Summary
Stephen Brown from LedgerGurus sits down with Mark Lupton, founder of Greenhouse Business Advisors, to talk about what actually makes a business valuable while you are still running it.
Most founders only think about valuation when they are ready to sell. But the choices you make every day about growth, profit, and risk are already shaping what your business is worth.
Stephen and Mark break down the difference between chasing growth and building real value, why buyers care so much about risk and how the business is run, and why proof of traction matters more than a good idea on paper.
Takeaways
- Cash flow, profit, and business value don’t always move in the same direction.
- Value grows when opportunities are backed by proof they work.
- New channels only add value when the numbers already make sense.
- Relying too much on one supplier or platform hurts your valuation.
- Customer retention shows whether your business delivers real value.
- Buyers want to see revenue consistently turn into cash.
- Needing constant outside capital makes your business less attractive.
- How you run the business matters just as much as how much you make.
- The less the business depends on you, the more it is worth.
- Thinking long term moves you from putting out fires to building something valuable.
What We Cover:
- 00:00 Why founders misunderstand business value
- 01:20 Mark Lupton’s journey into ecommerce finance
- 03:40 The three financial lenses every founder should use
- 06:10 Why valuation matters even without a planned exit
- 08:20 Looking at your business like a potential buyer
- 10:10 Opportunity versus risk in company valuation
- 13:00 When chasing growth can actually destroy value
- 20:10 Proof and protection in business strategy
- 23:10 How Porter’s Five Forces applies to ecommerce
- 28:10 Why customer value drives long-term growth
- 31:10 Demonstrating that your financial engine works
- 34:50 Growth that consumes capital versus growth that generates it
- 38:20 The different ways businesses are valued
- 41:50 Financial returns versus founder satisfaction
- 45:10 Knowing when someone else can scale the business further
- 47:20 Turning a founder-led company into a real asset
- 49:20 Where to connect with Mark Lupton
Guest Information
Mark Lupton founded Greenhouse CFO in 2021 to empower founders to grow their companies well. He leads a team of consumer brand-focused CFOs who provide strategic financial leadership to 8-figures consumer brands by bringing financial clarity, improving operational efficiency, and implementing the right financial processes for healthy growth. Mark also works directly with founders to navigate the financial complexities of scaling. Notably, he has served as CFO of Carnivore Snax for 3 years on their journey from $2 million to over $30 million. Additionally, he serves as a strategic advisor to DTC fintech companies, leveraging his operational CFO experience to help develop solutions for emerging brands.
Prior to Greenhouse, Mark was a partner at a consulting firm providing fractional CFO services, FP&A analysis, and executive advisory across multiple industries. He supported several clients in securing multi-million dollar raises.
Mark holds an MBA with distinction (entrepreneurship and finance) and a BS in Engineering. He began his career as an engineer at a Global Fortune 300 company.
Work with LedgerGurus
If you want to understand how your numbers translate into real business value, reach out to us at LedgerGurus. We help ecommerce operators build financial clarity that supports smarter growth decisions.
Stephen Brown (00:00)
Welcome to the Ecommerce Finance Podcast. I’m Stephen Brown with LedgerGurus Today I have Mark Lupton with Greenhouse Business Advisors back on the podcast and we’re going to talk about growing your business value. Thanks for joining me again, Mark.
Mark Lupton (00:08)
Hey, hey. It’s a pleasure. I enjoyed it the first time and I’m sure I’ll enjoy it even more this time.
Stephen Brown (00:18)
No, it was a great episode. And in case somebody didn’t listen to that, which they really should, ⁓ give us a little introduction of yourself and kind of how you got into ecommerce.
Mark Lupton (00:30)
Sure, yeah. So Mark Lupton like you said, the founder and managing director of Greenhouse Business Advisors. We do fractional CFO services for growing, emerging, ⁓ established ecommerce and consumer goods brands, especially in the eight figures and beyond. And so ⁓ started this business almost five years ago now. And ⁓ we’ve got a team of CFOs who are as experienced as anybody I’ve seen in the space and excited to share our insights on this topic today.
Stephen Brown (01:03)
Awesome. let’s talk about business value. ⁓ You’ve got a lot of ideas and I think part of it is like where, you know, there’s balancing and we talked about this last time around strategic finance, but short term, midterm, longterm values. Maybe we start there thinking about the different timelines and what you should be thinking about as a business owner.
Mark Lupton (01:34)
Absolutely. Last time we talked about strategic finance and we got a lot into founder mindset, which I always enjoy talking about. It’s kind of upstream of everything that you do is the mindset and the, even the heart set and how you approach the work that you’re doing. And I think that that parlays nicely into the conversation that we’re having today. ⁓ you know, strategic thinking is a shift from that short, fast thinking, right? Quick responsive reactive that the founder operators have to live in. It’s just the reality of running a business, especially at the earlier stages. But in time as you scale, you need to transition and make space and carve out space for the longer, slower thinking. ⁓ And so how that relates to finance is oftentimes the short-term view, fast thinking is related to cash flow. So you’re thinking about how to generate cash and how to fund getting product to people. You price it a certain way based off your costs early on and you’ve built in some level margin that could have been very scientific and calculated or just sort of lick your finger and put it to the wind, so to speak. But the short-term view is often on cash flow, making ends meet, getting month to month, getting product out, growing. And then you get more mature and you start to understand the difference between what changes in the bank account and your profitability. And so you start to focus on profit in the midterm. ⁓ So this is in line with what you guys over at LedgerGurus know well, which is the shift between cash and accrual accounting where you start to really understand is this business efficient? Is it making profit not just cash? And and so the short-term view cash flow midterm view profit and then there’s the more long-term view as I see it which is building value and that’s the longer slower thinking oftentimes. So, running decisions through the framework of how is this impacting cash flow? Yes. How is this impacting profit? Yes, but also how is this impacting the value of the asset that I own? It’s a different way of thinking. A strategy should consider all three of those things in every decision that you make on the financial perspective. That should be a habit, those three things running through your mind. But today, talking about value, the long-term view is one that is focused on value.
Stephen Brown (03:57)
You know, and value is interesting because I think when we think about business value, oftentimes we think about it in terms of selling the business. But I think what we’re going to unpack here is not just the value of your business when you sell, but in an ongoing basis. you know, again, let me just take a detour down this path to help enlighten people. ⁓
There’s a lot of business statistics around how long small businesses last. think the survival rate after like 10 years is like 66%. I don’t know, there’s some, there’s a, or maybe it’s 66 % go out of business. But let’s say you’re a survivor. I just pulled this up on chat GPT, so hopefully it’s right. 20 to 30 % of businesses are ever sold. And of the businesses that go to market, only 20 to 40 % of listed businesses actually sell. So a significant number of businesses are gonna go out of business. ⁓ There are many that will never sell. What we wanna frame is ongoing business value. Whether you sell or not, selling a business is hard, the odds are low, but what is the value you can get as you go along?
So let’s keep going down that path.
Mark Lupton (05:25)
I agree. People often sort of conflate business value with ⁓ just selling and there is reality to that, right? ⁓ I’ve heard it said that like the value of your business and your net worth therefore, it’s kind of like a Cadillac on the moon. You got a Cadillac, but it’s on the moon, you can’t access it, right? And so if, know, the only way to really realize that value is to liquidate in some way, is to be able to pull cash from that in some way. And oftentimes people think about that as a moment, as a singular transaction, an exchange of control of your equity to another person. And that’s generally the narrow focus on how you actually extract that value, how do you get the Cadillac down from the moon, right, and drive it around. ⁓ And so, but I think the mindset shift is important here again, is that, you know, as one of our lead CFO says, Andy Donaldson, he just in a prior call was talking about the best thing we do is build a strong business, build a strong valuable business for yourselves. That’s the best preparation for a sale. And so we come back to that. And so I just wanted to interject that for a moment before we continue.
Stephen Brown (06:37)
So let’s talk about some concepts of the value of a company. You gave us a high level. You’ve got a couple ideas here. Let’s go down those.
Mark Lupton (06:47)
Yeah, sure. ⁓ So I want to start, I suppose, you are, as a founder, you are in the position where you can have the opportunity to think of your business from the perspective of someone purchasing. know, building a valuable business isn’t just about selling it, it’s about the value to you. You are the 100 % or some percentage owner currently. And so thinking about the business from the perspective of a potential acquirer helps you because you are currently the one who has acquired, if you will, the business.
And so I think that’s the first frame of mind put on those lenses. We’re putting on the lenses of a potential acquirer. If you’re walking up to your own business right now, you’re looking at it and saying, is this thing valuable to me? Would I opt into it?
And so that’s number one. And so this is what a potential acquirer is doing, right? They’re saying, am I going to opt into this? And there’s a combination of things that they consider when doing that, that you should consider, that any person running a business or has stake in a business should consider. And those two very high level concepts are risk and opportunity, right? ⁓ Opportunity for future gains. What’s the potential that your business has and then de-risking those opportunities. Very simple in concept, but that’s the highest level and it trickles down to several other different types of ⁓ levers that you pull and things that you need to consider to get very specific and tactical within that. opportunity and risk, potential of the business and the chances of you actually receiving the gains from that potential or achieving and realizing that potential.
Stephen Brown (08:36)
I love that. I want to just kind of pull on this mindset for a second. I’ve seen some customers, they have businesses that struggle and they think, hey, somebody’s going to buy this and they’re going to be able to figure out how to make it work.
And I love that. if, if you’re having a hard time getting value out of the business where you are right now, I think the do the, does that exist? Those business exists where somebody’s like, I know how to solve your problems. I can unlock all this, this value. But the reality is in that moment, the business isn’t valuable to you. You want to get rid of it. It’s not going to be that valuable to somebody else. And I think if you get in that mindset, it’s really helpful, which is interesting. It’s this catch 22. It’s kind of like lending. The conversation around lending is get lending before you need it. And you could maybe say the same thing goes with, with selling. If the best time to sell your business is when you don’t want to sell your business, right? Or you’re not thinking about it, right? You’re just, you’re coming along, you’re getting a lot of value out of it. You see a lot of upside.
You’re in a good mindset. But I think one of the fallacies of selling your business is that somebody’s gonna find more value than you currently find in the business. That’s not always the case. In fact, it’s usually not.
Mark Lupton (09:58)
Right.
Yeah, the person acquiring the business needs to be excited about it one way or another. And so if you’re not excited about the prospects of growth, then there’s a lower chance. It’s maybe just a really ⁓ basic indicator of whether someone else will be.
Stephen Brown (10:08)
Yeah.
So let’s go down the concept of opportunity, talk about that.
Mark Lupton (10:23)
Sure. So when you think about opportunity, this is ⁓ where operators are spending a lot of their time. Thinking about areas for growth, improvement, incremental, major, pivotal opportunities for growth and improvement. ⁓
And there’s a variety of things within that, right? ⁓ Expanding sales channels. ⁓ This could be expanding marketing channels, how you’re getting eyeballs. This could be reaching new customer base. This could be expanding your customer lifetime value and repurchase rates. This is increasing your production capacity. This is getting more efficient in your operations. This is your team, your capabilities. additional products, additional SKUs.
So it’s all of these opportunities that founders are often weighing and prioritizing, right? ⁓ Real time. And so to me, this is the topic that, it’s less about encouraging founders and operators to think about growing and expanding. That’s just default. That’s just how you survive and what you’re doing day to day. It’s more about the lens in which you view these opportunities. And so, you know, the shiny object syndrome is everywhere. Are we running the decision to, expand to another sales channel or a marketing channel? Are we running that decision through the thinking that I mentioned at the beginning here? Or are we considering the impacts of short-term, mid-term, long-term cash flow, short-term, mid-term, long-term profitability, and short-term, mid-term, long-term value? Because it’s going to have different profiles for each of those. And this is where the slowdown thinking comes into play.
Oftentimes you’ll see people get into a spot where they’re just assuming that expansion into different channels or different products, more is better. Obviously not always the case. And there’s generally some level of logic that goes into justifying that decision. But what I’m asserting here is just to say that maybe that logic is more justifying something that you want to do because you feel like it’s the right thing just generally versus having a systematic way of thinking through that decision and how it impacts and writing down specifically how that impacts value, how that impacts profit and how that impacts cashflow in the short, mid and long term.
So that’s, know, everybody’s thinking about opportunity. Everybody’s thinking about growth. Everybody’s thinking about all the things they could do. It’s a matter not of just thinking about things you could do and acting on those, but the things that you ought to do and how you approach deciding which of those things to do based off of your situation. And that’s different for everybody. But the framework of thinking should be able to be applied.
Stephen Brown (13:07)
Gotta. Cash flow, profit, value. Cash flow, profit, value. And keep those three going. So, there’s opportunity and I think what I’ve seen is a lot of sellers they do well at this if you’re struggling to find more opportunity that’s a sign that maybe maybe it is time to sell if your business is healthy but usually that’s not the problem I see usually I see them chasing opportunity maybe faster than they should, New channels, you know, and they haven’t fully, you know, or sometimes they see it as, I see two forms of thinking and it’s gotten better since things have gotten tighter. But I think there was a thought of, we just have to be everywhere now, which I think is a good way to think about opportunity. The more places you’re in, the more distribution, but if you’re not executing well on every opportunity, more opportunities doesn’t necessarily create more value. And it definitely can be a drag on cashflow and profit. ⁓ so that I see people with that mindset. The other one is the desperation mindset, which I think is even more dangerous where it’s like, business isn’t working. need to throw a Hail Mary. I’m really struggling on Amazon and the answer is to get on Shopify.
I’m struggling on Shopify. I need to get onto Amazon. And that to me is even more dangerous thinking, thinking that chasing this other opportunity is the answer to all the problems, which sometimes it is, but a lot of times it’s just more challenges, know, less value.
Mark Lupton (14:45)
Absolutely, Desperation is something I’m seeing more and more too, or temptation towards it at least. Across the industry at least, I’m seeing that marketers in particular are needing to get creative. Over the last several years, everybody knows that the easy return on ad spend is not there as it used to be. It’s just ⁓ marketing engines are just less efficient. With that said, it can create a feeling of desperation. The basic contribution margin economics that were at the core of my business in two years past, a year and a half, know, 12 months past, are not the same anymore. And I was noticing at the end of last year, a lot of people were trying to, wrestle with that, understand why and try and, yeah, we had a lot of questions around it. Now I see a lot of people accepting that there’s a new reality and I see a trend, really a push around generating a lot more creative and trying to not just desperation leap to other channels or desperation leap to other marketing channels, but to do things like generate more creative than you ever have. Understand the customer ⁓ and the appeal of your brand to that customer more than you ever have get more deeply in the shoes of the customer and know them better so that your advertising efficiency ⁓ grows not based off of just amount of spend, or audience changes, things like this, just different types of tactics, but also based off of the messaging and how you’re positioning yourself in front of your customers. Like that’s a small, that’s one example ⁓ that I see oftentimes can drive desperation or can drive thoughtful experimentation and pressing into your core. So a risk around saying, ⁓ my core channel’s not working as well as it used to. I need to jump to another channel. From a business value perspective, your business has been built on that core channel. And so when you ⁓ jump to a different one with your time and attention, your calendar, if you will, is pointing to the fact that you are betting more so on something new fixing the overall system, as opposed to betting on the core engine getting better and incrementally better over time. Definitely there is need to diversify channels and we can talk about that more later. There’s much value in that de-risking. It definitely comes with diversification. But oftentimes the temptation in a desperate state to jump to something else ⁓ without evaluating tactics to improve your core can be dangerous.
Stephen Brown (17:21)
Yeah, I mean, we’re getting into risk. Let’s talk about risk a little bit more. And I think that this is a good analogy because the risk is I’m exposed. I’m on one channel of selling. I’m on one channel of marketing. That is a risk and it does your value can go up through diversification, but it’s not guaranteed. Diversification generates additional value when you are executing well on across multiple channels, but if you leap over to a second channel and don’t, it actually can increase your risk because now your attention, your cash flow, profits are spread and maybe being drug down by that additional channel. So what are some of the risks that people need to be thinking about as they’re thinking about value?
Mark Lupton (18:15)
There’s a lot of places to go with that. Yeah. So the, the first thing I want to do is just go back to the broader concepts, right? When you’re talking to yourself as your own acquirer, right? You’re talking to yourself about the opportunities to grow both within the current channels and current means you have of selling of marketing, but also in new channels, new means.
You’re talking about opportunities to improve operational efficiency, all these things. You’re talking yourself about those opportunities and you’re evaluating priorities, which one is the most important and then how to attack those with what resources, opportunities.
And then you’re saying, are the chances that I’m actually going to succeed at those things? This is the risk part. So if you’re looking at the business and someone comes to you, if you’re looking at the business and you’re talking to yourself again, and this internal conversation, right? The conversation looks like the choir version of you talks to your operator self and says, these opportunities look great. Prove to me that it’s not a pipe dream but that it’s really possible. And this isn’t just some fantasy, but this is a ⁓ high probability of a future that we could see. And so the operator self says to the acquirer self or the potential acquirer self, ⁓ well, I’ll show you two things. I’ll show you proof in the form of traction evidence of what we already done. And I’ll show you protection.
Proof and protection. Those are two ways two like sub concepts under the idea of risk. You want to prove that you have traction in the opportunities that you’re pitching to the potential acquirer or to yourself, right? You want to have proof that you can realistically see growth in those areas you’re proposing, right? And then you want to also talk about not just proof that we can get there, but there’s protection in the event of threats to that in the future.
⁓ We touched on Porter’s Five Forces last time ⁓ briefly, This framework is super helpful when it comes to de-risking the future, right? And assessing where you should prioritize, like what opportunities you should prioritize. So I could get into that more later, but that’s, when it comes to risk, you think about proof and protection. I’ve got traction in certain areas that I can prove my opportunities actually could come to fruition. I’ve got a reason to believe it could be real. And then I’ve got protection. I’ve got a moat, the proverbial moat.
I’ve got a moat built around each of these things so that I’m protected from risk.
Stephen Brown (20:45)
Yeah, I’m going to give a good example. I’ve got a customer right now who is exploring a sale of their business. They ⁓ have expanded into wholesale, so they’ve had some initial traction, but they were also like, I don’t know that I’m part of the reason they’re thinking of selling is like, they don’t feel like they have the skills to continue to execute. They see the early opportunity. They’re talking to what the industry calls a strategic buyer, which is basically a bigger company who’s interested in plugging you into them. Usually bigger companies have lots of existing relationships to distribute your product to as wholesalers. So in that case, the thesis would be, hey, I’ve tested, I’ve had some success. I’ve realized some opportunity. There’s more opportunity. ⁓
A buyer could come in and extract that, could execute against that opportunity. Cause they’re like, Hey, we’re good. We know all these people will come around every time we come around and talk to them. We’ll be like, here’s their latest and greatest thing. Get them on the shelves. Win-win scenario. So there’s, there’s an example of proof and then expanding upon that opportunity. And sometimes the answer is, Hey, I, I’ve got, I’ve had some success. I know how to go out and find some wholesale people, I can do it myself, and I can capitalize on the value.
Mark Lupton (22:13)
That’s a great example and it gets to an important question also which is around, When is it the right time to sell but I know there’s more there’s a lot more to unpack with that But yeah, the types of buyers also dictate types of potential value another example that’s coming to mind So one opportunity you could see is by expanding our product lines, we have the opportunity to increase customer lifetime value and AOV, AOV and LTV will increase. That will then improve our MER in the course of the next year by X amount. And that will then reflect to EBITDA in this way. So that sort of domino effect. And so you say, that’s great. ⁓ What is the proof? Well, in the past, we’ve done these product launches, and with this methodology, and we decided to do it this way, and this is the result that it yielded. And so we believe, therefore, that if we do this similar type of product launch, then we could see similar results in this way. Example of proof. And so that’s more operational and less dependent on a transaction. That’s just one of many, as an example.
Stephen Brown (23:24)
You mentioned Porter’s Five Forces. Let’s just go into that right now. This is a theory that’s been around for many years. It’s taught in business schools. What is Porter’s Five Forces and how do people use it?
Mark Lupton (23:26)
Yeah. Sure.
Yeah, Porter’s Five Forces of competition is the concept specifically. And the Porter’s Five Forces, they’re a great guide to understanding all the potential risks to your business’s success.
And it doesn’t include absolutely everything because there are many risks, including like partnership relationships and all sorts of financial things. it does talk about, expands your view of what competition really is ⁓ and more talks about what are the threats and what are the risks. So here, there’s five categories, right? Most people think about the, when they think about competition, most people consider rivals. These are existing competitors who you, who your customer is making a choice between, right? Obvious. There are new entrants.
There’s a risk that some others will be able to come in and grab market share from you and grab your customers attention away from you. There’s the threat of ⁓ supplier power. And so if you are too dependent on one supplier, then there’s a real risk that that supplier has the ability to completely wipe out your supply chain ⁓ if they go bankrupt, for instance, or if they determine that you’ve breached contract somehow. And they spend a lot of legal dollars, because they’re bigger than you, to prove that out.
Customers, so this is concentration on customers. In the ecommerce world, you have a wide range of individual customers, right? But what we’re talking about here is maybe dependency on sales channels ⁓ and things of that nature. Dependency on sales channels. So ⁓ if you’re very dependent on Amazon and Amazon decides for some reason or another that your product is at odds with their rules and regulations, then they could completely shut you down. And so additionally, another risk would be ⁓ within the customer’s header. Another risk would be how much you own that customer. So if you’re primarily an Amazon seller, there’s a degree of separation between the ownership of that customer. And so with that degree of separation that creates, you don’t own that customer in the same way you do if they’re coming straight to your website. So there’s a lot more in there. There’s a lot of nuance to that. And then the last one is alternatives and substitutes. So what?
This is not rivals, right? This is not other things that people could buy necessarily that are direct competitors. This is other things that people could do to solve the same problem, scratch the same edge that you, that your product is ⁓ solving or scratching, right?
So those five components help give a widespread framework. It allows you to look across the entirety of your business and say, where are my weak spots? Where are my vulnerabilities? And I hope right now anybody listening is able to ⁓ quickly say, that one. I’m really dependent on that supplier. You know what? If they pulled the rug, that would be brutal for me. Well, the acquirer self or a potential acquirer would say the same thing.
Stephen Brown (26:47)
Well, I don’t want to pull on that less throughout the alternatives because you defined it as things that could solve the same problem. want to, one of the things I think about is a lot of ecommerce is discretionary spending, right? You have, so sometimes I think what is the alternative to this thing? Well, I, you know, like I co-own a skincare brand, so could be like another brand of skincare, but, ⁓
And that one, that’s probably not the best example because one could argue that’s less, that’s something that people use or they don’t. There’s a lot of stuff, a lot of widgets, a lot of products, even apparel where the alter, you know, there are people are buying that because they want it’s makes them happy. Your alternative, especially in this higher inflation, much more difficult economy.
You know, they might be choosing between Netflix and that cool thing that they, an ad they saw for. And so one of the concepts I’ve been pushing the last couple of months is the value economy. What is your value to the customer? Do you create value to that customer? ⁓ Because one of the competitive forces that I think we’re experiencing outside of what you described is macro economic pressure.
And then I think that gets manifested in the alternatives, right? We see a lot of people swapping for brand names for, you know, generics, or in my example, maybe they’re going to swap, might not buy whatever it is you have at all and keep something else that gives them happiness.
Mark Lupton (28:30)
Absolutely. I think that’s really well said that macroeconomic pressures.
Yeah, macroeconomic pressures manifest themselves in the form of alternatives and substitutes that people are going to start choosing things that are not just direct competitor, but are something altogether different to to to, like I said, scratch that itch or fill that that need. And so, you know, getting way over outside of the finance realm, but it is still strategic is understanding that that need. just the core of all of all businesses, really relationships. It’s just a network and series of relationships and so with the customer, it’s getting down, what is the real deep value that I’m providing for that customer ⁓ at all times, knowing that. It’s easy to get away from that and think tactics. ⁓ And that’s okay, that happens. You can’t always ⁓ fully be in the shoes of the customer because you got a business to run and there’s operational realities to that. But the challenge I hear you bringing up that’s really important is for a strategy to be driven by sitting deeply in the customer’s shoes and staying there and understanding your value prop to them. ⁓ Sounds so basic. It sounds like elementary school business. And sometimes I even like I hear the words go out of my mouth and I’m like this, am I just spouting off ⁓ the latest cliche? But I would say like these common sense ideas, these first principles, they don’t go away just because they’re cliche, just because they’re common sense or something like that. They don’t just ⁓ become less important or less relevant. They’re actually the danger in just thinking, I already know that, is letting such a deep and important idea ⁓ fall to the back of your mind instead of being front of mind where it belongs. So that when you just zooming back all the way to evaluation, How to connecting the dots there. ⁓
You lose an understanding of the customer value add. You don’t have the creative that speaks to them. Your marketing efficiency isn’t as solid. Their lifetime value goes down. Your EBITDA isn’t as high as a result. The quality of earnings, if you will, or the reliability of your revenue going forward is put at risk. And you can see that slip over time as you watch your If you do a cohort analysis and look cohort by cohort, what’s the LTV doing? What’s the repurchase rate looking like? Cohort by cohort over time, that’s evidence potentially of you potentially allowing your true value add to customers and what your brand means to them in their life slipping. And, acquirers care about that. That’s a, that’s a, that’s a financially quantifiable thing in the form of LTV, in the form of customer cohort analysis, the form of LTV to cact, you know, ratio in the form of all that, that gets played in into, into diligence and evaluating the value of a business. It’s not just soft talk.
Stephen Brown (31:25)
So another concept you talk about with de-risking is the traction and evidence around things. Let’s talk about that.
Mark Lupton (31:32)
Mm-hmm. Yes, for sure. So I mentioned an example around LTV improvements. ⁓ Another part of proof and traction, proof, traction, evidence that we’ll actually be able to achieve the opportunities that we pitched is proving your financial engine works. Right?
And that’s not just EBITDA. People talk in valuation terms often with EBITDA multiples, revenue multiples, this is P &L focused things.
A common valuation methodology is discounted cash flow, right? And so that’s just a finance way of saying how much cash will this thing spit out over the next handful of years? And we put a discount rate on it to risk it, literally, to bring it to present value. So it’s literally, what are the opportunities with cash?
And what’s the risk that surrounds that in the form of discount rate? That’s like a very core way of evaluating a business. Opportunity, cash, risk, discount rate, discounted cash flow, right? So with that, part of the proof and traction evidence is proving that that financial engine works. And specifically that even like the working capital engine, your cash conversion cycle. For instance, we talked about this last time, think briefly also, Stephen, but ⁓ it’s this idea of a sustainable growth rate. If you have growth plans in your forecast that are going to require more capital into the business, an acquirer will see that as a deduction on your value, right? So if your growth plans require lots of infusion of further capital, and because you’ve exceeded what growth rate you can fund with your own cashflow, that is going to hurt your valuation. And so can you prove that your growth rate was fundable within the company’s cash flows and current working capital debt structure stack, for instance. Does your cash conversion cycle need a lot of fuel from outside sources that a natural line of credit can’t fund, for instance? ⁓ If so, be aware of this and this is a real potential bottleneck. So you wanna be able to show from a proof perspective that I’ve achieved certain growth rates beyond the growth rates that we’re looking to achieve in the future. And we’ve achieved those growth rates with this working capital structure, with this cash conversion cycle. And we can keep doing that. Additionally, same thing goes, then this is all below EBITDA, into your balance sheet, into the less understood of the financial statements. ⁓ Additionally, we talk about, especially for manufacturing folks, we talk about asset intensity, another finance word. Do you need to buy more machines to keep growing?
How many? How often? And how much capital outlay is that gonna take? And who’s gonna pay for that? Have you saved for that? Is that part of the transaction here? So I would consider these things both if you’re looking at the value of the business from an acquirer’s perspective or if you’re looking at it from your own perspective.
So you need to be able to prove that we can grow at the clip that we’re proposing within our own generated cash flows or within the already accessible working capital or debt structure that we have.
Stephen Brown (35:00)
Yeah, I mean, I think you bring up some really good points that there are costs. Here’s some of my key takeaways of what you just said. There’s costs of going into different opportunities. They might drag. And the reality is, let’s look at channel expansion.
I think the long-term game of retail is a volume game. And as volume goes up, oftentimes margin will go down, right? You’re having to give, let’s take like a Shopify store versus a Amazon store. There’s a decent chance that you’re giving more margin to Amazon to sell on that platform. There’s ⁓ wholesale, right? You might have to give up a good chunk of margin to give them a a wholesale rate. But at the end of the day, the idea should be you’re increasing, you might not, your profit margin, that percentage of profits of revenue might go down, but maybe your total profit dollars, your total profit dollars should go up, right? I think one of the, as you think through these opportunities,
Mark Lupton (36:07)
Right.
Stephen Brown (36:13)
One of things you got to think about is there’s going to be different margin structures. There’s going to be different costs and investments that go into them. And whether it’s you making that decision to pursue an opportunity or somebody else, that’s something you have to consider. And that can increase the overall value, but you need to understand the implications of going into those different opportunities.
Mark Lupton (36:39)
Mm-hmm. No question at all and it kind of gets back to gets back to that point around how you’re evaluating and prioritizing those opportunities. know, if you’re going back to this theoretical conversation between, you know, yourself in the form of an operator, yourself in the form of an acquirer where you’re, you know, in that scenario, you’re, you’re choosing to opt into this business or to not and you’re having a dialogue with yourself. If you go back to that, the acquirer version of yourself is going to look at the operator version of yourself and is going to have an assessment of the operators capabilities based off of what they are focusing on and prioritizing. It is another proof point of management’s capabilities. And so am I prioritizing the right things in my growth plan? That question has valuation impacts. Here’s how we’re going to grow. Here’s how we’re going to do it. Well, acquire yourself talking to Operator Self says, well, you’re completely blind to this other thing. This is actually what’s constraining your growth. And why I don’t see any resources going to this direction. So, I come all the way back to that. How are we prioritizing what our opportunities are, what opportunities we’re actually going to chase after. And we run that through the filter, like I mentioned before, of impacts on profit, cashflow value. We run it through that ⁓ without a doubt.
And another way to run through that though, which I really think is important is to think about those bottlenecks. What’s bottleneck in the growth really? And attack that, throw the resources at that and then do that systematically. What would be the next bottleneck?
So prioritization of those opportunities is key and it has valuation impact as the acquirer assesses the capabilities of management.
Stephen Brown (38:35)
Now you talked a little bit about a valuation method, discounted cash flow. How is business value determined? Let’s talk about different ways that the value of a business is measured.
Mark Lupton (38:46)
Yeah, sure. There are several different ways. ⁓ so I mentioned discounted cash flows. It’s very basically a forecast of your best plans for growth. ⁓ And the dollars flow all the way down to cash flow from revenue. And there’s some details about exactly what is included in that cash flow number, but we’ll stay at this level for now.
And those cash flows are forecasted into years to come with some value of estimated cash flows beyond what your forecast says. And then you slap a discount rate on it and say, for the risks that we’re expecting to incur for the time value of money, et cetera, ⁓ this is what we think the value of those cash flows is today.
And so that’s very simply what the discounted cashflow method is. It’s standard, it often is measuring sort of the intrinsic value of the business’s operation itself. But then there’s what everybody else is talking about, which is how do we understand the market value versus the intrinsic value, so to speak? Intrinsic value may be future cashflow is discounted back, right? The market value, which is what actually gets determined in a valuation setting, is where you hear the terms about multiples, right?
⁓ And so ⁓ value determination versus value like ⁓ in the market is a little bit different how we do those two things. So a buyer is not going to come in with ⁓ just a blanket multiple to apply to anything that’s in this industry, right? There will be comparisons to public comps.
There’ll be comparisons to other private transactions done recently and where those multiples have fallen generally. But those multiples are results of deep due diligence and forecasting and practically what dollars we can expect to get back from this thing, especially in the private equity front. So I’m not gonna go into too much detail there because I wanna focus ⁓ in on the founder building value. And so if you’re looking at your own business to determine its value, you look at the intrinsic value of those future cash flows, right? There’s models that can help you out with that. There’s people called greenhouse business advisors that can help you out with that, figuring out those sorts of things. That’s the model-driven way of understanding your business’s present value to you. How much cash can I generate over the next several years? Then there’s the public comps that say, if I were to sell this thing, what are the public markets showing that these things are trading at? And then what are recent private transactions that have been done in my industry, in my space, in my vertical?
And we can say, all right, if I sold it, that’s what that would be worth. But key to singling, singling factor here. ⁓ The market rate applies if you sell it. The intrinsic value applies if you keep it.
And there may be a big difference between those two sometimes. And it will depend on who the buyer is. And so certain buyers can value businesses in different ways. But as a founder, you’re valuing it based off of ⁓ the cash flow that it can bring you. That’s just the financial part. There’s personal parts. Do you love it? Is it worth your time? You know, all these things. Is it a legacy in your family? All this. But from financial standpoint, that’s how you really want to think about valuing it, future cash flows.
Stephen Brown (42:11)
And I like that because as a business owner, you can look at the profits and profits don’t always equal cash because you might be taking that cash immediately using it to buy additional inventory because you want to keep growing. so, and so your, your focus on cashflow is like, you don’t pay out of profits with these businesses, you pay out of cashflow and ⁓ usually cash flow from sales, right? Not cash flow from investments, cash flows from sales are what you can use to pay yourself. I think there’s also some intangibles that I’ve seen with founders. The value can be the purpose you get out of the business. You might be really passionate about the product, really love what you’re doing, love the control. That can give you value even though you might not get a lot of money. ⁓ Ideally, you should have a little, you should have a decent amount of both. You should have satisfaction in what you do. I see some founders who get tired, right? The business might be doing really well, but they’re tired and they’re like, I just want to be done. And you hear all the time, I was in a very acquisitive enterprise software company years ago and I bumped into a lot of folks that had sold their business. Sometimes they stepped away and then they got super bored.
Mark Lupton (43:19)
Yeah.
Stephen Brown (43:36)
And so if you’re having great financial performance and you’re unhappy, you can sometimes fix that problem, right? You can hire somebody to do the things you don’t love anymore and focus on the things that you do love. ⁓ So as you think about value, you know, we’re talking specifically financial value, but value can extend to other areas of what it means to own a business. And you want to consider those just as well. think
Mark, you and I would always be like, profits, cashflow, know, super important. Create a business of value. So if you did want to sell it one day, because eventually you’re going to get old and you will need to find a way to move on from your business, whether it’s giving somebody else ownership or maybe hiring a CEO or selling the business. But in the meantime, there’s a lot of ways to generate value and you wanna kinda look at all of those intangibles as well.
Mark Lupton (44:34)
Absolutely. Yeah, there are many different reasons ⁓ to sell a business or to transition from it. And I do see more folks who are tired and are discouraged even by the performance of their businesses that maybe what they wished the value of it would have been five years ago is not what it has become today. And so they’re coming to terms with that. I think what you’re talking about ⁓ is a real contingency of of operators right now that feel that way as far as I’ve seen. ⁓ Additionally, another reason to sell is what is this product need to become this product or brand rather more importantly, what does this brand need as far as team, as far as resources to become what you believe it’s meant to become in the world?
And that may be something beyond you. And that oftentimes is a really good reason to consider handing this over or in another way, you know, ⁓ to bring someone in, you don’t, to bring someone in who is that person to take it to the next level. Yeah.
Stephen Brown (45:45)
Yeah. Well, let me pull on that thread real quick.
You, I talk about my customer who’s considering a sale. You know what you need to do. You know you don’t have the skills to do it. You feel like the risk of you gaining the skills or finding somebody who could do the things that you know you can’t do is higher than the risk of, it’s higher than maybe going out and selling it and let somebody who has those skills and capabilities to do it. And I think that’s a very enlightened entrepreneur when they know they’ve hit their limitations, but they see the value in their business, they kind of do that risk assessment and say, you know what, I could do this, but the risk of me having success is lower than if I were to sell it to somebody who’s got the capabilities of doing it. And so they make that, that to me is one of the more enlightened positions I’ve seen with entrepreneurs is when they come to that place, they’ve had a level of success, they know what it would take to go to that next level, they do the risk analysis and say, I see the opportunity, but the risk is higher for me than it would be for somebody else. And that usually ends up being a really good outcome too, because for the buyer, they’re like, yeah, that’s a low risk for me, I do this all day. But that’s when you get into a win-win outcome. All right, let’s wrap things up.
If we were to summarize this conversation down to a few things, my key takeaway would be value looking at cash flows, profit, and just overall value. Why don’t you give us your quick summary?
Mark Lupton (47:30)
Yeah, circling all the way back to the beginning, that initial question of are you building an asset, are you building value, are you building a job? I think a lot of these factors, ⁓ they improve enterprise value, but enterprise value is a representation of whether or not you’re building something that’s dependent on you completely or is not. And so generally speaking, if your enterprise value is going up, it means that you’re scaling to a place where it’s not all dependent on you. ⁓ That key man dependency, so to speak, is a big part of valuation. But as you do these other things, build the team out, build out the capabilities, scale, focus on building ⁓ protection around some of the opportunities and vetting the opportunities with a clear systematic way of thinking, and you record how you’re doing that, right? The business becomes less dependent on you because you’ve built a team out, you’ve built protections around it, you’ve built a way of thinking, way of prioritizing ⁓ strategic decision making. And then this becomes less of a job and more of an asset that you are responsible for stewarding.
And once it becomes that, then you think about it from that enlightened entrepreneur perspective that you just brought up, Stephen which is, am I the best person to steward this asset forward? And is this asset bringing me the returns both personally in a fulfillment, you know, personal fulfillment perspective, but also financially, is it bringing those returns to me? And if it’s not, then I have the freedom and ⁓ opportunity and the asset itself that’s functioning not independent of me, but less dependent than it’s ever been. Do I have that freedom to then go in and look for a better partner, better opportunity? So if I’m summing it all up, that’s really what I’m landing on is that you build enterprise value in doing so you’re building something that isn’t just a job. That’s the way it works.
Stephen Brown (49:33)
Awesome. If somebody wanted to connect with you, what’s the best way to do it, Mark?
Mark Lupton (49:37)
Yeah, so you can just email me directly at mark at greenhouse dot business. That’s right. Greenhouse business advisors. So greenhouse dot business is the website, but Mark@greenhouse.business, or you can find me on LinkedIn. Mark Lupton. I’d to connect with you directly.
Stephen Brown (49:51)
Awesome. Thanks for joining me again, Mark. I’ll have to do it again.
Mark Lupton (49:54)
I enjoyed it. Thank you for having me.