In this episode of the Invest Like A Billionaire podcast, join your host, Ben Fraser, as interviews Steve Coughran, founder of Coltivar and Boosting Your Financial IQ. Steve was formerly a CFO of several venture backed businesses and mastered the art of scaling with a financial edge. He now takes the things he learned and applies them in his consulting practice helping business owners maximize value, as well as with individuals through his Boosting Your Financial IQ brand. Learn the strategic secrets used by successful entrepreneurs & investors to build thriving businesses and achieve remarkable results.
Connect with Steve Coughran on LinkedIn https://www.linkedin.com/in/stevecoughran/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Transcription
Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of the Invest Like a Billionaire podcast. Today’s guest is Steve Coughran of Cultivar and Boosting Your Financial IQ. Steve is a very smart guy and really excited to have him on this podcast. He is really a strategic CFO, has been with many venture backed companies, helping them scale and grow, and now runs a consulting practice.
Four entrepreneurs and business owners looking to maximize the value of their businesses and to continue to scale with kinda the financial edge that he has. So he takes this mindset and approach that he uses for entrepreneurs and business owners, but also applies that to individuals and how do we maximize our personal financial wealth?
There are situations and really free cash flow understanding. The reasons why cash flow is so important, and so he has a great platform called Boosting Your Financial IQ. Alex was on his podcast a few weeks ago and had a great conversation, so there’s a lot of nuggets you’ll wanna pull out of this. I think you’re really gonna enjoy it.
So tune in and enjoy the episode. Thanks. This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor and help you build legacy wealth.
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Hello, Future Billionaires! Welcome back to another episode of the Invest Like a Billionaire podcast. I am your host today, Ben Fraser, and we’ve got a really exciting guest, Steve Coughran.
He’s the founder of Cultivar, which is a consulting firm that helps empower companies to drive successful financial, operational, and strategic transformations. He was a strategic CFO for several companies for many years, and now runs several media companies really helping investors, individuals, as well as businesses to just boost their financial IQ, which is actually the name of one of your media companies.
So Steve, thanks so much for coming on the show.
Steve Coughran: Absolutely Ben. It’s great to do this conversation now on your podcast. Ben did an amazing job on the Boosting Your Financial IQ podcast, where he was talking about real estate and private equity and investing in all different types of things, which he did an amazing job on.
So I’m glad to be here with you. Yeah.
Ben Fraser: Thanks man. Appreciate that. And it was, we had such a great conversation during the podcast and afterward that wanted to have you on our show and just talking about some of these things that I think are really important for investors, just individuals to understand.
Just coming from your background as a C F O, knowing the numbers and. Using that knowledge to really boost your financial IQ as you’re looking at investment opportunities, you’re looking at portfolio allocation as you’re looking at all these things to go back to the basics, and so I thought it’d be great to bring you on.
Just hear some of those things that you’ve really studied and have built out an amazing repertoire of knowledge on. So before we get into that, share a little bit of your background, people have the context for who you are and some of the media companies you have, and what you’re really doing to help further this message.
Steve Coughran: Yeah, absolutely. When most people think of A C F O and somebody where I’m at today. My path is definitely not linear. So I started my first company when I was 16 as a landscape design build firm. It was a total mistake. It was just supposed to be a summer job, but then it grew into this multimillion dollar business.
I did that for 13 years. I gained a lot of experience just with design and networking skills. A lot of my clients were CEOs and executives and entrepreneurs who had successful exits in their businesses and therefore that’s when they were hiring me to spend several hundred thousands of dollars on their landscaping.
As a young Ladd, I learned a lot about business and learned a lot about just working with people and building relationships. I moved forward and I I worked for Ernst and Young in Public Accounting as a CPA and that gave me great exposure to a different scale of businesses. And one of my clients was a financial services firm, and they had $22 billion of debt and they were paying about $2 billion in interest a year.
And what I realized in that time is that through leadership, they were creating these strategies. And the financial teams were building these elaborate forecasts and financial models and budgets, and the two things weren’t connecting. And that’s when a light bulb went out in my head and I was like, okay, there’s this massive disconnect between strategy and finance and how those two things come together to drive value.
So that’s when I left. I started my consulting firm called Cult Bar, and I spent the next decade turning around and growing companies. And I worked with several companies in different industries and I also during that time became a CFO of some of the portfolio companies or clients that I was working with.
So I worked as a CFO for a renewable energy company where we’re building massive solar farms out in the desert. I use utility scale solar farms. I was also CFO of a FinTech company. Where we raised about a hundred million dollars and grew our enterprise value to nearly a billion dollars within a couple years.
So that, that was a really exciting experience. So I’ve raised capital, I’ve been part of that process. I’ve done many acquisitions, been involved in the private equity world, and and now Ben mentioned, I have I, I still do turnarounds and help organizations grow, but I’m also building out a financial media platform called Boosting Your Financial iq.
Very cool, man.
Ben Fraser: That’s a really cool background. So you’ve seen everything from, you said, lawn landscape and design, million dollar businesses to billion dollar of interest payments, per year, which is, a pretty big range of a size of companies. But I would imagine there’s a lot of similar concepts and things that you can apply at any level, right?
And cut. Just distill for us some of the things that you saw happening to me, these big companies, they weren’t really paying attention to. Obviously the impact there is a lot greater, but, how do you translate that to the more personal side of things? So you have your brand boosting your financial IQ and your podcast, boosting your financial iq and really focus more into individuals.
What are some of the concepts that you find most people have a challenge with or struggle with or really understanding?
Steve Coughran: No, that’s a great question, Ben. When I think about financial literacy and financial illiteracy, which is a major problem out there in the world, there’s the personal side, but then there’s also the business side.
So I believe that business is an amazing vehicle to transform lives and communities and families and so on and so forth. If business is good, life is good. If business sucks and you’re a business owner, an entrepreneur, like life’s gonna suck. And what I found is that working with these companies, You have different functions of the business.
So you have sales and business development, legal, the people side marketing FinOps as my department. And you have all these functions of a business and you have these functional leaders. But so many of these functional leaders, they don’t have the financial literacy skills necessary to drive value in the business.
So let me explain here. I don’t think people need to be like, Green shade, wearing nerds in the back office like doing debits and credits, and everybody in the organization understands how accounting works and how financial statements come together and what the general ledger is and all that stuff. I don’t believe that at all.
However, I believe every single person in an organization, they impact the financial statements. There’s people that impact revenue. You have sales and marketing, you have people with the cost of goods sold that impact labor and the efficiency of labor and material purchasing and procurement. Then in overhead, there’s overhead structural choices and how the business, the cost structure that makes it, the business, those types of decisions are made throughout, every single level of the business.
So I believe that people should have some level of financial intelligence when it comes to business, so they know what the value drivers are, so they know how to maximize the value of the firm. Otherwise, you’re just going out there and you’re playing to play. And what’s interesting, Ben, is that when I wrote my second book called Sizing, I did this study and I took 363 contractors, landscape contractors were construction contractors rather.
And I chose the construction industry ’cause I had proprietary data where I was able to compute the economic profit of these companies. So not just like the profit, the accounting profit that just says, here’s revenue minus cost, here’s your profit. That’s what most people look at. But I computed the economic profit, which accounts for.
Working capital and capital expenditures, which aren’t on the income statement, right? So I computed this for 360 3 companies and then I mapped it, and these are companies with a few million dollars revenue to a billion dollars revenue. And I charted it out and I got this curve right, where it’s down here in the bottom left hand corner it’s negative, and then it curves up to the right.
What I found out from this is that 20% of the contractors were earning 83% of the profits, which follows the Pareto principle, right? It’s 20%, 80%, 20, 80 rule, and then the top 10% of companies were capturing 63% of the profits. So everybody else in the middle, they’re just playing a play.
And I think that’s so true with other industries because after the construction industry, I went through and did this to other industries, and the same results apply. Ben, what I’m saying here is that so many companies out there and entrepreneurs, they’re just playing a play. Yeah. They’re grinding, they’re working hard.
They’re looking at their income saying, oh, okay, I made a hundred grand this year in profit. Yay. But then it’s oh, I gotta reinvest that in, equipment or, other types of investments and that cash goes out the door, or it’s tied up in working capital and. I think there’s this massive disconnect in understanding they’re in the world of business.
So I’ll pause there, then I’ll talk about how that relates to personal, personal size.
Ben Fraser: Yeah. No, I think that’s so interesting in, a lot of people that we work with, as investors, that a lot of our business owners, right? One of the greatest ways to build your own net worth and financial stability is being an entrepreneur.
But a lot of times entrepreneurs, they wanna just run. They wanna do the business, they wanna make the sales, they wanna go and have the vision and I don’t worry about the accounting. That’s just my C P A does that. I don’t worry about you, the financial statements. And most of the time it’s just they don’t understand it.
But even going back to my time, I used to be a commercial lender and a banker. Underwriter, and you find this all the time, right? Especially coming to the lower level, several million dollar businesses versus the billions, the smaller scale, small, mid market there. There’s definitely a lack of financial literacy and really understanding, to your point.
If you just look at the bottom line on the net income, on your income statement, that doesn’t necessarily mean your business is super healthy. You have to kinda look at it as a holistic thing, understand the cash flows, which we’re gonna get into in a little bit. Before you kinda get into the personal side what really drove the differences between those, top 20% of the businesses, even the top 10% versus the average.
Just to break down the perimeter principle like you mentioned it generally it can be applied in. Almost anywhere, but 20% of inputs, produce 80% of outputs is the simple way to think about it. 20% of your sample size represented 80% of the cumulative profit of that of that group.
So talk about what are some kind of like key things for those that are listeners that are entrepreneurs and run their businesses? What are they like? 1, 2, 3 punches that were the kind of separators from those averages to the kind of top?
Steve Coughran: Yeah, great question. I think most people think, oh the players with the scale, with the top line scale are the ones that are capturing all the profits.
So if you’re doing a billion in revenue, of course you’re gonna be in the top decile. That’s not true. Like a lot of the big companies earning a billion dollars, they’re competing in decile 2, 3, 4, and they’re just playing a game as well. It’s really the differentiators that have a solid strategy , that’s the first thing, and I’m not talking about that marketing gimmick strategy where you’re like, Hey, let’s get together and define our mission and vision and values, and.
Create a mission statement for the next five years. That stuff’s great. Like no doubt you should have that as a foundation of your company. But that’s not a strategy. SWOT analysis, I’m sorry, that’s not strategy either. You’re just identifying your strengths, weaknesses, opportunities and threats.
Putting it up on the wall and saying, okay, there’s a strategy. The strategy is determining, okay, what’s our shared vision with everybody, with our stakeholders, our customers, our employees. What’s our go-to-market strategy? Like, where are we gonna compete and position ourselves geographically to capture competitive advantages?
What are our activities? Are we using technology? Are we outsourcing? How are we streamlining all the activities of the business? And then what are the returns and resources that are required based on the strategy? So it’s a real hard look at the business in making trade-offs in order to drive.
True business value. So that’s what I mean by strategy there. I’m not gonna go into too much more detail, but a really good strategy was ingredient number one. Ingredient number two is the people. So high performing teams. So you could have the best strategy in the world and a terrible team, and you’re not gonna drive value.
Right now, a high performing team is built on having this clarity and this alignment at the top with strategy number one. That’s why I started with that. But then also it’s empowering your team and it’s building that trust and it’s executing and achieving results. So that’s what keeps high performers around.
So a high performing team is really critical. And then I think the third thing is just understanding. Of the financial drivers, so many consultants, and I can say this ’cause I’ve consulted tons of companies, tons of consultants destroyed businesses. They do. They come in and they’re like, Hey, we’re gonna cut your overhead. ’cause that’s the easiest thing to do. We’re gonna come in 1, 2, 3, punch, cut the overhead by 20%. You just boosted profits and then we get the fee and we’re out the door. And then little do you know that you just. Laid off your most valuable employees that are driving all the value of the company.
You just fired them because they have the highest salaries. And yeah, you saved $2 million in the short term, but now you don’t have the ability to generate that revenue in the future. So I think understanding the value drivers and look price premiums and lowering your cost, your you’re cost of cost of goods sold.
Those are your two ways. To maximize value. Those are the easiest ways, but most people go to cutting g and a o overhead costs and growing without having that margin improvement. And then you just grow yourself outta the business. So those are the three things that I’ve seen as characteristics of those who play at the top.
Ben Fraser:
Yeah, that’s really interesting and I think we’re kind of segue here. And I wanna make a little comment ’cause one of the things that. I noticed as I was doing, banking and small middle market companies, we all heard the stats of, the number of, small businesses that go outta business every year.
It’s difficult to last more than a couple years, especially as a small, smaller business. And a lot of times you actually think just economies of scale, the bigger you are, the easier it is to survive. But one of the things that was so interesting is two thirds of the businesses that go out of business every year.
Don’t go outta business because they don’t have customers, they don’t have revenue. It’s actually because they don’t understand cash flow. They don’t actually have the ability, they’re actually making money, but they don’t have the ability to pay the bills when they need to pay ’em, and they’re not managing their cash flow cycle.
And for some of these businesses, landscaping is a great example. It’s more of a seasonal business. You have to understand the ebbs and flows of cash throughout the year. And, this will apply kinda to the personal side as well, but talk a little bit about. About cash flow, why that’s so important as a business and understanding what the drivers of that are.
’cause it’s not just, on the income statement, you can’t just look at the bottom line of revenue minus expenses equals net income. That’s one piece of the pie.
Steve Coughran: Yep. Yeah, your comments. So smart, Ben. 70% of companies that go bankrupt are profitable when they close their doors.
Think about that. Yeah. People are like how do they go bankrupt if they’re profitable because, There’s the working capital requirements. You have your money caught up in between accounts receivable and accounts payable, and that number can be massive sometimes. And then you also have capital expenditures, property plan equipment that you’re buying that’s not accounted for on the income statement.
It’s captured on the balance sheet and the statement of cash flows, but most people don’t look at that. So cash flow is king and really cashflow drives intrinsic value, which we’ll get into here later on in the episode, but, That’s why I’m such a proponent of cash. Too many entrepreneurs.
They build forecasts and budgets and it’s just a p and l budget. So it just comes down to profit and they’re like, cool, okay, look at it, we have profit for the month, we’re good. And then it’s oh, you need to do a distribution to cover your taxes. You need to invest in this piece of equipment over here, and it’s 150 grand.
Or you have working capital and it’s climbing because you changed your accounts receivable policy, whatever it may be. Next thing you know that there’s these cash shortages. And, it kills a business. I was working with a doctor years ago and he hired me in to help him out with his strategy and just some financial pieces of his business, and he said, Steve, I got this bill I owe, a million dollars in taxes and I have no cash.
He had two to 300 grand in the operating account, but he is like, how’s this even possible? How do I owe, how do I owe this money? When I don’t have the cash and when I look at the books, it is okay, because you accelerated depreciation in the past and you have these other things working capital.
So you’re showing on an accrual basis that you’re earning profit. So you’re paying taxable income here, but you don’t have the cash ’cause you didn’t manage your cash. He ended up covering it, but he had to pull on his line of credit and it was a big wake up call.
But so many companies don’t have access to capital like that. And they could just be killed.
Ben Fraser: Yeah. That’s so important. And just for those that maybe aren’t as financially sophisticated, working capital and just a gap, basically it’s the gap between, when you’re receiving funds from a customer versus when you have to pay your bills that you owe.
And a great example is I worked with some businesses that were supplying Costco, right? So they’re actually producing products that would go into Costco. That’s great and you can make all the sales to Costco and you can record those on your income statement as received or as earned, but you haven’t received the cash.
And Costco doesn’t pay for 180 days. So from the time you can recognize the revenue, you have six months to cover that gap before you actually receive the payments in cash. And so just. Break down a little bit real quick. What that kinda looks like and you have the capital expenditures alongside of that, and then let’s tie it into the personal side here.
Steve Coughran:
Yeah. Absolutely. Another example, I was working with a company and they had a million dollars in working capital requirement. So the money that customers owed them between the money they owed their vendors a million bucks. They grew by five times, five x in three years. They quin tippled their sales, right?
Quintupled their sales. Their working capital also increased at the same time. So it went from a 1 million in working capital to 5 billion and almost bankrupt them. And so yeah it’s just that, it’s the money. There’s other things in it. It’s current assets. My ex minus current liabilities.
I love how you explained it, Ben, just very simply, but it’s the money people owe you versus the money you owe people. There’s a delta and you get to become the bank. So a lot of entrepreneurs are in the bank, right? And they’re. Loading this money, but if you’re not, if you don’t have the capital behind the scenes to cover that, it can really hurt you from a personal standpoint.
I think this all relates, so we work with a lot of entrepreneurs and business owners as well. So you make all this money or you’re cash strapped. A lot of entrepreneurs are just cash strapped until they have a liquidity event and then they have a bunch, especially if they’re
Ben Fraser: growing, to your point, right? ’cause growth acquires capital.
Steve Coughran: Yeah. So a lot of working, a lot of entrepreneurs are actually broke. They have debt lines of credit, but then they have a liquidity event and then all of a sudden they come across 10, 50, a hundred million bucks and they’re like, wow, what do I do with this?
Or they have some success along the way. Their salary starts to increase. And they’re like, okay, I put in my 4 0 1 k, my i r a, they just put it in there. They trust a financial advisor and they put it in other assets and, but they don’t really know what that looks like behind the scenes. For example, if you’re paying fees, a lot of people are paying fees for their 4 0 1 k in their IRAs, the underlying assets, and they don’t, they’re not aware of it.
So you could put your money in these. These funds, right? That is underlying your 4 0 1 k, and you could be giving away like 50 or 60% of your returns to a financial advisor, but you think, oh yeah, you know what’s 2%? It’s no big deal, but compounded over time, it’s a major deal. So that’s something really important to understand.
Also, there’s just a lot of talk from the personal, from a personal standpoint where it’s okay, debt is bad, all debt’s bad. That’s Dave Ramsey, which he has a lot of great advice out there, but. It’s Hey, debt is bad. Avoid debt at all costs. But really there’s good debt and there’s bad debt.
You can use debt to invest in assets that will produce cash flow, and that’s good debt. You can use debt to go buy the Louis Vuitton purse and go on vacation and buy stuff that you can’t afford. That’s bad debt, right? You’re buying liabilities. So if you’re using debt to buy assets, that’s good. If you’re using debt to buy liabilities, that’s bad.
And then from the alternative investment standpoint, I know a lot of people with money, people come to me all the time. They’re pitching ’em and saying, Hey Ben, I got this new business idea. Hey, or do you want in, it’s 500 grand to get in. You’re gonna make a ton of money. I’m gonna make you so rich.
And they don’t really understand the fundamentals behind investments and cash flow and private equity. So then they tend to make some bad decisions and they can lose a lot of money in that process as well. So that’s what I loved about our conversation when we were talking about alternatives.
Investments related to real estate because I think there’s a lot of upside, but unfortunately most people don’t understand how that alternative investment world works.
Ben Fraser: Talk a little bit about this alignment of interest. ’cause you’ve shared on your website, Boosting Your Financial IQ.
The financial advisors, the consultants, they don’t always have your best interest in mind. And so you saw that the business standpoint where the consultants are coming and actually destroying businesses, but that also applies to the personal financial side, right? I see so many people to the exact point.
They make all this money. They haven’t invested in financial literacy. They’ve been invested in the kinda 1 0 1, 1 0 2 level understanding of finances. So they blindly trust an advisor assuming that, Hey, is this too complicated for me to understand? This is, I’m never gonna be able to get to their level, so I’m just gonna trust them.
But there could be a misalignment of interest, there could be things that you’re not aware of that are actually hurting you, that would cost you a lot less to just invest into understanding some of the basics.
Steve Coughran: Exactly. And look, I know a lot of financial advisors out there in FinTech.
We worked with a lot of financial advisors. I think there’s a tiny little fraction that are malicious and that want to rip people off. Okay. However, I think it’s important to understand that there’s a difference between a fiduciary and a non-fiduciary. So if you’re an r i A, a fiduciary, it means you have a legal obligation.
To act in the best interest of your client. So if I’m a registered fiduciary, which I’m not, but if I was then as Ben as my client, I would put him into investments that serve Ben in the most appropriate way. That’s my fiduciary responsibility. However, if you’re not registered as a fiduciary, you’re basically a broker, and I could put Ben into whatever type of assets I want.
So over here, I had this fun. It pays me a commission of 25 basis points. Oh, this other one charges me at three, five basis points. I’m gonna just put Ben in that, right? And I say, Ben, you’re diversified in this fund. You have no clue what’s the underlying asset of that fund. It could be invested in China and Venezuela and these other types of.
Assets, geographically speaking, but then other asset classes and you, and it’s just junk, but you have no clue. But I don’t care, I earn my commission and you think your funds are diversified and when the economy’s going well, it’s fine. You get your statement every month.
You see you’re earning some type of return. When things go bad, they go really bad and Ben says, Hey, what the heck, Steve? And I say, sorry, did the best I could to diversify you, and. And that, that’s the conflict of interest. So I think it’s like you could work with a fiduciary.
You also have to be careful because I could be a fiduciary, but dually registered as a broker too, so I can market it myself as a fiduciary. Hey, I got your best interest, but I’m also, the back end here, I could still be a broker selling you high fee products, putting you in high fee products.
That’s just the misalignment that occurs out there in the personal finance bills. Yeah.
Ben Fraser: Talk about financial freedom. What does that mean to you? How do you know as an individual you’re financially free? I love that you have a goal here of traveling to 50 countries by 50.
Yep. You have freedom of time, freedom of money and other things to be able to do that. How does someone know that they could be financially free? What are the kind of parameters that you have to understand and be able to achieve?
Steve Coughran: Yeah. Great question. When I was young, The idea of being restrained was terrible.
I actually had a leash. My mom likes to put me on a leash. That’s before the leashes are cool. Yeah, that it’s concealed like a monkey backpack with a little thing. You’re like, oh, how cute. A little leash. Backpack. No, I had a straight up dog harness on me. ’cause I had, I was like wild running around the store.
But I just, I don’t like the idea of being restrained, and I’m creative, so I wanna be able to go out there if I have an idea to go execute on it. So financial freedom to me means I’m not a slave to something that I hate doing. And Steve Jobs, he gave a great talk, through his commencement speech to Stanford where he’s saying essentially if you’re waking up every day and you’re like, what am I doing?
You’re not free. So financial freedom I know a lot of people that make a million bucks a year. And their costs are like a million bucks a year. They’re not free. I had the C E O I was working with and he said to me a couple years ago, he said, look, If I don’t make 500 grand, at least 500 grand a year, like I can’t cover my bills.
So you could have 5 million bucks and you spend a million bucks a year, it lasts five years, or you could have 5 million bucks and you spend 200 grand a year. It could last you a long time. So financial freedom is having the ability to choose and pursue whatever you want to pursue in life. But it also, it’s based on, your income but also your spend.
Ben Fraser:
A hundred percent. I think it’s, To your point earlier, having the knowledge and the literacy to understand these kinds of things, right? Because if you don’t understand what your expenses are, you don’t have a budget, you’re not tracking things, then you don’t know how long you could last, if you had to pull the plug on if you’re a doctor or high paid professional or something.
I saw this with some family members of mine that were in the medical profession and had to work till. They were, retirement age and even then were terrified that they weren’t gonna have enough to live. ’cause they just, they didn’t ever invest any time into understanding these kinds of basic financial concepts and cash flow and all that.
So it was, there, there’s so much. I think financial freedom plays into financial knowledge, but also the freedom of understanding that really opens up the whole. Equation, if you can understand some of these basic concepts, it allows you to be able to do a lot of different things if you understand it.
Absolutely. I love that. Let’s shift the last kind of segment here. I thought it was so interesting when we were talking before, just because of your background and working for some private equity backed companies. Talk a little bit about private equity as an asset class. This is something that, as I’ve studied some of the ultra wealthy, it’s generally a pretty big allocation of their.
Investments are into private equity, and this is differentiated from venture capital or angel investing, the lottery pick of the next big tech company. But private equity is a tried and true model leveraged buyouts. It’s been used for many decades with some great success.
So talk about what that looks like in your experience in that, and maybe how it relates to just some basic financial principles here.
Steve Coughran: Yeah, and the idea of leveraged buyouts is relatively new, a few decades old. It’s been happening since the beginning of time, in some form or fashion.
But it really became popular and private equity really exploded. Just recently, back in like the late seventies, eighties, nineties that’s really when it started taking out, taking off. But essentially when I talk about private equity, ’cause private equity could be a general term for private money used for hedge funds and venture capital and real estate things like you mentioned, Ben.
But today I’ll talk about it in regards to LBOs leveraged buyouts. The idea is you have a general partner, okay? So you form an entity and you have a general partner, and that’s the operator, the owner of this private equity firm. And they go out there and they raise capital from limited partners, LPs.
So they go out to individuals or accredited investors and institutions primarily like ultra wealthy people right now and. They say, Hey, do you wanna put $50 million into my fund? And they collect all this money. Then once they collect all this money into their fund, let’s say it’s a billion dollars, then they earn fees off that fund.
So the person operating the private equity firm, the gps, the general partners, they earn typically 0.5 to 3%. On average, it’s say 2% management fees on that committed capital. Then they take the money and they deploy it and they go buy companies with cash flow. Typically, it’s companies with strong cash flow.
Sometimes they’ll buy distressed companies and do turnarounds, but most of ’em, they want to buy businesses with cash flow because they’re gonna pile on a bunch of debt. That’s the leverage part. That L of the L B O, they’re gonna put on, 90, 80 to 90% debt, and they’re only gonna put in like 10 to 20% of their own equity outta that fund, outta that billion dollars.
To buy these companies and it’s really similar to real estate it is kinda like you buy an asset and then you get a tenant and then the tenant pays you rent. You take that cash flow, use the cash flow to service the debt, hopefully the property appreciates and you have some type of upside, same type of thing with the business.
With the business’s a little bit different because the realist, when you buy a real estate asset, it’s like a fixed building and you have a tenant, hopefully they’ll go rogue, but. That’s the business model with the business. You have a bunch of wild kitty cats running the business and you have to manage it and get in there and do strategy and make sure the products are good and you’re satisfying the customers and the suppliers.
And there’s a lot more risk, but there’s also a lot more upside, there’s some real estate properties where you could buy and you can achieve substantial upside, but with private equity you could buy a business or $2 billion, like this equity just did. They bought a business for $2 billion.
They invested in it, optimize it, and now they’re exiting for four, for $4 billion. So the upside amazing, but you have to go in there and you have to nurture the business and keep all those pieces together. And then when you sell it, that’s typically what private equity firms do within three to seven years.
They’re selling it to somebody else or they’re taking it public. Then they earn money on the profits, which is called carried interest. They’ll earn around 20%. The profits, and that’s how a private equity firm works
Ben Fraser: overall. Yeah, no, I love that. I’ve talked a little bit about private equity on the podcast here, and, back when, as a banker, I did several kinds of m and transactions where you’re helping people buy businesses.
And what’s so interesting about it is commercial real estate and private equity is, as we’re referring to it as, the leveraged buyouts. Are generally priced on a multiple of cash flow. So it’s a very similar valuation methodology where you’re looking at what’s the annual cash flow and, take out all the fluff and then you price based on that.
And what’s interesting is, you’re looking at valuation real estate, commercial real estate. Say for just a simple math generally trades around say a 5% cap rate. For a class A property it’s a multifamily or something that’s probably pretty, pretty average, especially in big metro areas.
So that’s a 5% cap rate equates to about a 20 x multiple of annual cash flow. So $1 million, of annual cash flow. Times 20 is $20 million. That’s a 5% cap rate in private equity. They generally aren’t trading for that type of a multiple. Right? And for a lot of reasons, but to some of your points, one, there’s not really an asset that’s just there whether there’s a tenant or not, right?
If you have that ability, real estate has generally been shown to appreciate over time as lack of avail, availability and supply is limited. In businesses, you don’t always have an asset. A lot of times it’s goodwill or just you’re buying for the brand value. And talk a little bit about just valuations, like kinda what you’ve seen and what I’ve also seen too.
It’s a really interesting private equity strategy. Strategy’s probably the most, one of the most common is you go and you find a really well operated business and you use that as your anchor business model. Then you go and acquire other smaller mom and pop businesses in the same industry.
As you can continue to grow and get scale, the multiples actually expand as you get bigger, right? So you can buy a business for say, a three or four x multiple down at a million dollar level. But if you can get to, 10, 20, $50 million in annual ebitda, all of a sudden the value of that business goes up a lot.
Just in the same amount of cash flow. You can actually sell that at a higher multiple because, The bigger money that’s trying to get into the space. If you can create scale, you can actually create value, which is really interesting in this kind of space. Talk a little about some of those things.
Steve Coughran: Yeah. So when you’re building a valuation model, when you’re doing private equity and looking at different organizations to acquire, you’re looking at their free cash flow and there’s a formula. So you could look at the free cash flow into perpetuity or you could look at free cash flow as a multiple, like you’re alluding to Ben.
Of companies for simplicity’s sake, you could do a multiple of ebitda and it varies by industry. Let’s just say, an industry with an average X in multiple of five, five x on ebitda. If you’re a smaller company, to your point you know you’re doing a million dollars in ebitda you’re multiple, yeah, an average it’s five, but maybe somebody’s only willing to pay you three ’cause you’re a smaller company.
There’s some key man risk, meaning that if a key person leads the business customers can leave with them or employees can leave with them or the business falls apart ’cause it’s relying on one person. So there’s some key, main risk. And then there’s liquidity. If you take that money and you go invest in Apple today, I could go put money in Apple and I know like I could sell it, like I could buy it, I could sell it in 10 seconds and I get my money back.
When you buy a company, there’s all the due diligence, you’re like locked in and it’s harder to turn around and sell it. So there, there are some. Lack of marketability. There’s a discount on that as well. But to your point, you go in and somebody says, yeah, you’re only doing a million in ebitda.
I’ll give you three x on your ebitda. They give you 3 million bucks. I buy your firm. And then there’s another firm over here. I do the same thing. They do a million in ebitda, buy it for three x. Now I have 2 million in ebitda, and that’s more attractive. Now I have more systems, more scale like the, more reach.
And now it may be worth four x. Then I keep growing it one day. I have a portfolio of companies with a hundred million in ebitda, and that may be worth six x. So just by combining them and rolling them up to your point, it’s called multiple expansion. That’s how I can make money. Another way to do it is, I did this in the past, the strategy was to buy a bunch of media companies and we are buying media companies because the idea was to collect, and combine all these companies in a roll up strategy about financial media companies.
Then if you take the data from these financial media companies and the behavioral analytics and all the other intrinsic value that’s behind the scenes, now you’re not just buying a financial media company. You’re buying a data analytics and behavioral analytics company, which can be worth a lot more.
So now you buy it at a five x multiple, but an analytics company is more sexy, more attractive. There’s more value with that, that the assets, the intellectual assets that you own in the business. Now you’re exiting outta 10 x multiple just by changing the nature and the strategy of the business.
So there’s so many different ways to do it. Or you could buy a business and they’re distressed or cyclical, like it’s a bad cycle. You buy it when the market’s down, like think of cruise ships back in 2020, I invested in Carnival and another. Companies with Covid, their stock prices just tanked.
And I’m like, okay, their stock is trading at a value less than their cruise ship value. The value of their tangible assets. You buy into a company like that when it’s cyclical, things come back around, people start going on cruises more, the stock increases, and then you could exit.
And so there’s strategies there as well as far as private equity goes. But I think ultimately it comes down to free cash flow. Okay. Whether it’s real estate or private equity, LBOs. Cryptocurrency or whatever it is, you’re putting money into an asset and then that machine that you’re buying is going to spit cash back out to you in the future.
And hopefully it’s more cash. But I think so many people, they just get caught up in this idea like, oh, I’m gonna invest in this startup or this business over here, and. Look at their top line. They went from 10 million to a hundred million and like they’re so successful. I want in. That stuff’s all great and fine, but if you’re not getting your cash back, that’s what I care about and you’re not watching the free cash flow, that’s where you could run into some serious trouble.
Ben Fraser: Yeah. Steve, this Has been awesome. I really love just bringing a thought to some of these concepts, and I think this is something that definitely people understand more of and just financial literacy. What’s the best way? Say someone is an entrepreneur, they’re in a business, they’re a c e O, they want some help on the consulting side, how do they, how they connect with you.
And then also on the more just personal side of things, people wanna just up their financial IQ. What you have, your two brands, share with us how people can get a hold of you to learn more.
Steve Coughran: Yeah. So I think that the best way, if you just want to increase your financial intelligence, is to download our Boosting Your Financial IQ app.
It’s on the Apple app or Google Play Store. It’s called Boosting your Financial IQ. You get it on your phone ’cause I think understanding the language and money should be as easy as checking your phone. So just, you could download the app. There’s a ton of free resources in there and you could just get started right now.
And then the second way, if you wanna learn more about Hey, help me with my business. Teach me more about how I can transform things and grow it to the next level. If you go to cultivar.com or website, cultivar. There’s a free masterclass and you could check that out, and I explain this all in more detail and I show you mathematically what I’m talking about.
Like I’ll pull up. An actual valuation model and show you, okay you impact these drivers right here, these three things. And look, it, you could take your valuation from 2 million to 10 million. So there’s that free masterclass on the website tho. Those are great things that you could do, but I just think listening to podcasts like this I love what you’re doing, Ben, with your base.
I love what Aspen Funds does with providing alternative investment ideas. For people to get in early and to do things far beyond just a 401k IRA type investment. Which is fine, but you need more than that. I, so I love and appreciate what you’re doing there, Ben.
Ben Fraser: Awesome. This is really fun. I can enjoy this conversation nerding out a little bit on some of these things. Give us a little teaser. What are some of the classes or the resources in your Boosting Your Financial IQ app? Could get you if they download the app. This is a free resource ride or is it paid?
Steve Coughran: It’s a free resource. So I have four masterclasses there right now. I’m constantly adding to them as far as investing in different asset classes. Just changing your mindset around money. There’s masterclasses there. I have community conversations where I have people from all walks of lives that I do interviews with.
I have all the podcasts that are essentially located there. But I also have tools that you could download, like financial models. A personal budget is on there. Then I just started a growth challenge. So there’s a four week growth challenge there. You can take part in every single week there.
There’s a little activity to push yourself. So it’s just all these financial tools and resources that are available to help you on a personal side and on the business side.
Ben Fraser: That’s awesome. Steve, thanks so much for coming on and sharing your knowledge. Definitely enjoyed the conversation. I’m sure our listeners will get a lot out of it.
Steve Coughran: I appreciate you having me, Ben. This has been great.
