DealQuest Episode 1 Remaster V1 - FINAL AUDIO
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Corey Kupfer: [00:00:00] Do you want your business to grow faster? Are you open to new and out of the box ways to drive revenues and increase value? How do you imagine the most successful entrepreneurs and business leaders double, triple, or expand their businesses tenfold or more? This is a weekly podcast featuring conversations with business owners, executives, and leaders as we reveal behind the scenes details that give you, our listeners, the confidence to pursue your own deal driven growth.
On the show, we discuss a huge variety of deals, everything from large complex mergers and acquisitions, capital raising joint ventures, strategic alliances, real estate affiliate and sponsorship deals, and more, including smaller deals that you could do without significant capital. My name is Corey Kupfer, and I've been supporting deal driven growth for businesses for over 35 years.
As a successful entrepreneur, professional, negotiator, and attorney, my goal is to help you strategize, plan for find and complete deals that will help your company grow [00:01:00] faster. Welcome to the Deal Quest podcast. Let's get started. DealQuest community, I'm so excited to introduce you to a remastered episode of the DealQuest podcast.
, the podcast has grown so much. We started it about five years ago now, at least at the point I'm recording this. , and, , we, in the beginning, , had, , maybe 60 or 80 listeners per episode. We now have many multiples of that. In fact, we've got, , about a hundred, almost a hundred times that, .
And I realized that there were so many great interviews I did early on in the podcast. In fact, in the first year of the podcast, it wasn't even called a deal quest. It was called fueling deals until we rebranded it. And we interviewed some amazing, amazing entrepreneurs and deal makers and, , just amazing stories, amazing content.
And I know that so many of our listeners have joined us over the last several years and may not have heard some of those earlier episodes from five years ago, four years ago, even three years ago. So we have picked the best of the best of [00:02:00] those old episodes and, , the advice and the stories and the experiences are timeless.
So we've remastered them, , , made sure the audio is great, , and put in our new, , intro and outro, that kind of stuff. And we're going to be re releasing some of these amazing, amazing episodes, , so look out for them from time to time. And here's one coming up right now. My guest today is David DeVoe.
Dave founded DeVoe and Company in 2011 to help wealth management companies optimize their business decisions. The company has supported hundreds of firms in valuations, consulting, and investment banking engagements since launch. And I've had the pleasure of doing a number of deals with Dave over the years.
And in fact, , knowing Dave from even before his, , Devoe and Company days, , as well. So we've known each other for a long time. And Dave is really one of the. , true professionals in the area and is a phenomenal investment banker. And I am thrilled to have you on the show.
David DeVoe: Kind words, Corey. It's great to be here.
Corey Kupfer: Excellent. So there, before we get into what you do now, I'm going to take you, I'm going to take you back. And, , I'm curious when you were a little [00:03:00] kid, what did you want to be growing up? Because my guess is, and I could be wrong, but my guess is it might not have been an investment banker in the wealth management specialty.
David DeVoe: No, you are absolutely correct. I'm trying to remember. I remember race car driver, astronaut. , as a matter of fact, it's kind of interesting. , , during my senior year at UC Berkeley, I accidentally started a clothing company. I had no intention, no focus on business. I was. Your rudderless liberal arts major didn't know what I wanted to do with my life.
And literally I accidentally started a clothing company. And before I knew it, I was selling surf pants and shorts. I was manufacturing them and selling them to a whole series of surf shops, as well as three Nordstrom locations. So that was my, , an unusual introduction to business.
Corey Kupfer: Well, I love it because you actually anticipated my second question on the podcast all the time, which is what was your first real, the first real business you started?
And it sounds like that might've been it, huh?
David DeVoe: Absolutely. It was called Devo and Co. No, that's my, that's my current one. It's called Devo lution. Devo [00:04:00] lution? See the themes here. Yeah, yeah. Sort of evolution with a D up front, a plan, last name, and . That was the first company. I did that for probably about nine months.
, I think I got lucky. With everything that we did, , before you knew it, we had Nordstrom reordering, etc. I should say I should I did because it was really just me And that I did another little company after that or even just a business idea and within probably two months I lost everything on that, smaller Opportunity, but , I probably learned more that the four four to six weeks that I did a suboptimal Little business than I did over that the year or so that I was running devolution
Corey Kupfer: I love it.
So actually before we jump to the present, then what was some of the bigger lessons you learned from that early, , , failure?
David DeVoe: Yeah. Yeah. I think, , well, one on a macro level, I think one of the things that I've realized is you learn more when things go badly than you do when they go well, , , matter of fact, I had almost probably, , gained a degree of, I wouldn't say arrogance, but of, , expectation [00:05:00] after
So, , what I did after that is I actually did a series of t shirts for UC Berkeley's big game. I was at Cal and we have this big annual game against Stanford. , so it was only, , 5, 000 bucks or something, but I did these t shirts and quite literally, Everything went wrong. , the content of the shirt, , suddenly knocked out half the population.
Guys were interested in it. The girls were not. , I had a couple of my friends go out and sell the t shirts. I mean, this is what happens when you're in college. They end up drinking too much and they didn't pay attention or they, , they were bartering to sell the t shirts, et cetera.
And of course the day of the big game too, I was dreadfully ill. So it was one of those things where I think on a macro level, it's just. , , what can go wrong will potentially go wrong, but on a micro level, it's more of okay. Risk mitigation. I think even to this day, it's sort of trying to think two steps ahead and figure out how to mitigate, , the potential risks that can emerge over time.
Corey Kupfer: So , it's interesting for me, it's always interesting for the path of, , [00:06:00] business executives and entrepreneurs. , because I, , you and I got to know each other when you were at Schwab and you were doing, , in general, , consulting and, , , to the various, , , advisory firms out there, , and really, , I mean, to put it on a macro level, not, , I know the specific, but, , what was really trying to help them you.
Do it right, and not make business mistakes, right?
David DeVoe: Yeah, absolutely. I had the opportunity, I spent a full 10 years at Charles Schwab Company, the vast majority of it on the Schwab institutional side. And , it was this great experience where, as you said, sort of an internal consulting role, which eventually, , morphed into a broader thought leadership role, , within the industry.
But just a great opportunity to, , initially pick people's brains that had done transactions, worked with people, find out what worked well, find out, , sort of the hobgoblins that can be in the closet, , what can go wrong. And then eventually, , starting to give advice and collaborate with folks like you pick a lot of the brains of the experts in the industry.
, and I think that, that luxury position enabled me , to get smart quickly as we used to say in [00:07:00] business strategy, , so that, , I could start adding more and more value to the clients I was working
Corey Kupfer: with. Yeah, and I, , I was fortunate enough to, , , Dave and I, we shared a couple of stages over that time, we worked together on some projects and then, , , I was excited as was a lot of people in the industry when Dave launched, , DeVoe and Company.
Yeah, tell us, , tell us a little bit more about, , DeVoe and Company and what you do, you and your team do
David DeVoe: now. Yeah, so we, we started, , just over seven years, seven and a half years ago, , just started with just me. , the team's now grown up to, , we're a total of 10 people now. And, , out of that group of 10, there, there's eight of us that are doing the consulting work.
Out of that group of eight, , there's six of us that are managing director level. And the way I define managing director are folks that, that essentially lead projects. , and those projects are consulting, investment banking, and valuation. I'll come back to that momentarily, but that's another great luxury of our industry, , or the business, the group that I've been able to, , sort of, , be honored to work with, , is I joke, half the team looks like me.
And half the team looks like our clients. So what do I mean by that? My background, I did business strategy at American Express,[00:08:00] , right out of business school. , Amex has a group, it's about 35 primarily ex McKinsey folks, there's some Bain and some Boston Consulting, couple investment bankers on there, but generally about 35 primarily ex McKinsey folks.
And that was really my foundation of getting into business for real. We all now know that. I kind of wung it running a couple of small companies before I went to grad school. But coming out of business school, that was sort of a core business. , so a couple of years business strategy there.
Matter of fact, at Schwab, I joined a business strategy team too. It was about a half dozen folks and primarily Boston Consulting Group folks. But that sort of classical business strategy training is shared by Tim Forrest on the team as well. Tim was actually at McKinsey for four years out of business school.
So he and I were trained the same way, the McKinsey way. And then he was at Schwab for a dozen years as well. So you have, , the two nerds in the group, , these sort of framework oriented, , hyper rigorous analytical folks. And then the other four people that are MD level have all [00:09:00] run.
, billion dollar plus res essentially, clients of ours, they've run some of the bigger businesses in the industry that we're in. So they've sat in our client's chair as president, CEO, or COO. They've made the decisions to, , acquire this firm or put in this new comp planner, figure out how to segment their client base.
They have the bumps and the bruises and, , the champagne corks in the corner of their office too, for things that went well, but it's this, it is this great thing where. We have not only this sort of McKinsey way of doing things, very structured thinking and analytical rigor. , but we also have all this rich experience of, , folks on the team that have had to made these, make these decisions and deal with the outcome.
So the great thing about it is, , the work that we do, , tends to be very, , implementable for lack of a better word. That's great.
Corey Kupfer: And just for our listeners, because, , , we have listeners who are in the RA space and some who are not, , plenty who are not because, , , about half my practice, for example, is in the, , RA industry.
And then, , half of it is, , is all kinds of other industries from technology to, , you name it. , I just want to [00:10:00] give some definitions for those listeners who are not in the RA space. And also, , , I have everybody on the stand and I say this when I have people from any particular industry, that what Dave's going to be talking about in terms of doing deals in this particular space, really a lot of it applies, , , across industry, right?
, , whether we're talking about structuring. , the valuation multiples may be different in other industries, but still the, , the evaluation approaches, , are often similar. So, , for those of you who don't know the space, RAA is a registered investment advisor. And these are people who provide wealth management services.
And it's an industry that, , Dave does a lot of work in as do we. And, , so these, , people who, , run, , firms that have, , assets under management that can range from. , a few hundred million up to multi multi billions, , and, , so that's the space that, , we're talking about, but again, , you'll see once, , we get into some of the discussions, a lot of the principles apply across other industries as well.
David DeVoe: Yeah. A hundred percent, Corey. A matter of fact, we joke, , or I guess we'd point out that when we work with our clients, we're bringing, it might be 180 years of combined experience now within the wealth management [00:11:00] space to our clients. But my counterpoint is, , forget all that experience.
, forget all the exposure to, , running a company or managing a company, all these things. At the end of the day, what do we bring? We bring structured thinking to complex, , problems. We bring strategic context where we're a group that thinks very strategically about the option set. We tend to be goal based consultants.
So we're really going to have a foundation of what that, that man, , the CEO or the management team or the company, what are their goals and objectives? What do they seek to achieve either with their company, even their professional lives? , and then a lot of analytical rigor too. , , at the end of the day, sure, we're focused on the wealth management space.
Sure. You spend half your time on that industry but the tools that we use and the conversation we have today will probably apply to, to really almost any
Corey Kupfer: industry. Yes. So let's talk about the various types of things that you get involved in, right? From M& A to, , , , what they call tuck ins to, , ex, , , succession deals, which could be external, internal valuations.
, , give us an idea of the scope and let's start jumping in, like with some [00:12:00] examples and, , ways you work with people and really even more importantly than that, because, is what, for the value of the listeners, is, is, It's what kind of, , what kind of things should they be looking out for when they're doing a deal?
Corey Kupfer: What kind of lessons are there to be learned? , things to remember, that kind of stuff.
David DeVoe: Yeah. Yeah. So I think, , development company, what do we do? , there's really three key areas and we'll be focusing primarily on, on, , one or even two of them. , the first thing we do is consulting. You are the team.
We can help any wealth manager quite frankly, with any strategic decision they need to make. So, that can be succession planning, will be part of today's discussion. , that could be governance, , how to run the company better. It can get into, , equity migration, it can get into incentive compensation plans and HR, it can get into product development and segmentation.
Any strategic decision that, , a wealth manager wants to make. So, that's one. The second one is investment banking. Helping firms buy, sell, or merge, which will really probably be the core of today's discussion. And then we also, we have a third line of business. third service line, [00:13:00] which is valuation. , your listeners will know momentarily, you already know this.
I'm a nerd. So when we started thinking about valuation or for 16 years now, as I've seen, valuation in this industry, , I just felt like it wasn't hitting the mark. So, , when we launched our own company or I launched it and then this team came along, , we were total nerds about valuation. We have a 30, 000 cell discounted cashflow model.
It's a elegant tool to essentially rip a company apart and put it back together again economically to come up with, , a defensible industrial strength valuation. So we may or may not get. may or may not get into that. But really the core of what I expect today's discussion is around that investment banking.
So for us we help some firms sell. And that could be prior shooting and negotiating a deal they already have at hand. That can be a white sheet of paper to go out and find potential acquirers for them. , we also work on the other end of the continuum with buyers, some buyers. And I'll say, Hey Dave, we got a live one.
Help us negotiate this deal. , in other cases, again, that white sheet of [00:14:00] paper going to market and finding, , sellers that are a good fit for them. And we also do a fair amount of merger work. , in many cases, these are two parties. , they see some strategic fit and power. But they want a third party, an objective third party to come in, not just to give them fair advice, but be that sherpa to get them up the mountain.
And in many cases too, they even share our costs. They're like, Hey, we just, we want your guidance. We're going to split the fee. Just hit it down the middle of the fairway and help us, , craft a deal that makes sense for all parties.
Corey Kupfer: So talk to me about who is, cause it, listen, we both experienced this and you and I frankly have talked about it the best, right?
You hear a lot of, of firms saying that they're buyers or want to be buyers. , so let's talk about, , who are really buyers. What did it take to be a buyer? And what are some of the misconceptions that may be some of the companies out, out there who think they want to be buyers, , who may not be buyers?
David DeVoe: Yeah. Yeah. So we, , in our industry in particular, a very hyper fragmented industry, there's say 10, 000 firms, , in the industry and maybe. 5, [00:15:00] 000 that have a degree of scale. And Corey, you and I have done this. We've been on stage with a couple hundred people and we've said, okay, raise your hand if you're a buyer, raise your hand.
And if you're a seller and almost every hand in the room goes up when we ask if you're a buyer and very few raise their hand when they're a seller, even though you and I know that a lot of, a lot more, , in the audience or sellers are just. reticent to say it. And I'm respectful of that. , there's some potential risks or trade offs in raising your hand to say you're a seller, despite the fact you've built a firm that has value, .
But on the buyer side, and this might be common for other industries as well, it's one thing to raise your hand and say, I'm a buyer. , I have capital. I have enough scale that I want to go out and , acquire firms It's one thing to have that intention. It's a completely different thing to be able to go out and do it at a former company, I actually created a diagnostic to help firms, self identify whether or not they were really in a position to go out and acquire.
And if not, and a lot of them weren't, , to either go build those [00:16:00] capabilities, , or decide, , Hey, maybe I should just grow organically. This is more complex than I thought. , we, , some of those things to contemplate if you're flirting with the concept of aquarium firms.
Yeah. Some of it is very technical, like, okay, do I have capital? Do I have the amount of money and access to capital to go out and acquire in the marketplace? , and each industry is going to have its own unique deal structure. So you don't necessarily need that hoard of cash to put on the barrel head in many cases.
Now there will be a down payment and other structure that over time, , part of it is truly having access to capital and being intelligent about it. , have I talked to lenders or do I need lenders? What does that look like? Have you started to think through deal structure is an immediate, , relationship with how much capital you need in place, depending on the deal structure you have.
, that's going to influence the, how much capital you need and also going into the marketplace and having a story, Hey, we structure deals this way. We can be flexible on these areas. We're not really flexible on those areas. That conversation alone will start to build [00:17:00] credibility with, , with sellers.
So I'm happy to elaborate as appropriate, but there's two samples of some of the things that a buyer would want to have in place before they start going mid market.
Corey Kupfer: Yeah. And the one thing I would add that is so on the mark, David, and the one thing I would add is even more basic than that, which I know we've also talked about in the past, which is that.
, which is them having actually some sort of value proposition for people that they want to acquire. I mean, a lot of them understand they need a value proposition for their clients. And some of them think the value proposition for their clients is the same as for somebody that they want to bring in.
And that's not the case. And some of them think, , that they're really nice people and they have a, , a good firm and it's a nice place to work as a value proposition. And that's not either,
David DeVoe: right? Yeah. Yeah. 100%. I think, , by all means, , that's part of the story is knowing what your value proposition is for your end clients.
Matter of fact, that'll help you with another topic we might talk about, which is when you come into the market, you want to have a target profile. Who's a good fit and , who isn't, how do you save your time? So that's a component of it is that in client, the experience, the depth that you might have in a certain part of the market, et cetera, [00:18:00] but as, or perhaps much more important is, , your value proposition to that organization that might be selling to you.
, so, , it might be, Hey, we have an easy path for you to, , exit and retire on your own terms. It could be, , join forces with us. We're one of the biggest firms in the industry. And we're going to help you run better, , eliminate some expenses, be more efficient. It could be we're big and we have a broader product side or service set or set of capabilities.
We can help you do what you're doing better with more clients or improve the relationship that you have with your clients. And in some cases too, we even see say expertise. , , again some firms. , really are focused on the technical side, but they're not necessarily business experts.
They're running a company, but they might not be ninjas of running a company. By contrast, a buyer might say, Hey, we are ninjas. We have. industrial strength capabilities to, to have you review your employees better, to , to optimize your compensation structure better, to market [00:19:00] more effectively to track these different elements.
There's a whole host of things. , just a couple of different examples, but as a buyer goes into the marketplace, they want to answer the question of, so what, , why should one of these firms be talking to you and contemplating a sale to you?
Corey Kupfer: That's great, Dave. And so let's jump to the other side now.
Let's say, what is it? , what makes an attractive seller and what does sellers need to get in place if they don't have it, , to be, , , a good, , target for somebody who wants to acquire them.
David DeVoe: Yeah. Yeah. So a few thoughts, , I, I think, and this goes for both I'd start with goals and objectives.
, having that foundation of what you seek to achieve, , we'll put it in the context of sellers, but you can flip it for buyers too. They should have clear goals and understand how that M& A strategy fits within. , that, that seller, we always encourage them to start thinking through what they seek to achieve, perhaps with their organization over the next five plus years.
, and in some cases, selling to another organization might accelerate the achievement of those goals and objectives. What? Maybe it doesn't. Maybe merging with a firm would better achieve those goals and objectives. Maybe acquiring a firm might [00:20:00] better achieve those goals and objectives. Or maybe none of these transactions are just other tools of the tool shed.
Instead, they shouldn't be selling, , or buying or merging. They should be putting, , a professional management team in place, or they should be, , fixing this element or that. So we always encourage them to start with clarity about what they seek to achieve as a company. And depending on the industry that, that of the listeners, oftentimes the season gets into a personal and professional level for the executives, the executive team as part of this.
, selling your company to another organization cannot just be incremental benefit. It can be transformational, not just to your company, but even how you spend your time, , getting these things off your plate or reallocating how you spend your time, getting rid of these elements to focus more on those elements.
Those are all part of the equation. So I know your question, , and feel free to push me further to go into the characteristics of what makes a seller attractive. But I think even before. So let's start thinking about that. They should have a better strategic context, or have that strategic [00:21:00] context for what they seek to achieve, and if a transaction will support
Corey Kupfer: that.
Yeah, that's, I agree, Dave and, , it's, essentially, so let's take, let's go from there, which I think is the right, , , starting, not only starting point but, , , overview. And let's scroll down a little bit. , , one of the things that, for example, , On my end as a lawyer, , and I know, , , you help companies on due diligence side as well is, , having done so many deals, I know a couple of things.
I know that buyers are always worried about what they don't know about the, the firm that they're potentially buying and where it can go wrong. And, , and if it's a bigger firm. , whose job might be on the line if they lose something. , so one of the things I always do is help prepare companies and due diligence beforehand because I know what, , the buyers could be looking for.
So as opposed to try to scrounge around to make sure that they have, , all their, , T's crossed and I's dotted almost literally, , do they have all of their signed contracts with their clients? Do they, , , , are there, , , and this morning, , their financial is in shape.
, do they, , do they basically have their house in order so when, , a buyer comes in to do due diligence, they're not spooked by something that actually there may not [00:22:00] be any fire there, but the, but there seems to be smoke there and they get worried. , , so talk to me about how you prepare, , a buyer, what things they need to have in place to be, , attractive and also not to
David DeVoe: blow a deal.
Yeah, no, that is great stuff. I think, , one, and we can come back to it, but the story that's told to the buyers, usually plural, but sometimes not, but the story is so critical, , and having an awareness of not only your goals, but your strengths, your weaknesses, the potential way your puzzle piece might fit into different puzzles, Yeah.
can be extremely powerful and actually optimize the negotiation that you'll ultimately get into. So I think, , part of this is strategic thinking through, okay, , let's have a diagnostic of the firm. What are the strengths, weaknesses, capabilities, threats, opportunities, all these different things, , so that you can go into the marketplace selling a nice, tight, succinct story, but that also can influence the target profile of who might be a good fit for different types of buyers.
, again, I'm getting distracted by all these great things to [00:23:00] talk about, , specifically very early on in the process, , we think of, , mergers and acquisitions. We break it into three key, , phases of the life cycle and that first phase is sort of the planning and fundamentals. So in this stage, we're not just talking about the goals, we're not just talking about the story, but we're valuing the potential seller.
To know what they're going to be worth in the marketplace and Corey, , ripping a page from your playbook. You're so spot on in this phase. We're not only gathering the information, we're helping them start to put together the due diligence documents that they need. So rather than just sending a scribbles or pieces of Excel to, to try to do the valuation, we're letting them know in advance, we want to put together the.
All the supporting information that you're going to need, , you won't need it for three or four months, but let's start gathering it now. And I'll use a direct example. It's heartbreaking. Really. , we had one client, , who, , went through this process, , goodness growing so quickly, , almost hard to get his or her attention.
, [00:24:00] and that's a good problem to have, but as a result of that, wasn't as buttoned down on certain elements like this due diligence processes as we typically like to have. So we valued them up front and we moved down field. We didn't have all the ducks in a row. Eventually an offer on the table, letter of intent, really, I think a phenomenal.
phenomenal opportunity for them and deal and that it was a go time and so let's do due diligence. Let's start crafting the final agreement. And , a week goes by, two weeks go by, we start raising flags. We're like, hey, , seller, you really got to get these ducks in a row. Matter of fact, you got to get them in soon because this is going to create that smoke that you just alluded to.
, it got long enough that we cautioned and eventually it was a punchline, but we cautioned that one of two things is going to start happening at this point. Because it's taking so long to put these documents in place, , put them in a data room. The buyer is going to start wondering. Either you're playing around with the numbers behind the scenes to try to make a match, or you're just not buttoned [00:25:00] down.
You're not run like a nice tight machine. And that's a different type of yellow flag. And sure enough this actually disrupted the deal. It wasn't the CEO of the acquirer that, , ultimately walked away, but it was a private equity firm that was backing that acquirer. , and , these are big numbers.
These are, , , eight figure transaction that we're talking about here. So I think, , back to your point. Having those due diligent items in place, , is not just an exercise to save time and our energy down the road. And ultimately can affect, , literally affect whether or not, , a deal gets done.
Corey Kupfer: Yeah, that's great. And what kind of, , , either on the seller or the buyer's side, , what kind of resources do they have to have in place in terms of people and , and energy and money? Because you talked about capital a little bit, but I think one of the things, , in my experience that people ought to estimate is that, Listen, if you're going to do a one off deal, you could, you might be able to manage to do that and run your business and figure it out.
But companies that do, , , certainly on the buyer's side, companies that acquire regularly, , they build infrastructure around that, right? Yeah.
David DeVoe: Yeah. And I think even, , for that one and done, someone who's going out to do a single transaction clearly unbiased to a [00:26:00] degree, although we run our company in a very unbiased way.
We're like, Hey, we want to help you with whatever you want. We're going to give you objective. Yeah. advice. At the end of the day, , to go out even as a buyer and do a transaction, there's just a lot of risk on the line. , someone is doing something for the very first time. So to not only hire a good lawyer, but, , hire an investment banker, hire a consultant, someone just, whatever it is, surround yourself with that right team.
, because this is a critical, , business decision that if it goes wrong, It's not only money poorly spent, but it can actually start to affect your entire organization too. It becomes a distraction. , so I strongly encourage folks to get, , a team in place that they have those ducks in a row.
Now, clearly anyone who's going out and they're seeking to do several transactions, , an investment bank is not only arms and legs, but brains to, to go out and help get that
Corey Kupfer: done. Yeah, that's great. Let's take a break from the show for a minute so I can tell you about an incredible resource my team and I have put together for you secrets of deal driven growth, creative [00:27:00] ways to grow your business.
Even in challenging times, there's a powerful ebook that helps you take deal quest. Podcast episodes and apply them to your own life and business. This is the ideal tool for anyone looking for creative ways to grow as deal makers. And you can get yours. Now it's as easy as heading to Corey comfort. com slash workbook and downloading your cup while you're there.
You can also consider joining our dynamic deal driven community of founders, experts, small business owners, and entrepreneurs. Now back for the show, let's jump a little bit into the area of valuation. You mentioned it before. It's a big, , it's a piece of what you do. , there are all different, , they're all different value valuation methodologies.
You, you mentioned discounted cashflow before. Some of the listeners may not know what that is. , they've heard of revenue multiples. They've heard of maybe EBITDA multiples, maybe EBAC multiples. There's so many different ways and it gets confusing to people. Can you start? Just sort of lay that out for us.
What all those different things are.
David DeVoe: Yeah. Yeah. I'm slightly [00:28:00] oversimplifying, but very slightly there's only a couple of ways to value a firm. , and I'm nerd been to Cornell business school. I took all those classes, , live and breathe that stuff. But at the end of the day, there, there's really three ways to value a going concern.
, there's the, there's book value, there's comparables or multiples, and then there's discounted cashflow. , and then from there we'll riff and we'll talk about different strategic, , premiums and things like that. But out of those three ways, it really depends on the industry. For instance, book value.
Book value is a calculation of all the hard assets associated with an organization. , if, for our industry or my industry, the REA space, it doesn't apply. , because the hard assets for , a wealth advisor are some desks, some computers, some chairs, , it's maybe a hundred or a couple hundred thousand dollars for a firm that's worth millions or tens of millions of dollars.
It's just, , the hard assets are not what the value of that organization is. Now, by contrast, firms that have. Lots of equipment, have lots of inventory and Billy buildings or fleets of trucks, all these different things, , that can be a [00:29:00] more appropriate way or a component, a critical component of some of the valuations.
But for the financial services industry, for the most part, that's not part of the equation.
Corey Kupfer: And frankly, Dave, the full majority of the companies in, at least in the U. S. these days, the service businesses. And . So not only wealth management, but I would say that valuation methodology is not applicable to the, , the majority of businesses.
Majority of firms.
David DeVoe: Yeah. And so in many industries, you start to hear the second technique, which is comparables, , multiples. So that can be, , two times revenue or seven times cash flow. , and , I think that's getting warmer. Right. , and it's toward what is an, , an appropriate way to, to optimally value firms, at least in our business.
But the multiple is, , those multiples of this metric or that essentially, , what you're saying is, , typically for this industry. We have a lot of good data that indicates that firms play in this range. Now, , I'll be very specific because some on the phone might say or listening in might say, Dave, come on, give me a break.
PE ratios is an example of [00:30:00] comparables and that's used by people way smarter than you'll ever be, Dave. , what are you talking about that's not necessarily a great technique? Well, that can be very powerful and agree. There's people a lot smarter than I'll ever be that are doing it.
And let me talk briefly about why that might not apply to our industry as well. So others. The comparable approach goes like this. You say, okay, what? Let's use the market technique. You're going to take, , 20 or, , maybe even a hundred firms, but let's say there's about 20 comparable organizations.
And let's say we're talking about, , I don't know, Wells Fargo, we want to value Wells Fargo. So what we can do is we can pull, , a whole bunch of companies that fall into that code. , what are organizations like Wells Fargo? So we have, , Schwab and all, , And we're going to stack them all up and look at the price to earnings ratio and we'll stack them up from top to bottom and we'll say, okay, Wells Fargo, are they in the top decile or the third decile or gee, they're not running a great organization.
They should be in the ninth or 10th decile. And you start calibrating based on a whole [00:31:00] variety of factors where you think they should play. Within that zone. This is a slightly oversimplified way to do it, but that's what's happening now. That works well with publicly traded firms, publicly traded firms.
you have a great P the price in that, , you just sit Google, , , Yahoo finance refresh and turn and, , down to the minute with that firm as well. So you have great intelligence on what the valuation of that firm is. You also have great detail into the quality of that company.
, audited financials, , they're required to share information. You can run, , the revenue per employee the profit per client. You can, , look at the attrition bill. You just have unlimited amounts of information that you look at. So consequently, you're in a position. to better determine where they should play in those different deciles or quartiles.
And when you're comparing them to others, when you're using privately held firms, you don't have that luxury. You don't have any of that information. So even though, , Corey, you and I might be talking about a firm and say, Hey, what? I think this one might be worth, , seven or eight times cashflow or, , nine or [00:32:00] 10, that sort of parlor talk that's you and me as experts having a ballpark.
But the counterpoint is we're using very rough math, math, my, , 14 year old kid because he easily do in his head to value a firm that's worth millions or tens of millions of dollars. I personally don't think it's a responsible way to value a privately held term.
Corey Kupfer: Yeah. So talk about that.
And , so listen, there are so many factors that can come into it. Right. , and I know, , I'm not, , I know you have a primary valuation, , model, and I'm not looking for you to give it all away, but , listen, there are some things like, for example, The people who might not think about like, , let the client relationship age of the clients, , , growth rates, , various other things that go into figuring out a more, , , targeted, , and accurate valuation, , , approach, right.
David DeVoe: Yeah, no, you're spot on. So the discounted cash flow gets into that rich amount of details. , if let's say in that situation, Corey and I are just batting around, okay, G a firm is worth eight or nine times. Part of what's going into that is, is he and I are thinking through, okay, What's the growth trajectory of this firm?
Is it a fast growing firm or a slow growing firm? Is it a machine or driven [00:33:00] by someone's charisma? , what's the profit margins? Are those going to expand or contract? We're looking at, , the risk profile. Gee, this thing has a lot of, , hobgoblins that could come back and haunt it or not.
So a discounted cashflow, at least ours, the intention is really there to capture all of those elements. And create a very nerdy tool to do that. So when, , what is a discounted cash flow? Essentially what you're doing is you're looking at, , we use five years of historical data. Starts to give you some, for different trend lines, , gee, what's the revenue growth been over time?
Or in our industry, what's the asset growth as well? And what's going to change that over time as we start to forecast in the future, let's say we're going to forecast five years out. We're looking at, , the revenues, the expenses, how those might shift over time. And ultimately we're yielding, , a projection of profitability over the next five years or so.
And we're using Excel to, , project this out and I'm happy to get detailed, but create a terminal value at the end of that period too. And then we're discounting all these cash flows back to present day, because this is a [00:34:00] risky transaction. We don't know for a fact all those profit numbers are going to.
, so we got to make a calculation in terms of how much, how risky those are. , that modeling that you're doing, , as I said, we're nerds about breaking growth into 16 different ways that a firm can grow. When we're looking at the expenses we're looking at not only, , employee compensation increasing with, , , the GDP, but also there's a constrained industry that we're in.
So there's something on top of that. We're thinking through when people are going to get promoted and what sort of balance they might have in their comp that we're really nerdy now. And on the wrist side you took down a couple of them. We're looking at things like the age of the clients in our industry, which is important, or the concentration, do they have one or two or three big clients?
And then. , if those clients left, they'd be at risk, , near and dear to your heart. Do they have non competes, non solicits? , do they have a succession plan? All these different things. , we use 48 different factors that go into it where you want to assess the risk. , clearly it's a lot more complicated than seven to eight times cash flow.
But once you do this, , you. Have [00:35:00] a business plan for what this organization is going to perform like in the future. You have a much better understanding of how this will be integrated into your organization. So consequently it's just a much more accurate and robust way to value a firm.
Corey Kupfer: That's great.
And , it's amazing how often I know all of us who do this get, , and even the industry press, , will. We'll talk about, , I mean, , it's one thing to talk about multiple cash flow or even, , , , but, , you even hear things like multiples of revenue, which are even worse because, , at a simplest level, my firm could be twice as profitable as your firm, , so to go on, , , So, Dave, listen, there are so many things that we could talk about, , but obviously we're limited on time.
What I'd love to do is, , we were talking about things, , that apply, , even, , across industries, but I want to get specific on the RA industry because you really have your, finger on the pulse and you see what's happening. And listen, there's been some really interesting evolutions that affect, deals and growth, et cetera, , from everything from, , , , private equity and other money, , coming into the space.
Some firms that have been going public, , consolidators, aggregators, a lot more, , various types of platforms out there.[00:36:00] , and then you and I have talked for years on the evolving demographics, , of the industry, , which frankly, , have accelerated deals, but not necessarily yet at the pace that, , I might've thought, , would have happened already.
, talk to me about the trends that you're seeing, how you think they're going to affect, , RA firms and deals in the space.
David DeVoe: Yeah. No, , trends are near and dear to my heart where we're just about, I think even tomorrow morning, we come out with a new vein. Devoe, , REA, M& A, , deal book that we do once a quarter, and it'll show that, , we had yet another record year here.
, I think you're spot on too, despite these record number, the record amount of activity we've seen over the last, , five years or so, , there's still not the number of transactions that one would expect for the industry of our size. So Corey, to me, the it's actually a red flag each year we see, , what I think is half the number of deals we should be seeing.
It just means there's more supply that is going to come onto the market at some point. , I think there's [00:37:00] just a growing amount of advisors that need. to sell externally. In many cases, advisors want to sell internally, but more and more often, we're seeing firms just become too valuable for the next gen to be able to afford them.
And, , advisors are just not planning the way they should be. Only about 30 percent of advisors have a written succession plan in place. , I think as I look forward the next 5, 7, even 10 years, M& A will likely continue to increase, , fairly aggressively I expect. We might even see, , one or two times where we just see a surge of sellers come onto the marketplace.
And that surge may very well, I expect at some point will outstrip the ability of all the buyers out there to be able to acquire. , we talked about it earlier. You need to be a qualified buyer in many cases to be able to get a deal done. And even these teams that are acquiring firms, there's just, , So many hours in the day, so many people to work on a given deal or integrated deal.
So I think we might even experience just when I look at the supply of the potential buyers, sellers that need to come on the [00:38:00] market. I think we may hit a point over the next, , five or seven years where there, there simply is a doubling of the number of sellers in a given year and they just can't be cleared in the marketplace.
Corey Kupfer: And, the other interesting thing for me before I go there are final questions is, , , especially, , the ups and downs of the economy and specifically the market affect all businesses, but , this particular industry, which gets paid on, , , mainly on assets of the management, , if the market goes down, their revenue goes down, , even if they're.
providing the same services to the same number of clients, et cetera. , and , the interesting thing that I've seen in, , you and I have both been around for, let's say more than one cycle. , and, , and, , , interesting thing that I've seen is that, , unfortunately when prices are higher and the business is good, , business is easier and people sort of, , cruise along, whereas that might be a good time for them to consider selling.
And then, , inevitably what happens with some of them is the next down market comes and things aren't as good and they're a little tougher and then I'm making as much money and it's a bad time to sell, but they sort of look at it and they say, Hey, I'm 60, , five or 62 or whatever I am, .
And, , it's, , going to take five years for this thing to really come [00:39:00] back up to its highest. Do I really want to wait that whole cycle out? And, , some of them end up selling, , , at a less than ideal time from a seller point of
David DeVoe: view. Yeah. Yeah. I think we're in an industry where no one wants to time the market.
That's a challenging thing to do. Conversely, You need to be aware of how the market can affect your own timing. And I think the shock to the system that we've had over the last couple months here, , sort of opened up some scabs from 2008 that a lot of people in the industry had, , for reviewers that aren't RAAs or listeners.
, 2008 was when we saw that stock market, , massive decline, , and for this industry, it went from essentially all time highs for valuations to all time lows. I've been in this industry 17 years now, , for valuations within about, , a few weeks and then it stayed at that nadir, these very low valuations.
For months and months and quarters and quarters, and it took a couple years to return to a point of normalcy. [00:40:00] Well, here we are yet again as you noted, valuations are now just barely off the all time highs that we saw. Valuations are extremely high in this industry, and I think we just had a big shock to the system.
, we had some big drops and folks probably started realizing or jogged many of their memories the way our switchboards are lighting up here. It seems to be the case anecdotally and the conversations we're having where people realized, okay, wait a sec. If I want to, I'm planning on selling in the next two years and Armageddon comes again.
, before that two year point, I might be on the sideline for another five years, , and you, so I think it's important for advisors to not try to time the market and get the all time high, but, , conversely, valuations are extremely rich. What's underreported to query is deal structures are more attractive than I've ever seen either, , sort of the, , underreported part of that.
And if the right time for an organization to sell is, , within the next year or two, , understanding the potential risk to that, if there's a market [00:41:00] correction, what that can do to the timing is, , just, , disciplined, , management.
Corey Kupfer: Yeah, absolutely. So Dave, before I ask you my last question, , I'm sure that listeners have gotten huge value as, , as people always do when you're being interviewed or been on stage.
, if they, , wanna find out more about you or reach out to you, , what's the best place for them to go?
David DeVoe: Yeah. Let's see. So, , our website, , www devoe and a company.com just fully spelt out or my email address is David DeVoe, DEV [email protected]. devoe-co.com.
Corey Kupfer: Great. And, , and the deal report you do quarterly, is that something they can subscribe to or get on the list if they
David DeVoe: want?
Absolutely. If you go to the website it'll be posted there. And by the way, , we have several years now posted there and don't just ignore them because you're like, Oh that's Q1 from 2018 or 2016, who cares? , once we get through the numbers on the first page or two, then we start getting into rich data.
, in the most recent issue we do a byline article or a side article, I should say. on, , the next generation [00:42:00] and as a principle cells, what's the impact on the next jet? , last issue we talked about valuations and what's driving it up. We talk about waves of buyer categories and what we're likely to see over the future.
So the old ones have a lot of rich data too. So you can go to the website and see them there. And I believe there's probably a link to that. You can click on or send me an email and we'll get you added to the list. Excellent.
Corey Kupfer: Excellent. So my final question for you, Dave, , is, , , one of the themes that I'm a big proponent of, , is authenticity.
It's, my book is on authentic negotiating. I talk about authentic deal making. And for me, authenticity is, , it's not just, , , integrity and morals. And because those are, I mean, that's , I don't think you'd be authentic if you're, I have no integrity.
, but it's also being, , like acting in a way, making your business decisions, running your life in a way that's aligned with really your inner truth, what's true for you. And I think, , , it's interesting because. I know you, , pretty well and, , you describe yourself as a nerd and, , and all that stuff and, , it's easy to think, , that, , yeah, the numbers are important, et cetera, but you also talked about your client's objectives and one of the things that, , [00:43:00] in, in order to get the objectives, you really need to go, in my mind, to a possible authenticity.
So, I'm wondering for you in your own business decisions with your own company, , whether it's the kind of clients you choose to work with, the people you choose to hire, the types of, , deals you used to do, , , you choose to do. , what do you do to make sure they're authentic to, , your truth, your vision, what, , what you're here to do?
David DeVoe: Yeah. Yeah. I want to answer two ways, , because, , one is about how authenticity affects. M& A and then answer your question too about, , me and Devone company, because you've touched on something that's so critical, Corey. And, , when I, when you, even when you sent the title of the book and you had me review it before you released it and I started reading it, it resonated so much, , and it's so important for everyone to, on the call to know this.
When you go to sell. , or by, , I'll be very specific. We work with sellers up front. We say, okay, you heard me say so that goals, objectives, , the characteristics of your firm, the strengths as well as the weaknesses. I mean, part of strategically what we're doing as an investment banker is determining what those weaknesses are.
Every [00:44:00] firm has them. , and then determining, okay, when do we bring this up? Is it the first meeting? Is it the fourth meeting? Does the banker bring it up? Does the person? , what's the best way? , and then part of that is we are creating positioning around this organization. The story that we're going to tell in the marketplace that is going to not only generate interest.
But generally, ideally a premium for the firm, there's going to be firms out there that will pay a strategic premium because this story resonates with them. Their puzzle piece fits well into the acquirer's puzzle in a way that unlocks all this great value for everyone involved. Now, as we're crafting that story, we know what's going to sell in the marketplace.
We know what buyers are looking for, even on the buyer side, we know what sellers are looking for. And we will help craft that story, but we use your exact word, Corey. We say through the process, we're going to be sharing and crafting the story. But you need to have your compass out and make sure that everything that we're starting to talk about is authentic for you.
We don't want to go into the marketplace and have something that resonates really well, but it's not really authentic. to this organization. [00:45:00] That's just, , bearing a problem that's going to rear its head later. So authenticity throughout this whole process is so powerful. And then, , for myself, DeVoe Company, , I find myself each year, I've been running a company seven years now.
Each year, this concept of authenticity, of values, of principles becomes more and more important. We're able to get really smart people to come and work at DeVoe Company. But when it doesn't work out, it's usually because Of values and principles and priorities and the way they think about , not just the business the company the work They do how they live their lives.
, so I think as i'm maturing and getting older and It's starting to make more and more sense to me why this cultural element values, principles authenticity is so important So yeah, it's a compass that I continually continue to try to refine. , just because of, if I'm very attuned to it in any given time, especially highly in process and critical business decisions, it really puts me, , me and the company on the path to, , [00:46:00] to gain the, , the optimal success.
Corey Kupfer: Great. Dave, I so appreciate you being on the show.
David DeVoe: My pleasure. Thanks for having me.
Corey Kupfer: Thank you for joining me on this episode of DealQuest, where we help you understand how deal driven growth can be your ticket to freedom. I want to invite you to a unique way to tap into the wisdom and experience of the DealQuest community.
The Deal Den is a place where entrepreneurs, high level executives, and business leaders come together, support each other's growth and success, and share what's working best, as well as what challenges we are facing right now. You will get input not only from me, but from all of our members. We collaborate and serve each other.
To join us, go to coreykupfer.com slash DealDeck. I'll see you there. I'm Corey Kupfer. Until next week, wishing you the freedom and financial prosperity that I know your DealQuest will bring.
