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E229 | The Secrets Behind Building Value-Based Businesses with Patrick E. Donohue

The definition of value creation is giving something valuable to receive something else that’s more valuable to you. In today’s fast-paced economy, every business owner should strive to make their company as valuable as possible, and optimise wherever they can to provide value. 

Isn’t it all about profit? It may be true for large company stockholders, but not so much for small business owners. A major corporation’s stockholder may be exclusively concerned with earnings. It’s part of their investment portfolio, and its sole purpose is to increase their wealth. However, a small company would be more interested in communicating a mission and vision that attracts the world, creating a product or service that adds value to both customers and shareholders, and creating value through optimising processes and finance. 

Some investors have advanced to impact investing because they seek more than just profits from their investments. As a result, B-corporations are becoming increasingly common. Impact investment and B-corporations seek to maximise financial returns while providing a public benefit and creating long-term value.

This week, expert in valuation, business angel, and financial advisor for entrepreneurs Patrick E. Donohue, joins us on a new episode of Mind Your F**king Business Podcast. He started his adventure at a very young age when he showed interest in stock shares and making money when he was ten years old. His passion lies in helping small businesses grow in a way that generates value and has a lasting impact on the community. He firmly believes that business owners shape the world by providing solutions to the complexities of human life. 

His book Breakout Valuation breaks down complex financial concepts and shares them in plain English. His aim is for every leader to be able to understand financial intelligence and apply it in actionable plans to drive sustainable growth. 

In today’s episode: 

  • Business Valuation For Beginners 
  • How to Define a Sustainable Level of Growth 
  • Insights from Breakout Valuation
  • Business Design That Drives Value
  • Every Business Has A Special Talent That Makes It More Investable 
  • What Patrick E. Donohue Wishes He’d Known Earlier


The Secrets Behind Building Value-Based Businesses and How To Make Them Investable

Patrick E. Donohue is an entrepreneur and investor from Minnesota. He started his expertise as a Wall Street stock analyst and became one of the most highly regarded valuation experts today. At the age of four, he showed great investing initiative with a lemonade stand and, at the age of ten he purchased Coca-Cola stock. Today he provides unique insights into the dynamics of money and business as an investor, stock analyst, and advisor to numerous entrepreneurial ventures.

Patrick is also the founder of Hill Capital Corporation, a private investment fund that finances and supports emerging growth companies. Furthermore, he holds the Chartered Financial Analyst (CFA) designation and has served on the boards of the Entrepreneurs’ Organization of Minnesota and the CFA Society of Minnesota.

He is the proud author of Breakout valuation, a book that provides entrepreneurs with the insider knowledge they need to build a valuable business. In this book, he shares his entrepreneurial journey and everything he learned in three decades of investing, analysing, and advising billions of dollars of transactions. 

Business valuation for beginners 

Value is what an asset or business can do and achieve in a timespan. Valuation is the process of determining that value and establishing a company’s economic worth. During this process, the entire corporation is examined to evaluate its value and that of its departments or divisions. A company valuation can be used to evaluate a corporation’s fair worth for various purposes, including determining selling value, establishing partner ownership, taxation, and even divorce processes. Owners frequently seek fair estimates of the worth of their businesses from expert business assessors. 

The value of a business is not only a mathematical equation to solve; it is the result of everything that creates value. Leaders need a magnetic vision that motivates and stimulates employees to love their work, a solid business model, and strong business intelligence to create real value. 

“When leaders focus only on improving the cash flow of their company, they are doing it for a short-term result. They are making a lot of short-term decisions at the cost of a long-term vision that creates real value.”

Venture capital and angel investors love to invest in a business that is planning to sell in a couple of years. They usually invest to multiply their capital, and not only rely on periodic returns on investment. However, if an entrepreneur wants to own a business for 10 or 20 years, they can adequately plan for that. Instead of looking for fast capital injection, they can grow step by step while pausing to optimise regularly. The incremental growth is more solid than a fast cash injection. 

Patrick’s book Breakout Valuation tackles this issue. It teaches entrepreneurs how to make financial decisions that create scalable value for the business. Financial advising should be easy to read and actionable. A leader should be able to get the information from a book or an advisor and putting into action right away. No amount of expertise is as effective as taking action. For that reason, he took complicated financial concepts and wrote about them in his book in plain English. Everybody should be able to understand it and put it in motion. 

How to define a sustainable level of growth 

Patrick shares that we can achieve sustainable growth that is optimal for businesses. It obviously depends on the business model. Some businesses, like tech companies, can withstand a 50% growth, while others can hardly afford a 10% growth. We need to rely on a monthly cash balance forecast to understand how much sustainable growth our business can withstand. 

One of the challenges we face with the exponential rise in entrepreneur numbers is the lack of financial knowledge and the inability to forecast cash flow and cash balance. Without these two, one cannot have a sustainable business model because they don’t know what type of clients generates what kind of profits. They won’t be able to prioritise the right clients for the right growth strategy. 

Entrepreneurs need to have the confidence to stick to their terms of doing business and their pricing. They need to engage more markets or win bigger markets without necessarily losing their margin. That is how we have sustainable growth. Winning bigger markets doesn’t necessarily need entrepreneurs to be cheaper or reduce their profits. It can be a death blow to the business if not handled properly with clear cash flow forecasting.

Insights From Breakout Valuation

Being an entrepreneur is one of the most challenging things one can do. We often expect it to be straightforward, only to realise we constantly have to learn, adapt, and grow. Entrepreneurs don’t have enough time for the training they should have, but they can find packaged pieces of training that englobes most of what they need efficiently. However, in entrepreneurial finance, leaders can only find academic books that are challenging to digest. This is why Patrick’s book is so important. It breaks down complex financial ideas into easy-to-digest actionable plans.

“Know enough so that you can navigate financial intelligence, and then leave the rest up to the accounting and finance team. But know enough so that you can own your business and control it to create something valuable for you and your family in the long term.”

Patrick shares in his book the 9 components of breakout valuation: 

  • Confidence 
  • Vision 
  • Curiosity 
  • People 
  • Communication 
  • Cash management 
  • Financial forecast 
  • Capital Strategy 
  • Business design

Vision is the most important: Magnetic vision is one common thread with all entrepreneurs. Everybody has a vision, but the leaders that stand out are the ones with a vision they can articulate and attract people to. According to Patrick, it is where the foundation of value is driven. 

“There is a reason why Google bought YouTube for $1 billion, and Facebook bought Instagram. It is because the founders of these companies had a magnetic vision. It was so vivid and granular that the buyers knew that the business model would endure. The founders were able to articulate it and attract somebody to pay for that vision.” 

Communicating the business vision in the right way is important to convince the world of its value. We need to understand the ‘why’ behind the company and its intrinsic value. That’s what will create solid long-term valuation. And, it will attract the right audience for what the business proposes due to the resonance they have with our product or service. 

“Google has a magnetic vision that inspires everybody. They wanted to organise the world’s information, so they opened a way for people to learn more and share their interests. There is value for everybody in that.” 

Curiosity: One of the biggest lessons Patrick ever received in his career was watching executives at their best. He noticed that investors ask very basic questions like “How do you make money?”. He realised they were more interested in the executive’s reaction than the answer to that question. The idea of curiosity comes down to asking really good questions. And the simpler they are, the better. 

“The difference between the entrepreneurs that I’ve seen win and the ones that didn’t is that the latter were not asking questions of assets.”

Communication: This is a key component for all stakeholders. We tend to feel vulnerable or afraid to overcommunicate and expose ourselves and our ideas. Patrick has seen awesome businesses led by awesome people fail when they didn’t communicate to the extent they could have. 

“A great example would be when things aren’t going well, and people are afraid to communicate it ideally. That is where sad situations happen. On the other side, I’ve seen entrepreneurs share bad news in such an effective way that investors invested more money instead of running away”. 

Business design that drives value 

Patrick believes that optimisation is the key to business design that drives value. Despite the apparent business benefits of creating exceptional products and services, consistently achieving optimised operations is famously difficult—and becoming more complex. Given the fast growth in customer expectations driven by companies like Amazon; immediate access to worldwide information and reviews; and the blurring of borders between hardware, software, and services, only the greatest designs today stand out from the crowd. Companies now require more powerful design skills than ever before. 

“In finance, good design is taking the time to make sure that your revenues are forecasted, cashflow is forecasted, and then making sure that you can stay true to that. A high-growth business cannot afford to be sloppy. It all comes back to optimisation.”

The potential for design-driven growth in both product and service industries is huge. There are more options than ever before to explore user-centred, analytically informed design. Customers may provide firms (and each other) real-time feedback, allowing the design to be judged by customers—whether or not corporations choose to listen.

We can optimise many aspects of a business. It can be in sales, HR, Logistics, etc. However, the largest expanse in growth is people. Building a team is as important as realising when someone has to go. It needs to be done efficiently. 

Every business has a special talent that makes it more investable 

Every company has one little golden nugget that takes the form of something it naturally excels at, and in which investors wouldn’t mind investing millions of dollars. It’s often linked to one half-metric that the leader is driving on, and the whole economic model succeeds if that is achieved. 

A faster acquisition of talent can demolish the competition because the business would be more efficient in hiring the best available talent in the market. The processes in which a business is naturally excellent represent valuable assets that leaders shouldn’t ignore and should invest more in. 

What Patrick E. Donohue wished he knew earlier 

Patrick wishes he’d known the concept of ‘life by design’ earlier. We should all aim to intentionally design our lives, and optimise as much as we can. A great example would be getting up early in the morning. We receive the advantages of numerous excellent habits when we get up early, leading to an energetic, well-rested, stress-free, punctual, and healthy version of ourselves. We gain a feeling of order in our life, which makes us happier and more productive. 

“Designing my life around intentional reflections of my body and soul in the morning has been absolutely profound”. 

Stoicism is something that Patrick added to his life too, and it helped him design it better. It is a philosophy that optimises happy emotions, decreases negative ones, and assists individuals in honing their character qualities through life events. 

“Sometimes you win, and sometimes you fail. It’s about being deliberate in picking yourself up when you’re trying.”

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