Value Acceleration before Planning Your Exit with David Clayman at Twelve Points Wealth
There may be a day in the future you want to sell your company. You will want to make sure you are getting the most for it. One term to add to your understanding is “value acceleration.” Today’s guest is Dave Clayman, Co-Founder, and CEO at Twelve Points Wealth Management. Inc Magazine ranked his company #869 on the 2020 Inc 5000 list. Twelve Points Wealth Management LLC provides wealth management services. Dave teaches us about value acceleration through the lens of a potential buyer. We look at one of the most missed aspects in leadership if you want to sell your company eventually. Value acceleration is not something you can make happen quickly — it takes time to get these things right.
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David Clayman: The Transcript
About: The proudest moment of David Clayman was when he became an Eagle Scout at the age of sixteen, so it should come as no surprise that his co-founders and he created a financial services firm based on the twelve principles of scouting. These include trustworthiness, loyalty, kindness, and helpfulness. he began his career in financial services at Paine Webber, now UBS Financial Services, where he developed his passion for the markets and trading. Over the next twelve years, he became a Financial Advisor and Sr. Vice President of Investments. He spent the next five years working for Morgan Stanley, where he grew to appreciate the value of providing in-depth financial planning services to his clients to help them focus on their goals and protect their wealth. For the 5th year in a row, he has received the Five Star Wealth Manager award, which appeared in Boston Magazine.
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Disclaimer: This transcript was created using YouTube’s translator tool and that may mean that some of the words, grammar, and typos come from a misinterpretation of the video.
David Clayman: Failure to plan, I think underestimating how much of your expenses are absorbed in your business now? When you’re projecting how much money you’re going to need in the future, and really not being prepared for the deep dive and due diligence, that’s going to be required when, if someone’s going to pay a significant price for your business. You know, and nobody wants to be told their baby is ugly, but the job of the other side of that transaction is to find all the warts and the flaws in your business. So having someone on your side, that’s already done that deep dive to win, to really flesh out what those things are and how you might cover them. And protect yourself is a really important piece of having this team of advisors put together to prepare you for the exit.
Intro: Welcome to Growth Think Tank. This is the one and only place where you will get insight from the founders and the CEOs, the fastest-growing privately held companies. I am the host. My name is Gene Hammett. I hope leaders and their teams navigate the defining moments of their growth. Are you ready to grow?
Gene Hammett: We look at value accelerations specifically, how do you accelerate your value of your company before you plan to exit? You may not want to exit this year, next year or even five years from now, but there’s some things that you should know now so that you can prepare for your value acceleration moment. That is to come. You may want to sell your business to your employees. You may want to sell your business to private equity or some other strategic player, but you want to make sure you are prepared no matter what happens because that’s what you do. You look around the corners, you are the visionary for your business. And if you’re the founder CEO of a company, and you want to make sure that you understand what we talk about today. Our guest today is the founder and CEO. Of Twelve Points Wealth Management we’re with Dave Clayman and Dave really shares the gaps that are common and people just don’t understand what those three gaps are.
When they look at their money before the exit. We also look at what really goes into the factors of valuing in your company. We look at the most critical factor, which I’ll tell you right now is does your business run without you? Now, if you already know the answer to that, then you want to make sure you stick around. Because I’m here to help you understand that across all of the podcasts episodes I create because my job is to make sure you are the CEO of your company, that your people really understand how to take ownership of their work and the client experience and their goals so that you can actually be the visionary for the company. So you want to check out some of the free resources, just go to genehammett.com. If you think you might be a good fit for the community of other fast-growth company leaders, we have. Just check out fastgrowthboardroom.com inside that group, we get together and we talk about what does it take to be an extraordinary leader, to create a business that does run without you.
One that maximizes its value and all of the things necessary for you to prepare for an eventual exit someday, just go to the fast-growth boardroom. If you think you’re a fit, I’d love you to apply, and I’d love to get to know you and help you with your next steps. Absolutely for free create that game plan just for you. It’s all customized. It’s all free. And it’s just for fast growth leaders that want to grow faster than they are today. Now here’s the interview with Dave, Dave, how are you?
David Clayman: Very well, Gene, how are you?
Gene Hammett: I am fantastic. We’re gonna have, , a great talk today about your exit strategy, what we should be doing to prepare in advance of any exit day that might be coming in the future. Before we dive into that, tell us a little bit about, , Twelve Points Wealth Management.
David Clayman: Sure. Thanks for asking. So Twelve Points Wealth Management was founded in 2014 by myself and, two of my other co-founders when we left Morgan Stanley looking to create a firm that really was devoted to its clients. And the name comes from the Twelve Points of the scout law, the first of which to be trustworthy and in the financial services industry was voted the least trusted industry in America. When we were finding the firms, we thought that was a good place to start.
Gene Hammett: That’s some professional speaking to, these different organizations. And I did find that trust was one of the things that they struggle with. , why do you think.
David Clayman: Well, look as you’re living through 2007, 2008, there were a lot of people that were doing things that were not, above board. There were always a lot of hidden fees in our industry, unfortunately, and up until advisers become fiduciaries, they’re allowed to sell whatever product potentially pays them a higher fee commission, even though it may not be different than another for the client. So that was something that the industry has struggled with for a really long.
Gene Hammett: I think I’ve been a victim of that. Can’t say for sure. , but I’ve had to unwind a few things that I don’t think, a lot of other advisers said, oh, that’s probably not the best strategy for you given where you were and where you’re going. Dave, I wanna, we had a great conversation around, what does it take to exit your company for the most value you’ve you’ve got some certifications along this journey. Why is pre-planning for your exit, such an important thing to do?
David Clayman: Well, I think there’s a few things it’s determining how ready are you personally and financially to exit the business. And then also how attractive is your business? You know, we take a look at three gaps that really every business owner should know and then assess where do they stand and where do they want to go?
Gene Hammett: You can’t leave us hanging like that. What are those three gaps?
David Clayman: So the first gap is your wealth gap. Your wealth gap is how much money do you need to live the rest of your life? So you have to have a financial plan. And most business owners are so busy running their business. They haven’t stopped to do that versus what do you have now outside of your business? So that provides how much does your business need to provide to you to fill your wealth gap?
Your second gap is your, is your profit gap. What is your EBITDA versus best in class in your industry’s EBITDA. So if your EBITDA is 15% and best in class is 20%, that’s a significant difference. And then lastly,
your value gap, what multiple does accompany with best-in-class EBITDA in your industry earn versus what multiple would your company be worth at your current EBITDA company worth might be worth three to four times as much if you think about getting to world-class margins and then world-class best in class, valuations,
Gene Hammett: Have you seen any people that started to go down this exit strategy that just weren’t prepared with maybe those three gaps and just probably a lot of things they’re not prepared with, but they’re probably rushing it as opposed to doing it with intention.
David Clayman: I have. And think about that. Think about how hard you work every day, and the idea you’re going to suddenly increase your EBITDA over three months, 6 months. Not very likely also what factors come into your valuation, your multiple is it, there are a lot of intangibles. It can, the business run without you. That’s a really serious thing. I’ll be honest right now. 12 points, not salable. We’re still building to replace me as only seven years old. So how do you do that? Is your customer base diversified? How are you viewed in the community? All of those things are things that get built up overnight.
Commentary: Let’s slow down for a second here, Dave just said this key question. Does your business run without you now be honest with yourself? If you are still involved with sales, you are still involved with the operations side of the business. If you don’t have all of the details where people really understand how to take ownership of their work, if your executive leadership team is not dialed in and they’re empowered in such a way that you don’t have to be there day in, day out, then you are really in a business that doesn’t run without you. And so you want to make sure you’re really intentional about what your next steps are. My big focus inside my business as an executive coach is to help you create that kind of business of freedom, help you create a business that runs without you. If you want to get a free assessment, you’re going to get a free insight that is customized specifically to you. Then just go to genehammett.com and click start your journey. I’m here to serve you and help you create a business that runs without you. Now back to Dave.
Gene Hammett: I’m glad you mentioned that. , cause that’s when. I actually work in, can your business run without you? I had a client of mine who had no intention of selling but wanted to let his executive team run the business. They were, they were trying to step up, and we just kind of looked at him, stepping away and letting them run. And so for the last eight months, he started another business, took it to eight figures. And while his company is, is, being run by his entire executive team from previous, , it’s a big Testament to where he is and what his ability to do that. But I know you guys, don’t, don’t dive into the business running without you. You stay on the financial side. So I’m going to steer us back to that day. When you think about this, where do people make mistakes in exit planning?
David Clayman: I think the thing you’ve mentioned a couple of times now, the failure to plan, I think underestimating how much of your expenses are absorbed in your business now. When you’re projecting how much money you’re going to need in the future, and really not being prepared for the, deep dive and due diligence, that’s going to be required when, if someone’s going to pay a significant price for your business, you know, and nobody wants to be told their baby is ugly, but the job of the other side of that transaction is to find all the warts and the flaws in your business. So having someone on your side, that’s already done that deep dive to win, to really flesh out what those things are and how you might cover them and protect yourself is a really important piece of having this team of advisors put together to prepare you for the exit.
Gene Hammett: At what point do you recommend someone have their books audited by someone else? Well, I think certainly if you’re thinking about exiting, you want to do that three years in advance, but also. You know this? Yes. It talks about exit planning, my designation of certified exit planning advisor, but really it’s value acceleration because the time could be right for you to sell soon and it could fill your gaps, even though you weren’t necessarily intending to do it because you might come to fork in the road where you have to invest or sell, you might come to a fork in the road where suddenly your business is worth so much more just because the multiple of the cycle is so good. Think about a farm with grain prices going crazy right now, any of those kinds of things, there’s just different times and always being prepared for that moment that you could walk away is a great position to put yourself in. Then you’re in control.
I want to look at the gaps a little bit more in detail because I think. It’s easy to kind of brush over those and thinks you’ve got them. So I took notes on this, the wealth gap, , what is often missed there? I know you, you ran through a couple of things, but let’s just really put a spotlight on that.
David Clayman: Yeah. I think that it’s the ability to really understand what you want out of the rest of your life, both for your personal and for any philanthropic endeavors you make. And understanding what those numbers really mean. You know, if you’re going to stop, you know, get out of your business at age 65, you have another 30 years to go. How much money truly is that? And have you truly sat down as a, as couple and sorted that out. And what about if you have a business partner, if you have partners, have you each sat down with each other and discussed, this is what I need the business to bring me to live my life. Do we have the same vision? Are you ready to leave now? And I need to buy you out. So that I can get the business to where I need it to be. Is that a decision I want to make? Those are big ones that are missed. And I think again, the other one, just people don’t realize how many expenses and how many different things you run through your business. In the course of running the business,
Gene Hammett: I had one of my clients talk to me about someone in his industry had sold, and it was an impressive. But if you peel back the layers, it was getting, paying himself $5 million a year. He netted 5 million after taxes and so four years into it, he could really see the writing on the wall of like, I’ve almost spent all the money I’m going to go back to work and do something else because I didn’t anticipate that my level, level of lifestyle was not shifting as I no longer was working. When you see people exiting or do you, do you help them actually figure out that lifestyle shifts and get really honest about what does it take for you to make this money stretch?
David Clayman: We do, we say there’s really three legs to the stool. Preparing to exit. One is the business. One is your personal financial and the other is your personal and mental facet. What is life after the business? What does that look like? Do you want to Consult? Do you want to take board seats? Do you want to do a philanthropic endeavor? You know, I have a running joke. I came into the office most days through the pandemic and people ask me why. And I said, my wife and I have a lovely agreement it’s for better or worse, but not for lunch. You know, it’s the same kind of thing. When you exit your business, have you thought about that? Have you prepared yourself for the first day a paycheck doesn’t come in. What does that feel like? We had a business owner just sell recently. He’s staying on for three years. I called him the Friday after his first week as a non-owner and asked how’d that go? How’d that feel? What are you struggling with this week? What are the challenges versus what we talked about and was just great to have that conversation and be kind of a sounding board for him because it was different? He was the boss for 32 years.
Gene Hammett: No. Do you have any numbers on how many people are asked to stay on after they exit versus there’s a, there’s a workout period where you’re like transferring over you know, whatever knowledge you can in three months later, you’re you’re done. , I know I’ve seen a lot of my clients choose both paths.
David Clayman: Well, if it’s a strategic buyer or a private equity, they probably want you to stay on for, for quite some time. , usually two to three years, we actually just had another client who begged and borrowed to get out of there. He had been the CEO of his company for 30 plus years and he wasn’t ready to be someone’s employee. He hated these structured meetings. And all the things that went into being part of a private equity-owned entity, and they wouldn’t let him resign. They went three months without letting him resign. He walked away from $6 million worth of pay additional payout because he hated it so much. And it’s a real black eye for the private equity company. If someone walks away because they want to be able to say to the next acquiree you look, you can talk to Mark and hear about what has experienced with us was you can talk to John and hear about how great it was and how we kept his vision. It’s a real black eye for them, for him not to stay on.
Gene Hammett: I’ve had a cousin of mine who is exited multiple times and the first one he definitely did not stay around. And I know the second. I think it was a six month period, but he specifically arranged for it to be that way. So you do have some flexibility with what that looks like, but you may have to give up a little bit of, of profit or money to make that happen. Is it, are you seeing that kind of conversation go down to negotiate?
David Clayman: You definitely can negotiate out your time and get it back for an exchange for money. But I think it’s also a question to our earlier conversation. How ready is the business to run without you? If you’re the, I met with two business owners last week and they said we generate 70% of the sales here. I said, well if someone’s buying you, they’re going to want you around for three years. That’s that’s a big problem so, I think that that’s definitely things that you see is, okay, how ready is the business to run without you? Or it’s not, then we need you for this amount of time. Well, if you want your life back sooner than you’re going to have to give back significant amounts of money. So it’s all about what are you trying to maximize your lifestyle, your value dollars. What do you need to live, where you want to go?
Gene Hammett: Let’s zero in on that, a whole conversation of the business running without you. Obviously, if you’re generating sales for the business and some capacity, maybe you’re, maybe you’re just bringing across the top a finish line, but that’s still your involvement into sales. What are the other factors that outsiders are looking at to see if your business runs without you?
David Clayman: Sure. So do you have procedures and processes in place for everything that happens? Do you have an operations manual? Do you have a strong leadership team that has been there for a long period of time? Are they likely to stay through the transition? Have you locked them up so that they will be incentivized to stay throughout the transition? Those are all things that can indicate. Yes. Dave can walk away, but the rest of the team is here, or Nope. Dave has Gene, but Gene has been here for 35 years and he gets a big paycheck when we walk when we buy them out too. So we’re in trouble. If, if Dave doesn’t stay,
Gene Hammett: I want to go back to negotiations. There’s, there’s a whole lot of pre-planning, which, you know, we’ve got to get that right. But what do we, what do you learn from all the negotiations you’ve been in, things that you really want to be prepared for? When you sit down with someone to talk about numbers.
David Clayman: I think the first one is again, be prepared that they are going to try to beat you up. They’re going to try to find everything ugly about your company. So having thought this through with a great partner, to show you your, the flaws from your own side and being prepared for that, that I’ve seen deals fall apart, just because of the things that were said in the room and the owner not being prepared. This was before I had gone through this practice a number of times, and hadn’t mentally prepared the owner for that. So that’s a big one. , another thing is, what discounts are they going to be looking for? So is it, my staff might be able to leave. Is it how many key customers do I have? Am I diversified? Is it how, as my retirement plan run, according to plan all this time, do I have any potential liabilities hiding in there? Are there environmental liabilities that I need to worry about? All of those things can be big factors in negotiations.
Gene Hammett: Well, we’ve had a really good conversation, route planning for your exit someday. This was not intended to be about what do you do today? We want to sell, you know, next week. , but is there anything that we haven’t covered that you feel like is really important to this conversation?
David Clayman: I think the biggest thing that people don’t know, and I touched this briefly is it used to be that the value of a company was very heavy and tangible assets. And now about 80% of most businesses are intangible assets that come down to the value of your company. So making sure that you’ve covered, if you will, your four C’s, your structural capital. Policies and procedures, your social capital, how you look inside the business and outside the business in your community, your employee culture, your cultural capital, and then your customer capital. How well diversified you are. So I’d look at those four C’s as the key pieces to preparing yourself for, to maximize the value of your business, whether you’re running it today and going to run it for the next 20 years. Are you going to look to sell it in three years, maximizing those improving your margins will put more money in your pocket, whether it’s today, tomorrow, or in the long run.
Gene Hammett: Dave, This has been an incredible conversation to talk about. How do we increase the value for a someday exit? I really appreciate you sharing your perspective, your wisdom with us today.
David Clayman: Gene, Thanks so much for having me. It was a pleasure.
Gene Hammett: I’m going to recap just a little bit of this. You may not be ready to sell today, but you might want to sell someday. If you really do want to have an exit strategy where someone else is going to pay you money, then you want to think about that and start about doing it today. The first thing you can actually do is really look at your business and be honest with yourself. Does it run without you? What are the key steps of that? That’s one of the core things. , so if I can help you with that, let me know. But I really, you know, love what Dave was talking about. All the numbers in this, that the gaps, the things that you aren’t thinking about. There’s more to it than just run the business and have sales and have all this money and customers. You want to make sure you feel and understand those gaps.
When you think about growth and courage, think about Growth Think Tank as always, live with courage. See you next time.
Disclaimer: This transcript was created using YouTube’s translator tool and that may mean that some of the words, grammar, and typos come from a misinterpretation of the video.
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