September 21, 2022

Breakout Valuation: Patrick E. Donohue

Warning: Investors and lenders do not want you to read this book. With trillions of dollars at stake, those who own and control investment capital, profit handsomely by severely undervaluing privately held businesses. Lenders lure you with teaser rates, investment partnerships dazzle you with fancy marketing materials, these are the tools of their trade helping them earn excess returns on your hard work.

The new book, Breakout Valuation, provides entrepreneurs with the insider knowledge they need to build what matters: a valuable business. Written by an author who shares your entrepreneurial journey and has spent three decades investing and analyzing and advising billions of dollars of transactions, Breakout Valuation tells you everything you need to know to finance your future today.

You can finance growth and stick to your moral compass while avoiding the tricks of the hucksters who want to take outsized returns on your hard work and innovation. You hold in your hands the knowledge to achieve a breakout valuation. This is The Author Hour Podcast, and I’m your host, Frank Garza. Today, I’m joined by Patrick E. Donohue, author of a brand-new book, Breakout Valuation: How to Finance Your Future Today.

Patrick, welcome to the show.

Patrick E. Donohue: Frank, it’s a pleasure to be here to discuss creating value for entrepreneurs.

Frank Garza: I’d love to start by just hearing a little bit about your background and how that led to you writing this book.

Patrick E. Donohue: My background has really been all in finance and it started at a tender age when I bought my first ten shares at Coca-Cola and went on through a career to be an investment banker and an investor. To see what works in finance and what doesn’t and it’s really allowed me to put my life’s work into a book and I’m excited to get it out to the world and that book is of course, Breakout Valuation. So the background of the book is everything I’ve been doing since a very young age.

Frank Garza: Who is the target audience you had in mind as you wrote this book?

Patrick E. Donohue: Very simple, entrepreneurs. It is all for entrepreneurs, the people who founded their businesses and have created something. That’s who the book is speaking to and that’s who we look to, to help with the book and the content.

Frank Garza: So in the introduction of the book, you spent some time talking about legacy and securing your legacy and why that’s important, and you asked the reader the question: Who comes to mind when you think of someone who has secured their legacy? Could you share someone who comes to mind for you and why?

Patrick E. Donohue: Very much so. You know in the book, I actually highlight some of the well-known people who have secured their legacy. I think it’s really easy for people to point to the Steve Jobs of the world and the Mahatma Gandhi’s and so on and so forth but the people that really come to mind for me are a lot of the entrepreneurs that nobody, not many people have heard of.

It’s the people that own the main street businesses, people who have created something in their home town, that’s who I think about because a lot of times, those people have created businesses that are very impactful in their local communities or in their industries and not only did they create jobs but many times, they left a lasting impact. Whether it’s in their industry or maybe it was something as simple as they sold their business and were able to make a donation to the local school and helped their community out.

So that’s what I find most inspiring about legacy, is the people who have intentionally built something and have done things to help create things long-term, that really support not only their families but the broader community.

Frank Garza: Okay, in the book, you talk about the nine components of a breakout valuation and I’m excited to dig into a few of those but before we do that, can you just define what you mean by breakout valuation?

Patrick E. Donohue: Yeah, breakout is all about getting value today based on what the business can do in the future. I think that’s really important and the inspiration behind the book is, when I would constantly see entrepreneurs talk about EBITDA and EBITDA multiples and the reality is, most entrepreneurs don’t even know what EBITDA stands for and they shouldn’t have to know what EBITDA stands for and they’ve really been distracted on what creates value.

So breakout is all about getting value based on what the business could do in the future, and so the content of the book is really helping entrepreneur focus on what builds value and that is the whole build up in the book, to help entrepreneurs understand how to create a valuable business because at the end of the day, that’s what’s important.

Frank Garza: So let’s talk about some of those components that are essential for a breakout valuation. The first one I want to touch on is confidence and in the chapter of the book where you talk about confidence, you have a section called, “Take Out the Trash.”

Patrick E. Donohue: Right. 

Taking Out the Trash and Stepping Into the Mindset of Creating Value

Frank Garza: What do you mean by take out the trash and then, how do you take out the trash?

Patrick E. Donohue: I’m an entrepreneur myself and so a lot of this stories in these books, [are] a healthy dose of self-reflection and throughout my life I have always been — I considered myself happy go lucky, even back in school. One of those years got nominated as the most happy-go-lucky person but as the years would go on, I just realized how limiting beliefs can be.

Probably the one that has been most recent for me was, as my kids have gotten very active in scouts and activities and so forth and I’ve wanted to stay healthy and active for them. We’ve done some fairly intense trips and I remember when we did a canoe trip not too long ago; we had to do cordages and you carry a 50 pound pack and the canoe and all of your equipment and walking through the woods on a sloppy trail that’s full of mud and branches and so forth, you’re like, “Oh my gosh, I can’t do this.” 

I’ve had back surgery in the past and this isn’t good, what if I trip? And that’s where I just, bang, I had that “aha moment”. I’m like, “I can’t do that anymore” and so I just kept telling myself, “I am healthy, I am strong. I am healthy, I am strong” and that’s what I talk about taking out the trash, is really being self-aware and starting to examine what’s going through your head and the trash is anything negative or anything unnecessarily negative, to really make sure that one removes that.

And the reason I started the book out with this and why it’s a key component of a breakout valuation is that people need to be aware of what’s going on their minds, because creating a valuable business is not easy. There’s really not much about entrepreneurship that is easy, and so it really has to start with that mindset as the foundation to making sure somebody’s got that healthy mindset to do the things they need to do to really create the best value, the most value in their business.

Frank Garza: Okay, the next one I want to talk about is community and in this section of the book, you distinguished between community versus network, they’re not the same things. What do you see is the difference between having a community and having a network?

Patrick E. Donohue: Yeah, it took me a long time to learn this lesson myself. As a young person, I would go to business meetings and conferences and have a pocket full of business cards and it was almost like a game. How many cards could I get, how many could I hand out, how many people could I get to know? And that’s what I call networking. 

Like, going out there, shaking as many hands as you can versus, community is being much more intentional about building deep lasting relationships, and it’s taking me a long time to get to this, but I’ve come to the realization that a handful or a smaller amount of deep relationships goes a lot further than a massive rolodex.

So in the portion around community, we intentionally talk about community in the book and I use that in my day-to-day now versus networking because it’s really about building that core constituents around yourself as an entrepreneur, to help you build and grow as an entrepreneur and help build your business, because networking is just candy. You need some really nutritious inputs into your business and that’s what I reflect upon and call community.

Frank Garza: Any tips on how to take those first steps towards building community based on your own experience or what you’ve seen from some of the entrepreneurs you’ve worked with?

Patrick E. Donohue: Sure, I’ll just share a quick antidote of what I’ve been doing over the last few years, but when I go to any meetings now, especially in an environment where I don’t know people, I walk in and don’t have the anxiety that I used to like, “Oh my gosh, I got to know who is who and who should I find.”

I just have a conversation and I have a very quality conversation with whomever I meet, and inevitably it will turn into another conversation and another conversation and it’s kind of magical, because I’ll step away or walk out of that meeting and say, “Wow, I didn’t have the anxiety”. And ironically, I ended up meeting some of the best people possibly that I could have met at that given meeting.

So my tip would be, for people as to not overthink the whole like, “Oh my gosh, who am I going to meet and how am I going to approach everything?” But it’s to go in there with just genuine quality interest in meeting people and getting to know them for who they are, because the thing I’ve found really fascinating, Frank, is some of the people that on first blush, I would have thought would have been unhelpful to me, have turned out to be some of the people who have been some of the most help.

So I’ve had to learn the hard way of just to not take a first impressions and let that dictate how I treat a conversation. I’ve learned to really lean into conversations and to get to know people because that’s where the magic really happens. So I encourage people to take that first step and just having quality conversations and not getting caught up too much on the title or who that one person is that they’re meeting at their local rotary club or chamber or one million cups or whatever groups that they’re attending but just to build quality relationships because it’s amazing what that can translate into as they’re properly curated.

Accelerate the Crisis

Frank Garza: The next one I want to talk about is communications, and you go over some techniques that you seen enhance communications, and one that I really wanted to learn more about is accelerate the crisis. Can you tell me what that is and how you can implement that technique?

Patrick E. Donohue: I’ve come to love accelerate the crisis, and I laughed because I’d ended up using this term a lot over the years and some of my good friends always point to me, they talk about, “I should accelerate the crisis like Patrick talks about.”

The big idea around accelerating the crisis is, if you know something is not going, it doesn’t feel right or it is not going to go well, is to probably address it much sooner than you would otherwise be comfortable in doing so. And this happens a lot in business and it is very dangerous for entrepreneurs. I can rattle off a number of examples but let us pick one. 

You hire somebody and it turns out, the weeks are going by and it is like, “Oh, this person is not the right fit for our culture” and the entrepreneurs will fall into the trap of like, “Well, maybe if we train them a little more, this and that”. The unfortunate reality is, if it’s not working out it is probably just going to get worse overtime, and the brutal reality is accelerate the crisis is probably just to let the person go and encourage them to move onto the next thing and the next journey of their life and accelerate it. 

It may be a tough conversation but entrepreneurs just don’t have the leisure of time. The time is one of their most valuable assets that they have as a business owner, and so they have to really guard it closely, and so if something is not quite working right, they have to be really careful not to let things fester because in my experience, they compound and get to be bigger and bigger problems than if they were addressed head on as soon as they showed any signs of being a problem. 

So I do love the idea of accelerating the crisis and there’s no easy answers for any of this but it is in the book because we definitely like to help people say, “Hey, recognize this and maybe think about this” if you do see things come up and you may need to have communications sooner and more rapidly than you may be comfortable with and you have to get comfortable being uncomfortable with that. 

Frank Garza: You talk about forecasting as something that’s another key component and you differentiate between budgets and forecast. What do you see is the difference between budgets and forecast and why is that important to understand? 

Patrick E. Donohue: Yeah, so when we put together financial models, I have been doing financial forecast or people call them proformas for companies. I have been doing it nearly my entire career and I highlighted this in the book because I see a forecast as something very different from a budget. People will see budget as something that is very stagnant. It is almost like a right to spend money. 

So in the beginning of a period of time, usually like in a fiscal year, a company will say, “Okay, we’re going to budget out. How much are we going to spend on marketing? How much are we going to spend on office space?” and so on and so forth. And usually, that is put into place for that entire period of time, again, usually a year and they will update it as they go along, whereas a forecast is more comprehensive. 

To take account for changes in income or product volumes and other things and most importantly, what I care about for a forecast is the things that impact cash, and so a good financial forecast is updated whenever there is new information. At a minimum, I would suggest people are updating every month. Some people might even be updating it every week but as there is more information and better information is continually updating it and having it as an ongoing tool. 

So the business owner, the entrepreneur can use that as a strategic decision making tool in the business and that’s what I grew up with in the public markets, where public companies are forecasting what to deal in the next quarter or the next year’s earnings are going to be and they’re always updating that versus just a budget on what they had planned to spend for the year. 

So again, this was in the book here to help entrepreneurs really think about the need for utilizing a much more dynamic process than they might have been taught earlier in their career, is to think more of a forecast and updating with better information and fully accounting for everything that could impact cash and ultimately, long-term and the impact of their value of their business. 

Capital The Lifeblood of Business

Frank Garza: Let’s talk about capital. A good part of the later portion of the book is around the capital ecosystem and how to raise capital and some strategies around that, but I guess let’s start with who should be considering raising capital or maybe if there is a business owner out there and they’re wondering if they should be trying to raise capital, what are some questions or exercises they should go through as they are trying to figure that out? 

Patrick E. Donohue: Yeah, it’s a great question, Frank, and I absolutely love it. Who should be thinking about raising capital? The punch line: Every entrepreneur. I highlight in the book, even companies like Apple and Berkshire Hathaway that have literally tens of billions, even over a hundred billions of dollars of cash; they are always raising capital. They are issuing bonds, they are doing different things to make sure that they are fully capitalized. 

When us as outsiders will look at it and it is kind of mind blowing to be like, “You got a $100 million in cash, why are you issuing bonds?” The reality is that the corporate finance teams at Apple and Berkshire Hathaway, they’re very smart and they know that they need to always be raising money and make sure that the business is properly capitalized if something happens, and that could be good or bad, that something might be a recession, to make sure that they’ve got plenty of money to see through it or there may be a big acquisition opportunity and they want to make sure that they’ve got all the money that they need to execute on that acquisition. 

Now, let’s boil that down to entrepreneurs. Entrepreneurs should always be raising money and thinking about where they’re going to access capital because accessing capital, the smaller the business is, the tougher it is. 

It takes a lot of work for a small business owner to be able to have those connections and so that is why we talk about it quite a bit in the book, to give some really solid frameworks that work, to be able to get external capital into a private business. And so those exercises, a lot of times will tie back to things that we talk about in the book. I mean, it has to start with confidence, to be able to be assured of the vision in what you are executing, to the forecast and what a business needs, to the community.

That’s why we have a whole chapter about building an intentional community because those can be really good and not only sources of capital but they may be influencers or people who are just knowledgeable about providers of capital because there is not an easy way for any private business owner to go and raise money. It just is about building relationships and going out there and working those relationships, making the phone calls, making the contacts and sitting down and having those conversations. 

So capital is the lifeblood of every business. That’s never going to change, it always has been the lifeblood, always will be and so entrepreneurs, the ones that want to create especially a really valuable business always need to be talking to all capital providers, in having a pulse on where they can bring money into their business and making strategic decisions when and where they do bring money into their business. 

Frank Garza: You go through the different sources of external capital and I want to ask you about what is one, what is the source of external capital that maybe you see as underutilized or that you find a lot of people don’t know that much about and especially as it pertains to maybe small and medium business, business owners?

Patrick E. Donohue: Yeah, that’s a really interesting question, Frank, and I really like it because the antithesis of that is the most well-known sources of capital is definitely like angel, you know, people think about Shark Tank and venture capitalist and they think about banks, but some of the most misunderstood are not known about. I would really highlight the section and the chapter on private debt. 

There are a lot of sources and money that can actually be paid back overtime, and for a lot of entrepreneurs, that’s a really powerful tool to capitalize their business and it doesn’t have to look like a traditional bank loan, it can be different. This market has developed quite a bit just in the last few years. We have seen a number of models come out like revenue-base financing and all sorts of FinTechs that are now tying into their payment platforms and so forth as a form of repayment. 

But these private debt sources can be a really powerful tool and I would encourage all entrepreneurs to be aware of it because, unfortunately, most entrepreneurs they have been scared away from traditional banks because the traditional banks need collateral than personal guarantees, and some of these newer sources of private debt, they don’t need these traditional collateral like a building or personal guarantee that has a hook into their house or their car and so on and so forth. 

So I encourage everyone to look into what those sources of private debt could look like and especially, to make this a bit of a timeless conversation, is that this market is going to continue to evolve a lot. We could talk about some of the private debt players today but I know for certain over the next five, ten, 20 years, there is going to be a lot more and a lot new models that come to market because it’s probably one of the hottest sectors in all of private capital today and will be in the foreseeable future. 

Frank Garza: Well, writing a book is such a feat, so congratulations on putting this out into the world. Before we wrap up, is there anything else about you or the book that you want to make sure our listeners know? 

Patrick E. Donohue: Yeah, this was really written from the heart. I am an entrepreneur and the vast majority of my friends are entrepreneurs and so, I work really hard to just write this in plain English and yeah, it was a big feat. If we are doing this as video right now, I am sitting in my office and there’s bookshelves all over and a lot of them are academic in nature around finance and so forth. 

If you do a Google search or an Amazon search around valuation, you really can’t find anything that’s written in plain English for entrepreneurs, and that was my goal for this book. I had my fingers crossed, that’s the feedback that I get on this is that it was written and presented in a way that entrepreneurs can identify with, as we talk about magnetic vision and access to capital. 

Thinking about concepts like effective capital, that it is frameworks that are very digestible for them and give them a platform to execute a break out evaluation, to create something much more valuable than what the average would be in the marketplace. So that is the ultimate goal of the book and I appreciate the opportunity to get this body of work out to the world, that’s for sure. 

Frank Garza: Thank you Patrick, this has been such a pleasure. The book is called, Breakout Valuation: How to Finance Your Future Today. Besides checking out the book, where can people find you? 

Patrick E. Donohue: and I put my email in there, so it’s [email protected]. I don’t mind people reaching out directly and you know, the social media links and LinkedIn and so forth, they’re all linked in there as well. I am always happy to connect with people. 

Frank Garza: Thank you, Patrick. 

Patrick E. Donohue: I enjoyed the conversation, Frank, and I hope the listeners took away some valuable insights. I appreciate the time with you today.