You cannot build wealth without financial planning. Wealth building without financial planning weakens the foundation. In this episode, David Chudyk, a Certified Financial Planner, provides insights on the BASICS of financial planning to help build your wealth. David shares the eight drivers of business value which separate him from other financial planners in the market. The “Hub and Spoke” is one of the eight drivers that highlights the importance of systems set in place in your business to help make your business sellable in the future. You better grab a pen and paper! Tune in today and build your wealth with David Chudyk.
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The BASICS Of Financial Planning And Building Wealth With David Chudyk
In this episode, I have a special guest. I have David Chudyk. He is a Certified Financial Planner as well as a Certified Value Builder. We will talk a little bit about that. Since 2005, David has been advising clients on how to make the right financial decisions for them and for reasons that are important to them. David, how are you?
I am doing well. This has been a fun year in the financial planning business. There are lots of ups and downs in the markets, which creates the need for good and strong sound logical advice. I’m excited to be here and talk about wealth building.
I’m going to put you on the spot right now. A quick question is, what’s the worst advice you have heard somebody give somebody else in this market if you have one?
People will say illogical things like, “I’m going to lose all of my money,” and if you lose all of your money, then we are back in prehistoric times and Russians have invaded and it’s Red Dawn. When people start talking about, “I don’t believe in the stock market no more,” and things like that, we never bet against the American economy over the long term. Are we going to have years where the markets are down? Absolutely.
What people don’t understand is most people lost between 10% and 20% of their portfolios. I did, and it stinks. I don’t like losing money but if you have been investing for a long time, what you lost is only a part of the money that you have gained. When you are having years and years gained and then you have a bad year, you have given back some of the house’s money, but there’s always a bright future.
I was at a conference and markets came up and stuff. Somebody brought up a good point and their comment was, “How many have ever lost all the money they invested in individual stock?” Three-quarters of the room raise their hand and I did because WorldCom was one. They ask the next question, “How many of you have ever lost all your money index fund or a Fidelity, a mutual fund, or something like that?” Nobody raises their hand. Diversity as you mentioned. If the entire stock market went to zero, then we have bigger problems.
You then need to be invested in the lead. That’s why, as you said, you shouldn’t own one stock. You shouldn’t even own one asset class. Real estate is a very important asset class that many people should own. Even precious metals or sometimes permanent life insurance. There are all kinds of different ways to diversify your risk and that’s how we mitigate things. That’s when people start talking negatively about the markets. Also, it depends on your time horizon. There are a lot of different factors, but if you have years and years to invest, getting out of the market is typically not a great idea if you are getting out all
My coworkers call me the squirrel who’s always chasing shiny objects. I am sorry I threw that curve ball at you at the start. Can you explain to us what a certified financial planner is for those that don’t know? That would be a great place to start.
It starts with some pretty difficult exams, studying, and certification. It’s gotten harder since I got the exams. The CFP board certifies CFP participants. We have a very high fiduciary responsibility to where we have to give no consideration to our benefit. The client’s best interest has to be considered. That even comes down to if there’s an area of financial planning where I don’t have the expertise, I would need to tell you, “I can’t help you here. This is not my area. I’m going to have to refer this out.”
We have a very high level of responsibility to our clients and what we do is we follow a process to where we are planning. We are analyzing. We are recommending needs. We are monitoring solutions and things like that and that helps our clients to have a holistically strong financial life. Let’s say that someone who’s not a certified financial planner and someone who’s not working with a comprehensive planning process, let’s say they work with your investment portfolio and you build up a portfolio of millions of dollars.
They did a good job managing your money, but let’s say they never talked to you about your wills and they never talked to you maybe about life insurance. They never talked to you about even your property and casualty insurance. Now, you run a stop sign and you rear-end someone who has five people in their car and they are all severely injured. Now, there are several million dollars in lawsuits. Guess what? Your investment account may be gone because they did not look at your insurance. That’s one example of where holistically financial planning, there’s so much more to it than where’s the best place to make the most money on my money right now?
That’s a very good definition. That last part is what a lot of people forget it’s not only asset acquisition valuation, but the asset protection side of things. One of the things that I see a lot of people look at, especially on the real estate side, is for example, you mentioned life insurance. Life insurance is an insurance policy and some people like to use the cash value as some type of investment vehicle. They will then knock it because they are like, “I can do better returns than what I could get on an investment vehicle.”
The people that I talked to, I said, “It’s not an investment vehicle. It’s a piece of the component of a pie that is insurance as well. If I drop dead tomorrow, there are X millions of dollars.” Depending on your policy size, there’s this much money that would go to the family as part of the asset protection. There’s always an offense and defense is the way I like to look at financial planning.
I lost my sister and she’s 51. She has a nineteen-year-old son. That little life insurance policy that cost her $45 a month or whatever it was is the difference between him being able to mourn in peace and not worry about money or mourning and also having to worry about how do I pay my bills or have him move in with me and I pay his bills.
That’s one small component of the financial planning process but if we are going to be holistic, we have to look at everything. The idea is that a client can sleep at night when they know that every part of their financial life is okay or if it’s not okay, we have a plan to make it okay. How many families are out there with children and they don’t have a guardian picked out so that both parents get into a car accident and now relatives may be fighting over the kids? Having those conversations on, whom we want to get the kids if something happened? Those are tough things to talk about. It costs a little bit of money as well to go to an attorney and get the documents drawn up, but it’s part of being a grown-up and part of being financially sound.
One of the things I will mention is like my wife and me, when we put together our estate planning and created a trust and stuff, we put it off and share this with people, “The reason I put it off is I thought I was going to jinx myself that if I put a will together then I’m going to die.” It is one of those things. Nobody likes to think about it, but unfortunately, the reality is nobody gets out of here alive at the end of the day. It’s something that I strongly recommend you plan ahead of time.
Case in point, I have a family member who had a sister-in-law who passed. It was unexpected and they are approximately about 60 years old. The person didn’t have any family, any children, or a significant other but hadn’t done any planning. The person had a house, cash, and a lot of different things. Now, because there was no planning in place, it’s been a lot of chaos. The chaos the people now are having to go through and resolve it. A lot of times, there could be potentially some financial incentives involved and it’s not clear who’s getting what. That adds some conflict as well.
Money makes normal people go crazy as well. If there’s an inheritance and things are not clearly spelled out on how things should be divvied up, there could be bad feelings. There are times when parents say, “For whatever reason, I’m not going to leave equal amounts to all my siblings or to all my children.” If it’s written out and if there are reasons, then people can accept it but if there’s money involved, people go crazy. Get your stuff in order. Deal with the questions and problems that we don’t want to deal with, but deal with it once and you look back every few years and it’s done.Money makes normal people go crazy. Suppose there's an inheritance, and things are not spelled out on how things are divvied up. There could be bad feelings. Click To Tweet
I do want to shift a little bit to the other aspect of how you help business owners as well, but before we hit the top of that if you can give people some advice as a planner? Again, we are not giving financial advice to somebody specifically because I know there are a lot of caveats of what has to happen, but holistically in general from the planning perspectives and things, what are the best recommendations that somebody should probably try and follow?
I can spend a minute and we can talk about the BASICS of financial planning. This applies to you, it applies to me, it applies to LeBron James and it applies to somebody who makes minimum wage. It applies to all of us. B is Budget. You have got to get your budget under control. I don’t know how much money you make, but you need to spend a little bit less than what you make. The more money you make, the more margin there is. If you are making minimum wage, there are not a lot of margins. Have a spending plan for your budget.
A for BASICS is Allocation. Figure out where your money should go. As you said before, there were people at your conference that lost all of their money that was in one stock. Nobody lost all of their money when it was diversified. How much money should you have in real estate? I own real estate. How much money should you have in stocks, bonds, precious metals, crypto, and things like that? That’s different for everybody. You can work on that yourself or you can work with a financial advisor.
S is Systems. You got to have financial systems in place. That’s everything from monthly investments and periodically meeting with your advisors. Maybe you and your spouse have a monthly meeting and discuss how you are doing financially. I in BASICS is Insurance. What we talked about is insurance protects your money. I don’t want insurance. I don’t care about insurance, but I want to know that if I rear-end your car and you are severely injured, 1) I’m a nice person. I’d want you to get good medical care but 2) I don’t want to pay for it. I’d rather my insurance company pay for it.
My insurance is hopefully adequate to cover anything that can happen. There are lots of different types of insurance. If you are a business owner, you need a good local insurance agent. C for BASICS is Caring. How are you going to use your money to care for the world when you are 80 years old and maybe on your deathbed? You are not going to say, “I had a Mercedes and if I had the nicer Mercedes, one more model up my life would have been better.”
You are probably going to look back and say, “I think there were some people I should have helped more, and maybe there was an organization I should have given more money to.” How are you using your money to care for the world? Part of that might be, “I need to make less money, take a different job so I’m working less and I can see my family because that’s caring for the world.” It’s making those financial decisions.
Finally, the S for BASICS is Support. We all need support from people. Whether that’s accountability partners, spouses, or attorneys. Googling how to write a contract is probably not a good idea. Real estate professionals, financial advisors, or accountants. We need support to help us with what we don’t know. We all follow the BASICS, Budget, Allocation, Systems, Insurance, Caring, and Support, you are going to be okay. There’s not a whole lot that you could screw up if you are working all those in the right direction.
A few things that resonated with me during that on the budget and allocation, allocation is diversifying your portfolio but also the allocation of when your budget, how much can you allocate? One of the things that we do is we have basically money automatically withdrawn from our account every time we have a paycheck. It’s like we never see it because like anything if it’s there, you will spend it somewhere else.
We have so much taken out. We break everything down into little components. This conference that I was at is a group I’m part of called GoBundance. As part of this group, they do what’s called One Sheet, which is like a baseball card of your life every year. They have you go through and there’s the financial side of, “How much did you make this past year in vertical income,” which is your W-2 income, and your horizontal income, which is your passive income like stocks and real estate. “Is that growing? What was it like last year? What was it this year? How much are you paying in taxes? What are your expenses?”
Then outlining, “Why do you have so much in expenses?” Another component is your net worth. Is that increasing or decreasing? Others are your goals for the year. It talks about things on there like your insurance and your giving. How much did you give this past year in money and time? It’s almost exactly what you said, the BASICS because it has support on there. What are your biggest needs for you this year or who’s a part of that team?
It’s very similar to what I went through and the interesting thing is when you put everything down on paper like that and it basically ends up being a goal, then you have something to go against. It’s not only you going through life wondering where things are at. You are creating that picture every year, every quarter, or whatever it is to understand because also things change in life. Things can change very quickly in life. You want to also be able to adapt quickly and the only way to adapt is to have that information readily available and handy.
You got to be purposeful in all areas of life that are important. Marriage is hard. Could you imagine living with me? That would be difficult but you have to be purposeful in having a good marriage. In health, nobody ever ate one cheeseburger and gained 100 pounds. You gained 100 pounds by a few extra calories per day over years and decades and then you are bigger than you want to be. It’s the same thing with money. It’s not that easy to destroy your financial life with one decision. Being purposeful, which is exactly what you described is how we can succeed in the areas of life that are important to us. It’s not easy but it’s simple or it’s not always easy.
I have learned nothing is easy in life, unfortunately. I don’t think everything takes to get to where you want to obtain your goals. It’s hard work and effort and if it’s easy for you to obtain that goal, then you set the wrong goal. Let’s roll a little bit. We talked somewhat on the financial planning side. I hope people gained some value from that.
Let’s talk about the next aspect of what differentiates you from a lot of other financial planners and stuff that I talked about. Let’s talk a little bit about the business side because a lot of our readers are entrepreneurs who will run businesses. We are talking about ways that you can create wealth and a lot of people do that through entrepreneurship. Can you tell me a little bit about that aspect?
If you look at the biggest asset of most business owners is the business itself. It’s also an asset that you have a lot of direct control over. A lot of times I will talk to business owners and number one, they will be saying, “Should I buy Amazon or sell Amazon, or what about Apple and these things?” In our firm, we have a process to make those decisions but ultimately, we don’t have any direct control over what Apple or Amazon, or Google does.
We can follow a process and our process is good, but it’s not always right. However, in your own business, you have a lot of direct control over what you can do to help to build the value of the business. There are eight drivers of business value and if you get those right, your business is going to be much more attractive to a potential buyer.
You can then sell the business for more or higher multiple when you are ready or you have an easier and more profitable life today because a sellable business is a more profitable business. As an example, 1 of the 8 value drivers is what we call the hub and spoke. You have probably seen something like this, and this may apply to your business. It certainly has applied to my business. When the business owner is the hub of everything and doing almost everything and has their hand in almost everything and can’t take time off because they have their hand in almost everything, would you buy that business? Would you buy it for a premium price? I don’t think so.
I always use this example. Let’s say you got out of your business and you are someone who likes doing lawn care. If Chris starts Chris’ lawn care business, he buys a riding mower and goes around. He knocks on doors and says, “I’d cut somebody else’s grass in your neighborhood. I’d like to cut your grass. Here’s a price.” They then say, “Yes, that’s fine.” Now, Chris is just Chris. It’s Chris in a truck and a lawnmower. He builds up a list of people whose grassy cuts but he doesn’t have contracts. He doesn’t have any other employees.
Chris gets to the point where he’s ready to retire and Chris comes to me and says, “David, would you like to buy my lawn care business? I brought in X amount of dollars last year.” I do my due diligence. I said, “First of all when you leave, most people are using Chris for Chris because they like Chris. When Chris is gone, they may not stay with me. Then you don’t have signed contracts. You don’t have policies and procedures in place. The only thing I would buy from you is your lawnmower.”
Whereas if you built up a whole system where you have a team, processes, standards, and build up a brand. You have maybe some additional services that make your company different, then all of a sudden I’m thinking, “I’m going to buy that business and I may pay a higher multiple for it,” because 1) I’m not going to have to be the one cutting grass. If I have a bad day or I’m sick and I can’t cut grass, there’s no money being made. 2) It’s running under Chris’ control, but it’s running without the direct daily total overseeing of the business owners. That’s one of them but I know that a lot of business owners struggle with being way too involved with way too many aspects of their businesses.
It’s interesting because two things came to light. Before this interview, I was on a call with my senior leadership team and that was pretty much the exact conversation of, “I run off on an island and you guys don’t hear from me again. Here’s the vision of the company. Here’s how things and implementing that process for having the business continue on from that standpoint and making sure the people are in the right seats on the bus.”
Also, having that expertise and getting them ready to get that standpoint hypothetically. That’s what we were doing. The second component that hit the nail on head was in the past, I have looked at buying some construction companies. Construction companies are a perfect example of the owner going and getting these contracts or they may have an agreement that they are building Honda dealerships for this one person in a region, but there are no other signed agreements and that person is literally the lifeblood.
That’s all there is to the company. There are no systems. There are no processes and procedures. It’s not a well-organized or run business and they want this extreme multiple based on, “We have $1 million in contracts so we think it’s worth $5 million.” When you are gone, there’s that million in contracts that you are buying those projects. There’s nothing else to that business. I looked at it at a much lower value because of that.
Also for me, if I were to go and start this business by myself, could I do it for less money and still I wouldn’t have those contracts, should I pay extra millions of dollars for something that doesn’t exist? That’s a perfect example when people look at companies to understand what the company’s going to look like after that acquisition.
There’s no question whatsoever. Some other things to look at is what we call the Switzerland structure. How dependent is a business on any one thing? Let’s say you have that construction company and you have one sales rep that’s going out and getting 95% of your jobs. I’m not going to buy your company from you because that sales rep, as soon as they leave, there goes 95% of the revenue. In theory, you would have several sales reps who are getting jobs.
Let’s say that you are overly building Honda dealerships. What happens when Honda goes out of business or somebody else gets into the Honda group? If you are selling on only one digital platform, digital platforms change. We want diversification and not to be overly dependent on one employee, vendor, supplier, industry, or even customer. There are businesses that may have 1 or 2 huge customers and that’s great until they leave.Don’t sell on only one digital platform. Digital platforms change. We want diversification and not to be overly dependent on one employee, vendor, supplier, industry, or even customer. Click To Tweet
I would use that as a negotiating tool if I were buying your company and you had 2 or 3 large customers. If one of them left, it would have a severe impact on cashflow. I would argue that your company is worth less, even if those are great customers because that’s a huge risk that I’m taking by buying your company, and that revenue’s not diversified.
There are more great points right there. What every business owner needs to think about is how dependent. You as the business owner and typically, if you are a smaller entrepreneur and you are starting that business, yes, you are the most important person. If something happens to you, it’s going to be difficult for others to step in.
As you look to exit that business, what is it that makes it the most valuable? Can somebody step in and is there a wealth of people who will stay and have that structure in place so it’s not all relying on one salesperson or one person who knows the secret sauce? We use Kentucky Fried Chicken. If Colonel Sanders was the only one who knew the recipe and he left and went away, the recipe was locked in the safe no one can get to, then there it goes.
How many small businesses that literally the owner have a list of passwords to important sites and who knows where that password is? COVID happens. People end up on ventilators. People get in car accidents. That’s important to get the owner out of it. You can do that with standard operating procedures and things like that. Clarifying everybody’s jobs, roles, and responsibilities but when it comes down to it, a lot of business owners have this innate desire to be freaking important.
We want to say that we are busy, but ultimately our goal should be not to be busy. Our goal should be that we are not doing anything other than the few things that only we can do to move the needle on the business. That normally does not include clerical work. It doesn’t include scrubbing toilets. It’s not that we are too good to do that, but we got to do the things that only we can do and delegate the rest.
What are a few other things for business valuation that are either things you see people missed the boat on or things that could add significant value to a company?
If you were looking to buy a business, you are going to sign some type of confidentiality agreement and a letter of intent that’s going to at least outline the general terms of purchase. There’s going to be a due diligence period where you and your attorneys and your representation can look through the books and see what you are buying.
If the books are not reliable or defendable, that means the company is worth less. If you are a big enough business to have professionally audited books every year to make sure the financials are more reliable, then that gives you a potentially higher multiple. Going back to construction, it’s interesting that you say that because construction companies tend to start off as a dude that likes building stuff. The dude gets involved with building and then they do a good job and then the business grows.
They are doing their books out of their truck and then the business grows. They are typically horrible at running businesses but good at building stuff. When it comes to tax time, they have no idea how much money they made. Their expenses are not recorded accurately. 1) It’s a mess to run a business like that, and 2) You wouldn’t want to buy a business whose books are a mess. Financial record-keeping and financial performance are hugely important as well.
One thing that a lot of people reading can relate to and I think to fall into this trap a little bit is if you are buying a rental property or portfolio from another investor, that’s the equivalent of buying a business. As you said, I can’t tell you how many times I have looked at a portfolio. It might have been 10 houses of 6 single families and 4 duplexes. Let’s say it’s 15 or 16 units or whatever it may be. I say, “Provide me the financials on it.”
They send me a spreadsheet that has some numbers on it. It’s like, “They are getting $600 for rent but it could be $800.” I’m like, “Do you have NOI?” “These are only estimates.” “Where are the last three years’ financials so I can see how these are running? Are they profitable? Are they not profitable?” They are like, “We don’t have that information.”
I’m like, “I’m taking this information in for a grain of salt that you are telling me because if you don’t have that information, you are just garbage in, garbage out. You can write any number on this piece of paper, but you have no financials back this.” When you try and negotiate with them, they are like, “We will find somebody who will buy it off of this information.”
To me, it’s like, “Go ahead. Find somebody but I want to know the true numbers because I don’t want to go pay based on these numbers and have it be something different,” or God forbid, I mentioned to them. I will say, “If I go off these numbers but these numbers are double, I want money held in escrow that then you will reimburse me for this.” They all look at me like I have seven heads and laugh at me.
For everyone reading, that’s so important. I used to work for a large company that bought several companies. I was on the M&A team doing this due diligence and one thing that I will always tell everybody. When you start diving into books or a company that doesn’t have books or they are very inaccurate, you are peeling the first layer of about a fifteen-layered onion of they are not going to tell you or they may say that there’s one little thing wrong, but that is the most minor of things.
There’s a lot more going on behind the scenes. It never gets better. In many years, I have never seen anything get better on financials when I started due diligence. I have always seen worse. I’d love to ask that question to you. Am I the only one that’s ever seen that or based on what you have seen, I’d love to get your opinion.
I have a client whom I have been working with. She is a nice person. She sent me an email saying, “I’m making progress. I’m now paying sales tax, income tax, and payroll taxes.” A nice person who didn’t know how to run a business. It was totally not run correctly. She literally could have probably ended up in jail. She turned things around. It’s a good thing but unfortunately, it’s sloppiness.
In my businesses, there are times that I can be sloppy as well, but you got to have stuff under control. You see it a lot with new businesses. They get $100 of revenue and they say, “I have $100 to spend.” No, you don’t because some of that needs to be put away for taxes. If it’s profits, some of it needs to be put away to buy inventory. Some of it needs to be put away to pay your people. I have seen some doozies for sure.
I remember this one. It was a construction company we were looking at and then we started digging into some of the contracts that they said they had and they weren’t contracts. They were estimates that they had put out. We started looking at the financials of the projects and they were not forecasting future losses based on the losses they already had. For example, they had staff on the project but they were over budget on staff but they weren’t forecasting the staff for the next four months to finish the project. All of a sudden, the numbers looked a lot worse as you get into it.
Business ultimately is a math equation. You can be a nice person but if you are spending more than what’s coming in for revenue, nice person or not, your business doesn’t survive that indefinitely.Business is a math equation. You can be a nice person, but if you spend more than you make, a nice person or not, your business will not survive for a long time. Click To Tweet
What’s one more thing, a piece of advice on the business side for people either looking to acquire another entity or people looking to exit? Keeping your numbers in-house and I know a lot of people like to do things off the book for tax purposes and so forth, which may benefit you there but if you are ever looking to exit that thing, it’s going to hurt you at some point. There’s probably some balance, but what are some of the other things?
I had lunch with my accountant and he said, “There’s a restaurant in town that you would know because you probably drive by it every day.” I forget the numbers, but he said, “They reported $100,000 in revenue and a loss.” They probably bring that in every two weeks or every week. They tried to borrow money to buy another restaurant and they couldn’t get it because their revenue wouldn’t support that. They wanted my accountant to write a letter. He’s like, “I can’t do that. What you told me you make, I can’t necessarily say that it’s not.” I’m going by your numbers and filing your tax return based on it, but it was probably pretty clear that they were reporting almost nothing. It does bite you.
Inaccurate books on the low end help you with taxes even though it’s immoral and illegal on the front end but it does make it much harder to sell a business for the right amount. It makes it harder to borrow money. If you need to borrow money and the numbers are not accurate, you are not going to be looking good. You want to do that. This is something else for business owners. If you can figure out a way to generate recurring subscription-based revenue, you are much more likely to get a higher multiple.
There is some florist that came out with the idea of we make a lot of money during Mother’s Day and Valentine’s Day but then the rest of the year, it’s not that much. There was a florist that said, “I’m going to go to higher-end restaurants.” I’m going to go to higher-end hotels and say, “I’m going to charge you X amount of money per month,” whatever that amount was. “I’m going to come to your restaurant and your floor. I’m going to take care of your plants. I’m going to rotate them out and put seasonal plants in.” That gave them a predictable revenue stream and that gives you a much higher selling price for a business.
You look at anything nowadays, especially software and everything, it is all gone from the one-off acquisition to the monthly. I know QuickBooks for example, I used to use QuickBooks or still do and that switched from, “You got to go to a monthly subscription service.” Everything streaming now is pretty much on monthly services. I almost don’t know anything. Even Tesla or some companies now are even offering monthly subscription services for things.
Everything is going to that model and there’s a reason why. As you mentioned, it is because it makes them more valuable or profitable. Even fitness equipment has subscription agreements now for being on their exercise programs. They have things that you can sign up to get you because that’s where the money is. It’s that recurring revenue and income.
If you looked at your own credit card statement, everybody probably has Netflix and Hulu. Once you get signed up you forget about it. Subscriptions are definitely a big thing.
As we wrap up this episode, there are two things. One is if people who are looking for your services, where can they reach you? Email or website? How can people reach out to you? The last piece is if there are any last thoughts that you want to share with people.
Check out my podcast. It’s the Weekly Wealth Podcast. We talk about the mindsets, tactics, and strategies that can help you to build and maintain wealth. You can find that on Apple, or Spotify or go to www.WeeklyWealthPodcast.com. We have put out quite a few episodes and I like to talk about the non-tangible parts of money. We don’t typically talk about where the markets are going. We talk to business coaches about how to run a more profitable business. We talk to attorneys about which business documents you should have and things like that.
If you are interested in the other part of my financial planning practice, the business valuation coaching, you can go to my website www.AllOfMyAssets.com and you can take the Value Builder Score. It will give you a range of value for your business based on the numbers you put in. It also will tell you some of the areas that your business may need to improve to help the valuation.
The premise of the name of the website is most business owners neglect the value of their biggest asset. I want to help you with all of your assets, not only your IRA accounts and Roth IRA. I want to help you with your business. A lot of business owners say, “I don’t need to save that much money because I’m going to sell my business.”
“How much are you going to sell it for?” “$20 million?” “Where’d you come up with that number?” “I don’t know. I think that’s what it’s worth.” “It may or may not be what it’s worth but what if you could make a few changes over the last five years of your career and get $25 million or $30 million? What if $20 million is not even close to the real number and now the fact is you might be able to get $1 million for it? We need to plan with that reality.”
The Value Builder Score can be taken at AllOfMyAssets.com. It takes you 10 or 15 minutes at the most and it gives you some valuable insight into your business. If there’s anything keeping you up at night about money in general, I’m always happy to do a 30-minute call with anybody. Email me at David@ParallelFinancial.com or you can go to my Calendly link which is www.Calendly.com/davidpf. The PF is for Parallel Financial.
Before we finish, a question did pop into my head that I will figure out while I have you on this show to ask you because I think a lot of people see this run into this and I’m curious how it’s typically handled. You are looking at a business to acquire. Let’s say it had revenues of $900,000 or $1 million and all of a sudden, it jumped to $1.7 in the third year. Now, they are trying to sell it based on that $1.7 valuation. It’s not clear. I know in real estate like COVID short-term rentals had a huge boom which increased a lot and people were buying off that highest number and so forth. I’m curious as somebody who values businesses. When you see something like that, how does somebody evaluate that? Sometimes you may have a seller that has very high demand based on that latest, but you as a buyer also realize, “Is it fool’s gold essentially if I tried to pay for that valuation?”
The seller wants to get the highest price. The borrower wants to pay the lowest reasonable price. Did it jump up by 40% or 50% and is that a trend that’s l likely to continue? If so, then that’s a negotiating tool for a higher multiple. If there was one contract that was a one-off type deal or a construction company that just had that one contract that’s not recurring or if there’s a project with the government, that’s a one-time deal.
What are you buying with the business? You are buying the assets. You are buying the desks, the trucks, and the equipment, but you are also buying what you think the future revenue stream is. If the future revenue stream is likely to be that higher number, then you pay for it. If the future revenue stream is not likely to be that higher number because that was an anomaly, then that’s a bargaining tool that both sides are going to have to hash out for sure.
Thank you for coming on. As David mentioned, go on to his podcast at WeeklyWealthPodcast.com. Also, his website is AllOfMyAssets.com. Schedule a call with him on Calendly.com/davidpf. David, thank you for joining us. As always, people, make sure to tune in to Apple Podcasts, Spotify, or your favorite platforms. Thank you all.
Thanks for having me.
- David Chudyk
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About David Chudyk
Since 2005 David has been advising clients on how to make the right financial decisions for them for the reasons that are important to them. David is a financial advisor with a twist… not only does he help with all of things that a traditional financial advisor does, he, as a Certified Value Builder Advisor helps business owners to increase the value of their businesses so that they can sell their business for a higher multiple when ready. Most business owners’ largest asset is their business, but they do not take the necessary steps to maximize the value.