter. How did you get your start on social media? Your account is growing very quickly. How did you make that happen?
I joined Twitter in 2009, so I have been a lurker for a very long time. In my previous roles, I wasn’t allowed to be on social media. That was part of the reason. When I launched OutFin Group, I spoke to a lot of people, and they said, “You need to get your name out there. Let’s do it.” I started posting, and everyone said, “Post what interests you.” That’s what I do try to find an interesting thing that I find interesting, and I put it out there.
Some of them people don’t care about, and some of them a lot of people care about. Interacting with people on Twitter has been super interesting. You and I had a call early on, and my Twitter growth, and we talked for 30, 40, and 50 minutes. It was great to connect. I can’t tell you how many of those conversations I have had. It’s been a super interesting experience, and I’ve met a lot of great people on the platform.
Cold Outreach
That was surprising to me. The first time I got a DM to hop on a Twitter call, it was like, “What is this? It’s going to be interesting? I have been nothing but pleasantly surprised from that aspect. What advice would you give to an entrepreneur, maybe somebody on the buy side, who wants to buy a small or medium-sized business? What advice would you give to them? You’ve seen it now when you are trying to buy a business, you see it now on the founder’s side. How would you give them advice to shape that discussion and that effort?
It takes a lot of effort, and I am not a big fan of cold outreach. Sitting around and trying to collect sims through the broker network. It can work, but a lot of those businesses are pretty picked over at that point. Trying to find businesses, cold outreach is the way to go. It takes a lot of effort, and it’s a lot of work. It’s a lot of hours, but you’re ultimately going to get a better deal in the end.
Some of our readers are very new. Unpack cold outreach. What does that mean? How many emails? Who are you emailing? How are you getting the list? It’s always the hardest thing. It’s not sending the email to get the list.
There are some services out there Apollo is one of them, ListKit, and several others. A lot of times, it’s going to websites, finding a number, and giving them a call. It takes brute force. Virtual assistants who can help out with that. A lot of people I know in the search world have interns, who are more than willing to help out. They are MBA interns or maybe undergrad interns, and they will help you do that work but that’s the necessary work we need to do now. It’s gotten a lot more competitive, and it just takes more brute force, if you will.
That’s interesting because there are a lot of services that will say, “We are cold call experts.” Make 2 or 3 emails a week. Why is forcing yourself or having some light support better than outsourcing? The last one I got said, “We are an AI call service or provider,” and I looked at the email, and I was not interested. How do you reframe that to make sure you’re going to get a founder interested if you do reach out to them?
It’s a numbers game, and all like telling your story, and being authentic. If you’re outsourcing your cold calling to someone who cold-emailed you, you’re going to get a different response rate than if you pick up the phone and call a founder and say, “Your business seems very interesting from the website. Do you want to talk about it? What are you going to do with it over the next few years?” It’s as simple as that.
One of our team members is going to put this LOI in. We had a debate. Do we want to hand-carry it over to the founder now? He’s right down the road. It’s local Florida. The team had mixed opinions on this. I was like, “That’s ridiculous. It’s 2024.” How do you stay like that from the founders you’ve interacted with?
I think that’s great. It’s different, and it would be a touch that they would like. I do think that we are in such a digital era where it’s so easy to email and DM. If you pick up the phone or you show up with the package, I think that’s appreciated.
Advice For Pursuing A Career In Finance
The last couple of questions that always happen. What’s the best piece of advice you can give to someone wanting to pursue a career in finance or own their own company?
It’s probably out there, but it’s very true to find a mentor. A lot of times, it’s a lot easier said than done. I get hit up a lot in the DMs with “Can I pick your brain?” Trying to find a mentor. Target them and also try to add value. Instead of writing to someone, “Can I pick your brain?” Email, say, “I have three ideas. I want to get your take on.” To me, that’s like, “That’s interesting. I will certainly get on the call with you.” That’s why I want to hear the ideas versus, “I want your advice for 30 minutes.” That’s not as interesting. Try to add value and come up with ideas, and people will be more than willing to talk.
Building on that, I used to get very frustrated when someone would schedule a coffee chat with me, and they were like, “What are we going to talk about?” It’s like they read somewhere on some course online that was like, “You have to have X coffee with Y people in 90 days.” Say more about that if you felt that before. Why is that not as interesting?
It’s not as interesting from my perspective. I was in their shoes and I try to still do those calls and do those meetings because I got my foot in the door and Wall Street via cold email, and that started a fifteen-year career. I have a soft spot in my heart for when I get these calls. The more interesting ones are, “I’m coming up with ideas. I want your take on it,” versus, “I want to get your advice.”
I still do them. I did a call with a kid who was down in Georgia. He wanted to get into investment banking. I did a call with him and gave him some advice. He’s thinking about switching schools. I led him to do that, and I got a DM l and he’s like, “I did it. I got a 40 and I’m going to land this internship.” You get those back and you’re like, “That’s awesome.” I love to hear that.
Show me the incentives and I will show you the outcome. Share on XFavorite Quote
What’s your favorite quote?
As I mentioned, I’m a big fan of incentives, so it’s the Charlie Munger quote, “Show me the incentives, and I will show you the outcome.” Later on in that talk, he said that he’s in the top 5% of his generation in understanding the power of incentives, and he still doesn’t understand the full power. I love that and it’s so true in anything in life, in business, and politics. I’m a father of three young girls. I use the incentives system a lot, so I use it every day.
Closing Words
Scott, it’s great to have you. I’m looking forward to doing it again. How do we find you on social media and how do we find your website? We are OutFinGroup.com, and on social media, I’m @IAmScottLarson on Twitter.
Great to talk to you.
Thanks so much. I appreciate it.