A lot of us want to have a successful and meaningful business. After many years in our business, we all want to ensure that the business we have worked hard to establish will carry on well if we retire. Succession planning is the key to ensuring a seamless transition and long-term success. But how?
In this episode, I sit down with Lowell Mora, President of Impact CFO, who specializes in family- and privately-owned businesses. Lowell talks about the importance of planning for business transitions, especially as founders or business owners approach retirement, including finding suitable successors and maintaining business continuity. Tune in to learn more!
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Align Your Life and Thrive with Diamond Drip
Welcome to Action’s Antidotes, your antidote to the mindset that keeps you settling for less. Today, I want to talk to you a little bit about succession planning. We’ve talked quite a bit about the process of starting up a business on this particular podcast, about what challenge you face on the come up, but then, what happens when you’re getting ready to retire and you want to make sure that the business is going to be in good hands and you want to make sure that your own wealth is going to be in good hands. To discuss this topic, I would like to introduce you to my guest today, Lowell Mora, fractional CFO, who specializes in working with a lot of these family-owned businesses around such issues.
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Lowell, welcome to the program.
Thanks for having me. Appreciate you having me here today.
Tell me a little bit about Impact CFO. Tell me a little about your story, what you do with your clients.
At Impact CFO, I help primarily as a fractional CFO, which fractional means exactly as it sounds, I spend a portion of my time helping a business that may not be able to afford – it typically can’t afford a full time CFO. So my practice focuses primarily in on the family-owned business in the small to midmarket that is looking towards a transition, either to another family member or to an external exit to maximize the wealth of the family and the value of the business.
Now, when you say businesses that can’t quite afford, say, a full-time CFO, what’s a general size? What number of employees is that typical –
So the typical, most of us finance guys talk in dollars, but in employees, it’s typically employee levels of 25 to 100, 150. Again, it depends on the complexity of the business as well. So, in dollars, we typically talk somewhere around $5 million in sales, up to $50 million. Now, I’ve worked with smaller and I’ve worked with bigger but that’s the sweet spot.
And so you’ve encountered a lot of these family-owned businesses that have gotten to this level. You said like $5, $25 million annually. I assume it means, right? So, what do you notice in some of these family-owned businesses that get to that level? Do you notice any kind of common thread in the type of people that you work with and the type of founders who are in the situation about who they are, what they’ve done to get to where they’re at?
Yeah. Typically, in my practice, a lot of people out there is values based.
So I look to work with people that share the same values as me, which are pretty basic, which is a high level of integrity, strong, hard work ethic. Share on XA lot of what I do is in the manufacturing, industrials, industrial products, industrial equipment. I also work with services, business services, and IT providers and things like that but, typically, it’s a business of an entrepreneur and they’re overwhelmingly, today in our world, they’re overwhelmingly male, and they’ve gotten to a point where they have a successful business and can support them but they don’t necessarily have a natural heir or successor. In a lot of cases, they don’t know what to do with that. And what typically happens, and it’s common, is everything in that business runs through that one person and it’s kind of that hub and spoke mentality and it’s not intentional but that makes it very risky if somebody gets sick or something bad happens to them.
Yeah. Yeah, a that’s a risky place to be in no matter what kind of business you’re in. People talk about the idea of redundancy or even if you want to take a vacation and not have to hop on calls every day just to check in with your team.
So, interesting, the other thing that I’m seeing is that the people that are getting a little bit more towards retirement, they get so much of their identity through the business that they run that they can’t imagine them not being a part of it so it inhibits them looking at the succession planning and contingency and it’s kind of a double edged sword because then what happens is people have been somewhat successful and they say, “Well, I’m running this business,” and then, “Well, but I wanna go to Florida for four to six months, but I still but I still wanna be running this business,” so they take their foot off the accelerator and that has a way of diminishing the value of the business because there’s not a focus on growth or cost savings and because it’s running all through this one person.
They haven’t built up the other people – make those, so you haven’t built up, say, a second in command or even an executive team to say, “Okay, when I’m not able to put on the accelerator myself, you’re empowered to understand the business, make those decisions, etc.”
It’s kind of an endemic in our society. We have huge companies and we need the Proctor and Gambles and the Unilevers and the big companies like that, but the life blood of our country is small in size, family-owned businesses and a staggering statistic is that nearly 50 percent of all family owned businesses end up in bankruptcy within two years of the death of the founder or the owner. To me, that’s staggering and really what’s happening is it’s a lack of planning for scenario and it’s devastating not only to the family that owns it, it destroys their wealth, but then I think about all the other stakeholders in the business, all the employees, their families, customers, vendors, all those things and it’s just something that I really want to focus on with my practice.
So take me a little bit through the mindset of what’s going on in, say, a typical, say, 60-year-old founder that’s looking at their retirement and trying to figure out what to do, maybe hasn’t thought about it because he’s been buried in work for so long. What’s going on in his mind and what can be done?
Yeah. So the first thing that’s sometimes difficult is to get their attention and to say, “Hey, we really need to look at this,” because they would typically say, I use the kind of the shock jock mentality of, “Well, what happens if you get hit by a bus?” A 60-year-old or a 70-year-old, “Well, we’re screwed.” I say, “Well, you’re 60 or 70, the reality is we all have a shelf life,” and then they’ll typically say, “Yeah, but my family will be okay.” Well, that’s because you have life insurance on yourself and they’ll be okay, but then, all of a sudden, this person that was such a big part of your family is gone. Now, the burden of running this business that runs through one person falls onto your spouse or your kids and they don’t know how to do it. It’s sort of they have to be ready for the wakeup call that you’re not immortal and there’s an interesting dynamic going on is that I’m in my mid-50s and I love what I’m doing and I want to do it for a very long time but if I stop doing it tomorrow, I would have 800 things on my list of things to do.
The people that are a bit older, in their 60s and 70s, so much of their identity is tied up in that business that they’re not willing to let that go. So, once we get their attention, it’s pretty fun and easy, because you say, okay, the first thing is, have you talked to your other family? Have you talked to your children? Have you talked to other people in your family that might want to take the business over? And if there is somebody that’s interested, then you put a plan in place to get that succession plan going over a period of time. It doesn’t just take six months or a year, it takes years.
Yeah, usually, it’s like a five-year process.
About five years. And the other really important thing to do is get a good valuation of the business. So a lot of times, family-owned businesses will run a lot of their personal and household expenses through the business. When you want to get a good valuation of the business, you want to make it sort of clean and that’s a hard thing to do. So, typically, I’ll come in and I’ll say to a business, “Hey, once we get engaged, who’s doing your accounting?” Because what my offer in my practice is that upper level senior executive consultation, basically once we get a set of financial statements, we go from there. Do you have a clerical person who does it? As long as you’re recording the transactions correctly, I can work with it. There’s a lot of firms out there that are very cookie cutter and say, “You have to use this system and you have to use that system,” without getting too deep in the weeds. In my career, I’ve worked in every system, from QuickBooks to SAP, and SAP is the biggest one out there. So I say I’m going to customize what I do to you, so I say, “Hey, do you need outsource bookkeeping help?” I work with a bunch of different firms of all sizes and flavors. We can get them to do your bookkeeping. Then we get some financials that make sense and we’re able to build the plan of what is your plan? Do you want to maximize profitability over the next five years and turn it over to your family or do you want to maximize profitability without growth and then sell the business? Do we want to have a growth mentality? Because, in the end, the way that you value a business is pretty straightforward. It’s what is your adjusted EBITDA? And not to insult anybody, EBITDA is earnings before interest, taxes, depreciation, and amortization. It’s a common phrase. It’s a P&L measure. It’s a profit and loss measure that approximates cash flow. And then, based on the type of business you’re in, there’s a multiple. So this is how Pes, private equity firms would value it. This is how anybody, a business broker would value it. So, say, you have a business that’s got $5 million of EBITDA, and the multiple, the average multiple for that type of business is five. So your business would be valued at about approximately $25 million. That’s a pretty good return if that’s what you want to do with the business. But let’s make a plan. Is it growth oriented over the next few years? Is it let’s sustain this, let’s tighten up on costs and get it to be the cleanest, best that we can be so we can sell it on the open market. So I’m kind of that guide. It’s not my decisions. I can have my opinions. For me, it’s really fun to grow businesses and do all that, but it’s not my business. I’m there to help consult and guide people along.
Now, with some of these aging founders, how much of it is them motivated by wanting to have their family be okay? Because I’m seeing such a, I don’t want to say generational change in the sense that I imagine, say, back even 50 years, 100 years, if someone started a business, all they wanted to do was leave that business to their children. And I’m even thinking like we have Coors here in Colorado and the Coors family, it’s all about how the first founder, I think his name was Adolf Coors, because that name hadn’t been ruined yet by a certain dictator, but you know what I mean, but he left it to his children and his children and so on and that seemed to always be the path. Now, are you encountering founders that just aren’t thinking about that or are they not thrilled with or their children are not thrilled with the idea of running the business? Is there some of these other complications?
I think one of the biggest impacts is that the owners don’t know how to approach their children or handle it when their children aren’t interested. I deal with a lot of manufacturing things. You’re running a machine shop that makes special metallized parts for stuff and you’ve got your kid. Your kids grow up, you send them to college, you tell them to learn and get these degrees and they don’t want to do it. They’re not interested in it. That’s the first thing. And I think what’s really happening is when the owners find out that their kids aren’t interested, they just kind of say, “Huh, what am I gonna do with this and they don’t know how to handle it?” and they’re kind of secretly, and this is just my belief, they’re secretly hoping somebody’s going to decide that they want to do that, that they’re going to want to do it and –
Oh, yeah.
– it usually happen, and it’s really different. If you just have a small business like this, there’s not an immense amount of wealth. I’ve worked with some very, very wealthy families where they’ve done some creative things where they’ve had a very industrial business and they have a child who’s very interested in tech things. I said, “Okay, well, let’s maximize the wealth out of this and then you can use that to help your children run or design the businesses they wanna run.” So it’s really interesting and it’s kind of that stoic generation that were the children of the Depression era people and I kind of have a different perspective, because my grandparents went through the Depression, so I kind of have a little different perspective and go from there. So it’s really a lack of planning and it’s kind of one of those ignoring it. So the other thing that I talked to – I talk to a lot of them, wherever you call them, wealth advisors, people who do their investment, handle people’s investments. So, anybody who has any wealth or investments at all, they focus on their, “I’m gonna invest in stocks and bond,” and sometimes they have a bit of real estate but they don’t think of their business as an asset. They think of it as a lifestyle or they think of it as their, “Well, that’s what the money I’m gonna have when I go through retirement,” but if you’re not running it, it’s kind of weird. So we’re trying to change that mentality of thinking of it as an asset in your portfolio.
You talk about working with a lot of manufacturing type of businesses and I know there was like a three-, four-decade period that we’re just coming out of now where that really just wasn’t in vogue. But now we’re starting to see some headlines, mostly over the last, I’d say, 18 to 24 months, where, because of AI, because of other technology type of events happening right now, people are actually starting to have a renewed interest in some of these. It’s mostly talking about the trades and renewed interest in the idea of being a plumber or being an electrician or something like that but have you experienced any renewed interest amongst the younger generations in the types of businesses that you’re working with over the last 18 to 24 months based on this particular trend?
In general, no. In general, people, the young people, want to be in the tech businesses and they want to be a social media influencer. The people that are getting interested, the young people getting interested that have that engineering and mechanical background that says, “Hey, I wanna come in and tinker with this and reengineer it and see,” it’s all the advanced – AI is coming and all that, but AI is not going to take away all the manufacturing. There’s no way, because there’s still so many things that – we’ve been talking about things like robotic process automation and AI for 10 years now and it still has barely touched the midmarket, the small, the midmarket firms. The big companies, it has. So there’s less of an interest from people, younger people, to do those things and do the older industries so there is going to be a vacuum that is going to need to be occupied by increased efficiencies and functionality through the thing that the AI-type things that you can do. I know some younger people, and more people are interested in the trades. I think there’s a feeling of younger people that college education doesn’t have the value that it once did, because it’s a lot of money and they’re looking at it, they’re looking at it more from the opportunity cost standpoint than just, “Okay, I’m gonna be able to get a job,” because they’re seeing people go to college and then where are the jobs in your area? And there are jobs, like there’s – what they say, “Well, I’d rather have a lifestyle of doing something I want to do.” It’s really hard to look forward 30 years and know what you’re going to do so if you just you decide I’m really handy and I want to go to the trades, I want to be a home builder, I want to be a carpenter or whatever, you’re not thinking about how your back’s going to feel in 30 years and how you’re going to be able to work 30 years down the road. Those people have the unions and the pensions and it helps them out. And I think it ties a little bit into the fact that, as you come into the Generation Z and a little bit of the millennials is that they value lifestyle and feeling a sense of purpose to what they do more so than Xers and the boomers. I’m an old Xer. I think they have it right. I think we had it wrong and I think that the millennials and the Gen Z’s have it more on path than we do.
If you take this typical work week, it’s 40 hours, for a lot of people, it’s more, especially if you really care about it and you think about it even when you’re not at work, you want that to be something that matters to you. One of the interesting things is how people are coming around to this idea that I think maybe about 10 years ago, what matters, what’s significant had a much more narrow perspective, and now people are seeing like, okay, well, if you come in and you repair people’s roofs after they get hail damage or if you fix someone’s toilet when it gets stuck, that that actually has way more of a purpose than a lot of corporate jobs in some cases.
Yeah, and it’s a balance. We need people in all the areas and you need those big companies. Our country wouldn’t survive without those big companies. It’s just what role you play in and it’s all about the younger people, I call the millennials and the Z’s, they want to know what the mission of their organization is. You look at all the DEI initiatives that came out, because when it was popular, all the companies were going with it and now they’re flip flopping and backing up on that. I figure, you take a stance on something and you stick with the stance, but that’s the difference of having to cater to Wall Street or to, if you’re in a private equity-owned business, you have to cater to the investors where, if you’re running your own business, you do what you want and it should be all people based.
And that’s why I love discussing these family-owned businesses 100 percent because without all this other external pressure of going with whatever is happening now, shifting with the winds, family can really kind of be all about it and I had a recent podcast episode where we’re discussing how a lot of family-owned businesses are also very active in their communities, like maybe they sponsor the little league baseball team or they sponsor the softball team over there or they put on a cookout or something like that, like they mean something to their community and so even if it is something basic, such as, I don’t know, pouring concrete, something that isn’t really earth shattering, it happens everywhere, but you’re pouring the concrete for your community, and every time someone walks down the sidewalks of your town, your neighborhood, whatever it is, they’re experiencing the impact of why you get up every day, and so that closeness, that proximity, gives people a lot of sense of purpose.
Running this business after spending 30 years working for businesses, primarily family-owned businesses, and I worked for some other publicly traded and some private equity owned in there but always focused in family owned. I always said, “Hey, I’d rather help a family-owned business and their employees rather than helping to make financial investors more wealthy.” That’s just my own perspective on it and it just feels like you’re touching a lot of people.
And so that perspective, that feeling, how did you come to that realization? And how does that fit into your story of deciding to start your business?
Yeah, so it really is interesting because, over the course of my career, I worked for the mix of businesses but primarily family owned. So we were always able to take a long-term perspective on the business and optimize decision making on the long-term benefit and value of things. And when you work for publicly traded companies or private equity firms, publicly traded companies are fighting quarter to quarter and making decisions based on their stock price. Now, they can’t focus on the long term and I get that, we need those businesses. The same thing with private equity firms. If you’re holding a company for more than five years, it’s all about what is the return you’re going to get on it, not what the long-term value of this business is. And with family-owned businesses, you can always take that mid to long-term perspective. Now, one of the frustrating things working in family businesses is you tend to get slower decision making so I’ve always been a big proponent, and if you talk to anybody I ever worked with, I said, yes, the great thing is is we can take a long-term perspective but we still act and work with a sense of urgency, just without – and our strategic plan and initiative is based on the long term. And something that I’ve always made me very, very frustrated is sub optimization. So when you’re trying to maximize the quarter to quarter earnings and the stock price or what the private equity return is going to be, you have some sub optimization of resources and long-term value building.
Yeah, I mean, so it’s October at the time of recording this, and I forget the exact term of it, but there’s a term people use for a lot of people either laying people off or not hiring people in bigger businesses in October to meet a bunch of annual numbers and then, all of a sudden, January comes, and I’ve even seen situations where someone will lay someone off in October then try to get them back in January because that’s for the long term. Is there any way, because I know you talk about needing both, needing the small family-owned or any kind of small community business and needing the large corporations, but is there any way to get the large corporations to maybe, I don’t know, level out some of the more nonsensical aspects such as that in their practices?
That would be quite an effort to undertake. I think things like that evolve over time and I think that those businesses we may not see it completely to fruition in our lifetimes, but as the workforce profile changes, no matter what you think of the next generation, the generation above me and two above me said we were lazy, we were horrible, we weren’t going to do anything, every generation thinks that of the coming generations. Two things happening. One is we have very much of a shrinking population and the demographics are not in our favor. So we’ll get into one of my favorite topics which is immigration. Demographics are shrinking because all the boomers are coming out of the workforce, and even the Xers, less of us, and then the millennials, there’s a bit more, but then we don’t have enough people to do all the jobs that we need to do, so the big corporations are going to have to, over time, it’s almost like evolution.
I mean, evolution takes generations, but it’s almost like, over time, they’re going to have to morph their businesses to suit the workforce that they have. Share on XAnd maybe that’ll change. I mean, it’s a really tough one because our entire country was based on freedom and capitalism. And I’m all about capitalism but I’m about smart capitalism, and I don’t know how, in the short term, you’re going to get these big corporations to change what they do. It’s really an interesting fulcrum because some of it is starting to happen with the increased vigilance of the, I don’t know if it’s the SEC or the Department of Justice on monopolistic things.
Oh, that grocery store merger, right?
The grocery store merger is one and I worked in that business and they’re looking at some of these tech mergers now too. They’re trying to look at some of those. How big is too big? Is Amazon too big? So, on one side, if you’re about pure capitalism, you want less government intervention and less restrictions on it, and if you want things to run better and to not have negative impacts, then you need some intervention. It’s how do we get the right level of government intervention? The thing that scares me the most, and it’s starting to happen with AI, is the same exact thing that happened with social media. When something new comes, the government agencies don’t know how to handle it, and they just stay hands off. Same thing. You’ve seen it. We’ve seen it. We keep repeating the same thing. We saw it with social media in this section 230 We saw it with crypto. What happened with crypto? And it’s about to happen with AI. Something’s going to happen and we’re not ready for the regulation and the way that it needs to be controlled because it’s new and nobody knows it. I don’t know if I exactly answered your question but I think it’s a really tough challenge to get corporations to change the way that they operate.
Well, and one of my other concerns about that is just the layer of bureaucracy that you see, both in government and in corporations, where we’re having a shrinking workforce or shrinking workforce availability, not only less people but people who don’t, my generation and Gen Z, we don’t really have an interest in working 80 hours a week. I watched too many of my baby boomer parents and friends do that and it didn’t seem like a worthwhile endeavor. I’m just going to put that right out there, right? So, what strikes me is this idea that there’s a whole bunch of work that we’re doing that doesn’t necessarily need to be done because it’s just another three layers of paperwork to meet some standard or some compliance thing and what I’m wondering is whether or not there’s any hope, at least in the sense of just scaling back some of that, whether be at corporate level or anywhere else.
You know, it’s interesting that you talk about it and I haven’t worked for a publicly traded company for 25 years, so I’ve avoided all of the aftershocks of the Sarbanes-Oxley and all that stuff and all the red – but we did at the end of 2019, the company I was with, we sold it to a publicly traded company and I stayed in the transitionary period and had to help them with some of that setup. I don’t know what the number is, and it was something in the billions of what big companies have to spend to administer all of the requirements related to Sarbanes-Oxley. And it wasn’t happening before 2007, 2008, 2009, whenever those things came because of the problems and so, now, you have a whole department that is just compliance and statutory related that, maybe Amazon or maybe a huge company spending a billion dollars a year on it. It doesn’t really add any value to the results and there’s limited belief among most financial people that it’s really protecting the investor, because that was all based on protecting the investor. Forget what it came in, but it was all about doing that, and now it’s just we put things in place and then we don’t review them is what happens. So that’s a place of what I think is unnecessary bureaucracy.
One of the places that I always see this coming in is that you got all this bureaucracy here and the big companies, the Amazons, they can pay for it, but the smaller businesses, they can’t necessarily do it so I do feel like sometimes it also tips the playing field a little bit to where – so you said before about how we need kind of both. Do you believe that the balance of both that we have right now with our bigger companies the way they are, and our smaller mom and pop shops, family-owned business where they are, is a decent balance? Or do you think it might have gotten a little bit out of balance with some of this stuff?
My sense is that it’s in a good equilibrium right now but if we keep losing all of these locally owned businesses and these mom and pop shops that 50% of them are going bankrupt, we’re not going to be there. Now, the encouraging thing is that I think there’s a lot of entrepreneurship and there’s a lot of startups out there, people starting businesses, but people aren’t starting up machine shops. People are starting up IT support firms, they’re starting up SaaS businesses and some of the more techy things so I think that’s going to flow away. There’s a lot of money out there. The SBA, Small Business Administration, wants to loan money. They’re out there. They want small businesses, startups, and they want businesses that are in existence, family-owned businesses, to keep investing. And that’s one of the things that I’m stressed with ongoing business owners. And 90 percent of these businesses, if you go to them, they have zero debt. Because debt was verboten, debt was not good, it was considered awful, so you’re not using the leverage of being able to borrow at reasonable rates from the SBA to grow your businesses and then grow that way. So, when I say debt isn’t horrible, they look at me like I’m crazy. So, I mean, it’s a pretty simple thing. If you can borrow at say, well, I don’t know what you borrow at, if you can borrow 7 percent today or 8 percent and the return, without getting too technical, of the project they were investing or the new product line, is 15 percent, it’s a no brainer. You’re using somebody else’s money to leverage it and make money. But the even scarier part is that a lot of these businesses aren’t even reinvesting their profits back into it. So, I’ve worked for some companies and they were big, family owned, $20 million of free cash flow a year, and they take it out and I said, “Don’t we have anything in our business that we can reinvest that $20 million in?”
Yeah, just something –
I mean, there’s got to be new projects, new development, things like that. So it’s kind of that mentality of, “I’m just going to go stay the course with what I have here and not being creative or looking down the path into the future.” So, I veered off a little there, I apologize.
This is a really good veer off because, first of all, I think a lot of my listeners might be not quite aware or might benefit from understanding a little bit about this resource in the SBA that’s available so anyone out there listening who, say, is thinking about starting a business or thinking about expanding a business, how does that generally work? What kind of people generally get approved for these types of loans?
I mean, it’s, it’s fairly easy to get approved. I work with several different banks and representatives of banks that that handle primarily the SBA loans. But there’s a couple different types, which I don’t know all the technicalities on, but in a particular case and I just finished one of these, a business owner of a fairly small business was selling his business and wanted to sell it to an employee so I helped them make that happen. The SBA will fund somewhere between 80 to 90 percent of that. So, basically, I go and I make the marriage, and I say, “Hey, Joe is buying the business from Tom and we’ve got an agreement in place where he’s going to pay 10 percent of it down and we wanna finance 90 percent.” So scary part there is there’s obviously got to be personal guarantees. There’s the assets of the business that they can use as some collateral but if you want to try it and go with it, you sometimes have to give some personal guarantees. So that’s where a lot of people get scared off, but if you want to grow a business and you know you’ve got a good business, you can fund it with loans from the SBA.
So is this something that someone can use, say, from seed stage, like I’m starting a business now –
Yeah, yeah.
– and because usually what people from seed stage need for a business is something to fund, say, startup and operating costs. Obviously, you’re going to need a marketing team or a sales team of some kind and in a lot of these tech businesses, you need, obviously, the development, the engineering team, and even with one of the kind of materials business, you probably need to buy, purchase and obtain your assets, whether it be a warehouse, a storage front, stuff like that. So when people are looking into this, what you said about the SBA having that you need some kind of a guarantee, is that the primary catch around it? Because –
That’s where a lot of people get caught up, because then you’re putting it against your personal home or whatever, you have to do that, and you need to have a very strong business case. Obviously, you need to work your business case to show to the SBA. But a lot of the guys that are trying to do all these tech things, they’re making up, and these are these geniuses in Silicon Valley that are going out, and when they get the venture capital money, there’s really less strings attached because venture capital, if you know anything about venture capital, they hit on one out of ten so they invest in it, now you’re giving up equity, future equity in your business if you make it big. With an SBA loan, you keep all the equity and you just have to make sure you can make the interest and principal payments. But, by and large, the banks today, the SBA-backed loans, they want the businesses to succeed. You have to pay the interest but they’re not putting unreasonable debt covenants on those and requirements and things. They want these businesses to succeed. So it’s not for everybody, but it’s a mechanism, if you’ve got a business that you’re running that’s spitting off, say, you got a business that’s spitting off $5 million EBITDA a year and you have no debt, you just have your credit line and you want to invest in something, typically, an existing business owner can qualify for the borrowing based on the assets of their business, not their personal assets.
I see. But if you’re starting from scratch, if you’re starting from a business that’s not established, then it becomes you need to have some kind of a personal asset for it to guard against. And I guess that sounds like the same thing for like, even like a regular bank loan. So what would be the difference between getting an SBA loan and just going to your bank and seeing if they would loan you money to start?
The SBA is – the nice thing is the SBA loans are typically coming through a smaller, more community-sized bank. The Chases of the world, the big banks don’t have the time or the attention for a small customer, and they’re already – I worked for a couple businesses that were $200, $250 million and we were a client at Chase and we weren’t deemed that relevant to them because they have big, big clients, and they have even their midmarket businesses – Chase’s mid-market businesses don’t focus on that as much, so you can’t really get the attention. So, yeah, there’s lots of ways to just get normal bank loans too, but the SBA-backed loans are more favorable to the startups, the businesses that want to grow that are smaller.
I see. And then you also talked about people who kind of have a cash flow, and they’ve reached that rung where they’re kind of set with it, but not really taking that as an opportunity to invest further into their business. Is that something you advise your clients to do a bit as well?
I think it’s fun to invest and grow but it’s not my business. Is there ways to expand our product line, right?
Yeah.
Easily. Is there adjacencies to what we do? Is there a way to expand our business geographically, right? A lot of these businesses are small geographic. Well, we don’t do it because we can’t touch them and all that. And, okay, but there’s lots of ways to do it –
Yeah, building up a warehouse –
– how much is it going to cost to do this? How much – and, again, I lay that out. In the end, it’s what the business wants, it’s what the business owner wants, and if that business owner has strong management team and advisors around them, they’re going to want to do exciting, fun things. So the tricky part that happens is it’s tough to attract growth-minded, ambitious people to a business that isn’t looking to do different things and grow, right? And so that’s the conundrum. So when I go in and I say, “Hey, here’s what we could do if you do this and this is the kind of people we’re gonna to need.” And I’ve done it a lot of places. You go in and you start analyzing your margins by your products or your territories or your sales channels and you find out where are you making money and you lose it. So stop selling the things that we’re losing money at, right? It’s not a loss leader but this is not a grocery store, right? So it’s kind of amazing that the lack of understanding of the makeup of the margins of where your business is coming from, right? And there’s lots of levers once you get into that to look at.
And now you work with the business as someone is going to retirement planning, let’s just say, and they’re going to pass it off, and let’s just say they pass it off to either one of their children or even just another younger member of their neighborhood that happens to be interested in it, because it doesn’t have to be the children, do you often stay on with the business after it gets passed in? And what do you notice often happens different when the new generation takes the reins of the business?
Yes. That’s often the most fun, because, typically, let’s just say it’s a family member taking over, typically, they need more guidance and hand holding because they don’t know what they’re doing, which is great because that’s kind of fun to mentor people and go through it with that. And, typically, if they want to be in the business, they have some new ideas and they want to do these things that we’ve been talking about where they want to grow, they want to take a little more risk, and that’s really fun, because that’s where they need the help and that’s where they want to go. Now, sometimes, if the generation passing it on is still around, there’s some interesting relationships and oversight and how did they pass the business along? Was it really – I like to do everything in an arm’s length transaction. If your kid is buying the business from you, there might be times where you want to finance it, do the seller finance parts of it, because they can’t afford it, but you got to let that person run the business. And a great portion of my job is just playing traffic cop or social worker, mediator between family. I mean, families are crazy. We all have our own families. Thank God my family, there’s no business interest together because it wouldn’t be very much fun. But, yeah, but the younger people, typically, if you’ve got an interest in it, and so first is a business that I helped sell to an outside person, to an employee is they do some heated underground – radiant heating of flooring. So the one gentleman is running forever and then the guy taking it over that’s buying it, he’s got all these ideas and they look at each other and they say, “Yeah, I’ve been asking him to do that for five years and he won’t do it,” but once he owns it. now I’m helping him and I can give him some guidance how to do it. So he’s already taken out some loans to just buy the company. Now, what do we do to expand our territories? This is a business that’s very localized, even within the region, it’s localized, and you’ll see a lot of these businesses only do things based on referrals. So we only take referrals. I don’t do any sales and marketing. Well, you could grow your business if you did a bit of marketing and I’m no expert on the use of all these social marketing, social media things and all that, but a lot of that’s really great marketing. So you invest a little bit with an outsource marketing firm to help you do it. Well then – but typically they’ll say, “Well, then, I have to hire more people.” Well, yeah, you have to hire more people and you have to manage more things but you’re making more money and that’s the goal of it. But the people that are in their 60s, they’re like, “Yeah, I’ve been there, done that. I don’t wanna work as hard,” and it’s okay but when you see these next people coming in, they’re typically not buying the business to keep being a farmer, they want to grow it, and that’s when we talk about those things and that’s when it’s fun.
So that, yeah, that’s like a fun spot where you can kind of give it a new lifeblood, sometimes. Not to say it’s always that way. I mean, there’s plenty of people well into their 70s that probably still want to keep growing things and envisioning new ideas.
Absolutely.
I do imagine these family dynamics getting a bit dicey. And I guess the last question I want to ask you is that, given that you deal with these dicey family situations, what’s your background in, by the way?
Oh, I’m an accountant, originally, MBA and all that stuff.
Yeah, so that’s kind of what I had assumed it was. Did you find that you had a talent for dealing with some of this family drama type of stuff that most people who your average accountant, MBA person doesn’t that made you kind of lean into this particular business?
In general, accountants and finance people are a little less personable and many of them don’t grow into leadership roles, so a lot of it is and I’m working on all the time is listening skills and being able to take your head out of the emotion of it and explain things and understand. I get in trouble all the time because my wife is a social worker and I say when I go to work and I’m helping people, I’m a therapist, my wife and my three daughters are like, “You’re the least emotional person in the world.” I go, “Well, that’s why I’m good at it is because I’m not emotional and I can understand the issues.” I mean, I have crazy stories of all the things of family stuff. In the end, you have to understand the emotions and get it distilled down to the facts and the facts of it and the logic of it without dismissing the emotional part of it. And that’s hard. It’s not easy. And, again, I’m not trained in that, it’s just years and years of doing it, and sometimes you have to be really patient. You have to just listen. I’ve been told – I’ve been working on my listening skills for 30 years, I’m still working on them every day but it’s a lot of it is listening and distilling the noise because there’s a lot of noise. Even when it’s not related to the family issues, just in business, there’s a lot of noise.
Oh, yeah, no matter what.
And this isn’t right, yeah, it’s not right, it’s not fair, but this is the reality we’re faced with and these are the decisions we have and all this thinking about it and going through it a thousand times isn’t going to make the result any different.
Yeah, yeah. And so it’s kind of weird, like that conversation you have with someone where the whole purpose of that conversation, you know going into it, you’re not going to have any actual written value from it, the main reason you have that conversation so that people feel like they’ve been heard, and I guess that’s a value that people often kind of overlook, but when someone feels like they were heard and explained like, “Okay, I get why you feel like this was not the right decision and I get why you feel like this is not fair, not right, but here’s the reality of it. I’m gonna explain to you like an adult, not like a cog in a machine, and just say, okay, there’s this stupid regulation and we have to adhere to it but the alternative is losing this much in fees,” or whatever it is.
Yeah, but that’s what makes it interesting, right? If it was just all fact based and there weren’t people involved then it wouldn’t be that interesting.
Yeah, it would be a decision tree, as they say in the technology world, right?
Absolutely.
All right, Lowell, thank you so much for joining us today on Action’s Antidotes. I love your mission. I’ve had some previous episodes about fractional resources as well. Love the fact that that’s kind of something available to businesses that it doesn’t have to be all or nothing in that sense but also love the mission of making sure that these family-owned businesses, especially as we see the baby boomers, the largest generation, they’re in a retirement phase right now so getting these businesses protected and making sure that the missions they’re serving, especially in some of these industries such as materials and processing stuff can be a little bit challenged so making sure that these businesses kind of stay and their missions kind of keep going as we encounter this transition.
Yeah, great.
And I would also like to thank everybody out there listening today. Hope you got some great insights out of this episode and hope you’ll tune in to some more.
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About Lowell Mora
Lowell Mora, President of Impact CFO, brings a wealth of expertise in leading small to mid-sized businesses. His extensive experience spans both family-owned and private equity-owned companies, making him a versatile and strategic advisor to CEOs.
Lowell is a sought-after speaker and financial expert, specializing in guiding family-owned businesses through the complexities of succession planning and profitable exits.
With decades of hands-on experience, Lowell has helped countless businesses secure their legacy and prepare for the future. His expertise extends across key areas like financial literacy, cash flow management, and leveraging debt to unlock growth. Known for his engaging, approachable style, Lowell delivers actionable strategies that empower business owners to make informed decisions and protect their company’s future.