Brad Johnson: Welcome back to another episode of Do Business, Do Life. I have Jason Early here with me today out of Future Proof Live, founder and CEO of RISR. Welcome to the show, Jason.
Jason Early: Awesome to be here. Thanks for having me.
Brad Johnson: It’s a good place to be, man. We’re next to the beach. Life is good. Our last business of the day, then it’s on to life, right?
Jason Early: No doubt. This is a special event and we’re thrilled to be here and thrilled to be a part of this.
Brad Johnson: Well, cool. So, as we dive in, you were just giving me a rundown of RISR. How long have you guys been around to this point?
Jason Early: Couple years. Yeah, we just hit our two-year mark, but have spent my whole career in and around financial services. And I had a nice run with a company prior to this in a similar space, and so, we’re two years old at this point.
Brad Johnson: Cool. Well, congrats. I mean, Triad’s coming up on five, so we’re not that far ahead of event. As we dove in, this is really cool, I mean, there’s a lot of advisors. I’ve worked with advisors, 15, 20 years now. Business owners are always at the top of the list. How do I develop relationships? How do I add value? And they can get complex because there’s a lot of moving parts for a lot of business owners. It sounds like that’s what RISR essentially does is it’s a tool that financial advisors can plug into to add value for their business advisor clients, or potentially to attract, I’m assuming, new business owner clients. So, can you give us a rundown for those that aren’t familiar?
Jason Early: Yeah, exactly right. So, look, we’ve got this whole thesis and belief that business owners need better advice and that the advisors that serve them need better tools and technology. So, some 25 years ago, the advent of financial planning software allowed for advisors to leverage technology to deliver great advice and financial plans to individuals and families and households. But for far too long, advisors have been in a difficult position where they’ve got to treat the business, the most important asset for the owner of the business, like every other asset on the balance sheet, meaning an advisor may sit there in a conversation or a discovery session with a business owner and they’re like, all right, what’s in the brokerage account? What’s in the 401(k)? What’s the house worth and what’s the business worth? And that’s unjust, right?
If you’re going to give quality advice to a business owner, you’ve got to better understand that asset. And so, that’s what we do. We make it easy to better understand that asset and then launch the advisor into planning-related conversations. So, we value the business. We help them understand what the value needs to be to accomplish their goals, hopes, and dreams and things like that. And now, advisors can deliver tailor-made succession and exit plans to business owners based on their priorities. And so, we think the timing, obviously, in all things in life matters an awful lot.
And the demographics are such right now that you’re seeing all of these baby boomers that own businesses, they’re transitioning and transacting. And everyone in financial services, every wealth manager on the planet wants to manage those assets. But what everyone’s starting to realize is, I better be there now providing advice. I’ve got to be there leading up to that event to provide quality advice, to make sure that I’m the one who captures those assets when in fact, they do transact. So, yeah, everything we do is about deepening relationships between advisors and business owners and yeah, we love the work we’re doing.
Brad Johnson: Yeah. Well, I mean, I heard it a long time ago. In finance, you have to date the money before you marry the money and you look at it, a business is a real, I mean, it’s a big asset, oftentimes very illiquid. So, it’s like, as an advisor, I can only deal with this money that I can move around, right? So, now you’re unlocking a way to help a business owner date that relationship, date that money, add value. And we just had one of our members, a $50 million transaction. He didn’t work with the guy before he sold the business. So, you sure don’t want to be that advisor that it’s literally like he sold the $50 million business, now he goes to look for an advisor. You want to be there all along the way. So, let’s dive in a little deeper. If you were an advisor, you’re using RISR, the software, I’m the business owner, which I am, what sort of conversations does that allow the advisor to have?
Jason Early: Yeah, so we think about the platform in three ways really, which is data capture, insights, and client ready deliverable. So, one of the big problems that business owners and their advisors alike face is business owners have data that is disparate. It’s disorganized, it’s all over the place. And so, that can be a real challenge. And so, we built deep hooks into QuickBooks, but more and more what’s becoming most frequently used is our tax doc uploader. So, you can upload the tax returns into the software, and we use AI to pull all the data out, the financial data, and render it into a P&L and balance sheet. So, data capture has become seamless and frictionless. You can literally get the data in and on seconds. We take in that data.
Brad Johnson: There’s a tax return, just plug it right in.
Jason Early: Plug it right in. And then from there, we go through a set of qualitative questions to better understand the specific company risk, right? So, every business, you and I may both own car dealerships on two corners of the street with the exact same revenue and the exact same EBITDA, but might be valued differently. Why? Well, your business may depend on you as the owner, and mine might not as me, or I may have customer concentration risk and you might not. And so, there’s specific company risk.
And so, we go through this qualitative question flow to better understand the business and then we surface all of these relevant insights across the areas that we talked about, valuation, what we call wealth, which is effectively to say, Brad, that’s great that your business is worth 15 million bucks, but based on everything you told me, retirement income goals, legacy goals, philanthropic, all this other stuff, the business needs to be worth 25. And so, we try and understand how the business, this asset fits into your overall financial plan and your life plans.
Risks, so operational risk in the business, equity risk in the business, meaning do you have a buy/sell agreement, is it funded, all those types of things. And then the succession and exit plan. So, from a succession and exit planning standpoint, we talked a little bit about their financial plan deliverables. If I went out on the floor here at Future Proof and asked a thousand advisors to show me a succession plan that they did for a business owner, the best would show me a Word document. And so, we’re the first to be able to deliver a tailored succession plan to a business owner.
And on top of that, we’ll look at the owner and business readiness score. So, how ready is the owner to exit the business? Because don’t forget, this is the single most emotional asset they own, their blood, their sweat, their tears, their family oftentimes have been involved. And so, how ready are you as an owner to exit and how ready is your business to exit? And so, we serve up that score and you’ve got all those deliverables.
So, those are the conversations that we’re empowering and we’re very careful because there’s a whole lot of things that a business owner might care about. But for it to make it into our UI, UX, and into our report, it’s got to hit on two fronts. The owner’s got to care about it, but the advisor’s got to want to talk about it, right? So, how willing is the advisor to have the conversation and we want to launch them into planning, right, ecommerce business.
Brad Johnson: So, with all of the different types of business owners that any advisor you work with, but it’s just like, well, any business that most likely could exist in the United States of America, that seems like a very complex problem to solve with software. How difficult was that to make sure, hey, no matter what sort of business owner and advisor might run into, the software is going to be able to tailor those valuations to that business?
Jason Early: Yeah, I mean, no doubt about it. Valuation can be complex, but it’s not all that complex. So, we actually run three models at once on the business and so we cover over 850 industries. And we run three models on the business. So, there’s two kinds of market approaches, which is both an EBITDA and a revenue multiple on the business, as well as an income approach where we build a cap rate based on the specific company risks. So, we run all three of those models and create a range of value in the business. But your point is a good one and that we’ve got an underlying engine that has all of the data, transaction history and market comp data that feeds the engine. So, once we understand the industry and all the financials, we can run it up against that and ultimately, value the business.
Brad Johnson: So, if you’re really dealing with the form of triangulation, you’ve got three different ways you’re valuing it. In certain industries, they might lean more towards one type than the other, but you’ve got a little range of reality is what you’ve…
Jason Early: Yeah, that’s exactly right. I mean, I think, on the market approach side, the most common one for most industries is EBITDA multiple, right? Revenue multiple is really a lazy way to value a business that a venture capitalist came up with to value software companies that lose money. But there are some industries that trade on revenue multiples, and then the income approach is building a cap rate on the business, and that really looks at the specific company risk, and you get to get that as discounted cash flow that you might have learned in business school. For those of us that went to business school, I’m not one of them. But the discounted cash flow is how they think about valuing businesses in public markets. But most private companies and small companies don’t have those forward-looking projections, and so, it’s a DCF minus the forward-looking projections.
Brad Johnson: How often does it work where an advisor that’s also a business owner uses your software and they’re like, “Wait, I need this,” and they run it on their own business?
Jason Early: Yeah, look, we’re in the subscription business, so our clients are advisors and firms and enterprises, and they’re typically their first customer on the platform, right? They typically run it on themselves for…
Brad Johnson: Which is great because they should know their numbers better than a random business owner.
Jason Early: 100%. Great. Look, I think that the best advisors eat all their own cooking, right? So, they can sit in the shoes of their clients and have that conversation, whether it’s from an investment strategy perspective or protection planning, whatever it might be. This certainly fits that bill as well.
Brad Johnson: Well, you’re a couple years old. I’m assuming, at this point, you’ve got some advisors that have had some success with business owners using your software. Do you have a story or two that comes to mind?
Jason Early: We’ve got a bunch. I’ll share one that someone just stopped us over here, which was awesome to hear. They said, “Hey, we got to share a story with you guys.” And so…
Brad Johnson: Those are the best, by the way.
Jason Early: Yeah. It was awesome to be here at a meeting like this and hear stories like that. But they had a client that they were working with, two partners in the business, and they had that relationship with one of the partners. They didn’t have a relationship with the other partner, and they’d been trying to get into the other partner and they’d been trying to do some planning for the business. And these guys have started to think about transacting and what that might look like. And so, they brought them RISR and really opened their eyes to the actual value of the business because what’s interesting is people say to us all the time, “Oh, I bet you bum a lot of people out,” meaning they think their business is worth X and it’s worth a lot less.
The reality is every business owner has a country club number, their accountant number in terms of what their industry trades for, and they kind of apply that multiple their business and they say, great. But what’s critically important is normalizing the EBITDA, meaning most of these businesses, you own a business, you’re running all sorts of expenses through the business to lower your overall tax exposure and you’ve got to normalize that EBITDA. You got to add that back, right? So, the country club expense, your daughter’s wedding, all the stuff that you run through the business, you got to add that back to normalize the EBITDA. More commonly, it might be like profit sharing and things like that.
And so, super long story short, I’ll land the plane here in a second. These guys were way pleasantly surprised when they went through that exercise, they normalized the EBITDA, they understood the actual value of their business, and then they started to really think about what was important to them from a transaction perspective. And so, these guys had ballparked the business at roughly 10 million bucks. After going through the process, they realized it was nearly double that and they transacted at that number. But what’s neat about it is they did an ESOP, and so, what was really important to these people was the legacy of the business. They had a lot of long-term employees, a capable management team that was willing to step up and own the business, and so, they went through the process and did an ESOP. And so, everybody wins in that regard.
There’s tremendous tax benefit to the owners selling the business. There’s a tremendous benefit to the employees who now own the business and get to continue to build the business. And it was a great outcome for the advisors. They now work with both partners of the business. And so, we love hearing stories like that. We love sharing stories like that, and it’s what gets us out of bed every day. We want to create better outcomes for our clients who are the advisors, who are creating great outcomes for business hours, who need it most now.
Brad Johnson: Well, I also feel like, and correct me if I’m wrong, okay, you’ve got two partners. Just like in marriage. Hey, don’t always see things the same way, right? And I feel like if you’ve got a central hub for the shared business and they can start to be working off the same piece of paper, it almost can help bring those two parties together of like, oh, no, here is the reality of what this company’s worth. It’s almost like, oh, so much of being a financial advisor, a great one is being a therapist.
Jason Early: Oftentimes, 100%.
Brad Johnson: So, do you find, like, just because, okay, now, here’s reality. Now, this partner thinks it’s worth this, this partner thinks it’s worth this. It’s like, no, here’s reality. And it can be like a central place that kind of brings partners together on a transaction.
Jason Early: Yeah. Look, I think, like anything, it’s clarity seeking. And so, it drives alignment to your point. I mean, I think we say all the time, the best advisors ask the best questions. And so, what can you draw out of the business owner or owners in terms of what are your goals, hopes, and dreams? And can this asset deliver for you? Can it fund the things that you want it to fund? And we see all the time, I talked about the value of the business, but also, the goal value, meaning what does it have to be to accomplish your goals, hopes, and dreams? We love seeing the value number be higher than the goal of that.
Brad Johnson: For sure.
Jason Early: Because that happens a lot and that just gives the owner a ton of flexibility in terms of what to do with this important assay. And so, that wasn’t your question. Your question was, does this help kind of align and be a central place for multiple owners to kind of drive alignment? And we absolutely think that that’s the case.
Brad Johnson: Yeah. I could see how that, I mean, being a guy that’s worked with financial advisors and partners, I see that all the time. You see a lot of father/son transitions. Dad’s trying to figure out how to exit. Now, son’s trying to figure out how to take over. Multiple partners, whether it’s co-founders, where it’s just like, hey, how can we get everybody on the same page so we can just start the conversation and work towards the line? So, that makes a lot of sense. How often is RISR, the actual output, used by the seller to actually value the business? Does that happen frequently?
Jason Early: Yeah, look, all the time. The interesting thing about the businesses that run through our platform are more a reflection of who our clients serve. So, it really runs the gamut. I mean, if you look at it, we see businesses up in the several hundred million dollars, but it’s typically in the $5 to $50 million range. And when you’re at the lower end of that, there’s not investment banks involved in those types of transactions. And so, absolutely is the answer to the question. In fact, the success story, we had a client who was working with a business owner. She was going to transact. It was a private equity firm that was buying the business and they had offered 3 million bucks. And the RISR, they were a client of ours. And so, they ran a RISR report on it and the RISR report came in at that just under 4 million bucks, like 3.8, because we would pinpoint a number inside of the range and they took it to the private equity buyer and they sold it for three and a half million bucks. And so, she got an extra half a million bucks out of it and paid for their subscription. The advisor got an extra half a million bucks of AUM out of it and everybody’s thrilled, right?
And so, because that is the tricky thing about “valuation” of a business, right? If you gave that same business to three different firms, you’d get a bunch of different numbers back. That’s okay. It’s part art, it’s part science. But at the end of the day, it’s willing buyer meets willing seller, but if you have data and the ability to kind of show this, certainly leverage in those situations. So, we love stories like that.
Brad Johnson: How have you seen valuations? I feel like, definitely in finance right now, a little frothy right now. Have you seen that? Like, how are you benchmarking certain industries that at certain times get frothier, and then maybe go into a little bit more bearish? Is that factored in? Or how does that play?
Jason Early: Yeah, certainly. I mean, it’s real time feeds, but the little secret might be the private company evaluations or multiples don’t actually change all that much. They’re actually pretty steady over time. Now, what does happen, there’s a size effect. So, this feels intuitive, but the higher the revenue, the higher the EBITDA, the higher the multiple that you command. And so, as you go up and down, as you go up that scale, multiples get a lot bigger. And we’re seeing that in this industry for sure right now, meaning billion-dollar firms trade for a much different multiple than does a $10 or $20 or $30 billion firm. And so, you see the size effect really come into play there. And so, certainly though, private equity falls in love with industries, be it veterinary practices or HVAC companies or whatever, and that can push multiples up over time for sure. But the reality is private company multiples don’t actually change all that much.
Brad Johnson: Interesting.
Jason Early: Certainly far less than public markets.
Brad Johnson: Well, we have an audience here of independent financial advisors. If you were going to advise them on their own business and valuations, what sort of factors should they be looking at to increase their valuations? You talked about one right there, obviously scale. I feel like organic growth probably isn’t a piece of that conversation, but what factors, if you’re saying, “Hey, financial advisor, you want to maximize the value of your business. Here’s things to be thinking about”?
Jason Early: Yeah, look, people love growers, for sure. So, growth is always a great story to tell and can have a dramatic impact on what someone’s willing to pay. And so, that’s one of them. I think, like the best businesses, whether it’s a manufacturing firm or it’s a financial advisory practice, the best businesses run their business as if they were always ready to sell. Meaning if someone knocked on your door today, tomorrow, and said, hey, I want to buy your business. Let me look under the hood. You’ve got a nice package to show. I mean, you’ve got SOPs and processes and infrastructure, and you’ve got clean financials. I mean, it’s amazing how many businesses, incredible businesses, run with terrible financials and terrible financial hacks.
Brad Johnson: How would you define clean financials? Like, what’s an example? This is a clean financial versus this is not.
Jason Early: Well, I mean, do you have an accountant or a CPA or a bookkeeper that is running your financials and paying attention to your financials and boating things the right way and slotting things the right way, and things like that, versus just throwing everything into books and hoping for the best at the end, which happens far more than you might believe? And so, those are a couple things, I think understanding what drives value in a business. So, again, owner dependency, most business owners and financial advisors, especially, almost where it is as a badge of honor. Business doesn’t run without me. I’m the guy. I’ve got all the relationships until you say that’s not great for the value of your business, right? You want the business to be able to exist without you. So, that means a strong management team, that means multiple relationships on every account and things like that. So, I think, understanding what drives value. Customer concentration risk is a big one that you want to make sure that you can drive down. So, there’s several value drivers, but you want to run and build a great business and those tend to become pretty valuable.
Brad Johnson: So, the founder hit by bus test. If you’re hit by a bus, does the company survive? And I will say a lot of financial services firms, that would not be.
Jason Early: They don’t.
Brad Johnson: You said customer concentration risk. So, if we apply that to a financial advisor’s business, would that be, there’s two advisors in the firm and this advisor has 80% of the relationships? Is that the way you define or are you defining it…
Jason Early: Less that, take the practice in general or a single advisor and that practice manages $100, but one customer is 90 of those dollars, that’s a problem, right? So, you want to have a nice blend and client mix so that it’s not too overweight in any one.
Brad Johnson: Where Las Vegas client leaves and you’re broke.
Jason Early: Exactly.
Brad Johnson: Got it, yeah. Okay, well, this has been– I mean, for an end of the day conversation, we went hardcore. So, well, Jason, this has been awesome, man. Before we wrap, anything from a RISR perspective or just speaking to advisors out there that we haven’t hit so far, that you’re like, if I’m an advisor, I’d want to know this about either the work RISR does, or just in general, all the valuation talk we’ve chatted about?
Jason Early: I think there’s maybe two things that I would hit on that kind of popped into my head throughout the conversation. I think that a lot of advisors feel, you said something earlier in the business or earlier in the conversation about the concentration of wealth or the illiquidity of that asset, meaning traditionally in financial services, a lot of advisors over the last several years have said, forget the business owner, all the wealth is tied up in the business. And we don’t think that’s true, meaning certainly on a percentage basis, that is true. Meaning if you own a very successful business, more times than not, a large concentration of your wealth is in that business. But business owners themselves are actually wonderful clients. Advisors are paid for the size of the problems that you solve, and business owners are incredibly complex. And so, there’s tons of ways that you can deliver value and generate fees with business owners.
And oh, by the way, some 60% of millionaires are businesses and roughly 90% of those worth 30 million and up own businesses, so they’re an incredible client while they operate. And then you want to position yourself to be there when in fact, they do transact like we talked about before. And so, I think the misnomer is that they’re not great clients because all the wealth is tied up in the business, and a lot of people look at it and say, this is an interesting niche to serve. And we just don’t think that’s true either. Business owners are not niche. They’re everywhere, right? They make up and power our economy, but walk up and down any main street in USA and business owners power that economy.
Every advisor has them in their book of business. But far too often, they just serve the owner and the family. They don’t think about the business and they don’t think about how that asset fits into their overall financial plan. And so, advisors a lot of times will think they’ve got to reinvent themselves to serve business owners, and we just don’t think that’s true. Business owners are craving your advice. You are great as an advisor at delivering advice, and that’s what they’re looking for. You’ve just got to find a way to better understand that asset, and for a long time, you haven’t had the tools and technology. And so, that’s what we’re here to solve.
Brad Johnson: Jason, you just made me think about a different take because I grew up on a farm in Kansas. And then the saying in Kansas is farmers are asset rich and cash poor. Sometimes, I think that can apply to business owners, right? Because a lot of that money might be getting poured back into the business, the equity value.
Jason Early: 100%.
Brad Johnson: So, have any of your advisors using RISR, have they actually used it as a consulting tool to help from a valuation perspective for a business owner? Because there’s a lot of value we’ve talked about, but maybe the exit hasn’t happened yet, the big liquidity of that. Are they using this as an ongoing tool that they charge a fee for or is that…
Jason Early: Absolutely. I mean, we stay out of that. We don’t love, and it doesn’t happen all that much where someone’s like running around selling reports in that regard. But for sure, if advisors are paid for their advice, we see advisors baking this in and charging financial planning fees to owners and tends delivering that says, look, this is part of what you get. And we think that’s really important at the new client acquisition phase, meaning certainly, this is a wonderful tool to take to all of your existing clients, but the best users on our platform, when they’re targeting business owners and they’re working with business owners, they’re saying, look, part of the process with us, this is what we’re going to do, and we’re going to go through this on an annual basis. We don’t have to go through all of this at once. You can meet the owner where they are and just solve a couple pieces of the puzzle and do that over time. But it becomes a part of your annual deliverable, and very certainly, again, business owners are happy to pay for that advice. If the business is worth $50 million and you’re managing 2 million bucks for the owner today, it might not be all that interesting to you, but they are happy to pay for that advice to the business and help connect the dots there. So, yeah, we’re seeing that all the time.
Brad Johnson: I mean, they’re paying other people. They’re already paying an accountant.
Jason Early: Absolutely.
Brad Johnson: I mean, so they’re paying probably a general counsel or attorney legal side, so it just makes sense. Did you have a second point you wanted to circle back to, or…
Jason Early: If I did, I’ve lost it. I would say…
Brad Johnson: It’s the end of the day. I’m the only thing standing between you and a happy hour so…
Jason Early: Maybe I’m thinking about the farm in Kansas, yeah.
Brad Johnson: Well, hey, come on out. It’s still there. Is it still there? I’ve done a farm, cattle, wheat, basically farming and ranching. I got off of the farm so I didn’t have to throw hay bales anymore in the summertime. But yeah, come on out. It’s fun like to try, not when it’s your living, you know, so…
Jason Early: When Yellowstone got real popular, I said to my wife, I’m like, we’re going out to Montana for a month, and she’s like, okay, tough guy. You know, you don’t ride horses or fly fish, like what do you plan on doing there? But yeah, I’d like to spend some more time on the farm and check it out.
Brad Johnson: Well, if you want to test it out, you’ve got an open invite to Kansas.
Jason Early: I love it.
Brad Johnson: You can try before you buy.
Jason Early: Yeah, I love it. What was it, Brad? Date the money before you marry them.
Brad Johnson: That’s right. Date the farm before you buy. I will say a lot of farmers are married to the farm, so you got to be careful. Well, as we wrap here, this is the Do Business, Do Life podcast. What’s been really cool, we’ve talked all about business owners, and one of the things and the reason Triad exists is we want our members, our advisors to build a business that blesses their life, doesn’t become their life, and that’s not always easy as entrepreneurs. I’m sure you can relate to. So, I would love to hear your definition, Jason, of what does do business, do life mean to you.
Jason Early: I think I saw, I credited Will Ahmed, who’s the founder of WHOOP, but I think it’s better… there you go. But he said, success to me means I sprint to work and I sprint home. And so, I don’t have a great answer for you in terms of work-life balance or what all that looks like, but to me, that encapsulates it perfectly. And so, I know that things are going well when I feel that way about both of those areas of my life, sprinting to work and sprinting home, and so, I try to keep that as a frame of reference.
Brad Johnson: I love that. Well, my man, it’s been awesome sharing time with you here at Future Proof. We’re in a beautiful spot. We better get out and enjoy it. So, thanks so much.
Jason Early: Thanks for having me. Really enjoyed it.
Brad Johnson: Take care, Jay.
