The Importance of a Breakout Valuation

As an entrepreneur, your business is your baby. You’ve put in countless hours, made numerous sacrifices, and taken risks to bring your vision to life. When it comes time to exit your business, the value you receive will determine the compensation for all the time, money, and personal financial risks you’ve taken. This is one of the biggest defining moments in the journey of entrepreneurship, and it’s essential to value your time and talent and compensate yourself and your family for all the risks and sacrifices along the way.

The question that arises is, how do you value your company? Is your answer a mathematical equation? Is it addressing any items that create value? If you answered the question “How do you value your company?” with something like a multiple of EBITDA, revenue, or customers, this article is for you!

While academics and finance professionals attempt to make valuation objective, the reality is that valuation is subjective. Knowing why and how experts and professionals use objective valuation tactics will arm you with an advantage to get what you want—a Breakout Valuation.

Over the years, we have come to appreciate that valuation is a present view of what the company will produce in the future. Contrast this with most private market investors who want to value a business based on what it is producing today. Academically, investments, such as stocks traded in public markets, are based on the net present value of future earnings expectations. The challenge with the academic view of valuation is that it is based on a forecast of cash flows, which has a major drawback: no one has an accurate forecast, so all we have are expectations based on the biased viewpoints of the forecaster.

Valuation is more important to you than to anyone else in and around your business. While you may have other shareholders, as the founding shareholder, you have the most to gain or lose from outsiders pegging a value to your business. Valuation is what your business is worth—and what it is worth is in the eye of the beholder. Valuation is the economic value (primarily cash) that will change hands when and if ownership of the assets and all the rights of the business are sold.

Knowing what your ownership of the business is worth becomes increasingly important as the business matures. Understanding value may allow owners to pledge their ownership as collateral for loans, and it helps them make important financial planning decisions that impact their families and future generations.

Valuable businesses can also accomplish something magical: they make it easier for founders to transform from employees into owners—meaning founders can retire from working day to day in their businesses and transition to being strictly owners. Additionally, valuable businesses have an easier time attracting and retaining employees, customers, and strategic relationships. People want to work with companies that are seen as valuable and have bright futures. A valuable business becomes a magnet attracting top talent, quality customers, and superior vendor relationships, and it provides its owners freedom.

It’s time to turn the tables and put you in the driver’s seat to maximize your odds of getting a Breakout Valuation. You don’t need to be a valuation expert; you only need the context of what makes your business valuable to articulate the value drivers to other parties.

Valuation is simple. It is the present view of what the company is capable of producing in the future. It is up to you to have a vision—a forecast of what the company is capable of achieving. Valuation is the net present value of the future cash flows you expect to receive. While it’s important to look at current performance, it’s equally important to evaluate future growth opportunities and create a compelling story around them.

Valuation is subjective, but it’s essential to understand what your business is worth. 

What are your views on the importance of owning a valuable business?Share your thoughts in the comments or ping me directly at: patrick (at) hillcapitalcorp (dot) com.

Patrick E. Donohue, CF

Magnetic Vision Drives Valuation

The key to achieving a Breakout Valuation is having a magnetic vision that inspires action, loyalty, and hard work. This vision is what drives the culture and investor support from inception. The concept of Breakout Valuation is an important one for any entrepreneur to understand. Essentially, it refers to the value of a business based on its future potential rather than just its past performance.

To articulate your magnetic vision, you need to go deep and think about why you started your business in the first place. What need did you see in the market? What problem did you want to solve? Through the discovery and launch of your business, you likely had some visions of the future. What are they? Why should your business be the one to deliver its products and services throughout the region or even the world?

The value of a magnetic vision goes beyond inspiring and motivating employees and investors. It is also used to increase the value of your business, even if you have no intention of selling it. A Breakout Valuation makes capital formation easier, makes capital less expensive, and provides better terms with vendors because outside partners will extend better credit and terms to businesses they view as growing and having a bright future. It also compounds returns by attracting talented employees and quality customers.

In addition, a valuable business makes it easier for the entrepreneur to evolve from an employee to an owner. Your business is likely your most valuable asset, and it should be treated as such, with a dedication to growing and fortifying its value. 

So how do you go about creating a magnetic vision and achieving a Breakout Valuation? It starts with your mindset. You need to lead with a vivid, long-term vision and be constantly communicating it to your team, investors, and customers. You need to be focused on creating value, not just for today, but for the future. And you need to be willing to take risks and think outside the box to achieve that vision.

By having a magnetic vision and building a valuable business, you can increase the value of your business and achieve greater success, whether you plan to sell it or not. It all starts with your mindset and your dedication to creating value, both for today and for the future. So go out there and create a vision that inspires action, loyalty, and hard work. The sky's the limit!

What are your views on the drivers of valuation?  Share your thoughts in the comments or ping me directly at: patrick (at) hillcapitalcorp (dot) com.

Patrick E. Donohue, CFA

Entrepreneurs' Rally XI Recap

Hill Capital had the privilege of hosting the 2023 Entrepreneurs’ Rally XI with EO Minnesota and our friends at Traction Capital. It was a fantastic celebration of over 400 energized entrepreneurs from across the country! 

The day began with a talk titled “From Suck to Success” by EO Detroit member Todd D. Palmer, who is the retired CEO of a 6x INC 5,000 company and is now a coach and retreat facilitator at Extraordinary Advisors. Todd vulnerably shared his entrepreneurial journey and reminded us to share our authentic selves. As so much of business today is filtered through the highlight reel of social media, it was refreshing to hear from someone who has truly traveled the highs and lows of the entrepreneurial journey and emerged victorious on the other side.

After Todd’s talk, we had three roundtable mentoring sessions where attendees were intentionally partnered with mentors to create meaningful connections. Likewise, later in the afternoon attendees were partnered again and had an opportunity to share their experiences. These sessions were intentionally designed to maximize the connections that entrepreneurs could make with each other throughout the day. Thank you to the moderators and mentors that lead the roundtable discussions! Your support was invaluable. 

Before lunch, we heard from our first keynote speaker of the day, Meredith Elliott Powell, who is an award-winning author and business strategist. She captivated the audience by sharing nine powerful strategies to embrace change, visualize success, and thrive amidst uncertainty.

To end the day, we learned valuable business insights from Alex “A-Rod” Rodriguez, the former MLB MVP and current Minnesota Timberwolves co-owner. While recounting his journey, Alex's story of failure and resilience resonated with everyone in the room. He candidly discussed his suspension from baseball, sharing his struggles with depression and a sense of being washed up. Nevertheless, he discovered how to transform his mindset and make a remarkable comeback. His empowering message to his daughters, as well as all of us, is now a resounding declaration: "I have a Ph.D. in failure and a Master's in getting back up."

Fun fact: Did you know that A-Rod is the 5th leader in strikeouts? As entrepreneurs…you gotta swing and keep getting back up to the plate!

As the current EO Minnesota chapter president and CEO of Hill Capital, it was my honor to be a part of such an incredible event. Every entrepreneur I've encountered possesses a unique story. We find common ground in the shared challenges we face, fostering a sense of mutual respect and understanding that unites us. Our collective ambition lies in the desire to create something remarkable from nothing. This year’s MN Entrepreneurs’ Rally affirmed what entrepreneurship stands for. 

Are you an entrepreneur in search of community? Consider the following action steps:

1. Join your local EO chapter. With more than 18,000 business owners in 61 countries, EO helps business owners grow personally and professionally through peer-to-peer learning, best practices, and connections with like-minded experts. To join EO Minnesota, click Apply at https://www.eominnesota.org/learn-more. For more information on EO Chapters in other states and countries, check out https://www.eonetwork.org/ 

2. Attend Empire Builders on November 2, 2023. Empire Builders is open to entrepreneurs at all stages in their journey and will include curated connections, speakers, and opportunities for meaningful mentorship with Hill Capital Ambassadors. Want to learn more? Send me an email at patrick [at] hillcapitalcorp [dot] com

3. Save the date for the 2024 Rally on May 9, 2024—or better yet—send me an email at patrick [at] hillcapitalcorp [dot] com and I’ll send you the link to register now at a deeply discounted early bird price. 

Thank you to everyone at EO Minnesota, Traction Capital, and all our sponsors that made this event possible, including Flagship Bank, Magnetic North, Blue Sparq Marketing, EideBailly, Lathrop GPM, Choice Bank, Broughton Ward, Taft, Teams by Beam, Bust Out, Fredrikson, Multifunding Business Loan Advisors, Jak + Co., Apex Gets Business, The University of Saint Thomas Schulze School of Entrepreneurship, CFA Society Minnesota, Gustavus Adolphus College, Entrepreneur Fund, Elevate Hennepin, and SCORE. 

See you on May 9, 2024 for next year’s Rally!

Bigger Isn't Better

Most entrepreneurs believe that bigger is better and bigger creates value. They believe more revenue will solve all problems. That is not the case. More revenue and “bigger” businesses lead to bigger problems and exacerbate underlying business model issues. 

When I wrote Breakout Valuation, the goal was to empower you to optimize your business to achieve a life-changing valuation. So, spoiler alert: when we discuss value drivers, growing revenue is not one of them! Rather, the key to success is intentionally designing and strategizing all aspects of the business to be a valuable asset to its owners. In today's business landscape, optimization is critical to achieving breakout valuation. Breakout Valuation is getting people to see the future potential of your business and give you substantial credit for that vision because the vision is fortified with optimized designs.

Entrepreneurs are typically good at managing the day-to-day operations of their businesses, but they often fail to step back and intentionally work on building value in their businesses. The rare few who do manage to step back and optimize their business are the ones who achieve Breakout Valuation.

The goal of optimization is to create a valuable asset that can be sold for a high valuation. When designing your business, keep optimization in mind and focus on the value drivers that will increase the worth of your business. 

Focus on other areas that are essential to your business's success and avoid those that are distracting from building value. That focus will help you understand that chasing more “revenue” is likely not the optimal answer for your business today.

What are your views on the drivers of valuation? Share your thoughts in the comments or ping me directly at: patrick (at) hillcapitalcorp (dot) com

Patrick E. Donohue, CFA

Five Minute Cash Management

Do Cash forecasts scare you?

Is it daunting to think about how to build a forecast, let alone keep it updated and relevant?

Here is a tip. Start small. Very small.

Going forward, look at all of your bank accounts every day and journal your cash balance.

That’s it. Purposefully do not allow yourself to do anymore work for the first 10 days of this tiny habit. Let it soak in and reflect upon trends and questions that come to mind.

I have personally found that there is tremendous comfort in simply knowing the balances. I have also figured out that it is a catalyst, with time, to do more work and dive in deeper. The key is to get started.

The best resources I’ve found to help you do this in a framework for busy entrepreneurs are two entrepreneurial accounting books “Simple Numbers, Straight Talk, Big Profits!” by Greg Crabtree and “Profit First!” by Mike Michalowicz. Time invested here is well spent.

And if you need some inspiration to “start small”, I highly recommend the book “Tiny Habits” by BJ Fogg.

What are your views on making cash management easier? Share your thoughts in the comments or ping me directly at: patrick (@) hillcapitalcorp.com

Patrick E. Donohue, CFA

Fuzzy Money Math

This week I am giving a keynote address talking about “Emotion and Money” at the Prairie Capital Summit in Fargo, ND. I have 10 minutes to share some money in business insights on what has taken two decades and thousands of hours to understand. As I reflect back upon my presentation and the key points I like to make in a short time frame, I arrive at a very simple insight that can offer the biggest impact. 

Observe. 

Yes. Observe. And specifically, observe without judgement. 

Money is emotional. It provides angst and excitement among the vast majority of human beings. The emotional roller coaster is more pronounced when people “have everything on the line” and most entrepreneurs have “been there”. 

Emotions run high when money is at stake - especially for entrepreneurs that are making a bet that their product and service will provide handsome returns. 

When was the last time that you looked at your cash balance? Debt balance? Mapped out when you expect to receive money (accounts receivable) and have to make payments (accounts payable)? As the business owner, are you doing this or relying on your accountant / bookkeeper / CFO?  Do you know what your cash conversion cycle is? Does that term send shivers down your spine as you're not quite sure what a “cash conversion cycle” even is? 

If accounting, finance and money is not your strong suit, no worries. It doesn’t need to be. However, if you want to get your company (or maybe even your personal finances) less fragile, then here is a simple way to do so. 

Observe. Begin with Tiny Habits of checking account balances weekly, or better yet, daily. Don’t take action. Just take a few minutes every day and look at them. As the days pass, jot down some notes on what you are observing, what questions you have, what makes sense and what doesn’t. Observe the fluctuations in balances for 90 days. 

Why 90 days? Because for most businesses that will capture most accounts receivable and accounts payable cycles. If you have a business with longer cycles, consider observing for 180 days. If this is not enough, consider finding a different business model! 

After your period of observations (and do make sure it is after), then reflect upon:

• Are policies on billing and collections in place?

• If so, are they being followed to the T?

• What is the frequency of bookkeeping? Real time, daily weekly, monthly or worse?

Your goal is to set into motion granular policies on accounts receivable (invoicing and collections) and payables and be accountable to these policies. Ideally you want daily or even real-time bookkeeping. This may seem daunting, but anything longer than daily deteriorates the value of having actionable information in which to make business decisions. For cash conversion, I will have to save the details for another post, but the punchline is that it is the time that it takes to convert the money you are spending to get sales into cash. 

In summary, you can win the finance game through a mere investment of a few minutes a day observing. When you have observed the fluctuations of key balance sheet items like cash, inventory, accounts receivable, accounts payable, then you have the foundation to execute your plan to make finance work for you. 

What are your views on making fuzzy math more clear?  Share your thoughts in the comments or ping me directly at: patrick (@) hillcapitalcorp.com

Patrick E. Donohue, CFA

Goal: Money Failure

Empire Builders January 16, 2020

Giving my keynote talk on “Emotion and Money” at Hill Capital’s recent Empire Builders event, I found myself recommending to the audience to avoid setting goals related to money. A participant, Sarah Kowal, astutely picked up on this point and posted to social media “Goal setting is a trap. Do you agree or disagree?” 

A comment to her question asking about context inspired me to write this. 

In preparing for my presentation about Money and Emotion I realized that making the point about avoiding goal setting, as it relates to money, is important because these goals are subject to failure at some point. Goals typically do not address the root causes or address systems to ensure perpetual success. Let me explain.

Goals are finite. 

Processes and habits are infinite. 

Over the past few years I have keyed into a handful of “successful” people that I respect that have mentioned that they no longer set goals in the traditional ways. They see goals as a trap; nearly assured to not be met and thus create a label of “fail”. In lieu of goals, they focus on habits and processes to get them to where they want to go. I have also been inspired by philosophy that discourages the distractions of the past and the future (“illusions”) and teaches a focus on the present moment (“reality”). Building small habits today is in line with being present and avoids the trap of excessive distracting thoughts of the past or future that comes with traditional goal setting.

I have been inspired by the work of BJ Fogg of Stanford University over the years. He just released a book called “Tiny Habits”. His work has helped me truly understand the saying “How do you eat an elephant? One bite at a time”. Most people understand the punchline, but fail to apply this to their work. How do you get to the top of the ladder? By stepping on the first rung. If you don’t do this well and build a habit of taking one quality step after the other, you are prone to stumbling - and getting hurt. 

What I have realized with two decades in finance is that people fail to take one bite at a time - to do all of the small things systematically. They feel it is beneath them, not worth the administrative task, that it is not worth the time, etc. They want their business to be financially stable, but have no granular plan to make that happen. They want to achieve an exit at a superior valuation multiple, yet don’t even understand something as simple as the company’s cash balance on a daily basis. If a business owner doesn't know where cash in their business goes daily, they are highly prone to stumble on their ladder to a big exit. 

How do I know this? Well, I have lived it. I have been the proverbial “cobbler’s kid” being an “expert” in personal and business finance yet not knowing where my cash was going in my personal life or in the businesses I started. That all changed when times got skinny. Nothing like buying a home, starting a family or embarking on a big business venture with your own capital that focuses you to start tracking every dollar. I started small - observing $ flows - and now it is a weekly habit.  

So, have I thrown away goal setting? No, not quite. I use it strategically for achieving the big ROCKs that my friend Gregg Saunders (successful entrepreneur and now EOS implementer) taught me as a mentor in Entrepreneurs' Organization. I use goals. But I have largely abandoned the Big Hairy Audacious Goals (“BHAGs”) and have focused on doing all the little things systematically that can put me - and my business - in a position to get to where I would like to be long term. Over the past couple of years I have personally found that continuous habitual practices yield greater achievements. I am now more interested in developing habits and systems that provide the small bites to the big goal - using daily and weekly practices to grow without the finite goal anvil over my head. 

Drawing this back to my keynote on Emotion and Money - If money is a tough subject for you, don’t set a big goal to “cure it” - do the small things consistently to understand where and how money moves and it that alone will reduce the emotional burden. 

Thank you Sarah Kowal for the inspiration to share more on this :) 

Interested in learning more on your own? I recommend:

Tim Ferris Interview of Scott Adams // Transcript (see page 26+)

Scott Adams Blog on “Goals vs. Systems”

Shane Parrish's Farnam Street Podcast Episode #54 (@ 31 minutes)

What are your views on goal setting and habits? Share your thoughts in the comments or ping me directly at: patrick (@) hillcapitalcorp.com

Patrick E. Donohue, CFA

Investors Want You to Find Them

Have you seen him? He is the investor who wants to write a check, but he doesn’t know you. You’re lost with a lack of resources and feeling pinched on time. Money’s gotta come in or your dreams are going out the door. “Where’s Waldo?!”

So let us help you connect the dots. Put two and two together. People only invest in people they like. Investors are capitalists that back passionate entrepreneurs to give them resources to execute. Waldo wants to find you. He’s on Twitter, LinkedIn, and AngelList. In fact, he’s trying to make this so easy for you, he’s telling you exactly what he’s looking for. 

If you want to be a successful entrepreneur, you need to create your networks, meet investors, build rapport, demonstrate thought leadership, and prove to them you are worthy of their money. Nobody, we repeat, NOBODY can do this for you. So lace up your running shoes and put on your game face because Waldo is out there and you just need to find him. And technology is a great way to help expedite your journey.

Want some tactical insights? Share your thoughts in the comments or ping me directly at: patrick (@) hillcapitalcorp.com

Patrick E. Donohue, CFA