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Sam Brownell of Stratus Wealth Advisors: “Start Your Education Early”

One of the biggest challenges we face when we sit down with business owners is that they are often reluctant to bring on another vendor, supplier, or consultant because of the monetary commitment and lack of knowledge about the succession planning process. Therefore, it is our job to educate the business owner on the investment […]

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One of the biggest challenges we face when we sit down with business owners is that they are often reluctant to bring on another vendor, supplier, or consultant because of the monetary commitment and lack of knowledge about the succession planning process. Therefore, it is our job to educate the business owner on the investment they are making in assembling a qualified team, and if they invest 20,000 dollars to 40,000 dollars over a few years, they may see a return of a couple hundred thousand in the final selling price. Further, we remind the business owner that they probably have many of the team members in place already, so at this point what they need is someone to coordinate and quarterback the succession planning team. Oftentimes, the business owner we are meeting with is relieved to know they won’t be paying someone to give them advice that they then have to integrate with what their lawyer, CPA, and banker are telling them.


As a part of our series about “Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit, I had the pleasure of interviewing Sam Brownell.

Sam Brownell, CVA, CFA, MBA is the founder of Stratus Wealth Advisors in Kensington, MD. Stratus helps independent business owners maximize the value of their business. Our valuation, succession planning, asset management, and financial planning services empower clients to run more profitable and rewarding companies. We quarterback a comprehensive process to provide business owners with essential data, knowledge, and advice to make the best decisions for their company and their family.


Thank you so much for doing this with us! Before we dive in, our readers would love to learn a bit more about you. Can you tell us a story about what brought you to this specific career path?

I started my career working at various positions inside investment banks, and after 5 or 6 years, I wanted to move on from working with so many intermediaries (e.g., hedge funds, private equity firms) and be able to work with the independent business owners who are oftentimes overlooked by the investment banks like the one I worked at and by the financial firms I worked with. Therefore, I left my job to start my own firm.

As I looked to build my reputation with independent business owners, a friend of mine was working in her father’s independent home center business, and they needed help with a strategy for transitioning ownership of the business from the father to the daughter. This was my first major succession planning engagement, and ever since I have focused most of my work on the independent lumber, building materials, home center, and hardware industries, thanks to the good luck of knowing someone who trusted me to guide her family through an ownership transition even though my firm was just getting off the ground.

Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lesson you learned from that?

I spent a number of years coaching a youth swim team for a local non-profit in the Washington, DC metro area, and the kids there were probably sick of all the times I told them that making mistakes is one of the best ways to learn. But it really is the truth, and it becomes even more critical when you are building your own business because you do not have the same experience or infrastructure to rely on when making decisions.

In my early days of business, one of the biggest questions was which software products I would work with to help with business valuations, portfolio management, financial planning, and performance reporting. I was so worried about the administrative side of the business taking time away from business development and client service that I was in too much of a rush to make decisions and would typically handle calls with vendors while I was away from my desk. During one call, I was out on a walk with my dog, and I was so wrapped up in negotiating prices with a vendor that I didn’t notice where my dog had stopped to relieve himself and stepped directly in a pile of dog poop.

As unpleasant an experience as that was, it taught me two lessons. First, spending time up front to make the best decision about which vendors to work with is an investment and will pay dividends in the long run because you will make better choices and not have to spend time every few years deciding on whether to change vendors. Second, it taught me that getting away from your desk and your phone oftentimes leads to fresh thoughts that can help you tackle frustrating or complicated problems because you have removed so many potential distractions. I now view walks with my dog as an integral part of my planning and advice process.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

I like to keep in mind the quote attributed to Einstein that “Everything should be made as simple as possible, but not simpler.” When working with business owners, it is important to gain a full picture of both their personal and professional goals and finances because there are often many different pieces to their life that do not fit neatly together. However, the next step is to help streamline their goals into effective personal and professional plans with action items that allow the business owner to make changes without complicating their underlying business or personal life. Overcomplication is a surefire recipe to have the owner ignore your advice.

Ok super. Thank you for all of that. Let’s now shift to the main part of our discussion. Can you tell us a story about how you were able to build a business from scratch, scale and sell it to a bigger firm?

At Stratus Wealth Advisors, we help independent business owners transition ownership internally (either to a family member and/or key employee), externally to a strategic or financial buyer, or to their workers through strategies such as an Employee Stock Ownership Plan (ESOP). All of these are viable options that may be relevant considerations for an owner.

To answer the question more directly, we do not work with start-up businesses. Our work is with established businesses where the owner is moving toward retirement or actively considering retirement. In these instances, we work with the owner to identify possible exit strategies (e.g., internal, external, and/or ESOP) and then we value the business to give us and the owner an idea of the equity value of the company. The valuation allows us to build a strong working knowledge of the business so we can then suggest strategies to increase the value of the business.

A few years ago, we were working with a lumber and building materials (LBM) dealer in the Midwest who was still active in the business at 75 and could not convince his children to move back and take over the family business. Therefore, we had to consider external buyers and the first step was to look for a strategic buyer in the region. The owner did know a few companies that might be interested, so our next step was to value the business and come up with a timeline for the transition since it is very important to know when the owner wants to sell. We always counsel clients that at least 3 years is ideal because the first documents a buyer often asks for is three years of financial and tax returns. However, not every transition will meet this ideal timeline due to multiple factors, such as the health of the owner or a hot M&A market in their industry.

In this example, we put together a 3-year timeline that focused on a few areas. First, we made sure that all old inventory was cleared out through various promotional sales and charity giveaways. Second, we cleaned up loans from the owner. Third, we worked to improve gross margins by ~1% a year and decrease operating expenses by ~1% per year — thus boosting net cash flow, and therefore value. Finally, we made sure the physical facilities were in good shape, the floors were clean, signs were in place, lighting worked, etc. The key in preparing any business for sale is to answer the hard questions before the buyer can ask them, because a buyer will not pay an exiting owner for capital they will have to invest in the business.

Based on your experience, can you share with our readers the “Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit”. Please give a story or example for each.

  1. Start Your Education Early: Most business owners do not think about a sale until a trigger event forces them to consider life after ownership.

As an example, we were contacted by the wife of an owner who just had a heart attack. She was scared for her husband, for the business, and for their finances. They had never considered what life would look like if they did not have ongoing income from the business, and further, the business needed a lot of work to get it ready for maximizing the value at the time of sale so the couple could support their lifestyle in retirement.

The reason this story is important is that even if you are a business owner in your 40s who is (hopefully) many years away from an exit, it is never too early to begin learning about the succession planning process so you can make adjustments to your operations that can lead to predictable profits and predictable growth, because both of these will drive the ultimate value of your business, as well as how many interested buyers there will be at the time of sale.

2. Get an Objective Valuation of Your Business from Someone Who Knows Your Industry:

If you don’t know where you stand today, it is very hard to plan for where you need to be in the future. Further, having an objective business valuation gives an owner a “tough love” look at how a buyer would view their business. Finally, each industry is unique and the reason we focus on only 4–5 industries is that we need to understand the nuances that make for a good business, because that allows us to provide a more accurate valuation and better advice for improving that value.

Independent business owners are typically great at what they do and provide valuable products and/or services to their markets. However, it is often a shock to them that their business is not worth more. When we talk to groups of business owners, we usually start by telling the story of the family business that used the business profits to fund a great lifestyle, but when it came time to transition ownership, they were surprised that the business was not worth more. One of the siblings looked at me and stated, “We have been in business for 60 years, we should be worth more.” This story is a great example of how business owners often misinterpret time in business for value. I then tell the audience that the value of your business derives from its ability to productively turn assets (both tangible and intangible) into cash flow, so it is important to have an outside valuation at the beginning of the succession planning process so we know what areas to focus on in order to improve that value. We can then update the valuation as we approach the transition date to make sure that we are effectively implementing the value maximizing changes.

3. Discuss the Tax Implications of a Sale:

In our experience, one of the most overlooked pieces of a successful exit are the taxes paid by the seller. Asking questions such as, “What kind of entity do I own?” (e.g., C Corp, S Corp, partnership, etc.), “Will the buyer be internal or external?”, “How will the sale be structured?” (e.g., asset sale vs stock sale), and “How will I be paid?” are all important if the seller is going to leave with the highest NET sales price.

We initiated a conversation with a business owner who told us that his friend across town had sold his business for 5 million dollars and that he was at least as good a business owner, so his business should be worth at least 5 million dollars. Our follow up question to this statement was “How much cash do you think your friend received after paying taxes?”. Our point to this business owner was to consider that in any transaction, there are taxes involved and if the sale was not structured properly, the business owner could have paid 40% or more of the purchase price to Uncle Sam. For example, if the purchase price was allocated to favor the buyer, the seller could have ended up with a majority of the 5 million dollars sale price taxed at ordinary income rates as opposed to more favorable capital gains rates. Therefore, in our opinion, having a professional who can create, implement, and coordinate a succession plan is vital to an independent business owner maximizing the NET cash they receive from a sale.

4. Review and Update Business and Estate Documents:

Like taxes, many business owners have copies of their formation documents, but they have not reviewed them in years. The same is typically true of their personal estate planning documents. Both areas need to be reviewed and updated as part of a succession plan so that the business owner makes sure they are protecting their family, their business, their employees, and their customers.

Two documents that we believe are vital to a successful business transition that are often never discussed are a Business Letter and a Family Letter, since they are not typical documents that a lawyer drafts. We believe these documents are important because they allow the business owner to detail who will handle what job (e.g., hiring and firing, making payroll, etc.) and how the family will be involved in business decisions if the owner dies or is incapacitated. For example, we worked with a business where the owner went on an off-the-grid hunting trip and due to poor weather was not able to get back to the office to run payroll. The issue we ran into was that only the owner knew the passwords to the payroll software and the bank account. Therefore, we had to scramble and use the line of credit from the bank to make payroll. Once the owner returned, we created a password account and wrote out the Business and Family Letters to detail who had access to the password account (as well as all the other important business functions).

The bottom line is that we can’t predict the future, so creating documents to limit the disruption to business activities are vital to a well-functioning company and a smooth ownership transition.

5. Assemble the Right Team of Advisors:

Your job as a business owner is to run a successful, growing business. Since most business owners will only sell their company once, it is imperative to work with a team of professionals (e.g., valuation/succession planning expert, CPA, corporate attorney, banker, etc.) that has experience guiding business owners through the ownership transition process. Further, having a succession planner who can develop, implement, and coordinate your succession plan means that you do not have another process to manage — what you get is essential data, knowledge and advice that makes the business transition a win for the three most important stakeholders: you as the departing owner, the incoming owner(s), and the loyal employees and customers.

One of the biggest challenges we face when we sit down with business owners is that they are often reluctant to bring on another vendor, supplier, or consultant because of the monetary commitment and lack of knowledge about the succession planning process. Therefore, it is our job to educate the business owner on the investment they are making in assembling a qualified team, and if they invest 20,000 dollars to 40,000 dollars over a few years, they may see a return of a couple hundred thousand in the final selling price. Further, we remind the business owner that they probably have many of the team members in place already, so at this point what they need is someone to coordinate and quarterback the succession planning team. Oftentimes, the business owner we are meeting with is relieved to know they won’t be paying someone to give them advice that they then have to integrate with what their lawyer, CPA, and banker are telling them.

In your experience, is there a difference in approach for building a service-based business versus a product-based business when you have the intent to eventually sell the business. Can you explain?

The bottom line is that a business with good margins versus their competitors, that has turnkey operations, and a good product and/or service niche will always be easier to sell. That is why we always educate business owners that part of running a business is building an asset that they can eventually sell. With that goal in mind, it becomes easier to plan for creating predictable profits and predictable growth, which leads to predictable value.

When it comes to the business growth strategy, there are differences for service-based and product-based businesses. For example, service-based businesses are not as concerned with inventory management and turnover as product-based businesses. However, both business types are ultimately creating solutions for clients, and therefore they must have well thought out business development, client communication, and pricing strategies to attract and retain customers in their chosen market.

How does one go about the process of finding a buyer?

In the industries where we typically work, the independent business owners are often part of a larger purchasing group or purchasing cooperative. This is not only useful for competing against larger competition but can also be an important source of buyers. Well-run purchasing groups and cooperatives typically keep lists of the independent business owner members who are interested in buying and selling, so this can be a great place to start.

One of the other questions that many aging business owners do not ask is whether their child or children are interested in ownership. Too many business owners assume their child wants to go off to the “big city” and that they want a different experience than their parents. We encourage these business owners to sit down and discuss with their child the way the business runs and the opportunities to be entrepreneurial, even in industries that seem stuck in the past (e.g., lumber dealer or community pharmacy).

Finally, business owners who have been in the field for many years often know their competition quite well from seeing them at industry trade shows and local events. Therefore, it behooves an owner thinking about selling to gauge his or her competition to understand who might be interested in acquisitions.

How can one decide if it is better to build a business in order to exit, or if it is better to stick around for the long term and let the company bring in residual income, or if it is better to go public?

Most business owners we work with run private companies that range in revenue from 1 million dollars to 30 million dollars. At this revenue level, going public is not an option. However, the owner has typically built-up value in the business that they will need to monetize in order to meet their retirement goals. The goal of a good succession plan is to figure out the best method to take an illiquid value and turn it into useable cash flow.

With that goal in mind, we do not view building a business in order to exit and residual income as two mutually exclusive strategies. In many instances, they may work together to help both the outgoing owner and the incoming owner. For example, we believe that every business owner needs to have a strategy in place to create predictable profits and predictable growth, because these will drive the equity value the owner can receive with a sale. As we stated earlier, creating a business that has turnkey operations (e.g., well thought out and documented sales process), strong margins versus competitors, and serves a specific niche is, in our opinion, the goal of any business that wants to be successful; it just so happens that this will also increase the value of the business.

Once the owner has created a well-run business with predictable profits and predictable growth, unless they are independently wealthy, there will come a time when the owner needs to monetize their investment, and this is where using a residual income strategy can be useful for both the outgoing owner and incoming owner. For example, we worked with a family business that wanted to transition ownership from a husband and wife to their children, but there were two challenges: the business did not create enough cash flow to pay off the 5-year promissory note stated in the buy-sell agreement based on our valuation of the company and the children did not have cash on hand to buy out their parents. Therefore, we created emeritus roles for the parents where they remained employees of the company and were paid a salary over a 10-year period that equated to their stake in the business. These emeritus positions had three benefits: the parents were able to turn their ownership stake into cash flow while controlling the taxes they paid, the children were not strapped for cash flow and were able to deduct the parent’s emeritus salary payment on their business tax return, and the knowledge the parents had gained over four decades of ownership was retained for a longer period than is typical in an ownership transfer.

This is one example of why we think that building a strong business with the goal of an exit and the payment of residual income (whether through an emeritus role, deferred compensation, or a non-compete) are in fact complementary strategies that can help monetize a business owner’s illiquid asset (which in most cases is their largest asset).

Can you share a few ways that are used to determine a good selling price for the business?

Businesses are typically valued in three ways: by determining the adjusted net assets, by projecting future cash flows and discounting them to the present using an appropriate discount rate to account for risk, and by looking at comparable transactions for other private or public businesses. Each of these approaches has its benefits and drawbacks, so perhaps an example would be helpful. Further, it is important to know what type of value we will be calculating — enterprise or equity — because that makes a difference for our calculations.

We do a lot of work with independent lumber dealers and hardware retailers. Because of the high level of tangible assets in these businesses, it is important to value the business based on their adjusted net assets. This process involves adjustments such as marking marketable securities to market as of the valuation date, shifting inventory from LIFO to FIFO to reflect its true cost, looking at depreciable assets and adjusting their value, and possibly receiving an appraisal for any real property that is owned by the business or business owner. Then we subtract the liabilities of the company, adjusted, if necessary, for items like deferred taxes, to arrive at an adjusted net asset value. In many instances, this calculation will provide us with a floor value for the business — but not always.

We then move into a discounted cash flow analysis by working with management to project future revenue and expenses after making appropriate adjustments to various cash flow items (e.g., is owner’s compensation above the industry average, are family members on the payroll at above market rates, adjusting cost of goods sold for FIFO inventory accounting). These future cash flows are then discounted to the present using an appropriate equity discount rate to account for the macroeconomic, industry, and company specific risks and, if calculating enterprise value, an appropriate debt discount rate based on the financing structure of the business. While this method relies on numerous hypotheticals, it does consider that the business will have cash flow in the future.

The final method we look at is to calculate common adjusted financial metrics (e.g., EBITDA, Seller’s Discretionary Earnings, Price-to-Revenue) for the subject company and then use actual transactions from comparable companies to determine an appropriate value. This method has the benefit of being the easiest to understand and is based on real-world data. If owners are considering a strategic or financial sale, they will often hear M&A advisors talk about these “multiples”.

At Stratus, we typically use a combination of these three approaches with product business like lumber dealers and hardware retailers because it helps give us a “sanity check” to make sure our three valuations are falling within a decent range of each other. For service businesses, the discounted cash flow and comparable transactions approaches are typically better due to a lack of assets (other than cash, marketable securities, and possibly intangibles) reported on most service companies’ balance sheets.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. 🙂

Buy local. It sounds simple, but think about the impact your dollars have if you spend them at your local, independent hardware store, pharmacy, grocer, or restaurant. These businesses employ your neighbors, invest money in your community, volunteer at the fire department or church, and provide support to their fellow local businesses during difficult times.

I’ll use a short story here as an example. The hardware businesses we work with had a great year in 2020 because they were deemed essential businesses, and with millions of Americans at home because of the pandemic, the motivation to improve home offices and school rooms, create new or improved outdoor living areas, and tackle home improvement projects increased dramatically. But during these boom times, the hardware owners never forgot about their local business community. For example, with their friends in the restaurant industry struggling, hardware stores made a practice out of ordering lunch or dinner for all their employees from different local restaurants every week.

This kind of reinvestment in the community is good for business but also strengthens the relationships between community members and reminds us that even in these difficult times, what unites us is much greater than what divides us.

How can our readers follow you on social media?

You can connect with me and follow Stratus Wealth Advisors on LinkedIn.

Also, sign up for our newsletter on our website (www.StratusWealthAdvisors.com), download our succession planning kit, and read our blog.

Thank you so much for joining us. This was very inspirational.

Thank you so much for having me!

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